UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from             to            

Commission File Number 000-31191

The Medicines Company

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (973) 656-1616

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý    No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:  As of November 4, 2005, there were 49,721,388 shares of Common Stock, $0.001 par value per share, outstanding.

THE MEDICINES COMPANY

TABLE OF CONTENTS

THE MEDICINES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements.

THE MEDICINES COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE MEDICINES COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE MEDICINES COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.             Nature of Business

                The Medicines Company (the Company) was incorporated in Delaware on July 31, 1996. The Company is a pharmaceutical company that specializes in acute care hospital products and is engaged in the acquisition, development and commercialization of late-stage development drugs.  In December 2000, the U.S. Food and Drug Administration (FDA) approved Angiomax® (bivalirudin), a direct thrombin inhibitor, for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty.  In June 2005, the FDA approved new prescribing information for Angiomax to also include patients undergoing percutaneous coronary intervention.  The Company is also currently developing Angiomax for other indications.  The Company has concentrated its commercial sales and marketing resources on the United States hospital market, and revenues to date have been generated principally from sales of Angiomax in the United States.  In September 2004, the Company received authorization from the European Commission to market Angiomax as Angiox™ (bivalirudin) in the member states of the European Union for use as an anticoagulant in patients undergoing percutaneous coronary interventions.  In addition to Angiomax, the Company is currently developing two other pharmaceutical products as potential acute care hospital products. The first of these, clevidipine, is an intravenous drug intended for the short-term control of blood pressure in surgical patients, including patients undergoing cardiac surgery. The second potential product, cangrelor, is an agent that suppresses platelet activation and inhibits platelet aggregation, which the Company believes has potential advantages in the treatment of vascular disease.

2.             Summary of Significant Accounting Policies

Basis of Presentation

                The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the accompanying financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented.

                The results of operations for the three- and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2005.  These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission.

Use of Estimates

                The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Available for Sale Securities

                The Company considers all highly liquid investments purchased with an original maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents at September 30, 2005 consisted of $27.1 million in demand deposits and money market funds and $21.5 million of corporate bonds and United States government agency notes with original maturities of less than three months.  Cash and cash equivalents at December 31, 2004 consisted of $34.5 million in demand deposits and money market funds and $2.0 million of corporate bonds with original maturities of less than three months.  These investments are carried at cost, which

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approximates fair value.  The Company measures all original maturities from the date the investment was originally purchased by the Company.

                The Company considers securities with original maturities of greater than three months to be available for sale securities. Securities under this classification are recorded at fair market value and unrealized gains and losses are recorded in accumulated other comprehensive loss, a separate component of stockholders’ equity. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. The cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity.

                At September 30, 2005, the Company held available for sale securities with fair value totaling $87.6 million. These available for sale securities included various corporate debt securities and United States government agency notes, $33.0 million of which had original maturities of more than three months and up to one year and $54.6 million of which had original maturities of more than one year and up to two years. At December 31, 2004, the Company held available for sale securities with fair value totaling $123.8 million.   These available for sale securities included various corporate debt securities and United States government agency notes, $49.1 million of which had original maturities of more than three months and up to one year and $74.7 million of which had original maturities of more than one year and up to two years.

Revenue Recognition

                Product Sales. The Company sells its products primarily to domestic wholesalers and international distribution partners, who, in turn, sell to hospitals. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about sale of the product, the amount of returns can be reasonably estimated and collectibility is reasonably assured.  Revenue from product sales that do not meet all of these requirements is recorded under current deferred revenue.

                Domestic Sales. The Company records allowances for chargebacks and other discounts and accruals for product returns and rebates at the time of sale, and reports revenue net of such amounts.  In determining allowances and accruals, the Company must make significant judgments and estimates. For example, in determining these amounts, the Company estimates hospital demand, buying patterns by hospitals and group purchasing organizations from wholesalers and the levels of inventory held by wholesalers. Making these determinations involves estimating whether trends in past wholesaler and hospital buying patterns will predict future product sales.  The Company recently agreed with its largest wholesalers to enter into fee-for-service arrangements under which these wholesalers have agreed to provide the Company with more frequent data on wholesaler inventory levels and hospital purchases. As these arrangements are implemented, the Company expects to apply this data in determining allowances and accruals.

                The nature of the Company’s allowances and accruals requiring critical estimates, and the specific considerations it uses in estimating their amounts, are as follows:

•                                          Product returns.   The Company’s customers have the right to return any unopened product during the 18-month period beginning six months prior to the labeled expiration date and ending 12 months after the labeled expiration date. As a result, in calculating the allowance for product returns, the Company must estimate the likelihood that product sold to wholesalers might remain in their inventory to within six months of expiration and analyze the likelihood that such product will be returned within 12 months after expiration.

In estimating the likelihood of product remaining in wholesalers’ inventory, the Company relies on information from wholesalers regarding their inventory levels and measured hospital demand as reported by the Company’s largest wholesalers, other third party sources and internal sales data. The Company believes that the information from its wholesalers and third party sources is directionally reliable, but the Company is unable to verify the accuracy of such data independently. The Company also considers its wholesalers’ past buying patterns, estimated remaining shelf life of product previously shipped and the expiration dates of product currently being shipped.

In estimating the likelihood of product returns, the Company relies primarily on historic patterns of returns and estimated remaining shelf life of product previously shipped.

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•                                          Chargebacks and rebates.  Although the Company sells Angiomax primarily to wholesalers and distributors, the Company typically enters into agreements with hospitals, either directly or through group purchasing organizations acting on behalf of their hospital members, in connection with the hospitals’ purchases of Angiomax from the Company’s wholesalers. Based on the terms of these agreements, most of the Company’s hospital customers have the right to receive a discounted price and volume-based rebate on product purchases. The Company provides a credit to the wholesaler, or a chargeback, representing the difference between the wholesaler’s acquisition list price and the discounted price.

As a result of these contracts, at the time of product shipment, the Company must estimate the likelihood that Angiomax sold to wholesalers might be ultimately sold to a contracting hospital or group purchasing organization. The Company must also estimate the contracting hospital’s or group purchasing organization’s volume of purchases.

The Company bases its estimates on the historic chargeback data it receives from wholesalers, which detail historic buying patterns and sales mix for particular hospitals and group purchasing organizations, and the applicable customer chargeback rates and rebate thresholds.

                The Company has adjusted its allowances for chargebacks and accruals for product returns and rebates in the past based on actual sales experience, and the Company will likely be required to make adjustments to these allowances in the future. The Company continually monitors its allowances and makes adjustments when the Company believes actual experience may differ from its estimates.

                At September 30, 2005 and December 31, 2004, the Company’s allowance for chargebacks was $0.9 million and $3.1 million, respectively, its accrual for rebates was $1.7 million and $1.6 million, respectively, and its accrual for product returns was $0.4 million and $0.6 million, respectively.

                International Distribution Partners.  Under the Company’s agreements with international distribution partners, the Company sells its product to these distribution partners at a percentage of the distribution partner’s established net selling price. The established net selling price is typically determined in the quarter in which the Company sells its products to these distribution partners, based on the distribution partner’s net selling price to its customers. In those situations, usually prior to product launch, where product is sold prior to the establishment of the distribution partner’s selling price, the Company records revenue at minimum prices specified in these agreements and subsequently adjusts its selling price once the established net selling price is determined.  In accordance with the terms of these agreements, under no circumstances would the subsequent adjustment result in the net selling price being less than the minimum price.

                Revenue from the sale of distribution rights includes milestone payments. These payments are recorded as deferred revenue until contractual performance obligations have been satisfied, and they are recognized ratably over the term of these agreements. When the period of deferral cannot be specifically identified from the contract, the Company must estimate the period based upon other critical factors contained within the contract. The Company reviews these estimates at least annually, which could result in a change in the deferral period.

Inventory

                Inventory is recorded upon the transfer of title from the Company’s vendors. Inventory is stated at the lower of cost or market value.  Angiomax bulk drug product is classified as raw materials and its costs are determined using acquisition costs from contract manufacturers. Work-in-progress costs of filling, finishing and packaging are recorded against specific product batches.  Prior to FDA approval of Angiomax and its original manufacturing process in December 2000, the Company expensed all of these costs as research and development. The Company recorded as inventory any Angiomax bulk drug product manufactured using the original manufacturing process to which the Company took title after FDA approval.

                Together with its contract-manufacturing partner, UCB Bioproducts S.A., the Company developed a second-generation chemical synthesis process, the Chemilog process, for the manufacture of Angiomax bulk drug substance. In May 2003, the Company received FDA approval of this process.  All Angiomax bulk drug product that was manufactured using the Chemilog process to which title had transferred to the Company prior to FDA approval was expensed as research and development at the time of transfer of title, and all bulk drug product manufactured after FDA approval of the Chemilog process has been and will be recorded as inventory upon transfer of title from

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the Company’s vendors.

                The major classes of inventory are as follows:

During the nine months ended September 30, 2005, in order to mitigate the risk of relying on its single suppliers, the Company increased the production of inventory to ensure an adequate supply of Angiomax to meet the anticipated commercial demands for Angiomax. The Company obtains all of its Angiomax bulk drug substance from one manufacturer and relies on a separate third party to carry out all fill-finish activities for Angiomax.  The Company reviews inventory for slow-moving or obsolete amounts based on expected product sales.

Research and Development

                Research and development costs are expensed as incurred.

Stock-Based Compensation

                Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (Statement 123) encourages, but does not require, companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25).

                The following table illustrates the pro forma effect on net income/(loss) and earnings/(loss) per share if the Company had applied the fair value recognition and share-based compensation cost provisions of Statement 123 to stock-based employee compensation:

For purposes of the table above, the Company estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

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                During the nine months ended September 30, 2005, the Company issued 1,056,974 shares of its common stock (Common Stock), of which 556,795 shares were issued upon the exercise of stock options and purchases under the 2000 Employee Stock Purchase Plan. The remaining 500,179 shares were issued upon the exercise of common stock purchase warrants.   During the nine months ended September 30, 2004, the Company issued 546,476 shares of its Common Stock, of which 511,342 shares were issued upon the exercise of stock options and purchases under the 2000 Employee Stock Purchase Plan. The remaining 35,134 shares were issued upon the exercise of common stock purchase warrants.

3.                                      Recent Accounting Pronouncement

                On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision to Statement 123. Statement 123(R) supersedes APB Opinion No. 25, and amends FASB Statement No. 95, “Statement of Cash Flows.”  Generally, the approach in Statement 123(R), is similar to the approach described in Statement 123.  However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Statement 123(R) must be adopted no later than January 1, 2006. Thereafter, pro forma disclosure is no longer an alternative.

                As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options or shares purchased by employees under the 2000 Employee Stock Purchase Plan.  Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on the Company’s results of operations.  The specific impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the transition method the Company adopts.  The Company has not assessed the impact of Statement 123(R) but the impact of Statement 123(R) would likely be material.  Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

4.             Net Income/(Loss) per Share

                                                                The following table sets forth the computation of basic and diluted net income/(loss) per share for the three and nine months ended September 30, 2005 and 2004:

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                Basic earnings/(loss) per share is computed using the weighted average number of shares of Common Stock outstanding during the period, reduced where applicable for outstanding yet unvested shares.  As of September 30, 2005, there were options to purchase 6,371,732 shares of Common Stock outstanding.  These options were not included in the computation of diluted net loss per share for the three and nine months ended September 30, 2005, as their effects would have been antidilutive.  As of September 30, 2004, there were outstanding options to purchase 5,575,951 shares of Common Stock and outstanding warrants to purchase 754,517 shares of Common Stock.  These options and warrants have been included in the computation of diluted earnings per share for the three and nine months ended September 30, 2004.  The number of dilutive Common Stock equivalents was calculated using the treasury stock method.

5.             Comprehensive Income/(Loss)

                Comprehensive income/(loss) is primarily comprised of net income/(loss), unrealized gain/(loss) on available for sale securities and currency translation adjustments.   Comprehensive income/(loss) for the three and nine months ended September 30, 2005 and September 30, 2004 is detailed below.

6.             Income Taxes

                For the nine months ended September 30, 2005, the Company provided for taxes based upon its estimated tax liability for the year.  This provision includes state taxes based on net worth and some income taxes in international jurisdictions.  At December 31, 2004, net operating losses available to offset future taxable income for federal income tax purposes were approximately $233.1 million.  If not utilized, federal net operating loss carryforwards will expire at various dates beginning in 2011 and ending in 2023. The Company has not recognized the potential tax benefit of its net operating losses in its balance sheets or statements of operations.  The future utilization of the Company’s net operating loss carryforwards may be limited based upon changes in ownership pursuant to regulations promulgated under the Internal Revenue Code of 1986, as amended.

7.             Commitments

                Contractual Obligations

                The Company’s long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business.  These include commitments related to purchases of inventory of the Company’s products, research and development service agreements, operating leases and consulting, employment and professional services agreements associated with selling and general administrative activities.

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The Company’s estimated contractual obligations as of September 30, 2005 are:

(1) Represents estimated contractual obligations remaining in 2005

Included above are inventory-related non-cancellable commitments to make payments to UCB Bioproducts of a total of $5.7 million during the fourth quarter of 2005, $9.7 million during 2006 and $14.6 million during 2007 for Angiomax bulk drug substance to be produced using the Chemilog process and $1.4 million in remaining Angiomax-related filling, finishing and packaging non-cancellable commitments through 2005.  The Company has $35.4 million of total estimated contractual obligations for research and development activities, of which $2.3 million is non-cancellable.  The Company also has $4.3 million of estimated contractual obligations for consulting, employment and professional services agreements associated with selling, general and administrative activities, of which $1.7 million is non-cancellable.

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q.  In addition to the historical information, the discussion in this quarterly report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting policies and factors set forth under “Factors That May Affect Future Results” below and elsewhere in this quarterly report on Form 10-Q.  Except where otherwise indicated, or where the context may otherwise require, references to “Angiomax” in this quarterly report on Form 10-Q mean Angiomax and Angiox collectively.

Overview

We are a pharmaceutical company that specializes in acute care hospital products. To date, we have generated substantially all of our revenues from sales of our first product, Angiomax® (bivalirudin).  Angiomax is a direct thrombin inhibitor that was approved by the FDA in December 2000 for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty.  In June 2005, the FDA approved new prescribing information for Angiomax to also include patients undergoing percutaneous coronary intervention.  The expanded label also includes a new Angiomax dosing recommendation, which is the same dose used in our REPLACE-2 clinical trial. We are also currently developing Angiomax for other indications. Since we began selling Angiomax in 2001, revenues to date have been generated principally from sales of Angiomax in the United States.   In September 2004, we received authorization from the European Commission to market Angiomax as Angiox™ (bivalirudin) in the member states of the European Union for use as an anticoagulant in patients undergoing percutaneous coronary interventions.

In evaluating our operating performance, we focus on use of Angiomax by existing hospital customers, as well as penetration to new hospitals, which are critical elements of our ability to increase revenues.  Since the announcement of the results of our REPLACE-2 clinical trial in November 2002, the number of hospitals that have granted Angiomax formulary approval and hospital demand for the product have increased.  Although these trends continued in the three months ended September 30, 2005, each grew more slowly than we had forecast.  We recently expanded our sales force and increased our marketing capabilities and we believe that our improved sales and marketing capabilities, and the expansion of our product label, will allow us to more effectively serve our existing customers and penetrate new hospitals.

Except for our most recently completed year, we have incurred losses on an annual basis since our inception.  We incurred a net loss this quarter, as our research and development expenses together with our general and administrative expenses, exceeded our net revenue.  Research and development expenses represent costs incurred for product acquisition, clinical trials, activities relating to regulatory filings and manufacturing development efforts.  We outsource much of our clinical trials and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead.  We expense our research and development costs as they are incurred.  Selling, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with marketing and promotional activities.

We expect to continue to spend significant amounts on the development of our products.  In the remainder of 2005, we plan to continue to invest in clinical studies to expand the approved indications for Angiomax and to continue to develop clevidipine and cangrelor.   We also plan to continue our sales and marketing programs to promote Angiomax, and to support programs to educate and inform physicians, nurses, pharmacists and other medical decision-makers about the benefits of Angiomax.  In light of these activities, our expanded sales force, and our plan to continue to evaluate possible acquisitions of late development-stage products, approved products, or businesses that fit within our growth strategy, we will likely need to generate greater revenues to achieve and maintain profitability.

Recent Developments

                We recently agreed with our largest wholesalers to enter into fee-for-service arrangements. We expect that these arrangements will result in reductions in wholesaler inventories, improved margins, more predictable buying patterns and more frequent data on wholesaler inventory levels and hospital demand.  We expect our three largest wholesalers to reduce their

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Angiomax inventory levels to an average of four to six weeks by the end of the first quarter of 2006.  As a result, we believe that the reported net sales for Angiomax over the next two quarters will be negatively affected.  We estimate that our wholesalers reduced their aggregate inventories of Angiomax by approximately $13.0 million in the three months ended September 30, 2005.  We expect these wholesalers to also reduce their aggregate inventories of Angiomax by approximately $13.0 million in each of the fourth quarter of 2005 and the first quarter of 2006.

                In October 2005, we also announced that we would resume our Phase III clinical safety trials of clevidipine, our intravenous, short-acting antihypertensive agent.  We voluntarily suspended enrollment in the safety trials in March 2005 after preliminary data from a planned interim analysis of approximately half of the study population showed more frequent atrial fibrillation among patients randomized to clevidipine than patients randomized to comparator drugs.  We recently completed our review of the interim results of the safety studies, which included more patients as well as a more detailed assessment of atrial fibrillation risk factors, incidence, treatment and outcomes than was available at the time of the suspension of enrollment. As a result of this more detailed review, we found no significant differences in the incidence of atrial fibrillation between the clevidipine and the comparator arms. Specifically, the incidence of atrial fibrillation was found to be similar among the randomized groups and in line with published data from other studies.  The independent drug safety monitoring board of the trials reviewed the completed data for the interim analysis and supported the resumption of patient enrollment. We plan to resume enrolling patients in January 2006 and anticipate completing enrollment in the safety studies by the end of 2006.

Application of Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information.  Actual results may differ significantly from these estimates under different assumptions and conditions.  In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.

We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where:

•                  the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for uncertain matters or the susceptibility of such matters to change; and

•                  the impact of the estimates and assumptions on financial condition or operating performance is material.

Our significant accounting policies are more fully described in the Notes to Unaudited Condensed Consolidated Financial Statements section of this quarterly report on Form 10-Q and Note 2 of the Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2004.  Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are “critical accounting estimates.”  We have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to revenue recognition and inventory described under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Application of Critical Accounting Policies” in our annual report on Form 10-K for the year ended December 31, 2004, are “critical accounting estimates.”

Results of Operations

Three Months Ended September 30, 2005 and 2004

                Net Revenue. As shown in the table below, net revenue for the three months ended September 30, 2005 decreased 15% to $31.9 million as compared to $37.7 million for the three months ended September 30, 2004.

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Net Revenue

                Net revenue for the three months ended September 30, 2005 decreased compared to the three months ended September 30, 2004 primarily as a result of the impact of reduced purchases by wholesalers in connection with our restructured wholesaler arrangements.  We estimate that our wholesalers reduced their aggregate inventories of Angiomax during the three months ended September 30, 2005 by approximately $13.0 million in implementing the planned inventory reduction. This decrease in sales in the 2005 period was offset in part by higher revenues associated with the effect of a 9.6% price increase to wholesalers in December 2004 and an increase in underlying hospital demand for Angiomax.

                We expect our revenues in the next two quarters to continue to be affected by lower product sales related to our restructured wholesaler arrangements, as our wholesalers reduce inventory levels to an average of four to six weeks.  We expect these wholesalers to reduce their aggregate inventories of Angiomax by approximately $13.0 million in each of the fourth quarter of 2005 and the first quarter of 2006. The timing of the inventory reduction, and the reduction in product sales in any quarter, may vary depending on the end-user demand for the product and the actions of our wholesalers.

                We believe that the decrease in international sales in the three months ended September 30, 2005 compared to the three months ended September 30, 2004 reflects a high initial level of sales in the 2004 period in preparation for the launch of Angiox in the European Union in the fourth quarter of 2004.

                Cost of Revenue.  As shown in the table below, cost of revenue for the three months ended September 30, 2005 decreased 33% to $6.1 million, or 19% of net revenue, compared to $9.1 million, or 24% of net revenue, for the three months ended September 30, 2004.   Cost of revenue consists of expenses in connection with the manufacture of Angiomax sold, royalty expenses under our agreement with Biogen Idec, Inc. and the logistics costs of selling Angiomax, such as distribution, storage and handling.

Cost of Revenue

                The decrease in cost of revenue for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 resulted from a decrease in manufacturing costs and royalty expenses due to lower sales volume. The decrease in royalty expenses in the 2005 period resulted from the decrease in Angiomax sales during the period and an adjustment to the royalty rate used to calculate payments to Biogen due to our reduced sales forecast for Angiomax. As a result of our lower annual forecast, we expect an effective royalty rate for the year ending December 31, 2005 to be lower than the royalty rate we had applied in the first two quarters of 2005. In the three months ended September 30, 2005, we applied a royalty rate that was less than the expected full-year royalty rate in order to bring our effective royalty rate in line with our expected full-year royalty rate.

Research and Development Expenses.  Research and development expenses for the three months ended September 30, 2005 increased 45% to $17.8 million from $12.3 million for the three months ended September 30,

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2004.  The increase in research and development expenses resulted primarily from an increase in patient enrollment and associated expenditures related to the ACUITY trial, our study of Angiomax in patients presenting in the emergency department with acute coronary syndromes, which is further described below, as well as expenses related to increased business development activities.  The increases were offset in part by lower expenses relating to clevidipine as a result of the voluntary suspension of Phase III safety trials in March 2005.

                The following table identifies for each of our major research and development projects, our spending for the three months ended September 30, 2005 and 2004. Spending for past periods is not necessarily indicative of spending in future periods.

Research and Development Expenses

  We currently plan to spend approximately $10 million to $13 million on research and development in the fourth quarter of 2005, of which approximately 78% is expected to be spent for Angiomax.  This anticipated research and development spending in the fourth quarter of 2005 primarily reflects expected patient enrollment and associated expenditures relating to the ACUITY trial and clinical trial costs for clevidipine and cangrelor.

Angiomax.   As of the date of this quarterly report, we are conducting a randomized 13,800-patient Phase III trial called ACUITY to study the use of Angiomax in patients presenting to the emergency department with acute coronary syndromes who may be medically managed or ultimately treated in the catheterization laboratory or operating room. We expect to complete patient enrollment in ACUITY in the fourth quarter of 2005. We recently completed a Phase III trial program studying the use of Angiomax as an anticoagulant in patients undergoing coronary artery bypass graft surgery, or CABG, with and without the use of a bypass pump, and in treatment of patients with a clinical condition known as heparin-induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS, who are undergoing CABG, with and without the use of a bypass pump.  We expect to submit an application to the FDA for approval to market Angiomax in patients undergoing CABG in the fourth quarter of 2005.

                Clevidipine. We completed two 100-patient pivotal Phase III efficacy studies of clevidipine in cardiac surgery in 2004.  We also plan to resume three 500-patient safety trials.  We voluntarily suspended enrollment in the safety trials  in March 2005 after a planned interim analysis of approximately half of the study population showed more frequent atrial fibrillation among patients randomized to clevidipine than patients randomized to comparator drugs. We recently completed our interim review of the results of the safety studies and we found no significant differences in interim safety results between the clevidipine and the comparator arms. We plan to resume enrolling patients beginning in January 2006 and anticipate completing enrollment in the safety studies by the end of 2006.

                Cangrelor.  We have completed enrollment in a clinical trial of cangrelor in 40 healthy volunteers to identify a dosing strategy for use of cangrelor in the cardiac catherization laboratory and expect results later this year.

                We expect to begin negotiating site agreements with potential sites for a  Phase III clinical testing of cangrelor in the fourth quarter of 2005.

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                Other.  Spending in this category consists of clinical trial infrastructure costs including data management, statistical analysis, product safety related costs and expenses related to business development activities. In the three months ended September 30, 2005, we incurred business development expenses in connection with an agreement that we entered into with a third party to evaluate early stage compounds as well as expenses in connection with our evaluation of strategic opportunities for the development and commercialization of cangrelor.

                Our success in expanding the approved indications for Angiomax, or developing our product candidates, is highly uncertain.  We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

•                  the scope, rate of progress and costs of our clinical trials and other research and development activities;

•                  the financial contributions of our third-party distributors to the costs of our clinical trials;

•                  future clinical trial results;

•                  the terms and timing of any collaborative, licensing and other arrangements that we may establish;

•                  the cost and timing of regulatory approvals;

•                  the cost and timing of establishing sales, marketing and distribution capabilities;

•                  the cost of establishing clinical and commercial supplies of our product candidates;

•                  the effect of competing technological and market developments; and

•                  the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

                Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the three months ended September 30, 2005 increased 35% to $15.4 million from $11.4 million for the three months ended September 30, 2004.  This increase was primarily due to the Angiomax sales force expansion.

                Other Income.  Other income, which is almost completely comprised of interest income, increased to $1.1 million for the three months ended September 30, 2005 from $0.5 million for the three months ended September 30, 2004. This increase was primarily due to higher rates of return.

Nine Months Ended September 30, 2005 and 2004

                Net Revenue. As shown on the table below, net revenue for the nine months ended September 30, 2005 increased 14% to $118.1 million as compared to $103.4 million for the nine months ended September 30, 2004.

Net Revenue

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                We believe that the increase in net revenue for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004  is due primarily to increased use of Angiomax by existing hospital customers, adoption of Angiomax by new hospital customers and effects of higher prices, including a 9.6% price increase to our wholesalers in December 2004 and a 3% price increase to our wholesalers in June 2004. These factors were offset in part by the impact of reduced purchases by wholesalers in connection with our restructured wholesaler arrangements.  International sales in the nine months ended September 30, 2005 increased over the comparable period in 2004 because the 2005 period included a full nine months of selling activity in the European Union.

                Cost of Revenue.  As shown in the table below, cost of revenue for the nine months ended September 30, 2005 increased 36% to $27.7 million, or 23% of net revenue, compared to $20.3 million, or 20% of net revenue, for the nine months ended September 30, 2004.   Cost of revenue consists of expenses in connection with the manufacture of Angiomax sold, royalty expenses under our agreement with Biogen and the logistics costs of selling Angiomax, such as distribution, storage and handling.

Cost of Revenue

                Cost of revenue increased primarily as a result of an increase in the cost of manufacturing and royalty expenses. Cost of manufacturing increased in part due to increased sales volume in the 2005 period.  In addition,  in the first quarter of 2004, we sold mostly Angiomax manufactured using the Chemilog process prior to the FDA approval of that process in May 2003.  All costs of manufacturing this Angiomax had been expensed as research and development costs and therefore were not reflected in cost of revenue. Our cost of manufacturing as a percentage of net revenue increased in the first nine months of 2005, compared to the first nine months of 2004 because all of the Angiomax we sold in 2005 was manufactured using the Chemilog process after FDA approval of the process. All costs of manufacturing this Angiomax had been recorded as inventory, which is reflected in cost of revenue when sold, rather than as research and development expense.  Since the second quarter of 2004, and for the foreseeable future, we expect to sell Angiomax manufactured using the Chemilog process that has not been previously expensed.  Our royalty expenses increased by $5.4 million for the 2005 period under our agreement with Biogen reflecting a higher effective royalty rate and increased sales volume compared to the comparable 2004 period.

Research and Development Expenses.  Research and development expenses for the nine months ended September 30, 2005 increased 50% to $51.4 million from $34.2 million for the nine months ended September 30, 2004.  The increase in research and development expenses reflects an increase in patient enrollment and associated expenditures related to the ACUITY trial, enrollment and data analysis in the clevidipine trials, and manufacturing development costs and clinical trial costs for cangrelor.

                The following table identifies for each of our major research and development projects, our spending for the nine months ended September 30, 2005 and 2004. Spending for past periods is not necessarily indicative of spending in future periods.

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Research and Development Expenses

                Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the nine months ended September 30, 2005 increased 18% to $44.5 million from $37.6 million for the nine months ended September 30, 2004. This increase was primarily due to the Angiomax sales force expansion.

                Other Income.  Other income for the nine months ended September 30, 2005, which is almost completely comprised of interest income, increased 100% to $3.0 million from $1.5 million for the nine months ended September 30, 2004. This increase was primarily due to higher rates of return.

Liquidity and Capital Resources

Sources of Liquidity.    Since our inception, we have financed our operations through the sale of common and preferred stock, sales of convertible promissory notes and warrants, interest income and revenues from sales of Angiomax.  With the exception of the quarterly periods beginning with the third quarter of 2003 through the second quarter of 2005, we have not been profitable. We had $136.1 million in cash, cash equivalents and available for sale securities at September 30, 2005.

Cash Flows.    As of September 30, 2005, we had $48.6 million in cash and cash equivalents, as compared to $36.5 million as of December 31, 2004. Our major uses of cash during the nine months ended September 30, 2005 included net cash used in operating activities of $27.9 million, which was offset by net cash of $33.3 million received in investing activities and $6.7 million received from employee stock option exercises.

During the period, we used cash in operating activities to fund:

•                  increase in accounts receivable of $20.4 million, attributable to the timing of cash receipts from our customers;

•                  planned growth in inventory of $15.3 million, relating to purchases of Angiomax bulk drug product and filling, finishing and packaging costs from our contract manufacturers to meet anticipated product demand growth; and

•                  a decrease in accounts payable of $6.4 million due to timing of payments.

These cash uses were partly offset by cash provided by operations, which consisted of an increase of $9.5 million in deferred revenue and an increase of $6.6 million in accrued expenses.  The increase in deferred revenue represents a product shipment in the quarter ended September 30, 2005 for which all of the revenue recognition requirements were not met.

During the nine months ended September 30, 2005, we received $33.3 million in cash in net investing activities, which consisted principally of the maturity and sale of available for sale securities, partially offset by purchases of available for sale securities and purchases of fixed assets relating to leasehold improvements and computer equipment.

                Funding Requirements.    We expect to devote substantial resources to our research and development efforts

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and to our sales, marketing and manufacturing programs associated with the commercialization of our products. Our funding requirements will depend on numerous factors including:

•                  the extent to which Angiomax is commercially successful in the United States;

•                  the extent to which our international distribution partners, including Nycomed, are commercially successful;

•                  the progress, level and timing of our research and development activities related to our clinical trials with respect to Angiomax, clevidipine and cangrelor;

•                  the cost and outcomes of regulatory submissions and reviews;

•                  packaging approval for Angiox from the European authorities, and pricing reimbursement approvals in individual European countries, on a timely basis or at all;

•                  the continuation or termination of third party manufacturing or sales and marketing arrangements;

•                  the cost and effectiveness of our sales and marketing programs;

•                  the status of competitive products;

•                  our ability to defend and enforce our intellectual property rights; and

•                  the establishment of additional strategic or licensing arrangements with other companies, or acquisitions.

                We believe, based on our operating plan as of the date of this quarterly report, which includes anticipated revenues from Angiomax and interest income, that our current cash, cash equivalents and available for sale securities will be sufficient to fund our operations through 2006 and beyond, without requiring us to obtain external financing. We expect, however, to periodically assess our financing alternatives and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated revenues from Angiomax or otherwise, or if we acquire additional product candidates or businesses, or if we otherwise believe that raising additional capital would be in our interest and the interests of our stockholders, we may sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in dilution to our stockholders, and debt financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. We cannot be certain that public or private financing will be available in amounts or on terms acceptable to us, if at all. If we seek to raise funds through collaboration or licensing arrangements with third parties, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish or grant licenses on terms that may not be favorable to us.  If we are unable to obtain additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results.

Contractual Obligations

Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business.  These include commitments related to purchases of inventory of our products, research and development service agreements, operating leases and consulting, employment and professional services agreements associated with selling and general administrative activities.

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Our estimated contractual obligations as of September 30, 2005 are: