UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2005

Commission file number: 0-23736

GUILFORD PHARMACEUTICALS INC.

(Exact name of Registrant as specified in its charter)


Delaware		52-1841960
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

6611 Tributary Street Baltimore, Maryland (Address of principal executive offices)		21224 (Zip Code)

(410) 631-6300

Registrant’s telephone number, including area code:

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2. Yes þ No o

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding August 2, 2005

Common Stock, $0.01 par value		46,577,927

TABLE OF CONTENTS


			Page

PART I
	Item 1 Financial Statements (unaudited)			4
		Consolidated Balance Sheets		5
		Consolidated Statements of Operations		6
		Consolidated Statements of Cash Flows		7
		Consolidated Statement of Changes in Stockholders’ Equity (Deficit)		8
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
	Item 3 Quantitative and Qualitative Disclosure About Market Risk			34
	Item 4 Controls and Procedures			35

PART II
	Item 1 Legal Proceedings			36
	Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			36
	Item 3 Defaults Upon Senior Securities			36
	Item 4 Submission of Matters to a Vote of Security Holders			36
	Item 5 Other Information			37
	Item 6 Exhibits			58
	Signatures			59

FORWARD-LOOKING STATEMENTS

From time to time in this interim quarterly report we may make statements that reflect our current expectations regarding our future results of operations, economic performance, and financial condition, as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “estimate,” and similar expressions.

All of these items involve significant risks and uncertainties. These and any of the other statements we make in this quarterly report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements.

We discuss some factors that could cause or contribute to such differences in the “Risk Factors” section of this quarterly report. In addition, any forward-looking statements we make in this document speak only as of the date of this document, and we do not intend to update any such forward-looking statements to reflect events or circumstances that occur after that date.

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements. (unaudited)*

The consolidated financial statements included in this report have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and the related notes included in our annual report on Form 10-K for the year ended December 31, 2004.

In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements as of and for the three months and six months ended June 30, 2005 (or Unaudited Consolidated Financial Statements) are of a normal recurring nature, necessary to present fairly our financial position, results of operations, cash flows and changes in stockholders’ equity (deficit.) Interim results are not necessarily indicative of results for the full fiscal year.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)


			June 30,			December 31,
			2005			2004

			(Unaudited)
ASSETS
Cash and cash equivalents			$	38,878		$	61,889
Marketable securities				18,444			27,705
Investments — held by Symphony Neuro Development Company				23,771			32,062
Accounts receivable, net				5,540			4,666
Inventories				3,166			2,373
Prepaid expenses and other current assets				1,709			4,744

	Total current assets			91,508			133,439
Investments — restricted				1,837			19,899
Property and equipment, net				1,988			1,758
Intangibles, net				36,069			75,943
Other assets				4,980			6,096

	Total assets		$	136,382		$	237,135


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable			$	11,296		$	15,333
Current portion of long-term debt				1,941			2,916
Accrued payroll related costs				5,555			2,932
Accrued contracted services				7,665			3,929
Accrued expenses and other current liabilities				5,112			6,355

	Total current liabilities			31,569			31,465
Long-term debt, excluding current portion				70,033			87,393
Revenue interest obligation				45,890			44,932
Other liabilities				8,899			8,320

	Total liabilities			156,391			172,110

Minority interest				21,145			28,132
Commitments and contingencies				—			—
Stockholders’ Equity (Deficit):
	Preferred stock, par value $0.01 per share; authorized 4,700,000 shares, none issued			—			—
	Series A junior participating preferred stock, par value $0.01 per share; authorized 300,000 shares, none issued			—			—
	Common stock, par value $0.01 per share; authorized 125,000,000 shares,
		46,638,788 and 46,638,788 issued		466			466
	Additional paid-in capital			436,310			435,130
	Accumulated deficit			(472,427	)		(391,416	)
	Accumulated other comprehensive loss			(1,061	)		(2,130	)
	Unearned compensation			(3,830	)		(3,653	)
	Treasury stock, at cost; 123,415 and 304,336 shares			(612	)		(1,504	)

		Total stockholders’ (deficit) equity		(41,154	)		36,893

	Total liabilities and stockholders’ equity (deficit)		$	136,382		$	237,135

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands, except per share data)


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2005			2004			2005			2004

Revenue:
	Net product revenue		$	12,384		$	10,747		$	22,887		$	19,474
	Revenue from license fees, milestones and other			381			402			614			603

		Total revenue		12,765			11,149			23,501			20,077

Costs and Expenses:
	Cost of sales			857			1,232			1,842			2,223
	Research and development			16,910			8,852			32,935			18,225
	Selling, general and administrative			14,724			14,433			29,585			26,181
	Intangible amortization			1,042			1,705			2,755			3,426
	Acquired in-process research and development			—			5,238			—			5,238
	Impairment of long-lived assets			6,093			—			37,118			—

		Total costs and expenses		39,626			31,460			104,235			55,293

Operating Loss				(26,861	)		(20,311	)		(80,734	)		(35,216	)
Other Income/(Expenses):
		Investment and other income		600			402			720			880
		Revenue interest expense		(2,107	)		(2,095	)		(4,203	)		(4,430	)
		Interest expense		(1,063	)		(1,367	)		(2,296	)		(2,673	)

Loss before Minority Interest				(29,431	)		(23,371	)		(86,513	)		(41,439	)
	Minority Interest			2,964			2,104			5,502			2,104

Net Loss			$	(26,467	)	$	(21,267	)	$	(81,011	)	$	(39,335	)

Basic and Diluted Loss per Common Share			$	(0.58	)	$	(0.63	)	$	(1.76	)	$	(1.16	)

Weighted-average shares used to calculate basic and diluted loss per share				46,015			33,954			45,969			33,938

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)


				Six Months Ended
				June 30,

				2005			2004

Cash Flows From Operating Activities:
	Net loss			$	(81,011	)	$	(39,335	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Impairment of long-lived assets			37,118			—
		Acquired in-process research and development			—			5,238
		Depreciation and amortization			3,518			6,348
		Minority interest			(5,502	)		(2,104	)
		Non-cash compensation expense			1,511			233
		Non-cash imputed revenue interest expense			866			1,476
		Loss on sale of marketable securities			893			144
		Loss on termination of swap agreement			524			—
	Changes in assets and liabilities:
		Accounts receivable			(874	)		(643	)
		Prepaid expenses and other current assets and other assets			3,573			299
		Inventories			(793	)		(1,037	)
		Accounts payable and other liabilities			597			1,132

			Net cash flows used in operating activities		(39,580	)		(28,249	)

Cash Flows From Investing Activities:
	Purchases of investments held by SNDC				—			(43,000	)
	Proceeds from sale of investments held by SNDC				8,291			6,803
	Proceeds from maturities and sales of available-for-sale securities				30,825			26,127
	Purchases of available-for-sale securities				(3,310	)		(10,949	)
	Purchases of property and equipment				(270	)		(11	)

			Net cash flows from (used in) investing activities		35,536			(21,030	)

Cash Flows From Financing Activities:
	Principal payments on debt and revenue interest obligation				(18,729	)		(2,234	)
	Net proceeds from sale of preferred stock by SNDC				—			43,000
	Payment to terminate swap agreement				(622	)		—
	Proceeds from sale of treasury stock				384			159
	Debt issuance costs				—			(3,105	)
	Net proceeds from issuances of common stock				—			235

			Net cash flows (used in) from financing activities		(18,967	)		38,055

Net decrease in cash and cash equivalents					(23,011	)		(11,224	)
Cash and cash equivalents at the beginning of year					61,889			29,939

Cash and cash equivalents at the end of period				$	38,878		$	18,715

Supplemental cash flow data:
	Net interest paid			$	6,945		$	5,209
	Stock distributed to 401(k) and ESP plans				653			292
	Non-cash investing and financing activities:
		Capital lease obligations			394			847

See accompanying notes to consolidated financial statements.

LANDSCAPE>

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

($ in thousands, except share data)

(unaudited)


														Accumulated
				Common Stock										Other									Total
								Additional						Comprehensive						Treasury			Stockholders’
				Number of				Paid-In			Accumulated			Income			Unearned			Stock, at			Equity
				Shares		Amount		Capital			Deficit			(Loss)			Compensation			Cost			(Deficit)

Balance, December 31, 2004					46,638,788	$	466	$	435,130		$	(391,416	)	$	(2,130	)	$	(3,653	)	$	(1,504	)	$	36,893
Comprehensive gain(loss):
	Net loss											(81,011	)											(81,011	)
	Other comprehensive gain(loss):
		Recognition of loss on termination of swap agreement													524									524
		Unrealized gain on interest rate swap agreements													5									5
		Unrealized gain on available-for-sale securities													540									540

			Total other comprehensive gain(loss)																					1,069

Total comprehensive loss																								(79,942	)

Amortization of unearned compensation																		1,183						1,183
Exercise of stock options and restricted stock units (12,902 shares)									(19	)											64			45
Issuance of restricted stock units									1,360									(1,360	)					—
Distribution of 66,775 shares to 401(k) plan									(16	)											330			314
Distribution of 98,141 shares to ESP plan									(145	)											484			339
Distribution of 3,103 shares to consultant									—												14			14

Balance, June 30, 2005 (unaudited)					46,638,788	$	466	$	436,310		$	(472,427	)	$	(1,061	)	$	(3,830	)	$	(612	)	$	(41,154	)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Description of Business

Guilford Pharmaceuticals Inc. (together with its subsidiaries, Guilford or the Company) is a pharmaceutical company located in Baltimore, Maryland, engaged in the research, development and commercialization of proprietary pharmaceutical products that target the hospital and neurology markets.


2.	Summary of Significant Accounting Policies and Practices

Basis of Presentation

The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s 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 to disclose contingent assets and liabilities as of the dates of such financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Interest Obligation

The Company has entered into a Revenue Interest Assignment Agreement (or Revenue Agreement) with Paul Royalty Fund, L.P. and certain of its affiliated entities (or collectively, PRF), pursuant to which PRF is entitled to receive revenue interest payments based on sales of certain of the Company’s existing and future products. The Company recorded its revenue interest obligation as debt due to the Company’s significant continuing involvement in the generation of cash flows due to PRF. The Company amortizes the revenue interest obligation under the effective interest method and utilizes an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF reduce the future obligation.

Revenue Recognition

Revenue from sales of GLIADEL® Wafer (or Gliadel) and AGGRASTAT® Injection (or Aggrastat) is recognized when all four of the following criteria are met:


	•	the Company has persuasive evidence that an arrangement exists;

	•	price is fixed and determinable;

	•	title has passed; and

	•	collection is reasonably assured.

The Company records its revenue net of provisions for returns, chargebacks and discounts, which are established at the time of sale. The Company’s credit and exchange policy includes provisions for return of any product that has expired or was damaged in shipment. The Company’s historical return rate is applied to its current unit sales to provide an allowance for future product returns. The product return rate is periodically updated to reflect actual experience.

Product demand by distributors and wholesalers during a given period may not correlate with prescription demand for the product in the same period. As a result, the Company periodically evaluates the specialty distributor’s and wholesalers’ inventory positions. If such evaluation causes the Company to believe that these

levels are too high based on expected prescription demand, then until these levels are reduced to acceptable levels the Company will:


	•	defer recognition of revenue if the Company determines there is excess channel inventory for the product; and

	•	not accept purchase orders from the distributor or not ship additional products.

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Principals Board Opinion No. 25, “Accounting for Stock Issued to Employees” (or APB 25), and recognizes compensation costs attributable to stock option and similar plans based on any excess of the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock.

Statement of Financial Accounting Standards (or SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (or SFAS 148), which amended SFAS 123, “Accounting for Stock-Based Compensation,” (or SFAS 123) requires companies to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS 148 have been incorporated herein.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2005			2004			2005			2004
($ in thousands, except per share data)
Net loss, as reported		$	(26,467	)	$	(21,267	)	$	(81,011	)	$	(39,335	)
Add:Stock-based employee compensation expense included in reported net loss			622			—			1,183			—
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards			(1,930	)		(2,562	)		(4,552	)		(5,446	)

Pro forma net loss		$	(27,775	)	$	(23,829	)	$	(84,380	)	$	(44,781	)

Basic and diluted loss per share:
	As reported	$	(0.58	)	$	(0.63	)	$	(1.76	)	$	(1.16	)
	Pro forma	$	(0.60	)	$	(0.70	)	$	(1.84	)	$	(1.32	)

New Accounting Standards

SFAS 123R:

In December 2004, the Financial Accounting Standards Board (or FASB) issued SFAS 123R (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123. SFAS 123R supersedes APB 25 and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. In accordance with the effective date of the statement, the Company will adopt the statement starting in its fiscal year beginning January 1, 2006.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method. However, SFAS 123R 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 over the expected period of service. Accordingly, the adoption of SFAS 123R’s fair value

method may have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.

The impact of adopting SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, if the Company adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and loss per share as disclosed above in “Stock-Based Compensation.” SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is unable to estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.


	SFAS 151:

In November 2004, FASB issued SFAS 151, “Inventory Cost.” This statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage.) The provision of the statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the impact of this statement on its consolidated financial positions, results of operations and cash flows.


	SFAS 154:

In June 2005, FASB issued SFAS 154, “Accounting Changes and Error Corrections” (or SFAS 154), a replacement of APB 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. As of June 30, 2005, this statement had no impact on the Company’s financial statements, results of operations and cash flows.


3.	Aggrastat Intangibles

On April 5, 2005, the Company concluded that its Aggrastat intangibles and other related assets and liabilities (or the Aggrastat Assets) were not essential to the Company’s long-term business strategy. As a result, the Company is pursuing strategic alternatives for the Aggrastat Assets, including, but not limited to, selling, divesting, partnering, licensing or entering into other similar arrangements with respect to those assets.

In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the Company performed an impairment analysis as of March 31, 2005 due to the Company’s expectation that it was more likely than not that the Aggrastat Assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. The impairment analysis was performed using market-based sales multiples for comparable product lines and the Company determined that the carrying value of the Aggrastat Assets was in excess of its fair value. Accordingly, during the quarter ended March 31, 2005, the Company recorded a non-cash charge of $31.0 million to write-down the carrying value of the Aggrastat Assets to fair value.

As of June 30, 2005, the Company performed an impairment analysis and determined that the carrying value of the Aggrastat Assets was still in excess of its fair value based on a non-binding offer received from a third-party. Accordingly, during the quarter ended June 30, 2005, the Company recorded a non-cash charge of $6.1 million to further write-down the carrying value of the Aggrastat Assets to its fair value. The Aggrastat Assets are being classified as an “Asset Held for Use” because assets are not available for immediate sale as PRF holds a security interest in the assets related to Aggrastat under the Revenue Agreement.

As of June 30, 2005, the Company stopped all Aggrastat related trials, including TENACITY, a multi-center, double-blind, randomized comparison of Aggrastat and Abciximab (ReoPro®.) As of June 30, 2005, the Company’s contractual commitments related to the Aggrastat Assets included:


	•	an agreement with Baxter Healthcare Corporation for the supply of 250 ml and 100 ml bags of Aggrastat through July 2009, which commits the Company to purchase approximately $6.1 million of such bags, and $1.3 million of such purchase commitment remains outstanding for the remainder of 2005; and

	•	various funding commitments and agreements related to the advancement of the Company’s research and development activities, which the Company currently estimates to be no more than $1.0 million.

Additionally, under the Revenue Agreement, PRF is entitled to require the Company to repurchase all or a portion of PRF’s revenue interest if the Company sells the Aggrastat Assets. The repurchase price guarantees PRF a return in an amount over its initial investment which is reduced based on the Company’s prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million.

Effective July 20, 2005, in connection with the merger agreement with MGI Pharma, Inc. (or MGI Pharma), the Company entered into a letter agreement with PRF and MGI Pharma whereby PRF agreed to sell, and on or before the consummation of the merger, MGI Pharma agreed to repurchase, PRF’s revenue interest granted under the Revenue Agreement for an agreed calculated price. In the event the merger is not consummated, the letter agreement will terminate and, should the Gliadel business be sold to MGI Pharma as provided under the line of credit agreement, PRF’s revenue interest in Gliadel will be repurchased by the Company for the same agreed calculated price. The repurchase price ranges from approximately $58.0 million to approximately $66.0 million and is dependent on when the repurchase occurs between August 1, 2005 and March 31, 2006, at which time the option to sell Gliadel to MGI Pharma expires. If the Company repurchases PRF’s revenue interest during this period, the Company would incur a non-cash loss on restructuring the revenue interest obligation ranging from approximately $14.0 million to approximately $20.0 million depending on when the repurchase occurs. See Note 11. “Subsequent Events” below for further detail.


4.	Accounts Receivable


		June 30,			December 31,
		2005			2004
($ in thousands)
Trade accounts receivable		$	5,556		$	4,692
Less allowance for doubtful accounts			(16	)		(26	)

	Accounts receivable, net	$	5,540		$	4,666

Accounts receivable include amounts relating to sales of Gliadel to a specialty distributor, hospitals and wholesalers that provide for net payments in 91 days, and sales of Aggrastat to wholesalers that provide for net payments in 31 days, both with certain discounts for early payment.


5.	Inventory


		June 30,		December 31,
		2005		2004
($ in thousands)
Raw materials		$	714	$	354
Work-in-process			635		314
Finished goods			1,817		1,705

	Inventory	$	3,166	$	2,373


6.	Intangible Assets and Acquired In-process Research and Development


		Estimated		June 30,			December 31,
		Life in Years		2005			2004
($ in thousands)
Gliadel rights reacquisition			10	$	8,412		$	8,412

Aggrastat patents			13		21,589			53,390
Trademarks			13		3,942			9,750
Customer contracts and related relationships			13		103			14,712
Other			11		5,949			267

	Total Aggrastat intangible assets				31,583			78,119

Less accumulation amortization					(3,926	)		(10,588	)

	Intangible assets, net			$	36,069		$	75,943

On April 5, 2005, the Company concluded that the Aggrastat Assets were not essential to the Company’s long-term business strategy. As a result, the Company evaluated the recoverability of the Aggrastat Assets as of March 31, 2005 and determined that the carrying value was in excess of the fair value. Accordingly, the Company recorded a non-cash charge of $31.0 million to write-down the carrying value of the Aggrastat Assets to fair value.

As of June 30, 2005, based on a non-binding third-party offer, the Company determined that the carrying value of the Aggrastat Assets was still in excess of its fair value. Accordingly, the Company recorded a non-cash charge of $6.1 million to further write-down the carrying value of the Aggrastat Assets to its fair value.

Amortization expense for the three months ended June 30, 2005 and 2004 was $1.0 million and $1.7 million, respectively, and $2.8 million and $3.4 million for the six months ended June 30, 2005 and 2004, respectively.


7.	Long-term Debt

In January 2005, the Company paid off the outstanding principal balance of $17.2 million on its five-year term loan with Wachovia Bank National Association (or Wachovia.) Under the terms of the loan, the Company was required to maintain a restricted cash collateral account in the amount of the remaining unpaid principal of the loan. Additionally, the Company had entered into a swap agreement that effectively fixed the interest rate on this indebtedness at 5.36%. As a result of the repayment, the related cash collateral account balance of $17.2 million has been released and the swap agreement was paid and terminated, which resulted in a realized loss of $0.5 million.


8.	PRF Revenue Interest Obligation

On October 28, 2003, the Company acquired from Merck & Co., Inc. the rights to Aggrastat in the United States and its territories for a purchase price of $84.0 million. The Company paid $42.0 million in cash and entered into a $42.0 million revenue interest financing arrangement with PRF pursuant to the Revenue Agreement, the terms of which are summarized as follows:


	•	PRF is entitled to receive:


	•	from October 28, 2003 through December 31, 2006 — 10% of the Company’s combined net revenue from Gliadel and Aggrastat up to $75.0 million and 2.5% of those annual net revenues in excess of $75.0 million;

	•	from January 1, 2007 through December 31, 2012 (the end of the term of the financing arrangement with PRF) — 17.5% of the Company’s combined net revenue from Gliadel and Aggrastat up to $75.0 million and 3.5% of those annual net revenues in excess of $75.0 million;


	•	the revenue interest percentages can increase if the Company fails to meet contractually specified levels of annual net revenue from products for which PRF is entitled to receive its revenue interest; and

	•	minimum payments payable quarterly totaling $6.3 million in 2005, $7.5 million in 2006, $10.0 million per year in 2007 through 2009, and $12.5 million per year in 2010 through 2012. During the three months ended June 30, 2005 and June 30, 2004, the Company paid $1.6 million and $1.3 million, respectively, to PRF related to the minimum payments requirements, and $3.1 million and $2.5 million during the six months ended June 30, 2005 and 2004, respectively.


	•	During each year of the term of the Revenue Agreement, PRF will be entitled to receive a portion of revenue from products that the Company may acquire in the future or of the Company’s product candidates AQUAVAN® Injection (or Aquavan) and GPI 1485, in the case that the Company’s calculated annual obligation(s) to make royalty payments under the Revenue Agreement (based upon the combined net revenue from Gliadel and Aggrastat) are less than $7.6 million for 2005, $8.3 million for 2006, $15.3 million for 2007, $15.5 million for 2008, $15.8 million for 2009, $16.0 million for 2010 or $15.9 million for 2011 and 2012, respectively.

	•	PRF received five-year warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $9.15 per share.

	•	PRF received a security interest in the assets related to Gliadel and Aggrastat. As a result of this security interest, the Company may not be free to utilize those assets at its discretion, such as selling or outlicensing rights to part or all of those assets, without first obtaining the permission of PRF. This requirement could delay, hinder or condition the Company’s ability to enter into corporate partnerships or strategic alliances with respect to these assets.

	•	PRF may be entitled to require the Company to repurchase its revenue interest under the following circumstances:


	•	if the Company fails to maintain an escrow account funded with eight quarters of minimum payments to PRF in the aggregate of $15.7 million and $13.8 million as of June 30, 2005 and December 31, 2004, respectively, or fails to maintain at least $20.0 million of net working capital;

	•	if the Company fails to make its minimum payments to PRF;

	•	if the Company sells Gliadel and Aggrastat (with PRF having partial rights to make the Company repurchase its interest in the event of the sale of one, but not both products);


	•	upon the occurrence of a bankruptcy or similar event; or

	•	upon certain conditions related to a change of control of the Company.

The repurchase price guarantees PRF a return in an amount over its initial investment and is reduced based on the Company’s prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million.

Revenue interest expense, calculated using the effective interest method, was $2.1 million for both of the three months ended June 30, 2005 and 2004, and $4.2 million and $4.4 million for the six months ended June 30, 2005 and 2004, respectively. The Company utilizes an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF reduce the future obligation.

Effective July 20, 2005, in connection with the merger agreement with MGI Pharma, the Company entered into a letter agreement with PRF and MGI Pharma whereby PRF agreed to sell, and on or before the consummation of the merger, MGI Pharma agreed to repurchase, PRF’s revenue interest granted under the Revenue Agreement for an agreed calculated price. In the event the merger is not consummated, the letter agreement will terminate and, should the Gliadel business be sold to MGI Pharma as provided under the line of credit agreement, PRF’s revenue interest in Gliadel will be repurchased by the Company for the same

agreed calculated price. The repurchase price ranges from approximately $58.0 million to approximately $66.0 million and is dependent on when the repurchase occurs between August 1, 2005 and March 31, 2006, at which time the option to sell Gliadel to MGI Pharma expires. If the Company repurchases PRF’s revenue interest during this period, the Company would incur a non-cash loss on restructuring the revenue interest obligation ranging from approximately $14.0 million to approximately $20.0 million depending on when the repurchase occurs. See Note 11. “Subsequent Events” below for further detail.


9.	Related Party Transactions

In December 2004, the Company recorded $3.8 million in unearned compensation to stockholders’ equity for the fair value of the equity instruments granted to Dean J. Mitchell, the Company’s President and Chief Executive Officer. The Company is amortizing the unearned compensation expense into operations over the service period. During the three months and six months ended June 30, 2005, the Company recorded non-cash compensation expense of $0.4 million and $0.9 million, respectively. As of June 30, 2005, $2.8 million of unearned compensation remained to be amortized for Mr. Mitchell’s equity instrument grants.

Pursuant to the terms of the Company’s September 2004 consulting and separation agreement with Craig R. Smith, M.D., the Company’s former President, Chief Executive Officer and Chairman of the Board, the Company paid Dr. Smith approximately $0.3 million and $0.4 million for the three months and six months ended June 30, 2005, respectively. As of June 30, 2005, $1.4 million in consulting and separation costs remained and is recorded in accrued payroll related costs on the Unaudited Consolidated Balance Sheet.

Pursuant to the terms of the Company’s September 1995 consulting agreement with Solomon H. Snyder, M.D., a director, the Company paid approximately $0.1 million for consulting services for both of the three months ended June 30, 2005 and 2004, and $0.2 million and $0.1 million for the six months ended June 30, 2005 and 2004, respectively. These services included advising on the Company’s research and development programs and on the acquisitions of new technologies and laboratory equipment and participating in business meetings.


10.	Restructuring

On May 24, 2005, the Company announced a workforce reduction of 38 employees. As a result of this reduction, the Company will incur approximately $1.3 million of expenses primarily related to employee severance and related costs during 2005, of which $1.0 million was recorded during the three months ended June 30, 2005. As of June 30, 2005, a restructuring reserve of $1.0 million is recorded in accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet.


11.	Subsequent Events

Merger Agreement

On July 20, 2005, the Company entered into a definitive merger agreement (or the Merger Agreement) with MGI Pharma. Pursuant to the terms of the Merger Agreement, MGI Pharma will acquire all of the Company’s outstanding shares of common stock in a taxable merger for total consideration of $3.75 per share, which consists of a fractional share of MGI Pharma’s common stock that will have a value of $2.625 (as determined over the five day trading period ending three trading days prior to closing the merger), plus $1.125 in cash. However, if the average closing price of MGI Pharma’s common stock is equal to or more than $31.71 (as determined over the five day trading period ending three trading days prior to closing the merger), each share of the Company’s common stock will be exchanged for 0.0828 of a share of MGI Pharma’s common stock, plus $1.125 in cash; if the average closing price is equal to or less than $23.43, each share of the Company’s common stock will be exchanged for 0.1120 of a share of MGI Pharma’s common stock, plus $1.125 in cash. Subject to regulatory and the Company’s stockholder approvals, and other customary closing conditions, the Company expects the merger to close in the fourth quarter of 2005. The Company has agreed to pay MGI Pharma a termination fee of $7.0 million if the Merger Agreement is terminated under certain specified circumstances.

Line of Credit Agreement

On July 20, 2005, the Company entered into a line of credit agreement with MGI Pharma, pursuant to which, commencing October 1, 2005, until the earlier of December 31, 2005 or the termination of the Merger Agreement, MGI Pharma has agreed to advance the Company an aggregate amount not to exceed $18.0 million. The line of credit will bear interest at a rate equal to 14% per annum, payable in arrears on the first day of each month, commencing January 1, 2006 and unless due sooner pursuant to the terms of the line of credit agreement, the outstanding principal and interest with respect to the line of credit will be due on December 31, 2006. The line of credit is subject to a security agreement. MGI Pharma has been granted a first priority interest in the NAALADase inhibitor Compounds and PARP inhibitor Compounds and in the Aquavan intellectual property and related assets (but excluding, in each case, any collateral in which PRF has a security interest.) In addition, if the Merger Agreement is terminated without closing, the Company has a 90-day right to sell its Gliadel business to MGI Pharma for a purchase price of $90.0 million.

Letter Agreement with PRF

On July 20, 2005, the Company entered into a letter agreement with PRF and MGI Pharma whereby PRF agreed to sell, and on or before the consummation of the merger, MGI Pharma agreed to repurchase, PRF’s revenue interest granted under the Revenue Agreement for an agreed calculated price. In the event the merger is not consummated, the letter agreement will terminate and, should the Gliadel business be sold to MGI Pharma as provided under the line of credit agreement, PRF’s revenue interest in Gliadel will be repurchased by the Company for the same agreed calculated price. The repurchase price ranges from approximately $58.0 million to approximately $66.0 million and is dependent on when the repurchase occurs between August 1, 2005 and March 31, 2006, at which time the option to sell Gliadel to MGI Pharma expires. If the Company repurchases PRF’s revenue interest during this period, the Company would incur a non-cash loss on restructuring the revenue interest obligation ranging from approximately $14.0 million to approximately $20.0 million depending on when the repurchase occurs.


12.	Commitments and Contingencies

In April 2005, the Company awarded retention bonuses to certain employees of the Company who are considered important to the implementation of the Company’s business strategy announced in April 2005. These employees will be paid their retention bonuses if they continue their employment with the Company through December 6, 2005 or April 6, 2006, depending on the employee. If the MGI Pharma merger is consummated, the retention bonuses, totaling $1.8 million, consisting of both cash and grants of restricted stock units, will be paid out on an accelerated basis as of the merger date. As of June 30, 2005, $0.5 million of retention bonus expense has been recorded. Further, officers of the Company may be entitled to receive severance payments under the terms of their employment agreements upon termination of their employment under certain circumstances. Amounts contingently payable under these arrangements total up to $6.4 million as of June 30, 2005. Additional amounts may be due to these officers as “gross up” payments resulting from excise taxes owed by these officers on these severance payments.

In addition, under the terms of the Company’s 5% convertible subordinated notes due in July 2008, upon completion of the merger with MGI Pharma, each holder of an outstanding convertible note may require MGI Pharma to repurchase that note in cash at 100% of the principal amount, plus accrued and unpaid interest. MGI Pharma must mail a notice to each holder of a convertible subordinated note within 20 days of completing the merger. Should all holders so require, the cost of such repurchase could be up to $69.4 million in principle plus accrued and unpaid interest.

In addition, the Company, from time to time, is involved in routine legal matters and contractual disputes incidental to its normal operations. In management’s opinion, there are no existing matters that are expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.


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

Overview

We are a pharmaceutical company engaged in the research, development and commercialization of proprietary pharmaceutical products that target the hospital and neurology markets. We market and sell proprietary pharmaceutical products within our targeted markets, conduct clinical research to expand the labeled indications for our marketed products, and develop new product candidates.

We have financed our operations since inception in July 1993 through the issuance of equity securities, convertible subordinated notes, revenues from the sales of GLIADEL® Wafer (or Gliadel) and more recently AGGRASTAT® Injection (or Aggrastat), funding pursuant to collaborative and partnering agreements, a revenue interest obligation with Paul Royalty Fund, L.P. and certain of its affiliated entities (or PRF), a sale and leaseback transaction of our facilities and proceeds from loans or other borrowings. Any or all of these financing vehicles, or others, may be utilized to fund our future capital requirements.

We currently have two marketed products: Gliadel and Aggrastat. Gliadel provides targeted, site-specific chemotherapy for the treatment of malignant glioma and recurrent glioblastoma multiforme in conjunction with surgery and radiation. Aggrastat is an inhibitor of platelet aggregation approved for the treatment of acute coronary syndrome (or ACS), including patients who are to be managed medically and those undergoing percutaneous transluminal coronary angioplasty. We acquired the rights to Aggrastat in the United States and its territories and possessions from Merck & Co., Inc. (or Merck) in October 2003.

Based on our review of our long-term strategy, on April 5, 2005, we determined that we should focus our activities and resources on Gliadel and our product candidate, AQUAVAN® Injection (or Aquavan), in order to maximize their value, and consequently, maximize shareholder value. We have pursued this strategy by seeking the sale of the Aggrastat intangibles and other related assets and liabilities (or the Aggrastat Assets) and have received a non-binding offer from a third party. On July 20, 2005, we entered into a merger agreement with MGI Pharma, Inc. (or MGI Pharma), described below, pursuant to which we expect to combine our business with theirs and under which our stockholders will receive a combination of MGI Pharma’s common stock and cash, but if the merger is not consummated, we will seek other strategic options, which could include seeking strategic partners, licensees, acquirers or other similar opportunities to divest our non-key assets, such as Aggrastat, which transactions would be subject to the approval of our Board of Directors. If we are unable to consummate any of these strategic alternatives, we intend to continue to sell Aggrastat, but may begin a significant sales price discount program.

Recent Events

Merger Agreement

On July 20, 2005, we entered into a definitive merger agreement (or the Merger Agreement) with MGI Pharma. Pursuant to the terms of the Merger Agreement, MGI Pharma will acquire all of our outstanding shares of common stock in a taxable merger for total consideration of $3.75 per share, which consists of a fractional share of MGI Pharma’s common stock that will have a value of $2.625 (as determined over the five day trading period ending three trading days prior to closing the merger), plus $1.125 in cash. However, if the average closing price of MGI Pharma’s common stock is equal to or more than $31.71 (as determined over the five day trading period ending three trading days prior to closing the merger), each share of our common stock will be exchanged for 0.0828 of a share of MGI Pharma’s common stock, plus $1.125 in cash; if the average closing price is equal to or less than $23.43, each share of our common stock will be exchanged for 0.1120 of a share of MGI Pharma’s common stock, plus $1.125 in cash. Subject to regulatory and our stockholder approvals, and other customary closing conditions, we expect the merger to close in the fourth quarter of 2005. We have agreed to pay MGI Pharma a termination fee of $7.0 million if the merger agreement is terminated under certain specified circumstances.

Line of Credit Agreement

On July 20, 2005, we entered into a line of credit agreement with MGI Pharma, pursuant to which, commencing October 1, 2005, until the earlier of December 31, 2005 or the termination of the Merger Agreement, MGI Pharma has agreed to advance us an aggregate amount not to exceed $18.0 million. The line of credit will bear interest at a rate equal to 14% per annum, payable in arrears on the first day of each month, commencing January 1, 2006 and unless due sooner pursuant to the terms of the line of credit agreement, the outstanding principal and interest with respect to the line of credit will be due on December 31, 2006. The line of credit is subject to a security agreement. MGI Pharma has been granted a first priority interest in the NAALADase inhibitor Compounds and PARP inhibitor Compounds and in the Aquavan intellectual property and related assets (but excluding, in each case, any collateral in which PRF has a security interest.) In addition, if the Merger Agreement is terminated without closing, we have a 90-day right to sell our Gliadel business to MGI Pharma for a purchase price of $90.0 million.

Letter Agreement with PRF

On July 20, 2005, we entered into a letter agreement with PRF and MGI Pharma whereby PRF agreed to sell, and on or before the consummation of the merger, MGI Pharma agreed to repurchase, PRF’s revenue interest granted under the Revenue Interest Assignment Agreement dated October 28, 2003 (or Revenue Agreement) for an agreed calculated price. In the event the merger is not consummated, the letter agreement will terminate and, should the Gliadel business be sold to MGI Pharma as provided under the line of credit agreement, PRF’s revenue interest in Gliadel will be repurchased by us for the same agreed calculated price. The repurchase price ranges from approximately $58.0 million to approximately $66.0 million and is dependent on when the repurchase occurs between August 1, 2005 and March 31, 2006, at which time the option to sell Gliadel to MGI Pharma expires. If we repurchase PRF’s revenue interest during this period, we would incur a non-cash loss on restructuring the revenue interest obligation ranging from approximately $14.0 million to approximately $20.0 million depending on when the repurchase occurs.

Product Pipeline

Our product pipeline consists of product candidates in various stages of clinical and pre-clinical development as described below in this quarterly report.

AQUAVAN® Injection

Aquavan is a proprietary water soluble prodrug of propofol. Unlike propofol, which is formulated in an oil or lipid-based emulsion, Aquavan is formulated in a clear aqueous solution and is rapidly converted by an enzyme in the body, called alkaline phosphatase, into propofol after intravenous injection.

Aquavan is currently in Phase III clinical trials for use for procedural sedation during brief diagnostic or therapeutic procedures. In support of the filing of a New Drug Application (or NDA) for Aquavan, we expect additional Phase III and supporting Phase II studies with Aquavan to include its use (i) in the intensive care unit, (ii) in a study of its interaction with other drugs, (iii) for colonoscopy procedures, and (iv) for minor surgical procedures. We expect that the colonoscopy and minor surgical procedures studies will be based on the results of a dose finding trial in colonoscopy that we launched in July 2005. Based on our current projected timelines, we expect to be able to file an NDA during the second half of 2006.

GPI 1485

GPI 1485, a lead clinical candidate in the neuroimmunophilin ligand program, is in Phase II clinical trials for the treatment of Parkinson’s disease and post-prostatectomy erectile dysfunction (or PPED) and in pre-clinical development for HIV related dementia and neuropathy. GPI 1485 is licensed to Symphony Neuro Development Company (or SNDC).

AGGRASTAT® Injection

On April 5, 2005, we concluded that Aggrastat was not essential to our long-term business strategy. As a result, we intend to divest, partner, license or enter into other similar arrangements for this product. As a result, we performed impairment analyses as of March 31, 2005 and June 30, 2005, as described below under “Impairment of Long-lived Assets,” and wrote down the carrying value of the Aggrastat Assets to its fair value. As of June 30, 2005, we received a non-binding offer from a third party to acquire Aggrastat Assets and have stopped all Aggrastat related trials, including TENACITY, a multi-center, double-blind, randomized comparison of Aggrastat and Abciximab (ReoPro®). If we are unable to consummate any of these strategic alternatives, we intend to continue to actively sell Aggrastat, but may begin a significant sales price discount program.

Additional Product Candidates

Our other product candidates and pre-clinical research programs include DOPASCAN® Injection, an imaging agent used to diagnose and monitor the progression of Parkinson’s disease; NAALADase inhibitors for the treatment of neuropathic pain and peripheral neuropathy; PARP inhibitors for cancer chemo-and radiosensitization; and GPI 15715, a non-intravenous formulation of the prodrug of propofol.

Results of Operations — Revenue

Total revenue for the three months and six months ended June 30, 2005 and 2004 consisted of the following:


		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2005		2004		2005		2004
($ in millions)
Net product revenue:
	Gliadel	$	8.5	$	7.1	$	15.9	$	12.6
	Aggrastat		3.9		3.6		7.0		6.9

Total net product revenue			12.4		10.7		22.9		19.5
Revenue from license fees, milestones and other			0.4		0.4		0.6		0.6

Total revenue		$	12.8	$	11.1	$	23.5	$	20.1

For the three months and six months ended June 30, 2005, the increase in total revenue compared to the same periods in 2004 was due to the increase in Gliadel net product revenue. We believe that the increase in Gliadel revenue for the three months and six months ended June 30, 2005 over the same periods in 2004 is attributable to:


	•	a 7% list price increase in January 2005 and 7% list price increase in May 2005;

	•	European Union regulatory approval in 2004 of expanded labeling to permit use at the time of initial surgery for malignant glioma as an adjunct to surgery and radiation; and

	•	a lower reserve for sales returns in 2005.

During the three months and six months ended June 30, 2005 and 2004, we sold Gliadel primarily to a specialty distributor. We also sold Gliadel during those periods:


	•	directly to hospitals;

	•	by drop shipment to hospitals pursuant to purchase orders from wholesalers; and

	•	to distributors located outside the United States for resale in non-United States markets.


	*Revenue — Gliadel net product revenue*


	Three Months						Six Months
	Ended June 30,						Ended June 30,

	2005			2004			2005			2004
($ in millions)
Specialty distributor revenue	$	6.8		$	5.0		$	12.5		$	8.8
Direct hospital revenue		0.7			0.8			1.7			1.5
International revenue		0.8			0.8			1.5			1.4
Other		0.2			0.5			0.2			0.9

Total Gliadel net product revenue	$	8.5		$	7.1		$	15.9		$	12.6

Revenue within United States	$	7.7		$	6.3		$	14.4		$	11.2
% of total Gliadel net product revenue within United States		91	%		88	%		91	%		89	%
% of total Gliadel net product revenue outside of United States*		9	%		12	%		9	%		11	%


*	Including revenue from Europe and Canada, either through distributors or directly to hospitals.

During the three months ended June 30, 2005 and 2004, our specialty distributor, Cardinal Health Specialty Pharmaceuticals Distribution (or SPD), a division of Cardinal Health Inc. (or Cardinal), sold 454 and 456 units, respectively, to hospitals and wholesalers. Total units we sold to SPD were 449 and 455 units during the three months ended June 30, 2005 and 2004, respectively. During the six months ended June 30, 2005 and 2004, SPD sold 901 and 857 units, respectively to hospitals and wholesalers. Total units we sold to SPD during the respective same six months were 856 and 819 units. SPD has nationwide marketing and distribution capabilities that complement our sales and marketing efforts. SPD is also responsible for shipping the product that it purchases from us to hospital pharmacies, thereby reducing our overall distribution costs due to the fact that, without SPD, we would incur separate shipping costs from our logistical distributor for each shipment. SPD receives a discount on its monthly purchases of Gliadel based on the projected inventory in the distribution channel, compared to the previous month’s prescription demand, and also receives an additional discount for early payment. We have the ability to accept or reject purchase orders from SPD at our sole discretion based on our review of estimated inventory in the distribution channel compared to current prescription demand.

During the three and six months ended June 30, 2005 and 2004, Gliadel direct hospital revenues resulted from sales made directly to hospitals or drop shipments to hospitals pursuant to purchase orders from wholesalers. Substantially all of these sales to hospitals and wholesalers included our normal payment terms, including discounts for early payment.


	*Revenue — Aggrastat net product revenue*

For the three months ended June 30, 2005 and 2004, Aggrastat net product revenue was $3.9 million and $3.6 million, respectively. Three principal wholesalers accounted for $3.3 million and $3.2 million in Aggrastat revenue for the three months ended June 30, 2005 and 2004, respectively. During the six months ended June 30, 2005 and 2004, Aggrastat net product revenue was $7.0 million and $6.9 million, respectively, of which $6.2 million and $6.3 million were accounted for by the three principal wholesalers, respectively. All of our Aggrastat net product revenue arose from direct sales to wholesalers in the United States and its territories.

Cost of Sales and Gross Margin


		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2005			2004			2005			2004
($ in millions)
Cost of sales:
	Gliadel*	$	0.6		$	1.0		$	1.3		$	1.8
	Aggrastat		0.3			0.2			0.5			0.4

	Total cost of sales	$	0.9		$	1.2		$	1.8		$	2.2

Cost of sales as % to net product revenue:
	Gliadel*		7	%		14	%		8	%		14	%
	Aggrastat		8	%		7	%		8	%		6	%

	Total cost of sales as % to net product revenue		7	%		11	%		8	%		11	%

Total gross margin as % to net product revenue			93	%		89	%		92	%		89	%


*	Gliadel cost of sales includes the cost of materials, labor, overhead and royalties paid to Massachusetts Institute of Technology (or MIT) pursuant to a license agreement.

The unit cost to manufacture Gliadel can vary inversely with production volume. To the extent that production levels materially increase or decrease in the future, we anticipate that the unit cost to manufacture Gliadel will respectively decrease or increase. In the event of such a material change in production levels, we would expect the cost of sales of Gliadel, and accordingly, gross profit percentage, to fluctuate from quarter to quarter.

We have entered into an exclusive supply agreement with Merck for the manufacture and supply of the active pharmaceutical ingredient of Aggrastat until December 31, 2014. In the second quarter of 2004, we also entered into a manufacturing and supply agreement with Baxter Healthcare Corporation (or Baxter) to supply us with finished product of Aggrastat in 250 ml and 100 ml bags, through July 2009. This agreement with Baxter replaced an agreement with Merck whereby Merck had agreed to supply us with finished product in bags through December 2007. Depending on whether we divest Aggrastat, we may need to record a loss for Aggrastat inventory that we are required to purchase from Baxter.

Research and Development Expenses

In 1999, we began recording research and development costs under two platforms, pharmaceutical technologies and biopolymer technologies. From January 1, 1999, through June 30, 2005, we incurred, in the aggregate, costs of $166.4 million for our pharmaceutical technologies platform, $35.4 million for our biopolymer technologies platform, and $100.4 million of indirect expenses. From our inception in July 1993 through December 1998, we recorded $100.4 million in direct and indirect research and development costs relating to pharmaceutical and biopolymer technologies.

Our research and development projects are currently focused on pharmaceutical technologies. For our biopolymer technologies, we plan to pursue potential corporate partnerships, divestitures or similar strategic alternatives to further their research and development, rather than develop these projects ourselves. The

following chart sets forth our projects in the pharmaceutical and biopolymer technology areas and the stage to which each has been developed:


	Development Stage	Status

Pharmaceutical technologies:
Aquavan	Phase III		Active
GPI 1485 (neuroimmunophilin ligand)	Phase II		Active
GPI 15715 (non-IV)	Phase I		Active
NAALADase inhibitors	Phase I/ Pre-clinical		Active
PARP inhibitors	Pre-clinical		Active
Other neuroimmunophilin ligands	Research		Active
Other research projects	Research		Active
Aggrastat for percutaneous coronary intervention (or PCI)	Phase III		Inactive
Biopolymer technologies:
PACLIMER® Microspheres (Ovarian Cancer)	Phase I/ II		Inactive
PACLIMER® Microspheres (Lung Cancer)	Phase I/ II		Inactive
Lidocaine-PE (formerly LIDOMER^tmMicrospheres)	Phase I		Inactive
Other biopolymer projects	Research		Inactive

As stated above, on April 5, 2005, we concluded that Aggrastat was not essential to our long-term business strategy and identified Gliadel and Aquavan as key assets on which to focus our future efforts. Consequently, we are pursuing other strategic alternatives for Aggrastat and other non-key assets. As of June 30, 2005, we stopped all Aggrastat related trials, including TENACITY.

For each of our research and development projects, we incur both direct and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies. We may also incur third-party costs related to these projects, such as contract research, consulting and clinical development costs. Indirect expenses, such as facility and equipment costs, utilities, general research and development management and other administrative overhead are allocated to research and development generally based on, among other things, the extent to which our general research and development efforts make use of facilities, non-project personnel and other resources. Because of the uncertainties involved in progressing through pre-clinical and clinical testing, and the time and cost involved in obtaining regulatory approval and in establishing collaborative arrangements, among other factors, we cannot reasonably estimate the future expenses and timing necessary to complete our research and development projects, or reasonably estimate the period in which material net cash inflows from significant projects are expected to commence.

Our research and development expenses for the three months and six months ended June 30, 2005 and 2004 were incurred among our research and development platforms and projects in the following manner:


		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2005		2004		2005		2004
($ in millions)
Research and development expenses:
Pharmaceutical technologies		$	13.7	$	6.0	$	26.6	$	12.6
Biopolymer technologies			0.2		0.2		0.4		0.3
Indirect expenses			3.0		2.7		5.9		5.3

	Total research and development expenses	$	16.9	$	8.9	$	32.9	$	18.2


	*Pharmaceutical Technologies*

For the three months ended June 30, 2005, our pharmaceutical technologies’ research and development expenses increased by $7.7 million compared to the same period in 2004, primarily due to increased spending of:


	•	$4.5 million on Aquavan primarily as a result of costs incurred for the initiation of the Phase III clinical trial which we began in the third quarter of 2004;

	•	$1.7 million for the preparation and initiation of the Phase III clinical trials of Aggrastat for use in PCI; and

	•	$1.6 million for the GPI 1485 program primarily due to increased payroll expenses and contract clinical research expenses as SNDC continues the Phase II clinical trial for Parkinson’s disease.

For the six months ended June 30, 2005, our pharmaceutical technologies’ research and development expenses increased by $14.0 million compared to the same period in 2004, primarily due to increased spending of:


	•	$8.5 million on Aquavan primarily as a result of costs incurred for the initiation of the Phase III clinical trial which we began in the third quarter of 2004;

	•	$3.5 million for the preparation and initiation of the Phase III clinical trials of Aggrastat for use in PCI; and

	•	$2.1 million for the GPI 1485 program primarily due to payroll expenses and contract clinical research expenses as SNDC continues the Phase II clinical trial for Parkinson’s disease.

Based on our recently announced new strategic focus, we intend to pursue other strategic alternatives for Aggrastat, including divesting, partnering, licensing or entering into other similar types of arrangements for this product. As of June 30, 2005, we stopped all Aggrastat related trials, including TENACITY.


	*Biopolymer Technologies*

For the three months ended June 30, 2005 and 2004, our biopolymer technologies’ research and development expenses were $0.2 million and $0.2 million, respectively. For the six months ended June 30, 2005 and 2004, our biopolymer technologies’ research and development expenses were $0.4 million and $0.3 million, respectively. Currently, we do not plan on conducting additional research or clinical testing on our biopolymer technologies. Instead, we plan to pursue a corporate partnership, divestiture or similar strategic transaction to further develop these technologies. To that end, in September 2004, we entered into licensing agreements with MIT, Johns Hopkins University (or JHU) and Angiodevice International GmbH (or Angiotech), which terminated one existing license agreement we had with MIT and JHU, thereby allowing Angiotech to obtain an exclusive license to certain rights in two patents we had previously licensed from the MIT and JHU. Concurrently with the execution of our agreement with Angiotech, we also entered into an exclusive license agreement with each of MIT and JHU granting us certain rights to develop polilactofate and paclitaxel based products (e.g., PACLIMER® Microspheres) for certain indications in oncology and women’s health under the two patents licensed to Angiotech.


	*Indirect Expenses*

For the three months and six months ended June 30, 2005, our indirect research and development expenses increased by $0.3 million and $0.6 million, respectively, compared to the same periods in 2004, primarily from an increase in research and development facility rent expense as a result of the December 2004 sale and leaseback of our research and development facility, and increase in payroll expenses due to retention bonuses for certain employees deemed important to the implementation of our new business strategy announced in April 2005.

Selling, General and Administrative Expenses


		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2005		2004		2005		2004
($ in millions)
Selling, general and administrative expenses:
	Marketing, selling and distribution	$	8.2	$	9.0	$	16.8	$	15.9
	General and administrative		6.5		5.4		12.8		10.3

Total selling, general and administrative expenses		$	14.7	$	14.4	$	29.6	$	26.2


	*Marketing, selling and distribution*

For the three months ended June 30, 2005, the costs incurred to market, sell and distribute Gliadel and Aggrastat decreased by $0.8 million compared to the same period in 2004, principally from a decrease of $1.7 million in medical education expenses incurred in 2004 in connection with conferences held to educate members of the medical community as to the benefits of the use of Aggrastat. The foregoing decrease was offset by an increase of $0.8 million in sales commission due to a restructured commission schedule with higher commission rates and retention bonuses for certain sales employees deemed important to the implementation of our new business strategy announced in April 2005.

For the six months ended June 30, 2005, the costs incurred to market, sell and distribute Gliadel and Aggrastat increased by $0.9 million compared to the same period in 2004, principally from:


	•	an increase of $1.0 million in sales commission due to a restructured commission rates and retention bonuses for certain sales employees deemed important to the implementation of our new business strategy announced in April 2005;

	•	an increase of $0.7 million in market research primarily for Aquavan; and

	•	an increase of $0.6 million in promotional expenses for Aggrastat.

The foregoing increases were primarily offset by the following expenses incurred in 2004:


	•	a decrease of $0.8 million primarily related to Aggrastat consulting;

	•	a decrease of $0.5 million in medical education expenses in connection with Aggrastat; and

	•	a decrease of $0.5 million in sales training expenses related to Aggrastat and Gliadel product training of our commercial operations force.


	*General and administrative*

Expenses associated with our general and administrative functions increased by $1.1 million for the three months ended June 30, 2005 compared to the same period in 2004, principally from:


	•	$1.0 million in severance costs related to our reduction in force as a result of our strategic reorganization; and

	•	$0.4 million in non-cash compensation expense related to the amortization of the fair value of equity instruments granted to Dean J. Mitchell in December 2004.

The foregoing increases were offset by $0.4 million decrease in relocation and recruiting expenses incurred in 2004 related to expansion of the sales force and developments teams in preparation for the Phase III clinical trials of Aggrastat and Aquavan.

For the six months ended June 30, 2005, expenses associated with our general and administrative functions increased by $2.5 million compared to the same period in 2004, principally from:


	•	$1.3 million in professional services expenses related to our long-term strategic planning and analysis;

	•	$1.2 million in severance costs related to our reduction in force as a result of our strategic reorganization; and

	•	$0.9 million in non-cash compensation expense related to the amortization of the fair value of equity instruments granted to Dean J. Mitchell in December 2004.

The foregoing increases were primarily offset by a $0.4 million decrease in relocation and recruiting expenses incurred in 2004 related to expansion of the sales force and developments teams in preparation for the Phase III clinical trials of Aggrastat and Aquavan.

Our general and administrative functions include the areas of executive management, finance and administration, investor and public relations, corporate development, human resources, legal, intellectual property and compliance. We include the costs to prepare, file and prosecute domestic and international patent applications and for other activities to establish and preserve our intellectual property rights in our general and administrative expenses. For each function, we may incur direct expenses such as salaries, supplies and third-party consulting and other external costs. A portion of indirect costs such as facilities, utilities and other administrative overhead are also allocated to selling, general and administrative expenses.

Intangible Amortization


		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2005		2004		2005		2004
($ in millions)
Intangible amortization:
	Gliadel rights reacquisition amortization	$	0.2	$	0.2	$	0.4	$	0.4
	Aggrastat intangible amortization		0.8		1.5		2.4		3.0

Total intangible amortization		$	1.0	$	1.7	$	2.8	$	3.4

During the three months ended March 31, 2005, we recorded an impairment charge of $31.0 million related to Aggrastat intangibles. During the three months ended June 30, 2005, we recorded an additional impairment charge of $6.1 million also related to Aggrastat intangibles. The intangible amortization expense is expected to be $4.6 million for fiscal year 2005 and $3.6 million for each of the next five fiscal years (see “Impairment of Long-lived Assets” below for further detail).

Impairment of Long-lived Assets

On April 5, 2005, we concluded that our Aggrastat intangibles and other related assets and liabilities (or the Aggrastat Assets) were not essential to our long-term business strategy. As a result, we intend to sell, divest, partner, license or enter into other similar arrangements with respect to those assets.

In accordance with Statement of Financial Accounting Standards (or SFAS) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” we performed an impairment analysis as of March 31, 2005 due to our expectation that it is more likely than not that the Aggrastat Assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. The impairment analysis was performed using market-based sales multiples for comparable product lines and we determined that the carrying value of the Aggrastat Assets was in excess of its fair value. Accordingly, during the quarter ended March 31, 2005, we recorded a non-cash charge of $31.0 million to write-down the carrying value of the Aggrastat Assets to fair value.

As of June 30, 2005, we performed an impairment analysis and determined that the carrying value of the Aggrastat Assets was still in excess of its fair value based on a non-binding offer received from a third-party. Accordingly, during the quarter ended June 30, 2005, we recorded a non-cash charge of $6.1 million to further

write-down the carrying value of the Aggrastat Assets to its fair value. The Aggrastat Assets are being classified as an “Asset Held for Use” because assets are not available for immediate sale as PRF holds a security interest in the assets related to Aggrastat under the Revenue Agreement.

As of June 30, 2005, we stopped all Aggrastat related trials, including TENACITY. As of June 30, 2005, our contractual commitments related to the Aggrastat Assets included:


	•	an agreement with Baxter Healthcare Corporation for the supply of 250 ml and 100 ml bags of Aggrastat through July 2009, which commits the Company to purchase approximately $6.1 million of such bags, and $1.3 million of such purchase commitment remains outstanding for the remainder of 2005; and

	•	various funding commitments and agreements related to the advancement of our research and development activities, which we currently estimate to be no more than $1.0 million.

Additionally, under the Revenue Agreement, PRF may be entitled to require us to repurchase all or a portion of PRF’s revenue interest if we sell the Aggrastat Assets. The repurchase price guarantees PRF a return in an amount over its initial investment which is reduced based on our prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million.

Other Income and Expenses


		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2005			2004			2005			2004
($ in millions)
Other income (expenses):
	Investment and other income	$	0.6		$	0.4		$	0.7		$	0.9
	Revenue interest expense		(2.1	)		(2.1	)		(4.2	)		(4.4	)
	Interest expense		(1.1	)		(1.4	)		(2.3	)		(2.7	)

Net other income (expenses)		$	(2.6	)	$	(3.1	)	$	(5.8	)	$	(6.2	)

The investment income increased for the three months ended June 30, 2005 compared to the same period in 2004 primarily due to investment income from investments held by SNDC. The investment income decreased for the six months ended June 30, 2005 compared to the same period in 2004 primarily due to a loss of $0.5 million on the payment and termination of a swap agreement during the first quarter, offset by investment income from investments held by SNDC in 2005.

Revenue interest expense relates to the PRF revenue interest obligation and is calculated using the effective interest method, utilizing an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments.

The interest expense decreased for the three months and six months ended June 30, 2005 compared to the same periods in 2004 primarily due to the fact that in January 2005 we paid off the outstanding principal balance of the $17.2 million five-year term loan with Wachovia Bank National Association (or Wachovia) and also paid off and terminated the related swap agreement. Other interest expense items include amounts arising under our 5% convertible subordinated notes; capital leases entered into for the purchases of various equipment; and a note payable to a commercial bank primarily used to repay a $2.4 million account payable to Cardinal Health Sales and Marketing Services.

Liquidity and Capital Resources


	*Overview*

Our primary cash requirements are to:


	•	fund our research and development programs;

	•	support our sales and marketing efforts;

	•	obtain regulatory approvals;

	•	prosecute, defend and enforce any patent claims and other intellectual property rights;

	•	fund general corporate overhead; and

	•	support our debt service requirements and contractual obligations.

Our cash requirements could change materially as a result of changes in our business and strategy. As a result of the new senior management team’s evaluation of our business strategy, we are committed to pursuing strategic alternatives for the Aggrastat Assets, including selling the Aggrastat Assets. As of June 30, 2005, we have received a non-binding offer from a third party to acquire the Aggrastat Assets.

Our cash requirements could also change materially depending on the level of success of our marketed products, our competitive position in the marketplace, the progress of our research and development and clinical programs, licensing activities, acquisitions, divestitures or other corporate developments. If the merger is not completed, we would not have sufficient cash to meet our ongoing obligations and would need to draw down on the line of credit and raise additional capital, or sell Gliadel for $90.0 million to MGI Pharma.

We have financed our operations since inception primarily through:


	•	the issuances of equity securities and convertible subordinated notes;

	•	revenue from Gliadel and, more recently, from Aggrastat;

	•	funding pursuant to collaborative agreements;

	•	our Revenue Agreement with PRF;

	•	a sale and leaseback transaction; and

	•	proceeds from loans or other borrowings.

In evaluating alternative sources of financing we consider, among other things, the dilutive impact, if any, on our stockholders, the ability to leverage stockholder returns through debt financing, the particular terms and conditions of each alternative financing arrangement and our ability to service our obligations under such financing arrangements.

Our cash, cash equivalents, marketable securities and restricted investments were $59.2 million and $109.5 million at June 30, 2005 and December 31, 2004, respectively. Of these amounts, $1.8 million and $19.9 million were restricted as of June 30, 2005 and December 31, 2004, respectively, as collateral for certain of our loans and other financial lease obligations. The $50.3 million decrease in cash, cash equivalents, marketable securities and restricted investments from December 31, 2004 to June 30, 2005 resulted primarily from our overall operating activities and our repayment of the outstanding principal balance of $17.2 million on our Wachovia term loan and an additional $0.6 million to pay off and terminate the related swap agreement in January 2005. Additionally, we had investments held by SNDC of $23.8 million and $32.1 million at June 30, 2005 and December 31, 2004, respectively.

Sources and Uses of Cash


	*Operating Activities*

Cash used in operating activities was $39.6 million and $28.2 million for the six months ended June 30, 2005 and 2004, respectively. Our net loss, adjusted for non-cash charges, of $43.5 million and $28.1 million for the six months ended June 30, 2005 and 2004, respectively, is the primary reason for the use. Net changes in assets and liabilities provided net cash of $2.5 million during the six months ended June 30, 2005, mainly due to a decrease in prepaid expenses and other current assets and other assets and an increase in accounts payable and other liabilities, partially offset by increases in accounts receivable and inventory.

Prepaid expenses, which fluctuate from period to period depending on the timing and level of preparation and initiation of clinical trials, decreased by $2.8 million. We are often required to prepay contract research organizations for services prior to the initiation of work performed. Fluctuations in operating items vary from period to period due to, among others, timing of sales and the subsequent cash receipts thereof, and research and development activities such as clinical trial preparation and initiations.

The change in accounts receivable results from the timing of sales and the subsequent cash receipts thereof. Depending on the timing of the sales and the associated subsequent payment, which is traditionally within 31 days, our accounts receivable will increase or decrease for comparative reporting periods. Both at June 30, 2005 and December 31, 2004, we had $2.5 million in accounts receivable relating to the specialty distributor, primarily related to sales made in June 2005 and December 2004. Additionally, at June 30, 2005 and December 31, 2004, we had $2.7 million and $1.2 million, respectively, in accounts receivable relating to Aggrastat primarily related to sales made in June 2005 and December 2004, respectively.

Included in operating activities for the six months ended June 30, 2005 were $8.3 million of SNDC operating activities funded by investments held by SNDC.


	*Investing and Financing Activities*

In December 2004, we sold our corporate and research and development facilities for $20.8 million, net of expenses, and concurrently leased the properties back from the purchaser for an initial term of 15 years. The lease is renewable at our option for two additional terms of ten years each. A gain of $1.5 million from the sale is being deferred and amortized as a reduction of rent expense over the initial term of 15 years. We acquired the research and development facility in May 2003 utilizing a five-year $18.8 million term loan agreement with Wachovia in order to finance the acquisition. In January 2005, we paid off the outstanding principal balance of $17.2 million on our Wachovia term loan and an additional $0.6 million to terminate the related swap agreement. This repayment reduced our restricted cash by $17.2 million.

During the six months ended June 30, 2005, we reduced our total long-term debt, including current portion, but excluding the revenue interest obligation, by $18.3 million to $72.0 million at June 30, 2005, compared to $90.3 million at December 31, 2004. During the six months ended June 30, 2005, we made principal repayments of $18.7 million, including the above-mentioned $17.2 million payment in January 2005 to Wachovia. Our revenue interest obligation to PRF was $45.9 million at June 30, 2005, compared to $44.9 million at December 31, 2004.

During the six months ended June 30, 2005, we used 98,141 and 66,775 shares of treasury stock to meet our commitment under our employee stock purchase plan and for our 401(k) plan match, respectively. We may continue to use our treasury stock in the future for the same or similar needs, which will cause dilution to our shareholders.

On October 28, 2003, we acquired from Merck the rights to Aggrastat in the United States and its territories for a purchase price of $84.0 million. We paid $42.0 million in cash and entered into a $42.0 million

revenue interest financing arrangement with PRF pursuant to the Revenue Agreement, the terms of which are summarized as follows:


	•	PRF is entitled to receive:


	•	from October 28, 2003 through December 31, 2006 — 10% of our combined net revenue from Gliadel and Aggrastat up to $75.0 million and 2.5% of those annual net revenues in excess of $75.0 million;

	•	from January 1, 2007 through December 31, 2012 (the end of the term of the financing arrangement with PRF) — 17.5% of our combined net revenue from Gliadel and Aggrastat up to $75.0 million and 3.5% of those annual net revenues in excess of $75.0 million;

	•	the revenue interest percentages can increase if we fail to meet contractually specified levels of annual net revenue from products for which PRF is entitled to receive its revenue interest; and

	•	minimum payments, payable quarterly totaling $6.3 million in 2005, $7.5 million in 2006, $10.0 million per year from 2007 through 2009, and $12.5 million per year from 2010 through 2012. During the three months ended June 30, 2005 and 2004, we paid $1.6 million and $1.3 million to PRF, respectively, related to the minimum payments requirement, and $3.1 million and $2.5 million during the six months ended June 30, 2005 and 2004, respectively.


	•	During each year of the term of the Revenue Agreement, PRF will be entitled to receive a portion of revenue from products that we may acquire in the future or of our product candidates Aquavan and GPI 1485, in the case that our calculated annual obligation(s) to make royalty payments under the Revenue Agreement (based upon the combined net revenue from Gliadel and Aggrastat) are less than $7.6 million for 2005, $8.3 million for 2006, $15.3 million for 2007, $15.5 million for 2008, $15.8 million for 2009, $16.0 million for 2010, or $15.9 million for 2011 and 2012, respectively.

	•	PRF received five-year warrants to purchase 300,000 shares of our common stock at an exercise price of $9.15 per share.

	•	PRF received a security interest in the assets related to Gliadel and Aggrastat. As a result of this security interest, we may not be free to utilize those assets at our discretion, such as selling or outlicensing rights to part or all of those assets, without first obtaining the permission of PRF. This requirement could delay, hinder or condition our ability to enter into corporate partnerships or strategic alliances with respect to these assets.

	•	PRF may be entitled to require us to repurchase its revenue interest under the following circumstances:


	–	if we fail to maintain an escrow account funded with eight quarters of minimum payments to PRF in the aggregate of $15.7 million and $13.8 million as of June 30, 2005 and December 31, 2004, respectively, or fail to maintain at least $20.0 million of net working capital;

	–	if we fail to make our minimum payments to PRF;

	–	if we sell Gliadel and Aggrastat (with PRF having partial rights to make us repurchase its interest in the event of the sale of one, but not both products);

	–	upon the occurrence of a bankruptcy or similar event; or

	–	upon certain conditions related to a change of control of us.


	The repurchase amount guarantees PRF a return in an amount over its initial investment and is reduced based on payments that we have previously made to PRF prior to the time that its interest is repurchased, but the repurchase price may never exceed three and a half times PRF’s initial investment, or $147.0 million.

Effective July 20, 2005, in connection with the merger agreement with MGI Pharma, we entered into a letter agreement with PRF and MGI Pharma whereby PRF agreed to sell, and on or before the consummation of the merger, MGI Pharma agreed to repurchase, PRF’s revenue interest granted under the Revenue

Agreement for an agreed calculated price. In the event the merger is not consummated, the letter agreement will terminate and, should the Gliadel business be sold to MGI Pharma as provided in the line of credit agreement described below, PRF’s revenue interest in Gliadel will be repurchase by us for the same agreed calculated price. The repurchase price ranges from approximately $58.0 million to approximately $66.0 million and is dependent on when the repurchase occurs between August 1, 2005 and March 31, 2006, at which time the option to sell Gliadel to MGI Pharma expires. If we repurchase PRF’s revenue interest during this period, we would incur a non-cash loss on restructuring the revenue interest obligation ranging from approximately $14.0 million to approximately $20.0 million depending on when the repurchase occurs.

We fund capital expenditures through either lease arrangements or direct purchases utilizing our existing cash. To the extent possible, we finance property and equipment requirements by obtaining leases. During the six months ended June 30, 2005 and 2004, we had $0.7 million and $0.9 million in capital expenditures, respectively.

We have an agreement with SPD to whom we sell Gliadel that permits either us or SPD to terminate the agreement upon 60 days prior written notice. Under the terms of our agreement with SPD, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of Gliadel that SPD may have in its inventory. As of June 30, 2005, we believe that SPD had $1.9 million treatments of Gliadel in its inventory.

Future Cash Needs

Historically, we have financed our operations primarily through the issuance of equity securities and convertible subordinated notes, revenues from the sale of Gliadel and more recently of Aggrastat, funding pursuant to collaborative agreements, a revenue interest obligation with PRF and proceeds from loans and other borrowings.

Our future capital requirements and liquidity will depend on many factors, including but not limited to:


	•	the consummation of our merger with MGI Pharma;

	•	the timing and the extent of draw downs on the line of credit with MGI Pharma;

	•	the revenue from Gliadel and, to a lesser extent, Aggrastat;

	•	our ability to partner, divest, license or enter into a similar type of transaction for Aggrastat and our other non-key assets or intellectual property, and the consideration we receive therefor;

	•	our need to potentially discount the sale price of Aggrastat;

	•	the progress of our research and development programs;

	•	the timing and progress of SNDC’s clinical development of GPI 1485 and our option to purchase SNDC;

	•	the progress of pre-clinical and clinical testing;

	•	the time and cost involved in obtaining regulatory approvals;

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

	•	the changes in our existing research relationships, competing technological and marketing developments;

	•	our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others;

	•	the conversion of the long-term convertible notes;

	•	the terms of any renegotiation of our revenue interest obligation

	•	the costs of servicing debt;


	•	the costs of product in-licensing; and

	•	any future change in our business strategy.

We do not know and cannot reasonably estimate when we may incur significant future expenses or the period in which material net cash flows from significant projects are expected to commence because of, among other factors, the risks and uncertainties involved in:


	•	the amount of our revenue from Gliadel and, to a lesser extent, Aggrastat;

	•	the costs and outcomes of pre-clinical testing and clinical trials and the time when those outcomes will be determined;

	•	obtaining future corporate partnerships;

	•	the time and expense of obtaining regulatory approval;

	•	the competing products potentially coming to market; and

	•	obtaining protection and freedom to operate for our patented technologies.

We have the right to sell Gliadel to MGI Pharma for $90.0 million under the terms of the line of credit agreement with MGI Pharma. While we expect to complete the merger with MGI Pharma during the fourth quarter of 2005, if the merger with MGI Pharma does not close, we will need to draw down on the line of credit, raise additional capital, or sell Gliadel for $90.0 million to MGI Pharma, in order to achieve our future business objectives. These objectives include clinical and pre-clinical development activities for our product candidates, including, but not limited to:


	•	Aquavan;

	•	GPI 1485;

	•	NAALADase inhibitors;

	•	PARP inhibitors;

	•	GPI 15715 (non-iv); and

	•	other research projects.

The revised estimated costs to complete the current series of Aquavan trials are approximately $30.0 million to $35.0 million. Additionally, we may, at our discretion, exercise our right to acquire all of the equity of SNDC at any time beginning on April 1, 2005 and ending on the earlier of March 31, 2007 or the 90th day after the date that SNDC provides us with financial statements showing cash and cash equivalents of less than $2.0 million. The option exercise price started at $75.1 million in April 2005 and increases incrementally to $119.8 million in January 2007, and may be paid in cash or in our common stock, at our sole discretion, provided that our common stock may not constitute more than 50% of the consideration tendered for payment.

The source, timing and availability of this funding will depend on market conditions, interest rates and other factors. This funding may be sought through various sources, including debt and equity offerings, corporate collaborations, divestures, partnership, bank borrowings, lease arrangements relating to fixed assets or other financing methods. There can be no assurance that additional capital will be available on favorable terms, if at all.

If adequate funds are not available, we may be required to:


	•	divest Gliadel and/or Aggrastat;

	•	draw down on the line of credit with MGI Pharma;

	•	alter or revise our newly-announced corporate strategy;

	•	significantly delay, curtail or eliminate one or more of our research, development and clinical programs;


	•	reduce the scope of our efforts to market and sell Gliadel;

	•	reduce our workforce;

	•	reduce the scope of our intellectual property protection;

	•	enter into corporate partnerships or co-promotions to market and sell Gliadel; or

	•	enter into arrangements with collaborative partners or others that may require us to relinquish certain rights to our technologies, product candidates or future products, including licensing or transferring rights to our research or development programs to third parties.

If we are required to do one or more of the foregoing due to insufficient funds, then it may have the effect of delaying or restricting our ability to generate additional revenues from any of our products or product candidates. We may also have to outsource one or more of our programs in order to continue its development, resulting in increased costs and reductions in any potential returns realizable by us.

Off-Balance Sheet Arrangements

The only off-balance sheet arrangements we have entered into are our facility and equipment operating lease agreements. Our obligations under these agreements are presented in this section under “Contractual Obligations” in the Form 10-K for the year ended December 31, 2004.

Contractual Obligations

Our contractual commitments for long-term debt as of December 31, 2004 were reduced in January 2005 by our repayment of the outstanding principal balance of $17.2 million under the Wachovia term loan we used to finance the acquisition of our corporate and research and development facilities.

In addition, in April 2005, we awarded retention bonuses to certain of our employees who are considered important to the implementation of our business strategy announced in April 2005. These employees will be paid their retention bonuses if they continue their employment with us through December 6, 2005 or April 6, 2006, depending on the employee. If the MGI Pharma merger is consummated, the retention bonuses, totaling $1.8 million, consisting of both cash and grants of restricted stock units, will be paid out on an accelerated basis as of the merger date. As of June 30, 2005, $0.5 million of retention bonus expense has been recorded.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base our estimates and assumptions on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from our estimates and assumptions. We believe the following critical accounting policies, among others, affect our more significant estimates and assumptions and require the use of complex judgment in their application. These policies have been reviewed by the Audit Committee.

Revenue Recognition. Revenue from Gliadel and Aggrastat is recognized when the following four criteria are met: (i) we have persuasive evidence that an arrangement exists; (ii) the price is fixed and determinable; (iii) the title has passed; and (iv) the collection is reasonably assured. Revenues are recorded net of provisions for returns, chargebacks and discounts, which are established at the time of sale.

Our primary customer for Gliadel is SPD, a specialty pharmaceutical distributor who sells directly to hospitals. Our three main wholesalers for Aggrastat, AmerisourceBergen Drug Corporation, Cardinal and McKesson Corporation, sell directly to hospitals.

Product demand by distributor and wholesalers during a given period may not correlate with prescription demand for the product in that period. As a result, we periodically evaluate the distributor and wholesalers’ inventory positions. If we believe these levels are too high based on prescription demand, we will either


	•	defer recognition of revenue if we determine that there is excess channel inventory for our products; or

	•	not accept purchase orders from the distributor; or

	•	not ship additional products until these levels are reduced.

Provisions for sales discounts, and estimates for chargebacks, product returns for damaged or expired products, are established as a reduction of product revenues at the time such revenues are recognized. We establish these revenue reductions with our best estimate at the time of the sale based on historical experience, adjusted to reflect known changes in the factors that impact such reserves.

Research and Development Expenses. For each of our research and development projects, we incur both direct and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies. We may also incur third-party costs related to these projects, such as contract research, consulting and clinical development costs. Indirect expenses, such as facility and equipment costs, utilities, general research and development management and other administrative overhead are allocated to research and development generally based on, among other things, the extent to which our general research and development efforts make use of facilities, non-project personnel and other resources.

We accrue clinical trial expenses based on estimates of work performed and completion of certain milestones. Certain milestone payments are deferred and amortized over the clinical trial period. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known (a change in estimate.) Expense of other contracted research arrangements or activities are charged to operations either under the terms of the contract, milestones or in some instances pro rata over the term of the agreement. Based on the facts and circumstances, we select the method that we believe best aligns the expense recognition with the work performed.

Intangible Assets. When we purchase products, we classify the purchase price, including expenses and assumed liabilities, as intangible assets. The purchase price may be allocated to product rights, trademarks, patents and other intangibles using the assistance of valuation experts. We estimate the useful lives of the assets by considering the remaining lives of the patents, competition from products prescribed for similar indications, estimated future introductions of competing products, and other related factors. The factors that drive the estimate of the life of the asset are often uncertain. When events or circumstances warrant review, we assess recoverability of intangibles from future operations, using undiscounted future cash flows derived from the intangible assets. Any impairment would be recognized in operating results, to the extent the carrying value exceeds the fair value (see “Impairment of Long-lived Assets” below.)

Impairment of Long-lived Assets. We review our property and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and, in some cases, the current fair value of the asset. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

Revenue Interest Obligation. Our revenue interest obligation was recorded as debt as we have significant continuing involvement in the generation of the cash flows due to PRF. The obligation is being amortized under the effective interest method, utilizing an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF reduce the future obligation.

Consolidation of SNDC. In accordance with FIN 46R, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights, and accordingly should consolidate the entity, SNDCH is considered a variable interest entity. Under FIN 46R, we have been deemed the primary beneficiary of the variable interest entity because we are most closely associated with SNDCH. Accordingly, the financial results of SNDCH have been consolidated with our financial statements since June 2004.

New Accounting Pronouncements

SFAS No. 123R. In December 2004, FASB issued SFAS 123R (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting Principles Bulletin Opinion (or APB) No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. In accordance with the effective date of the statement, we will adopt the statement starting with our fiscal year beginning January 1, 2006.

As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method. However, SFAS 123R 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 over the expected period of service. Accordingly, the adoption of SFAS 123R’s fair value method may have an impact on our results of operations, although it will have no impact on our overall financial position.

The full impact of adoptions of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 4 to the Consolidated Financial Statements. SFAS 123R also required the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are unable to estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

SFAS 151. In November 2004, FASB issued SFAS 151, “Inventory Cost.” This statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage.) The provision of the statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the impact of this statement on our consolidated financial positions, results of operations and cash flows.

SFAS 154. In June 2005, FASB issued SFAS 154, “Accounting Changes and Error Corrections” (or SFAS 154), a replacement of APB 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. As of June 30, 2005, this statement had no impact on our financial statements, results of operations and cash flows.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

A substantial portion of our assets are investment grade debt instruments such as direct obligations of the U.S. Treasury, securities of federal agencies that carry the direct or implied guarantee of the U.S. government, bank certificates of deposit and corporate securities, including commercial paper and corporate debt instruments. The market value of such investments fluctuates with current market interest rates. In general, as rates increase, the market value of a debt instrument would be expected to decrease. The opposite is also true. To minimize such market risk, we have in the past and, to the extent possible, will continue in the future to hold such debt instruments to maturity, at which time the debt instrument will be redeemed at its stated or face value. Due to the short duration and nature of these instruments, we do not believe that we have a material exposure to interest rate risk related to our investment portfolio. The investment portfolio at June 30, 2005 was $55.4 million and weighted-average yield to maturity was approximately 3.2%. The return on our investments during the three months ended June 30, 2005 was approximately 2.8%.

Certain of our debt, primarily the $17.2 million in borrowings from Wachovia that was repaid in January 2005, was established with interest rates that fluctuate with market conditions. As a hedge against such fluctuations in interest rates, we had entered into interest rate swap agreements with a commercial bank (or counter party) to exchange the variable rate financial obligations for fixed rate obligations. We have one interest rate swap agreement remaining that had a total notional principal value of $0.8 million as of June 30, 2005.

Pursuant to the interest rate swap agreement, we pay a fixed rate of interest to the counter party and receive from the counter party a variable rate of interest. The differential to be paid or received as interest rates change is charged or credited, as appropriate to operations. Accordingly, we had fixed interest rate on $0.8 million of our June 30, 2005 financial obligations at 2.78%. The interest rate swap agreement has the same maturity date as the financial obligation and expires in April 2006. We do not speculate on the future direction of interest rates nor do we use these derivative financial instruments for trading purposes. In the event of non-performance by the counter party, we could be exposed to market risk related to interest rates.

In January 2005, we paid off the $17.2 million outstanding principal balance on the Wachovia term loan, and as a result, the related cash collateral account balance has been released and the related swap agreement has been paid and terminated.


Item 4.	*Controls and Procedures.*

Disclosure Controls and Procedures: Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”), as of June 30, 2005 (the “Evaluation Date”.) Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting: There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended on the Evaluation Date that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

None.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

None.


Item 3.	*Defaults Upon Senior Securities*

None.


Item 4.	*Submission of Matters to a Vote of Security Holders*

Our stockholders voted on four items at the Annual Meeting of Stockholders held on May 4, 2005:


	1. The election of directors to serve on our Board of Directors for a term of one year and until their successors are elected and qualified;

	2. The ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2005;

	3. The amendment of our 2002 Stock Award and Incentive Plan (the “Incentive Plan”) to (i) increase the number of shares available for issuance under the Incentive Plan by 1,500,000 shares, and (ii) increase the number of shares other than non-incentive stock options that may be issued under the Incentive Plan by 1,000,000 shares;

	4. The amendment of our 2002 Employee Stock Purchase Plan (the “Stock Purchase Plan”) to increase the number of shares available for issuance under the Stock Purchase Plan by 400,000 shares.

The nominees for director were elected based on the following votes:


Nominee	Votes For		Votes Withheld

George L. Bunting, Jr.		37,645,486		3,980,397
Joseph R. Chinnici		37,877,691		3,748,192
Barry M. Fox		37,762,283		3,863,600
Elizabeth M. Greetham		37,408,654		4,217,229
Joseph Klein, III		37,898,291		3,727,592
Dean J. Mitchell		38,601,278		3,024,605
Ronald M. Nordmann		38,043,158		3,582,725
Craig R. Smith, M.D.		37,739,817		3,886,066
Solomon H. Snyder, M.D.		38,123,886		3,501,997
David C. U’Prichard, Ph.D.		33,569,783		8,056,100

The proposal to ratify the selection of KPMG LLP as independent registered public accounting firm for 2005 received the following votes:


	•	40,631,679 votes for approval

	•	972,831 votes against

	•	21,373 abstentions

There were no broker non-votes for this item.

The proposal to amend the 2002 Stock Award and Incentive Plan to increase the number of shares available received the following votes:


	•	19,111,489 votes for approval

	•	5,624,488 votes against

	•	33,448 abstentions

There were 16,856,458 broker non-votes for this item.

The proposal to amend the 2002 Employee Stock Purchase Plan to increase the number of shares available received the following votes:


	•	22,976,576 votes for approval

	•	1,764,529 votes for against

	•	28,733 abstentions

There were 16,856,045 broker non-votes for this item.


Item 5.	*Other Information*

Risk Factors

Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth herein, as well as other information we include in this report and the additional information in the other reports we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline and you could lose all or part of your investment.


	*Risks Related to the Merger*

If the proposed merger with MGI Pharma is not completed, our business could be materially and adversely affected and our stock price could decline.

We have entered into an Agreement and Plan of Merger (or Merger Agreement), dated as of July 20, 2005 with MGI Pharma, Inc. (or MGI Pharma,) under which MGI Pharma would acquire us through the merger of a wholly owned subsidiary of MGI Pharma with and into Guilford Pharmaceuticals Inc. Upon the closing of the merger, the holders of our outstanding common stock will receive consideration consisting of a fractional share of MGI Pharma’s common stock worth $2.625, subject to a collar, and $1.125 in cash. The merger is subject to customary closing conditions, including stockholder approval, customary regulatory approvals and other closing conditions. Therefore, the merger may not be completed or may not be completed in the expected time period. If the Merger Agreement is terminated, the market price of our common stock will likely decline, as we believe that our market price reflects an assumption that the merger will be completed. In addition, our stock price may be adversely affected as a result of the fact that we have incurred and will continue to incur significant expenses related to the merger prior to its closing that will not be recovered if the merger is not completed. If the Merger Agreement is terminated under certain circumstances, we may be obligated to pay MGI Pharma a termination fee of $7.0 million. As a consequence of the failure of the merger to be completed, as well as of some or all of these potential effects of the termination of the Merger Agreement, our business could be materially and adversely affected in that concerns about our viability are likely to increase, making it more difficult to retain employees and existing customers and to generate new business.

The fact that there is a merger pending could have an adverse effect on our business, revenue and results of operations.

While the merger is pending, it creates uncertainty about Guilford’s future. As a result of this uncertainty, customers may decide to delay, defer, or cancel purchases of our products or to enter into other transactions with us pending completion of the merger or termination of the Merger Agreement. If these decisions represent a significant portion of our anticipated revenue, our results of operations and quarterly revenues could be substantially below the expectations of market analysts.

In addition, while the merger is pending, we are subject to a number of risks that may adversely affect our business, revenue and results of operations, including:


	•	the diversion of management and employee attention and the unavoidable disruption to our relationships with customers and vendors may detract from our ability to grow revenues and minimize costs;

	•	we have and will continue to incur significant expenses related to the merger prior to its closing; and

	•	we may be unable to respond effectively to competitive pressures, industry developments and future opportunities.

Some of our directors and executive officers have interests that differ from those of our stockholders in recommending that our stockholders vote in favor of adoption of the merger agreement.

Certain of our executive officers and directors have interests in the merger that are different from and in addition to the interests of our stockholders generally. These interests include change of control and severance payments that are due as a result of the merger. In addition, either the adoption by our stockholders of the Merger Agreement or the completion of the merger will result in the accelerated vesting of stock options that have been granted under our equity compensation plans to employees, executive officers and directors. Restricted stock units held by our executive officers will also vest immediately prior to the merger.

MGI Pharma also agreed in the Merger Agreement to indemnify and provide liability insurance to our officers and directors. At the effective time of the merger, our current chief executive officer Dean Mitchell will be appointed to MGI Pharma’s board of directors.

Third parties may terminate or alter existing contracts with us.

We have contracts with suppliers, distributors, customers, licensors and other business partners. Various contracts require us to obtain consent from these other parties in connection with the merger. If these third-party consents cannot be obtained on favorable terms, the combined company may suffer a loss of potential future revenue and may lose rights that are material to the business of the combined company.

We expect to incur significant costs associated with the merger.

We estimate that we will incur significant direct transaction costs in connection with the merger. Our costs in connection with the merger will be expensed in the periods in which they are incurred. In addition, the merger with MGI Pharma has required and is expected to continue to require substantial management time, attention and resources. We believe the combined company may incur charges to operations, but cannot reasonably estimate those costs at this time, in the quarter in which the merger is completed, to reflect costs associated with integrating the two companies. There is no assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger.

Provisions of the Merger Agreement may discourage other companies from entering into a merger or other business combination with us which might otherwise benefit our stockholders.

The Merger Agreement prohibits us, subject to certain limited exceptions, from soliciting or encouraging any discussions regarding a proposal to enter into any business combination with any party other than MGI Pharma. Under specified circumstances, we may be required to pay MGI Pharma a termination fee of

$7.0 million. These restrictions may discourage other companies from entering into a merger or other business combination with us which might otherwise benefit our stockholders.

If we do not close the merger prior to October 1, 2005, we will be required to incur additional indebtedness pursuant to our Line of Credit Agreement (the “Credit Agreement”) with MGI Pharma, and to secure our indebtedness with certain of our intellectual property rights.

Our Credit Agreement with MGI Pharma provides that, commencing October 1, 2005 until the earlier of December 31, 2005 or the termination of the Merger Agreement, MGI Pharma will advance us up to an aggregate of $18.0 million. The outstanding principal and interest of any amounts advanced to us under the Credit Agreement will be due on December 31, 2006. Guilford’s obligations under the Credit Agreement are secured by a first priority security interest in (i) our NAALADase inhibitors and PARP inhibitors and (ii) Aquavan intellectual property and related assets; provided that such security interest does not attach to any property in which Paul Royalty Fund, L.P. and Paul Royalty Fund Holdings II (collectively “PRF”) maintains a security interest. If we default in our obligations under the Credit Agreement, we will incur additional indebtedness and fees, and may lose certain rights to our intellectual property.

The value of the shares of MGI Pharma’s common stock that our stockholders receive in the merger could vary as a result of the fixed exchange ratio above and below the collar and fluctuations in the price of MGI Pharma’s common stock.

At the effective time of the merger, each outstanding share of our common stock will be converted into the right to receive a fractional share of MGI Pharma’s common stock and $1.125 in cash. The stock portion of this consideration is subject to a collar such that, if MGI Pharma’s common stock price is between $23.4345 and $31.7055, our shareholders will receive total consideration of $3.75 per share, consisting of a fractional share of MGI Pharma’s common stock equal to $2.625 divided by the average closing price of MGI Pharma’s common stock, as determined over the five day trading period ending three trading days prior to closing of the merger, plus $1.125 in cash. If the average closing price of MGI Pharma’s common stock is equal to or more than $31.7055, each share of our common stock will be exchanged for 0.0828 of a share of MGI Pharma’s common stock plus $1.125 in cash. If the average closing price of MGI Pharma’s common stock is equal to or less than $23.4345, each share of our common stock will be exchanged for 0.1120 of a share of MGI Pharma’s common stock plus $1.125 in cash. In these circumstances, changes in the price of MGI Pharma’s common stock above or below these prices will affect the value of the consideration that our stockholders receive in the merger, meaning that if the price of MGI Pharma’s common stock declines prior to completion of the merger, the value of the merger consideration to be received by our stockholders will decrease. Stock price variations could be the result of changes in the business, operations or prospects of MGI Pharma, us or the combined company, market assessments of the likelihood that the merger will be completed within the anticipated time frame or at all, general market and economic conditions and other factors which are beyond the control of MGI Pharma or us. There is no provision in the Merger Agreement that guarantees a minimum value for the MGI Pharma’s common stock to be issued at closing or permits Guilford to terminate the merger if MGI Pharma’s common stock declines.

Risks Related to Our Business

We may not be able to generate sufficient cash to satisfy our existing and future debt obligations.

Our ability to pay the required interest and principal payments on our debt depends on the future performance of our business. As of June 30, 2005, we had total long-term debt and revenue interest obligations of $117.9 million. We will require substantial funds to service our debt obligations and to operate our business in the future, including to fund research and development activities, pre-clinical and clinical testing, to manufacture our products and to make acquisitions.

Our obligations for 2005 include approximately $1.9 million in principal payments on our long-term debt. In addition, we are obligated to make payments on our revenue interest obligation as disclosed in the PRF risk factor below. We are obligated to pay the minimum amount under the PRF agreement of $6.3 million in 2005.

We have a history of net losses. Our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations. Unless we are able to substantially increase our profitability and cash flow from operations compared to historical levels or obtain refinancing, we cannot assure you that our business will generate sufficient cash flow from operations or that future capital will be available to us in amounts sufficient to enable us to pay our debt, or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we may be required to restructure or refinance our debt or seek additional equity capital or we may be required to sell assets. We cannot assure you that if and when required to do so we will be able to accomplish those actions on satisfactory terms, or at all.

We have a history of losses and our future profitability is uncertain.

We may not be able to achieve or sustain significant revenues or earn a profit in the future. Since we were founded in July 1993, with the sole exception of 1996, we have not earned a profit in any year. Our losses for the years ended December 31, 2004, 2003 and 2002, were $87.9 million, $53.9 million and $59.3 million, respectively, and for the six months ended June 30, 2005 were $81.0 million. Our losses result mainly from the significant amount of money that we have spent on research, development and clinical trial activities. As of June 30, 2005, we had an accumulated deficit of $472.4 million. We expect to have significant additional losses over the next several years due to expenses associated with our product candidates related to research, development and clinical trial activities, applying for and obtaining meaningful patent protection and establishing freedom to commercialize and applying for and receiving regulatory approval for our drug product candidates.

Our product candidates are in research or various stages of pre-clinical and clinical development. Except for Gliadel and Aggrastat, none of our products or product candidates may be sold to the public. Nearly all of our past revenues have come from:


	•	our sale and distribution of Gliadel and more recently of Aggrastat;

	•	payments from Aventis, Amgen and Pfizer under now terminated agreements with each of them, supporting the research, development and commercialization of our product candidates;

	•	royalty payments from Aventis’ sale and distribution of Gliadel; and

	•	payments relating to patent licensing agreements from Angiotech.

Presently, we expect to receive significant revenue only from sales of Gliadel and, in the short term, from Aggrastat. We do not expect that the revenue from these sources will be sufficient to support all our anticipated future activities. We do not expect to generate revenue from sales of our product candidates for the next several years, if ever, because of the significant risks associated with pharmaceutical product development.

Many factors will dictate our ability to achieve sustained profitability in the future, including:


	•	our ability to successfully market, sell, distribute and obtain initial or additional regulatory approvals for Gliadel and Aquavan;

	•	the successful development of our other product candidates either on our own, or together with future corporate partners with whom we enter into collaborative or license agreements; and

	•	the ability to in-license or acquire additional products in our targeted markets.

We will depend on Gliadel and, to a limited extent, Aggrastat for revenues.

Our short-term prospects depend heavily on sales of Gliadel and Aggrastat, our commercial products. Gliadel and Aggrastat accounted for approximately 69% and 31%, respectively, of our total product revenues for the year ended December 31, 2004, and approximately 69% and 31%, respectively, of our total revenues for the six months ended June 30, 2005. Gliadel was launched commercially in the United States by Aventis and its predecessors in February 1997 after having received approval from the Food and Drug Administration (or FDA) in September 1996. We do not know whether the product will ever gain broader market acceptance. If Gliadel fails to gain broader market acceptance, the revenues we receive from sales of Gliadel would be unlikely to increase.

Prior to early 2003, we only had approval from the FDA to market Gliadel in the United States for patients who had a brain tumor surgically removed and had recurrent forms of a type of brain cancer called glioblastoma multiforme (or GBM), affecting approximately 3,000 to 4,000 patients annually. On February 25, 2003, we received FDA approval to also market Gliadel for patients undergoing initial surgery, also known as first line therapy, in the United States for malignant glioma in conjunction with surgery and radiation. We estimate that the total number of such patients to be between 7,000 and 9,000 per year. In the second quarter of 2003 we instituted a new sales and marketing effort for Gliadel for initial surgery. We cannot assure you, however, that we will be successful in this effort or in achieving sales of Gliadel for use in initial surgeries.

We acquired Aggrastat from Merck and Co., Inc. on October 28, 2003. Prior to acquiring Aggrastat, we had never marketed and sold a product for cardiovascular conditions. Through the end of the first quarter of 2005, our efforts to ramp up our sales of Aggrastat through expanded marketing efforts did not meet our expectations. We recently announced our plans to minimize our ongoing expenses related to Aggrastat and to devise and implement an exit strategy from the product, as discussed above. We cannot assure you that we will be successful in our efforts to do so.

We will require substantial funds in addition to our existing working capital to develop our product candidates, carry out our sales and marketing plans and otherwise to meet our business objectives.

We will require substantial funds in addition to our existing working capital to develop our product candidates, including to conduct clinical trials of Aquavan, to carry out our sales and marketing plans, including our plans for Gliadel and Aquavan, and otherwise to meet our business objectives. We have never generated enough revenue during any period since our inception to cover our expenses and have spent, and expect to continue to spend, substantial funds to continue our research and development and clinical programs and to support our sales and marketing efforts. We cannot be certain that we will be able to raise additional capital when we need it, on terms favorable to us, or at all. If we cannot raise additional capital in a timely manner, then we may not be able meet our business objectives.

Our operating results are likely to fluctuate from period to period, which could cause the price of our common stock to fluctuate.

Our revenue and expenses have fluctuated significantly in the past. This fluctuation has in turn caused our operating results to vary significantly from quarter to quarter and year to year. We expect the fluctuations in our revenue and expenses to continue and thus our operating results should also continue to vary significantly. These fluctuations may be due to a variety of factors, including:


	•	the timing and amount of revenue from Gliadel and Aggrastat;

	•	the timing and realization of milestone and other payments from existing and future corporate partners;

	•	the timing and amount of expenses relating to our research and development, product development, and manufacturing activities; and

	•	the extent and timing of costs related to our activities to obtain patents on our inventions and to extend, enforce and/or defend our patent and other rights to our intellectual property.

Because of these fluctuations, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, causing the market price of our common stock to decrease. For example, the trading price of our common stock from January 1, 2002 to June 30, 2005 ranged from $2.05 to $12.55.

We may not be successful in our attempts to minimize our ongoing expenses related to Aggrastat or to implement an exit strategy from this product.

Our attempts to minimize our ongoing expenses related to Aggrastat and to devise and implement an exit strategy from the product, whether occurring before or after our merger MGI Pharma, are contingent upon a number of factors, including our ability to appropriately manage the process of reducing product development expenses, find and engage qualified purchasers, licensees or partners for the product and minimize the time that it takes us to do so. Our success, if any, will also depend on the consideration that we are able to receive for Aggrastat. Even after consummation of our merger, the consideration to be received upon disposition of Aggrastat may not reach acceptable levels. If we do not find and engage qualified purchasers, licensees or partners who are willing to provide the consideration that we determine is reasonable or appropriate, or if it takes a significantly longer amount of time and resources than we presently anticipate to accomplish these objectives, we may not be able to minimize our ongoing expenses related to Aggrastat or be able to implement an exit strategy from the product.

As of June 30, 2005, our contractual commitments related to the Aggrastat Assets included an agreement with Baxter Healthcare Corporation for the supply of 250 ml and 100 ml bags of Aggrastat through July 2009, which commits us to purchase approximately $6.1 million of such bags, and $1.3 million of such purchase commitment remains outstanding for the remainder of 2005. Additionally, we had various funding commitments and agreements related to the advancement of our research and development activities, all of which are assignable with the mutual consent of the parties. If we elected to terminate these commitments and agreements, we would be responsible for the costs related to services rendered to date and any irrevocable commitments entered into on our behalf. We currently estimate these costs to be no more than $1.0 million.

Additionally, our ability to accomplish any of our objectives regarding Aggrastat will depend on our success in reaching a mutually acceptable arrangement with PRF regarding our revenue interest agreement with PRF. The revenue interest agreement is secured by, among other things, the revenues from Aggrastat and the intellectual property related to Aggrastat. Implementing a viable exit strategy for Aggrastat will require such an arrangement. If we are not able to reach this arrangement, then we may not be able to successfully minimize our expenses related to this product, which expenses include payments owed to PRF.

In addition, if the MGI Pharma merger does not close and we are unable to divest, partner, license or enter into other similar arrangements for Aggrastat, we intend to continue to sell Aggrastat, but may begin a significant sales price discount program.

Our ability to realize significant value from our early stage “pipeline” is dependent upon successful collaboration with external parties.

We are attempting to create value from our early stage pipeline through licensing, corporate partnerships, sales or other similar transactions. Any such transaction will be dependent upon the cooperation of a third-party. If we are not successful in reaching reasonable or appropriate agreements with such third parties related to these technologies, we may not be able to create significant value from them. Early stage research projects often fail to achieve commercial success due to factors such as unsatisfactory pre-clinical and clinical testing results, regulatory approval requirements, market acceptance, and reimbursement limitations. Additionally, in the absence of support from third parties, we may not be able to continue to fund the research and development of these early stage pipeline technologies. As a consequence, these technologies may never provide value to our shareholders.

Timely regulatory approval(s) to market Aquavan, without the requirement for monitored anesthesia care, will directly affect whether we achieve our financial goals.

It is essential to the success of our new business strategy that we receive approval from the Food and Drug Administration (FDA) to market Aquavan so that we may launch our sales of the product during the last calendar quarter of 2007. If this approval is significantly delayed, we may not achieve our financial goals, which include goals related to revenues, total expenses, losses and profits. Additionally, if the FDA’s approval of Aquavan limits or prohibits our ability to market the administration of the product without an anesthesiologist, a nurse anesthetist or similar medical professional, we do not expect to achieve our financial goals.

Our ability to significantly increase revenues of Gliadel will directly affect whether we achieve our financial goals.

In order to achieve our financial goals, we must substantially increase sales of Gliadel over the next five years. Our ability to increase these sales will be primarily based upon our ability to attain greater market penetration than we currently have. We expect to attain greater market penetration through, among other things, increasing the amount of time and effort that our sales force devotes to Gliadel, increasing the sales success of that sales force and increasing our marketing resources; however, if we fail to do so then we may not be able to increase our sales of the product. Even if we are able increase our sales and marketing efforts, such increases may not result in increased sales of Gliadel.

Our ability to achieve strong revenue growth for Gliadel and Aquavan may depend to a large extent on the results of additional clinical trials that we may conduct.

We may conduct additional clinical trials with Gliadel to provide physicians with added clinical data and/or to expand Gliadel’s labeled indications. There is no assurance that such clinical trials, if any, will be successful, or if successful, will persuade physicians to use the product with more frequency or convince the FDA that an additional indication is warranted. Also, if one or more additional clinical trials are not successful, sales of the product in its current markets could be adversely affected and could significantly adversely affect our ability to achieve our financial goals.

Additionally, our ability to increase the size of the potential market for Aquavan will depend upon our success in obtaining approval for the product in a variety of procedural sedation settings. We will likely need to conduct additional clinical trials beyond those we already have announced to do so, and such trials may not be successful or may not, in the determination of the FDA, warrant an indication for Aquavan larger than the one we are currently attempting to obtain. In such cases, sales of Aquavan may never meet our expectations and we would not be able to achieve our financial goals.

Revenue from Gliadel, Aggrastat or future products, if any, depends in part on reimbursement from health care payors, which is uncertain.

The efforts of government and insurance companies, health maintenance organizations and other payors of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. These efforts may also affect the future revenues and profitability of our potential customers, suppliers and collaborative partners, in turn affecting demand for our products. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent Federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a negative effect on our business and operating results.

Our ability to commercialize our products successfully will depend in part on the extent to which private health insurers, organizations such as HMOs and governmental authorities reimburse the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent

growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably.

Furthermore, even if reimbursement is available for our products, we cannot be sure that it will be available at price levels sufficient to cover the cost of our products to customers. This may have the effect of reducing the demand for our products, or may prohibit us from charging customers a price for our products that would result in an appropriate return on our investment in those products.

European regulatory agencies may impose restrictions on our ability to import Gliadel to the European Union.

We have been informed by the European regulatory agency responsible for overseeing the testing and release of Gliadel in the European Union that we may have to test each sublot of Gliadel that we ship to the European Union. Each time a lot is tested it results in the destruction of a portion of the lot. The cost associated with this requirement would make it commercially unfeasible to ship small sublots of Gliadel labeled for smaller European markets. If we are not able to agree with the regulatory agency to an alternative method of testing and releasing sublots of Gliadel, we may not be able to continue to ship Gliadel to our distributors for smaller European markets. As a result, our Gliadel revenue would be negatively affected.

PRF is entitled to a portion of our revenues, which may limit our ability to fund some of our operations. If we do not achieve certain revenue targets for Gliadel and Aggrastat, PRF may be entitled to a greater percentage of our revenue, revenue from future products we may acquire or certain of our product candidates.

Under the terms of our Revenue Interest Assignment Agreement (the Revenue Agreement) with PRF, PRF is entitled to receive a percentage of our combined annual net revenue from Gliadel and Aggrastat as follows: from October 28, 2003 through December 31, 2006, PRF is entitled to receive 10% of such net revenue up to $75.0 million, and 2.5% of such net revenue in excess of $75.0 million; from January 1, 2007 through December 31, 2012 (the end of the term of the financing arrangement with PRF), the respective percentages are 17.5% and 3.5%. If combined Gliadel and Aggrastat annual net revenue is less than $48.3 million, $60.2 million, or $80.6 million in 2004, 2005, and 2006, respectively, then PRF receives the higher of certain minimum payments for such years (the PRF Minimum Payments, as described below) or 12.5% of combined Gliadel and Aggrastat net revenue. If combined Gliadel and Aggrastat net revenue is less than $75.0 million in any of the years 2007 through 2012, then PRF will receive the higher of the PRF Minimum Payments or 22.5% of combined Gliadel and Aggrastat net revenue.

PRF Minimum Payments included a royalty payment of $5.0 million in 2004, and include minimum royalties of $6.3 million in 2005, $7.5 million in 2006, $10.0 million in each of 2007-2009 and $12.5 million in each of 2010-2012. During each year of the term of the Revenue Agreement, PRF will be entitled to receive a portion of revenues from products that we may acquire in the future or of our product candidates Aquavan and GPI 1485, in the case that our calculated annual obligation(s) to make royalty payments under the Revenue Agreement (based upon the combined net revenue from Gliadel and Aggrastat) are less than $6.4 million for 2004, $7.6 million for 2005, $8.3 million for 2006, $15.3 million for 2007, $15.5 million for 2008, $15.8 million for 2009, $16.0 million for 2010, or $15.9 million for 2011 and 2012, respectively. PRF is also entitled to receive portions of amounts payable to us on the resolution of future intellectual property disputes involving Gliadel or Aggrastat and on any future sale of ex-North American marketing rights to Gliadel. In addition to its revenue interest in our products or future products, as the case may be, PRF received five-year warrants to purchase 300,000 shares of our common stock at an exercise price of $9.15 per share.

If we are unable to close the MGI Pharma merger and we do not sell Gliadel to MGI Pharma, we would continue discussing a renegotiation of the terms of the Revenue Agreement with PRF. We cannot assure you that these discussions will result in a favorable change, or any change, to such terms or our obligations under the Revenue Agreement. Failure to renegotiate the terms may hinder or prevent our ability to achieve our financial goals.

Under certain circumstances, PRF may require us to repurchase its revenue interest, the payment of which may significantly deplete our cash resources or limit our ability to enter into significant business transactions.

PRF may be entitled to require us to repurchase its revenue interest under the following circumstances: (1) if we fail to maintain an escrow account funded with eight quarters of minimum payments to PRF or fail to maintain at least $20.0 million of net working capital, (2) if we fail to make our minimum payments to PRF, (3) if we sell Gliadel and Aggrastat (with PRF having partial rights to make us repurchase its interest in the event of the sale of one, but not both products), (4) upon the occurrence of a bankruptcy or similar event, or (5) upon certain conditions related to a change of control of us.

The repurchase amount guarantees PRF a return in an amount over its initial investment and is reduced based on payments that we have previously made to PRF prior to the time that its interest is repurchased, but the repurchase price may never exceed three and a half times PRF’s initial investment, or $147.0 million. If PRF requires us to repurchase its revenue interest, our ability to fund our operations may be significantly impaired. Additionally, because PRF would be entitled to exercise this repurchase right upon a change of control of us, or upon the sale of either Gliadel or Aggrastat, we may not be able to effect a business transaction that would have one of these results.

We have pledged our assets related to Gliadel and Aggrastat to PRF; therefore, we may not be free to utilize those assets at our discretion.

PRF has been granted a security interest in the intellectual property assets related to Gliadel and Aggrastat, which in the aggregate accounted for all of our net product revenue of $40.2 million for the year ended December 31, 2004, and all of our net product revenue of $22.9 million for the six months ended June 30, 2005. As of June 30, 2005, the intangible assets related to Gliadel and Aggrastat were $36.1 million, or approximately 26% of our total assets. We, therefore, may not be free to utilize those assets at our discretion, such as selling or outlicensing rights to part or all of those assets, without first obtaining the permission of PRF. This requirement could delay, hinder or condition our ability to enter into corporate partnerships or strategic alliances with respect to these assets.

Our clinical development plans for Aquavan will require significant additional capital.

In order to conduct clinical trials for Aquavan, we will require significant additional capital resources. We cannot reasonably estimate the required amount due to the uncertainties involved with these activities. With respect to our planned Phase III clinical trials of Aquavan, we do not know the number of procedural sedation settings that the FDA will require us to test in order to receive approval to market the drug for a broad range of brief diagnostic or therapeutic procedures. The results of these determinations can cause our capital requirements to vary considerably. This additional financing may take the form of an offering of debt or equity, and that offering could be material in size. If we conduct a primary equity offering, the issuance of the additional shares of common stock may be dilutive to our existing stockholders and may have a negative effect on the market price of our stock. We do not know if those capital resources will be available to us. If they are not available, we may not be able to successfully execute on these business objectives or on any other business or operational goals. We, therefore, may need to enter into corporate partnerships or co-promotions to market and sell Gliadel and/or Aggrastat, or divest ourselves of one or both of the products in order to support our operations.

We have licensed some of our GPI 1485 development and commercialization rights to Symphony Neuro Development Company (or SNDC) and will not receive any future royalties or revenues with respect to this intellectual property unless we exercise an option to acquire SNDC in the future. We may not have the financial resources to exercise this option or sufficient clinical data in order to determine whether we should exercise this option.

We have licensed to SNDC our rights to GPI 1485 in the United States in exchange for SNDC’s investment of up to $40.0 million to advance GPI 1485 through clinical development in four indications:

Parkinson’s disease, peripheral nerve injury, including post-prostatectomy erectile dysfunction, HIV neuropathy and HIV dementia. We expect that the $40.0 million clinical development budget will be fully expended in approximately one year. In exchange for the license rights and for five-year warrants to purchase 1.5 million shares of our common stock at $7.48 per share, we received an option to acquire all of the equity of SNDC. We may, at our discretion, exercise this option at any time beginning on April 1, 2005 and ending on the earlier of March 31, 2007 or the 90th day after the date that SNDC provides us with financial statements showing cash and cash equivalents of less than $2.0 million. The option exercise price starts at $75.1 million in April 2005 and increases incrementally to $119.8 million in January 2007, and may be paid in cash or in our common stock, at our sole discretion, provided that our common stock may not constitute more than 50% of the consideration tendered for payment.

If we elect to exercise the purchase option, we will be required to make a substantial cash payment or to issue a substantial number of shares of our common stock, or enter into a financing arrangement or license arrangement with one or more third parties, or some combination of these. A payment in cash would reduce our capital resources. A payment in shares of our common stock could result in dilution to our stockholders at that time. Other financing or licensing alternatives may be expensive or impossible to obtain. The exercise of the purchase option will likely require us to record a significant charge to earnings and may adversely impact future operating results. If we do not exercise the purchase option prior to its expiration, our rights in and to SNDC with respect to the GPI 1485 programs will terminate. We may not have the financial resources to exercise the purchase option, which may result in our loss of these rights. Additionally, we may not have sufficient clinical data in order to determine whether we should exercise this option.

We face technological uncertainties in connection with the research, development and commercialization of new products.

The research, development and commercialization of pharmaceutical drugs involve significant risk. Before a drug can be commercialized, we, or a future corporate partner will have to:


	•	expend substantial capital and effort to develop our product candidates further, which includes conducting extensive and expensive pre-clinical animal studies and human clinical trials;

	•	apply for and obtain regulatory clearance to develop, market and sell such product candidates; and

	•	conduct other costly activities related to preparation for product launch.

In some of our research programs, we are using compounds that we consider to be prototype compounds that we are using primarily to establish that a relevant scientific mechanism of biological or chemical action could have commercial application in diagnosing, treating or preventing disease. We generally do not consider our prototype compounds to be lead compounds acceptable for further development into a product because of factors that make them unsuitable as drug candidates. In order to develop commercial products, we will need to conduct research using other compounds that share the key aspects of the prototype compounds but do not have the unsuitable characteristics. Identifying lead compounds may not always be possible.

In addition, our product candidates are subject to the risks of failure inherent in the development of products based on new and unsubstantiated technologies. These risks include the possibility that:


	•	our new approaches will not result in any products that gain market acceptance;

	•	a product candidate will prove to be unsafe or ineffective, or will otherwise fail to receive and maintain regulatory clearances necessary for development and marketing;

	•	a product, even if found to be safe and effective, could still be difficult to manufacture on the scale necessary for commercialization or otherwise not be economical to market;

	•	a product will unfavorably interact with other types of commonly used medications, thus restricting the circumstances in which it may be used;

	•	third parties may successfully challenge our proprietary rights protecting a product;


	•	proprietary rights of third parties will preclude us from manufacturing or marketing a new product; or

	•	third parties will market superior or more cost-effective products.

As a result, our activities, either directly or through future corporate partners, may not result in any commercially viable products.

We will depend on collaborations with third parties for the development and commercialization of our products.

Our resources are limited, therefore, our business strategy requires us to depend on either corporate collaborations, strategic financings or both, in order to develop one or more of our product candidates through to commercialization. In developing our product candidates, we may enter into various arrangements with:


	•	corporate and financial partners;

	•	academic investigators;

	•	licensors of technologies; and

	•	licensees of our technologies.

If we are unable to enter into such arrangements, our ability to proceed with the research, development, manufacture and/or sale of product candidates may be limited and we may have to alter or curtail our business objectives based on our capital resources. If we do so, it could result in delaying the progress of pre-clinical research or clinical trials, and consequently, the eventual commercialization of a marketed product based on one of these programs, or eliminating one or more research or development programs from our business objectives.

We face serious competition from other small pharmaceutical companies and the in-house research and development staffs of larger pharmaceutical companies in trying to attract corporate and financial partners. Additionally, we may not be successful in attracting such partners (or collaborators) over other companies because (i) their research programs may be more attractive to a collaborator, (ii) their stage in the research process may be more advanced, (iii) they may have synergies with the collaborator’s existing research programs, or (iv) they may agree to terms and conditions of the collaboration that are more favorable to the collaborator than we would otherwise agree. It is common practice in many corporate partnerships in our industry for the larger partner to have responsibility for conducting pre-clinical studies and human clinical trials and/or preparing and submitting applications for regulatory approval of potential pharmaceutical products. If such a collaborative partner of ours fails to develop or commercialize successfully any of our product candidates, we may not be able to remedy this failure and it could negatively affect our business.

Furthermore, larger pharmaceutical companies often explore multiple technologies and products for the same medical conditions. Therefore, they are likely to develop or enter into collaborations with our competitors for products addressing the same medical conditions targeted by our technologies. Our collaborators may, therefore, be pursuing alternative technologies or product candidates in order to develop treatments for the diseases or disorders targeted by our collaborative arrangements. Depending on how other product candidates advance, a corporate or financial partner may slow down or abandon its work on our product candidates or terminate its collaborative arrangement with us in order to focus on these other prospects.

We do not have manufacturing capabilities for commercial quantities of any of our product candidates.

Currently, we have no manufacturing capabilities for commercial quantities of any of our product candidates. Consequently, in order to complete the commercialization process of any of our product candidates, we must either acquire, build or expand our internal manufacturing capabilities, or rely on third parties to manufacture these product candidates. If we are not able to accomplish either of these tasks, it would impede our efforts to bring our product candidates to market, which would adversely affect our business. Moreover, if we decide to manufacture one or more of our product candidates ourselves, we would incur substantial start-up expenses and would need to expand our facilities and hire additional personnel.

Third-party manufacturers must also comply with FDA, DEA and other regulatory requirements for their facilities. In addition, the manufacture of product candidates on a limited basis for investigational use in animal studies or human clinical trials does not guarantee that large-scale, commercial production is viable. Small changes in methods of manufacture can affect the safety, efficacy, controlled release or other characteristics of a product. Changes in methods of manufacture, including commercial scale-up, may, among other things, require the performance of new clinical studies.

A significant portion of our revenue from Gliadel is to Cardinal Health Specialty Pharmaceuticals Distribution (or SPD), a specialty pharmaceutical distributor.

Approximately 79% of our revenue from Gliadel in the six months ended June 30, 2005 were made to SPD pursuant to a purchase agreement between us and SPD. Under the terms of this agreement, either we or SPD may terminate the agreement upon 60 days prior written notice. We have no assurance that SPD will not exercise its right to terminate the agreement at any time. If SPD does terminate the agreement, there can be no assurance that we will be able to enter into an arrangement with another specialty distributor for the purchase and sale of Gliadel. Additionally, under the terms of our agreement with SPD, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of Gliadel that SPD may have in its inventory. As of June 30, 2005, we believe that SPD had approximately $1.9 million of Gliadel in its inventory.

SPD orders Gliadel treatments based upon, among other things, its estimation of our ability and its ability to successfully sell Gliadel to hospital pharmacies and its desired level of inventory. If the demand for Gliadel from hospital pharmacies decreases, or SPD decreases the amount it keeps in its inventory, SPD may decrease or stop making additional purchases of the product from us. The result of such a decrease would most likely be our reporting lower revenue from Gliadel.

We depend upon Merck to supply us with the active pharmaceutical ingredient for Aggrastat. We will depend upon Baxter Healthcare Corporation (or Baxter) to provide us with finished product of Aggrastat in bags.

Aggrastat consists of an active pharmaceutical ingredient (or API), which is sold as finished product in both vials and bags. Merck is obligated to supply us with the API until 2014. Under our agreement with Merck, we are obligated to purchase all of our requirements of API from Merck. In the event of Merck’s breach of the agreement, we may seek an alternative source of API. However, we have not investigated alternative sources, and we may not be able to procure an alternative source of API. Should we succeed in procuring an alternative source of API, we would still need to pay a royalty to Merck for the use of the API until 2014. Because we depend upon this relationship with Merck for key ingredients of Aggrastat, the limited duration of Merck’s obligation to us, and the potential lack of an alternative provider may adversely affect the operation of our business.

We sell Aggrastat primarily in 250 ml and 100 ml bags, which are filled for us by Baxter under an exclusive manufacturing agreement that we executed with them on July 1, 2004. This agreement provides us with certain remedies if Baxter is not able to perform its obligations to us. Regardless, if Baxter is not able to provide us with finished bags of Aggrastat, we may not be able to provide Aggrastat to our customers, which may adversely affect our business.

We also sell Aggrastat in vials that we have obtained from Merck directly. Merck has informed us that it can no longer sell us vials of the product. We are engaged in discussions with a third-party contract manufacturer to obtain vials of Aggrastat. If we do not enter into a direct relationship with such a contract manufacturer, or if we are not able to procure vials of Aggrastat through Merck or otherwise, we may not be able to meet the demands of our customers for vials and this inability may adversely affect our business.

Pre-clinical and clinical trial results for our products may not be favorable.

In order to obtain regulatory approval for the commercial sale of any of our product candidates, we must conduct both pre-clinical studies and human clinical trials that demonstrate the product is safe and effective for the clinical use for which we are seeking approval. Adverse results from any studies, including clinical

trials, could have a negative effect on our ability to obtain FDA and other approvals on our business. We also may not be permitted to undertake or continue clinical trials for any of our product candidates in the future. Even if we are able to conduct such trials, we may not be able to demonstrate satisfactorily that the products are safe and effective and thus qualify for the regulatory approvals needed to market and sell them. Safety and efficacy results from pre-clinical studies involving animals and other models and from early clinical trials are often not accurate indicators of results of later-stage clinical trials that involve larger human populations, and, moreover, may not always be representative of results obtained while marketing an approved drug, particularly with regard to safety.

We may be unable to obtain proprietary rights to protect our products and services, permitting competitors to duplicate them.

Any success that we have will depend in large part on our ability to obtain, maintain and enforce intellectual property protection for our products, processes and uses, and to license patent rights from third parties. Intellectual property for our technologies and products will be a crucial factor in our ability to develop and commercialize our products. Large pharmaceutical companies consider a strong patent estate critical when they evaluate whether to enter into a collaborative arrangement to support the research, development and commercialization of a technology. Without the prospect of reasonable intellectual property protection, it would be difficult for a corporate partner to justify the time and money that is necessary to complete the development of a product.

The rules and criteria for receiving and enforcing a patent for pharmaceutical inventions are in flux and are unclear in many respects. The range of protection given pharmaceutical patents is uncertain, and our product candidates are subject to this uncertainty.

Many others, including companies, universities and other research organizations, work in our business areas, and we cannot be sure that the claims contained in our issued patents will be interpreted as we would like in light of the inventions of these other parties. In addition, we cannot be sure that the claims set forth in our pending patent applications will issue in the form submitted. These claims may be narrowed or stricken, and the applications may not ever ultimately result in valid and enforceable patents. Thus, we cannot be sure that our patents and patent applications will adequately protect our product candidates.

Furthermore, any or all of the patent applications assigned or licensed to us from third parties may not be granted. We may not develop additional products or processes that are patentable. Any patents issued to us, or licensed by us, may not provide us with any competitive advantages or adequate protection for our products. Others may successfully challenge, circumvent or invalidate any of our existing or future patents or intellectual property.

We rely on confidentiality agreements to maintain trade secret protection, which may not be adhered to or effective.

Our policy is to control the disclosure and use of our know-how and trade secrets by entering into confidentiality agreements with our employees, consultants and third parties. There is a risk, however, that:


	•	these parties will not honor our confidentiality agreements;

	•	disputes will arise concerning the ownership of intellectual property or the applicability of confidentiality obligations; or

	•	disclosure of our trade secrets will occur regardless of these contractual protections.

We may not be able to acquire exclusive rights to inventions or information resulting from work performed under consulting or collaboration agreements.

We often work with consultants and research collaborators at universities and other research organizations. If any of these consultants or research collaborators use intellectual property owned by others as part of their work with us, disputes may arise between us and these other parties as to which one of us has the rights

to intellectual property related to or resulting from the work done. We support and collaborate in research conducted in universities, such as JHU, and in governmental research organizations, such as the National Institutes of Health. We may not be able to acquire exclusive rights to the inventions or technical information that result from work performed by personnel at these organizations. Also, disputes may arise as to which party should have rights in research programs that we conduct on our own or in collaboration with others that are derived from or related to the work performed at a university or governmental research organization. In addition, in the event of a contractual breach by us, some of our collaborative research contracts provide that we must return the technology rights, including any patents or patent applications, to the contracting university or governmental research organization.

Our products may now or in the future infringe upon the proprietary rights of others, which could result in considerable litigation costs or the loss of the right to use or develop products.

Questions of infringement of intellectual property rights, including patent rights, may involve highly technical and subjective analyses. Some or all of our existing or future products or technologies may now or in the future infringe the rights of other parties. These other parties might initiate legal action against us to enforce their claims, and our defense of the claims might not be successful.

We may incur substantial costs if we must defend against charges of infringement of patent or proprietary rights of third parties. We may also incur substantial costs if we find it necessary to protect our own patent or proprietary rights by bringing suit against third parties. We could also lose rights to develop or market products or be required to pay monetary damages or royalties to license proprietary rights from third parties. In response to actual or threatened litigation, we may seek licenses from third parties or attempt to redesign our products or processes to avoid infringement. We may not be able to obtain licenses on acceptable terms, or at all, or successfully redesign our products or processes.

In addition to the risk that we could be a party to patent infringement litigation, the U.S. Patent and Trademark Office could require us to participate in patent interference proceedings, or we may find it necessary to provoke an interference with a third-party. These proceedings are often expensive and time-consuming, even if we were to prevail in such proceedings.

We rely on licensed intellectual property for Gliadel and our product candidates, the agreements for which impose requirements on us.

We have licensed intellectual property, including patents, patent applications and know-how, from universities and others, including intellectual property underlying Gliadel, Dopascan, Aquavan and the neuroimmunophilin ligand technology. Some of our product development programs depend on our ability to maintain rights under these licenses. Under the terms of our license agreements, we may be obligated to:


	•	exercise diligence in the research and development of these technologies;

	•	achieve specified development and regulatory milestones;

	•	expend minimum amounts of resources in bringing potential products to market;

	•	make specified royalty and milestone payments to the party from which we have licensed the technology; and

	•	reimburse patent costs to these parties.

In addition, these license agreements may require us to abide by record-keeping and periodic reporting obligations. Each licensor has the power to terminate its agreement if we fail to meet our obligations. If we cannot meet our obligations under these license agreements, we may lose access to our key technology.

If licensed patents covering our products or product candidates are infringed, we generally have the right, but not the obligation, to bring suit against the infringing party. If we choose to bring suit against an infringing party, the licensor of the technology is generally required to cooperate with the enforcement of the patents that we have licensed. If we do not choose to bring suit against an infringing party, rights to enforce the licensed

patents generally revert to the licensor. Proceeds received from the successful enforcement of our patent rights are generally split between us and the licensor, with the party bringing the suit receiving the more significant portion of those proceeds.

Losing our proprietary rights to our licensed technology would have a significant negative effect on our business, financial condition and results of operations.

Our license agreements for Gliadel require us to pay a royalty to the Massachusetts Institute of Technology on revenue from Gliadel. Similarly, we will have to pay milestone and/or royalty payments in connection with the successful development and commercialization of Dopascan and any products that result from the neuroimmunophilin ligand technology.

Our U.S. patent protection for Gliadel, which for the six months ended June 30, 2005 accounted for approximately 69% of our product revenue, expires in August 2006. In addition, the FDA recently notified us that, pursuant to the Orphan Drug Act, Gliadel was entitled to seven years of market exclusivity for the treatment of patients with malignant glioma undergoing primary surgical resection. This seven year exclusivity period commenced from the date of the FDA’s approval of Gliadel in February 2003. Accordingly, following the expiration of U.S. patent protection, we now have approximately four additional years of market exclusivity for Gliadel for initial surgical resection. However, there can be no assurance that others will not enter the market with a generic copy of Gliadel for recurrent surgical resection. The availability of such a generic copy could negatively impact our revenues from Gliadel for initial surgical resection after August 2006.

The U.S. government holds rights that may permit it to license to third parties technology we currently hold the exclusive right to use.

The U.S. government holds rights that govern aspects of specific technologies licensed to us by third-party licensors. These government rights in inventions conceived or reduced to practice under a government-funded program may include a non-exclusive, royalty-free, worldwide license for the government to use resulting inventions for any governmental purpose. In addition, the U.S. government has the right to grant to others licenses under any of these non-exclusive licenses if the government determines that:


	•	adequate steps have not been taken to commercialize such inventions;

	•	the grant is necessary to meet public health or safety needs; or

	•	the grant is necessary to meet requirements for public use under federal regulations.

The U.S. government also has the right to take title to a subject invention if we fail to disclose the invention within specified time limits. The U.S. government may acquire title in any country in which we do not file a patent application within specified time limits.

Federal law requires any licensor of an invention partially funded by the federal government to obtain a commitment from any exclusive licensee, such as us, to manufacture products using the invention substantially in the United States. Further, these rights include the right of the government to use and disclose technical data relating to licensed technology that was developed in whole or in part at government expense. Several of our principal technology license agreements contain provisions recognizing these rights.

We are subject to extensive governmental regulation, which may result in increased costs and significant delays in, or ultimate denial of, approval for our product candidates.

Our research, pre-clinical development and clinical trials, and the manufacturing and marketing of our product candidates are subject to extensive regulation by numerous governmental authorities in the United States and other countries, including the FDA and the DEA. Except for Gliadel and Aggrastat, none of our product candidates has received marketing clearance from the FDA or any foreign regulatory authority.

As a condition to approval of our product candidates under development, the FDA could require additional pre-clinical, clinical or other studies. Any requirement that we perform additional studies could

delay, or increase the expense of, our product candidates’ regulatory approval. This delay or increased expense could have a negative effect on our business. Additionally, to receive regulatory approval, we must also demonstrate that the product is capable of being manufactured in accordance with applicable regulatory standards.

When trying to obtain regulatory approval, significant risk exists that:


	•	we will not be able to satisfy the FDA’s requirements with respect to any of our drug product candidates; or

	•	even if the FDA does approve our product candidates, the FDA will approve less than the full scope of uses or labeling that we seek or otherwise will require special warnings or other restrictions on use or marketing.

Failure to obtain regulatory drug approvals on a timely basis could have a material adverse effect on our business.

Even if we are able to obtain necessary FDA approval, the FDA may nevertheless require post-marketing testing and surveillance to monitor the approved product and continued compliance with regulatory requirements. The FDA may withdraw product approvals if we do not maintain compliance with regulatory requirements. The FDA may also withdraw product approvals if problems concerning safety or efficacy of the product occur following approval. In response to recent events regarding questions about the safety of certain approved prescription products, including the lack of adequate warnings, the FDA and Congress are currently considering alternative regulatory and legislative approaches to monitoring and assessing the safety of marketed drugs. Such initiatives, if adopted, will affect all of our marketed drugs.

We cannot be sure that we can continue to meet FDA and other regulatory agency requirements pertaining to our marketed drugs or to our drug product candidates, if approved. We also cannot be sure that the current Congressional and FDA initiatives involving the safety of marketed drugs or other developments pertaining to the pharmaceutical industry will not adversely affect our operations. The process of obtaining FDA and other required approvals or licenses and of meeting other regulatory requirements to test and market drugs is rigorous and lengthy. We have expended, and will continue to expend, substantial resources in order to do this. We will need to conduct clinical trials and other studies on all of our product candidates before we are in a position to file a new drug application for marketing and must assure that the candidates can be made in accordance with cGMP requirements before approval is obtained. Unsatisfactory preclinical and clinical trial results, manufacturing problems, and other regulatory difficulties that result in delays in obtaining regulatory approvals or licenses could prevent the marketing of the products we are developing. Also, recent events regarding questions about the safety of marketed drugs may result in increased carefulness by the FDA in approving new drugs based on safety, efficacy, or other regulatory considerations and may result in significant delays in obtaining regulatory approvals or licenses. Such regulatory considerations may also result in the imposition of more restrictive drug labeling requirements as conditions of approval, which may significantly affect the marketability of our drug products. Until we receive the necessary approvals or licenses and meet other regulatory requirements, we will not receive revenues or royalties related to product revenue.

In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in some foreign countries, the proposed pricing for the product must be approved as well. Products may be subject to price controls or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. We cannot guarantee that any country that has price controls or reimbursement limitations for pharmaceuticals will allow favorable reimbursement and pricing arrangements for our products.

Because controlled drug products and radio-labeled drugs are subject to special regulations in addition to those applicable to other drugs, the DEA and the Nuclear Regulatory Commission (or NRC), may regulate some of our products and product candidates, including Dopascan, as controlled substances and as radio-labeled drugs. The NRC licenses persons who use nuclear materials and establishes standards for radiological health and safety. The DEA is responsible for compliance activities for companies engaged in the manufacture, distribution and dispensing of controlled substances, including the equipment and raw materials

used in their manufacture and packaging in order to prevent such substances from being diverted into illicit channels of commerce. Registration is required and other activities involving controlled substances are subject to a variety of record-keeping and security requirements, and to permits and authorizations and other requirements. States often have requirements for controlled substances as well. The DEA grants certain exceptions from the requirements for permits and authorizations to export or import materials related to or involving controlled substances. Our potential future inability to obtain exceptions from the DEA for shipment abroad or other activities could have a negative effect on us.

We cannot be sure that we will be able to meet applicable requirements to test, manufacture and market controlled substances or radio-labeled drugs, or that we will be able to obtain additional necessary approvals permits, authorizations, registrations or licenses to meet state, federal and international regulatory requirements to manufacture and distribute such products.

Once we receive regulatory approval to market a product, our promotional activities are subject to extensive regulation from the FDA, the Federal Trade Commission (or FTC), the Office of the Inspector General of the U.S. Department of Health and Human Services (or OIG), or state Attorneys General. If we violate any such regulations it could be damaging to our reputation and restrict our ability to sell or market our products, and our business condition could be adversely affected.

In their regulation of advertising, the FDA from time to time issues correspondence alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising or promotional practices, and the receipt of correspondence from the FDA alleging these practices could result in any or all of the following:


	•	incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements;

	•	changes in the methods of marketing and selling products;

	•	taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians, rescinding previous advertisements or promotions; and

	•	disruption in the distribution of products and loss of revenue until compliance with the FDA’s position is obtained.

If we were to become subject to any of the above requirements, it could be damaging to our reputation, and our business condition could be adversely affected.

Physicians may prescribe pharmaceutical products for uses that are not described in a product’s labeling or differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use. Companies cannot actively promote FDA-approved pharmaceutical products for off-label uses, but under certain limited circumstances they may disseminate articles to physicians published in peer-reviewed journals. If our promotional activities of this type fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA.

Additionally, if we fail to comply with the FDA regulations prohibiting promotion of off-label uses and the promotion of our products, the FDA, FTC, Department of Justice, OIG or state Attorneys General could bring enforcement actions against us that would inhibit our marketing capabilities as well as result in significant penalties.

Our competitors are pursuing alternative approaches to prevent or treat the same conditions we are working on. Our products use novel alternative technologies and therapeutic approaches, which have not been widely studied.

Many of our product development efforts focus on novel alternative therapeutic approaches and new technologies that have not been widely studied. Applications for these approaches and technologies include, among other things, the diagnosis and monitoring of Parkinson’s disease, the promotion of nerve growth and

the prevention of neuronal damage. These approaches and technologies may not be successful. We are applying these approaches and technologies in our attempt to discover new treatments for conditions that are also the subject of research and development efforts of many other companies. Our competitors may succeed in developing technologies or products that are more effective or economical than those we are developing, or they may introduce a competitive product before we are able to do so. Rapid technological change or developments by others may result in our technology or product candidates becoming obsolete or noncompetitive.

Our business is dependent on our ability to keep pace with the latest technological changes.

The technological areas in which we work continue to evolve at a rapid pace. Our future success depends upon maintaining our ability to compete in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and expected to increase. Many of these competitors have substantially greater research and development capabilities and experience and manufacturing, marketing, financial and managerial resources than we do.

Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors. These competitors may develop products that are superior to those we are developing. We are aware of the development by other companies and research scientists of alternative approaches to:


	•	the treatment of malignant glioma;

	•	the treatment of acute cardiovascular conditions;

	•	the diagnosis and treatment of Parkinson’s disease;

	•	the development of a water-soluble formulation of propofol;

	•	the promotion of nerve growth and repair;

	•	the treatment and prevention of neuropathic pain and peripheral neuropathy; and

	•	Development of chemo- and radiosentizers.

Our competitors may develop products that make our products or technologies noncompetitive or obsolete. In addition, we may not be able to keep pace with technological developments.

Our products must compete with others to gain market acceptance.

For the treatment of malignant glioma, Gliadel competes with traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR® Capsules, a chemotherapy product manufactured by Schering Corporation, and other experimental protocols. Aggrastat competes directly with INTEGRILIN® Injection, marketed by Millennium Pharmaceuticals, and ReoPro®, marketed by Eli Lilly, for the inhibition of platelet aggregation. In some medical institutions, Angiomax®, an antithrombin is being used as a replacement for IIb/ IIIa inhibitors in PCI but that use is generally limited to low-risk and elective PCI patients.

Any product candidate that we develop and for which we gain regulatory approval must then compete for market acceptance and market share. An important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success.

Significant competitive factors include:


	•	capabilities of our collaborators;

	•	product efficacy and safety;

	•	timing and scope of regulatory approval;


	•	product availability;

	•	awareness and acceptance of our products by physicians;

	•	manufacturing, marketing and sales capabilities;

	•	reimbursement coverage from insurance companies and others;

	•	the amount of clinical benefit of our product candidates relative to their cost;

	•	the method of administering a product;

	•	price; and

	•	exclusivity, through patent protection or other legal means.

Our competitors may develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we do, which could have a material adverse effect on our business.

The loss of the services of any key personnel, or an inability to attract new personnel, could harm our business.

We are highly dependent on key personnel and members of our executive management, and the loss of the services of any of such persons might impede the achievement of our strategic objectives. We cannot assure you that we will be able to attract and retain key personnel or executive management in sufficient numbers, with the requisite skills or on acceptable terms necessary or advisable to support our continued growth. The loss of the services of key personnel or members of executive management could have a material adverse effect on us.

The market price of our stock may be negatively affected by market volatility.

The market price of our stock has been and is likely to continue to be highly volatile. Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations and small biopharmaceutical companies, like us, have from time to time experienced and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company.

From time to time, stock market professionals publish research reports covering our business and our future prospects. For a number of reasons, we may be unable to meet the expectations of these professionals and our stock price may decline. These expectations may include:


	•	announcements by us or our competitors of strategic changes, clinical results, technological innovations, regulatory approvals, product sales, new products or product candidates;

	•	developments or disputes concerning patent or proprietary rights;

	•	regulatory developments affecting our products;

	•	period-to-period fluctuations in the results of our operations;

	•	market conditions for emerging growth companies and biopharmaceutical companies;

	•	revenue received from Gliadel and Aggrastat; and

	•	our expenditures.

In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been initiated against those companies. If we face such litigation, it would result in substantial costs and divert management’s attention and resources, which would negatively impact our business.

Furthermore, market volatility may adversely affect the market price of our common stock, which could limit our ability to raise capital or make acquisitions of products or technology.

The large number of shares of common stock eligible for future sale could depress our stock price.

Upon conversion of our $69.4 million principal amount of outstanding notes at their conversion price of $6.24, approximately 11,114,423 shares of common stock would be issuable. Additionally, upon the exercise by PRF of its warrants to purchase 300,000 shares of our common stock at an exercise price of $9.15 per share, by SNDC of its warrants to purchase 1.5 million shares of our common stock at an exercise price of $7.48 per share, or by the holders of warrants from the Company’s 2003 private placement of warrants to purchase 962,000 shares of our common stock at an exercise price of $7.55, 300,000, 1.5 million and 962,000 shares of our common stock, respectively, would be issuable. Our stock price could be depressed significantly if the holders of the notes decide to convert their notes or the holders of the warrants decide to exercise such warrants and sell the common stock issued thereby or are perceived by the market as intending to sell them. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

We are subject to risks of product liability both because of our product line and our limited insurance coverage.

We may potentially become subject to large liability claims and significant defense costs as a result of the design, manufacture or marketing of our products, including Gliadel and Aggrastat, or the conduct of clinical trials involving our products. We currently maintain only $10.0 million of product liability insurance covering clinical trials and product sales. This existing coverage or any future insurance coverage we obtain may not be adequate. Furthermore, our insurance may not cover a claim made against us. Product liability insurance varies in cost. It can be difficult to obtain, and we may not be able to purchase it in the future on terms acceptable to us, or at all. We also may not be able to otherwise protect against potential product liability claims. Product liability claims and/or the failure to obtain adequate product liability insurance could prevent or inhibit the clinical development and/or commercialization of any products we are developing.

We depend on qualified personnel and consultants.

We depend heavily on the principal members of our management and scientific staff. The loss of the services of members of our senior management team could have a negative effect on our business.

Recruiting and retaining qualified personnel, collaborators, advisors and consultants will be critical to our activities. Our planned activities will require personnel and consultants with expertise in many areas including:


	•	medicinal chemistry and other research specialties;

	•	pre-clinical testing;

	•	clinical trial management;

	•	regulatory affairs;

	•	intellectual property;

	•	sales and marketing;

	•	manufacturing; and

	•	business development.

We may not be able to attract and retain personnel or consultants with these capabilities. Furthermore, many pharmaceutical, biotechnology and health care companies and academic and other research institutions compete intensely for personnel and consultants with these capabilities. If we are not able to hire these personnel or consultants, it could have a negative effect on us.

Our business involves using hazardous and radioactive materials and animal testing, all of which may result in environmental liability.

Our research and development processes involve the controlled use of hazardous and radioactive materials. We and our partners are subject to extensive laws governing the use, manufacture, storage, handling and disposal of hazardous and radioactive materials. There is a risk of accidental contamination or injury from

these materials. Also, we cannot control whether our collaborative partners comply with the governing standards. If we or our partners do not comply with the governing laws and regulations, we could face significant fines and penalties that could have a negative effect on our business, operations or finances. In addition, we and/or our collaborative partners could be held liable for damages, fines or other liabilities, which could exceed our resources.

We may also have to incur significant costs to comply with environmental laws and regulations in the future. In addition, future environmental laws or regulations may have a negative effect on our operations, business or assets.

Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our partners by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts.

Effecting a change of control of Guilford would be difficult, which may discourage offers for shares of our common stock, which may prevent or frustrate any attempt by shareholders to change our direction or management.

Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may delay or prevent an attempt by a third-party to acquire control of us. These provisions include the requirements of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits designated types of business combinations, including mergers, for a period of three years between us and any third-party who owns 15% or more of our common stock. This provision does not apply if:


	•	our Board of Directors approves of the transaction before the third-party acquires 15% of our common stock (as has happened with our proposed merger with MGI Pharma);

	•	the third-party acquires at least 85% of our common stock at the time its ownership goes past the 15% level; or

	•	our Board of Directors and two-thirds of the shares of our common stock not held by the third-party vote in favor of the transaction.

We have also adopted a stockholder rights plan intended to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of the Board of Directors under specified circumstances, our other stockholders have the right to purchase shares of our common stock, or shares of the acquiring company, at a substantial discount to the public market price. The plan makes an acquisition much more costly to a potential acquirer. We have waived the application of this plan to the proposed merger with MGI Pharma.

Our certificate of incorporation also authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms fixed by the Board of Directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult for a person or group to acquire control of us, as well as prevent or frustrate any attempt by shareholders to change our direction or management. No shares of our preferred stock are currently outstanding. While our Board of Directors has no current intentions or plans to issue any preferred stock, issuance of these shares could also be used as an anti-takeover device.

Our agreement with PRF gives PRF the right to cause us to repurchase its interests at substantial prices in the event of, among other things, a change in control. Our convertible notes are also subject to repurchase, at the option of the holders, upon a change in control.


Item 6.	*Exhibits*


	a.	Exhibits


Exhibit Number		Description

	2.1	Agreement and Plan of Merger by and among MGI Pharma, Inc., Granite Acquisition, Inc. and the Company, dated as of July 20, 2005 (incorporated by reference to the Company’s Current Report on Form 8-K filed July 22, 2005)
	10.1*	Guilford Pharmaceuticals Inc. Employee Retention Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed April 11, 2005)
	10.2*	Separation Agreement and General Release between the Company and Nancy J. Linck (incorporated by reference to the Company’s Current Report on Form 8-K filed April 20, 2005)
	10.3	Line of Credit Agreement by and between the Company and MGI Pharma, Inc., dated July 20, 2005 (incorporated by reference to the Company’s Current Report on Form 8-K filed July 22, 2005)
	10.4	Letter Agreement dated July 20, 2005 by and between Paul Royalty Fund, L.P., Paul Royalty Fund Holdings II, the Company and MGI Pharma, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed July 22, 2005)
	31.01	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	31.02	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.01	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.02	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)


*	Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Guilford Pharmaceuticals Inc.

	/s/ DEAN J. MITCHELL

	Dean J. Mitchell
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: August 8, 2005


	/s/ WILLIAM F. SPENGLER

	William F. Spengler
	Executive Vice President, Chief Financial Officer
	(Principal Financial Officer)

August 8, 2005


	/s/ ANDREW J. JEANNERET

	Andrew J. Jeanneret
	Vice President, Controller and
	Chief Accounting Officer
	(Principal Accounting Officer)

August 8, 2005

GUILFORD PHARMACEUTICALS INC 10-Q