MILLENNIUM ANNUAL REPORT 1998

Essential Inspiration

Extraordinary Innovation We are united in a single pursuit: to create a new type of company and with it, to transform healthcare. Streamlining drug discovery and development. Redefining patient management.

Transcending the limits of medicineSM

The Vision to Conceive A New Archetype THE PASSION TO SUCCEED Imagine a time when there is no uncertainty in medicine.

A time when the promise of science is realized. A time

when people are freed from the constraints of disease.

At Millennium® we have imagined. And we have acted.

Linking the strength of science and technology; drawing

on the power of genomics and informatics; harnessing

the passion of the industry’s finest minds; we are working

toward this vision. Together we are striving to build the

biopharmaceutical company of the future. Together we

are seeking to transcend the limits of medicine. In 1998 Millennium Pharmaceuticals, Inc. continued to raise the bar that defines success in the biopharmaceutical industry. We formed what is believed to be the largest strategic alliance in the industry. We made outstanding progress in moving our pipeline down- stream, receiving 15 new U.S. patents and establishing four new clinical research collaborations. Our existing pharmaceutical partners moved several of our drug targets into compound screening and several partners extended their alliances with us. And, with over $1 billion in potential partnership funding, we continued to demonstrate our ability to grow Millennium while maintaining a secure financial base.

Mark Levin Chairman and 2 Chief Executive Officer To Our Shareholders, Employees and Friends: Bayer AG Alliance Highlights

At Millennium, we share the passion and belief that as we And, to develop these products and to remain at the fore- come to understand the molecular basis of disease, we front of the industry, we must continue to aggressively Creates what is believed to be the can and will fundamentally change medicine for the better. build our platform, constantly incorporating the latest largest drug discovery alliance in Among our divisions and subsidiaries we also share a technological advances. the history of the biopharmaceutical technology platform that allows us to understand how specific changes in genes relate to disease – a platform we Over-the-Top Alliances industry worldwide. believe will drive forward the discovery of new medicines, new diagnostic and prognostic products, and new methods Since our inception five years ago, we have consistently Constitutes a broad strategic alliance in for patient management. been focused on building both our platform and the 7 disease areas: cardiovascular disease, company itself. Our modus operandi has been to come cancer, pain, osteoporosis, liver diseases, But we also believe that, to deliver breakthrough products out fast. Get ahead. And stay ahead. To that end, we have blood diseases and viral infections. that will change people’s lives, we first need to create a developed and purchased cutting-edge technology, acquired very significant company. That is why our immediate goal a company and created over-the-top alliances – partner- Harnesses revolutionary new approaches is to build the biopharmaceutical company of the future. ships believed to be of unprecedented magnitude and to utilizing genes, identifying targets and configuration within the biopharmaceutical industry. The Proprietary Platform developing drug screening assays. In 1994, we formed an alliance with Hoffmann-La Roche Our strategy starts with our science and technology Inc. that was one of the first between a pharmaceutical Seeks identification, validation and platform. High throughput, integrated and leverageable company and a genomics company; that partnership helped screening of 225 targets over 5 years. across the life sciences, it is designed to enable us to establish genomics as an important discipline. In 1997, we industrialize drug discovery and development and to acquired and integrated ChemGenics Pharmaceuticals Inc. Provides up to $465 million in total increase productivity, efficiency and quality. We are using for its chemistry, high throughput screening and infectious funding, assuming the alliance goes full it to reduce the impact of bottlenecks in the drug disease research platforms. Later that year we pursued term and milestones are achieved. discovery process. We also anticipate using it to optimize a market opportunity, partnering with the Monsanto key steps across the healthcare continuum from gene Company to transfer our technology platform into a new, Bayer will make an estimated 90% discovery to patient management. nonrelated sector: agriculture. Other alliances with Pfizer of targets available to Millennium for Inc.; Eli Lilly and Company; Astra AB; and American Home With this platform, we are rapidly moving downstream, Products/Wyeth-Ayerst have focused on specific disease its own proprietary drug development advancing our discoveries toward clinical trials and areas, or targeted a certain form of therapeutic. pipeline. moving closer to marketing and commercializing our own products. We expect these products to be truly In 1998, Millennium made significant progress in our alliance breakthrough medicines that could make a difference commitments. We delivered three novel antibacterial drug in the treatment of human disease. targets to Wyeth-Ayerst for screening, and with that company identified two novel genes implicated in central

3 Measured by New Metrics

We are creating a new type of company in a new nervous system disorders. We delivered four cardiovascular type of industry and thus must be valued according disease drug targets to Lilly and two obesity drug targets to Roche. Each of these achievements triggered milestone to a new set of standards. payments. In addition, Astra, Lilly and Pfizer each extended Process engineering the length of their alliances. We believe this underscores their faith in our ability to deliver novel high-quality Worked to create efficiencies by industrializing the targets and drug leads. process of drug discovery and development. Yet,our most momentous news was this: in 1998 we Progressed towards goal of increasing number of formed an alliance with Bayer, believed to be the largest drugs being successfully developed. drug discovery partnership ever in the history of the biopharmaceutical industry. Partnerships The Bayer Alliance Established important partnerships across multiple disease states. As part of our overall business strategy to industrialize the pharmaceutical discovery and development process, we Upheld rigorous partnership standards of major established a partnership with one of the world’s leading pharmaceutical companies. pharmaceutical industrialists: Bayer.This alliance effectively creates a strategy for Millennium to work together with Demonstrated partner satisfaction through a strong ally in identifying drug targets, setting up drug renewal of three alliances. screens and identifying small molecule leads. Ultimately, we expect those leads to move through the clinical candidate Leveraged the science and technology platform stage and into clinical testing. for even greater growth. Example: our alliance with Monsanto. Our agreement with Bayer is to identify 225 drug targets over five years across seven disease states: cardiovascular Scientific Excellence disease, cancer, pain, osteoporosis, liver diseases, blood diseases, and viral infections. There are four classes of pro- Attracted outstanding scientists across many teins that are most likely to be suitable for intervention disciplines. with small molecule drugs. Our goal is to identify the genes that encode these classes of proteins, rapidly assess their Published 74 articles in major scientific publications relevance within the seven key disease states, then discover in 1998. small molecule drug candidates that interact with them. We are neither This program is a large-scale industrialization of early drug Financial Strength discovery, from gene to target to drug lead candidate; it is constrained by emblematic of our commitment to introduce significant Reached over $1 billion in total potential alliance scale and efficiencies into the process. funding in 1998. conventional concepts

Achieved profitability in 3 years of our 6-year nor divided by corporate history. classifications. At Strengthened balance sheet and ended 1998 with $191 million in cash. Millennium®,, we know

no boundaries.

4 Millennium pharmaceuticals Management In addition, our alliance with Bayer provides a mechanism tion, diagnosis, prognosis and treatment of diseases. They to take Millennium further downstream: approximately also know the Company is focused on supporting them Mark J. Levin 90% of the targets we intend to deliver to Bayer will also and is dedicated to their professional growth. We conduct Chairman and Chief Executive Officer be available to feed into the Millennium pipeline. Moreover, a cultural survey every six months, hold an open company Janet C. Bush the alliance will supply us with significant funding, placing forum each quarter, and offer ongoing training in topics Vice President, Finance Millennium over the $1 billion mark in total potential ranging from bioethics to stress management at our alliance funding. internal “Millennium University.” Sandra DiCesare Vice President, Information Systems Providing funding, downstream momentum, and the Fortunately, our commitment to our employees is equaled Nicholas G. Galakatos, Ph.D. opportunity to further our industrialization strategy, this by their commitment to the Company and to its vision. Vice President, New Businesses partnership with Bayer is a perfect example of an over- the-top alliance. The Measurement of Success Steven H. Holtzman Chief Business Officer Strategic Decisions To change the practice of medicine as we know it today, we must first build the biopharmaceutical company of Frank D. Lee, Ph.D. The hallmark of an effective organization is the ability to the future. To do that we are leveraging three unique Chief Technology Officer respond to changing circumstances, which Millennium strengths: our powerful proprietary science and technology Clare Midgley did in 1998. At Millennium, our goal is to build significant platform, our over-the-top alliances with the world’s Vice President, Corporate Communications companies that make a difference. In 1997, we founded premier pharmaceutical companies, and our great group Millennium Information, Inc. with the intent of creating of scientists and business people. Michael R. Pavia, Ph.D. databases that would be valuable within the healthcare Chief Technology Officer industry.Yet,the intelligence these databases generate is It is through these strengths that we continue to move Linda K. Pine also vital to Millennium Predictive Medicine, Inc.: diagnostic ahead aggressively, and it is through their success that we Senior Vice President, Human Resources and prognostic markers and the information surrounding measure ours. them are the twin pillars of long-term patient management. Kevin P. Starr Thus, we have chosen to combine our expertise in infor- In the rest of this report, we present more in-depth Chief Financial Officer mation with that in DiagnomicsTM and pharmacogenomics, information about our achievements in 1998.You will see creating what we believe will be a powerful foundation for how our three key strengths interacted to realize those Robert I.Tepper, M.D. the development of predictive medicine products. achievements, and you will find the strategies behind them. Chief Scientific Officer Those same strengths and strategies will guide and direct The Passion of Our People our actions in the future as we continue to strive to build value for you, our shareholders. The true strength of Millennium is our people. Individually they bring expertise, insight, and passion. Together they form a powerful force, developing innovations from gene identification to patient management.

We have created both an organization and a culture that attracts and retains scientists and business executives who Mark Levin are at the top of their fields. They join Millennium because Chairman and Chief Executive Officer they believe that we could lead a revolution in the preven-

5 Patents Creating profound change requires revolutionizing the entire system

Millennium has a vision for the future of medical practice. Industrialization of the Process Millennium’s patent portfolio is comprised of more It entails developing precise therapies, targeted to the At Millennium, we are seeking to use our science and tech- than 500 U.S. and foreign patents and patent applica- disease, personalized to the patient. It entails building nology platform to literally industrialize the drug develop- tions.They cover diverse inventions, from genes and the biopharmaceutical company of the future. It entails ment process with a goal of increasing current productivity therapeutic proteins, to diagnostic tests and drug transcending the limits of medicine as we know them now. by 100%. Our strategy is initially to apply key resources screening assays, to small molecules. against each of three critical bottlenecks: target validation, Our strategy is simple: industrialize the drug discovery Received a total of 57 patent allowances from the clinical drug candidate selection and human clinical trials. process; develop breakthrough healthcare products that U.S. Patent and Trademark Office to date; of these address every critical stage of disease from gene to patient; Often, failures at each of these junctures are not discovered 57 allowances, 31 U.S. patents have been issued. create immediate shareholder value through innovative, until late in the process, burdening researchers with lost 15 U.S. patents issued during 1998 include: over-the-top alliances; and build long-term value through time and unwarranted expense. Millennium is intent on significant products. eliminating these drug failures early, freeing scientists to U.S. Patent No. 5,741,666 relating to UCPH pursue other, more promising leads. gene sequences The Gene to Patient Continuum Target Validation U.S. Patent Nos. 5,756,305 and 5,821,076 Millennium’s entry point is the identification and elucidation relating to methods of identifying targets for of the role of genes in disease initiation and progression. Historically, developing assays to prove that a potential use in antimicrobial drug discovery We expect that this method will allow us to go to the root drug target is involved in a disease process has been of disease and, ultimately, we believe, to deliver the right extremely time-intensive and extremely fallible.Validation U.S. Patent No. 5,795,726 relating to methods for drug to the right patient. We then plan to follow the entire has been conducted gene by gene, protein by protein. identifying drugs for treating certain forms of continuum from gene to target to lead to clinic to product Our challenge, therefore, is to speed this process. Using type 2 Diabetes to patient, seeking ways to optimize each step. multiple components from our science and technology U.S. Patent No. 5,800,998 relating to methods for platform, we first determine a correlation between a The Science and Technology Platform determining whether a person has, or is at risk target and a particular disease state. Then, using the same for developing certain forms of type 2 Diabetes Our unique research platform lays the foundation for all components, we assess those genes and proteins – not one our work. Many companies utilize individual technologies at a time, but thousands at a time. US Patent No. 5,834,248 relating to Smad6 to address specific steps in the drug discovery and devel- gene sequences Drug Candidate Selection opment process.Yet single step improvements may not U.S. Patent No. 5,837, 837 relating to caspase-8 enhance overall efficiency. At Millennium, we view the A drug must not only be effective in the laboratory, it gene sequences process as a whole. Integrating what we believe to be the also must be effective in humans. It must be deliverable most powerful, innovative tools available – from genomics (for instance, active when taken orally) and it must not U.S. Patent No. 5,853,975 relating to methods for to chemistry to robotics to informatics, we have created a cause harmful side effects. These are all potential obstacles discovering new obesity drugs proprietary platform that can speed and enhance every to successful drug development and they often do not step of the process. The refinement, implementation and surface until clinical trials. We are currently expanding expansion of this platform is the responsibility of our our science and technology platform to address each of Technology Division. these challenges and to enhance our ability to identify promising candidates.

6 Technology Division

At every step of the drug discovery process – from gene discovery to product manufacturing – dozens of technologies are required.Within Millennium’s Technology Division, we seek the most advanced methods available whether developed internally or licensed from other companies, to form our integrated, proprietary platform. We believe this platform will enable Millennium to identify commercially important genes, elucidate their function, validate drug and product devel- opment targets, and identify and develop clinical candidates.The platform should increase the probability of success and reduce time to market. It is the core technological resource and engine of innovation for the Pharmaceutical Division, MBio and MPMx.

management Frank D. Lee, Ph.D. Chief Technology Officer

Michael R. Pavia, Ph.D. Chief Technology Officer

David Gearing, Ph.D. Vice President, Molecular Technologies

Vincent Miles, Ph.D. Vice President, Business and Technology Management Technology Division accomplishments

• Achieved all technology transfer objectives with Monsanto/Cereon Genomics, LLC, receiving highest possible milestone payments allowed under the alliance agreement.

• In-licensed multiple technologies to integrate and enhance platform.

• Successfully serviced four technology transfer alliances.

Genomics The source of most human disease can be traced either to genes of a patient or to those of an invading pathogen, such as a virus. By first identifying those genes involved in the disease process, we can then screen collections of synthetic and natural compounds to seek specific drugs for therapeutic intervention. Functional Genomics To prioritize potential drug candidates for further study, we analyze the specific functions of an individual gene and the role that it plays in the disease of interest. In Vivo Models To determine the effect of intervention on a specific gene, we arrange for genes to be expressed at unusually high or low levels in specific cells or tissues of specialized organisms and mice. Transgenic mice carry an extra gene, usually one that is over expressed; knockout mice have had a normal gene deleted. Both models provide clues about the gene’s relation to organ development, viability and reproduction, and about its function.Through this manipulation we also can create models that mimic human diseases; they enable us to identify potential drug compounds rapidly and cost-effectively. High Throughput Screening Validated targets are exposed to a large number of compounds to discover which elicit an appropriate response and are worthy of consid- eration for further drug development. Informatics All of the technologies described above rely on high-level computational tools to collect, analyze and store the vast amounts of information generated by Millennium. Human Clinical Trials The underlying biological basis of the same disease is often distinct in different individuals. Consequently, certain drugs may be effective in one patient but not in another. In broad-based phase III clinical trials, this variation may cause an effective drug to show no statistical impact on disease. At Millennium, we are using our technology to further the science of pharmacogenomics, the study of the role of genetic makeup in determining a patient’s response to a therapeutic. We believe this science will give us the ability to reveal the true efficacy of the drug in clinical trials. More importantly, we believe it will allow physicians to begin personalizing therapies, improving both efficacy and safety. Organizational Structure – Essential to the Process Three groups harness Millennium’s technology in seeking to develop important new products that address unique areas of medicine. Millennium’s Pharmaceutical Division focuses on small molecule drugs; Millennium BioTherapeutics, Inc. (MBioTM), a subsidiary, focuses on biotherapeutics such as proteins and antibodies; and Millennium Predictive Medicine, Inc. (MPMxTM), also a subsidiary, focuses on developing DiagnomicsTM , pharma- cogenomics and patient management products and services. Each group works toward its individual mission. Yet,there is significant synergy among them and the success of each, in large measure, relies on their close interaction with the whole. Information flows freely, opening new possibilities, leading to new discoveries. This business structure is at the core of Millennium’s success. It offers the single-mindedness to accomplish great things and the flexibility to harness opportunities. It is through this structure that we are working to build the biopharmaceutical company of the future. Five years ago, obesity

From left to right: Lou Tartaglia, Ph.D., Metabolic Diseases was attributed to a Hong Chen, Ph.D., Genetic Systems Dennis Huszar, Ph.D., Target Validation Karen Moore, Ph.D., Genetic Systems weakness of will. Now Shara Ertel, Corporate Development, MBio we can recognize its

contributing genetic

sources. Someday we

may be able to treat

it successfully. 8 Pharmaceutical Division

Simply stated, these are the goals of Millennium’s Pharmaceutical Division. management Accelerate the discovery of disease-related genes. Produce validated drug targets and drug leads. Lay the foundation for the development of new, proprietary small Robert I.Tepper, M.D. molecule and natural product drugs. Ultimately: enable physicians to treat disease Chief Scientific Officer at its root cause through orally-available drugs. Alan L. Crane Small molecule drugs, so called because they consist of relatively small chemical Vice President, Business Development compounds, are the mainstay of the traditional pharmaceutical industry. To help achieve our stated goals quickly and efficiently, we have chosen to focus on spe- Yigal Koltin, Ph.D. cific diseases. These diseases affect millions of people and are underserved by cur- Vice President, Program Management rent therapies. Kazumi Shiosaki, Ph.D. To augment our resources, we have partnered with six leading pharmaceutical Vice President, Drug Discovery companies. These partners have substantial assets and expertise in research, preclinical and clinical development, regulatory issues and marketing. They also provide crucial funding resources: research funding, additional milestone revenues and royalties on drug sales. Working together we believe we can accelerate the path not only to drug discovery but also to the market. Pharmaceutical Division Accomplishments

• Formed $465 million alliance with Bayer.

• Delivered four drug targets to Lilly for cardiovascular disease; received milestone payments.

• Delivered two drug targets to Roche for obesity; received milestone payments.

• Delivered three antibacterial targets to Wyeth-Ayerst for drug candidate screening; received milestone and bonus payments.

• Identified two novel genes with Wyeth-Ayerst implicated in central nervous system diseases; received milestone payments.

• Extended alliances with Astra, Lilly and Pfizer. Product alliances

AHP/Wyeth-Ayerst Astra AB Bayer AG Eli Lilly and Co Hoffmann-La Roche Pfizer

Bacterial Respiratory Cardiovascular Cancer Type 2 Diabetes Fungal Central Nervous Hematology Cardiovascular Obesity System Liver Fibrosis Oncology Osteoporosis Pain Viral Determining the cause is the first step in determining the cure

This quest is the single greatest testimony of the power of ge- technology platform to uncover the causes of obesity. UCPH nomics to allow us to identify the root cause of obesity. This is what we have discovered: The metabolic diseases group used high throughput gene sequencing techniques to identify the gene encoding the Approximately 34 million Americans are more than 30% OB-R uncoupling protein homolog (UCPH), which regulates metabo- above their ideal body weight and are classified as obese. The Pharmaceutical Division’s metabolic diseases group lism and energy expenditure in mice.This gene literally These people suffer from a serious medical condition with first used expression cloning techniques to identify the dissipates excess calories by converting them into heat. limited therapeutic alternatives.They risk increased danger gene encoding ob-r, the receptor for the hormone leptin; of other life-threatening diseases, such as coronary heart communicating body fat content to the brain, leptin is a Mahogany disease, certain cancers and type 2 Diabetes. And they en- fundamental regulator of weight and appetite.Then, the The mouse genetics group used genetic and positional dure the scorn of a society led to believe they are at fault. genetic systems group employed genetic techniques to cloning techniques to identify mahogany, a gene that demonstrate that the ob-r receptor gene is identical to db, modifies or suppresses obesity in mice. Mice lacking a Although there are multiple factors that contribute to a gene that causes obesity in mice. functional form of this gene do not become obese even obesity, studies of identical twins suggest that genetic pre- when fed high-fat diets. disposition is the principal cause of the disease. Millennium Tu b is at the forefront of discovering which genes are involved. The genetic systems group used both genetic and positional In partnership with Hoffmann-La Roche, Millennium cloning techniques to identify tub, a gene responsible for scientists have conducted drug target identification, Currently, we have identified five of the major genes obesity in mice. Tub is believed to be associated with adult validation, and development programs with these and either responsible for obesity in animal models or strongly onset obesity, the most prevalent form of human obesity. other genes. In fact, several of these genes are in screening implicated in the disease. This progress is striking as is the to identify small molecule drugs and two have resulted in multiplicity of molecular and biological techniques we’ve MC4-R the identification of drug candidates which are currently harnessed and the way this work has transcended groups Using transgenic knockout mouse techniques, the mouse in optimization and/or animal trials. Others have moved within our Technology and Pharmaceutical Divisions. models group demonstrated that the gene encoding the to MBio, where they are being used as the basis for Targets have been supplied to our subsidiary MBio and melanocortin 4-receptor (MC4-R), a G-protein coupled biotherapeutic drug development. to our partner Hoffmann-LaRoche. receptor, is an important regulator of appetite and body weight in mice.These studies show that the absence of Additionally, through collaborations with academic From high throughput sequencing to transgenic mice MC4-R produces a maturity-onset obesity syndrome in investigators, our Pharmaceutical Division is conducting to human genetics, we are working together across the mice that is primarily due to fat cell hypertrophy, as is human genetic studies in appropriate populations around spectrum of Millennium’s broad-based science and true of most human forms of obesity. the world. Certainly, there are additional, as yet undefined mechanisms involved in obesity. But we believe these first steps have taken us further down the path toward its ultimate control.

9 Innovation has many sources Clinical Collaborations and many applications Our alliances are part of our funding engine, providing To further our clinical research and extend our licensing fees, research funding, equity investments, platform, we have built a global network of more than milestone payment opportunities, and the potential of 150 academic collaborators. In addition, we established downstream royalties and product revenue.They are a these important new partnerships: source of expertise and novel technologies gleaned from industry leaders. Ultimately, we believe they are a testament University of Texas M.D. Anderson Cancer to the power of our platform and the validity of our vision. Center: this clinical collaboration provides Millennium important access to tissue samples American Home Products/Wyeth-Ayerst and clinical resources. Focus: Antibacterial Drug Discovery

■ In 1998 we delivered three new antibacterial drug University of Pittsburgh Medical Center Health targets for screening, receiving milestone payments. System: we believe the creation of a comprehen- This brings the total delivered targets to six. sive, clinically annotated tissue bank will facilitate ■ The alliance provides Wyeth-Ayerst with exclusive the identification of novel molecular targets.The worldwide rights to develop and commercialize initial focus will be oncology and cardiovascular small molecule drugs based on these targets for the and pulmonary disorders. treatment of bacterial infections.

Mayo Clinic: this collaboration with MPMx is American Home Products/Wyeth-Ayerst intended to give physicians at Mayo access to Focus: Central Nervous System Disorders

novel diagnostic and prognostic tools; MPMx ■ In 1998, with Wyeth-Ayerst, we identified two novel scientists receive access to test populations genes implicated in major central nervous system and clinical resources. disorders, receiving milestone payments. ■ The initial alliance focus is on psychiatric disorders, Harvard Medical School: an umbrella collab- including anxiety, depression and bipolar disorder. oration agreement with Millennium allows scientists to share novel genes and biological Astra AB materials more freely. Focus: Respiratory Drug Discovery

At Millennium®,, we ■ In 1998 the alliance was extended for four years based Partners HealthCare System, Inc.: this broad on successful delivery of novel respiratory disease research collaboration has as its goal to improve strive to create alliances drug targets. patient care through the development of new ■ The extension phase will focus on applying the products and techniques for better treatment that are as innovative targets for drug discovery and continuing validation and earlier diagnosis. Additionally, the alliance of new targets. will provide Millennium with the ability to as our mission, alliances clinically validate drug candidates and new that break new ground diagnostic tests as they move forward in the development process. in size, structure

and strategy.

10 MBio

At Millennium BioTherapeutics, Inc. (MBioTM), a majority-owned subsidiary of management Millennium, we focus on biology and disease. Our goal is the discovery and commercialization of a special class of drugs: novel biotherapeutics. Our initial John Maraganore, Ph.D. areas of focus are therapeutic proteins and antibodies.To complement and General Manager accelerate our work, we collaborate with leading organizations, such as Harvard Medical School and Eli Lilly. Ronald Lindsay, Ph.D. Currently, in partnership with Lilly, we are conducting a major genomics-based Vice President, Preclinical Research and Development effort to rapidly identify and establish the therapeutic utility of protein product candidates; we may each commercialize one half of the candidates this program produces. Likewise, our therapeutic antibody program pairs genomics-based discovery of novel antibody targets with new antibody technologies from companies such as Abgenix, Inc., to rapidly discover potent antibody products and advance our antibody pipeline. In addition, we believe that significant opportunities exist in gene therapy, antisense and vaccine therapeutic products; we plan to leverage these opportunities through future strategic partnerships. In sum, coupling high throughput gene discovery with extensive in vivo gene validation, we have built an advanced research pipeline of therapeutic proteins and antibodies.We believe MBio is likely to have biotherapeutics in clinical trials within the next 18 months. MBio Accomplishments

Built a robust biotherapeutic portfolio of proteins and antibodies including:

• Over 100 leads.

• A pool of 18 bioactive leads.

• Two preclinical antibody candidates.

• Formed an umbrella collaboration with the Harvard Medical School to obtain access to world-class biological research.

• Established an agreement with Abgenix, Inc. to use XenoMouseTM technology in developing two antibody drug candidates.

• Established a collaborative agreement with Genzyme Transgenics Corporation to develop transgenic therapeutic proteins and antibodies. Bayer AG Hoffmann-La Roche Inc. Focus: Genomics-Based Targets in 7 Disease States Focus: Obesity and Type 2 Diabetes

■ Established in September 1998, this is believed to be ■ In 1998 we delivered two drug targets for obesity, the largest drug discovery alliance in the pharmaceutical receiving milestone payments. industry worldwide. ■ Millennium has cloned the tub obesity gene and ■ The primary goal is to identify, validate and screen identified the ob-r, MC4-R, Uncoupling Protein Homologue 225 targets in seven disease areas over five years. (UCPH) and mahogany genes. ■ These areas are: cardiovascular disease, cancer, pain, ■ Millennium has been granted several U.S. patents in the osteoporosis, liver diseases, blood diseases, and obesity field. viral infections. Monsanto Company ■ Targets Bayer determines are not strategically Focus: Agriculture important to their pipeline – which we estimate to be 90% of those identified – will be available to ■ The alliance established Cereon Genomics, LLC, a Millennium for use in our own pipeline development. wholly-owned subsidiary of Monsanto, to apply Millennium’s technology platform to the discovery Eli Lilly and Company and development of plant agricultural products. Focus: Atherosclerosis and Congestive Heart Failure ■ Millennium built Cereon with Monsanto; it is believed ■ In 1998 we delivered four cardiovascular drug targets, to be the largest genomic agricultural company in receiving milestone payments and bringing the total the world. delivered targets to five. ■ Millennium retains the right to use certain technologies ■ Millennium retains exclusive rights to all diagnostic and developed by Cereon outside the plant agricultural fields. antisense drug applications. Pfizer Inc. ■ Millennium has access to select combinatorial chemistry Focus: Antifungal Drug Discovery libraries and high throughput screening technologies controlled by Lilly, with exclusive worldwide rights ■ In 1998 the initial four-year alliance was extended for to develop and commercialize any resulting two years. product candidates. ■ The first phase yielded a pipeline of several drug targets that are advancing into screening. Eli Lilly and Company ■ The second phase will focus on creating a “lead to target” Focus: Oncology Drug Discovery discovery paradigm to expedite lead identification. ■ In 1998 the alliance was extended to its full term, an additional two years. ■ The program leverages our efficient target discovery and validation process, producing a pipeline of validated targets in selected areas of oncology.

11 From left to right: Jeanette Just, Ph.D., Medical and Program Management, MPMx John Hunter, Ph.D., Oncology Andy Shyjan, Ph.D., Oncology Jim Deeds, Cervical Cancer Diagnostics, MPMx

12 MPMx

At Millennium Predictive Medicine, Inc. (MPMxTM), a majority-owned subsidiary of Millennium, we hold ourselves to a strict standard: every product we discover or plan to develop either by ourselves or with our partners must produce a significant improvement over current methods. We plan to focus only on areas where that improvement can change the practice of medicineSM – for instance, in the diagnosis of cancer. In fact, our initial focus is on diseases that are life-threatening. To meet our goals we are harnessing twin disciplines: DiagnomicsTM, molecular diagnostic testing that both determines the patient’s medical status and correlates therapeutic decisions to their economic impact; and Pharmacogenomics, the study of the underlying biological variations that cause people to react differently to the same drug. Combining these two sciences with informatics, we hope to be able to shift medical care from merely addressing symptoms to tackling the root causes of disease.We believe that in the future, by using our products, physicians will identify not just the disease, but its genetic basis, selecting not just an appropriate drug, but the most effective one for the patient.We believe that through these tools they will truly customize treatment and truly change the practice of medicine.

Management

Kenneth J. Conway President

Michael Kauffman, M.D., Ph.D. Vice President, Medicine

Chris Sander Chief Information Science Officer

John T. Unger, Ph.D. Chief Technology Officer MPMx

Accomplishments

• Put five major oncology DiagnomicsTM programs into development: melanoma, breast, cervical, ovarian and prostate.

• Formed collaboration with the Mayo Clinic.

• Formed a $70 million alliance with Becton Dickinson and Company, believed to be the largest research alliance in the diagnostic industry.

Product Pipeline Focus

DiagnomicsTM Pharmacogenomics

Oncology Chemoprediction Breast Breast Ovarian Prostate Uterine Colon Colon Prostate Melanoma Certain knowledge can make the difference between life and death Definitions:

TM This is a story of collaboration. It is a story of innovation. It is They identified Melastatin , a protein encoded by a novel DiagnomicsTM: a story of hope. gene, discovering that nonexpression or expression of this Molecular diagnostic testing that both determines gene shows a high level of correlation with whether or not the patient’s medical status and correlates Cancer is the second largest killer in the United States. the melanoma is metastatic.Thus, Melastatin may function therapeutic decisions to economic impact. Yet in the majority of cases,when cancer is fatal, it is as a metastasis suppressor in malignant melanoma or not due to the primary tumor, but to malignancies that In vitro: skin cancer; it also appears to be a clinical marker for spread throughout the body, a process called metastasis. Testing in an environment outside the living body, non-metastatic melanoma. Millennium has received 2 U.S. Recognizing this, Millennium’s scientists are determined to for example, in cell cultures or test tubes. patents related to Melastatin. find the genetic differences between those primary tumors Metastasize: that metastasize and those that don’t. Since this gene’s greatest immediate potential utility is as To spread by transferring a malignancy from the a Diagnomics tool, Millennium formally transferred all To this end, we are exploring several types of cancers, site of disease to another part of the body. related information and rights to MPMx, its subsidiary among them melanoma (cancer of the skin). Although focused on predictive medicine. Molecular diagnostic: extremely prevalent, melanomas are rarely dangerous DNA, RNA, and/or protein-based tests used to when treated early. However, if they are left untreated or There, a team is working toward clinical development predict disease onset or progression. if they metastasize, these aggressive cancers can be fatal. and validation of Melastatin as a potential important new The extreme difficulty of obtaining an accurate prognosis tool for the diagnosis and management of patients with Pharmacogenomics: is usually to blame. melanoma. The study of the underlying biological variations that cause people to react differently to the Currently, physicians grade melanomas by measuring the We believe these studies will validate the utility of same drug. thickness of the lesion. If the lesion is thin, there is a high Melastatin within the year and that once they are complete, probability – around 98% – that it will not metastasize. a Diagnomics product should result.Then, we will work Transcriptional profiling: A group of technologies used to measure the level Our goal is to identify the other two percent – those with Becton Dickinson and Company, our partner in cancer of expression of many genes in parallel. lesions that appear nonthreatening, but that in fact require Diagnomics, to develop and commercialize the product. immediate, aggressive treatment. Similarly, not every thick Using this test, physicians should be able to definitively lesion is life-threatening, but because there is a high proba- determine which melanomas are truly nonthreatening and bility of danger current treatment protocols may include which are likely to metastasize. Based on this information, debilitating chemotherapy, radiation, even the removal of they should be able to deliver appropriate therapies lymph nodes. We believe that a Diagnomics test that tailored to each patient’s specific condition. It is a scenario would allow physicians to determine quickly and accurately that would realize Millennium’s vision: the development of whether such treatment is necessary would greatly a product that fundamentally changes the way medicine is improve the quality of their patients’ lives. practiced and that enables the delivery of truly precise and Recognizing both the need and the opportunity for such a personalized medicine. tool, Millennium set to work.The Pharmaceutical Division’s oncology group sought a genetic indicator to determine whether a tumor will metastasize.They utilized transcrip- tional profiling to try to identify genes that were expressed at different levels in metastatic and nonmetastatic melanoma.

13 Millennium Selected Financial Data 15 Pharmaceuticals Financial Management’s Discussion and Analysis of Financial Condition Section and Results of Operations 16

Report of Independent Auditors 20

Consolidated Balance Sheets 21

Consolidated Statements of Operations 22

Consolidated Statements of Cash Flows 23

Statements of Stockholders’ Equity 24

Notes to Consolidated Financial Statements 26

Corporate Information 35 Millennium Pharmaceuticals, Inc. selected Financial data

Year Ended December 31, 1994 1995 1996 1997 1998 Statement of Operations Data: (in thousands, except share and per share data) Revenue under strategic alliances $ 7,963 $ 22,880 $ 31,764 $ 89,933 $133,682 Costs and expenses: Research and development 10,990 17,838 34,803 74,828 114,190 General and administrative 3,240 3,292 7,973 16,517 24,419 Acquired in-process R&D – – – 83,800 – Amortization of intangible asset – – – 2,397 2,702 14,230 21,130 42,776 177,542 141,311 Income (loss) from operations (6,267) 1,750 (11,012) (87,609) (7,629) Interest income (expense), net (105) (466) 2,244 2,977 3,788 Minority interest – – – 3,410 14,179 Net income (loss) $ (6,372) $ 1,284 $ (8,768) $ (81,222) $ 10,338 Basic net income (loss) per share (pro forma in 1995 and 1996) $ 0.09 $ (0.40) $ (2.87) $ 0.34 Shares used in computing basic net income (loss) per share 13,851,639 21,696,894 28,322,722 30,319,175 Diluted net income (loss) per share (pro forma in 1995 and 1996) $ 0.07 $ (0.40) $ (2.87) $ 0.33 Shares used in computing diluted net income (loss) per share 17,853,914 21,696,894 28,322,722 31,508,308

Year Ended December 31, 1994 1995 1996 1997 1998 Consolidated Balance Sheet Data: (in thousands) Cash, cash equivalents and marketable securities $ 6,105 $ 17,847 $ 63,848 $ 96,557 $190,964 Working capital 3,151 10,498 60,273 85,571 178,395 Total assets 10,101 25,105 87,744 144,513 257,954 Long-term debt, net of current portion 3,067 1,467 – – – Capital lease obligation, net of current portion 2,359 2,499 9,308 19,809 24,827 Stockholders’ equity $ 1,559 $ 13,096 $ 66,639 $ 91,755 $206,362

15 Millennium Pharmaceuticals, Inc.

Management’s Discussion and To date, all of Millennium’s revenues have resulted from payments from strategic partners Analysis of Financial Condition and United States government research grants. We have not received any revenue from and Results of Operations the sale of products. Millennium’s strategic alliances through the end of 1998 include the following: two agreements with the Wyeth-Ayerst Division of American Home Products Overview (“AHP”) in certain disorders of the central nervous system and in bacterial diseases; an agreement with Astra AB (“Astra”) in inflammatory respiratory diseases; an agreement Millennium Pharmaceuticals, Inc. (“Millennium” or “the Company”) incorporates large-scale with Bayer in cardiovascular disease, areas of oncology not covered by Millennium’s alliance genetics, genomics, high throughput screening, and informatics in an integrated science and with Lilly, osteoporosis, pain, liver fibrosis, hematology and viral infections; two agreements technology platform. We apply this technology platform primarily in discovering and devel- with Eli Lilly and Company (“Lilly”) in atherosclerosis, and in select areas of oncology, oping proprietary therapeutic and diagnostic human healthcare products and services. The as well as a third agreement, through MBio, in therapeutic proteins; an agreement with Company has two subsidiaries, Millennium BioTherapeutics, Inc. (“MBio”) and Millennium Hoffmann-La Roche Inc. (“Roche”) in obesity and type 2 Diabetes; an agreement with Predictive Medicine, Inc. (“MPMx”). MBio is focused on developing therapeutic proteins Monsanto Company (“Monsanto”) in plant agriculture; and an agreement with Pfizer, Inc. and antibodies, vaccines and gene therapy, and antisense products. MPMx is focused on (“Pfizer”) in the area of antifungal treatments. These agreements have provided the DiagnomicsTM (genomics-based diagnostics) and pharmacogenomics (correlation of patient Company with various combinations of equity investments, up-front and follow-on fees and genotypes to drug responses), and on generating and integrating diverse biomedical data research funding, and may provide certain additional payments contingent upon the attain- to provide products and services to the healthcare industry. Within the parent company, ment of research and regulatory milestones and royalty and/or profit sharing payments referred to herein as “MPI,” Millennium focuses on the development of small-molecule based on sales of any products resulting from the collaborations. drugs, on continuing development and integration of the platform, on high throughput processes and services, and on information and informatics technologies that support During 1999, we expect to continue to pursue additional alliances, and will consider our strategic alliances and discovery efforts across the entire organization. joint development and acquisition opportunities that may provide Millennium with access to products on the market or in later stages of commercial development than those During 1998, Millennium expanded efforts in our subsidiaries and in the parent company. represented within our current programs. We expect that Millennium will incur increasing We hired additional staff in research and drug discovery, informatics, biotherapeutics and expenses and may incur increasing operating losses for at least the next several years, diagnostics/prognostics, as well as in other support areas. Millennium formed MPMx and primarily due to expansion of facilities and research and development programs, and as Millennium Information, Inc. (“MInfo”) in September 1997. MInfo was established to a result of efforts to advance acquired products or our own development programs to generate and integrate biomedical data and develop information products and services commercialization. Our revenues under strategic alliance and licensing arrangements for use by the healthcare industry. During 1998, Millennium combined the operations of may fluctuate from period to period or year to year in both timing and amounts; these these two subsidiaries. In January 1999, MInfo was merged with MPMx, and MPMx was fluctuations, as well as fluctuations in spending, may result in periods of profitability and the surviving corporation of the merger. periods of losses. Therefore, Millennium’s results of operations for any period may not be comparable to the results of operations for any other period. In September 1998, Millennium formed a broad alliance with Bayer AG (“Bayer”). Under the terms of this agreement, Bayer will receive access to key technologies in gene research Results of Operations as well as a flow of genomics-based drug development targets that Millennium discovers Years Ended December 31,1998 and December 31, 1997 through our research efforts. This collaboration also gives Millennium residual rights to develop, on our own behalf, certain products derived from research conducted under the Revenue under strategic alliances increased to $133.7 million for the year ended December alliance. As part of the agreement, Bayer invested $96.6 million in November 1998 for 31, 1998 (the “1998 Period”) from $89.9 million for the year ended December 31, 1997 approximately 4.96 million common shares of Millennium stock and made an up-front (the “1997 Period”). During the 1998 Period, Millennium recognized revenue from all seven license payment of $33.4 million.

16 of its partners in ten alliances. During the 1997 Period, Millennium recognized capital lease obligations during that year. The minority interest of $14.2 million in 1998 revenue from six partners, AHP, Astra, Lilly, Monsanto, Roche and Pfizer, in nine alliances. and $3.4 million in 1997 represents the entire net loss of MBio. This loss is attributed The 1998 Period included a $33.4 million one-time payment from Bayer received in completely to the minority stockholder because the minority stockholder has provided November. In addition, during 1998, Monsanto provided $38.2 million in a combination of all equity funding for MBio. program and technology transfer fees, performance payments for achievement of research objectives, and payments for administrative and facilities services. The 1998 Period included Years Ended December 31,1997 and December 31, 1996 a full year of research funding under our eight other alliances as well. The 1997 Period included a one-time license fee of $38 million from Monsanto in the fourth quarter. Revenue under strategic alliances increased to $89.9 million for the 1997 Period from $31.8 million for the year ended December 31, 1996 (the “1996 Period”). During 1997, Research and development expenses increased to $114.2 million for the 1998 Period from Millennium recognized revenue from six partners in nine alliances. During the 1996 Period, $74.8 million for the 1997 Period. The increase was primarily attributable to increased we recognized revenue from four partners, AHP, Astra, Lilly and Roche, in five alliances. personnel expenses, facilities expenses, increases in spending for laboratory supplies, and The 1997 Period included an up-front license fee of $38 million from Monsanto in the external collaborations and increased equipment depreciation. We expect research and fourth quarter, a full year of funding under five alliances, 11 months of funding under two development expenses to continue to increase as personnel are added and as research alliances and a partial year of funding under the MBio alliance with Lilly. The 1996 Period and development activities are expanded to accommodate our existing strategic alliances included an up-front license fee from AHP and various research milestone payments. and additional commitments that we may undertake in the future. Effective March 1996, Lilly exercised its option to enter into a strategic alliance with the Company in select areas of oncology. As a result, we recognized $2.8 million of revenue General and administrative expenses increased to $24.4 million for the 1998 Period from that had been previously deferred. $16.5 million for the 1997 Period. The increase was primarily attributable to increased expenses for additional management and administrative personnel, as well as to increases Research and development expenses increased to $74.8 million for the 1997 Period from in facilities expenses, consulting, and other professional fees associated with the expansion $34.8 million for the 1996 Period. The increase was primarily attributable to increased and increased complexity of our operations and business development efforts. We expect personnel expenses associated with staffing growth due to the ChemGenics acquisition, that general and administrative expenses will continue to increase as Millennium the establishment and staffing of MBio, and other additional research and development continues to grow. personnel. Related to these costs were increases in facilities expenses, increases in purchases of laboratory supplies and increased equipment depreciation. During 1997, Millennium acquired ChemGenics Pharmaceuticals Inc. (“ChemGenics”) for approximately 4.8 million shares of common stock at $21.50 per share. General and administrative expenses increased to $16.5 million for the 1997 Period from $8.0 million for the 1996 Period. The increase was primarily attributable to increased In connection with the ChemGenics acquisition, Millennium incurred a nonrecurring charge expenses for additional management and administrative personnel, as well as to increases of $83.8 million for acquired in-process research and development in 1997, and amortization in facilities expenses, consulting and professional fees. expense of $2.7 million in 1998 and $2.4 million in 1997. The in-process research and development was charged to operations because, in management’s opinion, technological Millennium had net interest income of $3.0 million for the 1997 Period and net interest feasibility for the acquired research and development had not been established and would income of $2.2 million for the 1996 Period. Interest income grew because of an increase require a significant amount of additional expenditures over a number of years. in our average cash balance. Interest expense grew due to additional capitalized lease obligations during 1997. The minority interest in 1997 of $3.4 million represents the entire Millennium had net interest income of $3.8 million for the 1998 Period and net interest net loss of MBio.This loss is attributed completely to the minority stockholder because income of $3.0 million for the 1997 Period. Interest income increased in 1998 due to the the minority stockholder has provided all equity funding for MBio. increase in our average cash balance. Interest expense grew in 1998 due to increases in

17 Liquidity and Capital Resources losses in future years may be limited under the change of stock ownership rules of the Internal Revenue Service. Millennium has financed operations since inception primarily through strategic alliances, a public offering, private placement of equity securities, and issuance of debt and capital Millennium believes that existing cash and marketable securities and anticipated cash leases. Through December 31, 1998, Millennium has recognized approximately $286 million payments from its strategic alliances will be sufficient to support our operations for of revenue under strategic alliances. In November 1998, Bayer invested $96.6 million for the foreseeable future. Our forecast of the period of time through which our financial approximately 4.96 million shares of Millennium common stock. In May 1996, we completed resources will be adequate to support operations is forward-looking information, and, as an initial public offering of common stock resulting in proceeds, net of underwriting such, actual results may vary. Factors that may cause actual results to vary include those discounts and offering costs, of $57.1 million. The private placement of equity securities described below under the heading “Factors Affecting Future Operating Results.” has provided aggregate gross proceeds of approximately $45.9 million. We have obtained $4.0 million in long-term debt, $49.1 million in capital lease financings and $1.1 million Impact of Year 2000 to finance a facility construction project. As of December 31, 1998, Millennium had approximately $191 million in cash, cash equivalents and marketable securities. The Year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. Any computer program that has date-sensi- During 1998, Millennium acquired assets under capital leases totaling $15.2 million and tive software may recognize a date using “00” as the year 1900 rather than the year 2000. expended an additional $7.6 million for equipment, leasehold improvements and construction It is possible that this incorrect recognition of dates could cause system failures or in progress. At December 31, 1998, the aggregate outstanding commitment under capital miscalculations of data. If these errors were to occur in Millennium systems, they could lease obligations was $33.5 million. We expect capital expenditures to continue at a level cause us to be unable to process data and engage in normal business activities. at least as significant as expenditures in 1998 over the next several years as we expand facilities and acquire equipment to support increased research and development and other Millennium has determined that we have Year 2000 exposure in the following areas: efforts. In addition, we have entered into commitments to provide security deposits associ- (i) software and hardware embedded in our laboratory equipment and used in our research ated with facilities leases of approximately $10.8 million through December 31, 1998. and development programs, (ii) computer software and hardware used in our business and facilities operations and (iii) computer systems used by vendors and suppliers with The Company maintains an investment portfolio in accordance with its Investment Policy. whom we do business. In addition, we have Year 2000 exposure with respect to internally The primary objectives of the Company’s Investment Policy are to preserve principal, developed informatics application software that is used by Millennium and certain alliance maintain proper liquidity to meet operating needs and maximize yields. The Company’s partners who have access to our technology platform. Investment Policy specifies credit quality standards for the Company’s investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Millennium has a Year 2000 task force that is evaluating our internal computer programs, systems and equipment and overseeing our Year 2000 efforts. We are using both internal The Company does not believe that there is any material market risk exposure with respect and external resources to identify potential issues, costs and solutions to address Year 2000 to derivative or other financial instruments which would require disclosure under this item. concerns. For this effort, we are using procedures outlined in the Government Accounting Office’s Y2K Guide. We have completed a preliminary inventory of our informatics applica- As of December 31, 1998, Millennium had net operating loss carryforwards of approximately tions, and we are conducting an in-depth assessment of this inventory. In addition, we have $16.5 million to offset future federal and state taxable income through 2013. Due to the inventoried a substantial amount of software and hardware embedded in our laboratory degree of uncertainty related to the ultimate realization of such prior losses, no benefit has and facilities equipment as part of our effort to determine Year 2000 compliance. We are been recognized as of December 31, 1998. Moreover, Millennium’s ability to utilize these also making inquiries of our important suppliers and vendors to assess their Year 2000

18 readiness. We have inventoried software used in our business operations as well. We intend There can be no assurance that we will identify all Year 2000 compliance problems as a to identify critical systems and equipment on which to focus our inquiries and testing. result of our efforts or that we will be able to correct compliance problems that are identified in a timely manner. If we are unable, in a timely manner, to identify and correct To date, we have identified aspects of our computer hardware, network infrastructure and compliance problems in critical systems and equipment, our business, financial position business systems that are not Year 2000 compliant. We have obtained and begun to imple- and results of operations could be adversely affected. ment vendor recommendations for correcting these deficiencies. We have also identified as- pects of internally developed software applications that are not Year 2000 compliant and Factors Affecting Future Operating Results have begun testing and corrective programs in this area. In addition, we expect to complete an inventory and assessment of critical laboratory and facilities equipment and systems by This Annual Report to Stockholders contains forward-looking statements. For this purpose, the end of the first quarter of 1999. We expect to complete testing and remediation for any statements contained in the Annual Report that are not statements of historical fact critical computer hardware, network infrastructure, business systems and internally devel- may be considered to be forward-looking statements. Although not a complete list of oped software applications by the end of the third quarter of 1999. We expect to complete words that might identify forward-looking statements, we use the words “believes,” “antici- testing and any remediation of critical laboratory and facilities equipment by the end of the pates,” “plans,” “expects,” “intends” and similar expressions to identify forward-looking year. We are not experiencing and do not anticipate any forward-looking problems. statements. There are a number of important factors that could cause Millennium’s actual results to differ materially from those indicated by forward-looking statements. These At the current time, we expect to be able to correct the problems of which we are aware factors include, but are not limited to, those listed below and elsewhere in this Annual in a reasonable and timely manner. As we have not completed our evaluation of all of our Report to Stockholders and in the Section titled “Business-Factors which May Affect critical systems, software or equipment, there can be no assurance that we will not find Results” in the Company’s Annual Report on Form 10-K for the year ended December 31, problems that will require us to incur substantial costs to correct or will disrupt our 1998, as filed with the Securities and Exchange Commission, incorporated herein by reference. business. Should such problems occur, they could have a material adverse effect on our business, financial position or results of operations. To date, Millennium has not developed or commercialized any products or services based on our technological approaches. There can be no assurance that these approaches will We do not currently have contingency plans for all critical aspects of our systems and enable us to successfully discover and develop life-science-based products and services. In operations in the event that we or any of our important suppliers or vendors are not able addition, we face intense competition from commercial and academic organizations, many to become Year 2000 compliant.We expect to develop contingency plans for critical areas if of which are larger and better financed. we determine that we or any important vendors or suppliers are not likely to become Year 2000 compliant. Millennium has a substantial accumulated deficit. We may incur losses for at least the next several years, or may show periods of profitability and periods of losses. Losses may We have not incurred material remediation costs to date and we do not currently expect increase as we expand our infrastructure, research and development, and commercialization that the aggregate cost of our efforts will be material to our operations or financial position activities. We will require substantial additional funds for our research and development taken as a whole. However, it is possible that remediation costs will be greater than we programs, operating expenses, the pursuit of regulatory approvals and expansion of our anticipate and that such costs could have a material adverse effect on our financial position production, sales and marketing capabilities. Adequate funds for these purposes, whether or results of operations. Our alliance partners or collaborators may also experience through equity or debt financings, collaborative or other arrangements with corporate disruption as a result of the Year 2000 issue. If our alliance partners and collaborators partners or from other sources, may not be available when needed or on terms acceptable experience disruption, it is possible that our alliances with these partners could be to us. Insufficient funds could require us to delay, scale back or eliminate certain of our adversely affected, which could have a material adverse effect on our financial position research and product development programs or to license third parties to commercialize and results of operations. products or technologies that we would otherwise develop or commercialize ourselves.

19 Millennium Pharmaceuticals, Inc.

Millennium’s strategy for development and commercialization of therapeutic and diagnostic Report of Independent Auditors products based upon our discoveries and technologies depends upon the formation of various strategic alliances, licensing and technology transfer arrangements. There can be Board of Directors and Stockholders no assurance that current or any future strategic alliances, licensing or technology transfer Millennium Pharmaceuticals, Inc. arrangements ultimately will be successful. If any of our strategic partners was to breach or terminate its agreement with us or otherwise fail to conduct its collaborative activities We have audited the accompanying consolidated balance sheets of Millennium successfully in a timely manner, such breach, termination or other failure could have a Pharmaceuticals, Inc. as of December 31, 1998 and 1997, and the related consolidated material adverse effect on our business, financial condition and results of operations. statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the Proprietary rights relating to Millennium’s future products, and to our methods and services responsibility of the Company’s management. Our responsibility is to express an will be protected from unauthorized use by third parties only to the extent that they are opinion on these financial statements based on our audits. covered by valid and enforceable patents or are maintained in confidence as trade secrets. There can be no assurance that any pending patent applications relating to our products, We conducted our audits in accordance with generally accepted auditing standards. methods and services will result in patents being issued or that any such patents will afford Those standards require that we plan and perform the audit to obtain reasonable protection against competitors with similar technology. There may be pending or issued assurance about whether the financial statements are free of material misstatement. third-party patents relating to our methods and services and we may need to acquire An audit includes examining, on a test basis, evidence supporting the amounts and licenses to, or to contest the validity of, any such patents. It is likely that we would need to disclosures in the financial statements. An audit also includes assessing the accounting expend significant funds to defend any claim that Millennium infringes a third-party patent. principles used and significant estimates made by management, as well as evaluating There can be no assurance that any license required under any such patent would be the overall financial statement presentation. We believe that our audits provide a made available. reasonable basis for our opinion.

During 1998, Millennium significantly increased the scale of our operations to support the In our opinion, the consolidated financial statements referred to above present fairly, in expansion of our disease research programs and alliances. The resulting growth in personnel all material respects, the consolidated financial position of Millennium Pharmaceuticals, and facilities could place significant strains on our management, operations and systems. Inc. at December 31, 1998 and 1997, and the consolidated results of operations, Inability to manage such growth effectively could have a material adverse effect on the stockholders’ equity and cash flows for each of the three years in the period ended Company’s business, financial position and results of operations. December 31, 1998, in conformity with generally accepted accounting principles.

Other factors that may affect our future operating results include the inherent risk of product liability claims which may result from testing, marketing and sale of pharmaceutical products, fluctuations in our quarterly operating results, our ability to continue to attract and retain qualified management and scientific staff, and the ability of our alliance partners February 8, 1999 or ourselves to obtain on a timely basis regulatory approvals for marketing and sale of Boston, Massachusetts products and to compete successfully in the market.

20 December 31, 1998 1997 Millennium Pharmaceuticals, Inc. (in thousands, except par value and shares)

Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents $138,284 $ 69,236 Marketable securities 52,680 27,321 Due from strategic partners 6,660 778 Prepaid expenses and other current assets 5,033 4,595 Total current assets 202,657 101,930 Property and equipment, net 38,170 29,030 Restricted cash and other assets 11,416 5,140 Intangible asset, net 5,711 8,413 Total assets $257,954 $144,513

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 6,918 $ 3,165 Accrued expenses 6,186 4,294 Deferred revenue 2,501 3,053 Current portion of capital lease obligations 8,657 5,847 Total current liabilities 24,262 16,359 Capital lease obligations, net of current portion 24,827 19,809 Minority interest 2,503 16,590 Commitments and contingencies

Stockholders’ Equity: Preferred Stock, $0.001 par value; 5,000,000 shares authorized, none issued — — Common Stock, $0.001 par value; 100,000,000 shares authorized: 34,923,204 shares in 1998 and 29,169,398 shares in 1997 issued and outstanding 35 29 Additional paid-in capital 296,370 193,254 Deferred compensation (957) (1,992) Notes receivable from officers (87) (166) Other comprehensive income (loss) 29 (4) Accumulated deficit (89,028) (99,366) Total stockholders’ equity 206,362 91,755 Total liabilities and stockholders’ equity $257,954 $144,513

21 Year Ended December 31, 1998 1997 1996 Millennium Pharmaceuticals, Inc. (in thousands, except per share and share data) Consolidated Statements of Operations Revenue under strategic alliances $133,682 $ 89,933 $ 31,764 Costs and expenses: Research and development 114,190 74,828 34,803 General and administrative 24,419 16,517 7,973 Acquired in-process R&D — 83,800 — Amortization of intangible asset 2,702 2,397 — 141,311 177,542 42,776 Loss from operations (7,629) (87,609) (11,012) Interest income 6,198 4,412 3,131 Interest expense (2,410) (1,435) (887) Minority interest 14,179 3,410 — Net income (loss) $ 10,338 $ (81,222) $ (8,768) Basic net income (loss) per share (pro forma in 1996) $ 0.34 $ (2.87) $ (0.40) Shares used in computing basic net income (loss) per share 30,319,175 28,322,722 21,696,894 Diluted net income (loss) per share (pro forma in 1996) $ 0.33 $ (2.87) $ (0.40) Shares used in computing diluted net income (loss) per share 31,508,308 28,322,722 21,696,894

22 Year Ended December 31, 1998 1997 1996 Millennium Pharmaceuticals, Inc. (in thousands)

Consolidated Statements Operating activities of Cash Flows Net income (loss) $ 10,338 $(81,222) $ (8,768) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Acquired in-process R&D — 83,800 — Depreciation and amortization 16,284 12,168 3,867 Minority interest (14,179) (3,410) — Net loss on asset disposal 97 433 199 Amortized interest income — — (280) Stock compensation 2,029 1,693 774 Changes in operating assets and liabilities: Prepaid expenses and other current assets (438) (1,706) (1,818) Due from strategic partners (5,882) 4,932 (3,967) Restricted cash and other assets (6,276) (4,465) (288) Accounts payable and accrued expenses 5,645 2,962 1,856 Deferred revenue (552) (1,480) 433 Net cash provided by (used in) operating activities 7,066 13,705 (7,992)

Investing activities Purchase of property and equipment (7,590) (4,256) (3,210) Sale of marketable securities 59,606 58,728 52,595 Purchase of marketable securities (84,932) (30,778) (99,113) Net cash provided by (used in) investing activities (32,916) 23,694 (49,728)

Financing activities Proceeds from sale of Common Stock and warrants 96,600 — 57,403 Proceeds from sale of subsidiary stock — 20,000 — Acquisition of ChemGenics, net of cash acquired — 7,087 — Net proceeds from employee stock purchases 5,699 2,039 653 Payments on long-term debt — (1,467) (1,600) Payments of capital lease obligations (7,401) (5,910) (2,734) Proceeds from sale of Preferred Stock — — 3,500 Net cash provided by financing activities 94,898 21,749 57,222 Increase (decrease) in cash and cash equivalents 69,048 59,148 (498) Cash and cash equivalents at beginning of year 69,236 10,088 10,586 Cash and cash equivalents at end of year $138,284 $ 69,236 $ 10,088

Noncash investing and financing activities: Equipment acquired under capital leases $ 15,229 $ 17,426 $ 11,142

23 Notes Other Additional Receivable Comprehensive Total Millennium Pharmaceuticals, Inc. (in thousands, except shares) Convertible Preferred Stock Common Stock Paid-in Deferred from Income Accumulated Stockbrokers’ shares amount shares amount Capital Compensation Officers (Loss) Deficit Equity Statements of Stockholders’ Equity Balance at December 31, 1995 11,783,333 $ 12 4,211,926 $ 4 $ 22,722 $(266) $ (9,376) $ 13,096 Issuance of Series D Convertible Preferred Stock 388,888 3,500 3,500 Conversion of Convertible Preferred Stock to Common Stock (12,172,221) (12) 12,172,221 12 Issuance of Common Stock 5,175,000 5 57,097 57,102 Repurchase of Common Stock (342,818) (3) (3) Exercise of stock warrants 300,000 1 300 301 Employee stock purchases 2,343,197 2 654 656 Issuance of Common Stock in exchange for note from officer 54,625 33 (54) (21) Forgiveness of notes from officers 75 75 Deferred stock compensation 3,487 $(3,487) Stock compensation earned 719 719 Net loss (8,768) (8,768) Unrealized loss on marketable securities $(18) (18) Comprehensive loss (8,786) Balance at December 31, 1996 — — 23,914,151 24 87,790 (2,768) (245) (18) (18,144) 66,639 Issuance of Common Stock 4,783,688 5 102,844 (247) 102,602 Repurchase of Common Stock (87,130) (23) (23) Exercise of stock warrants 123,589 Employee stock purchases 415,312 2,062 2,062 Forgiveness of notes from officers 79 79 Stock compensation expense 370 370 Write off deferred stock compensation (119) 119 Stock compensation earned 904 904 401K stock match 19,788 330 330 Net loss (81,222) (81,222) Unrealized gain on marketable securities 14 14 Comprehensive loss (81,208) Balance at December 31, 1997 29,169,398 29 193,254 (1,992) (166) (4) (99,366) 91,755 Issuance of Common Stock 4,957,660 5 96,595 96,600 Repurchase of Common Stock (55,200) (23) (23) Exercise of stock warrants 23,090 Employee stock purchases 796,938 1 5,629 5,630 Forgiveness of notes from officers 79 79 Stock compensation expense 565 565 Write off deferred stock compensation (182) 182 Stock compensation earned 853 853 401K stock match 31,318 532 532 Net income 10,338 10,338 Unrealized gain on marketable securities 33 33 Comprehensive income 10,371 $296,370 $ (957) $ (87) $ 29 $(89,028) $206,362 24 Balance at December 31, 1998 34,923,204 $ 35 25 Notes Other Additional Receivable Comprehensive Total Millennium Pharmaceuticals, Inc. (in thousands, except shares) Convertible Preferred Stock Common Stock Paid-in Deferred from Income Accumulated Stockbrokers’ shares amount shares amount Capital Compensation Officers (Loss) Deficit Equity Statements of Stockholders’ Equity Balance at December 31, 1995 11,783,333 $ 12 4,211,926 $ 4 $ 22,722 $(266) $ (9,376) $ 13,096 Issuance of Series D Convertible Preferred Stock 388,888 3,500 3,500 Conversion of Convertible Preferred Stock to Common Stock (12,172,221) (12) 12,172,221 12 Issuance of Common Stock 5,175,000 5 57,097 57,102 Repurchase of Common Stock (342,818) (3) (3) Exercise of stock warrants 300,000 1 300 301 Employee stock purchases 2,343,197 2 654 656 Issuance of Common Stock in exchange for note from officer 54,625 33 (54) (21) Forgiveness of notes from officers 75 75 Deferred stock compensation 3,487 $(3,487) Stock compensation earned 719 719 Net loss (8,768) (8,768) Unrealized loss on marketable securities $(18) (18) Comprehensive loss (8,786) Balance at December 31, 1996 — — 23,914,151 24 87,790 (2,768) (245) (18) (18,144) 66,639 Issuance of Common Stock 4,783,688 5 102,844 (247) 102,602 Repurchase of Common Stock (87,130) (23) (23) Exercise of stock warrants 123,589 Employee stock purchases 415,312 2,062 2,062 Forgiveness of notes from officers 79 79 Stock compensation expense 370 370 Write off deferred stock compensation (119) 119 Stock compensation earned 904 904 401K stock match 19,788 330 330 Net loss (81,222) (81,222) Unrealized gain on marketable securities 14 14 Comprehensive loss (81,208) Balance at December 31, 1997 29,169,398 29 193,254 (1,992) (166) (4) (99,366) 91,755 Issuance of Common Stock 4,957,660 5 96,595 96,600 Repurchase of Common Stock (55,200) (23) (23) Exercise of stock warrants 23,090 Employee stock purchases 796,938 1 5,629 5,630 Forgiveness of notes from officers 79 79 Stock compensation expense 565 565 Write off deferred stock compensation (182) 182 Stock compensation earned 853 853 401K stock match 31,318 532 532 Net income 10,338 10,338 Unrealized gain on marketable securities 33 33 Comprehensive income 10,371 $296,370 $ (957) $ (87) $ 29 $(89,028) $206,362 24 Balance at December 31, 1998 34,923,204 $ 35 25 Millennium Pharmaceuticals, Inc.

Notes to Consolidated Financial December 31, 1998 Statements [1] Basis of Presentation The Company

Millennium Pharmaceuticals, Inc. incorporates large-scale genetics, genomics, high through- put screening, and informatics in an integrated science and technology platform. Millennium applies this technology platform primarily in discovering and developing proprietary thera- peutic and diagnostic human healthcare products and services.The consolidated financial statements include the accounts of the Company and its 82%-owned subsidiary, Millennium BioTherapeutics, Inc. (“MBio”), as well as its wholly-owned subsidiary, Millennium Predictive Medicine, Inc. (“MPMx”). As more fully described in Note 4, the consolidated financial statements include the accounts of ChemGenics Pharmaceuticals Inc. (“ChemGenics”) subsequent to February 10, 1997. All intercompany transactions have been eliminated in consolidation.

Risks and Uncertainties

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

[2] Significant Accounting Policies Cash Equivalents and Marketable Securities

Cash equivalents consist principally of money market funds and corporate bonds with original maturities of three months or less at the date of purchase. Cash equivalents and marketable securities at December 31, 1998 and 1997 are classified as available-for-sale.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and marketable securities. The Company’s cash equivalents and marketable securities are held by high-credit quality financial institutions. By policy, the Company limits the credit exposure to any one financial institution. At December 31, 1998, the Company had no significant concentrations of credit risk.

26 Property and Equipment SFAS 130 resulted in revised disclosures but had no effect on the financial position, results of operations or liquidity of the Company. Comprehensive income is reported by the Equipment consists principally of assets held under capitalized leases and is stated at the Company in the statements of stockholders’ equity. present value of future minimum lease obligations. Depreciation is recorded over the shorter of the estimated useful life or the term of the lease using the straight-line method. Effective January 1, 1998, the Company adopted SFAS No. 131,“Disclosures about Segments Leasehold improvements are stated at cost and are amortized over the remaining life of of an Enterprise and Related Information.” SFAS No. 131 established standards for the way the building lease. that public business enterprises report information about operating segments in annual financial statements and interim financial reports. SFAS No. 131 also established standards Intangible Asset for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position. The Goodwill recorded in connection with the ChemGenics acquisition (See Note 4) is being Company has identified three operating segments which, under the applicable provision of amortized over a period of four years. SFAS No. 131, have been aggregated into one reportable segment. The Company conducts business exclusively in the United States. Revenue Recognition In June 1998, the FASB issued SFAS No. 133,“Accounting for Derivative Instruments and The Company recognizes revenue under strategic alliances as research services are Hedging Activities,” which is effective for fiscal years beginning after June 15, 1999. The performed, reimbursable expenses are incurred, certain milestones are achieved or license Company believes the adoption of this new accounting standard will not have a significant fees are earned. effect to its financial statements as the Company’s investment policies prohibit the use of derivatives. Stock-Based Compensation

Income Taxes The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), in accounting for its stock-based The liability method is used to account for income taxes. Deferred tax assets and liabilities compensation plans, rather than the alternative fair value accounting method provided for are determined based on differences between financial reporting and income tax bases of under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting assets and liabilities, as well as net operating loss carryforwards, and are measured using the Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as this alternative enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax requires the use of option valuation models that were not developed for use in valuing assets may be reduced by a valuation allowance to reflect the uncertainty associated with employee stock options. Under APB 25, when the exercise price of options granted under their ultimate realization. these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. Fair Value of Financial Instruments

Accounting Pronouncements The carrying amounts reported in the Company’s balance sheets for other current assets and long-term debt approximate their fair value. The fair values of the Company’s long-term Effective January 1, 1998, the Company adopted SFAS No. 130,“Reporting Comprehensive debt are estimated using discounted cash flow analyses based on the Company’s current Income,” which established standards for reporting and displaying comprehensive income incremental borrowing rates for similar types of borrowing arrangements. and its components in a full set of general-purpose financial statements. The adoption of

27 Net Income (Loss) Per Share respectively. The Company has subleased approximately $0.6 million of equipment to MBio under an existing capital lease agreement. All such intercompany transactions have been Net income per share for 1998 is computed using the weighted-average number of common eliminated in consolidation. shares and dilutive-equivalent shares from stock options and warrants using the treasury stock method. Net loss per share for 1997 is computed using the weighted-average Millennium Predictive Medicine, Inc. number of common shares outstanding. Pro forma net loss per share for 1996 is computed using the weighted-average number of common shares, convertible preferred shares assuming In September 1997, the Company established a wholly-owned subsidiary, Millennium conversion at date of issuance, and dilutive equivalent shares from stock options and Predictive Medicine, Inc. (“MPMx”), to develop products and services to optimize the warrants using the treasury-stock method. At December 31, 1998, the difference between prevention, diagnosis, treatment and management of disease. In addition, in September 1997, basic and diluted shares used in the computation of earnings per share is the 1,189,133 the Company incorporated Millennium Information, Inc. (“MInfo”) to generate and integrate weighted-average common equivalent shares resulting from outstanding common stock biomedical data and develop information products and services for use by the healthcare options and warrants. Historical earnings per share for 1996 has not been presented since industry. The accompanying consolidated financial statements include the accounts of MPMx such amount is not deemed meaningful due to the significant change in the Company’s and MInfo since inception. During 1998, Millennium combined the operations of these two capital structure that occurred in connection with the initial public offering. subsidiaries. In January 1999, MInfo was merged with MPMx, and MPMx was the surviving entity of the merger. All intercompany transactions with these subsidiaries have been [3] Subsidiaries eliminated in consolidation.

Millennium BioTherapeutics, Inc. [4] Merger

In May 1997, the Company established Millennium BioTherapeutics, Inc. (“MBio”) as a On February 10, 1997, the Company acquired ChemGenics Pharmaceuticals Inc. subsidiary and, pursuant to a Technology Transfer and License Agreement, transferred and/or (“ChemGenics”) for 4,783,688 shares of Common Stock at $21.50 per share, approximately licensed certain technology to MBio in exchange for 9,000,000 shares of the subsidiary’s $103 million in aggregate. In addition, a principal shareholder of ChemGenics received Series A Convertible Preferred Stock. At that time, MBio entered into a strategic alliance approximately $4 million in settlement of a promissory note and repurchase of warrants with Eli Lilly and Company (“Lilly”) for the discovery and development of novel therapeutic previously issued by ChemGenics, and outstanding warrants were purchased from another proteins (See Note 5). Under the terms of a related stock purchase agreement, Lilly shareholder of ChemGenics for approximately $.5 million. The transaction has been purchased $20 million of Series B Convertible Preferred Stock of MBio for an approximate recorded as a purchase for accounting purposes. Consequently, the operating results of 18% equity interest in MBio. The accompanying consolidated financial statements include ChemGenics have been included in the Company’s financial statements from the date of the accounts of MBio since inception. The minority interest included in the accompanying acquisition, and the fair value of the issued shares has been allocated to the assets consolidated balance sheets reflects the equity interest of Lilly in MBio as of the balance purchased and liabilities assumed based upon their respective fair values. The acquisition sheet date and the minority interest included in the accompanying consolidated statements resulted in goodwill of $10.8 million, which is being amortized over a period of four years. of operations represents the minority stockholder’s interest in the net loss of MBio for the Amortization expense recorded was $2.7 million in 1998 and $2.4 million in 1997. years ended December 31, 1998 and 1997. Since the minority stockholder has provided all In connection with the acquisition, in 1997, the Company incurred a nonrecurring charge equity funding, the entire net loss of MBio is attributed to the minority stockholder. of $83.8 million for acquired in-process research and development which was charged to operations because, in management’s opinion, technological feasibility for the acquired The Company is not required to provide any funds for the operations of MBio, but has research and development had not been established. entered into certain agreements with this subsidiary to provide specific services and facilities at negotiated fees. Such fees amounted to $12.5 million and $5.6 million in 1998 and 1997,

28 The following unaudited pro forma consolidated results of operations have been prepared Alliances Beginning in 1998 as if the acquisition of ChemGenics had occurred at the beginning of 1997 and 1996: In September 1998, the Company entered into a strategic alliance with Bayer AG (“Bayer”). Year ended December 31, 1997 December 31, 1996 In November 1998, Bayer made an equity investment of $96.6 million for approximately (in thousands, except share and pershare amounts) 4.96 million shares of Millennium Common Stock. In addition, Bayer paid $33.4 million as Pro Forma: an up-front licensing fee. Revenues under strategic alliances $ 90,426 $ 35,337 Net loss $ (82,386) $(107,171) The primary goal of the alliance is for the Company to supply 225 drug targets to Bayer Net loss per share $ 1 (2.86) $ (4.05) over a period of five years. These targets will be identified as relevant for cardiovascular Shares used in calculating net loss per share 28,860,068 26,480,582 disease, areas of oncology not covered by Millennium’s alliance with Lilly, osteoporosis, pain, The pro forma net loss and net loss per share amounts for each period above include the liver fibrosis, hematology and viral infections. Future payments which may be made over the acquired in-process research and development charge. The pro forma consolidated results full alliance term include $219 million of ongoing license and research program funding, as do not purport to be indicative of results that would have occurred had the acquisition well as a potential of up to $116 million of performance payments for delivery of targets. been in effect for the periods presented, nor do they purport to be indicative of the results Bayer has the right to cancel the agreement after two and three years if certain minimum that will be obtained in the future. target delivery objectives are not met.

[5] Revenues— Strategic Alliances Alliances Beginning in 1997

The Company has formed strategic alliances with major participants in marketplaces where In October 1997, the Company entered into a technology transfer alliance through a its discovery expertise and technology platform are applicable. These agreements include collaborative agreement with Monsanto Company (“Monsanto”). Under this agreement, alliances based on the transfer of the Company’s technology platform, alliances which the Company granted to Monsanto exclusive rights to its technologies in the field of plant combine technology transfer with a focus on a specific disease or therapeutic approach, agriculture, as well as a nonexclusive license to its technologies outside the plant agriculture and disease-focused programs under which the Company conducts research funded by its field. The Company has agreed to collaborate exclusively with Monsanto in the application partners. The Company’s disease-based alliances and alliances which combine technology- of those technologies through the establishment of a subsidiary wholly owned by Monsanto. transfer with a disease focus are generally structured as research collaborations. Under Monsanto agreed to pay $118 million in up-front, licensing and technology transfer fees over these arrangements, the Company performs research in a specific disease area aimed at the five-year term of the agreement. Monsanto may also pay the Company up to $100 discoveries leading to novel pharmaceutical (small molecule) products. These alliances million over five years, contingent upon the achievement of mutually agreed-upon research generally provide research funding over an initial period, with renewal provisions, which objectives. Millennium will also receive royalty payments from the sale of products, if any, vary by agreement. Under these agreements, the Company’s partners are required to make originating from the research conducted by the Monsanto subsidiary. Millennium realized additional payments upon the achievement of specific research and product development $38.2 million in revenues associated with technology transfer and license fees, achievement milestones, and will pay royalties or in some cases profit-sharing payments to the Company of mutually agreed-upon research objectives, and administrative services under the based upon any product sales resulting from the collaboration. agreement in 1998, and $38.0 million in revenues as an up-front payment in 1997.

In May 1997, the Company, through MBio, entered into a collaborative agreement with Lilly in connection with its program to discover and develop therapeutic proteins. The agreement covers an initial three-year period during which Lilly is providing $8 -$10 million annually in research funding, with a two-year renewal option at the same funding level.

29 Under the terms of the agreement, MBio and Lilly are jointly funding the collaborative Effective March 1996, Lilly exercised this option and entered into a strategic alliance with program and each company will share the rights to use and commercialize the resulting the Company in select areas of oncology. In December 1998, the Company and Lilly discoveries. Additional licensing fees, development milestones and royalties will be payable amended certain terms of the oncology alliance and Lilly agreed to extend the program by Lilly in connection with specific therapeutic protein product candidates identified through March 2001. through the collaboration and licensed by Lilly. MBio recorded approximately $9.1 million in revenues under this alliance in 1998 and $5.5 million under this alliance in 1997. In March 1994, the Company entered into a five-year strategic alliance with Hoffmann-La Roche Inc. (“Roche”) in the fields of obesity and type 2 Diabetes. Under the terms of a Through its merger with ChemGenics, the Company became engaged in an alliance with related stock purchase agreement, an affiliate of Roche purchased $6 million of Series B the Wyeth-Ayerst Division of American Home Products (“AHP”) to discover and develop Convertible Preferred Stock, subsequently converted into 2,000,000 shares of Common antibacterial drugs for human use, as well as a collaboration with Pfizer Inc. (“Pfizer”) to Stock. This alliance is expected to conclude in March 1999. discover and develop antifungal treatments for human use. Under the terms of the AHP agreement, as amended in 1997, AHP is funding and collaborating with the Company over a [6] Marketable Securities five-year period ending in December 2001. AHP has the right to terminate the agreement in November 1999 if certain research objectives are not met. Under the terms of the Pfizer Marketable securities consist of high-grade corporate bonds, which are carried at fair value, agreement, as amended in 1997 and 1998, Pfizer is funding a discovery program that is with the unrealized gains and losses reported in a separate component of stockholders’ scheduled to conclude in December 2000. equity. There have been no realized gains or losses on sales of any securities in 1998, 1997 or 1996. Alliances Beginning before 1997 The amortized cost and estimated fair value of debt securities at December 31, by contractual In July 1996, the Company entered into a strategic alliance with AHP to discover and maturity, are shown below ($ in thousands):

develop targets and assays to identify and develop small molecule drugs and vaccines for 1998 1997 treatment and prevention of disorders of the central nervous system. In addition, this Estimated Estimated agreement provides for the license and transfer of certain technology to AHP. If certain Cost Fair Value Cost Fair Value specified research objectives are not met, AHP may terminate the agreement in September Due in one year or less $37,406 $37,435 $27,325 $27,321 of 1999, 2000 or 2001. Due in one year to two years 15,245 15,245 — — $52,651 $52,680 $27,325 $27,321 In December 1995, the Company entered into a strategic alliance with Astra AB (“Astra”) in the field of inflammatory respiratory diseases. Under the agreement, as amended in [7] Property and Equipment December 1998, Astra will continue to fund a discovery program in inflammatory respira- tory diseases for a four-year period concluding in December 2002. Astra has the right to Property and equipment consists of the following at December 31 ($ in thousands): terminate the agreement in December 2000, and will be obligated to provide an early 1998 1997 termination payment if it exercises the early termination right. Equipment $52,921 $37,452 Leasehold improvements and construction in progress 9,779 4,576 In October 1995, the Company entered into a strategic alliance with Lilly in the field of 62,700 42,028 atherosclerosis. Under the terms of this agreement, Lilly purchased $8 million of Series C Less accumulated depreciation and amortization 24,530 12,998 Convertible Preferred Stock, subsequently converted into 1,333,333 shares of Common $38,170 $29,030 Stock. The Lilly alliance included an option permitting Lilly to fund research in other fields.

30 [8] Commitments External Collaborations Lease Commitments In April 1997, the Company joined a corporate consortium with Affymetrix Inc. and Bristol- Myers Squibb to fund a five-year research program in functional genomics at the Whitehead The Company conducts the majority of its operations in leased facilities with leased equip- Institute for Biomedical Research. Under this agreement, the Company receives certain ment. At December 31, 1998 and 1997, respectively, the Company has capitalized leased licensing rights to developments arising from the consortium. In addition, the Company equipment totaling $46.4 million and $33.5 million, with related accumulated amortization funds research efforts of various academic collaborators in connection with its research of $21.2 million and $12.0 million. and development programs. Total future fixed commitments under these agreements are The Company leases its laboratory and office space under operating lease agreements with approximately $6.4 million in 1999, $3.4 million in 2000, $2.6 million in 2001 and $1.3 various terms and renewal options, including major facilities with lease expirations in 2003, million in 2002. 2013 and 2014. One of these facilities was under construction during 1998, and is expected [9] Stockholders’ Equity to be occupied in the first quarter of 1999. In addition to minimum lease commitments, these lease agreements require the Company to pay its pro rata share of property taxes Preferred Stock and building operating expenses. At December 31, 1998, the Company has pledged $10.8 million of marketable securities as security for three letters of credit for the same amount The Company has 5,000,000 authorized shares of Preferred Stock, $0.001 par value, with the purpose of securing leased facilities. issuable in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and At December 31, 1998, future minimum commitments under leases with noncancelable liquidation preferences, as shall be determined by the Board of Directors. terms of more than one year are as follows ($ in thousands): Common Stock Warrants Capital Leases Operating Leases

Year: At December 31, 1998, the Company has outstanding exercisable warrants to purchase 1999 $ 10,378 $ 15,163 357,470 shares of Common Stock with a weighted-average exercise price of $3.49 per 2000 9,922 14,892 share, which expire through 2004. 2001 9,115 14,133 2002 6,377 13,093 Stock Option Plans 2003 3,306 12,891 Thereafter 340 101,574 The 1993 Incentive Stock Plan (the 1993 Plan) allows for the granting of incentive and Total 39,438 $ 171,746 nonstatutory options to purchase up to 5,400,000 shares of Common Stock. Incentive Less amount representing interest 5,954 options granted to employees generally vest over a four-year period. Nonstatutory options Present value of minimum lease payments 33,484 granted to consultants and other nonemployees generally vest over the period of service Less current portion of capital lease obligations 8,657 to the Company. In December 1995, the Company amended the terms of outstanding Capital lease obligations $ 24,827 option agreements to allow option holders the right to immediately exercise outstanding options, with the subsequent share issuances being subject to a repurchase option by the Total rent expense was $8.5 million in 1998, $4.2 million in 1997 and $2.4 million in 1996. Company under certain conditions according to the original option vesting schedule and Sublease rental income in the amount of $.4 million was recorded in 1998. Interest paid exercise price. At December 31, 1998, 173,548 shares issued under the 1993 Plan are under all financing and leasing arrangements during 1998, 1997 and 1996 approximated subject to the Company’s repurchase option. interest expense. The 1996 Equity Incentive Plan (the 1996 Plan) effectively succeeded the 1993 Plan. The terms and conditions of the 1996 Plan are substantially consistent with those of the 1993 31 Plan and provide for the granting of options to purchase 4,100,000 shares of Common approximately $3.5 million to recognize the aggregate difference between such deemed Stock, effective March 13, 1997. fair value and the exercise price. The deferred compensation is being amortized over the option vesting period of four years. The 1996 Director Option Plan (the Director Plan) provides that, upon adoption, each then-eligible nonemployee director be granted a nonstatutory option to purchase 20,000 The following table presents the combined activity of the 1993 Plan, 1996 Plan, 1997 Plan shares of Common Stock. Thereafter, each new nonemployee director will be granted a and the Director Plan for the years ended December 31, 1998, 1997 and 1996: nonstatutory option to purchase 30,000 shares of Common Stock upon election to the 1998 1997 1996 Board of Directors. Upon completion of the vesting of each option grant under the Weighted- Weighted- Weighted- Director Plan, each nonemployee director will be granted a new nonstatutory option Average Average Average to purchase 20,000 shares of Common Stock. All options will be issued at the then fair Exercise Exercise Exercise Shares Price Shares Price Shares Price market value of the Common Stock, vest ratably over four years and expire ten years Outstanding after date of grant. A total of 250,000 shares of Common Stock have been reserved for at January 1 5,463,635 $ 12.92 2,762,156 $ 9.19 2,724,261 $ .24 issuance under the Director Plan. Granted 1,897,365 $ 18.77 3,436,163 $ 14.79 2,497,958 $10.23 Exercised (693,618) $ 5.85 (338,903) $ 3.46 (2,398,265) $ .29 Under the Employee Stock Purchase Plan (the Stock Purchase Plan), eligible employees Canceled (554,187) $ 17.35 (395,781) $ 11.49 (61,798) $ 2.42 may purchase Common Stock at a price per share equal to 85% of the lower of the fair Outstanding at market value of the Common Stock at the beginning or end of each offering period. December 31 6,113,195 $ 15.13 5,463,635 $ 12.92 2,762,156 $ 9.19 Participation in the offering is limited to 10% of the employee’s compensation or $25,000 Options exercisable at December 31 2,435,654 $ 11.51 1,821,654 $ 5.91 1,251,982 $ 1.78 in any calendar year. The first offering period began on October 1, 1996. A total of 350,000 shares of Common Stock have been reserved for issuance under the Purchase Plan. At December 31, 1998, subscriptions were outstanding for an estimated 42,000 shares at The weighted-average per share fair value of options granted during 1998, 1997 and 1996 $13.28 per share. was $10.96, $14.79 and $6.01, respectively.

In March 1997, the Board of Directors adopted the Company’s 1997 Equity Incentive Plan The following table presents weighted-average price and life information about significant (the 1997 Plan) covering 2,000,000 shares of Common Stock. The terms and conditions of option groups outstanding at December 31, 1998 for the above plans: the 1997 Plan are substantially consistent with those of the 1993 Plan and the 1996 Plan. Options Outstanding Options Exercisable Weighted- In 1994, the Company granted its chief executive officer an option to purchase 533,364 Average Weighted- Weighted- shares of Common Stock for $0.30 per share. In connection with the grant, the Company Range of Remaining Average Average Exercise Contractual Exercise Exercise agreed to provide a loan of up to $267,000 at 7% per annum upon option exercise. In Prices Number Life (Yrs.) Price Number Price November 1995, the officer exercised this option. The Company made the loan and issued $ 0.10-$12.00 1,024,078 6.64 $ 2.53 893,625 $ 1.86 the Common Stock, subject to a repurchase option that lapses over four years.The loan $12.63-$15.75 1,097,338 8.54 $14.62 405,373 $14.49 and related interest, secured by a pledge of the shares issued, are being forgiven ratably $16.00-$16.75 1,047,853 8.32 $16.53 421,291 $16.53 over 48 months subject to the officer’s continued employment. $17.00-$18.88 1,571,461 8.97 $18.22 348,893 $17.97 $19.00-$21.00 1,019,945 8.55 $19.78 346,256 $19.75 During 1995 and 1996, the Company granted options to purchase 1,580,682 shares of $21.75-$22.38 352,520 9.54 $21.96 20,216 $22.16 Common Stock at exercise prices below the deemed fair value for accounting purposes of 6,113,195 2,435,654 the stock options at the date of grant.The Company recorded an increase to additional paid-in capital and a corresponding charge to deferred compensation in the amount of

32 At December 31, 1998, 7,060,823 shares of Common Stock were reserved for issuance The following table presents weighted-average price and life information about significant upon exercise of stock options and warrants. option groups outstanding at December 31, 1998 for the MBio and MPMx plans:

In May 1997, the Board of Directors of MBio adopted the MBio 1997 Equity Incentive Options Outstanding and Exercisable Plan (the MBio 1997 Plan). The plan as amended allows for the granting of incentive and Weighted- Average Weighted- nonstatutory options to purchase up to 1,500,000 shares of common stock of MBio. Remaining Average Incentive options granted to employees generally vest over a four-year period and may Exercise Contractual Exercise Prices Number Life (Yrs.) Price be exercised sooner subject to stock repurchase provisions that vest over the same period $.05 497,210 9.14 $.05 as the original option grant. Nonstatutory options granted to consultants and other $.90 -$1.10 436,800 9.14 $.95 nonemployees generally vest over the period of service. 934,010 $.47

In November 1997, the Board of Directors of MPMx adopted the MPMx 1997 Equity SFAS No. 123 Disclosures Incentive Plan (the MPMx Plan). In April 1998, the Board of Directors of MInfo adopted the Pursuant to the requirements of SFAS No. 123, the following are the pro forma consoli- MInfo 1998 Equity Incentive Plan (the MInfo Plan). Both plans allow for the granting of dated net income (loss) and consolidated net income (loss) per share for 1998, 1997 and incentive and nonstatutory options to purchase up to 1,200,000 shares of common stock 1996 as if the compensation cost for the stock option and stock purchase plans had been of each subsidiary. Incentive options granted to employees generally vest over a four-year determined based on the fair value at the grant date for grants in 1998, 1997 and 1996 period and may be exercised sooner subject to stock repurchase provisions that vest over (in thousands, except per-share data): the same period as the original option grant. Nonstatutory options granted to consultants and other nonemployees generally vest over the period of service. In connection with the 1998 1997 1996 merger of MPMx and MInfo in January 1999, options issued under the MInfo plan were As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma canceled, and employees were granted options to purchase shares of MPMx. The MPMx Net income (loss) $10,338 $(6,782) $(81,222) $(94,668) $(8,768) $(12,096) Plan was amended to increase the number of shares reserved to 2,200,000. Basic net income (loss) per share 0.34 (0.22) (2.87) (3.34) (0.40) (0.54) Diluted net income Through December 31, 1998, the MBio 1997 Plan, the MPMx 1997 Plan and the MInfo (loss) per share 0.33 (0.22) (2.87) (3.34) (0.40) (0.54) 1998 Plan granted a combined 3,078,539 options to purchase common shares of these subsidiaries at a weighted exercise price of $0.44 per share. During 1998, options for The fair value of stock options and common shares issued pursuant to the Stock Option 2,103,248 shares at a weighted exercise price of $0.43 per share were exercised, and and Stock Purchase Plans at the date of grant were estimated using the Black-Scholes options for 41,281 shares at a weighted exercise price of $0.52 per share were canceled. model with the following weighted-average assumptions: At December 31, 1998, options for 934,010 shares at a weighted-average exercise price of $0.47 per share were outstanding and exercisable, and 1,574,062 shares are subject to Stock Options Stock Purchase Plan the plan’s repurchase option. 1998 1997 1996 1998 1997 1996 Expected life (years) 4.4 4.5 3.7 .5 .5 .5 Interest rate 5.36% 6.12% 5.94% 5.15% 6.14% 6.14% Volatility .7 .7 .7 .7 .7 .7

33 The Company has never declared dividends on any of its capital stock and does not expect Deferred income taxes reflect the net tax effects of temporary differences between the to do so in the foreseeable future. carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets The effects on 1996, 1997 and 1998 pro forma net income (loss) and net income (loss) per as of December 31 are as follows ($ in thousands): share of expensing the estimated fair value of stock options and common shares issued pursuant to the Stock Option and Stock Purchase Plans are not necessarily representative 1998 1997 Net operating loss carryforwards $ 6,556 $ 5,758 of the effects on reported results of operations for future years as the periods presented Research and development tax credit carryforwards 12,720 6,422 include only two, three and four years, respectively, of option grants and share purchases Capitalized research costs 5,875 7,640 under the Company’s plans. Property and other intangible assets 3,310 1,315 Other 1,739 1,255 [10] Income Taxes Total deferred tax assets 30,200 22,390 Valuation allowance (30,200) (22,390) The difference between the Company’s “expected” tax provision (benefit), as computed Net deferred tax assets $ — $ — by applying the U.S. federal corporate tax rate of 34% to income (loss) before minority interest and provision for income taxes, and actual tax is reconciled in the following chart ($ in thousands): The valuation allowance increased by $7.8 million during 1998 due primarily to the increase in research and development tax credits and of net operating loss carryforwards. 1998 1997 1996 The valuation allowance increased by $12.7 million during 1997 due primarily to the Loss before minority interest $(3,841) $(84,632) $(8,768) increase in research and development tax credits and the addition of various deferred tax Expected tax benefit at 34% $(1,306) $(28,774) $(2,981) assets related to the ChemGenics merger offset by the utilization of net operating loss State tax benefit net of federal benefit (231) (5,078) (526) carryforwards. The deferred tax assets acquired from ChemGenics are subject to review Write off of purchased research and development — 33,520 — and possible adjustments by the Internal Revenue Service and may be limited due to the Amortization of goodwill 1,081 958 — change in ownership provisions of the Internal Revenue Code. Change in valuation allowance for deferred tax assets allocated to tax expense (458) (1,019) 3,492 Any subsequently recognized tax benefits relating to the valuation allowance for deferred Stock compensation expense 788 361 tax assets as of December 31, 1998 would be allocated as follows ($ in thousands): Nondeductible expenses 126 32 15 Income tax provision $ — $ — $ — Reported in the statement of operations $27,420 Reported in additional paid-in capital 2,780 At December 31, 1998, the Company has unused net operating loss carryforwards of $30,200 approximately $16.5 million available to reduce federal and state taxable income, and research and development tax credits of approximately $12.7 million available to offset federal and state income taxes, both of which expire through 2013. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has fully reserved these tax benefits.

34 Board of Directors Internet Address Price Range of Common Stock Mark J. Levin www.mlnm.com The Company's Common Stock trades on The NASDAQ Chairman and Chief Executive Officer Millennium Pharmaceuticals, Inc. Stock Market under the symbol MLNM. As of March 15, Auditors Joshua Boger, Ph.D. 1999, there were approximately 394 holders of record President and Chief Executive Officer Ernst & Young LLP of the Company's Common Stock. No cash dividends Vertex Pharmaceuticals Boston, MA have been paid on the Common Stock to date, and the Eugene Cordes, Ph.D. Company currently intends to retain any earnings for the Professor of Pharmacy and Chemistry Legal Counsel University of Michigan, Ann Arbor development of the Company's business and does not Hale and Dorr LLP expect to pay cash dividends for the foreseeable future. A. Grant Heidrich, III Boston, MA General Partner Mayfield Fund The following tables illustrate, for the fiscal periods William W.Helman Common Stock indicated, the range of high and low closing sale prices General Partner Listed on NASDAQ: “MLNM” of Common Stock on The NASDAQ Stock Market. Greylock Limited Partnership

Raju Kucherlapati, Ph.D. Highs and lows based on closing price only Professor and Chairman, College of Molecular Genetics Annual Meeting Albert Einstein College of Medicine June 2, 1999 1998 High Low Eric S. Lander, Ph.D. 10:00 a.m. EST Director of the Whitehead/MIT Hale and Dorr LLP Center for Genome Research 60 State Street 1Q98 Boston, MA 3 3 Jan., Feb., March 22 /8 17 /4

Corporate Officers Transfer Agent & Registrar 2Q98 1 Mark J. Levin April, May, June 19 14 /8 Chairman and Chief Executive Officer Boston EquiServe 150 Royall Street Steven H. Holtzman 3Q98 Canton, MA 02021 11 9 Chief Business Officer July, Aug., Sept. 18 /16 10 /16 Frank D. Lee, Ph.D. SEC Form 10-K 4Q98 Chief Technology Officer 7 3 Oct., Nov., Dec. 25 /8 14 /4 Michael R. Pavia, Ph.D. A copy of the Company’s annual report to the Securities Chief Technology Officer and Exchange Commission on Form 10-K is available without charge upon written request to Investor Relations, Kevin P.Starr Millennium Pharmaceuticals, Inc., 75 Sidney Street, 1997 High Low Chief Financial Officer Cambridge, MA 02139. Robert I.Tepper, M.D. 1Q97 Chief Scientific Officer 1 5 Stockholder Inquiries Jan., Feb., March 21 /2 13 /8 Inquiries related to stock transfer or lost certificates 2Q97 Corporate Headquarters should be directed to the Transfer Agent (781) 575-4176. 1 April, May, June 17 /2 13 640 Memorial Drive General information regarding the Company can be Cambridge, Massachusetts 02139 obtained by contacting Millennium’s Investor Relations department (617) 679-7000 or through our web site 3Q97 1 1 As of July 1, 1999: at www.mlnm.com. Recent news releases can also be July, Aug., Sept. 21 /8 12 /2 75 Sidney Street obtained by contacting Millennium’s automated Cambridge, Massachusetts 02139 fax-on-demand line (800) 758-5804 and entering the 4Q97 1 3

pin number 114562. Oct., Nov., Dec. 21 /4 16 /4 design: Design Inc., Ciavarra Boston, MA Transcending the limits of medicineSM

TM MILLENNIUM®

Millennium Pharmaceuticals, Inc. 640 Memorial Drive Cambridge, Massachusetts 02139 617.679.7000

As of July 1, 1999: 75 Sidney Street Cambridge, Massachusetts 02139

Millennium is a registered trademark of Millennium Pharmaceuticals, Inc. MPMx, Melastatin and Diagnomics are trademarks of Millennium Predictive Medicine, Inc. MBio is a trademark of Millennium BioTherapeutics, Inc. XenoMouse is a trademark of Abgenix, Inc. © 1999 Millennium Pharmaceuticals, Inc. All rights reserved. Printed in USA. MLNM-AR-98