10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005

Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission file number 000-49839

Idenix Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Delaware	45-0478605
(State or Other Jurisdiction of	(IRS Employer Identification No.)
Incorporation or Organization)
60 Hampshire Street
Cambridge, MA	02139
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 995-9800

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

     As of July 31, 2005, the number of shares of the registrant’s common stock, par value $.001 per share, outstanding was 48,233,942 shares.

TABLE OF CONTENTS

	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
SIGNATURES
Exhibit Index
EX- 2005 Stock Incentive Plan
EX-31.1 302 Certification of CEO
EX-31.2 302 Certification of CFO
EX-32.1 906 Certification of CEO
EX-32.2 906 Certification of CFO

	Page
Part I—Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		3
Unaudited Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2005 and 2004		4
Unaudited Condensed Consolidated Statements of Operations for the Six Months ended June 30, 2005 and 2004		5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004		6
Notes to the Unaudited Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		48
Item 4. Controls and Procedures		48
Part II—Other Information
Item 1. Legal Proceedings		49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 3. Defaults upon Senior Securities		49
Item 4. Submission of Matters to a Vote of Security Holders		49
Item 5. Other Information		50
Item 6. Exhibits		50
Signatures
Exhibit Index
Ex-31.1 Sect. 302 Certification of the Chief Executive Officer
Ex-31.2 Sect. 302 Certification of the Chief Financial Officer
Ex-32.1 Sect. 906 Certification of the Chief Executive Officer
Ex-32.2 Sect. 906 Certification of the Chief Financial Officer

2

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

	June 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	46,673		$	42,083
Restricted cash		411			—
Marketable securities		69,897			38,429
Accounts receivable, related party		15,784			16,243
Prepaid expenses and other current assets		2,657			3,231
Total current assets		135,422			99,986
Property and equipment, net		7,512			6,805
Restricted cash		750			750
Marketable securities		12,503			76,754
Income taxes receivable		467			370
Investment		500			500
Other assets		2,541			1,953
Total assets	$	159,695		$	187,118
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,395		$	4,619
Accrued expenses		16,002			15,300
Deferred rent		50			50
Deferred revenue, related party		9,283			9,695
Income taxes payable		294			199
Total current liabilities		28,024			29,863
Long-term obligations		2,724			3,691
Deferred rent, net of current portion		1,430			1,455
Deferred revenue, net of current portion		4,272			4,272
Deferred revenue, related party, net of current portion		32,489			38,779
Total liabilities		68,939			78,060
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 60,000,000 shares authorized at June 30, 2005 and December 31, 2004; 48,167,986 and 47,857,887 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		48			48
Additional paid-in capital		344,930			340,938
Deferred compensation		(1,103	)		(1,987	)
Accumulated other comprehensive (loss) income		(343	)		136
Accumulated deficit		(252,776	)		(230,077	)
Total stockholders’ equity		90,756			109,058
Total liabilities and stockholders’ equity	$	159,695		$	187,118

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

	Three Months Ended June 30,
	2005			2004
Revenues:
License fees and collaborative research and development — related party	$	15,983		$	42,689
Government research grants		99			67
Total revenues		16,082			42,756
Operating expenses (1):
Research and development		23,190			17,684
General and administrative		4,749			3,275
Sales and marketing		2,414			912
Total operating expenses		30,353			21,871
(Loss) income from operations		(14,271	)		20,885
Investment income, net		803			66
Other expense		(2	)		(1	)
(Loss) income before income taxes		(13,470	)		20,950
Income tax benefit		37			—
Net (loss) income	$	(13,433	)	$	20,950
Net (loss) income per common share:
Basic	$	(0.28	)	$	0.57
Diluted	$	(0.28	)	$	0.53
Shares used in calculation of net (loss) income per share common share:
Basic		48,119			36,517
Diluted		48,119			39,225

(1) During the three months ended June 30, 2005 and 2004, stock-based compensation expenses included in operating expenses amounted to approximately:

	Three Months Ended June 30,
	2005		2004
Research and development	$	254	$	311
General and administrative		226		193
Sales and marketing		32		33
	$	512	$	537

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

	Six Months Ended June 30,
	2005			2004
Revenues:
License fees and collaborative research and development — related party	$	30,809		$	59,319
Government research grants		176			132
Total revenues		30,985			59,451
Operating expenses (1):
Research and development		41,653			36,094
General and administrative		9,944			6,737
Sales and marketing		3,833			1,813
Total operating expenses		55,430			44,644
(Loss) income from operations		(24,445	)		14,807
Investment income, net		1,622			144
Other expense		(2	)		(2	)
(Loss) income before income taxes		(22,825	)		14,949
Income tax benefit		126			114
Net (loss) income	$	(22,699	)	$	15,063
Net (loss) income per common share:
Basic	$	(0.47	)	$	0.41
Diluted	$	(0.47	)	$	0.39
Shares used in calculation of net (loss) income per common share:
Basic		48,038			36,495
Diluted		48,038			38,924

(1) During the six months ended June 30, 2005 and 2004, stock-based compensation expenses included in operating expenses amounted to approximately:

	Six Months Ended June 30,
	2005		2004
Research and development	$	517	$	618
General and administrative		387		379
Sales and marketing		63		66
	$	967	$	1,063

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Six Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net (loss) income	$	(22,699	)	$	15,063
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		970			533
Stock-based compensation expense		967			1,063
Gain on sale of marketable securities		(279	)		—
Revenue adjustment for contingently issuable shares		897			2,461
Changes in operating assets and liabilities:
Accounts receivable, related party		458			(4,016	)
Prepaid expenses and other current assets		506			2,178
Income taxes receivable		(97	)		—
Other assets		(593	)		155
Accounts payable		(2,136	)		(3,045	)
Accrued expenses		901			1,552
Deferred rent		(25	)		(25	)
Deferred revenue		—			73
Deferred revenue, related party		(4,851	)		(6,177	)
Income taxes payable		4			(250	)
Long-term obligations		(933	)		(986	)
Net cash (used in) provided by operating activities		(26,910	)		8,579
Cash flows from investing activities:
Purchase of property and equipment		(1,902	)		(2,198	)
Restricted deposits		(411	)		20
Purchases of marketable securities		(13,402	)		—
Proceeds from sales of marketable securities		46,416			—
Net cash provided by (used in) investing activities		30,701			(2,178	)
Cash flows from financing activities:
Proceeds from exercise of common stock options		1,030			74
Deferred offering costs		—			(1,291	)
Repayment of capital lease obligations		—			(2	)
Net cash provided by (used in) financing activities		1,030			(1,219	)
Effect of changes in exchange rates on cash and cash equivalents		(231	)		(56	)
Net increase in cash and cash equivalents		4,590			5,126
Cash and cash equivalents at beginning of period		42,083			43,485
Cash and cash equivalents at end of period	$	46,673		$	48,611
Supplemental disclosure of cash flow information:
Taxes paid		—			178
Supplemental disclosure of noncash investing and financing activities:
Value of shares of common stock contingently issuable or issued to related party	$	2,749		$	10,616

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. DESCRIPTION OF BUSINESS

     Idenix Pharmaceuticals, Inc. (together with its consolidated subsidiaries, the “Company”) is a biopharmaceutical company engaged in the discovery, development and commercialization of drugs for the treatment of human viral and other infectious diseases. The Company’s current focus is on diseases caused by hepatitis B virus (“HBV”), hepatitis C virus (“HCV”) and human immunodeficiency virus (“HIV”).

     The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, the successful development and commercialization of products, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel and collaborative partners, competition, technological and medical risks and management of growth.

     Effective May 8, 2003, Novartis Pharma AG (“Novartis”), a subsidiary of Novartis AG, acquired a majority interest in the Company’s outstanding capital stock and the operations of the Company have been consolidated in the financial statements of Novartis AG since that date. Novartis has the ability to exercise control over the Company’s strategic direction, research and development activities and other material business decisions (Note 4).

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim reporting.

     The consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

     Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. Certain prior year amounts have been reclassified to conform to current year presentation. The interim financial statements, in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods presented.

     The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the fiscal year ending December 31, 2005. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004, which are included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 17, 2005.

Revenue Recognition

     The Company records revenue provided that there is persuasive evidence that an arrangement exists and service has been performed, the price is fixed or determinable and collectibility is reasonably assured. The Company earns revenue under collaborative research and development arrangements and government research grants.

7

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

     Collaborative Research and Development Revenue — Revenue related to collaborative research and development arrangements includes nonrefundable license fees, milestones and research and development payments from the Company’s collaborative partners. Where the Company has continuing performance obligations under the terms of a collaborative arrangement, nonrefundable license fees are recognized as revenue over the specified development period as the Company completes its performance obligations. When the Company’s level of effort is relatively constant over the performance period, the revenue is recognized on a straight-line basis. The determination of the performance period involves judgment on the part of management. If the Company cannot reasonably estimate its costs, then it recognizes the license fee revenue on a straight-line basis over the performance period. Payments received from collaborative partners for research and development efforts by the Company are recognized as revenue over the contract term as the related costs are incurred, net of any amounts due to the collaborative partner for costs incurred during the period. Revenues from milestones related to an arrangement under which the Company has continuing performance obligations, if deemed substantive, are recognized as revenue upon achievement of the milestone. Milestones are considered substantive if all of the following conditions are met: the milestone is nonrefundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone. If any of these conditions is not met, the milestone payment is deferred and recognized as revenue as the Company completes its performance obligations.

     Where the Company has no continuing involvement under a collaborative arrangement, the Company records nonrefundable license fee revenue when the Company has the contractual right to receive the payment, in accordance with the terms of the license agreement, and records milestones upon appropriate notification to the Company of achievement of the milestones by the collaborative partner.

     In March 2003, the Company entered into a final settlement agreement with Sumitomo Pharmaceuticals Co., Ltd. (“Sumitomo”) under which the rights to develop and commercialize telbivudine, the Company’s lead drug candidate for the treatment of hepatitis B, in Japan, China, South Korea and Taiwan previously granted to Sumitomo were returned to the Company. This agreement with Sumitomo became effective upon consummation of the Company’s collaboration with Novartis in May 2003. The Company repurchased these product rights for $5,000,000 and, as a result of this payment, the Company reversed approximately $4,571,000 of revenue previously recognized in original arrangements with Sumitomo with the remaining amount recorded as a reduction of deferred revenue. The Company also has $4,272,000 included in deferred revenue on its consolidated balance sheet at each of December 31, 2004 and June 30, 2005, representing amounts received from Sumitomo that have not been included in revenue to date. The Company must pay an additional $5,000,000 to Sumitomo upon the first commercial sale of telbivudine in Japan. This payment will be recorded first as a reduction of the remaining $4,272,000 of deferred revenue, with the excess recorded as an expense. If and when the Company determines that it will not seek regulatory approval for telbivudine in Japan, the Company would have no further obligations under the settlement agreement with Sumitomo and, therefore, the $4,272,000 of remaining deferred revenue would be recognized as revenue at that time.

     In November 2002, the Emerging Issues Task Force (“EITF”), reached a consensus on EITF No. 00-21, ’’Accounting for Revenue Arrangements with Multiple Deliverables’’ (“EITF No. 00-21”). EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF No. 00-21 apply to revenue arrangements with multiple deliverables entered into or modified on or after July 1, 2003.

8

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

     Government Research Grant Revenue - Government research grants that provide for payments to the Company for work performed are recognized as revenue when the related expense is incurred and the Company has obtained governmental approval to use the grant funds for these expenses.

Marketable Securities

     The Company invests its excess cash balances in short-term and long-term marketable debt securities. The Company classifies all of its marketable securities as available-for-sale. The Company reports available-for-sale investments at fair value as of each balance sheet date and includes any unrealized gains and losses in stockholders’ equity. Realized gains and losses are determined on the specific identification method and are included in investment income. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other than temporary” and marks the investment to market through a charge to the consolidated statement of operations. The Company classifies its marketable securities with remaining maturities of 12 months or less as current marketable securities exclusive of those categorized as cash equivalents. The Company classifies its marketable securities with remaining maturities greater than 12 months as non-current marketable securities, unless it is not expected to hold the investment to maturity.

Stock-Based Compensation

     As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), the Company accounts for its stock-based awards to employees and directors using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Changes to option terms subsequent to award can also give rise to compensation expense. The Company recognizes compensation expense for restricted stock sold and stock options granted to nonemployees in accordance with the requirements of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services” (“EITF 96-18”). EITF 96-18 requires that such equity instruments be recorded at their fair value at the measurement date, which is generally the vesting date of the instruments. Therefore, the measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest.

     In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An amendment of FAS 123” (“SFAS No. 148”). This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based compensation be displayed more prominently and in tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in the interim financial statements. The Company has elected to continue to account for employee stock options under APB No. 25.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment". This Statement replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123 (revised 2004) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. SFAS No. 123 (revised 2004) requires such transactions to be accounted for using a fair value based method that would result in expense being recognized in the Company’s financial statements. The Company will be required to adopt SFAS No. 123 (revised 2004) beginning in the first quarter after December 15, 2005 and has not yet determined the impact of adoption on the consolidated financial position or results of operations.

9

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

     If compensation expense for the Company’s stock-based compensation plan had been determined based on the fair value using the Black-Scholes method at the grant dates as calculated in accordance with SFAS No. 123, the Company’s net (loss) income and net (loss) income per common share would have approximated the pro forma amounts below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(in thousands, except						(in thousands, except
	per share data)						per share data)
Net (loss) income:
Net (loss) income — as reported	$	(13,433	)	$	20,950		$	(22,699	)	$	15,063
Add stock-based employee compensation expense included in reported net (loss) income		512			537			967			1,063
Deduct stock-based employee compensation expense determined under fair value method		(1,765	)		(707	)		(3,120	)		(1,403	)
Net (loss) income — pro forma	$	(14,686	)	$	20,780		$	(24,852	)	$	14,723
Net (loss) income per share:
Basic — as reported	$	(0.28	)	$	0.57		$	(0.47	)	$	0.41
Basic — pro forma	$	(0.31	)	$	0.57		$	(0.52	)	$	0.40
Diluted — as reported	$	(0.28	)	$	0.53		$	(0.47	)	$	0.39
Diluted — pro forma	$	(0.31	)	$	0.53		$	(0.52	)	$	0.38

The assumptions used were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Expected dividend yield		—			—			—			—
Risk-free interest rate		3.83	%		3.60	%		3.88	%		3.14	%
Expected option term (in years)		5			5			5			5
Expected volatility		85	%		—			85	%		—

Basic and Diluted Net (Loss) Income per Common Share

     The Company accounts for and discloses net (loss) income per common share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net (loss) income per common share is computed by dividing the net (loss) income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing the net (loss) income available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Common equivalent shares consist of common shares issuable upon the assumed exercise of outstanding stock options (using the treasury stock method), issuance of contingently issuable shares subject to Novartis subscription rights (see Note 4) and restricted stock awards.

	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
	(in thousands, except					(in thousands, except
	per share data)					per share data)
Basic and diluted net (loss) income per common share:
Net (loss) income	$	(13,433	)	$	20,950	$	(22,699	)	$	15,063
Common Shares:
Weighted average number of common shares outstanding for basic net (loss) income per share:		48,119			36,517		48,038			36,495
Net effect of dilutive stock options		—			1,336		—			1,218
Effect of contingently issuable shares subject to Novartis stock purchase rights		—			1,372		—			1,211
Weighted average number of common shares outstanding for diluted net (loss) income per share:		48,119			39,225		48,038			38,924
Basic net (loss) income per common share	$	(0.28	)	$	0.57	$	(0.47	)	$	0.41
Diluted net (loss) income per common share	$	(0.28	)	$	0.53	$	(0.47	)	$	0.39

10

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

     The following potentially dilutive, common share equivalents were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(in thousands)				(in thousands)
Options		3,781		—		3,781		—
Shares contingently issuable to related party		1,125		—		1,125		—
Restricted stock		53		—		53		—

3. COMPREHENSIVE (LOSS) INCOME

     For the three and six months ended June 30, 2005 and 2004, respectively, comprehensive (loss) income was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(in thousands)						(in thousands)
Net (loss) income	$	(13,433	)	$	20,950		$	(22,699	)	$	15,063
Changes in other comprehensive (loss) income:
Foreign currency translation adjustment		(267	)		(46	)		(431	)		(72	)
Unrealized gain (loss) on investments		132			—			(48	)		—
Total comprehensive (loss) income	$	(13,568	)	$	20,904		$	(23,178	)	$	14,991

4. NOVARTIS RELATIONSHIP

Overview

     In May 2003, the Company entered into a collaboration with Novartis relating to the worldwide development and commercialization of the Company’s drug candidates. Novartis paid the Company a license fee of $75,000,000 for its lead HBV drug candidates, telbivudine and valtorcitabine, has agreed to provide development funding for these HBV drug candidates and will make milestone payments, which could total up to $35,000,000, upon the achievement of certain regulatory approvals, as well as additional milestone payments based upon achievement of predetermined sales levels.

     Novartis also acquired an option to license the Company’s HCV and other drug candidates. If Novartis exercises its option to collaborate on valopicitabine, the Company’s initial HCV drug candidate, it would be required to provide development funding and pay the Company up to $525,000,000 in license fees and regulatory milestone payments, as well as additional milestone payments based upon achievement of predetermined sales levels. In June 2004, the Company received a $25,000,000 milestone payment from Novartis that it recognized as revenue based upon results from a phase I clinical trial of valopicitabine, also known as, NM283. This amount was recognized as revenue when it became payable as the milestone was determined to be substantive.

     The Company is reimbursed by Novartis on a quarterly basis for expenses incurred by Idenix in connection with the development of its HBV product candidates. Pursuant to a cost sharing arrangement with Novartis, the Company is also reimbursed for certain registration expenses and phase IIIb/IV clinical trial costs associated with telbivudine, net of certain qualifying costs incurred by Novartis.

11

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

     Simultaneously with the collaboration described above, Novartis purchased approximately 54% of the Company’s outstanding capital stock from the Company’s then existing stockholders for $255,000,000 in cash, with an additional aggregate amount of up to additional $357,000,000 contingently payable to these stockholders if the Company achieves predetermined development milestones relating to an HCV drug candidate. As of June 30, 2005, Novartis and its affiliate, Novartis BioVentures, own approximately 57% of the Company’s outstanding stock.

     To date, the Company has received from Novartis a $75,000,000 license fee for its HBV product candidates and a $5,000,000 reimbursement for reacquiring product rights from Sumitomo to develop and commercialize telbivudine in certain markets in Asia. The Company has included this reimbursement as part of the up-front license fee for accounting purposes because Novartis required the repurchase of these rights as a condition of entering into the development agreement. The Company has estimated that the performance period during which the development of the HBV product candidates and valopicitabine would occur is a period of approximately six and one-half years following the effective date of the development agreement that the Company entered into with Novartis, or December 2009. The Company is recognizing revenue on the license fee and other up-front payments over this period. If the estimated performance period changes, the Company will adjust the periodic revenue that is being recognized and will record the remaining unrecognized license fee and other up-front payment over the remaining development period during which the Company’s performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results.

Novartis’ Stock Purchase Rights

     Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as is required to maintain its percentage ownership of the Company’s voting stock if the Company issues shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of the Company’s stock in any 24-month period. These purchase rights of Novartis remain in effect until the earlier of: a) the date that Novartis and its affiliates own less than 19.4% of the Company’s voting stock; or b) the date that Novartis becomes obligated to make the additional contingent payments of $357,000,000 to holders of the Company’s stock who sold shares to Novartis on May 8, 2003.

     Additionally, if the Company issues any shares of its capital stock, other than in certain situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of the Company’s voting stock for the same consideration per share paid by others acquiring the Company’s stock. Subject to certain exceptions, upon the grant of options and stock awards under stock incentive plans, with the exception of the 1998 Equity Incentive Plan, the fair value of the Company’s common stock that would be issuable to Novartis, less the exercise price, if any, payable by the option or award holder, will be recorded as a reduction of the upfront license fee associated with the Novartis collaboration. The amount will be attributed proportionately between cumulative revenue recognized through that date and the remaining amount of deferred revenue. These amounts will be adjusted through the date of option exercise or, in the case of stock awards, full vesting based upon changes in the value of the Company’s common stock and in Novartis’ percentage ownership. These adjustments will also be attributed proportionately between cumulative revenue recognized through the measurement date and the remaining deferred revenue.

     In connection with the closing of the Company’s initial public offering in July 2004, Novartis terminated a common stock subscription right with respect to 1,399,106 shares of common stock issuable by the Company as a result of the exercise of stock options granted after May 8, 2003 pursuant to the 1998 Equity Incentive Plan. In exchange for Novartis’ termination of such right, the Company issued 1,100,000 shares of common stock to Novartis for a purchase price of $0.001 per share. The fair value of these shares was determined to be $15,400,000 at the time of issuance. As a result of the issuance of these shares, Novartis’ rights to purchase additional shares as a result of future option

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

grants and stock issuances under the 1998 Equity Incentive Plan are terminated, and no additional adjustments to revenue and deferred revenue will be required. Prior to the termination of the stock subscription rights under the 1998 Equity Incentive Plan, as the Company granted options that were subject to this stock subscription right, the fair value of the Company’s common stock that would be issuable to Novartis, less par value, was recorded as a adjustment of the license fee and payments received from Novartis. The Company is still subject to potential revenue adjustments relating to future grants of options and stock awards under other stock incentive plans.

     As of June 30, 2005, this Novartis stock subscription right has reduced the license fee by a total of $18,184,000 and has been reclassified to additional paid-in capital. Of this amount, $14,625,000 has been recorded as a reduction of deferred revenue as of June 30, 2005 with the remaining amount of $3,559,000 recorded as a reduction of revenue. The Company recorded $708,000 and $838,000 of this reduction of revenue for each of the three months ended June 30, 2005 and 2004, respectively, and $897,000 and $2,461,000 of this reduction of revenue for the six months ended June 30, 2005 and 2004, respectively.

5. MARKETABLE SECURITIES

     The Company invests its excess cash with large U.S. based financial institutions and considers its investment portfolio as marketable securities available-for-sale as defined in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, these investments are recorded at fair value, which is based on quoted market prices. The fair values of available-for-sale investments by type of security, contractual maturity and classification in the balance sheets as of June 30, 2005 and December 31, 2004 are as follows:

	June 30, 2005
			Gross		Gross
	Amortized		unrealized		unrealized			Market
	cost		gains		losses			value
	(in thousands)
Type of security:
Money market funds	$	6,636	$	—	$	—		$	6,636
Corporate debt securities		39,796		—		(272	)		39,524
U.S. Treasury securities and obligations of U.S. government agencies		21,511		—		(122	)		21,389
Taxable auction rate securities		27,478		3		—			27,481
Accrued interest		713		—		—			713
	$	96,134	$	3	$	(394	)	$	95,743

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

	June 30,		December 31,
	2005		2004
	(in thousands)
Contractual maturity:
Maturing in one year or less	$	83,240	$	59,505
Maturing after one year through two years		—		40,679
Maturing after two years through ten years		—		15,500
Maturing after ten years		12,503		20,575
	$	95,743	$	136,259

	December 31, 2004
			Gross		Gross
	Amortized		unrealized		unrealized			Market
	cost		gains		losses			value
	(in thousands)
Type of security:
Money market funds	$	13,040	$	—	$	—		$	13,040
Corporate debt securities		40,102		26		(232	)		39,896
U.S. Treasury securities and obligations of U.S. government agencies		34,252		—		(137	)		34,115
Taxable auction rate securities		48,570		—		—			48,570
Accrued interest		638		—		—			638
	$	136,602	$	26	$	(369	)	$	136,259

     Included in the table above are taxable auction rate securities, which typically reset to current interest rates every 28 to 45 days, but are included in the table above based on their stated maturities. All securities with contractual maturities greater than two years are taxable auction rate securities.

	June 30,		December 31,
	2005		2004
	(in thousands)
Classification in balance sheets:
Cash equivalents	$	13,343	$	21,076
Marketable securities		69,897		38,429
Marketable securities, non-current		12,503		76,754
	$	95,743	$	136,259

     The cash equivalent amounts of $13,343,000 and $21,076,000 are included as part of cash and cash equivalents on the Company’s consolidated balance sheet at June 30, 2005 and December 31, 2004, respectively.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

6. ACCRUED EXPENSES

     Accrued expenses consist of the following:

	June 30,		December 31,
	2005		2004
	(in thousands)
Research and development contract costs	$	9,364	$	8,064
Payroll and employee benefits		2,295		2,649
Professional fees		2,024		2,412
License fees		1,000		1,000
Unvested restricted stock		158		256
Other		1,161		919
	$	16,002	$	15,300

7. LEGAL CONTINGENCIES

Hepatitis C Drug Candidates

     In May 2004, the Company and, in an individual capacity, its Chief Executive Officer (“CEO”), entered into a settlement agreement with the University of Alabama at Birmingham (“UAB”) and its affiliate, the UAB Research Foundation (“UABRF”), to resolve a dispute among these parties. In March 2004, the Company and, in an individual capacity, its CEO, filed a lawsuit against UABRF in the United States District Court, District of Massachusetts, seeking declaratory judgment regarding the Company’s ownership of inventions and discoveries made during the period from November 1999 to November 200 (“Leave Period”) by the CEO and the Company’s ownership of patents and patent applications related to such inventions and discoveries. During the Leave Period, while acting in the capacity of the Company’s Chief Scientific Officer, the CEO was on sabbatical from November 1999 to November 2000 (“Sabbatical Period”) and then unpaid leave prior to resigning in November 2002 from his position as a professor at UAB.

     As a part of the settlement agreement, UAB and UABRF agreed that neither UAB or UABRF has any right, title or ownership interest in the inventions and discoveries made or reduced to practice during the Leave Period or the related patents and patent applications. In exchange, the Company made a $2,000,000 payment to UABRF in May 2004, dismissed the pending litigation and agreed to make certain future payments to UABRF. These future payments consist of (i) a $1,000,000 payment upon the receipt of regulatory approval to market and sell in the U.S. a product which relates to inventions and discoveries made by the CEO during the Sabbatical Period, and (ii) payments in an amount equal to 0.5% of worldwide net sales of such products with a minimum sales based payment to equal $12,000,000. The sales based payments (including the minimum amount) are contingent upon the commercial launch of products that relate to inventions and discoveries made by the CEO during the Sabbatical Period. The minimum amount is due within seven years after the later of the commercial launch in the United States or any of the United Kingdom, France, Germany, Italy or Spain, of a product that (i) has within its approved product label a use for the treatment of hepatitis C infection, and (ii) relates to inventions and discoveries made by the CEO during the Sabbatical Period, if sales based payments for such product have not then exceeded $12,000,000. At that time, the Company will be obligated to pay to UABRF the difference between the sales based payments then paid to date for such product and $12,000,000.

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IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

Hepatitis B Drug Candidates

     In addition to the Leave Period matter noted above, the Company was notified in January 2004, February 2005 and June 2005, that UABRF believes that patent applications which the Company has licensed from UABRF can be amended to obtain broad patent claims that would generally cover the method of using telbivudine to treat HBV. The Company disagrees with UABRF’s assertion. If UABRF pursues such patent claims, they could assert that the obligations of the Company arising under the license agreement with respect to licensed technology (including the amount and manner of payments due) are applicable to the Company’s intended use of telbivudine to treat hepatitis B. The agreement requires the Company to make, for each significant disease indication for which licensed technology is used, payments aggregating $1,300,000 if certain regulatory milestones are met. Additionally, if commercialization is achieved for a licensed product, the Company will be required to pay a royalty with respect to annual net sales of licensed products by the Company or an affiliate of the Company at the rate of 6% for net sales up to $50,000,000 and at the rate of 3% for net sales in excess of $50,000,000. If the Company enters into a sublicense arrangement with an entity other than one which controls at least 50% of the Company’s capital stock, the Company would be required to remit to UABRF 30% of all royalties received by the Company on sales of the licensed product by the sublicensee. The Company is also required to pay to UABRF 20% of all license fees, milestone payments and other cash consideration the Company receives from the sublicensee with respect to the licensed products. If UABRF’s position were to be upheld, and telbivudine was found to be covered by the agreement, the Company could be required to pay UABRF $15,000,000 related to the upfront payment received from Novartis. In addition, the Company could have to pay future royalties to UABRF. The Company does not believe that it is probable that UABRF’s position will be upheld.

Indemnification

     The Company has agreed to indemnify Novartis and its affiliates against losses suffered as a result of any breach of representations and warranties in the development agreement. Under the development agreement and the stock purchase agreement, the Company made numerous representations and warranties to Novartis regarding its hepatitis B and C drug candidates, including representations regarding the Company’s ownership of the inventions and discoveries described above. If one or more of the representations or warranties were not true at the time they were made to Novartis, the Company would be in breach of one or both of these agreements. In the event of a breach by the Company, Novartis has the right to seek indemnification from the Company and, under certain circumstances, the Company and its stockholders who sold shares to Novartis, which include many of its directors and officers, for damages suffered by Novartis as a result of such breach. While it is possible that the Company may be required to make payments pursuant to the indemnification obligations it has under the development agreement, the Company cannot reasonably estimate the amount of such payments or the likelihood that such payments will be required.

8. RELATED PARTY TRANSACTIONS

     Prior to June 7, 2005, the Company had on its board of directors a partner in the law firm of Wilmer Cutler Pickering Hale and Dorr LLP. The Company retains Wilmer Cutler Pickering Hale and Dorr LLP as its corporate counsel. The Company incurred legal expenses of approximately $40,000 and $120,000 for services rendered by Wilmer Cutler Pickering Hale and Dorr LLP during the three months and six months ended June 30, 2005, respectively. The Company incurred legal expenses of $235,000 for services by Wilmer Cutler Pickering Hale and Dorr LLP during the period from May 31, 2004 through June 30, 2004 in which the Company’s board member was a partner in the firm.

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IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

9. EQUITY INCENTIVE PLANS

     In May 2005, the Company’s Board of Directors adopted, and in June 2005, the Company’s stockholders approved, the 2005 Stock Incentive Plan (“2005 Plan”). The 2005 Plan allows for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, performance share awards and restricted stock awards (“Awards”). The 2005 Plan provides for the authorization of Awards covering an aggregate of 2,200,000 shares of common stock plus 800,000 shares previously authorized for issuance under the 2004 Stock Incentive Plan, of which 792,000 shares are subject to outstanding options.

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

Forward-Looking Information and Factors That May Affect Future Results

     This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any express or implied statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs and expenses, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipate,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projections,” “will,” “would” and similar expressions or the negative thereof, other variations thereof or comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements reflect our current views with respect to future events. We cannot guarantee that we actually will achieve the plans, intentions, or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the express or implied forward-looking statements we make. These important factors include our “critical accounting estimates” and the risk factors set forth below under the caption “Factors That May Affect Future Results.” Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

Overview

     Idenix is a biopharmaceutical company engaged in the discovery, development and commercialization of drugs for the treatment of human viral and other infectious diseases. Our current focus is on the treatment of infections caused by hepatitis B virus, or HBV, hepatitis C virus, or HCV and human immunodeficiency virus, or HIV. Each of our current product candidates is a small molecule antiviral compound, which is intended to have significant competitive advantages in one or more areas, such as safety, efficacy, resistance profile or convenience of dosing compared to currently approved treatments.

     The following table summarizes key information regarding our pipeline of product candidates:

	Drug		Next
	Candidates/		Development
Indication	Programs	Description	Stage
HBV	telbivudine (L-nucleoside)	Telbivudine achieved the primary endpoint in the phase III registration trial, referred to as the GLOBE study, in July 2005. Submission to the United States Food and Drug Administration, or FDA, of a new drug application, or NDA, based on one-year data from this phase III registration trial is anticipated in late 2005. Additionally, marketing trials, which are intended to provide certain additional product data at the commercial launch of telbivudine, are ongoing.	NDA
HBV	valtorcitabine (L-nucleoside)	Being developed for use in fixed dose combination with telbivudine for treatment of hepatitis B patients who require more intensive antiviral therapy than achieved by single agent therapy. A phase IIb clinical trial of the combination of valtorcitabine and telbivudine is ongoing.	phase III
HCV	valopicitabine (NM283) (Nucleoside analog)	Being developed as a potentially more effective alternative to ribavirin in interferon-based therapy for patients that have failed prior therapy and for patients that have not been treated for chronic HCV infection who we refer to as treatment naive patients.	phase III
		Treatment Naive
		A phase IIa clinical trial of the combination of valopicitabine and pegylated interferon in treatment naive patients is ongoing. Preliminary data demonstrate

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	Drug		Next
	Candidates/		Development
Indication	Programs	Description	Stage
		a mean reduction from baseline levels of hepatitis C virus in patients’ blood serum of 4.5 log10, or more than a 99.99% reduction in viral load, at week 24 in nine patients receiving the combination therapy.
		A phase IIb clinical trial of the combination of valopicitabine and pegylated interferon in treatment naive patients has recently been initiated. We anticipate completing enrollment of this trial by the end of 2005.
		Prior Treatment Failure
		A phase IIb clinical trial of the combination of valopicitabine and pegylated interferon in patients that have previously failed other therapy is also ongoing. We anticipate reporting 12-week interim results from this trial in the fall of 2005.
HCV	NV-08 (Nucleoside analogs)	Preclinical evaluation of candidate compounds from this program are in progress. From this program, which consists of structurally different chemical classes than valopicitabine, we are seeking a candidate that may be developed for use in combination with valopicitabine.	phase I*
HIV	NV-05 (Non-nucleoside reverse transcriptase inhibitors or NNRTIs)	Lead compounds from two novel series are being evaluated in preclinical studies. We expect to file an IND for the most promising candidate among these lead compounds in 2006.	phase I*

* Phase I clinical trial incorporates or is expected to incorporate certain of the objectives of a phase II clinical trial.

     In May 2003, we entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates. Novartis paid us a license fee of $75 million for our lead HBV product candidates, telbivudine and valtorcitabine, has agreed to provide development funding for these HBV product candidates and will make milestone payments, which could total up to $35 million upon the achievement of specific regulatory approvals, as well as additional milestone payments based upon achievement of predetermined sales levels.

     Novartis also acquired an option to license our HCV and other product candidates. If Novartis exercises its option to collaborate with us on valopicitabine, also known as NM283, our initial HCV product candidate, it would be required to provide development funding and pay us up to $525 million in license fees and regulatory milestone payments, as well as additional milestone payments based upon achievement of predetermined sales levels. We will co-promote or co-market with Novartis in the United States, the United Kingdom, France, Germany, Italy and Spain all products Novartis licenses from us that are successfully developed. Novartis has the exclusive right to promote and market such products in the rest of the world. In June 2004, we received a $25 million milestone payment from Novartis based upon the results from our phase I clinical trial of valopicitabine.

     In addition to the collaboration described above, Novartis purchased approximately 54% of our outstanding capital stock in May 2003 from our then existing stockholders for $255 million in cash, with an additional aggregate amount of up to $357 million contingently payable to these stockholders if we achieve predetermined development milestones relating to an HCV drug candidate. As of June 30, 2005, Novartis and its affiliate, Novartis BioVentures, collectively owned approximately 57% of our outstanding common stock.

     Novartis has the right to purchase from us that number of shares of our common stock as is required to enable Novartis and its affiliates, other than Novartis BioVentures, to maintain Novartis’ percentage ownership in our company. Novartis also has a contractual right to exercise control over corporate actions that may not require stockholder approval as long as it holds at least 19.4% of our voting stock.

19

     All of our product candidates are currently in preclinical or clinical development. To commercialize our product candidates, we will be required to successfully complete preclinical studies and clinical trials to obtain required regulatory approvals. We do not expect to submit an NDA to the FDA for a product candidate we are developing prior to late 2005. Any delay in obtaining or failure to obtain required approvals will materially adversely affect our ability to generate revenues from commercial sales relating to our product candidates. Accordingly, we expect our sources of funding for the next several years to include the reimbursement of expenses we may incur in connection with the development of licensed product candidates, license fees relating to valopicitabine and other product candidates we may successfully develop and license and milestone payments under existing and future collaborative arrangements. We may also need to seek additional financing to fund our future operations.

     We have incurred significant losses since our inception in May 1998 and expect such losses to continue in the foreseeable future. Historically, we have generated losses principally from costs associated with research and development expenses, including clinical trial costs, and general and administrative activities. As a result of planned expenditures for future discovery, development and commercialization activities and the expansion of our sales, operational and administrative infrastructure, we expect to incur additional operating losses for the foreseeable future.

     Our research and development expenses consist primarily of salaries and payroll-related expenses for research and development personnel, including stock-based compensation, fees paid to clinical research organizations and other professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with animal studies, costs of material used in research and development, costs of contract manufacturing consultants, occupancy costs associated with the use of our research facilities and equipment, consulting and license fees paid to third parties, and depreciation of property and equipment related to research and development. The majority of our research and development spending is incurred on clinical, preclinical and manufacturing activity with third-party contractors relating to the development of our HBV and HCV drug candidates. We expense internal and external research and development costs as incurred. We expect our research and development expenses to increase as we continue to engage in research activities, further develop our potential product candidates and advance our clinical trials.

     Pursuant to our development agreement with Novartis, after it licenses a product candidate, Novartis is obligated to fund development expenses that we incur in accordance with development plans agreed upon by us and Novartis. The option we have granted to Novartis with respect to its right to license our product candidates generally requires that Novartis exercise the option for each such product candidate prior to the commencement of phase III clinical trials. The expenses associated with phase III clinical trials generally are the most costly component in the development of a successful new drug.

Results of Operations

Comparison of Three Months Ended June 30, 2005 and 2004

     Revenues

     Total revenues were $16.1 million for the three months ended June 30, 2005 as compared with $42.8 million for the three months ended June 30, 2004.

        Total revenues for the three months ended June 30, 2005 were primarily comprised of $16.0 million in related party revenue from Novartis consisting of $1.7 million in license fee revenue, net of a $0.7 million reduction due to Novartis stock subscription rights, and $14.3 million for reimbursement of research and development expenses, net of a $0.5 million reduction for expenses incurred by Novartis for cost sharing arrangements for certain registration expenses and phase IIIb clinical trials associated with telbivudine.

20

     Total revenues for the three months ended June 30, 2004 were primarily comprised of $42.7 million in related party revenue from Novartis, consisting of $2.7 million in license fee revenue, net of a $0.8 million reduction due to Novartis stock subscription rights, $25.0 million in milestone revenue associated with achievement of certain milestones for valopicitabine, our lead HCV product candidate, and $15.0 million for reimbursement of research and development expenses.

     The decrease in revenues of $26.7 million for the three months ended June 30, 2005 in comparison with the prior reporting period was primarily due to the $25.0 million milestone payment received in June 2004 from Novartis associated with valopicitabine.

     Research and Development Expenses

     Research and development expenses were $23.2 million for the three months ended June 30, 2005 as compared with $17.7 million for the three months ended June 30, 2004. The increase of $5.5 million was primarily due to an increase of $4.4 million in expenses for third-party contractors, primarily for costs associated with clinical trials of telbivudine and valopicitabine and purchases of material associated with clinical trials of valopicitabine and an increase of $0.7 million in salary and other payroll-related expenses as we expand our research and development activities.

     We expect our research and development expenses to increase in future periods as we continue to devote substantial resources to these activities and we engage in a greater number of later stage clinical trials.

     General and Administrative Expenses

     General and administrative expenses were $4.7 million for the three months ended June 30, 2005 as compared with $3.3 million for the three months ended June 30, 2004. The increase of $1.4 million was primarily due to an increase in salary and payroll-related expenses and an increase in costs for directors’ and officers’ liability insurance coverage associated with being a public company.

     We expect that our general and administrative expenses will increase in the future as we expand our finance and accounting staff, engage in increased investor relations activities, maintain and enforce our patents and implement new computer systems.

     Sales and Marketing Expenses

     Sales and marketing expenses were $2.4 million for the three months ended June 30, 2005 as compared with $0.9 million for the three months ended June 30, 2004. The increase of $1.5 million was primarily due to an increase in salary and payroll-related expenses and an increase in consulting expenses as we expand our marketing activities in anticipation of the expected commercial launch of telbivudine.

     We expect that sales and marketing expenses will increase significantly in the future as we increase our marketing activities, build a commercial infrastructure, hire additional marketing staff and recruit a specialized sales force in the U.S. and Europe in anticipation of our expected submission to the FDA of an NDA for telbivudine in late 2005 and other product candidates, if any, which we may successfully develop and commercialize in the future.

     Investment Income, Net

     Net investment income was $0.8 million for the three months ended June 30, 2005 as compared with $0.1 million for the three months ended June 30, 2004. The increase of $0.7 million was the result of higher cash and marketable securities balances held during the three months ended June 30, 2005 due to the receipt of net proceeds of $132.6 million from the initial public offering and concurrent private placement of our common stock to Novartis in July 2004.

     Income Taxes

21

     Income tax benefit was approximately $37,000 for the three months ended June 30, 2005 as compared with no income tax expense or benefit for the three months ended June 30, 2004. The income tax benefit for the three months ended June 30, 2005 was due to amounts our French subsidiary has received or is expected to receive for certain research and development credits. Our income tax expense generally consists of tax expenses incurred by our U.S., French and Dutch subsidiaries. Our U.S. and French subsidiaries performed services for us and were reimbursed for these costs, plus a profit margin.

Comparison of Six Months Ended June 30, 2005 and 2004

     Revenues

     Total revenues were $31.0 million for the six months ended June 30, 2005 as compared with $59.5 million for the six months ended June 30, 2004.

     Total revenues for the six months ended June 30, 2005 were primarily comprised of $30.8 million in related party revenue from Novartis consisting of $4.0 million in license fee revenue, net of a $0.9 million reduction due to Novartis stock subscription rights, and $26.8 million for reimbursement of research and development expenses, net of a $0.5 million reduction for expenses incurred by Novartis for cost sharing arrangements for certain registration expenses and phase IIIb clinical trials associated with telbivudine.

     Total revenues for the six months ended June 30, 2004 were primarily comprised of $59.3 million in related party revenue from Novartis, consisting of $3.7 million in license fee revenue, net of a $2.5 million reduction due to Novartis stock subscription rights, $25.0 million in milestone revenue associated with achievement of certain milestones for valopicitabine, and $30.6 million for reimbursement of research and development expenses.

     The decrease in revenues of $28.5 million for the six months ended June 30, 2005 in comparison with the prior reporting period was primarily due to the $25.0 million milestone payment received in June 2004 from Novartis on valopicitabine.

     Research and Development Expenses

     Research and development expenses were $41.7 million for the six months ended June 30, 2005 as compared with $36.1 million for the six months ended June 30, 2004. The increase of $5.6 million was primarily due to an increase of $8.4 million in expenses for third-party contractors, associated with clinical trials of telbivudine and valopicitabine and material purchases associated with clinical trials of valopicitabine, and an increase of $1.5 million in salary and other payroll-related expenses as we expand our research and development activities. These increases were offset by a decrease of $5.1 million in material purchases as the manufacturing of telbivudine being used in existing clinical trials occurred in 2004.

     General and Administrative Expenses

     General and administrative expenses were $9.9 million for the six months ended June 30, 2005 as compared with $6.7 million for the six months ended June 30, 2004. The increase of $3.2 million was primarily due to an increase in salary and payroll-related expenses, an increase in costs for directors’ and officers’ liability insurance coverage associated with being a public company and an increase in professional fees in support of our growing operations.

     Sales and Marketing Expenses

     Sales and marketing expenses were $3.8 million for the six months ended June 30, 2005 as compared with $1.8 million for the six months ended June 30, 2004. The increase of $2.0 million was primarily due to an increase salary and payroll-related expenses and in consulting expenses attributable to marketing activities in anticipation of the expected commercial launch of telbivudine.

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     Investment Income, Net

     Net investment income was $1.6 million for the six months ended June 30, 2005 as compared with $0.1 million for the six months ended June 30, 2004. The increase of $1.5 million was the result of higher cash and net marketable securities balances held during the six months ended June 30, 2005 due to the receipt of proceeds from our initial public offering and concurrent private placement of our common stock to Novartis completed in July 2004.

     Income Taxes

     Income tax benefit was approximately $0.1 million for the six months ended June 30, 2005 as compared with $0.1 million for the six months ended June 30, 2004. The income tax benefit for the six months ended June 30, 2005 and 2004, respectively, was due to amounts our French subsidiary has received or is expected to receive for certain research and development credits. Our income tax expense generally consists of tax expenses incurred by our U.S., French and Dutch subsidiaries. Our U.S. and French subsidiaries performed services for us and were reimbursed for these costs, plus a profit margin.

Liquidity and Capital Resources

     Since our inception in 1998, we have financed our operations with proceeds obtained in connection with license and development arrangements and equity financings. The proceeds include license, milestone, and other payments from Novartis, reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the development of our HBV product candidates, net proceeds from Sumitomo for reimbursement of development costs, net proceeds from private placements of our convertible preferred stock, net proceeds from an initial public offering and concurrent private placement of our common stock and proceeds from the exercise of stock options.

     In July 2004, we completed an initial public offering and concurrent private placement in which we issued and sold 4,600,000 shares of common stock in the public offering and 5,400,000 shares of common stock to Novartis in the private placement. We received approximately $132.6 million in net proceeds from these offerings, after deducting underwriting discounts and offering expenses.

     We had $46.7 million and $42.1 million in cash and cash equivalents as of June 30, 2005 and December 31, 2004, respectively. We also invest our excess cash balances in short-term and long-term marketable debt securities. All of our marketable securities are classified as available for sale. Our investments have an effective maturity not greater than 18 months and investments with maturities greater than 12 months are classified as non-current marketable securities. We had $69.9 million and $38.4 million in current marketable securities as of June 30, 2005 and December 31, 2004, respectively. We had $12.5 million and $76.8 million in non-current marketable securities as of June 30, 2005 and December 31, 2004, respectively.

     Net cash used in operating activities was $26.9 million for the six months ended June 30, 2005 compared to net cash provided by operating activities of $8.6 million for the six months ended June 30, 2004. The net cash used in operating activities for the six months ended June 30, 2005 was primarily due to the net loss for the period adjusted for a decrease in deferred revenue due to the amortization of our license fee received from Novartis in 2003. The net cash provided by operating activities for the six months ended June 30, 2004 was primarily due to net income for the period, which included the recognition of a $25.0 million milestone payment received from Novartis during the second quarter as well as an increase in accrued expenses, receipt of an allowance for leasehold improvements and stock-based compensation. These increases were offset by decreases to accounts payable and deferred revenue and an increase in accounts receivable due to greater amounts of research and development expenses being reimbursed by Novartis.

     Net cash provided by investing activities was $30.7 million for the six months ended June 30, 2005 compared to net cash used in investing activities of $2.2 million for the six months ended June 30, 2004. The net cash provided by investing activities for the six months ended June 30, 2005 was primarily due to net proceeds from net sales of our marketable securities to fund operations. This cash increase was

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offset by capital expenditures and restriction of certain cash deposits relating to the issuance of a letter of credit in connection with a new lease we entered into in June 2005 for additional office facilities in Cambridge, Massachusetts. The net cash used in investing activities for the six months ended June 30, 2004 was primarily due to capital expenditures on leasehold improvements for our corporate headquarters in Cambridge, Massachusetts.

          Net cash provided by financing activities was $1.0 million for the six months ended June 30, 2005 compared to net cash used in financing activities of $1.2 million for the six months ended June 30, 2004. The net cash provided by financing activities for the six months ended June 30, 2005 was due to proceeds from the exercise of stock options. The net cash used in financing activities for the six months ended June 30, 2004 was primarily for professional fees associated with our initial public offering consummated in July 2004.

          Set forth below is a description of our contractual obligations as of June 30, 2005:

	Payments Due by Period
					One to
Contractual			Less Than		Three		Four to		After Five
Obligations	Total		One Year		Years		Five Years		Years
	(in thousands)
Operating leases	$	21,417	$	2,179	$	5,302	$	5,381	$	8,555
Consulting, employment and other agreements		11,565		7,357		3,208		1,000		—
Total contractual obligations	$	32,982	$	9,536	$	8,510	$	6,381	$	8,555

          In April 2005, we entered into a lease agreement for office and laboratory space in Montpellier, France. The lease term is 12 years expiring in April 2017. The lease agreement also includes an option entitling us to purchase the building in which the leased space is located at any time after April 16, 2011. The purchase option extends until the expiration of the lease term.

     In June 2005, we entered into a lease agreement for additional office space in Cambridge, Massachusetts. The lease term is for a period of 54 months commencing on the earlier of: (i) 30 days after we begin our use of the total leased premises; or (ii) September 21, 2005. The lease agreement also provides us with an option, exercisable not later than nine months prior to the expiration of the initial term, to extend the term of the lease for one additional 48-month period and with rights of first offer with respect to certain expansion space on two of the floors that we will occupy. In connection with this operating lease commitment, a commercial bank issued a letter of credit in May 2005 for $0.4 million collateralized by cash we have on deposit with that bank. The letter of credit expires in May 2006.

     We have certain potential milestone payment obligations under the exclusive license agreement that we entered into with the University of Alabama Research Foundation, or UABRF, in June 1998 and subsequently amended in June 1998 and July 1999, that we refer to as the UAB license agreement, our settlement agreement with Sumitomo, and our settlement agreement with UABRF entered into in connection with the resolution of matters relating to certain of our hepatitis C product candidates. The license agreement with UABRF provides for aggregate milestone payments of $1.3 million for each disease indication for which the licensed technology is used. Of this aggregate amount, $0.3 million is payable upon submission of an investigational new drug application or IND, for a product candidate that is covered by claims in patents or patent applications licensed from UABRF and $1.0 million is payable upon approval of an NDA for a product candidate that is covered by claims in patents or patent applications licensed from UABRF. We do not believe that any of the product candidates we are currently developing or those which we currently expect to develop will trigger payments or otherwise result in future obligations under the UAB license agreement. However, if the licensors disagree, they may assert claims to these milestone payments and to additional amounts. The settlement agreement with UABRF, which we entered into in connection with the resolution of matters relating to certain of our hepatitis C product candidates, provides for a milestone payment of $1 million to UABRF upon receipt of regulatory approval in the U.S. to market and sell certain hepatitis C products invented or discovered by our Chief Executive Officer during the period from November 1, 1999 to November 1, 2000. Such hepatitis C product candidates include valtorcitabine.

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     We believe that our current cash and cash equivalents and marketable securities together with funding we expect to receive from Novartis relating to the development of our HBV product candidates, will be sufficient to satisfy our cash needs until at least mid 2006. At any time, it is possible that we may seek additional financing. We may seek such financing through a combination of public or private financing, collaborative relationships and other arrangements. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to obtain financing when needed may harm our business and operating results.

Off-Balance Sheet Arrangements

     We currently have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial position and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and the fair value of stock related to stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K. No changes to those critical accounting policies have been effected during the three months ended June 30, 2005.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. This Statement replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123 (revised 2004) eliminates accounting for share-based compensation transactions using the intrinsic method currently used by us. SFAS No. 123 (revised 2004) requires such transactions to be accounted for using a fair value based method that would result in expense being recognized in our financial statements. We will be required to adopt SFAS No. 123 (revised 2004) beginning in the first quarter after December 15, 2005 and have not yet determined the impact of adoption on the consolidated financial position or results of operations.

Factors that May Affect Future Results

Factors Related to Our Business

We have a limited operating history and have incurred a cumulative loss since inception. If we do not generate significant revenues, we will not be profitable.

     We have incurred significant losses since our inception in May 1998. We have not generated any revenue from the sale of products to date. We expect our annual operating losses to increase over the next several years as we expand our drug discovery, development and commercialization efforts. To become profitable, we must successfully develop and obtain regulatory approval for our product candidates and effectively manufacture, market and sell any product products we develop. Accordingly, we may never generate significant revenues and, even if we do generate significant revenues, we may never achieve profitability. Our failure to become and remain profitable could depress the

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market price of our common stock and could impair our ability to raise capital, expand our business or continue our operations.

We will need additional capital to fund our operations, including product candidate development, manufacturing and commercialization. If we do not have or cannot raise additional capital when needed, we will be unable to develop and commercialize our product candidates successfully.

     We believe that the net proceeds from our initial public offering and concurrent private placement to Novartis which we received in July 2004, together with our current cash and cash equivalents, marketable securities and development expense funding by Novartis for our HBV drug candidates, will be sufficient to satisfy our anticipated cash needs at least until mid 2006. However, we may need or choose to seek additional funding within this period of time. Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review, manufacturing and sales and marketing efforts.

     Our need for additional funding will depend in large part on whether:

• with respect to our lead HBV product candidates, Novartis continues to reimburse us for development expenses and we achieve milestones relating to the development and regulatory approval of these product candidates and receive related milestone payments from Novartis; and

• with respect to our HCV and other product candidates, Novartis exercises its option to license these product candidates and we receive related license fees, milestone payments and development expense reimbursement payments from Novartis.

     In addition, although Novartis has agreed to pay for certain development expenses incurred under development plans it approves for our lead HBV product candidates and any other product candidates Novartis licenses from us, Novartis has the right to terminate its license and the related funding obligations with respect to any product candidate by providing us with six months’ written notice.

     Our future capital needs will also depend more generally on many other factors, including:

• the costs of launching telebivudine and any of our other product candidates if such product candidates are approved for commercial sale by regulatory authorities;

• the scope and results of our preclinical studies and clinical trials;

• the progress of our current drug development programs for HBV, HCV and HIV;

• the cost of obtaining, maintaining and defending patents on our product candidates and processes;

• the cost of establishing arrangements for manufacturing;

• the cost, timing and outcome of regulatory reviews;

• the cost of establishing sales and marketing functions;

• the commercial potential of our product candidates;

• the rate of technological advances in our markets;

• the cost of acquiring or undertaking development and commercialization efforts for any additional product candidates;

• the magnitude of our general and administrative expenses; and

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• any costs we may incur under current and future licensing arrangements relating to our product candidates.

     We estimate that we will incur significant costs to complete the clinical trials and other studies required to enable us to file NDAs with the FDA for our existing HBV and HCV product candidates, assuming we continue our development of each of these product candidates. The time and cost to complete clinical development of these product candidates may vary as a result of a number of factors.

     We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us.

     If we raise additional capital through the sale of our common stock, existing stockholders will be diluted and the terms of the financing may adversely affect the holdings or rights of our stockholders. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs or to enter into new collaborative, strategic alliance or licensing arrangements that may not be favorable to us. These arrangements could result in the transfer to third parties of rights that we consider valuable.

We will not be able to commercialize our drug products successfully if we are unable to hire and train qualified sales personnel to develop a direct sales force.

     Our product candidates are under development and we are starting to recruit sales personnel to establish a direct sales force for the markets in which we will co-promote or co-market drugs we successfully develop and for which we receive regulatory approval. Due to the promotion, marketing and sale of competitive and potentially competitive products within specialized markets by companies that have significantly greater resources and existing commercialization infrastructures, we believe that it may be difficult to recruit qualified personnel with experience in sales and marketing of viral and other infectious disease therapeutics. As a result, we may not be able to successfully hire and train qualified sales personnel to establish a direct sales force. We expect to incur significant expense in establishing and expanding our sales force and in establishing marketing and distribution arrangements with third parties and we may incur a substantial amount of these costs before our product candidates have been approved for marketing.

     Our market is subject to intense competition. If we are unable to compete effectively, our product candidates may be rendered noncompetitive or obsolete.

     We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target viral diseases, including the same diseases we are targeting. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. For example, we are aware that entecavir, a nucleoside analog, has recently been approved by the FDA for the treatment of hepatitis B and has been commercially launched in the United States. In addition, we believe that a significant number of drugs, currently under development, may become available in the future for the treatment of hepatitis B, hepatitis C and HIV. If any of these product candidates are successfully developed, they may be marketed before our product candidates. Our competitors’ products may be more effective, or better marketed and sold, than any of our products. Many of our competitors have:

• significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize products;

• more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;

• products that have been approved or are in late stage development; and

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• collaborative arrangements in our target markets with leading companies and research institutions.

     Under certain circumstances, Novartis has the right to compete with product candidates and drugs developed or licensed by us. Novartis has the right under certain circumstances to market and sell products that compete with the product candidates and products that we license to it, and any competition by Novartis could have a material adverse effect on our business.

     Competitive products may render our products obsolete or noncompetitive before we can recover the expenses of developing and commercializing our product candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased utilization of vaccines for the diseases we are targeting could render our product candidates noncompetitive, obsolete or uneconomical.

     If we successfully develop and obtain approval for our product candidates, we will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective or more affordable products, or obtain more effective patent protection, than we do. Accordingly, our competitors may commercialize products more rapidly or effectively than we do, which could adversely affect our competitive position and business.

     Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies.

If we successfully develop products but those products do not achieve and maintain market acceptance, our business will not be successful.

     Even if our product candidates are successfully developed, our success and growth will depend upon the acceptance of these candidates by physicians, healthcare professionals and third-party payers. Acceptance will be a function of our products being clinically useful and demonstrating superior therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. Lamivudine, adefovir dipivoxil and entecavir are small molecule therapeutics currently approved for the treatment of chronic hepatitis B. The current standard of care for the treatment of chronic hepatitis C is the combination of pegylated interferon and ribavirin. We are aware that a significant number of product candidates are currently under development and may become available in the future for the treatment of hepatitis B, hepatitis C and HIV. If our products do not achieve market acceptance, then we will not be able to generate sufficient revenue from product sales to maintain or grow our business. In addition, even if product candidates we successfully develop achieve market acceptance, we may not be able to maintain that market acceptance over time if:

• new products or technologies are introduced that are more favorably received than our products or render our products obsolete; or

• complications, such as unacceptable levels of viral resistance or adverse side effects, arise with respect to use of our products.

Our research and development efforts may not result in additional product candidates being discovered, which could limit our ability to generate revenues.

     Our research and development programs, other than our programs for telbivudine, valtorcitabine and valopicitabine, are at preclinical stages. Additional product candidates that we may develop will require significant research, development, preclinical studies and clinical trials, regulatory approval and commitment of resources before commercialization. We cannot predict whether our research will lead to the discovery of product candidates that could generate revenues for us.

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As we evolve from a company primarily involved in discovery and development to one also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.

     We have experienced a period of rapid and substantial growth that has placed a strain on our administrative and operational infrastructure, and we anticipate that our continued growth will have a similar impact. As we advance our product candidates through clinical trials and regulatory approval processes and initiate our preparations for the commercial launch of telebivudine, we are expanding our development, regulatory, manufacturing, marketing and sales capabilities and may contract with third parties to provide these capabilities for us. Such expansion of capabilities is requiring us to invest substantial cash and management resources. If the development or commercialization of any of our product candidates is delayed or terminated, we will have incurred significant unrecoverable costs in connection with the expansion of our administrative and operational capabilities at a time earlier than necessary, if necessary at all.

     As our operations expand, we expect that we will need to manage additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls that could expose us to an increased risk of incurring financial or accounting irregularities or fraud.

If we are not able to attract and retain key management and scientific personnel and advisors, we may not successfully develop our product candidates or achieve our other business objectives.

     We highly depend upon our senior management and scientific staff. The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of product development and other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may be unable to attract and retain these individuals, and our failure to do so would have an adverse effect on our business.

Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of insurance, a product liability claim against us could adversely affect our business.

     Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the indications for which such products may be used. Although we do not currently commercialize any products, product liability claims could be made against us based on the use of our product candidates in clinical trials. We currently have clinical trial insurance and will seek to obtain product liability insurance prior to marketing any of our product candidates. Our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage, obtain additional insurance or obtain sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us.

If the estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in our projections and accruals.

     Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will be correct. For example, we are recognizing the license fee and other upfront payments under our development agreement with Novartis over a development period that we have set.

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If the estimated performance period changes, we will adjust the periodic revenue that is being recognized and will record the remaining unrecognized license fee and other up-front payments over the remaining development period during which our performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results. This, in turn, could adversely affect our stock price.

Factors Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates

All of our product candidates are still in development and remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our product candidates, we will not be successful.

     To date, we have not marketed, distributed or sold any products. The success of our business depends primarily upon our ability to develop and commercialize our product candidates successfully. Our most advanced product candidates are telbivudine, valtorcitabine and valopicitabine. Currently, we are conducting phase III clinical trials of telbivudine and phase IIb clinical trials of both valopicitabine and the combination of valtorcitabine and telbivudine. Our other product candidates are in various earlier stages of development. Our product candidates must satisfy rigorous standards of safety and efficacy before they can be approved for sale. Safety standards include an assessment of the toxicology and carcinogenicity of the product candidates we are developing. To satisfy these standards, we must engage in expensive and lengthy testing and obtain regulatory approval of our product candidates. As a result of efforts to satisfy these regulatory standards, our product candidates may not:

• offer therapeutic or other improvements over existing comparable drugs;

• be proven safe and effective in clinical trials;

• meet applicable regulatory standards;

• be capable of being produced in commercial quantities at acceptable costs; or

• be successfully commercialized.

     Commercial availability of our product candidates is dependent upon successful clinical development and receipt of requisite regulatory approvals. We do not anticipate filing the first applications for such regulatory approval for telbivudine prior to the end of 2005.

If our clinical trials are not successful, we will not obtain regulatory approval for commercial sale of our product candidates.

     To obtain regulatory approval for the commercial sale of our product candidates, we will be required to demonstrate through preclinical studies and clinical trials that our product candidates are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. The results from preclinical studies of a product candidate may not predict the results that will be obtained in human clinical trials.

     We, the FDA or other applicable regulatory authorities may suspend clinical trials of a product candidate at any time if we or they believe the persons participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. Among other things, adverse side effects of a product candidate on persons in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular product candidate for any or all indications of use.

     Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment can result in increased costs and longer development times.

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     We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials, or delay the analysis of data from our completed or ongoing clinical trials.

     Any of the following could delay the completion of our ongoing and planned clinical trials:

• discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

• delays or the inability to obtain required approvals from institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials;

• delays in enrolling patients and volunteers into clinical trials;

• lower than anticipated retention rate of patients and volunteers in clinical trials;

• negative results of clinical trials;

• insufficient supply or deficient quality of product candidate materials or other materials necessary to conduct our clinical trials; or

• serious and unexpected drug-related side effects experienced by participants in our clinical trials.

     If the results of our ongoing or planned clinical trials for our product candidates are not available when we expect or if we encounter any delay in the analysis of data from our preclinical studies and clinical trials:

• we may be unable to complete phase III clinical trials of telbivudine or file an NDA for telbivudine;

• we may be unable to advance the clinical development of valtorcitabine and/or valopicitabine;

• we may be unable to commence human clinical trials of our other HCV product candidates, our HIV product candidates or other product candidates, if any;

• Novartis may choose not to license our product candidates other than telbivudine and valtorcitabine, and we may not be able to enter into other collaborative arrangements for any of our other product candidates; or

• we may not have the financial resources to continue research and development of our product candidates.

If we are unable to obtain U.S. and/or foreign regulatory approval, we will be unable to commercialize our product candidates.

     Our product candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and clinical trials and an extensive regulatory approval process are required in the U.S. and in many foreign jurisdictions prior to the commercial sale of our product candidates. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we are developing will obtain the appropriate regulatory approvals necessary to permit commercial distribution.

     We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The time required for FDA and other approvals is uncertain and typically takes a number of years, depending upon the

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complexity of the product candidate. Our analysis of data obtained from preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action, changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

     Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenues from a particular product candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. These restrictions may limit the size of the market for the product.

     We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside the U.S. Many foreign regulatory authorities, including those in major markets such as China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our product candidates.

Even if we obtain regulatory approvals, our product candidates will be subject to ongoing regulatory review. If we fail to comply with applicable U.S. and foreign regulations, we could lose those approvals and our business would be seriously harmed.

     Approvals of our product candidates are subject to continuing regulatory review, including the review of clinical results, which are reported after our product candidates become commercially available. The manufacturer, and the manufacturing facilities we use to make any of our product candidates, will be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or at commercial scale. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third-party manufacturer for regulatory compliance.

     If we fail to comply with applicable continuing regulatory requirements, we may be subject to civil penalties, suspension or withdrawal of regulatory approval, product recalls and seizures, injunctions, operating restrictions and criminal prosecutions and penalties. Because of these potential sanctions, we seek to monitor compliance with these regulations.

If we are subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, our business may be harmed.

     The regulations governing drug product licensing, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we may obtain regulatory approval for a product in a particular country, but then be subject to price regulations, which may delay the commercial launch of the product and may negatively impact the revenues we are able to derive from sales by us or Novartis of the product in that country.

     Successful commercialization of our products will also depend in part on the extent to which reimbursement for our products and related treatments will be available from government health administration authorities, private health insurers and other organizations. If we succeed in bringing one or more products to the market, these products may not be considered cost effective and reimbursement to the patient may not be available or sufficient to allow us to sell our products on a competitive basis. Because our product candidates are in the development stage, we are unable at this time to determine the cost effectiveness of these product candidates. We may need to conduct expensive pharmacoeconomic studies to demonstrate to third party payors the cost effectiveness of our product

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candidates. Sales of prescription drugs depend on the availability and level of reimbursement to the consumer from third-party payers, such as government and private insurance plans. These third-party payers frequently require that drug companies provide them with predetermined discounts from list prices, and third-party payers are increasingly challenging the prices charged for medical products. Because our product candidates are in the development stage, we do not know the level of reimbursement, if any, we will receive for products successfully developed. If the reimbursement we receive for any of our products is inadequate in light of our development and other costs, our profitability could be adversely affected.

     We believe that the efforts of governments and third-party payers to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory proposals to change the healthcare system in the U.S. and other major healthcare markets have been proposed in recent years. These proposals have resulted in prescription drug benefit legislation being enacted in the U.S. and healthcare reform legislation being enacted by certain states. Further federal and state legislative and regulatory developments are possible and we expect ongoing initiatives in the U.S. to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop.

If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

     Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us. Additional federal, state, foreign and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

Factors Related to Our Relationship with Novartis

Novartis has substantial control over us and could delay or prevent a change in corporate control.

     Novartis and its affiliate, Novartis BioVentures, presently hold approximately 57% of our outstanding common stock. For so long as Novartis owns at least a majority of our outstanding common stock, in addition to its contractual approval rights, Novartis has the ability to delay or prevent a change in control of Idenix that may be favored by other stockholders and otherwise exercise substantial control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including:

• the election of directors;

• any amendment of our restated certificate of incorporation or amended and restated by-laws;

• the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets; or

• the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders.

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Novartis has the right to exercise control over corporate actions that may not require stockholder approval as long as it holds at least 19.4% of our voting stock.

     As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define below, we cannot take certain actions without the consent of Novartis. These actions include:

• the authorization or issuance of additional shares of our capital stock or the capital stock of our subsidiaries, except for a limited number of specified issuances;

• any change or modification to the structure of our Board of Directors or a similar governing body of any of our subsidiaries;

• any amendment or modification to any of our organizational documents or those of our subsidiaries;

• the adoption of a three-year strategic plan;

• the adoption of an annual operating plan and budget, if there is no approved strategic plan;

• any decision that would result in a variance of total annual expenditure, capital or expense, in excess of 20% from the approved three-year strategic plan;

• any decision that would result in a variance in excess of the greater of $10 million or 20% of our profit or loss target in the strategic plan or annual operating plan;

• the acquisition of stock or assets of another entity that exceeds 10% of our consolidated net revenue, net income or net assets;

• the sale, lease, license or other disposition of any assets or business which exceeds 10% of our net revenue, net income or net assets;

• the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2 million;

• any material change in the nature of our business or that of any of our subsidiaries;

• any change in control of Idenix or any subsidiary; and

• any dissolution or liquidation of Idenix or any subsidiary, or the commencement by us or any subsidiary of any action under applicable bankruptcy, insolvency, reorganization or liquidation laws.

     Pursuant to the amended and restated stockholders agreement dated July 27, 2004, among us Novartis and certain of our stockholders, which we refer to as the stockholders agreement, we are obligated to use our reasonable best efforts to nominate for election as a director at least two designees of Novartis for so long as Novartis and its affiliates own at least 35% of our voting stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of our voting stock.

     Additionally, until such time as Novartis and its affiliates own less than 50% of our voting stock, Novartis’ consent is required for the selection and appointment of our chief financial officer. If in Novartis’ reasonable judgment our chief financial officer is not satisfactorily performing his duties, we are required to terminate the employment of our chief financial officer.

     Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003, among us, Novartis and substantially all of our then existing stockholders, which we refer to as the stock purchase agreement, Novartis is required to make future contingent payments of up to $357 million to these stockholders if we achieve predetermined development milestones

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with respect to an HCV product candidate. As a result, in making determinations as to our annual operating plan and budget for the development of our HCV product candidates, the interests of Novartis may be different than the interests of our other stockholders, and Novartis could exercise its approval rights in a manner that may not be in the best interests of all of our stockholders.

     Under the stockholders’ agreement, voting stock means our outstanding securities entitled to vote in the election of directors, but does not include:

• securities issued in connection with our acquisition of all of the capital stock or all or substantially all of the assets of another entity; and

• shares of common stock issued upon exercise of stock options or stock awards pursuant to compensation and equity incentive plans. Notwithstanding the foregoing, voting stock includes up to 1,399,106 shares that were reserved as of May 8, 2003 for issuance under our 1998 Equity Incentive Plan.

     Novartis has the ability to exercise substantial control over our strategic direction, our research and development focus and other material business decisions.

We currently depend on one collaboration partner, Novartis, for substantially all our revenues and for commercialization of our HBV product candidates, and we may depend on Novartis for commercialization of other product candidates. If our development, license and commercialization agreement with Novartis terminates, our business and, in particular, our drug development programs, will be seriously harmed.

     In May 2003, we received a $75 million license fee from Novartis in connection with the license of our HBV product candidates, telbivudine and valtorcitabine, under a development, license and commercialization agreement with Novartis, dated May 8, 2003, which we refer to as the development agreement. Assuming we continue to successfully develop and commercialize these product candidates, we are entitled to receive reimbursements of expenses we incur in connection with the development of these product candidates and additional milestone payments from Novartis. In June 2004, we received a milestone payment from Novartis in the amount of $25 million based upon the results achieved in the phase I clinical trial of valopicitabine, our lead HCV product candidate. Novartis has the option to license valopicitabine and additional product candidates from us. If it does so, we are entitled to receive additional license fees and milestone payments as well as reimbursement of expenses we incur in the development of such product candidates in accordance with development plans mutually agreed with Novartis. We expect that we will derive substantially all of our near term revenues from Novartis. Novartis may terminate the development agreement in any country or with respect to any product or product candidate licensed under the development agreement for any reason on six months’ written notice. If the development agreement is terminated in whole or in part and we are unable to enter similar arrangements with other collaborators, our business would be materially adversely affected.

Novartis has the option to license our product candidates, and if it does not exercise its option with respect to a product candidate, our development, manufacture and/or commercialization of such product candidate may be substantially delayed or limited.

     In addition to its license of telbivudine and valtorcitabine, Novartis has the option under the development agreement to license our other product candidates, including valopicitabine, our lead product candidate for the treatment of hepatitis C. Our drug development programs and potential commercialization of our product candidates will require substantial additional funding. If we are not successful in efforts to enter into a collaboration arrangement with respect to a product candidate not licensed by Novartis, we may not have sufficient funds to develop such product candidate internally. As a result, our business would be adversely affected. In addition, the negotiation of a collaborative agreement is time consuming, and could, even if successful, delay the development, manufacture and/or commercialization of a product candidate and the terms of the collaboration agreements may not be favorable to us.

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If we breach any of the numerous representations and warranties we made to Novartis under the development agreement or the stock purchase agreement, Novartis has the right to seek indemnification from us for damages it suffers as result of such breach. These amounts could be substantial.

     We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the development agreement and the stock purchase agreement. Under the development agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our hepatitis C and hepatitis B product candidates, including representations regarding our ownership of the inventions and discoveries relating to such product candidates. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could become liable to Novartis may be substantial.

     In May 2004, we entered into a settlement agreement with the University of Alabama, or UAB, and the UABRF, relating to our ownership of our chief executive officer’s inventorship interest in certain of our patents and patent applications, including patent applications covering our hepatitis C product candidates. Under the terms of the settlement agreement, we agreed to make payments to UABRF, including an initial payment paid in 2004 in the amount of $2 million, as well as regulatory milestone payments and payments relating to net sales of certain products. Novartis may seek to recover from us, and, under certain circumstances, us and those of our officers, directors and other stockholders who sold shares to Novartis, the losses it suffers as a result of any breach of the representations and warranties we made relating to our hepatitis C product candidates and may assert that such losses include the settlement payments.

     Novartis could also suffer losses in connection with any amounts we become obligated to pay relating to or under the terms of any license agreement, including the UAB license agreement, or other arrangements we may be required to enter into with UAB, Emory University and the Centre Nationale de la Recherché Scientifique, or CNRS, each licensors under the UAB license agreement, to commercialize telbivudine. Novartis, may seek to recover from us, and, under certain circumstances, us and those of our officers, directors and other stockholders who sold shares to Novartis, such losses and other losses it suffers as a result of any breach of the representations and warranties we made relating to our hepatitis B product candidates.

     If we are required to rely upon the UAB license agreement to commercialize telbivudine, we will be obligated to make certain payments to UABRF and the other licensors. Such amounts would include payments in the aggregate amount of $1.3 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to a non-affiliate sublicensee which is defined as any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to UABRF 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

If we materially breach our obligations or covenants arising under the development agreement or our master manufacturing and supply agreement with Novartis, we may lose our right to develop or commercialize our product candidates.

     We have significant obligations to Novartis under the development agreement and our master manufacturing and supply agreement, dated as of May 8, 2003, between our subsidiary, Idenix (Cayman) Limited, or Idenix Cayman, and Novartis. We refer to the master manufacturing and supply agreement as the supply agreement. The obligations to which we are subject include the responsibility for developing and, in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance with plans and budgets subject to Novartis’ approval. The covenants and agreements we made when entering into the development agreement and supply agreement include covenants relating to payment of our required portion of development expenses under the development agreement,

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compliance with certain third-party license agreements and the conduct of our clinical studies. If we materially breach one or both of these agreements and are unable within an agreed time period to cure such breach, the agreements may be terminated and we may be required to grant Novartis an exclusive license to develop, manufacture and/or sell such products. Although such a license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and Novartis have stipulated that no such payments would permit the breaching party to receive more than 90% of the net benefit it was entitled to receive before the agreements were terminated. Accordingly, if we materially breach our obligations under the development agreement or the supply agreement, we may lose our rights to develop or commercialize our drug candidates and receive lower payments from Novartis than we had anticipated.

If we issue capital stock, in certain situations Novartis will be able to purchase shares at par value to maintain its percentage ownership in Idenix and, if that occurs, this could cause dilution. In addition, Novartis has the right, under specified circumstances, to purchase a pro rata portion of other shares that we may issue.

     Under the terms of the stockholders’ agreement, Novartis has the right to purchase at par value of $0.001 per share, such number of shares required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If Novartis elects to maintain its percentage ownership of our voting stock under the rights described above, Novartis will be buying such shares at a price, which is substantially below market value, which would cause dilution. This right of Novartis will remain in effect until the earlier of:

• the date that Novartis and its affiliates own less than 19.4% of our voting stock; or

• the date that Novartis becomes obligated under the stock purchase agreement to make the additional future contingent payments of $357 million to all of our stockholders who sold shares to Novartis in May 2003.

     In addition to the right to purchase shares of our common stock at par value as described above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata portion of shares of capital stock that we issue. The price that Novartis pays for these securities would be the price that we offer such securities to third parties, including the price paid by persons who acquire shares of our capital stock pursuant to awards granted under stock compensation plans. Novartis’ right to purchase a pro rata portion does not include:

• securities issuable in connection with any stock split, reverse stock split, stock dividend or recapitalization that we undertake that affects all holders of our common stock proportionately;

• shares that Novartis has the right to purchase at par value, as described above;

• shares of common stock issuable upon exercise of stock options and other awards pursuant to our 1998 Equity Incentive Plan; and

• securities issuable in connection with our acquisition of all the capital stock or all or substantially all of the assets of another entity.

     Novartis’ right to purchase shares includes a right to purchase securities that are convertible into, or exchangeable for, our common stock, provided that Novartis’ right to purchase stock in connection with options or other convertible securities issued to any of our directors, officers, employees or consultants pursuant to any stock compensation or equity incentive plan will not be triggered until the underlying equity security has been issued to the director, officer, employee or consultant.

     If Novartis terminates or fails to perform its obligations under the development agreement, we may not be able to successfully commercialize our drug products licensed to Novartis and the development and commercialization of our other product candidates could be delayed, curtailed or terminated.

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     Under the development agreement, we will co-promote or co-market with Novartis in the U.S., the U.K., France, Germany, Italy and Spain, our lead hepatitis B drug products and other products that Novartis licenses from us, which may include our hepatitis C drug products. Novartis will market and sell these drug products throughout the rest of the world. As a result, we will depend upon the success of the efforts of Novartis to market and sell our drug products. However, we have limited control over the resources that Novartis may devote to its commercialization efforts under the development agreement and, if Novartis does not devote sufficient time and resources to such efforts, we may not realize the potential commercial benefits of the agreement, and our results of operations may be adversely affected.

     In addition, Novartis has the right to terminate the development agreement with respect to any product, product candidate or country with six months’ written notice to us. If Novartis were to breach or terminate this agreement with us, the development or commercialization of the affected product candidate or product could be delayed, curtailed or terminated because we may not have sufficient resources or capabilities, financial or otherwise, to continue development and commercialization of the product candidate, and we may not be successful in entering into a collaboration with another third party.

Novartis has the right under certain circumstances to market and sell products that compete with the product candidates and products that we license to it, and any competition by Novartis could have a material adverse effect on our business.

     Novartis has agreed that, except as set forth in the development agreement, it will not market, sell or promote certain competitive products except that:

• this agreement not to compete extends only until May 2008;

• as to any country, the agreement not to compete would terminate if Novartis terminates the development agreement with respect to that country; and

• if Novartis wishes to market, sell, promote or license a competitive product, it is required to inform us of the competitive product opportunity and, at our election, enter into good faith negotiations with us concerning such opportunity. If we either do not elect to enter into negotiations with respect to such opportunity or are unable to reach agreement within a specified period, Novartis would be free to proceed with its plans with respect to such competing product.

     Accordingly, Novartis may under certain circumstances market, sell, promote or license, competitive products. Novartis has significantly greater financial, technical and human resources than we have and is better equipped to discover, develop, manufacture and commercialize products. In addition, Novartis has more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. Moreover, any direct or indirect competition with Novartis with respect to products that we have licensed to them could result in confusion in the market. In the event that Novartis competes with us, our business could be materially and adversely affected.

Factors Related to Our Dependence on Third Parties

Because we have limited sales, marketing and distribution experience and capabilities, we may seek to enter into additional arrangements with third parties. We may not be successful in establishing these relationships or, if established, the relationship may not be successful.

     We have limited sales, marketing and distribution capabilities. Although we intend to build an internal sales force and expand our marketing capabilities, we may seek to further augment our sales, marketing and distribution capabilities through arrangements with third parties. We may not be successful in entering into any such arrangements and, if entered into, the terms of any such arrangements may not be favorable. We cannot be assured that any third party would devote the necessary time or attention to sell, market or distribute our products.

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If these arrangements are unsuccessful, we may be unable to successfully commercialize our products.

If we seek to enter into collaboration agreements for any other product candidates but are not successful, we may not be able to continue development of those product candidates.

     Our drug development programs and potential commercialization of our product candidates will require substantial additional cash to fund expenses to be incurred in connection with these activities. We have entered into an agreement with Novartis for the development and commercialization of telbivudine and valtorcitabine, our lead HBV product candidates, and we have granted options to Novartis with respect to development and commercialization of our other product candidates. We may seek to enter into additional collaboration agreements with pharmaceutical companies to fund all or part of the costs of drug development and commercialization of product candidates that Novartis does not license. We may not be able to enter into collaboration agreements and the terms of the collaboration agreements, if any, may not be favorable to us. If we are not successful in our efforts to enter into a collaboration arrangement with respect to a product candidate, we may not have sufficient funds to develop this or any other product candidate internally.

     If we do not have sufficient funds to develop our product candidates, we will not be able to bring these product candidates to market and generate revenue. As a result, our business will be adversely affected. In addition, the inability to enter into collaboration agreements could delay or preclude the development, manufacture and/or commercialization of a product candidate and could have a material adverse effect on our financial condition and results of operations because:

• we may be required to expend our own funds to advance the product candidate to commercialization;

• revenue from product sales could be delayed; or

• we may elect not to develop or commercialize the product candidate.

If any collaborative partner terminates or fails to perform its obligations under agreements with us, the development and commercialization of our product candidates could be delayed or terminated.

     We have entered into the development agreement with Novartis and we may enter into additional collaborative arrangements in the future. If collaborative partners do not devote sufficient time and resources to any collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if Novartis or future collaboration partners were to breach or terminate their arrangements with us, the development and commercialization of the affected product candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of the product candidate.

Our collaborations with outside scientists may be subject to restriction and change.

     We work with chemists and biologists at academic and other institutions who assist us in our research and development efforts. Telbivudine, valtorcitabine and valopicitabine, were discovered with the research and development assistance of these third-party chemists and biologists. Many of the scientists who have contributed to the discovery and development of our product candidates are not our employees and may have other commitments that would limit their future availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services.

We depend on third-party manufacturers to manufacture products for us. If in the future we manufacture any of our products, we will be required to incur significant costs and devote significant efforts to establish these capabilities.

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     We have limited manufacturing experience and have the capability to manufacture only small quantities of compounds required in preclinical studies for our product candidates. We do not have, and do not intend to develop, the ability to manufacture material for our clinical trials or at commercial scale. To develop our product candidates, apply for regulatory approvals and commercialize any products, we need to contract for or otherwise arrange for the necessary manufacturing facilities and capabilities. Under the supply agreement, Novartis has agreed to manufacture or have manufactured for us the active pharmaceutical ingredients, or API, of product candidates that we license to Novartis for our clinical supply requirements. In addition, Novartis may manufacture or have manufactured for us the API for commercial supplies of these products, subject to the terms of the supply agreement. Under this agreement, if Novartis manufactures the API for a product, we would generally rely on Novartis for regulatory compliance and quality assurance for that product. Currently, we are negotiating with Novartis an agreement with respect to the anticipated manufacture by Novartis of the commercial supply of telebivudine. If we are unable to successfully conclude an agreement with Novartis for the manufacture of the telebivudine commercial supply or Novartis were to breach or terminate its manufacturing arrangements with us, the development or commercialization of telbivudine could be delayed, which would have an adverse affect on our business. In addition, any change in our manufacturers could be costly because the commercial terms of any such arrangement could be less favorable than the commercial terms we negotiate with Novartis.

     We have relied upon third parties to produce material for preclinical studies and may continue to do so in the future. Although we believe that we will not have any material supply issues, we cannot be certain that we will be able to obtain long term supply arrangements of those materials on acceptable terms, if at all. We also expect to rely upon other third parties to produce materials required for clinical trials and for the commercial production of certain of our products if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

     Reliance on Novartis and third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on Novartis or the third party for regulatory compliance and quality assurance, the possibility of breach by Novartis or the third party of agreements related to supply because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by Novartis or the third party, based on its own business priorities, at a time that is costly or damaging to us.

     In addition, the FDA and other regulatory authorities require that our products be manufactured according to current good manufacturing practice regulations. Any failure by us, Novartis or our third-party manufacturers to comply with current good manufacturing practices and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval. In addition, such failure could be the basis for action by the FDA to withdraw approvals for product candidates previously granted to us and for other regulatory action.

     We may in the future elect to manufacture certain of our products in our own manufacturing facilities. If we do so, we will require substantial additional funds and need to recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

Factors Related to Patents and Licenses

If we are unable to adequately protect our patents and licenses related to our product candidates, or if we infringe the rights of others, we may not be able to successfully commercialize our product candidates.

     Our success will depend in part on our ability to obtain patent protection both in the U.S. and in other countries for our product candidates. The patents and patent applications in our patent portfolio are either owned by us, exclusively licensed to us, or co-owned by us and others and exclusively licensed to us. Our ability to protect our product candidates from unauthorized or infringing use by third parties depends substantially on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to

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obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for our product candidates or provide sufficient protection to afford us a commercial advantage against our competitors or their competitive products or processes. In addition, we cannot guarantee that any patents will be issued from any pending or future patent applications owned by or licensed to us. Even if patents have been issued or will be issued, we cannot guarantee that the claims of these patents are, or will be, valid or enforceable, or provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

     We may not have identified all patents, published applications or published literature that affect our business either by blocking our ability to commercialize our drugs, by preventing the patentability of our drugs to us or our licensors or co-owners, or by covering the same or similar technologies that may affect our ability to market our product candidates. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first to file, patent applications on our product candidates or for their use as antiviral drugs. In the event that a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent Office to determine priority of invention in the U.S. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S. and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed. Since our hepatitis B product candidate, telbivudine, was a known compound before the filing of our patent applications covering the use of this product candidate to treat hepatitis B, we cannot obtain patent protection on telbivudine itself. As a result, we are limited to relying upon patents granted on the method of using telbivudine in medical therapy for the treatment of hepatitis B.

     Our other hepatitis B product candidate, valtorcitabine, is a prodrug of the L-nucleoside ß-L-2’- deoxycytidine, or LdC, because it is converted into biologically active LdC in the body. We believe that valtorcitabine is a new compound. The U.S. Patent Office has recently issued to us a patent on valtorcitabine itself, as well as claims on pharmaceutical compositions that include valtorcitabine. Claims to the method to treat hepatitis B using valtorcitabine are pending. We will not, however, be able to obtain patent protection on the biologically active form of LdC itself, because it was a known compound at the time the patent applications covering LdC were filed. Instead, our patent protection will be limited to patents covering the method of using LdC in medical therapy for the treatment of hepatitis B.

     Pursuant to the UAB license agreement, we were granted an exclusive license to the rights that UABRF, Emory University and CNRS, which we collectively refer to as the 1998 licensors, have to a 1995 U.S. patent application and corresponding patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of hepatitis B. In January 2004, February 2005 and June 2005, UABRF notified us that it believes that the claims included in this 1995 patent application, which is a continuation in part of a 1993 patent application, can be amended in a manner that would enable the 1998 licensors to prosecute and obtain generic patent claims that would generally cover the method of using telbivudine to treat hepatitis B and, consequently, cover the use of telbivudine to treat hepatitis B. On August 2, 2005 the Company received notice that UABRF has filed with the U.S. Patent Office an amendment to the 1995 patent application.

     In connection with the 1998 licensors pursuit of such patent claims, we believe that they will assert that the UAB license agreement covers our telbivudine technology and that we are obligated to make payments to the 1998 licensors in the amounts and manner specified in the UAB license agreement. Such amounts include payments in the aggregate amount of $1.3 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to any entity other than one which holds or controls at

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least 50% of our capital stock, or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to the 1998 licensors 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

     If the 1998 licensors amend the patent claims of the pending 1995 patent application and corresponding foreign patent applications, we believe that they will assert a claim to 20% of the $75 million license fee we received in May 2003 in connection with the license of our hepatitis B drug candidates to Novartis. If UABRF asserts such a claim, we intend to dispute that such amount is owed. Under the terms of the UAB license agreement, the dispute would be resolved by a panel of arbitrators if we are unable to reach agreement with UABRF after a period of negotiation and mediation.

     If we fail to perform our material obligations under the UAB license agreement, the agreement may be terminated or UABRF could, on its own behalf and on behalf of the other licensors, render the license to us non-exclusive. In the event UABRF is successful in terminating the license agreement as a result of a breach by us after a period of arbitration, and the 1998 licensors obtain a valid enforceable claim that generically covers the use of telbivudine to treat hepatitis B, it would be necessary for us to obtain another license from the 1998 licensors. Such license may not be available to us on reasonable terms, on an exclusive basis, or at all. This could materially adversely affect or preclude our ability to commercialize telbivudine.

     If the 1998 licensors were instead to render the UAB license agreement to us non-exclusive, we would not be prohibited from using telbivudine to treat hepatitis B, but a non-exclusive license could be granted to one or more of our competitors by one or more of the 1998 licensors.

     If it is determined that the UAB license agreement between us and UABRF does cover our use of telbivudine to treat hepatitis B, or we must otherwise rely upon a license agreement granted by the 1998 licensors to commercialize telbivudine, we may be in breach of certain of the representations and warranties we made to Novartis under the development agreement and the stock purchase agreement. Pursuant to the terms of the development agreement and the stock purchase agreement, if there is a breach Novartis has the right to seek indemnification from us, and, under certain circumstances, us and our stockholders who sold shares to Novartis, for the losses Novartis incurs as a result of the breach. The amounts for which we could be liable to Novartis may be substantial.

     Our initial hepatitis C clinical product candidate, valopicitabine or NM283, is a prodrug of the active molecule NM 107, because it is converted into biologically active NM 107 in the body. We believe that NM283 may be a new compound, and therefore we are attempting to obtain patent protection on NM283 itself, as well as a method to treat hepatitis C with NM283. The U.S. Patent Office has recently granted to us a patent covering claims for the method of use of NM 107. However, since NM 107 was a known compound at the time that the patent application covering the use of the active form was filed to treat hepatitis C, we cannot obtain patent protection on NM 107 itself.

     Despite the fact that NM 107 is a known compound, we are aware that a number of companies have recently filed patent applications attempting to cover NM 107 specifically as a compound, as well as NM283, as members of broad classes of compounds. Companies have also filed patent applications covering the use of NM 107, specifically, and NM283, generically, to treat hepatitis C, or more generally Flaviviridae infection. Hepatitis C is a virus in the Flaviviridae virus family. These companies include Merck & Co., Inc. together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly owned subsidiary of Valeant Pharmaceuticals International, and Genelabs Technologies, Inc. We believe that we were the first to file patent applications covering the use of these product candidates to treat hepatitis C. Patents in countries outside the U.S. are awarded to the first to file on an invention, and we believe that we are entitled to patent protection in these countries. Notwithstanding this, a foreign country may grant patent rights covering our product candidates to one or more other companies, either because it is not aware of our patent filings or because the country does not interpret our patent filing as a bar to issuance of the other company’s patent in that country. If that occurs, we may need to challenge the third-party patent to establish our proprietary rights, and if we do not or are not successful, we will need to obtain a license that may not be available at all or on commercially reasonable terms. In the U.S., a patent is awarded to the first

42

to invent the subject matter. The U.S. Patent Office could initiate an interference between us and Merck/Isis, Ribapharm, Genelabs or another company to determine the priority of invention of the use of these compounds to treat hepatitis C. If such an interference is initiated and it is determined that we were not the first to invent the target use of these compounds under U.S. law, we would need to obtain a license that may not be available at all or on commercially reasonable terms.

      The U.S. Supreme Court, in Merck KGaA v. Integra Lifesciences I, Ltd., et al., recently addressed the limits of the exemption from patent infringement that was enacted as part of the Drug Price Competition and Patent Term Extension Act of 1994. The patent infringement exemption (codified at 35 USC§ 271(e)(1)) permits drug developers and manufacturers to perform the experiments needed to obtain FDA approval of their drugs without incurring liability for patent infringement, even if their activities infringe other’s patent rights. A number of companies have filed patent applications and have obtained patents covering research methods and materials for the discovery of drugs for the treatment of hepatitis B, hepatitis C and HIV. If our drug discovery activities go outside of the bounds articulated in this Supreme Court decision, and fall within the claims of and thus infringe infringe a third party patent, we will need to buy these research products or license the research methods from a company authorized to sell such products or license such methods, which may not be available to us on reasonable terms or at all.

     If we find during clinical evaluation that our hepatitis B, hepatitis C or HIV product candidates should be used in combination with a product covered by a patent held by another company or institution, and that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement or inducement of infringement of the third-party patents covering the product recommended for co-administration with our product. In that case, we may be required to obtain a license from the other company or institution to provide the required or desired package labeling, which may not be available on commercially reasonable terms or at all.

Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our products from competition or we may be precluded from selling our products. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate.

     Our success will depend in part on our ability to uphold and enforce patents or patent applications owned or co-owned by us or licensed to us, which cover our product candidates. Such litigation could take place in the U.S. in a federal court or in the U.S. Patent Office. The litigation could also take place in a foreign country, in either the court or the patent office of that country. Proceedings involving our patents or patent applications could result in adverse decisions regarding:

• ownership of patents and patent applications;

• the patentability of our inventions relating to our product candidates; and/or

• the enforceability, validity or scope of protection offered by our patents relating to our product candidates.

     Even if we are successful in these proceedings, we may incur substantial cost and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us.

     In May 2004, we and our chief executive officer, Dr. Sommadossi, entered into a settlement agreement with UAB and UABRF resolving a dispute regarding ownership of inventions and discoveries made by Dr. Sommadossi during the period from November 1999 to November 2002, at which time Dr. Sommadossi was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed with respect to such inventions and discoveries include the patent applications covering our hepatitis C product candidates. Under the terms of the settlement agreement, we agreed to make a $2 million initial payment to UABRF, as well as other potential contingent payments based upon the commercial launch of products discovered or invented by Dr. Sommadossi during his sabbatical and unpaid leave. In addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership interest in these inventions and discoveries.

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Under the development agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our hepatitis C product candidates, including representations regarding our ownership of the inventions and discoveries. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis may be substantial.

     Our success will also depend in part on our ability to avoid infringement of the patent rights of others. If it is determined that we do infringe a patent right of another, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we are not successful in infringement litigation and we do not license or develop non-infringing technology, we may:

• incur substantial monetary damages;

• encounter significant delays in bringing our product candidates to market; and/or

• be precluded from participating in the manufacture, use or sale of our product candidates or methods of treatment requiring licenses.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

     To protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

If any of our agreements that grant us the exclusive right to make, use and sell our product candidates are terminated, we may be unable to develop or commercialize our product candidates.

     We, together with Novartis, have entered into an amended and restated agreement with CNRS and L’Universite Montpellier II, which we refer to as University of Montpellier, co-owners of the patent applications covering our hepatitis B product candidates. This agreement covers both the cooperative research program and the terms of our exclusive right to exploit the results of the cooperative research, including our hepatitis B product candidates. We, together with Novartis, have also entered into two agreements with the Universita degli Studi di Cagliari, which we refer to as the University of Cagliari, the co-owner of the patent applications covering our hepatitis C product candidates and our NNRTI HIV product candidate. One agreement with the University of Cagliari covers our cooperative research program and the other agreement is an exclusive license to develop and sell the jointly created HCV and HIV product candidates. Under the amended and restated agreement with CNRS and the University of Montpellier and the license agreement, as amended, with the University of Cagliari, we obtained from our co-owners the exclusive right to exploit these product candidates. Subject to certain rights afforded to Novartis, these agreements can be terminated by either party in circumstances such as the occurrence of an uncured breach by the non-terminating party. The termination of our rights under the agreement with CNRS and the University of Montpellier or the license agreement with the University of Cagliari would have a material adverse effect on our business and could prevent us from developing a product candidate or selling a product. In addition, these agreements provide that we pay the costs of patent prosecution,

44

maintenance and enforcement. These costs could be substantial. Our inability or failure to pay these costs could result in the termination of the agreements or certain rights under them.

     Under our amended and restated agreement with CNRS and the University of Montpellier and our license agreement with the University of Cagliari, we and Novartis have the right to exploit and license our co-owned product candidates without the permission of the co-owners. However, our agreements with CNRS and the University of Montpellier and with the University of Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian law, respectively, which are different in substantial respects from U.S. law, and which may be unfavorable to us in material respects. Under French and Italian law, co-owners of intellectual property cannot exploit, assign or license their individual rights without the permission of the co-owners. Accordingly, if our agreements with the University of Cagliari terminate, we may not be able to exploit, license or otherwise convey to Novartis or other third parties our rights in our drug candidates for a desired commercial purpose without the consent of the co-owner, which could materially affect our business and prevent us from developing our product candidates and selling our products.

     Under U.S. law, a co-owner has the right to prevent the other co-owner from suing infringers by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari provide that such parties will cooperate to enforce our jointly owned patents on our product candidates. If these agreements terminate or their cooperation is not given or is withdrawn, or they refuse to join in litigation that requires their participation, we may not be able to enforce these patent rights or protect our markets.

If our cooperative research agreement with the University of Cagliari is terminated, we may be unable to develop research results arising out of that work prior to the termination.

     Our cooperative research agreement with the University of Cagliari, as amended grants us the exclusive right to directly or indirectly use or license to Novartis or other third parties the results of research obtained from the cooperative effort, in exchange for a fixed royalty. If the cooperative research agreement is terminated, our exclusive right to use the research results will also terminate, unless those rights are also granted under a separate license agreement, as has been done with respect to the patent applications covering our HCV product candidates and the classes of compounds we are evaluating for selection of NNRTI HIV product candidate. Our cooperative agreement with the University of Cagliari currently expires in January 2007, and can only be renewed by the written consent of both parties. If the agreement is not renewed, there is no guarantee that the University of Cagliari will agree to transfer rights to any of the research results into a separate license agreement on termination of the research program, or that it will agree to do so on reasonable commercial terms. If we are not able to obtain a license to research results in the event of a termination of the cooperative research agreement, we will be unable to develop the research results.

Other Factors

We face costs and risks associated with compliance with Section 404 of the Sarbanes-Oxley Act.

     Currently, we are evaluating our internal control systems in order to allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As a result, we are incurring additional expenses and a diversion of management’s time. While we anticipate completion of testing and evaluation of our internal controls over financial reporting with respect to the requirements of Section 404 of the Sarbanes-Oxley Act in a timely fashion, there can be no assurance that we will be able to realize this result. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to investigation by regulatory authorities or be required to defer necessary reporting. Any such action could adversely affect the market price of our common stock.

All of our outstanding common stock may be sold into the market at any time. This could cause the market price of our common stock to drop significantly.

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     Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of July 31, 2005, we had outstanding 48,233,942 shares of common stock. Subject to satisfaction of certain requirements of federal securities laws, all of these shares may be resold in the public market at any time. In addition, as of July 31, 2005, we have options outstanding to purchase 3,822,874 shares of our common stock . When issued upon exercise of such options, these shares can be freely sold in the public market. Any of these sales may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

     The holders of an aggregate of 36,194,463 shares of common stock, have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Additionally, we have filed a registration statement covering the shares of common stock that we may issue under our employee benefit plans. Subject to the restrictions included within the lockup agreements executed by employee benefit plan participants in connection with our initial public offering,

Fluctuation of our quarterly results may cause our stock price to decline, resulting in losses to you.

     Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of which are not within our control, could subject our operating results and stock price to volatility, including:

• realization of license fees and achievement of milestones under our development agreement with Novartis and, to the extent applicable, other licensing and collaborative agreements;

• reductions in revenue associated with Novartis’ right to maintain its percentage ownership of our voting stock when we issue shares at a price below fair market value;

• the results of ongoing and planned clinical trials of our product candidates;

• the results of regulatory reviews relating to the approval of our product candidates;

• the initiation or conclusion of litigation to enforce or defend any of our assets; and

• general and industry-specific economic conditions that may affect our research and development expenditures.

     Due to the possibility of significant fluctuations, we do not believe that quarterly comparisons of our operating results will necessarily be indicative of our future operating performance. If our quarterly operating results fail to meet the expectations of stock market analysts and investors, the price of our common stock may decline, resulting in losses to you.

An investment in our common stock may decline in value as a result of announcements of business developments by us or our competitors.

     The market price of our common stock is subject to substantial volatility as a result of announcements by us or other companies in our industry. As a result, purchasers of our common stock may not be able to sell their shares of common stock at or above the price at which they purchased such stock. Announcements which may subject the price of our common stock to substantial volatility include announcements regarding:

• our collaboration with Novartis;

• the results of discovery, preclinical studies and clinical trials by us or our competitors;

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• the acquisition of technologies, product candidates or products by us or our competitors;

• the development of new technologies, product candidates or products by us or our competitors;

• regulatory actions with respect to our product candidates or products or those of our competitors;

• the initiation or conclusion of litigation to enforce or defend any of our assets; and

• significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.

We could be subject to class action litigation due to stock price volatility, which, if it occurs, will distract our management and could result in substantial costs or large judgments against us.

     The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of companies in the biotechnology industry have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to changes in interest rates. The primary objective of our investment activities is to preserve capital, while maintaining liquidity, until it is required to fund operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest our excess cash in high quality financial instruments with active secondary or resale markets consisting primarily of money market funds, U.S government guaranteed debt obligations, repurchase agreements with major financial institutions, and certain corporate debt securities, with the dollar weighted average effective maturity of the portfolio less than nine months and no security with an effective maturity in excess of 18 months. Since our investments have effective maturities that are short term in duration and the investments are denominated in U.S. dollars, we believe that we are not subject to any material credit, market or foreign exchange risk exposure. We do not have any derivative financial instruments.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     Our management with participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or Exchange Act) as of June 30, 2005. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls over Financial Reporting

     No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2005 that has materially affected or is reasonably likely to materially affect, our internal controls over financial reporting.

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Part II. Other Information

Item  1. Legal Proceedings

     None

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

(a) Unregistered Sales of Equity Securities

     None.

(b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities

     We registered shares of our common stock in connection with our initial public offering under the Securities Act. Our Registration Statement on Form S-1 (Reg. No. 333-111157) in connection with our initial public offering was declared effective by the SEC on July 21, 2004. We completed our initial public offering on July 27, 2004.

     The aggregate purchase price of shares of our common stock sold in the offering by us was $64,400,000 and the net proceeds to us was approximately $57,000,000, after underwriting discounts and offering expenses. The net proceeds of the initial public offering are invested in investment grade securities with the dollar weighted average effective maturity of the portfolio less than nine months and no security with an effective maturity in excess of 18 months. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

(c) Repurchase of Securities

     None.

Item 3. Defaults Upon Senior Securities

     None

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

     The Company’s annual meeting of stockholders was held on June 7, 2005.

     The stockholders elected the directors named below to serve until the next annual meeting of stockholders or until his or her successor is elected and qualified or if earlier until her or his death, resignation or removal. The tabulation of votes with respect to the election of such directors was as follows:

	Total Vote		Total Vote
	For:		Withheld:
Jean-Pierre Sommadossi		34,577,414		1,095,638
Charles W. Cramb		34,581,571		1,091,481
Thomas Ebeling		34,355,869		1,317,183
Wayne Hockmeyer		34,575,171		1,097,881
Thomas Hodgson		34,581,571		1,091,481
Robert Pelzer		34,355,869		1,317,183
Denise Pollard-Knight		34,342,571		1,330,481
Pamela Thomas Graham		34,552,171		1,120,881

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     As of the date of this Quarterly Report on Form 10-Q, our Board of Directors consists of Jean-Pierre Sommadossi, Charles W. Cramb, Thomas Ebeling, Wayne Hockmeyer, Thomas Hodgson, Robert Pelzer, Denise Pollard-Knight and Pamela Thomas-Graham. Currently, there is one vacancy on the Board of Directors.

     In addition to the election of directors, the stockholders voted to approve the adoption of the 2005 Stock Incentive Plan pursuant to which stock options, restricted stock awards, stock appreciation and other stock and stock based awards may be granted to our directors, officers, employees, consultants and advisors and officers, employees, directors, consultants and advisors of our subsidiaries and other business ventures in which we have a substantial interest. The tabulation of votes with respect to the approval of the adoption of the 2005 Stock Incentive Plan was 32,013,642 votes in favor, 678,733 votes against and 100 votes abstaining. There were 2,980,577 broker non-votes on this matter.

     The stockholders also voted to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the current fiscal year ending December 31, 2005. The tabulation of votes with respect to the ratification of the selection of PricewaterhouseCoopers LLP was 35,667,952 votes in favor, 5,100 votes against and zero votes abstaining.

Item 5. Other Information

     None

Item 6. Exhibits

     See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits filed as a part of this quarterly report, which Exhibit Index is incorporated by reference.

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SIGNATURES

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

Date: August 3, 2005	By:	/s/ Jean-Pierre Sommadossi
		Jean-Pierre Sommadossi
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
Date: August 3, 2005	By:	/s/ David A. Arkowitz
		David A. Arkowitz
		Chief Financial Officer and Treasurer (Principal Accounting Officer)

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Exhibit Index

Exhibit		Description
No.
10.1	Indenture of Lease dated June 8, 2005 by and between Idenix Pharmaceuticals, Inc. and One Kendall Square Associates LLC (incorporated by reference to exhibit 10.1 to Form 8-K filed with the SEC on June 13, 2005)
10.2	Form of Incentive Stock Option Agreement (incorporated by reference to exhibit 10.2 to Form 8-K filed with the SEC on June 13, 2005)
10.3	Form of Non-Statutory Stock Option Agreement (incorporated by reference to exhibit 10.3 to Form 8-K filed with the SEC on June 13, 2005)
10.4 *	2005 Stock Incentive Plan
31.1 *		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 *		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 *		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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EX-10.4

                                                                    EXHIBIT 10.4

                          IDENIX PHARMACEUTICALS, INC.

                            2005 STOCK INCENTIVE PLAN

1. Purpose

      The purpose of this 2005 Stock Incentive Plan (the "Plan") of Idenix
Pharmaceuticals, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who are expected to make important
contributions to the Company and by providing such persons with equity ownership
opportunities and performance-based incentives that are intended to align their
interests with those of the Company's stockholders. Except where the context
otherwise requires, the term "Company" shall include any of the Company's
present or future parent or subsidiary corporations as defined in Sections
424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code") and any other business venture
(including, without limitation, joint venture or limited liability company) in
which the Company has a controlling interest, as determined by the Board of
Directors of the Company (the "Board").

2. Eligibility

      All of the Company's employees, officers, directors, consultants and
advisors are eligible to receive options, stock appreciation rights, restricted
stock, restricted stock units and other stock-based awards (each, an "Award")
under the Plan. Each person who receives an Award under the Plan is deemed a
"Participant".

3. Administration and Delegation

      (a) Administration by Board of Directors. The Plan will be administered by
the Board. The Board shall have authority to grant Awards and to adopt, amend
and repeal such administrative rules, guidelines and practices relating to the
Plan as it shall deem advisable. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. All decisions by the Board
shall be made in the Board's sole discretion and shall be final and binding on
all persons having or claiming any interest in the Plan or in any Award. No
director or person acting pursuant to the authority delegated by the Board shall
be liable for any action or determination relating to or under the Plan made in
good faith.

      (b) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
officers referred to in Section 3(c) to the extent that the Board's powers or
authority under the Plan have been delegated to such Committee or officers.

      (c) Delegation to Officers. To the extent permitted by applicable law, the
Board may delegate to one or more officers of the Company the power to grant
Awards to non-officer employees or officers of the Company or any of its present
or future subsidiary corporations and to exercise such other powers under the
Plan as the Board may determine, provided that the Board shall fix the terms of
the Awards to



be granted by such officers (including the exercise price of such Awards, which
may include a formula by which the exercise price will be determined) and the
maximum number of shares subject to Awards that the officers may grant; provided
further, however, that no officer shall be authorized to grant Awards to any
"executive officer" of the Company (as defined by Rule 3b-7 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) or to any "officer" of
the Company (as defined by Rule 16a-1 under the Exchange Act).

4. Stock Available for Awards

      (a) Number of Shares. Subject to adjustment under Section 9, Awards may be
made under the Plan for up to 2,200,000 shares of common stock, $.001 par value
per share, of the Company (the "Common Stock") plus the number of shares
previously authorized for issuance under the Company's 2004 Stock Incentive
Plan: (i) which are not subject to outstanding options on June 7, 2005; or (ii)
which become available for future Award grants as a result of the subsequent
forfeiture, lapse or expiration of options granted pursuant to the 2004 Stock
Incentive Plan and outstanding as of June 7, 2005. If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part (including as the result of shares of Common Stock
subject to such Award being repurchased by the Company at the original issuance
price pursuant to a contractual repurchase right) or results in any Common Stock
not being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan. Further, shares of Common
Stock tendered to the Company by a Participant to exercise an Award shall be
added to the number of shares of Common Stock available for the grant of Awards
under the Plan. However, in the case of Incentive Stock Options (as hereinafter
defined), the foregoing provisions shall be subject to any limitations under the
Code. Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.

      (b) Section 162(m) Per-Participant Limit. The maximum number of shares of
Common Stock with respect to which Awards may be granted to any Participant
under the Plan shall be 500,000 per calendar year. For purposes of the foregoing
limit, the combination of an Option in tandem with an SAR (as each is hereafter
defined) shall be treated as a single Award. The per-Participant limit described
in this Section 4(b) shall be construed and applied consistently with Section
162(m) of the Code or any successor provision thereto, and the regulations
thereunder ("Section 162(m)").

5. Stock Options

      (a) General. The Board may grant options to purchase Common Stock (each,
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".

      (b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the of Company, any of the
of Company's present or future parent or subsidiary corporations as defined in
Sections 424(e) or (f) of the Code, and any other entities the employees of
which are eligible to receive Incentive Stock Options under the Code, and shall
be subject to and shall be construed consistently with the requirements of
Section 422 of the Code. The Company shall have no liability to a Participant,
or any

                                       2



other party, if an Option (or any part thereof) that is intended to be an
Incentive Stock Option is not an Incentive Stock Option or for any action taken
by the Board pursuant to Section 10(f), including without limitation the
conversion of an Incentive Stock Option to a Nonstatutory Stock Option.

      (c) Exercise Price. The Board shall establish the exercise price of each
Option provided however that the exercise price shall not be less than 100% of
the Fair Market Value (as hereinafter defined) per share of Common Stock on the
date of grant. The exercise price shall be specified in the applicable option
agreement.

      (d) Limitation on Repricing. Unless such action is approved by the
Company's stockholders: (1) no outstanding Option granted under the Plan may be
amended to provide an exercise price per share that is lower than the
then-current exercise price per share of such outstanding Option (other than
adjustments pursuant to Section 9) and (2) the Board may not cancel any
outstanding Option and grant in substitution therefore new Awards under the Plan
covering the same or a different number of shares of Common Stock and having an
exercise price per share lower than the then-current exercise price per share of
the cancelled Option.

      (e) No Reload Rights. No Option granted under the Plan shall contain any
provision entitling the optionee to the automatic grant of additional Options in
connection with any exercise of the original Option.

      (f) Duration of Options. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement; provided however that no Option will be granted for
a term in excess of 10 years.

      (g) Exercise of Option. Options may be exercised by delivery to the
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board
together with payment in full as specified in Section 5(h) for the number of
shares for which the Option is exercised. Shares of Common Stock subject to the
Option will be delivered by the Company following exercise either as soon as
practicable or, subject to such conditions as the Board shall specify, on a
deferred basis (with the Company's obligation to be evidenced by an instrument
providing for future delivery of the deferred shares at the time or times
specified by the Board).

      (h) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:

            (1) in cash or by check, payable to the order of the Company;

            (2) except as the Board may otherwise provide in an option
agreement, by (i) delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price and any required tax withholding or (ii) delivery by the
Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price and any required tax withholding;

            (3) when the Common Stock is registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), by delivery of shares of Common Stock
owned by the Participant valued at their fair market value as determined by (or
in a manner approved by) the Board ("Fair Market Value"),

                                       3



provided (i) such method of payment is then permitted under applicable law, (ii)
such Common Stock, if acquired directly from the Company, was owned by the
Participant for at least six months (or such other period as the Board may deem
appropriate for purposes of satisfaction of applicable accounting rules), if
any, as may be established by the Board in its discretion, and (iii) such Common
Stock is not subject to any repurchase, forfeiture, unfulfilled vesting or other
similar requirements;

            (4) by payment of such other lawful consideration as the Board may
determine; or

            (5) by any combination of the above permitted forms of payment.

      (i) Substitute Options. In connection with a merger or consolidation of an
entity with the Company or the acquisition by the Company of property or stock
of an entity, the Board may grant Options in substitution for any options or
other stock or stock-based awards granted by such entity or an affiliate
thereof. Substitute Options may be granted on such terms as the Board deems
appropriate in the circumstances, notwithstanding any limitations on Options
contained in the other sections of this Section 5 or in Section 2. Substitute
Options shall not count against the overall share limit set forth in Section
4(a), except as may be required by reason of Section 422 and related provisions
of the Code.

6. Stock Appreciation Rights.

      (a) General. A Stock Appreciation Right, or SAR, is an Award entitling the
holder, upon exercise, to receive an amount in Common Stock determined by
reference to appreciation, from and after the date of grant, in the fair market
value of a share of Common Stock. The date as of which such appreciation or
other measure is determined shall be the exercise date.

      (b) Grants. Stock Appreciation Rights may be granted in tandem with, or
independent of, Options granted under the Plan.

      (c) Exercise. Stock Appreciation Rights may be exercised by delivery to
the Company of a written notice of exercise signed by the proper person or by
any other form of notice (including electronic notice) approved by the Board,
together with any other documents required by the Board.

7. Restricted Stock; Restricted Stock Units.

      (a) General. The Board may grant Awards entitling recipients to acquire
shares of Common Stock ("Restricted Stock"), subject to the right of the Company
to repurchase all or part of such shares at their issue price or other stated or
formula price from the recipient in the event that conditions specified by the
Board in the applicable Award are not satisfied prior to the end of the
applicable restriction period or periods established by the Board for such
Award. Instead of granting Awards for Restricted Stock, the Board may grant
Awards entitling the recipient to receive shares of Common Stock to be delivered
at the time such shares of Common Stock vest ("Restricted Stock Units")
(Restricted Stock and Restricted Stock Units are each referred to herein as a
"Restricted Stock Award").

      (b) Terms and Conditions. The Board shall determine the terms and
conditions of a Restricted Stock Award, including the conditions for repurchase
(or forfeiture) and the issue price.

      (c) Stock Certificates. Any stock certificates issued in respect of a
Restricted Stock Award shall be registered in the name of the Participant and,
unless otherwise determined by the Board, deposited by the Participant, together
with a stock power endorsed in blank, with the Company (or its designee). At

                                       4



the expiration of the applicable restriction periods, the Company (or such
designee) shall deliver the certificates no longer subject to such restrictions
to the Participant or if the Participant has died, to the beneficiary
designated, in a manner determined by the Board, by a Participant to receive
amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, "Designated Beneficiary" shall mean the
Participant's estate.

8. Other Stock-Based Awards.

      Other Awards of shares of Common Stock, and other Awards that are valued
in whole or in part by reference to, or are otherwise based on, shares of Common
Stock or other property, may be granted hereunder to Participants ("Other Stock
Unit Awards"), including without limitation Awards entitling recipients to
receive shares of Common Stock to be delivered in the future. Such Other Stock
Unit Awards shall also be available as a form of payment in the settlement of
other Awards granted under the Plan or as payment in lieu of compensation to
which a Participant is otherwise entitled. Other Stock Unit Awards may be paid
in shares of Common Stock or cash, as the Board shall determine. Subject to the
provisions of the Plan, the Board shall determine the conditions of each Other
Stock Unit Awards, including any purchase price applicable thereto.

9. Adjustments for Changes in Common Stock and Certain Other Events.

      (a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than an ordinary
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the sub-limit set forth in Section 4(b), (iii) the number and class of
securities and exercise price per share of each outstanding Option, (iv) the
share- and per-share provisions of each Stock Appreciation Right, (v) the
repurchase price per share subject to each outstanding Restricted Stock Award
and (vi) the share- and per-share-related provisions of each outstanding Other
Stock Unit Award, shall be appropriately adjusted by the Company (or substituted
Awards may be made, if applicable) to the extent determined by the Board. If
this Section 9(a) applies and Section 9(b) also applies to any event, Section
9(b) shall be applicable to such event, and this Section 9(a) shall not be
applicable.

      (b) Reorganization Events.

            (1) Definition. A "Reorganization Event" shall mean: (a) any merger
or consolidation of the Company with or into another entity as a result of which
all of the Common Stock of the Company is converted into or exchanged for the
right to receive cash, securities or other property or is cancelled, (b) any
exchange of all of the Common Stock of the Company for cash, securities or other
property pursuant to a share exchange transaction or (c) any liquidation or
dissolution of the Company.

            (2) Consequences of a Reorganization Event on Awards Generally. Upon
the occurrence of a Reorganization Event, or the execution by the Company of any
agreement with respect to a Reorganization Event, the Board shall provide that
all outstanding Awards shall be assumed, or substantially equivalent awards
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof). Notwithstanding the foregoing, if the acquiring or
succeeding corporation (or an affiliate thereof) does not agree to assume, or
substitute for, such Awards, then the Board may (i) upon written notice to a
Participant, provide that the Participant's unexercised Options or other
unexercised

                                       5



Awards shall become exercisable in full and will terminate immediately prior to
the consummation of such Reorganization Event unless exercised by the
Participant within a specified period following the date of such notice, (ii)
provide that outstanding Awards shall become realizable or deliverable, or
restrictions applicable to an Award shall lapse, in whole or in part prior to or
upon such Reorganization Event, (iii) in the event of a Reorganization Event
under the terms of which holders of Common Stock will receive upon consummation
thereof a cash payment for each share surrendered in the Reorganization Event
(the "Acquisition Price"), make or provide for a cash payment to a Participant
equal to (A) the Acquisition Price times the number of shares of Common Stock
subject to the Participant's Options or other Awards (to the extent the exercise
price does not exceed the Acquisition Price) minus (B) the aggregate exercise
price of all such outstanding Options or other Awards, in exchange for the
termination of such Options or other Awards, (iv) provide that, in connection
with a liquidation or dissolution of the Company, Awards shall convert into the
right to receive liquidation proceeds (if applicable, net of the exercise price
thereof) and (v) any combination of the foregoing.

            (3) Consequences of a Reorganization Event on Awards Other than
Restricted Stock Awards. For purposes of Section (2) above, an Option, SAR or
Other Stock Unit Award shall be considered assumed if, following consummation of
the Reorganization Event, the Option, SAR or Other Stock Unit Award confers the
right to receive, for each share of Common Stock subject to the Option, SAR or
Other Stock Unit Award immediately prior to the consummation of the
Reorganization Event, the consideration (whether cash, securities or other
property) received as a result of the Reorganization Event by holders of Common
Stock for each share of Common Stock held immediately prior to the consummation
of the Reorganization Event (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if the
consideration received as a result of the Reorganization Event is not solely
common stock of the acquiring or succeeding corporation (or an affiliate
thereof), the Company may, with the consent of the acquiring or succeeding
corporation, provide for the consideration to be received upon the exercise or
other payment of Options, SARs or Other Stock Unit Awards to consist solely of
common stock of the acquiring or succeeding corporation (or an affiliate
thereof) equivalent in value (as determined by the Board) to the per share
consideration received by holders of outstanding shares of Common Stock as a
result of the Reorganization Event. To the extent all or any portion of an
Option becomes exercisable solely as a result of clause (2)(i) above, the Board
may provide that upon exercise of such Option the Participant shall receive
shares subject to a right of repurchase by the Company or its successor at the
Option exercise price; such repurchase right (x) shall lapse at the same rate as
the Option would have become exercisable under its terms and (y) shall not apply
to any shares subject to the Option that were exercisable under its terms
without regard to clause (2)(i) above.

            (4) Consequences of a Reorganization Event on Restricted Stock
Awards. Upon the occurrence of a Reorganization Event other than a liquidation
or dissolution of the Company, the repurchase and other rights of the Company
under each outstanding Restricted Stock Award shall inure to the benefit of the
Company's successor and shall apply to the cash, securities or other property
which the Common Stock was converted into or exchanged for pursuant to such
Reorganization Event in the same manner and to the same extent as they applied
to the Common Stock subject to such Restricted Stock Award. Upon the occurrence
of a Reorganization Event involving the liquidation or dissolution of the
Company, except to the extent specifically provided to the contrary in the
instrument evidencing any Restricted Stock Award or any other agreement between
a Participant and the Company, all restrictions and conditions on all Restricted
Stock Awards then outstanding shall automatically be deemed terminated or
satisfied.

                                       6



10. General Provisions Applicable to Awards

      (a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution or, other than in the case of an Incentive Stock Option, pursuant
to a qualified domestic relations order, and, during the life of the
Participant, shall be exercisable only by the Participant. References to a
Participant, to the extent relevant in the context, shall include references to
authorized transferees.

      (b) Documentation. Each Award shall be evidenced in such form (written,
electronic or otherwise) as the Board shall determine. Each Award may contain
terms and conditions in addition to those set forth in the Plan.

      (c) Board Discretion. Except as otherwise provided by the Plan, each Award
may be made alone or in addition or in relation to any other Award. The terms of
each Award need not be identical, and the Board need not treat Participants
uniformly.

      (d) Termination of Status. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, or the Participant's legal
representative, conservator, guardian or Designated Beneficiary, may exercise
rights under the Award.

      (e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Company for payment of, any taxes required by law
to be withheld in connection with an Award to such Participant. If provided for
in an Award or otherwise approved by the Company, for so long as the Common
Stock is registered under the Exchange Act, Participants may satisfy such tax
obligations in whole or in part by delivery of shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value; provided, however, except as otherwise provided by the Board, that
the total tax withholding where stock is being used to satisfy such tax
obligations cannot exceed the Company's minimum statutory withholding
obligations (based on minimum statutory withholding rates for federal and state
tax purposes, including payroll taxes, that are applicable to such supplemental
taxable income). Shares surrendered to satisfy tax withholding requirements
cannot be subject to any repurchase, forfeiture, unfulfilled vesting or other
similar requirements. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.

      (f) Amendment of Award. Except as otherwise provided in Section 5(d), the
Board may amend, modify or terminate any outstanding Award, including but not
limited to, substituting therefor another Award of the same or a different type,
changing the date of exercise or realization, and converting an Incentive Stock
Option to a Nonstatutory Stock Option, provided that the Participant's consent
to such action shall be required unless the Board determines that the action,
taking into account any related action, would not materially and adversely
affect the Participant.

      (g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and

                                       7



delivery of such shares have been satisfied, including any applicable securities
laws and any applicable stock exchange or stock market rules and regulations,
and (iii) the Participant has executed and delivered to the Company such
representations or agreements as the Company may consider appropriate to satisfy
the requirements of any applicable laws, rules or regulations.

      (h) Acceleration. The Board may at any time provide that any Award shall
become immediately exercisable in full or in part, free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be.

      (i) Performance Conditions.

            (1) This Section 10(i) shall be administered by a Committee approved
by the Board, all of the members of which are "outside directors" as defined by
Section 162(m) or in the absence of a committee so constituted, the Board as a
whole (the "Section 162(m) Committee").

            (2) Notwithstanding any other provision of the Plan, if the Section
162(m) Committee determines, at the time a Restricted Stock Award or Other Stock
Unit Award is granted to a Participant, that such Participant is, or may be as
of the end of the tax year in which the Company would claim a tax deduction in
connection with such Award, a Covered Employee (as defined in Section 162(m)),
then the Section 162(m) Committee may provide that this Section 10(i) is
applicable to such Award.

            (3) If a Restricted Stock Award or Other Stock Unit Award is subject
to this Section 10(i), then the lapsing of restrictions thereon and the
distribution of cash or Shares pursuant thereto, as applicable, shall be subject
to the achievement of one or more objective performance goals established by the
Section 162(m) Committee, which shall be based on the relative or absolute
attainment of specified levels of one or any combination of the following: (a)
stock price, (b) market share, (c) regulatory compliance, (d) total shareholder
return, (e) cash flow, (f) filing of regulatory applications with respect to new
product candidates and drug products, (g) commercial launch of new drug
products, (h) successful completion of clinical trials, and (i) successful
discovery of new drug candidates and may be absolute in their terms or measured
against or in relationship to other companies comparably, similarly or otherwise
situated. Such performance goals: (i) may vary by Participant and may be
different for different Awards; (ii) may be particular to a Participant or the
department, branch, line of business, subsidiary or other unit in which the
Participant works and may cover such period as may be specified by the Section
162(m) Committee; and (iii) shall be set by the Section 162(m) Committee within
the time period prescribed by, and shall otherwise comply with the requirements
of, Section 162(m).

            (4) Notwithstanding any provision of the Plan, with respect to any
Restricted Stock Award or Other Stock Unit Award that is subject to this Section
10(i), the Section 162(m) Committee may adjust downwards, but not upwards, the
cash or number of Shares payable pursuant to such Award, and the Section 162(m)
Committee may not waive the achievement of the applicable performance goals
except in the case of the death or disability of the Participant.

            (5) The Section 162(m) Committee shall have the power to impose such
other restrictions on Awards subject to this Section 10(i) as it may deem
necessary or appropriate to ensure that such Awards satisfy all requirements for
"performance-based compensation" within the meaning of Section 162(m)(4)(C) of
the Code, or any successor provision thereto.

                                       8



11. Miscellaneous

      (a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.

      (b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.

      (c) Effective Date and Term of Plan. The Plan shall become effective on
the date on which it is adopted by the Board, but no Award may be granted unless
and until the Plan has been approved by the Company's stockholders. No Awards
shall be granted under the Plan after the completion of 10 years from the
earlier of (i) the date on which the Plan was adopted by the Board or (ii) the
date the Plan was approved by the Company's stockholders, but Awards previously
granted may extend beyond that date.

      (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time; provided that, to the extent determined by
the Board, no amendment requiring stockholder approval under any applicable
legal, regulatory or listing requirement shall become effective until such
stockholder approval is obtained. No Award shall be made that is conditioned
upon stockholder approval of any amendment to the Plan.

      (e) Provisions for Foreign Participants. The Board may modify Awards or
Options granted to Participants who are foreign nationals or employed outside
the United States or establish subplans or procedures under the Plan to
recognize differences in laws, rules, regulations or customs of such foreign
jurisdictions with respect to tax, securities, currency, employee benefit or
other matters.

      (f) Compliance With Code Section 409A. No Award shall provide for deferral
of compensation that does not comply with Section 409A of the Code, unless the
Board, at the time of grant, specifically provides that the Award is not
intended to comply with Section 409A of the Code.

      (g) Governing Law. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, excluding choice-of-law principles of the law of such
state that would require the application of the laws of a jurisdiction other
than such state.

      (h) Authorization of Sub-Plans. The Board may from time to time establish
one or more sub-plans under the Plan for purposes of satisfying applicable blue
sky, securities or tax laws of various jurisdictions. The Board shall establish
such sub-plans by adopting supplements to this Plan containing (i)

                                       9



such limitations on the Board's discretion under the Plan as the Board deems
necessary or desirable or (ii) such additional terms and conditions not
otherwise inconsistent with the Plan as the Board shall deem necessary or
desirable. All supplements adopted by the Board shall be deemed to be part of
the Plan, but each supplement shall apply only to Participants within the
affected jurisdiction and the Company shall not be required to provide copies of
any supplement to Participants in any jurisdiction which is not the subject of
such supplement.

                                       10

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jean-Pierre Sommadossi, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Idenix Pharmaceuticals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	[Not Applicable]
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August   3, 2005

/s/ Jean-Pierre Sommadossi  

Jean-Pierre Sommadossi
Chief Executive Officer 

53

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David A. Arkowitz, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Idenix Pharmaceuticals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	[Not Applicable]
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2005

/s/ David A. Arkowitz

David A. Arkowitz
Chief Financial Officer and Treasurer 

54

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the quarterly report on Form 10-Q of Idenix Pharmaceuticals, Inc. (the “Company”) for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jean-Pierre Sommadossi, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 3, 2005

/s/ Jean-Pierre Sommadossi  

Jean-Pierre Sommadossi
Chief Executive Officer 

     A signed original of this written statement required by Section 906 has been provided to Idenix Pharmaceuticals, Inc. and will be retained by Idenix Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the quarterly report on Form 10-Q of Idenix Pharmaceuticals, Inc. (the “Company”) for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David A. Arkowitz, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 3, 2005

/s/ David A. Arkowitz  

David A. Arkowitz
Chief Financial Officer 

     A signed original of this written statement required by Section 906 has been provided to Idenix Pharmaceuticals, Inc. and will be retained by Idenix Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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