NTMD Nitromed (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission file number 000-50439

NITROMED, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (781) 266-4000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o  No  x .

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  x  No  o .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x .

The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant was approximately $31,248,000, based on the price at which the registrant’s common stock was last sold on June 30, 2008.

As of March 17, 2009, there were 46,085,133 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s proxy statement for the annual meeting of stockholders, which are to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2008, are incorporated by reference into Part III of this report.

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NITROMED, INC.

ANNUAL REPORT

ON FORM 10-K

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This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product development and commercialization timelines or outcomes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described in “Item 1A—Risk Factors” and elsewhere in this annual report and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any obligation to update these forward-looking statements in the future, except as specifically required by law or the rules of the Securities and Exchange Commission. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this annual report.

PART I

ITEM 1.  BUSINESS

Recent Development — Proposed Merger with Deerfield Management

On January 27, 2009, we entered into an agreement and plan of merger with certain entities affiliated with Deerfield Management, a healthcare investment organization, which we refer to collectively as Deerfield Management. As of the date of the merger agreement, Deerfield Management owned approximately 11% of our outstanding common stock.

At the effective time of the merger with Deerfield Management, each outstanding share of our common stock will be converted into the right to receive $0.80 per share in cash, subject to adjustment if our net cash balance at the closing of the merger is greater than or less than $12.3 million, as calculated pursuant to the terms of the merger agreement. In addition, all outstanding options to purchase our common stock will become accelerated in full immediately prior to the effective time of the merger. Any option not exercised prior to the effective time of the merger will be converted automatically into the right to receive cash in an amount equal to the excess, if any, of the merger consideration per share of common stock over the exercise price of the option, multiplied by the number of shares of common stock underlying the option. The merger agreement includes a “go-shop” provision that allowed us to solicit, negotiate and evaluate competing acquisition proposals during a post-signing period that ended on February 26, 2009. We solicited, but did not receive any alternative acquisition proposals prior to the termination of the go-shop period. We currently expect to complete the merger with Deerfield Management in the second quarter of 2009 following the satisfaction or waiver of all conditions to the merger, including the adoption of the merger agreement by our stockholders at a special meeting of stockholders, which is currently scheduled for April 22, 2009.

Prior to entering into the merger agreement with Deerfield Management, we terminated our previously announced purchase and sale agreement with JHP Pharmaceuticals, LLC and our previously announced agreement and plan of merger with Archemix Corp. in accordance with the terms of each of those agreements, including the payment of termination fees. In connection with the termination of the JHP purchase and sale agreement, we paid a fee of approximately $900,000 to JHP. In connection with the termination of the Archemix merger agreement, we paid a fee of $1,500,000 to Archemix.

BiDil

We are the maker of BiDil, which is indicated for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapies. BiDil is an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride. The U.S. Food and Drug Administration, or FDA, approved BiDil in June 2005 and we commercially launched BiDil in July 2005.

In January 2008, we discontinued active promotional efforts for BiDil based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot allocate to the program, as well as our plans to conserve cash in order to pursue the development of BiDil XR, an extended release formulation of BiDil. We concurrently implemented a restructuring plan in which we immediately and significantly reduced our workforce. Although we have discontinued active promotional efforts related to BiDil, we continue to contract for the manufacturing of, and to sell, BiDil and maintain the product on the market for patients through normal wholesale and retail channels. We have also

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conducted limited advertising in select medical publications, and have utilized a third-party marketing firm to contact healthcare professionals on our behalf, in each case in an effort to maintain a limited market presence for BiDil.

Our January 2008 restructuring follows the elimination of our discovery research program in March 2006 and the replacement of our sales force with a small team of senior cardiovascular business managers in October 2006. The January 2008 restructuring also follows our efforts in August 2007 to deploy an expanded field organization designed to focus on selected prescriber targets.

BiDil XR

BiDil is an orally-administered medicine that is presently dosed three times daily. In connection with our efforts to develop BiDil XR as a once-daily formulation, in February 2007 we entered into a license agreement with Elan Pharma International Limited, or Elan, pursuant to which Elan granted to us an exclusive worldwide royalty-bearing license to specified sustained-release technology owned or controlled by Elan. In addition to our obligation to pay Elan a royalty on net sales, if any, we have also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events set forth in the agreement.

In December 2007, we met with the FDA to discuss our proposed development plan for BiDil XR. The FDA agreed that our clinical development plan to conduct bioequivalence and pharmacodynamic studies comparing BiDil XR to the current commercial immediate release formulation of BiDil is acceptable. Our proposed plan could support FDA approval to commercialize BiDil XR, if bioequivalence is demonstrated. The bioequivalence study design compares the pharmacokinetics of the BiDil XR formulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to the manner in which the body absorbs, distributes, metabolizes and excretes the study drug. The adequacy of the results will ultimately be determined by the FDA during the regulatory review period.

In conjunction with entering into the license agreement with Elan, we also entered into a development agreement with an affiliate of Elan, pursuant to which we have conducted the clinical studies on BiDil XR prototypes. Our pilot clinical trials have tested several BiDil XR prototypes and compared their pharmacokinetic profile with BiDil tablets. In preliminary clinical studies in healthy volunteers, we have demonstrated our ability to delay the release of isosorbide dinitrate and hydralazine hydrochloride by varying the amount of coating and ratios of different polymers on beads in capsules. We have continued to develop and refine BiDil XR prototypes as we seek a final formulation. However, additional clinical studies and trials will be required in order to finalize the BiDil XR formulation prior to the commencement of bioequivalence trials.  Based upon our activities in 2008 related to our now terminated agreement with JHP for the purchase and sale of our BiDil and BiDil XR drug business, as well as our determination to enter into a merger agreement with Deerfield Management, we have not yet commenced the next set of clinical trials pursuant to our BiDil XR development plan. We expect to incur minimal expenses in 2009 in connection with BiDil XR development activities.

Nitric Oxide-Enhancing Technologies

In connection with our past research and development programs, we generated intellectual property rights relating to our nitric oxide-enhancing technologies. We are seeking to divest these proprietary technologies through a sale of assets, exclusive license arrangement or other comparable transaction. Since March 2006, we have not conducted any research, and do not have any plans to conduct future research with respect to these technologies.

Company Information

We were incorporated in Delaware in 1992. Our office is currently located at 45 Hayden Avenue, Suite 3000, Lexington, Massachusetts 02421, and our telephone number is (781) 266-4000. Our Internet address is www.nitromed.com. The information on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered to be a part of this annual report. Our website address is included in this annual report on Form 10-K as an inactive textual reference only.

When used in this annual report on Form 10-K, the terms “NitroMed,” “we,” “our” and “us” refer to NitroMed, Inc., unless otherwise specified. We own the following registered U.S. trademarks: NitroMed, BiDil, NitroMed Cares, More Life to Live, and NitroMed’s logo “N.” In addition, we have filed an application for BiDil XR. Other trademarks and service marks appearing in this annual report on Form 10-K are the property of their respective holders.

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BiDil: Treatment for Heart Failure in African Americans

Heart Failure in African Americans

Heart failure, also called congestive heart failure or dilated cardiomyopathy, is a progressively worsening condition that occurs when the heart muscle weakens and cannot pump blood efficiently enough to meet the metabolic needs of the body. The loss of pump function is usually caused by an underlying condition, such as hypertension or coronary artery disease, which weakens the heart muscle and increases a person’s risk of heart failure. The most common symptoms of heart failure include shortness of breath from congestion in the lungs, fatigue, sleeping problems due to the inability to lay flat, sudden awakening with shortness of breath and swelling in the feet, ankles and other parts of the body.

Heart failure affects approximately five million Americans and there is currently no cure for the disease. After a patient is diagnosed with heart failure, their prognosis is generally poor, with approximately 50 percent of patients dying within five years. Heart failure is the primary reason for hospitalizations among people over the age of 65 and is one of the most expensive diseases faced by Americans, costing more than all cancers combined.

An estimated 750,000 African Americans are currently diagnosed with heart failure. African Americans between the ages of 45 and 64 are 2.5 times more likely to die from heart failure than Caucasians in the same age range. The African American community is also more likely to be subject to the disease at a younger age than their Caucasian counterparts, resulting in earlier disability and higher rates of both hospitalization and premature death. Ethnic disparities in the prevalence of heart failure have been attributed to a variety of factors, including access to medical care, disease management, socioeconomic factors, lifestyle habits and a higher incidence of diabetes, hypertension and metabolic syndrome.

African American Heart Failure Trial (A-HeFT)

In 2001, we partnered with the Association of Black Cardiologists, Inc. to conduct the African American Heart Failure Trial, or A-HeFT, the first trial conducted in a heart failure population in which all of the participants identified themselves as black. A retrospective analysis of an earlier study with a combination of isosorbide dinitrate and hydralazine hydrochloride had suggested a trend for improved survival in the subset of patients with mild to moderate heart failure who self-identified themselves as black. The randomized, double-blind, placebo-controlled A-HeFT study enrolled 1,050 self-identified black patients with New York Heart Association, or NYHA, class III or IV heart failure at 169 clinical research sites. The classification system means that patients had marked limitation of physical activity (class III) or were unable to carry out any physical activity without discomfort (class IV). Participants in A-HeFT were required to be stable while receiving standard heart failure therapy at the time of the beginning of the trial, per their physicians. The primary end point for the trial was a composite score made up of weighted values for death from any cause, a first hospitalization for heart failure, and change in the quality of life.

After a unanimous recommendation from the independent A-HeFT Data Safety Monitoring Board in July 2004, A-HeFT was halted early due to a significant survival benefit seen with the drug. Patients taking BiDil in addition to current therapies experienced a significant 43% decrease in the risk of mortality (p=0.012) (absolute mortality rate: BiDil, 6.2% vs. placebo, 10.2%), a 39% reduction in the risk of first hospitalization for heart failure (p<0.001) (absolute first hospitalization rate: BiDil, 16.4% vs. placebo, 24.4%) and a statistically significant improvement at most time points in response to the Minnesota Living with Heart Failure Questionnaire, which is a self-report of the patient’s functional status, versus patients taking placebo in addition to current standard therapies. Adverse events reported in the trial included symptoms of headache and dizziness, which were significantly more frequent in the group given BiDil, and exacerbations of congestive heart failure, both moderate and severe, which were significantly more frequent in the placebo group.

BiDil

BiDil, an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride, was approved by the FDA in June 2005 for the treatment of heart failure in self-identified black patients. BiDil is indicated for the treatment of heart failure as an adjunct to standard therapy in self-identified black patients to improve survival, to prolong time to hospitalization for heart failure, and to improve patient-reported functional status. There is little experience in patients with NYHA class IV heart failure. Most patients in the A-HeFT clinical trial received, in addition to BiDil or placebo, concomitant therapy with one or more of the following other heart failure medicines: a loop diuretic, an angiotensin converting enzyme inhibitor or an angiotensin receptor blocker, and a beta blocker. In addition, many patients also received a cardiac glycoside or an aldosterone antagonist. BiDil is a fixed-dose combination of isosorbide dinitrate, a vasodilator with

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effects on arteries and veins, and hydralazine hydrochloride, a predominantly arterial vasodilator. The mechanism of action underlying the beneficial effects of BiDil in the treatment of heart failure has not been established.

In January 2008, we discontinued active promotional activities for BiDil based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot allocate to the program, as well as our plans to conserve cash in order to pursue the development of BiDil XR. Although we have discontinued promotional activities related to BiDil, we continue to contract for the manufacture of, and to sell, BiDil and maintain the product on the market for patients through normal wholesale and retail channels.

We are party to a five-year exclusive manufacturing and supply agreement with Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, which is now a division of UCB S.A., for the three times daily immediate release dosage formulation of BiDil. As part of the manufacturing process, we order bulk materials of hydralazine hydrochloride from Flavine International, Inc., the U.S. representative of Sumitomo Corp., and isosorbide dinitrate from Dottikon ES Holding AG.

We estimate that a substantial majority of insured African American patients over the age of 45 have access to BiDil at Tier II insurance reimbursement, a term generally used to denote a preferential level of reimbursement at which patient co-pays range from approximately $15.00 to $30.00 per prescription. Our estimates are drawn from published databases, subscription databases and external consultants who have expertise in this area. Due to the fact that ethnicity data is not generally collected by commercial and Medicare Part D insurers, exact figures cannot be determined.

BiDil XR

The current formulation of BiDil is an immediate-release tablet that must be taken three times daily. We have pursued the development of an extended release formulation of BiDil, known as BiDil XR, which is designed to be taken once a day. We believe that BiDil XR could enhance the BiDil market by facilitating greater compliance by patients with their medications schedule, an issue which we believe is more pronounced in a patient population already on a substantial number of concomitant medications. We commenced clinical development of BiDil XR in October 2006, and preliminary clinical studies with BiDil XR have demonstrated proof of principle.

Nitric Oxide-Enhancing Intellectual Property

In March 2006, we eliminated our discovery research programs, and we do not have any plans to conduct future discovery research efforts with respect to our nitric oxide-enhancing technologies. We are seeking to divest these proprietary technologies through a sale of assets, exclusive license arrangement or other comparable transaction. Prior to our March 2006 restructuring, we utilized our nitric oxide expertise and proprietary position to develop product candidates for a variety of medical conditions. Our previous efforts sought to produce nitric oxide-enhancing drug candidates by combining an existing, marketed medicine with a nitric oxide donor, which is a molecule capable of increasing nitric oxide levels in the body. The nitric oxide donor and the existing medicine can be combined together through either a chemical linkage to potentially create a proprietary new chemical entity or through the direct mixing of the medicine and the nitric oxide-enhancing compound to potentially create a patentable new use and dosage form. Our prior research efforts did not result in any commercialized drug products.

Research and Development

Our current development activities have been solely directed to the continued development of BiDil XR. During the fiscal years ended December 31, 2008, 2007 and 2006, our total company-sponsored research and development expenses were $2.8 million, $12.2 million, and $17.0 million, respectively.

Proprietary Rights and Licensing

Our policy is to prosecute and enforce our patents and proprietary technology. We will be able to protect our proprietary technologies from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

BiDil.   As of December 31, 2008, NitroMed has two issued U.S. patents that expire in 2020, which relate to co-administration of the components of BiDil. The first U.S. patent covers methods for reducing mortality associated with chronic congestive heart failure, for improving the quality of life, for improving oxygen consumption or for improving exercise tolerance in black patients. The second U.S. patent covers additional claims to specific indications and dosing ranges

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for the treatment of heart failure and other conditions in black patients. In addition, NitroMed has filed 16 U.S. patent applications and 34 corresponding foreign patent applications that could provide additional patent protection for BiDil.

Nitric Oxide-Enhancing Technologies .  As of December 31, 2008, NitroMed has 31 pending U.S. patent applications and 87 issued U.S. patents and NitroMed also has 37 issued patents and 103 pending patent applications in certain major industrial countries, including Canada, the major European market countries, Australia and Japan generally relating to its nitric oxide-enhancing technologies. These issued U.S. and foreign patents expire on various dates through 2027.

Corporate Collaborations and Business Arrangements

Elan.   In February 2007, in connection with our efforts to develop BiDil XR, we entered into a license agreement with Elan. Pursuant to the agreement, Elan granted to us an exclusive worldwide license, for the term of the agreement, to certain know-how, patents and technology, and any improvements to any of the foregoing developed by either party during the term of the agreement. Pursuant to this license, we have the right to import, use, offer for sale and sell the oral capsule formulation incorporating specified technology referred to in the agreement and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride, including BiDil XR. In consideration for the grant of the license, we have agreed to pay Elan royalties that are calculated by reference to annual net sales parameters set forth in the agreement. In addition, we have also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events set forth in the agreement.

The term of the agreement runs in the United States from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first sale of the product by us or a permitted sublicensee to an unaffiliated third party, which is referred to in the agreement as the first in market sale, or (b) the expiration of the last-to-expire patent for the product listed in the FDA’s “Orange Book.” Elsewhere in the world, the term will run on a country by country basis from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first in market sale of the product in the country concerned or (b) the expiration of the life of the last to expire patent included in the Elan intellectual property in that country. Following the expiration of the initial term, the agreement shall continue automatically for rolling 3 year periods thereafter, unless the agreement has been terminated by either of the parties by serving 1 year’s written notice on the other party prior to the end of the initial term or any such additional 3 year period. Either Elan or we may terminate the agreement in the event of a material, uncured breach by the other party, or if the other party goes into liquidation or becomes bankrupt or insolvent. In addition, we may terminate the agreement in the event of a technical failure, which is defined as the inability to achieve a pharmacokinetic profile for the product consistent with that of BiDil administered three times daily (at 6 hour intervals). Elan may terminate the agreement with respect to a particular country in the territory in the event that we do not meet certain obligations set forth in the agreement with respect to such country, provided that Elan must first consult with us and, if applicable, provide us with an opportunity to meet such obligations prior to exercising Elan’s termination rights.

Schwarz Pharma Manufacturing, Inc.   In February 2005, we entered into a five-year exclusive manufacturing and supply agreement with Schwarz Pharma for the three times daily immediate release dosage formulation of BiDil. Under the supply agreement, we have the right to engage a backup manufacturer but do not currently have any backup manufacturing agreement in place. The agreement renews automatically upon the expiration of the then-current term for successive one year terms unless either party provides written notice of termination at least six months prior to the expiration of the then-current term. The agreement is also terminable upon the occurrence of certain specified events. Schwarz Pharma is now a division of UCB S.A.

Cardinal Health PTC, LLC.  In June 2005, we entered into a three-year exclusive distribution agreement with Cardinal Health for the distribution of BiDil in all formulations. We are obligated to pay Cardinal Health fees for the services provided under the agreement. Pursuant to the terms of the agreement, Cardinal Health has the right of first negotiation for any new pharmaceutical product to be sold by us during the term. The agreement renews automatically unless either party provides written notice of termination at least ninety days prior to the expiration of the then-current term. The agreement may be terminated without cause upon 120 days notice. However, we are obligated to pay certain fees if we exercise this termination right during the initial term of the agreement. The agreement is also terminable upon the occurrence of certain specified events.

Dr. Jay N. Cohn.   In January 1999, as amended in August 2000, January 2001, March 2002 and September 2008, we entered into a collaboration and license agreement with Dr. Jay N. Cohn, which we refer to as the collaboration agreement. Under the collaboration agreement, Dr. Cohn licensed to us exclusive worldwide royalty-bearing rights to technology and

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inventions owned or controlled by Dr. Cohn and that relate to BiDil for the treatment of cardiovascular disease. We have made milestone payments and are currently making royalty payments to Dr. Cohn upon sales of BiDil. During the years ended December 31, 2008, 2007 and 2006, we incurred royalties to Dr. Cohn in the approximate amounts of $448,000, $450,000, and $364,000, respectively. The collaboration agreement imposes upon us an obligation to use reasonable best efforts to develop and, upon receipt of regulatory approval, manufacture, market and commercialize products based upon the licensed rights. If we fail to meet this obligation, Dr. Cohn has the right to terminate the collaboration agreement and the license granted to us thereunder. Dr. Cohn also has the right to terminate the collaboration agreement if we materially breach the agreement and fail to remedy the breach within 30 days. We have the right to terminate the collaboration agreement at any time upon 30 days prior written notice. Unless earlier terminated, the collaboration agreement continues in perpetuity. Pursuant to the collaboration agreement, Dr. Cohn was appointed to our then-current scientific advisory board, entered into a consulting agreement with us and was granted an option to purchase 10,000 shares of our common stock.

In September 2008, we entered into a letter agreement with Dr. Cohn, pursuant to which we and Dr. Cohn clarified our understandings with respect to royalty payments pursuant to the collaboration agreement and the related amendments. The letter agreement resolves certain disputes with regard to the amount of planned costs and excess costs, as those terms are defined and referred to in the 2001 and 2002 amendments to the collaboration agreement. In addition, the letter agreement clarifies that we will pay Dr. Cohn a specified reduced royalty on net sales of collaboration products (as defined in the collaboration agreement) until such time as the aggregate dollar amount retained by us and not required to be paid to Dr. Cohn as a result of such reduced royalty rate equals a specified aggregate dollar amount, which we refer to as the maximum amount. Once the maximum amount has been achieved, we will resume making royalty payments to Dr. Cohn at the rate specified in the collaboration agreement. Additionally, the letter agreement clarifies that should we sublicense our rights under the collaboration agreement to a third party, Dr. Cohn will receive a specified percentage of any royalty payments we receive from the sublicense, and any such payments made to Dr. Cohn by us will also be subject to offset up to the maximum amount. Pursuant to the terms of the letter agreement, the parties agreed to terminate the amendments to the collaboration agreement dated January 29, 2001 and March 15, 2002. In consideration for agreeing to the terms of the letter agreement, we made a one time cash payment to Dr. Cohn in the amount of $800,000. This payment has been included as a component of cost of product sales in our statement of operations for the year ended December 31, 2008.

FoxKiser.   In connection with our efforts to obtain the approval of BiDil from the FDA, we entered into an agreement with the law firm of FoxKiser LLC, which we refer to as FoxKiser, for services related to the regulatory approval process for BiDil. The agreement provided for payment of legal consulting fees upon receipt of written FDA approval of BiDil. On June 23, 2005, we received written FDA approval of BiDil, and in July 2005, we paid $2.4 million pursuant to the terms of this agreement. In addition, the agreement requires us to pay royalties to FoxKiser on commercial sales of BiDil. The royalty term ends six months after the date of market introduction of an FDA-approved generic version of BiDil. During the years ended December 31, 2008, 2007 and 2006, we incurred royalties to FoxKiser in the approximate amounts of $448,000, $450,000 and $364,000, respectively.

Trademarks, Trade Secrets and Other Proprietary Information

We own the following registered U.S. trademarks:

·                   BiDil;

·                   NitroMed;

·                   NitroMed Cares;

·                   More Life to Live; and

·                   NitroMed “N” logo.

We have also filed applications for BiDil XR and HeartHealthHeritage. In addition, we depend upon trade secrets, know-how and continuing technological improvements to develop and maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection

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with their relationship with us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.

Competition

We face intense competition from a wide range of pharmaceutical and life science companies, as well as academic and research institutions and government agencies. These competitors include organizations that are pursuing the same or similar technologies to those which constitute our technology platform and organizations that are developing and commercializing pharmaceutical products that may be competitive with BiDil and, if successfully developed and commercialized, BiDil XR.

We believe that competition for BiDil principally comes from companies currently marketing and selling therapeutics to treat heart failure in the general population. These competitors include GlaxoSmithKline, plc, Merck & Co., Inc., Pfizer Inc. and AstraZeneca plc. We also compete on the basis of the availability in generic form and at substantially lower prices of the individual components that constitute BiDil (isosorbide dinitrate, which is separately marketed for angina, and hydralazine hydrochloride, which is separately marketed for hypertension). Although these generic components are not bioequivalent to BiDil, physicians have prescribed them in lieu of prescribing BiDil and may continue to do so in the future. We expect to face similar competitive factors with respect to BiDil XR to the extent that BiDil XR is successfully developed and commercialized.

Principal competitive factors in our industry include:

·                   improved patient outcomes;

·                   cost-effectiveness;

·                   acceptance by patients, physicians, other health care providers and third-party public and private payors;

·                   the quality and breadth of an organization’s technology;

·                   the skill of an organization’s employees and its ability to recruit and retain skilled employees;

·                   an organization’s intellectual property protection;

·                   development, sales and marketing capabilities; and

·                   the availability of substantial capital resources to fund development and commercialization activities.

Companies with which we compete generally have financial and other resources that are substantially greater than our own. Moreover, because we have discontinued all promotional activities for BiDil and we have ceased all research and development activities related to our nitric oxide based technologies, our ability to compete has been significantly adversely affected.

Government Regulation and Reimbursement

FDA Requirements for New Drug Compounds

The research, testing, manufacture, import, export and marketing of drug products (including their components) are extensively regulated by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, labeling, promotion, sampling, marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject us to a variety of enforcement actions all of which could have a material effect.

The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include pre-clinical laboratory tests, animal tests and formulation studies under the FDA’s good laboratory practice regulations, or GLP; the submission to the FDA of a notice of claimed investigational exemption or an investigational new drug application, or IND, which must become effective before clinical testing may commence; adequate and well-controlled clinical trials to

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establish the safety and efficacy of the drug for each indication for which FDA approval is sought; submission to the FDA of a new drug application, or NDA; satisfactory completion of a FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, requirements; and FDA review and approval of the NDA. Satisfaction of FDA pre-market approval requirements typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential product candidates for a considerable period of time and impose costly procedures upon a manufacturer’s activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product, including new safety risks, may result in restrictions on the product or even complete withdrawal of the product from the market.

Clinical trials to support a NDA for marketing approval are typically conducted in three phases. In phase I, the drug is tested to assess safety, including side effects associated with increasing doses, metabolism, pharmacokinetics and pharmacological actions. Phase II usually involves trials in a limited patient population, to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks, and provide preliminary support for the efficacy of the drug in the indication being studied. Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population. The FDA may require bioequivalence, bioavailability, or other clinical studies to support approval of new formulations of approved products, such as BiDil XR. All clinical trials must be conducted in compliance with patient protection laws and regulations, including requirements related to informed consent and institutional review board, or IRB, review and approval.

Clinical testing of any product may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of clinical trials that are conducted under an IND and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA, an IRB, or a clinical trial sponsor may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request additional clinical trials be conducted as a condition to product approval.

After successful completion of the required clinical testing, generally a NDA or supplement to an existing NDA is prepared and submitted to the FDA. FDA approval of the NDA or the NDA supplement is required before marketing of the product may begin in the United States. The cost of preparing and submitting a NDA or NDA supplement is substantial.

Following the FDA’s evaluations of the NDA or NDA supplement, including inspection of the manufacturing facilities, the FDA may issue an approval letter, an approvable letter, or a not approvable letter. A not approvable letter outlines deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. An approvable letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require post-approval commitments, including testing and surveillance to monitor the drug’s safety or efficacy, and may also impose other conditions, including labeling restrictions which can materially impact the potential market and profitability of the drug. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Once the NDA or NDA supplement is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic reports and/or supplemental NDAs for approval of changes to the originally approved prescribing information, product formulation, and manufacturing and testing requirements. Following approval, drug products are required to be manufactured and tested for compliance with NDA and/or compendial specifications prior to release for commercial distribution. The manufacture and testing must be performed in approved manufacturing and testing sites complying with current Good Manufacturing Practice, or cGMP, requirements and subject to FDA inspection authority. Drug manufacturers and their subcontractors are required to register their facilities with the FDA and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMPs. Accordingly, after approval manufacturers must continue to expend time, money and effort in the area of production and quality control, and employee training, to maintain compliance with cGMPs and other aspects of regulatory compliance.

The FDA strictly regulates the promotional claims that may be made about prescription drug products, including direct-to-consumer advertising, industry-sponsored scientific and educational activities, and promotional activities involving

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the Internet. Approved drug products must be promoted in a manner which is consistent with their terms and conditions of approval and the statutory standards of the Food, Drug, and Cosmetic Act. Failure to market consistent with the statutory and regulatory standards may result in enforcement action by the FDA, which may include product seizures, civil or criminal penalties, or regulatory letters, which may require corrective advertising or other corrective communications to healthcare professionals. Failure to comply with FDA regulations can also result in Department of Justice investigation based on the False Claims Act and other federal laws governing reimbursement for drugs under the Medicare, Medicaid and other federally supported healthcare programs. Both the FDA and Department of Justice enforcement may relate to previous marketing practices that we have since suspended.

Once a NDA is approved, the product covered thereby becomes a “listed drug” which can, in turn, be cited by potential competitors in support of approval of an abbreviated NDA, or ANDA. An approved ANDA provides for marketing of a drug product that has the same conditions of use, active ingredients, strength, dosage form, route of administration, and labeling as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. There is no requirement, other than the requirement for bioequivalence testing, for an abbreviated NDA applicant to conduct or submit results of pre-clinical or clinical tests to prove the safety or efficacy of its drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, are listed as such by the FDA, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

Federal law provides for a period of three years of marketing exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form, route of administration or combination, or for a new use, if the FDA deems that the approval of the drug was required to be supported by new clinical trials (other than bioequivalence studies) that were conducted by or for the sponsor. During this three-year period, the FDA cannot grant final approval of an ANDA based on that listed drug. Additionally, in the event that the sponsor of the listed drug has properly informed the FDA of patents covering its listed drug, applicants submitting an ANDA referencing that drug are required to certify whether they intend to market their generic products prior to expiration of those patents. If an ANDA applicant certifies that it believes all listed patents are invalid or not infringed, it is required to provide notice of its filing to the NDA sponsor and the patent holder. If the patent holder then initiates a suit for patent infringement against the ANDA sponsor within 45 days of receipt of the notice, the FDA cannot grant effective approval of the ANDA until either 30 months has passed or there has been a court decision holding that the patents in question are invalid, unenforceable or not infringed. If the ANDA applicant certifies that it does not intend to market its generic product before some or all listed patents on the listed drug expire, then the FDA cannot grant effective approval of the ANDA until those patents expire.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency or the courts in ways that may significantly affect our business and our product candidates. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

Foreign Regulation of New Drug Compounds

Approval of a drug product by comparable regulatory authorities will be necessary in all or most foreign countries prior to the commencement of marketing of the product in those countries, whether or not FDA approval has been obtained. The approval procedure varies among countries and can involve requirements for additional testing. The time required may differ than that required for FDA approval.

Hazardous Materials

Our previous research and development processes involved the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not expect the cost of complying with these laws and regulations to be material.

Reimbursement

Our ability to continue to generate revenue through the sale of BiDil and any future products depends in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly-approved health care products, products used for indications not approved by the FDA and products which have

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competitors for their approved indications. If we are unable to maintain our level of preferential reimbursement treatment for BiDil from governmental and other third-party payors, our ability to sell and/or maintain acceptable pricing schemes for BiDil may be impaired, thereby reducing our revenue.

Employees

As of December 31, 2008, we had five full-time employees, all of whom were engaged in management, administration, finance and regulatory functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement, nor have we experienced work stoppages.

Product Liability Insurance

The administration of our products to humans, whether in clinical trials or after marketing approvals are obtained and the product is in use commercially, may expose us to liability claims. These claims might be made by customers, including corporate partners, clinical trial subjects, patients, pharmaceutical companies or others. We maintain product liability insurance coverage for claims arising from the use of our products, whether in clinical trials or approved commercial usage. However, insurance coverage is becoming increasingly expensive, and our insurance may not provide sufficient coverage to fully protect us against liability. If we are unable to maintain sufficient levels of insurance due to increased costs or if our insurance does not provide sufficient coverage against liability claims, a finding of liability could deplete our resources and reduce the assets available for our daily operations.

Significant Customers

Our significant customers in each of the last three years, and their percentage of our total sales, are as follows:

Our sales of BiDil are made to customers geographically located throughout the United States.

We recognized $750,000 in research and development revenue from the non-exclusive licensing of certain non-strategic intellectual property in 2007, and recognized no research and development revenue in 2008 and 2006. No other company accounted for more than 10% of our total revenues in fiscal years 2008, 2007 or 2006.

Raw Materials

The active ingredients in BiDil are hydralazine hydrochloride, which we purchase from Flavine International, Inc., the U.S. representative of Sumitomo Corp., and isosorbide dinitrate, which we purchase from Dottikon ES Holding AG. We believe that Sumitomo is currently the only supplier that is qualified to provide hydralazine hydrochloride for the manufacture of BiDil. We do not have any agreement with Sumitomo regarding the supply of hydralazine hydrochloride.

Segment Information

During the three years ended December 31, 2008, 2007 and 2006, we operated in one reportable business segment, developing nitric oxide-enhancing medicines, under the management approach of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information.

Available Information

Our internet website address is http://www.nitromed.com. Through our website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, proxy and registration statements, and all of our insider Section 16 reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These SEC reports can be accessed through the “Investors” section of our website. We also make available on our website the charters for our audit committee, compensation committee, and nominating and corporate governance committee, as well as our code

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of business conduct and ethics, and such information is available in print to any stockholder of NitroMed who requests it. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC and The NASDAQ Global Market. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.

ITEM 1A.  RISK FACTORS

You should carefully consider the following risk factors, in addition to other information included in this annual report, in evaluating NitroMed and our business. If any of the following risks occur, our business, financial condition and operating results could be materially adversely affected.

Risks Relating to Our Proposed Merger with Deerfield Management

Our proposed merger with Deerfield Management may be delayed, enjoined by a court or not occur at all for a variety of reasons, including the possibility that the merger agreement is terminated prior to the completion of the merger.

The merger agreement with Deerfield Management may be terminated at any time before the completion of the merger, by either us or Deerfield Management, if:

In addition, the merger agreement may be terminated by Deerfield Management at any time before the completion of the merger if, among other things:

In the event that the proposed merger between us and Deerfield Management does not occur, we will review the strategic alternatives for our remaining business and assets, including the possible dissolution of our company and liquidation of our assets, the discharge of any remaining liabilities, and the eventual distribution of remaining assets, if any, to our stockholders. If we determine to dissolve and liquidate our assets, we will seek the approval of the holders of the majority of our then outstanding shares of common stock for that action, and we can not give any assurances as to the amount or timing of the payment of liquidation proceeds that might eventually be distributed to our stockholders.

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Even if our proposed merger with Deerfield Management is completed, our stockholders may receive less consideration than $0.80 for each share of our common stock, depending on our net cash balance at the closing of the merger.

The terms of our merger agreement with Deerfield Management provide that the amount of the merger consideration that our stockholders will be entitled to receive for each share of our common stock upon completion of the merger is $0.80 per share in cash, without interest, subject to the following adjustments:

Whether or not our net cash at closing is greater than, equal to or less than $12.3 million will depend on a variety of factors, including continued sales of BiDil, operational costs related to maintaining BiDil on the market and transactional costs related to completing the proposed merger with Deerfield Management. Many of the underlying forces that will determine our net cash at closing are not within our control, and we can make no assurance that our net cash at closing will be equal to or greater than $12.3 million. Accordingly, our shareholders may receive an amount of merger consideration that is less than $0.80 for each share of our common stock upon completion of the merger.

During the pendency of the merger with Deerfield Management, we may not be able to enter into a business combination with another party because of restrictions in the merger agreement.

Covenants in the merger agreement limit our ability to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the merger with Deerfield Management. While the merger agreement is in effect, and subject to limited exceptions, we are prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, other than the asset sale or a sale of our nitric oxide business other than in specified circumstances, an acquisition of our common stock, a tender offer for our common stock, a merger or other business combination outside the ordinary course of business. Any such transactions could be favorable to our stockholders.

Class action litigation could require us to incur significant costs and suffer management distraction, as well as delay and/or enjoin our potential merger with Deerfield Management.

We are aware of a purported class action lawsuit related to the merger with Deerfield Management that has been filed against us, each of our directors, our president and chief executive officer and certain of Deerfield Management’s affiliates in Suffolk County Superior Court in Massachusetts. The lawsuit, Mieczyslaw Stachnik et al. v. Kenneth Bate et al. , Civil Action No. 09-0622-BLS, was filed on February 12, 2009 and alleges, among other things, that the merger consideration to be paid to our stockholders in the merger is unfair and undervalues our company. In addition, the complaint alleges that our directors and our president and chief executive officer violated their fiduciary duties by, among other things, failing to maximize stockholder value and failing to engage in a fair sale process. The complaint seeks, among other relief, an injunction preventing completion of the merger or, if the merger is consummated, rescissory damages. We believe that this lawsuit is without merit and plan to defend it vigorously. However, we could incur substantial costs in defending this lawsuit.

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In addition, even though we believe this lawsuit is without merit, our potential merger with Deerfield Management could be delayed and/or enjoined by a court of competent jurisdiction, any of which could substantially harm our business and require us to pursue alternative strategic options, including the dissolution of our company and liquidation of our assets.

Risks Relating to Our Business, Strategy and Financial Condition

We have discontinued active promotional activities related to our only commercially-available product, BiDil, which is likely to significantly adversely affect our future revenue and our ability to continue to fund our operations, including supporting continued sales of BiDil and development of BiDil XR.

In January 2008, we discontinued active promotional activities for BiDil based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot allocate to the program, as well as our plans at that time to conserve cash in order to pursue the development of BiDil XR. We concurrently implemented a restructuring plan that eliminated approximately 80 positions , and we currently employ four full-time individuals. Although we have discontinued our promotional activities for BiDil, we continue to contract for the manufacturing of, and to sell, BiDil and maintain the product on the market for patients through normal wholesale and retail channels. We have also conducted limited advertising in select medical publications, and have utilized a third-party marketing firm to contact healthcare professionals on our behalf, in each case in an effort to maintain a limited market presence for BiDil.

Unless and until we complete the merger with Deerfield Management, we expect to incur operating expenses going forward primarily related to keeping BiDil available on the market. We expect to fund a substantial portion of these operating expenses through ongoing BiDil sales. We believe that the elimination of our sales force and discontinuation of our active promotional efforts related to BiDil is likely to result in a decline in BiDil prescriptions by healthcare providers and could also adversely affect the willingness of third party payors to provide reimbursement at favorable levels. If physicians do not continue to prescribe BiDil in sufficient quantities, and/or if managed care providers remove BiDil from a preferential reimbursement tier on their plan formularies, then our future revenue from sales of BiDil will decline significantly, we may not generate sufficient capital to support continued sales of BiDil, and our ability to advance the development of BiDil XR will be adversely affected, in which case we may be required to further curtail or cease our operations.

We have a history of operating losses and, if we are not able to complete the merger with Deerfield Management, we will require substantial additional amounts of cash to fund our operating plan, including our plans to support any continued sales of BiDil and seek to develop and commercialize BiDil XR. If additional capital is not available, we may be required to cease operations.

We have experienced significant operating losses since our inception in 1992. For the year ended December 31, 2008, we had a net loss of $5.9 million, and as of December 31, 2008, we had an accumulated deficit of $351.3 million. We have incurred loses in all but one quarter since inception, we have discontinued active promotion of BiDil, and we may incur losses in future periods. Losses that we may incur in the future could fluctuate from quarter to quarter, and these fluctuations may be substantial.

In January 2008, we ceased actively promoting sales of BiDil, which is our only significant source of revenue. Pending the completion of our merger with Deerfield Management, we expect to incur operating expenses going forward primarily related to keeping BiDil available on the market. We expect to also incur minimal additional expenses in 2009 related to the further development of BiDil XR. Whether or not the merger with Deerfield Management is completed, we believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations for at least the next twelve months. However, our future capital requirements, and the period in which we expect our current cash to support our operations, may vary due to a number of factors, including the following:

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While we intend to consummate the proposed merger with Deerfield Management, if the proposed merger with Deerfield Management is not approved by our stockholders or is not completed for other reasons, we will review the strategic alternatives available for our business, including the possible dissolution of our company and liquidation of our assets, the discharge of any remaining liabilities, and the eventual distribution of remaining assets, if any, to our stockholders .

If we fail to regain compliance with the requirements for continued listing on The NASDAQ Global Market, our common stock could be delisted from trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital or enter into strategic transactions.

On September 16, 2008, we received a letter from the NASDAQ Stock Market’s Listing Qualifications Department providing notification that, for the last 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Market, referred to as the minimum bid price rule. NASDAQ stated in such notification that, in accordance with the NASDAQ Marketplace Rules, we have 180 calendar days, or until March 16, 2009, to regain compliance with the minimum bid price rule. On October 22, 2008, we received an additional letter from NASDAQ to advise us that it has suspended enforcement of the bid price requirements for all NASDAQ listed companies through January 19, 2009. On December 23, 2008, we received another letter from NASDAQ to advise us that NASDAQ had determined to extend the suspension of the bid price requirements for all NASDAQ listed companies, and that enforcement of the bid price rules will be reinstated on April 20, 2009. The letter further stated that prior to the resumption of the bid price rules, NASDAQ will contact us to inform us of the number of calendar days remaining in our compliance period. Based upon the first suspension letter, in which NASDAQ informed us that we still had 151 days remaining in our 180 day compliance period as of the suspension date, upon reinstatement of the bid price rules on April 20, 2009, we believe that we will still have that number of days to regain compliance.

Prior to the end of the remaining time in our compliance period following the reinstatement of the bid price rules, if the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will provide written notification that we have achieved compliance with the minimum bid price rule. However, NASDAQ may, in its discretion, require that we maintain a bid price of in excess of $1.00 for a period in excess of 10 days, but generally no more than 20 days, before determining that we have demonstrated the ability to maintain long-term compliance. If we do not regain compliance with the minimum bid price rule prior to the end of the remaining time in our compliance period following the reinstatement of the bid price rules, NASDAQ will provide written notification that our securities will be delisted from The NASDAQ Global Market. At that time, we may appeal NASDAQ’s determination to delist our securities to a NASDAQ Listing Qualifications Panel. We cannot assure you that any such appeal, if made, would be successful. Alternatively, in the event such delisting is based solely upon non-compliance with the minimum bid price rule, we could apply to transfer our securities to The NASDAQ Capital Market, provided that we satisfy the requirements for initial listing on such market, other than the minimum bid price rule. If such an application were approved and we otherwise maintain the listing requirements for The NASDAQ Capital Market, other than the minimum bid price requirement, we would be afforded the remainder of The NASDAQ Capital Market’s second 180 calendar day grace period in order to regain compliance with the minimum bid price rule.

In the event that our proposed merger with Deerfield Management is delayed or not completed at all, any potential delisting of our common stock from The NASDAQ Global Market would make it more difficult for our stockholders to sell our common stock in the public market and would likely result in decreased liquidity and increased volatility for our common stock. There are many factors that may adversely affect our minimum bid price, including those described throughout this

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section titled “Risk Factors.” Many of these factors are outside of our control. As a result, we may not be able to sustain compliance with the minimum bid price rule in the long term.

Commercialization risks and other factors may adversely affect our ability to maintain sales of BiDil and, if successfully developed, BiDil XR.

Factors that we believe may materially adversely affect continued sales of BiDil, and may also affect sales of BiDil XR, if it is successfully developed and commercialized, include:

If the third-party manufacturer of BiDil encounters delays or difficulties in production, we may not be able to meet demand for the product and we may lose potential revenue, which would adversely affect our financial results and our ability to execute our business plan.

We do not physically manufacture BiDil and have no plans to do so. We have engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of BiDil. The terms of the supply agreement provide that it may be terminated by either us or Schwarz Pharma under specified circumstances, including a material breach of the supply agreement by either party, the occurrence of a payment default by us, our material impairment of the manufacturing licenses we have granted to Schwarz Pharma or a failure of Schwarz Pharma to supply conforming products. In addition, either party may terminate the supply agreement in the event the FDA takes any action, the result of which is to permanently prohibit the manufacture, sale or use of the product.

Furthermore, Schwarz Pharma may encounter difficulties in production. These problems may include, but are not limited to:

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If we are unable to maintain a commercially reasonable manufacturing agreement for the production of BiDil with Schwarz Pharma, we have no back-up manufacturing facility and thus we would not be able to manufacture and sell BiDil until another facility was qualified. The number of third-party manufacturers with the manufacturing and regulatory expertise and facilities necessary to manufacture finished products for us on a commercial scale is limited, and it would take a significant amount of time to arrange, qualify, and receive necessary regulatory approval for alternative arrangements. We may not be able to contract for alternative manufacturing on acceptable terms, if at all.

If we are unable to successfully contract for third-party manufacturing, or if Schwarz Pharma or any other third-party manufacturer of BiDil fails to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices, we may be unable to meet the demand for our product and we may lose potential revenues, all of which could cause the price of our common stock to decline and would adversely affect our financial results and our ability to execute our business plan.

We rely on a single supplier for one of the two active ingredients in BiDil, and the loss of this supplier could prevent or interrupt the sale of BiDil, which would materially harm our business.

We rely on Sumitomo Corp. for our supply of hydralazine hydrochloride, one of the two active ingredients in BiDil. We believe that Sumitomo is currently the only supplier that is qualified to provide hydralazine hydrochloride for the manufacture of BiDil. We do not have any agreement with Sumitomo regarding the supply of hydralazine hydrochloride. If Sumitomo stops manufacturing or is unable to manufacture hydralazine hydrochloride, or if we are unable to procure hydralazine hydrochloride from Sumitomo on commercially favorable terms, we will need to identify, qualify, and obtain FDA approval of a new drug application, or NDA, supplement for an alternative manufacturer/supplier of hydralazine hydrochloride. If we are unable or delayed in doing this, we may be unable to continue to sell BiDil on commercially viable terms, if at all, or the supply of BiDil may be interrupted . Furthermore, because Sumitomo is currently the sole qualified supplier of hydralazine hydrochloride for the manufacture of BiDil, Sumitomo exercises control over the price of hydralazine hydrochloride that we purchase. Any increase in the price for hydralazine hydrochloride may reduce our gross margins and adversely affect our ability to sell BiDil at a favorable price , unless an alternative manufacturer/supplier can be identified and qualified, a NDA supplement for the use of this manufacturer/supplier can be approved by the FDA, and a favorable price can be negotiated.

BiDil is subject to ongoing regulatory review and oversight. If we fail to comply with continuing United States regulations, we could lose our approval to market BiDil and our business would be seriously harmed.

Even after approval, any products we develop are subject to ongoing regulatory review and restrictions, including the review of new clinical results and other post-marketing data. The FDA can propose to withdraw approval or place additional restrictions on indications for which we can market the product or the manner in which we may distribute the product if new clinical data or experience shows that a product is not safe for use under the approved conditions of use.  In addition, we are required to report any serious and unexpected adverse experiences and certain quality problems with BiDil and make other periodic reports to the FDA.

The marketing claims we are permitted to make in labeling or advertising regarding our marketed products must comply with FDA laws and regulations and are limited to those specified in any FDA approval. Although we are not actively marketing BiDil, we could face liability for our previous marketing activities if the FDA believes that we have promoted our products for unapproved indications or otherwise failed to comply with the FDA’s promotional labeling or advertising regulations, or guidelines regarding company support for continuing medical education. Based on such allegations, the FDA could issue an untitled letter or warning letter, or take other enforcement action including seizure of allegedly violative product, injunctions or civil or criminal prosecution against us and our officers or employees. In addition, the Department of Justice enforces laws prohibiting kickbacks to healthcare providers and false claims in connection with government-funded reimbursement programs for drug purchases, such as Medicare and Medicaid, and any prior off-label marketing of BiDil could subject us to civil or criminal prosecution, for which the government could seek to recover substantial monetary penalties, the imposition of restrictions on our marketing activities, and the exclusion of BiDil from eligibility for government reimbursement programs.

In addition, the manufacturer and the manufacturing facilities we use to produce BiDil are subject to periodic review and inspection by the FDA. We are required to report any serious and unexpected adverse experiences and certain quality problems with BiDil and make other periodic reports to the FDA. The discovery of any previously unknown problems with a product, manufacturer or facility may result in restrictions on the product, manufacturer or manufacturing facility, including

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withdrawal of the product from the market. Certain changes to an approved product often require prior FDA approval before the product, as modified, may be marketed.

If we or our third-party manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we or they could be subject to enforcement actions which could affect our ability to develop, market and sell BiDil successfully and could harm our reputation and lead to lower acceptance of BiDil by the market. These enforcement actions include product seizures; voluntary or mandatory recalls; patient or physician notifications, including letters to healthcare professionals and corrective advertising; withdrawal of product approvals; restrictions on, or prohibitions against, marketing our products; operating restrictions; fines; restrictions on importation or exportation of our products; injunctions; debarments; civil and criminal penalties; and suspension of review of, or refusal to approve, pending applications.

Clinical testing of BiDil XR may not be successful, in which case we may be unable to commercialize BiDil XR and the value of our business will substantially decline.

In order to obtain regulatory approvals for the commercial sale of BiDil XR, we will be required to complete clinical trials in humans to demonstrate the safety and efficacy of BiDil XR. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials of BiDil XR can occur at any stage of testing.

We met with the FDA in December 2007, and the agency agreed that our clinical development plan to conduct bioequivalence and pharmacodynamic studies comparing BiDil XR to the current commercial immediate release formulation of BiDil is acceptable. The agency indicated that such a plan could support FDA approval to commercialize BiDil XR, if bioequivalence is demonstrated. The bioequivalence study design compares the pharmacokinetics of the XR formulation to the pharmacokinetics of the immediate release formulation. Pharmacokinetics refers to the manner in which the body absorbs, distributes, metabolizes and excretes the study drug. The adequacy of the results will ultimately be determined by the FDA during the regulatory review period. Although we are encouraged by this meeting with the FDA, we may experience numerous unforeseen events during, or as a result of, our planned clinical trials of BiDil XR that could delay or prevent our ability to receive regulatory approval for, or commercialize, BiDil XR, including:

·                   conditions imposed on us by the FDA regarding the scope or design of our clinical trials;

·                   difficulty obtaining or maintaining IRB approval of studies;

·                   problems in finalizing the formulation of BiDil XR through our planned clinical studies;

·                   our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials, including testing alternative formulations of BiDil XR;

·                   the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we currently anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate, any of which would result in significant delays and increased costs;

·                   our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;

·                   we might have to suspend or terminate one or more of our clinical trials if the participants are being exposed to unacceptable health risks;

·                   regulators may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

·                   the cost of our clinical trials may be greater than we anticipate;

·                   the supply or quality of BiDil XR or other materials necessary to conduct our clinical trials may be insufficient or inadequate; and

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·                   the effects of BiDil XR may not be the desired effects or may include undesirable side effects or may have other unexpected characteristics.

If we are required to conduct additional clinical trials or other testing of BiDil XR beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

·                   be delayed in obtaining marketing approval for BiDil XR;

·                   not be able to obtain marketing approval;

·                   obtain approval for an indication that is not as broad as intended; or

·                   have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether future clinical trials will begin as planned, will need to be redesigned or will be completed on schedule, if at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize BiDil XR, or allow our competitors to bring products to market before we do, which could impair our ability to commercialize BiDil XR and may harm our business and results of operations.

If we are not able to obtain required regulatory approvals, we will not be able to commercialize BiDil XR and our ability to generate revenue will be materially impaired.

BiDil XR, and the activities associated with its development and commercialization, including testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by authorities in other countries. Failure to obtain regulatory approval for BiDil XR will prevent us from commercializing BiDil XR.

Securing FDA approval may require the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. BiDil XR may not be effective, may be only moderately effective or may prove to have undesirable side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

The process of obtaining regulatory approvals is expensive and often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited in scope or subject to restrictions or post-approval commitments that render the product not commercially viable. If any regulatory approval that we obtain is delayed or is limited, we may decide not to commercialize BiDil XR after receiving that approval.

The development and future commercialization of BiDil XR may be terminated or delayed, and the cost of development and future commercialization may increase, if third parties on whom we rely to manufacture BiDil XR do not fulfill their obligations.

We do not have manufacturing capabilities for BiDil XR and have no current plans to develop any such capacity in the future. In order to continue to develop BiDil XR, apply for regulatory approvals and commercialize this product, we plan to rely on our collaborative licensor, Elan Pharma International Limited, and its affiliate, Elan Drug Delivery, Inc., for the production of clinical and commercial quantities of BiDil XR. In addition, contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with current Good Manufacturing Practices, or cGMP, and other governmental regulations and corresponding foreign standards. The cGMP requirements govern, among other things, quality control of the manufacturing process and documentation of policies and procedures. Other than through contract, we do not have control over compliance by our

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contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMP and other FDA requirements or similar regulatory requirements outside the United States. Any failure by our contract manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of BiDil, delays, suspension or withdrawal of approvals, seizures or recalls of such product candidate, operating restrictions, and criminal prosecutions, any of which could significantly and adversely affect our business. We will depend upon these third parties to perform their obligations in a timely manner and in accordance with applicable laws and regulations, including those related to quality control and quality assurance. To the extent that third-party manufacturers with whom we contract fail to perform their obligations in accordance with applicable laws and regulations, we may be adversely affected in a number of ways, including:

·                   we may not be able to initiate or continue clinical trials of BiDil XR;

·                   we may be delayed in submitting applications for regulatory approvals for BiDil XR; and

·                   even if we successfully commercialize BiDil XR, we may be required to cease distribution and/or recall some or all batches of the product and we may not be able to meet commercial demands for our products or achieve profitability.

Risks Relating to Our Intellectual Property Rights

Our patent protection for BiDil, the individual components of which are available in generic form, is limited, and we may be subject to generic substitution or competition and resulting pricing pressure.

We have no composition of matter patent covering BiDil, our product for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapy. BiDil is a fixed-dose combination of two individual components, isosorbide dinitrate and hydralazine hydrochloride, both of which are available in generic form, which are approved and separately marketed, in dosages similar to those we include in BiDil, for indications other than heart failure, at prices below the prices we are charging for BiDil. We have two issued method-of-use patents that expire in 2020. One patent covers the use of the combination of isosorbide dinitrate and hydralazine hydrochloride to reduce mortality associated with chronic congestive heart failure, for improving the oxygen consumption, for improving the quality of life or for improving exercise tolerance in a black patient. The other patent covers the use of the combination of isosorbide dinitrate and hydralazine hydrochloride in certain dosage amounts for reducing mortality associated with heart failure in a black patient. Our method of use patent that covered the use of the combination of isosorbide dinitrate and hydralazine hydrochloride to reduce the incidence of mortality associated with chronic congestive heart failure expired in accordance with its terms in April 2007.

We may not be able to enforce our method-of-use patents to prevent physicians from prescribing isosorbide dinitrate and hydralazine hydrochloride separately for the treatment of heart failure in black patients, even though neither drug is approved for such use. We also may not be able to enforce these method-of-use patents to prevent hospitals and pharmacies from supplying such patients with these individual components separately in lieu of BiDil.

Other factors may also adversely affect our patent protection for BiDil. If we are successful in marketing BiDil, manufacturers of generic drugs will have an incentive to challenge our patent position. The combination therapy of isosorbide dinitrate and hydralazine hydrochloride for use in heart failure was developed through lengthy, publicly-sponsored clinical trials conducted during the 1980s, prior to the filing of the patent application that resulted in the 2007 patent. The U.S. Patent and Trademark Office, or U.S. patent office, considered published reports on these clinical trials and concluded that they did not constitute prior art that would prevent the issuance of the 2007 patent. The U.S. patent office also considered the question of whether the 2007 patent constituted prior art with respect to the 2020 patents, and determined that the claims of the 2020 patents were non-obvious and patentable. A court considering the validity of the 2020 patents with respect to questions of prior art might be presented with other alleged prior art or might reach conclusions different than those reached by the U.S. patent office. If the 2020 patents were to be invalidated or if physicians were to prescribe isosorbide dinitrate and hydralazine hydrochloride separately for heart failure in black patients, our BiDil revenue could be significantly reduced, we could fail to recover the cost of developing BiDil and BiDil might not be a viable commercial product.

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If we are not able to obtain and enforce patent protection for our discoveries, our ability to divest our product candidates and technologies will be harmed.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we developed under the patent and other intellectual property laws of the United States and other countries, in order to prevent others from using our inventions and proprietary information. Because certain United States patent applications are confidential until patents issue, such as applications filed prior to November 29, 2000, or applications filed after such date which will not be filed in foreign countries, third parties may have filed patent applications for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may not have priority over patent applications of others.

The process of seeking patent protection for our discoveries is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications or maintain all issued patents at a reasonable cost. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The mere issuance of a patent does not guarantee that it is valid or enforceable; even if we have obtained patents, they may not be valid or enforceable against third parties.

The issued patents and patent applications for our potential product candidates and nitric oxide technology include claims with respect to both the composition of specific products or compounds and specific methods of using these products or compounds in therapeutic areas. In some cases, like BiDil, our only patent protection is with respect to the method of using a product or compound. Method-of-use patents may provide less protection for our product candidates and products. If another company gains FDA approval for an indication separate from the one claimed in our method-of-use patents, physicians may be able to prescribe that product for use in the approved indication. In addition, physicians may prescribe a product for which we or our potential strategic partners have obtained approval for an unapproved indication for that product. As a practical matter, we or our potential strategic partners may not be able to enforce our method-of-use patents against physicians prescribing products for such off-label use. Off-label use and any resulting off-label sales could make it more difficult to obtain the price we or our potential strategic partners would otherwise wish to achieve for, or to successfully commercialize, our potential products. In addition, in those situations where we have only method-of-use patent coverage for a product candidate, it may be more difficult to find a pharmaceutical company partner to license or support development of our potential product candidates.

Our pending patent applications may not result in issued patents. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards which the U.S. patent office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change over time. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or to others.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

If we become involved in patent litigation or other proceedings to enforce our patent rights, we would incur substantial costs and expenses, could incur substantial liability for damages and could be required to stop product development and commercialization efforts.

A third party may sue us for infringing on its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued to us or to seek a declaratory judgment on the scope and validity of third-party proprietary rights. The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert management efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from litigation could limit our ability to continue our operations.

If a third party is able to successfully claim that the development or use by us of proprietary technologies infringes upon that party’s intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license on terms that are unfavorable to us. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we

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fail to obtain a required license or are unable to design around a patent, we may be unable to effectively market some of our technology and product candidates, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating sufficient revenue to sustain our operations.

We in-license a significant portion of our principal proprietary technologies, and if we fail to comply with our obligations under any of the related agreements, we could lose license rights that are necessary to commercializing BiDil and out-licensing our other product candidates.

We are a party to several licenses that give us rights to third-party intellectual property that are necessary for our business. In particular, we have obtained the exclusive right to develop and commercialize BiDil pursuant to a license agreement with Dr. Jay N. Cohn, and some of our intellectual property rights relating to nitric oxide compounds have been obtained pursuant to license agreements with the Brigham and Women’s Hospital and Boston University. In addition, we may enter into additional licenses in the future. These licenses impose various development, commercialization, funding, royalty, diligence, and other obligations on us. If we breach these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology.

Risks Relating to Our Industry

We could be negatively impacted by the application or enforcement of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs. Because of the far-reaching nature of these laws, we may be required to alter or discontinue one or more of our practices to be in compliance with these laws. Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our business, financial condition and results of operations. Moreover, if there is a change in law, regulation or administrative or judicial interpretations, we may have to change or discontinue our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, we could become subject to false claims litigation under federal statutes, which can lead to treble damages based on the reimbursements by federal healthcare programs, civil money penalties (including penalties levied on a per false claim basis), restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against pharmaceutical and biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or restitution, or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. It is possible that we could become subject to such litigation and, if we are not successful in defending against it, such litigation would have a material adverse effect on our business, financial condition and results of operations. In addition, the cost of defending claims or allegations under the False Claims Act, even if successful, would also have a material adverse effect on our business, financial condition and results of operations.

We face significant competition and our ability to successfully compete has been significantly adversely affected by our discontinuation of promotional activities for BiDil, which may result in others commercializing competitive products more successfully .

The pharmaceutical industry is highly competitive and characterized by rapid and significant technological change. Moreover, because we have discontinued all promotional activities for BiDil and we have ceased all research and development related to our nitric oxide-based product candidates, our ability to effectively compete in the marketplace has been significantly adversely affected. Our principal competitors are large, multinational pharmaceutical companies that have substantially greater financial and other resources than we do and are conducting extensive research and development

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activities on technologies and product candidates similar to or competitive with ours. Many of our competitors are more experienced than we are in pharmaceutical development and commercialization, obtaining regulatory approvals and product marketing and manufacturing. As a result, our competitors may:

·                   develop and commercialize products that render BiDil and/or BiDil XR, if successfully developed and commercialized, obsolete or non-competitive or that cause BiDil to be less desirable as a result of patent or non-patent exclusivity;

·                   develop product candidates and market products that are less expensive or more effective than BiDil;

·                   initiate or withstand substantial price competition more successfully than we can;

·                   have greater success in recruiting skilled scientific workers from the limited pool of available talent;

·                   more effectively negotiate third-party licenses and strategic relationships; and

·                   take advantage of product acquisition or other opportunities more readily than we can.

There are a number of companies currently marketing and selling products to treat heart failure in the general population that compete with BiDil. These include GlaxoSmithKline, plc, which currently markets Coreg ® , Merck & Co., Inc., which currently markets Vasotec ®  and AstraZeneca, plc, which currently markets Toprol XL ® . We also compete on the basis of the availability in generic form and at substantially lower prices of the individual components that constitute BiDil (isosorbide dinitrate, which is separately marketed for angina, and hydralazine hydrochloride, which is separately marketed for hypertension). Although these generic components are not bioequivalent to BiDil, physicians have prescribed them in lieu of prescribing BiDil and may continue to do so in the future.

We expect to face similar competitive factors with respect to BiDil XR to the extent that BiDil XR is successfully developed and commercialized.

We may be exposed to product liability claims and may not be able to obtain or maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that is inherent in the clinical testing, manufacturing and marketing of human therapeutic products. Our clinical trial and commercial product liability insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain insurance on acceptable terms, if at all. Moreover, any insurance that we do obtain may not provide adequate protection against potential liabilities, and our capital resources could be depleted as a result.

Risks Relating to Our Common Stock

The price of our common stock is likely to continue to be volatile in the future.

The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market price of our common stock has been and may continue to be highly volatile. During the period from January 1, 2006 to March 1, 2009, our stock price has ranged from a low of $0.15 per share on each of October 8 and 10 and November 25, 2008 to a high of $14.90 per share January 9, 2006. The following factors, among others, may affect the price of our common stock:

·                   fluctuations in our financial results, including with respect to sales of BiDil;

·                   announcements concerning fundamental or material corporate transactions, restructuring or the like, or our failure to successfully consummate any such transaction, including the proposed merger with Deerfield Management;

·                   general market conditions, both domestic and international;

·                   announcements of technological innovations or new commercial products by our competitors;

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·                   announcements of actual or potential results relating to our BiDil XR development program;

·                   governmental regulations and regulatory developments in both the U.S. and foreign countries affecting us or our competitors;

·                   disputes relating to patents or other proprietary rights affecting us, our potential strategic partners or our competitors;

·                   public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies;

·                   fluctuations in price and volume in the stock market in general, or in the trading of the stock of biopharmaceutical and biotechnology companies in particular, that are unrelated to our operating performance;

·                   issuances of securities in equity, debt or other financings;

·                   sales of common stock by existing stockholders; and

·                   the perception that such issuances or sales could occur.

Insiders have substantial control over us and could delay or prevent a change in corporate control.

As of March 17, 2009, our directors and executive officer, together with their affiliates, owned, in the aggregate, approximately 33% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of most matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, if acting together, could have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:

·                   delaying, deferring or preventing a change in control of our company;

·                   impeding a merger, consolidation, takeover or other business combination involving our company; or

·                   discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

Provisions in our charter documents and under Delaware law may prevent or frustrate attempts by stockholders to change current management and hinder efforts to acquire a controlling interest in our company.

Provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may prevent or frustrate attempts by stockholders to replace or remove our current management. These provisions include:

·                   a prohibition on stockholder action through written consent;

·                   a requirement that special meetings of stockholders be called only by a majority of the board of directors, the chairman of the board or the chief executive officer;

·                   advance notice requirements for stockholder proposals and nominations;

·                   limitations on the ability of stockholders to amend, alter or repeal our certificate of incorporation or bylaws; and

·                   the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally defined as a person or entity which

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together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

Substantially 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.

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 March 17, 2009, there were 46,085,133 shares of common stock outstanding. Substantially all of these shares may also be resold in the public market at any time. In addition, we have a significant number of shares that are subject to outstanding options and restricted stock awards. The sale of the common stock underlying these options and pursuant to these restricted stock awards after such time as the options and restricted stock awards have vested and become exercisable or free from forfeiture, as the case may be, could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

We sublease approximately 4,000 square feet of office space at a facility located at 45 Hayden Avenue in Lexington, Massachusetts pursuant to a month-to-month sublease. We believe that our office space is adequate for our needs for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

We are aware of a purported class action lawsuit related to the merger with Deerfield Management that has been filed against us, each of our directors, our president and chief executive officer and certain of Deerfield Management’s affiliates in Suffolk County Superior Court in Massachusetts. The lawsuit, Mieczyslaw Stachnik et al. v. Kenneth Bate et al. , Civil Action No. 09-0622-BLS, was filed on February 12, 2009 and alleges, among other things, that the merger consideration to be paid to our stockholders in the merger is unfair and undervalues our company. In addition, the complaint alleges that our directors and our president and chief executive officer violated their fiduciary duties by, among other things, failing to maximize stockholder value and failing to engage in a fair sale process. The complaint seeks, among other relief, an injunction preventing completion of the merger or, if the merger is consummated, rescissory damages. We believe that this lawsuit is without merit and we plan to defend it vigorously.

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

On December 15, 2008, we filed a proxy statement requesting approval at a special meeting of stockholders, initially scheduled for January 14, 2009, for the sale of substantially all of the assets related to our BiDil and BiDil XR drug business pursuant to a purchase and sale agreement, dated October 22, 2008, between us and JHP Pharmaceuticals, LLC. In connection with the termination of the purchase and sale agreement with JHP Pharmaceuticals and our subsequent entry into a merger agreement with Deerfield Management, our board of directors cancelled this special meeting of stockholders .

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PART II

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

Market Price of and Dividends on NitroMed’s Common Stock and Related Stockholder Matters; Recent Sales of Unregistered Securities.

Market Price and Dividends

Our common stock is traded on The NASDAQ Global Market under the symbol “NTMD”. The following table sets forth the high and low sale prices per share of our common stock as reported on The NASDAQ Global Market for the periods indicated.

On March 17, 2009, the reported last sale price of our common stock on The NASDAQ Global Market was $0.75 per share, and we had approximately 54 holders of record of our common stock. This number does not include shareholders for whom shares are held in a “nominee” or “street” name.

We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors.

On September 16, 2008, we received a letter from the NASDAQ Stock Market’s Listing Qualifications Department providing notification that, for the last 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Market, referred to as the minimum bid price rule. NASDAQ stated in such notification that, in accordance with the NASDAQ Marketplace Rules, we have 180 calendar days, or until March 16, 2009, to regain compliance with the minimum bid price rule.  On October 22, 2008, we received an additional letter from NASDAQ to advise us that it has suspended enforcement of the bid price requirements for all NASDAQ listed companies through January 19, 2009. On December 23, 2008, we received another letter from NASDAQ to advise us that NASDAQ had determined to extend the suspension of the bid price requirements for all NASDAQ listed companies, and that enforcement of the bid price rules will be reinstated on April 20, 2009. The letter further stated that prior to the resumption of the bid price rules, NASDAQ will contact us to inform us of the number of calendar days remaining in our compliance period. Based upon the first suspension letter, in which NASDAQ informed us that we still had 151 days remaining in our 180 day compliance period as of the suspension date, upon reinstatement of the bid price rules on April 20, 2009, we believe that we will still have that number of days to regain compliance.

Prior to the end of the remaining time in our compliance period following the reinstatement of the bid price rules, if the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will provide written notification that we have achieved compliance with the minimum bid price rule. However, NASDAQ may, in its discretion, require that we maintain a bid price of in excess of $1.00 for a period in excess of 10 days, but generally no more than 20 days, before determining that we have demonstrated the ability to maintain long-term compliance

Information regarding our equity compensation plans and the securities authorized for issuance there under is set forth in Note 6 in our Notes to Financial Statements below.

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Comparative Stock Performance Graph

The comparative stock performance graph below compares the cumulative total stockholder return (assuming reinvestment of dividends, if any) from investing $100 on December 31, 2003 and plotted at the close of the last trading day of the fiscal years ended December 31, 2004, 2005, 2006, 2007 and 2008, in each of (i) our common stock, (ii) The NASDAQ Global Stock Market Index of U.S. Companies, which we refer to as the NASDAQ Composite Index, and (iii) The NASDAQ Global Stock Market Pharmaceutical Index, which we refer to as the NASDAQ Pharmaceutical Index.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among NitroMed Inc., The NASDAQ Composite Index

And The NASDAQ Pharmaceutical Index

*$100 invested on 12/31/03 in stock & index-including reinvestment of dividends.

Fiscal year ending December 31.

COMPARISON OF CUMULATIVE TOTAL RETURN

Among NitroMed Inc., The NASDAQ Composite Index

And The NASDAQ Pharmaceutical Index

The information included under the heading “Comparative Stock Performance Graph” in this Item 5 of our annual report on Form 10-K shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

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ITEM 6.  SELECTED FINANCIAL DATA

You should read carefully the financial statements included in this report, including the notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial data in this section are not intended to replace the financial statements.

We derived the statement of operations data for the years ended December 31, 2008, 2007 and 2006 and the balance sheet data as of December 31, 2008 and 2007 from our audited financial statements, which are included elsewhere in this report. We derived the statement of operations data for the years ended December 31, 2005 and 2004 and the balance sheet data as of December 31, 2006, 2005 and 2004 from our audited financial statements, which are not included herein. Historical results are not necessarily indicative of future results. See the notes to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per common share.

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

Recent Development – Proposed Merger with Deerfield Management

On January 27, 2009, we entered into an agreement and plan of merger with certain entities affiliated with Deerfield Management, a healthcare investment organization, which we refer to collectively as Deerfield Management. As of the date of the merger agreement, Deerfield Management owned approximately 11% of our outstanding common stock.

At the effective time of the merger with Deerfield Management, each outstanding share of our common stock will be converted into the right to receive $0.80 per share in cash, subject to adjustment if our net cash balance at the closing of the merger is greater than or less than $12.3 million, as calculated pursuant to the terms of the merger agreement. In addition, all outstanding options to purchase our common stock will become accelerated in full immediately prior to the effective time of the merger. Any option not exercised prior to the effective time of the merger will be converted automatically into the right to receive cash in an amount equal to the excess, if any, of the merger consideration per share of common stock over the exercise price of the option, multiplied by the number of shares of common stock underlying the option. The merger agreement includes a “go-shop” provision that allowed us to solicit, negotiate and evaluate competing acquisition proposals during a post-signing period that ended on February 26, 2009. We solicited, but did not receive any alternative acquisition proposals prior to the termination of the go-shop period. We currently expect to complete the merger with Deerfield Management in the second quarter of 2009 following the satisfaction or waiver of all conditions to the merger, including the adoption of the merger agreement by our stockholders at a special meeting of stockholders, which is currently scheduled for April 22, 2009.

                The merger agreement with Deerfield Management contains customary representations, warranties and covenants including, among others, covenants relating to using commercially reasonable efforts to obtain the requisite stockholder approval of the merger and related transactions, as well as our conduct of business during the period between the date of signing the merger agreement and the closing of the merger. Our and Deerfield Management’s obligations to consummate the merger are subject to the satisfaction or waiver of customary conditions, including (1) requisite approval of the merger by our stockholders, (2) the absence of any order or injunction preventing the consummation of the merger or any legal requirement that makes the consummation of the merger illegal, (3) obtaining any required governmental authorizations or consents and (4) determination of our final net cash in accordance with the merger agreement. Each party’s obligation to consummate the merger is also subject to other specified customary conditions, including the accuracy of the representations and warranties of the other party, subject to an overall material adverse effect qualification, and material compliance by the other party with its covenants. The merger agreement also provides us and Deerfield Management with specified termination rights. If the merger agreement is terminated under specified circumstances, we will be required to reimburse Deerfield Management for its documented fees and expenses associated with the merger agreement and the transactions contemplated thereby, up to a maximum of $750,000.

Prior to entering into the merger agreement with Deerfield Management, we terminated our previously announced purchase and sale agreement with JHP Pharmaceuticals, LLC and our previously announced agreement and plan of merger with Archemix Corp. in accordance with the terms of each of those agreements, including the payment of termination fees. In connection with the termination of the JHP purchase and sale agreement, we paid a fee of approximately $900,000 to JHP. In connection with the termination of the Archemix merger agreement, we paid a fee of $1,500,000 to Archemix.

BiDil

We are the maker of BiDil, which is indicated for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapies. BiDil is an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride. The FDA approved BiDil in June 2005 and we commercially launched BiDil in July 2005. We are currently a party to an exclusive five-year manufacturing and supply agreement with Schwarz Pharma Manufacturing, Inc., which is now a division of UCB S.A., for the three times daily immediate release dosage formulation of BiDil.

In January 2008, we discontinued active promotional activities for BiDil based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot allocate to the program, as well as our plans to conserve ca sh in order to pursue the development of BiDil XR, an extended release formulation of BiDil. We concurrently implemented a restructuring plan that eliminated approximately 80 positions, and our reduced headcount currently stands at four full-time positions. Although we have discontinued active promotional efforts related to BiDil, we continue to contract for the manufacturing of, and to sell, BiDil and maintain the product on the market for patients through

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normal wholesale and retail channels. We have also conducted limited advertising in select medical publications, and have utilized a third-party marketing firm to contact healthcare professionals on our behalf, in each case in an effort to maintain a limited market presence for BiDil. In conjunction with implementing our January 2008 restructuring plan, we implemented a plan to pursue strategic alternatives for our business, including the potential divestiture of our BiDil and BiDil XR business and/or our nitric oxide intellectual property portfolio, a merger or consolidation with another company, or other comparable arrangements.

Our January 2008 restructuring follows the elimination of our discovery research program in March 2006 and the replacement of our sales force with a small team of senior cardiovascular business managers in October 2006.  The January 2008 restructuring also follows our efforts in August 2007 to deploy an expanded field organization designed to focus on selected prescriber targets.

BiDil XR

BiDil is an orally-administered medicine that is presently dosed three times daily. In connection with our efforts to develop BiDil XR as a once-daily formulation, in February 2007 we entered into a license agreement with Elan Pharma International Limited, or Elan, pursuant to which Elan granted to us an exclusive worldwide royalty-bearing license to import, use, offer for sale and sell an oral capsule formulation incorporating specified technology owned or controlled by Elan and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride (which includes BiDil XR). In consideration for the grant of the license, we have agreed to pay Elan royalties that are calculated by reference to annual net sales parameters set forth in the agreement. In addition, we have also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events set forth in the agreement.

In December 2007, we met with the FDA to discuss our proposed development plan for BiDil XR. The FDA agreed that our clinical development plan to conduct bioequivalence and pharmacodynamic studies comparing BiDil XR to the current commercial immediate release formulation of BiDil is acceptable. Our proposed plan could support FDA approval to commercialize BiDil XR, if bioequivalence is demonstrated. The bioequivalence study design compares the pharmacokinetics of the BiDil XR formulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to the manner in which the body absorbs, distributes, metabolizes and excretes the study drug. The adequacy of the results will ultimately be determined by the FDA during the regulatory review period.

In conjunction with entering into the license agreement with Elan, we also entered into a development agreement with an affiliate of Elan, pursuant to which we have conducted the clinical studies on BiDil XR prototypes. Our pilot clinical trials have tested several BiDil XR prototypes and compared their pharmacokinetic profile with BiDil tablets. In preliminary clinical studies in healthy volunteers, we have demonstrated our ability to delay the release of isosorbide dinitrate and hydralazine hydrochloride by varying the amount of coating and ratios of different polymers on beads in capsules. We have continued to develop and refine BiDil XR prototypes as we seek a final formulation. However, additional clinical studies and trials will be required in order to finalize the BiDil XR formulation prior to the commencement of bioequivalence trials.  Based upon our activities in 2008 related to our now terminated agreement with JHP for the purchase and sale of our BiDil and BiDil XR drug business, as well as our decision to enter into a merger agreement with Deerfield Management, we have not yet commenced the next set of clinical trials pursuant to our BiDil XR development plan. We expect to incur minimal expenses in 2009 in connection with BiDil XR development activities.

Liquidity

Since our inception, we have mainly funded our operations through the sale of equity securities, debt financings, license fees, research and development funding, milestone payments from our collaborative partners, and more recently, sales of BiDil. We have never been profitable and have incurred an accumulated deficit of $351.3 million as of December 31, 2008.

We estimate that our operating expenses related to research and development and sales, general and administrative functions for the year ending December 31, 2009 will be approximately $11.5 million to $13.5 million, including share-based compensation expense related to Statement of Financial Accounting Standards No. 123(R), but excluding cost of product sales.

At December 31, 2008, our principal source of liquidity was $17.4 million of cash, cash equivalents and short-term marketable securities, which excludes approximately $1.6 million par value of auction rate securities classified as long-term

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marketable securities due to liquidity constraints. Pending the completion of our merger with Deerfield Management, we expect to incur operating expenses going forward primarily related to keeping BiDil available on the market. We expect to incur minimal additional expenses in 2009 related to the further development of BiDil XR. Whether or not the merger with Deerfield Management is completed, we believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations for at least the next twelve months. In the event that the planned merger with Deerfield Management is significantly delayed or is not completed at all, our future revenue from sales of BiDil could decline significantly based on a number of factors, including a decline in BiDil prescriptions by healthcare providers and a decline in the willingness of third party payors to provide reimbursement at favorable levels, in each case due, at least in part, to the prior elimination of our sales force and discontinuation of our active promotional efforts related to BiDil.

Financial Operations Overview

Revenue.   Our first commercial product, BiDil, was launched in July 2005, and generated product sales of $14.9 million for the year ended December 31, 2008. Prior to the launch of BiDil, all of our revenue had been derived from license fees, research and development payments and milestone payments that we received from our corporate collaborators. We discontinued active promotion of BiDil in January 2008.

Research and Development.   Research and development expense consists of expenses incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research and manufacturing, costs of facilities and BiDil medical support costs.

The following summarizes our primary research and development programs during the years ended December 31, 2008, 2007 and 2006. In some cases, we have not provided program costs because prior to 2000 we did not track and accumulate cost information by research program.

·                   BiDil.   From May 2001 to July 2004, we enrolled 1,050 patients at 169 clinical sites in the United States in our phase III clinical trial for BiDil. We halted the trial in July 2004 due to a significant survival benefit in the preliminary data for patients taking BiDil. The FDA approved BiDil on June 23, 2005, and we launched BiDil in July 2005. The total cost for the BiDil A-HeFT trial was approximately $43.0 million.

·                   BiDil XR.   The current formulation of BiDil is an immediate-release tablet that must be taken three times daily. We have pursued the development of BiDil XR, an extended release formulation of BiDil that could be taken once a day. To date, we have incurred approximately $11.0 million in connection with the development of BiDil XR. Preliminary clinical studies of BiDil XR demonstrated proof of principle, and we commenced clinical development of BiDil XR in October 2006. Additional formulation studies and trials will be required in order to finalize the formulation prior to the commencement of bioequivalence trials. Based upon our activities in 2008 related to our now terminated agreement with JHP for the purchase and sale of our BiDil and BiDil XR drug business, as well as our decision to enter into a merger agreement with Deerfield Management, we have not yet commenced the next set of clinical trials pursuant to our BiDil XR development plan. We expect to incur minimal expenses in 2009 in connection with BiDil XR development activities. Due to its stage of development, and the uncertainties inherent in pharmaceutical development generally, we may not be able to successfully develop and commercialize BiDil XR in the event that the merger with Deerfield Management is not completed.

·                   Other Discovery Research.   We have used our know-how and expertise in nitric oxide to develop preclinical stage drug candidates that are nitric oxide-enhancing versions of existing medicines in the areas of cardiovascular, gastrointestinal/anti-inflammatory and pulmonary medicine. These studies have not progressed beyond a discovery stage of testing, and it remains speculative whether the addition of nitric oxide will result in an improved clinical profile of these medicines. We continue to seek divestiture opportunities for the intellectual property rights associated with these technologies, and we have no plans to engage in any future research and development activities with respect to these programs. We cannot be certain if we will be able to secure divestiture arrangements for our nitric oxide-based intellectual property on favorable terms, if at all.

Sales, General and Administrative.   Sales, general and administrative expense has historically consisted primarily of salaries and other related costs for personnel in sales and marketing, executive, finance, investor relations, accounting, business development and human resource functions. Other costs include facility costs not otherwise included in research and

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development expense; costs for public relations, advertising and promotion services; professional fees for legal and accounting services; and costs related to our former arrangements with a contract sales organization.

Non-Operating Income.   Non-operating income includes interest earned on our cash, cash equivalents and marketable securities, auction rate securities impairments, state taxes and interest expense associated with our long-term debt.

Results of Operations

Years Ended December 31, 2008, 2007 and 2006

Revenue.   Total revenue for the year ended December 31, 2008 was $14.9 million, compared to $16.0 million in 2007 and $12.1 million in 2006. Product sales for the year ended December 31, 2008 were $14.9 million, compared to $15.3 million in 2007 and $12.1 million in 2006. The decrease in product sales is due to a reduction in prescriptions of BiDil in 2008 compared to 2007.

Research and development revenues were $-0- for the year ended December 31, 2008, compared to $0.8 million for 2007 and $-0- for 2006. The $0.8 million, or 100%, decrease in research and development revenues in 2008 compared to 2007 was due to a one-time upfront payment received in connection with our non-exclusive licensing of certain non-strategic intellectual property in October 2007 for which we have no continuing obligation.

Cost of Product Sales.   Cost of product sales for the year ended December 31, 2008 was $3.5 million, compared to $4.2 million in 2007 and $3.6 million in 2006. The $0.7 million, or 19%, decrease in cost of product sales in 2008 compared to 2007 is primarily due to a $1.7 million decrease in inventory impairment charges, offset by a $0.8 million increase in royalties. The $0.6 million, or 19%, increase in cost of product sales in 2007 compared with 2006 was primarily due to an increase of $0.8 million in inventory impairment charges related to commercial trade inventory, patient sample inventory and contractual purchase commitments. The charges were due to our then current estimate of inventory requirements based on our sales forecast.

Research and Development.   Research and development expense for the year ended December 31, 2008 was $2.8 million, compared to $12.2 million in 2007 and $17.0 million in 2006. The $9.4 million, or 77%, decrease in research and development expenses in 2008 compared with 2007 was primarily the result of a decrease in payroll and benefits due to our restructuring in January 2008, decreases in the areas of continuing medical education, clinical advisory boards, medical services fees, publications, stock-based compensation expense and other various contracted services totaling $5.9 million, and a $3.5 million decrease in spending related to BiDil and BiDil XR. The $4.8 million, or 28%, decrease in research and development expenses in 2007 compared with 2006 was primarily the result of decreased clinical and medical expenses needed to support BiDil, a decrease in payroll and benefits due to our restructuring in March 2006, and decreases in the areas of continuing medical education, clinical advisory boards, medical services fees, publications, stock-based compensation expense and other various contracted services totaling $8.6 million, offset by an increase of $3.8 million related to the development of BiDil XR.

The following table summarizes the primary components of our research and development expense for our principal research and development programs for the fiscal years ended December 31, 2008, 2007 and 2006.

Sales, General and Administrative.   Sales, general and administrative expense for the year ended December 31, 2008 was $12.1 million, compared to $31.4 million in 2007 and $59.4 million in 2006. The $19.3 million, or 61%, decrease in sales, general and administrative expense in 2008 compared to 2007 was primarily due to a $8.4 million reduction in salary and benefit expenses from our restructuring in January 2008, a $6.6 million reduction in advertising and promotional services and public relations, a $0.7 million reduction in rent expenses, and a $2.4 million reduction in stock-based compensation expense. The $28.0 million, or 47%, decrease in sales, general and administrative expense in 2007 compared to 2006 was primarily due to a $17.3 million reduction in salary and benefit expenses from the restructuring of our sales

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force in October 2006, offset by the hiring of a smaller sales force in mid-2007, a $5.1 million reduction in advertising and promotional services and public relations, a $1.6 million reduction in rent expenses, a $1.4 million reduction in stock-based compensation expense, and a $1.4 million reduction in consulting expenses.

Restructurings.   In the first quarter of 2006, we recorded a restructuring charge of $2.0 million related to a restructuring of our discovery research operations to better align costs with revenue and operating expectations. The restructuring charges pertained to employee severance and impairment of assets and were recorded in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146, and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. In connection with the restructuring, we terminated 30 employees in our discovery research group, or approximately 30% of our workforce, resulting in a charge of $1.4 million. All employees were terminated as of March 31, 2006. As a result of terminating these employees, we recorded an impairment charge for certain research laboratory equipment, computer equipment, and furniture and fixtures aggregating $0.6 million, for which the future use was uncertain. These assets were written down to their fair value utilizing a third party appraiser to estimate the fair value of the assets based on current market quotes and the current condition of the equipment, furniture and fixtures.

In the fourth quarter of 2006, we recorded a restructuring charge of $3.2 million, which includes severance benefits of $2.5 million and impairment charges of $0.7 million for certain research and development equipment, leasehold improvements, furniture and fixtures, and computers. The restructuring charges were recorded in accordance with SFAS 146 and SFAS 144. This restructuring program included the elimination of 120 sales personnel and eight general and administrative and research and development personnel. These employees were terminated in October 2006, and no employee remained employed at December 31, 2006. Due to these actions, certain research and development equipment, leasehold improvements, furniture and fixtures and computers became impaired. These assets were written down to the fair value based on either a third-party quote, or the estimated discounted cash flows they would generate over the remaining economic life.

In the first quarter of 2007, we recorded a restructuring charge of $1.0 million related to vacating our former headquarters location. The charge was recorded pursuant to SFAS 146. In March 2007, we entered into an Assignment of Lease and Assumption Agreement, which we refer to as the Assignment Agreement, with Shire Human Genetic Therapies, Inc., or Shire, pursuant to which we assigned our lease for office and laboratory space located at 125 Spring Street in Lexington, Massachusetts, which we refer to as the Spring Street Lease. Pursuant to the terms of the Assignment Agreement, we agreed to pay Shire the amount of approximately $1.2 million as consideration for Shire’s assumption of the Spring Street Lease. In addition to this charge, we incurred $0.6 million in expenses primarily related to real estate brokerage fees and clean-up costs. Offsetting these charges was a reversal of $0.8 million in accrued rent related to the Spring Street Lease. All amounts were paid as of June 30, 2007.

In the first quarter of 2008, we recorded restructuring charges of $2.7 million, which includes severance benefits of $2.6 million related to the reduction of our employee headcount from approximately 90 to approximately six positions, and impairment charges of $0.1 million for disposal of computer equipment. The severance benefit charges were recorded in accordance with Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postemployment Benefits , or SFAS 112, for contractual termination benefits for certain executives and SFAS 146 for one-time termination benefits for the remainder of employees terminated. As of December 31, 2008, we owed $24,000 for salary continuation payments.

Stock-Based Compensation Expense.   We follow the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment , or SFAS 123R. Compensation cost recognized subsequent to December 31, 2005 includes: (a) compensation cost for all stock-based payments granted but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation , or SFAS 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Such amounts have been reduced by our estimate of forfeitures of all unvested awards. Results for prior periods have not been restated.

Prior to the adoption of SFAS 123R, we accounted for share-based payments to employees using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , or APB 25.

Non-Operating Income.   Non-operating income decreased to $0.2 million in 2008 compared to $1.2 million in 2007 and $1.9 million in 2006. The $1.0 million, or 81%, decrease in non-operating income in 2008 compared to 2007 was primarily related to a $1.2 million decrease in interest income due to lower average investment balances and impairment

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charges of $0.2 million, offset by $0.6 million in lower interest expense associated with our debt, which was paid in full in June 2008. The $0.7 million, or 36%, decrease in non-operating income in 2007 compared to 2006 was primarily related to a $1.3 million decrease in interest income due to lower average investment balances, offset by $0.7 million in lower interest expense associated with our debt because the principal balance due on the debt was lower in 2007.

Liquidity and Capital Resources

Since our inception, we have primarily funded our operations through the sale of equity securities, debt financings, license fees, research and development funding, milestone payments from our collaborative partners and, more recently, sales of BiDil. As of December 31, 2008, we have received net proceeds of $321.2 million from the issuance of equity securities, primarily as the result of:

·                   the sale of $99.1 million of our redeemable convertible preferred stock;

·                   net proceeds of $60.1 million from our initial public offering in November 2003;

·                   net proceeds of $81.8 million from our follow-on public offering in December 2004;

·                   net proceeds of $58.5 million from our registered direct offering in January 2006; and

·                   net proceeds of $18.2 million from our registered direct offering in May 2007.

At December 31, 2008, we had $17.4 million in cash, cash equivalents and marketable securities.

During the year ended December 31, 2008, operating activities used cash of $9.2 million, primarily due to a net loss of $5.9 million and a decrease of $5.3 million in accounts payable and accrued expenses, offset by impairment charges of $0.2 million, non-cash stock-based compensation expense of $1.4 million and $0.1 million in depreciation and amortization. In 2007, operating activities used cash of $23.5 million, primarily due to a net loss in 2007 of $31.6 million and a $0.6 million increase in accounts receivable, offset by an increase of $1.4 million in accounts payable and accrued expenses, a decrease of $1.4 million in inventory, and non-cash charges of $6.0 million for depreciation expense and stock-based compensation expense.

During the year ended December 31, 2008, investing activities added cash of $15.1 million, primarily due to net sales of marketable securities of $14.9 million. In 2007, investing activities used cash of $1.1 million, primarily due to net purchases of marketable securities of $2.1 million and capital expenditures of $0.2 million, offset by $0.5 million in cash received on the disposal of fixed assets and $0.6 million of restricted cash received by us due to the assignment of the Spring Street Lease.

During the year ended December 31, 2008, financing activities used cash of $3.5 million due to $3.7 million in principal payments on long-term debt. In 2007, financing activities provided cash of $11.7 million due to net proceeds of $18.2 million from our registered direct offering, and $0.4 million from the issuance of common stock under our employee stock plans, offset by $6.9 million in principal payments on long-term debt.

In June 2005, we borrowed (i) $10.0 million from Oxford Finance Corporation, or Oxford, and (ii) $10.0 million from General Electric Capital Corporation, or GECC, pursuant to the terms of promissory notes made by us with both Oxford and GECC, respectively. The notes bore interest at a fixed rate of 9.95% per annum and were payable in 36 consecutive monthly installments of principal and accrued interest, beginning July 1, 2005. The notes were secured by a security interest in all our personal property and fixtures with the exception of any intellectual property or products acquired, whether by purchase, license or otherwise, on or after the execution of the notes. As of June 30, 2008, the promissory notes had been paid in full.

As of December 31, 2008, all marketable securities held by us have maturity dates that range from 2009 to 2045.

As of December 31, 2008, we held approximately $1.6 million par value of auction rate securities. These auction rate securities are comprised of approximately $1.3 million of preferred stock closed-end fund auction rate securities and a $0.3 million government-backed student loan auction rate security. Auction rate securities are securities that are structured to allow for short-term interest rate resets, but with contractual maturity dates that can be well in excess of ten years. Auctions have historically provided a liquid market for these securities. However, beginning in February 2008, the majority of auction

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rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Such failures resulted in the interest rate on these securities resetting to predetermined rates within the underlying loan agreement, which might be higher or lower than the current market rate of interest. Our ability to liquidate our auction rate securities and fully recover the carrying value of our investments in the near term may be limited or not exist. In the event that we need to access our investments in these auction rate securities, we will not be able to do so until a future auction of these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. As a result of these factors, we recorded impairment charges of $157,000 for the year ended December 31, 2008. We estimated the fair value of our auction rate securities using a discounted cash flow analysis that considered the following key inputs: (a) the underlying structure of each security; (b) the present value of future principle and interest payments discounted at rates considered to reflect the relevant risk associated with each security; (c) the time horizon that the market value of each security could return to its cost; and (d) other factors such as the credit rating of the issuer and any other credit enhancements. We may be required to record additional impairment charges on these investments from time to time.

As of December 31, 2008, we classify our auction rate securities as long-term marketable securities, reflecting management’s determination that these securities may not be liquidated within one year due to the auction failures described above. We did not experience any realized losses on sales of auction rate securities in 2008.

For the year ended December 31, 2008, the cumulative impairments recorded by us include an impairment of $32,000 on our government-backed student loan auction rate security and an impairment of $125,000 on our preferred stock closed-end fund auction rate securities.

Payments Due by Period

The following table summarizes our contractual obligations at December 31, 2008 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

In January 2008, we ceased actively promoting sales of BiDil, which is our only significant source of revenue. Pending the completion of our merger with Deerfield Management, we expect to incur operating expenses going forward primarily related to keeping BiDil available on the market. We expect to also incur minimal additional expenses in 2009 related to the further development of BiDil XR. Whether or not the merger with Deerfield Management is completed, we believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations for at least the next twelve months. However, our future capital requirements, and the period in which we expect our current cash to support our operations, may vary due to a number of factors, including the following:

·                   our ability to successfully consummate the proposed merger with Deerfield Management, or a comparable strategic arrangement related to our business and assets, and the expenses related to any such transaction;

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·                   the amount of future product sales of BiDil;

·                   the cost of manufacturing and selling BiDil;

·                   the timing of collections related to sales of BiDil;

·                   the time and costs involved in completing the clinical trials and further development of, and obtaining regulatory approvals for, BiDil XR, if at all;

·                   the effect of competing technological and market developments;

·                   the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

·                   the cost of maintaining licenses to use patented technologies;

·                   unfavorable conditions in the capital markets, which may adversely affect the value and liquidity of its investments; and

·                   general global and domestic economic conditions, including inflation, recessionary risks and volatile energy costs.

We intend to consummate the proposed merger with Deerfield Management. If the proposed merger with Deerfield Management is not approved by our stockholders or is not completed for other reasons, we will review the strategic alternatives available for our business, including the possible dissolution of our company and liquidation of our assets, the discharge of any remaining liabilities, and the eventual distribution of remaining assets, if any, to our stockholders .

Application of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue, inventory, accrued expenses and the factors used to determine the fair value of our stock options. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are recorded in the period in which they become known.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue.   Our principal source of revenue is the sale of BiDil, which began shipping in July of 2005. Other sources of revenue to date include license fees, research and development payments and milestone payments that we have received from our corporate collaborators. We exercise significant judgment in determining the amount of revenue we can recognize in connection with sales of our products and with respect to our corporate collaborations. To the extent that actual facts and circumstances differ from our initial judgments, our revenue recognition could change accordingly and any such change could affect our reported operating results.

Product Sales/Deferred Revenue.   We follow the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and recognize revenue from product sales upon delivery of product to wholesalers or pharmacies when persuasive evidence of an arrangement exists, the fee is fixed or determinable, title to product and associated risk of loss has passed to the wholesaler and collectibility of the related receivable is reasonably assured. All revenues from product sales are recorded net of applicable allowances for sales returns, wholesaler allowances, rebates, and discounts. For arrangements where the risk of loss has not passed to wholesalers or pharmacies, we defer the recognition of revenue by recording deferred revenue until such time that risk of loss has passed. In addition, we evaluate our level of shipments to wholesalers and pharmacies on a quarterly basis compared to the estimated level of inventory in the channel, remaining shelf-life of the product shipped, weekly prescription data and quarterly forecasted sales.

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Sales Returns, Allowances, Rebates and Discounts.   Our product sales are subject to returns, wholesaler allowances, rebates and cash and contract discounts that are customary in the pharmaceutical industry. A large portion of our product sales are made to pharmaceutical wholesalers for further distribution through pharmacies to patients, who are consumers of the product. We determine the provisions for sales returns, allowances, rebates and discounts based primarily on estimates and contractual terms.

Product Returns.   Consistent with industry practice, we offer contractual return rights that allow customers to return product only during the period that is six months prior to, and twelve months after, product expiration. Commercial product shipped during 2005 and the first half of 2006 had a shelf-life of twelve months from date of manufacture with expiration dates ranging from April 2006 to May 2007. During the third quarter of 2006, we began shipping commercial product with an expiration date of 18 months. During the second quarter of 2007, we began shipping commercial product with an expiration date of 24 months. During the fourth quarter of 2008, we began shipping commercial product with an expiration date of 36 months. Factors that are considered in our estimate of future product returns include an analysis of the amount of product in the wholesaler and pharmacy channels, discussions with key wholesalers and other customers regarding inventory levels and shipment trends, review of consumer consumption data, and the remaining time to expiration of our product. As a result of this ongoing evaluation, our product return reserve was $1.4 million and $0.9 million at December 31, 2008 and 2007, respectively. For the years ended December 31, 2008, 2007 and 2006, we recorded a reduction to revenue for product returns of $2.0 million, $1.0 million and $2.6 million, respectively. The return rate and related reserve are evaluated on a quarterly basis, assessing each of the factors described above, and adjusted accordingly. In developing a reasonable estimate for the reserve for product returns, we consider the factors in paragraph 8 of Statement of Financial Accounting Standards No. 48, Revenue Recognition When a Right of Return Exists. The actual amount of product returns could vary significantly from our estimates and could have a material effect on our financial condition and results of operations in any reporting period. Due to an increase in the volume of returns related to commercial product with an expiration date of 24 months, we revised our estimated product return reserve during the fourth quarter of 2008. Prior to the fourth quarter of 2008, we had estimated our provision for returns for commercial product with an expiration date of 24 months using historical return data for commercial product with expiration dates of 12 months and 18 months. Commercial product with an expiration date of 24 months did not begin to expire until the fourth quarter of 2008. This revision to our estimate resulted in an increase to the provision for returns of approximately $1.0 million in the year ended December 31, 2008, as compared to the year ended December 31, 2007.

Sample Voucher and Co-Pay Card Program.   Beginning in the third quarter of 2005, we initiated a sample voucher program whereby we offered an incentive to patients in the form of a free 30-day trial, or approximately 100 tablets, of BiDil. We have accounted for this program in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer . Initially, these sample programs had quarterly expiration dates such that each sample voucher program was only active for one quarter at a time. As a result, at the end of each quarter we could determine the actual amount of reimbursement claims received for the vouchers distributed during the quarter. The amount of reimbursement is recorded as a reduction to revenue. During the third quarter 2006, we initiated a six month co-pay program whereby we cover the co-pay for eligible insured patients for their BiDil prescriptions, including refills. As a result of these programs, we recorded a reduction to revenue of $0.1 million, $0.1 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Sales Discounts, Rebates and Allowances.   Sales discounts, rebates and allowances result primarily from sales under contract with healthcare providers, wholesalers, Medicare and Medicaid programs and other governmental agencies. We estimate rebates and contractual allowances, cash and contract discounts and other rebates by considering the following factors: current contract prices and terms, sales volume, estimated customer and wholesaler inventory levels and current average rebate rates. For the years ended December 31, 2008, 2007 and 2006, we recorded cash discounts, rebates and other allowances of $6.1 million, $5.3 million and $1.5 million, respectively.

License and Collaboration Revenue.   We record collaboration revenue on an accrual basis as it is earned and when amounts are considered collectible. Revenues received in advance of performance obligations, or in cases where we have a continuing obligation to perform services, are deferred and recognized over the contractual or estimated performance period. Revenues from milestone payments that represent the culmination of a separate earnings process are recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. When we are required to defer revenue, the period over which such revenue should be recognized is subject to estimates by management and may change over the course of the collaborative agreement.

Inventory.   We review our estimates of the net realizable value of our inventory at each reporting period. Our estimate of the net realizable value of inventory is subject to judgment and estimation. The actual net realizable value could

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vary significantly from our estimates and could have a material effect on our financial condition and results of operations in any reporting period. On a quarterly basis, we analyze our current inventory levels and future irrevocable inventory purchase commitments and write down inventory that has become un-saleable, inventory that has a cost basis in excess of its expected net realizable value and irrevocable inventory purchase commitments that are in excess of expected future inventory requirements based on our sales forecasts. For the year ended December 31, 2008, we recorded inventory impairment charges of $0.5 million to cost of sales related to commercial trade inventory, patient sample inventory and excess raw materials. For the year ended December 31, 2007, we recorded inventory impairment charges of $2.3 million to cost of sales related to commercial trade inventory, patient sample inventory, contractual purchase commitments in excess of our sales forecast, and excess raw materials. For the year ended December 31, 2006, we recorded inventory impairment charges of $1.5 million to cost of sales related to commercial trade inventory, patient sample inventory and contractual purchase commitments in excess of our sales forecast.

Accrued Expenses.   As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services which have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated expenses for which we accrue include fees such as amounts owed for clinical trials, sales and marketing data management, product development, contract manufacturers for the production of finished goods, marketing and medical support, such as advisory boards, and publications, marketing services and professional services, such as lawyers and accountants. In connection with such services, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs, which have begun to be incurred, or we over- or under-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often determined based on subjective judgments. We make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting principles.

Stock-Based Compensation.   Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R to recognize compensation cost associated with stock options issued to employees. Determining the amount of stock-based compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of a stock option. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires us to make estimates for volatility, risk-free interest rate, expected term, and expected dividend yield. Volatility is determined exclusively using historical volatility data of our common stock based on the period of time since our common stock has been publicly traded. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The expected life of stock options granted is based exclusively on historical data and represents the weighted average period of time that stock options granted are expected to be outstanding. The expected life is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior amongst our employee population.

Accounting for equity instruments granted or sold by us under APB 25, SFAS 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services , requires fair value estimates of the equity instrument granted or sold. If our estimates of the fair value of these equity instruments are too high or too low, our expenses may be over or under stated. For equity instruments granted or sold in exchange for the receipt of goods or services, we estimate the fair value of the equity instruments based upon consideration of factors which we deem to be relevant at that time. Because shares of our common stock were not publicly traded prior to the commencement of our public offering on November 5, 2003, market factors historically considered in valuing stock and stock option grants include comparative values of public companies discounted for the risk and limited liquidity provided for in the shares we are issuing, pricing of private sales of our redeemable convertible preferred stock, prior valuations of stock grants and the effect of events that have occurred between the time of such grants, economic trends, and the comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity.

Prior to our initial public offering, the fair value of our common stock was determined by our board of directors contemporaneously with the grant. In the absence of a public trading market for our common stock, our board of directors considered numerous objective and subjective factors in determining the fair value of our common stock. At the time of option grants and other stock issuances, our board of directors considered the liquidation preferences, dividend rights, voting control and anti-dilution protection attributable to our then-outstanding redeemable convertible preferred stock, the status of private and public financial markets, valuations of comparable private and public companies, the likelihood of achieving a

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liquidity event such as an initial public offering, our existing financial resources, our anticipated continuing operating losses and increased spending levels required to complete our clinical trials, dilution to common stockholders from anticipated future financings and a general assessment of future business risks.

Inflation

We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements , or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, FASB issued Staff Position No. 157-2, or FSP 157-2, which delayed the effective date of SFAS 157 for non-financial assets and non-financial liabilities. We adopted the provisions of SFAS 157 related to financial assets and liabilities and items that are recognized at fair value on a recurring basis on January 1, 2008. The partial adoption of SFAS 157 related to financial assets and financial liabilities did not have a material impact on our results of operations, financial position or cash flows for the year ended December 31, 2008.

As permitted by FSP 157-2, we will not apply the provisions of SFAS 157 to property, plant and equipment until calendar year 2009. We believe the impact of the adoption on January 1, 2009 of the deferred provisions of SFAS 157 will not have a material impact on our results of operations, financial position or cash flows.

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 , or SFAS 159. SFAS 159 permits companies to choose to measure many financial instruments at fair value, which are not currently required to be measured as such, at specified election dates under SFAS 159’s fair value option. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We adopted the provisions of SFAS 159 on January 1, 2008, but did not elect the fair value option for any of our financial assets and financial liabilities.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of U.S. money market and high-grade corporate and U.S. government-related securities, directly or through managed funds, with maturities of two years or less. In addition, we hold auction rate securities that reset monthly. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2008 or December 31, 2007, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including U.S. government agencies, corporate notes and bonds, commercial paper, and money market funds. These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

As of December 31, 2008, all marketable securities held by us have maturity dates that range from 2009 to 2045.

As of December 31, 2008, we held approximately $1.6 million par value of auction rate securities. These auction rate securities are comprised of approximately $1.3 million of preferred stock closed-end fund auction rate securities and a $0.3 million government-backed student loan auction rate security. Auction rate securities are securities that are structured to allow for short-term interest rate resets, but with contractual maturity dates that can be well in excess of ten years. Auctions have historically provided a liquid market for these securities. However, beginning in February 2008, the majority of auction rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Such failures resulted in the interest rate on these securities resetting to predetermined rates within the underlying loan agreement, which might be higher or lower than the current market rate of interest. Our ability to liquidate our auction rate securities and fully recover the carrying value of our investments in the near term may be limited or not exist. In the event that we need to access our investments in these auction rate securities, we will not be able to do so until a future auction of these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. As a result of these factors, we recorded impairment charges of $157,000 for the year ended December 31, 2008. We estimated the fair value of our auction rate securities using a discounted cash flow analysis that considered the following key inputs: (a) the underlying structure of each security; (b) the present value of future principle and interest payments discounted at rates considered to reflect the relevant risk associated with each security; (c) the time horizon that the market value of each security could return to its cost; and (d) other factors such as the credit rating of the issuer and any other credit enhancements. We may be required to record additional impairment charges on these investments from time to time.

As of December 31, 2008, we classify our auction rate securities as long-term marketable securities, reflecting management’s determination that these securities may not be liquidated within one year due to the auction failures described above. We have not experienced any realized losses on sales of auction rate securities in 2008.

For the year ended December 31, 2008, the cumulative impairments recorded by us include an impairment of $32,000 on our government-backed student loan auction rate security and an impairment of $125,000 on our preferred stock closed-end fund auction rate securities.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

NitroMed, Inc.

We have audited the accompanying balance sheets of NitroMed, Inc. as of December 31, 2008 and 2007, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NitroMed, Inc. at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

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NITROMED, INC.

BALANCE SHEETS

(in thousands, except par value amounts)

The accompanying notes are an integral part of the financial statements.

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NITROMED, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(1)                                   Includes stock-based compensation expense as follows:

The accompanying notes are an integral part of the financial statements.

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NITROMED, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)