e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended March 31, 2008


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

For the transition period from to

Commission file number 000-49839

Idenix Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware		45-0478605
(State or Other Jurisdiction of		(IRS Employer Identification No.)
Incorporation or Organization)

60 Hampshire Street		02139
Cambridge, MA		(Zip Code)
(Address of Principal Executive Offices)

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

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

Indicate by check mark whether the registrant is 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. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

As of April 25, 2008, the number of shares of the registrant’s common stock, par value $.001 per share, outstanding was 56,335,557 shares.

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)


	March 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	54,613		$	48,260
Restricted cash		411			411
Marketable securities		30,947			39,862
Receivables from related party		940			11,196
Prepaid expenses and other current assets		3,029			3,990

Total current assets		89,940			103,719
Intangible asset, net		13,258			13,548
Property and equipment, net		15,146			15,460
Restricted cash, non-current		750			750
Marketable securities, non-current		13,330			23,882
Other assets		3,151			3,181

Total assets	$	135,575		$	160,540


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	4,221		$	5,372
Accrued expenses		13,219			16,437
Deferred revenue, related party		8,193			8,372
Other current liabilities		486			553

Total current liabilities		26,119			30,734
Long-term obligations		18,073			19,107
Deferred revenue, related party, net of current portion		38,916			41,861

Total liabilities		83,108			91,702
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.001 par value; 125,000,000 shares authorized at March 31, 2008 and December 31, 2007, respectively; 56,306,286 and 56,189,467 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		56			56
Additional paid-in capital		510,445			506,800
Accumulated other comprehensive income		1,182			738
Accumulated deficit		(459,216	)		(438,756	)

Total stockholders’ equity		52,467			68,838

Total liabilities and stockholders’ equity	$	135,575		$	160,540

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

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)


	Three Months Ended March 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(20,460	)	$	(11,569	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,656			1,048
Stock-based compensation expense		1,540			2,405
Revenue adjustment for contingently issuable shares		887			—
Other		2			(100	)
Changes in operating assets and liabilities:
Receivables from related party		10,256			(10,570	)
Prepaid expenses and other current assets		550			532
Accrued interest on marketable securities		30			388
Other assets		697			1
Accounts payable		(1,171	)		(2,942	)
Accrued expenses		(3,457	)		2,788
Deferred revenue, related party		(2,098	)		(2,699	)
Long-term obligations		(1,138	)		(1,526	)

Net cash used in operating activities		(12,706	)		(22,244	)

Cash flows from investing activities:
Purchases of property and equipment		(763	)		(1,988	)
Purchases of marketable securities		(12,550	)		(21,267	)
Sales and maturities of marketable securities		31,939			50,814

Net cash provided by investing activities		18,626			27,559

Cash flows from financing activities:
Proceeds from exercise of common stock options		192			158

Net cash provided by financing activities		192			158

Effect of changes in exchange rates on cash and cash equivalents		241			5

Net increase in cash and cash equivalents		6,353			5,478
Cash and cash equivalents at beginning of period		48,260			55,892

Cash and cash equivalents at end of period	$	54,613		$	61,370

Supplemental disclosure of noncash investing and financing activities:
Value of shares of common stock contingently issuable or issued to related party	$	1,913			(34	)

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

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS

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

Effective May 8, 2003, Novartis Pharma AG (“Novartis”), a subsidiary of Novartis AG, acquired a majority interest in the Company’s outstanding stock and the operations of the Company have been consolidated in the financial statements of Novartis since that date. Since May 2003, Novartis has had the ability to exercise control over the Company’s strategic direction, research and development activities and other material business decisions (Note 5).

In October 2006, the Company received approval from the U.S. Food and Drug Administration (“FDA”) to market its first product, Tyzeka^® (telbivudine), for the treatment of patients with chronic hepatitis B in the United States. In territories outside the United States, telbivudine is marketed as Sebivo^®. In April 2007, Sebivo^® was approved in the European Union for the treatment of patients with chronic hepatitis B. To date, Sebivo^® has been approved in more than 50 countries outside the United States, including China, Switzerland and the European Union.

In July 2007, the Company announced that the FDA had placed on clinical hold in the United States the Company’s development program of valopicitabine (“NM283”) for the treatment of HCV based on the overall risk/benefit profile observed in clinical testing. The Company does not plan to continue the development of valopicitabine.

In September 2007, the Company entered into an amendment to the development, license and commercialization agreement dated as of May 8, 2003 between the Company and Novartis (the “2007 Amendment”, and the 2007 Amendment and all prior amendments, the “Development and Commercialization Agreement”). In September 2007, the Company and Novartis also entered into a transition services agreement (the “TSA”). Pursuant to the 2007 Amendment, the Company transferred to Novartis all of its development, commercialization and manufacturing rights and obligations to telbivudine (Tyzeka^®/Sebivo^®) on a worldwide basis. Effective October 1, 2007, the Company began receiving royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage will vary based upon the territory and the aggregate dollar amount of net sales.

In conjunction with the 2007 Amendment, the Company announced a restructuring of its operations in which the Company entered into a plan to enact a workforce reduction of approximately 100 positions, the majority of which had supported the development and commercialization of Tyzeka^®/Sebivo^® in the United States and Europe (Note 10). The restructuring was a strategic decision on behalf of the Company to focus its resources on its HCV and HIV discovery and development programs.

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

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

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

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

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the fiscal year ending December 31, 2008. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2007, which are included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 14, 2008.

Revenue Recognition

The Company records revenue provided that there is persuasive evidence that an arrangement exists, the price is fixed or determinable and collectability is reasonably assured.

Collaborative Research and Development Revenue — Revenue related to collaborative research and development arrangements includes nonrefundable license fees, milestones, collaborative research and development funding and royalties received from the Company’s collaborative partners.

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

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

Royalty revenue consists of revenue earned under the Company’s license agreement with Novartis for sales of Tyzeka^®/Sebivo^®. Royalty revenue is equal to a percentage of Tyzeka^®/Sebivo^® net sales, with such percentage increasing according to specified tiers of net sales. The royalty percentage varies based upon the territory and the aggregate dollar amount of net sales.

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

The Company entered into a collaboration arrangement with Novartis in May 2003. The collaboration arrangement contemplates several joint committees in which the Company and Novartis participate. The Company

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

participates in these committees as a means to govern or protect its interests. The committees span the period from early development through commercialization of product candidates licensed by Novartis.

As a result of applying the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition, (“SAB 101”) which was the applicable revenue guidance at the time the collaboration was entered into, the Company’s revenue recognition policy attributes revenue to the development period of the product candidates licensed under the Development and Commercialization Agreement. The Company has not attributed revenue to its involvement in the committees following the commercialization of the licensed products as the Company has determined that its participation on the committees as such participation relates to the commercialization of product candidates is protective. The Company’s determination is based in part on the fact that its expertise is, and has been, the discovery and development of drugs for the treatment of human viral and other infectious diseases. Novartis, on the other hand, has and continues to possess the considerable commercialization expertise and infrastructure necessary for the commercialization of such drug candidates. Accordingly, the Company believes its obligation post commercialization is inconsequential.

Marketable Securities

The Company invests its excess cash balances in short-term and long-term marketable debt securities. The Company classifies all of its marketable debt securities as available-for-sale. The Company reports available-for-sale investments at fair value as of each balance sheet date and includes any unrealized gains and, to the extent deemed temporary, losses in stockholders’ equity. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate whether the decline is “other than temporary” and, if so, marks the investment to market through a charge to the consolidated statement of operations. Realized gains and losses are determined using the specific identification method and are included in investment and other income, net. The Company classifies its marketable securities with remaining maturities of 12 months or less as current marketable securities exclusive of those categorized as cash equivalents. The Company classifies its marketable securities with remaining maturities greater than 12 months as non-current marketable securities.

Investments are considered to be impaired when a decline in fair value below cost basis is determined to be other than temporary. The Company evaluates whether a decline in fair value below cost basis is other than temporary using available evidence regarding the Company’s investments. In the event that the cost basis of a security significantly exceeds its fair value, the Company evaluates, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and trends, and the Company’s intent and ability to hold the investment. Once a decline in fair value is determined to be other than temporary, a write-down is recorded in the consolidated statement of operations and a new cost basis in the security is established. There were no unrealized losses in investments which were deemed to be other than temporary during the quarter ended March 31, 2008 or the year ended December 31, 2007.

Fair Value Measurements

Financial instruments, including cash and cash equivalents, restricted cash, marketable securities, accounts receivable, receivables from related party, accounts payable and accrued expenses, are carried in the consolidated financial statements at amounts that approximated their fair value as of March 31, 2008 and December 31, 2007. The fair value of the Company’s investments is generally determined from quoted market prices received from pricing services. In addition, the Company’s investments in auction rate securities which consist entirely of municipal debt securities are recorded at fair value, which has historically approximated cost due to their variable interest rates, which typically reset through an auction process every seven to 35 days. This auction mechanism generally allows existing investors to roll over their holdings and continue to own their securities or liquidate their holdings by selling their securities at par value. The Company monitors the success or failure of the auctions. To the extent an auction were to fail and the securities were not liquid, the Company would also consider other alternative inputs to determine the fair value of these securities which may not be based on quoted market transactions.

Effective January 1, 2008, the Company implemented Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements, (“SFAS No. 157”) for its financial assets and other items that are recognized or disclosed at fair value on a recurring basis. This statement, among other things, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In accordance with the

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

provisions of FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157, the Company has elected to defer implementation of SFAS No. 157 as it relates to the Company’s non-financial assets and liabilities until January 1, 2009. The Company is currently evaluating the impact on its financial statements of the adoption of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis.

SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumption, SFAS No. 157 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

	•		Level 1 — Observable inputs such as quoted prices in active markets;

	•		Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

	•		Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

With the exception of its holdings in auction rate securities, the Company’s marketable securities were valued at March 31, 2008 using information provided by pricing services. Because the Company’s investment portfolio includes many fixed income securities that do not always trade on a daily basis, the pricing service applied other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, model processes were used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.

Since the Company’s investments in municipal auction rate securities typically do not actively trade except on auction dates, these securities were valued at par value based on information received from pricing services in conjunction with recently executed trades in the secondary market. The Company also considered the rating of the securities, whether or not the securities were insured, and to the extent information was available, the status of that insurance.

The following table is the Company’s assets and liabilities measured at fair value on a recurring basis:


	March 31, 2008
	Significant		Significant
	Other		Unobservable
	Observable Inputs		Inputs
	(Level 2)		(Level 3)		Total
			(in thousands)
Marketable securities	$	70,645	$	—	$	70,645
Auction rate securities		—		3,375		3,375

	$	70,645	$	3,375	$	74,020

The following table is a rollforward of the Company’s assets whose fair value is determined on a recurring basis using significant unobservable inputs (Level 3):


	Fair Value
	(in thousands)
Balance at December 31, 2007	$	11,050
Purchases, sales, and settlements		(7,675	)
Impairment included in other comprehensive income		—

Balance at March 31, 2008	$	3,375

In February 2007, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS No. 159”) was issued. SFAS No. 159 includes an amendment of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, (“SFAS No. 115”) and permits entities to elect, at specified election dates, to measure eligible items at fair value and requires unrealized gains and losses on items for which the fair

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

value option has been elected to be reported in earnings. Effective January 1, 2008, the Company adopted SFAS No. 159 and chose not to elect the fair value option as described in SFAS No. 159.

Share-Based Compensation

In December 2004, SFAS No. 123 (revised 2004) Share-Based Payment, (“SFAS No. 123(R)”) was issued. SFAS No. 123(R) requires share-based transactions for employees and directors to be accounted for using a fair value based method that results in expense being recognized in the Company’s financial statements.

The Company recognizes compensation expense for stock options granted to non-employees in accordance with the requirements of SFAS No. 123(R) and EITF Issue No. 96-18, Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”). EITF 96-18 requires such equity instruments to be recorded at their fair value at the measurement date, which is generally the vesting date of the instruments. Therefore, the measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.

Income Taxes

As of January 1, 2007, the Company adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertain Tax Positions, (“FIN No. 48”) and recognizes uncertain tax positions in the financial statements if the tax position meets “a more likely than not” threshold for the benefit.

The total amount of unrecognized tax benefits was $2.8 million and $3.4 million at January 1, 2008 and March 31, 2008, respectively. Of this amount, $2.3 million will impact the effective tax rate if ultimately realized and $1.1 million would be offset by an increase in the valuation allowance on deferred tax assets.

As of March 31, 2008, the Company had accrued $0.5 million of interest and penalties relating to uncertain tax positions. The Company accounts for interest and penalties related to its uncertain tax positions as part of investment and other income, net.

3. NET LOSS PER COMMON SHARE

The Company accounts for and discloses net loss per common share in accordance with SFAS No. 128, Earnings Per Share (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares and dilutive potential common shares then outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of outstanding stock options (using the treasury stock method), issuance of contingently issuable shares subject to Novartis’ subscription rights (see Note 5) and restricted stock awards.


	Three Months Ended March 31,
	2008			2007
	(in thousands, except
	per share data)
Basic and diluted net loss per common share:
Net loss	$	(20,460	)	$	(11,569	)
Basic and diluted weighted average number of common shares outstanding		56,274			56,126
Basic and diluted net loss per common share	$	(0.36	)	$	(0.21	)

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

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


	Three Months Ended March 31,
	2008		2007
	(in thousands)
Options		6,357		4,792
Contingently issuable shares to related party		917		—

		7,274		4,792

In addition to the contingently issuable shares to related party listed in the table above, Novartis is entitled to additional shares under its stock purchase rights which would be anti-dilutive based on the Company’s current stock price.

4. COMPREHENSIVE LOSS

For the three months ended March 31, 2008 and 2007, respectively, comprehensive loss was as follows:


	Three Months Ended March 31,
	2008			2007
	(in thousands)
Net loss	$	(20,460	)	$	(11,569	)
Changes in other comprehensive loss:
Foreign currency translation adjustment		491			40
Unrealized loss on marketable securities		(47	)		(42	)

Total comprehensive loss	$	(20,016	)	$	(11,571	)

5. NOVARTIS RELATIONSHIP

Overview

In May 2003, the Company entered into a collaboration with Novartis relating to the worldwide development and commercialization of the Company’s product candidates. The collaboration includes the Development and Commercialization Agreement under which the Company collaborates with Novartis to develop, manufacture and commercialize product candidates which they license from the Company.

In September 2007, the Company entered into the 2007 Amendment and the TSA. The 2007 Amendment and TSA are effective as of October 1, 2007. Pursuant to the 2007 Amendment, the Company transferred to Novartis all of its development, commercialization and manufacturing rights and obligations related to telbivudine, the Company’s drug product for the treatment of hepatitis B virus (“HBV”), on a worldwide basis. Telbivudine is marketed as Tyzeka^® in the United States and as Sebivo^® in the rest of the world. The Company will receive royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage shall vary based upon the territory and the aggregate dollar amount of net sales. Novartis is solely responsible for development and commercialization expenses relating to telbivudine beginning on October 1, 2007. Novartis shall also be responsible for certain costs associated with the transition of third party contracts and arrangements relating to telbivudine and certain intellectual property prosecution and enforcement activities. Pursuant to the TSA, the Company will provide Novartis with certain services relating to telbivudine through June 2008 (or later if agreed to by the parties). The Company will be reimbursed by Novartis for these services.

As part of the Development and Commercialization Agreement, Novartis paid the Company a license fee of $75.0 million for its hepatitis B virus (“HBV”) product and product candidate, Tyzeka^®/Sebivo^® and valtorcitabine, respectively, provided development funding for Tyzeka^®/Sebivo^® and valtorcitabine and was obligated to make milestone payments which could have totaled up to $35.0 million upon the achievement of certain regulatory approvals, as well as additional commercial milestone payments. Of the $35.0 million in milestone payments, the Company received payment on two of these regulatory milestones in 2007 totaling $20.0 million. One of these regulatory milestones for $10.0 million was achieved in the quarter ended March 31, 2007 with the regulatory approval of Sebivo^® in China. The Company recognized this regulatory milestone as collaboration revenue from

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

related party during the quarter ended March 31, 2007 as the milestone was deemed to be substantive. The second regulatory milestone for $10.0 million was achieved in April 2007 with the regulatory approval of Sebivo^® in the European Union. This milestone was deemed not to be substantive and the Company has included this milestone as part of the license fee which is being recorded as collaboration revenue from related party over the remaining development period of the Company’s licensed product candidates. The Company does not expect to receive any additional regulatory milestones for telbivudine or valtorcitabine.

As part of the Development and Commercialization Agreement, Novartis also acquired an option to license the Company’s HCV and other product candidates. In March 2006, Novartis exercised its option to license valopicitabine, the Company’s lead HCV product candidate at that time. As a result, Novartis paid the Company a license fee of $25.0 million in March 2006 and provided development funding for valopicitabine. Under the Development and Commercialization Agreement, Novartis agreed to pay the Company up to $500.0 million in additional license fees and regulatory milestone payments for an HCV product candidate. In July 2007, the Company announced that the FDA had placed on clinical hold in the United States the Company’s development program of valopicitabine for the treatment of HCV based on the overall risk/benefit profile observed in clinical testing. The Company subsequently discontinued the development of valopicitabine. As a result, the Company is not expected to receive any additional license fees or milestone payments for valopicitabine from Novartis.

Under the Development and Commercialization Agreement, the Company granted Novartis an exclusive worldwide license to market and sell Tyzeka^®/Sebivo^®, valtorcitabine and valopicitabine, subject to the Company’s commercialization rights. The Company will grant Novartis similar licenses at a future amount to be determined with respect to any other product candidates for which Novartis exercises its option to license. The Company initially retained the right to co-promote or co-market Tyzeka^®/Sebivo^®, valtorcitabine and valopicitabine in the United States, United Kingdom, France, Germany, Italy and Spain. Under the 2007 Amendment, the Company transferred to Novartis all of its development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a worldwide basis in exchange for royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage will vary based upon the territory and the aggregate dollar amount of net sales.

The Company is reimbursed by Novartis on a quarterly basis for expenses it incurs in connection with the development and registration of its licensed products and product candidates. Effective October 1, 2007, Novartis is solely responsible for clinical trial costs and related expenditures associated with telbivudine. The Company will be reimbursed by Novartis for approved costs associated with telbivudine for certain agreements that were transferred to Novartis under the TSA.

Simultaneously with the initial collaboration described above, Novartis purchased approximately 54% of the Company’s outstanding capital stock from the Company’s then existing stockholders for $255.0 million in cash, with an additional aggregate amount of up to $357.0 million contingently payable to these stockholders if the Company achieves predetermined development milestones relating to an HCV product candidate. As of March 31, 2008, Novartis owned approximately 56% of the Company’s outstanding stock.

To date, the Company has received from Novartis a $25.0 million license fee for valopicitabine, a $75.0 million license fee for Tyzeka^®/Sebivo^® and valtorcitabine, offset by $0.1 million in interest costs, and a $5.0 million reimbursement for reacquiring product rights from Sumitomo to develop and commercialize Sebivo^® in certain markets in Asia. The Company included this reimbursement as part of the license fee for accounting purposes because Novartis required the repurchase of these rights as a condition to entering into the Development and Commercialization Agreement. The Company also incurred approximately $2.3 million in costs associated with the development of valopicitabine prior to Novartis licensing valopicitabine in March 2006 for which Novartis reimbursed the Company. The Company has included the $10.0 million milestone payment for the regulatory approval of Sebivo^® in the European Union as part of the license fee for accounting purposes as the milestone was deemed not to be substantive. The sum of these non-refundable payments received from Novartis, totaling $117.2 million, has been recorded as license fees and is being recognized over the development period of the licensed product candidates.

The Company reviews its assessment and judgment on a quarterly basis with respect to the expected duration of the development period of its licensed product candidates. During the quarter ended March 31, 2008, the Company has estimated that the performance period during which the development of its licensed product and product candidates will be completed is a period of approximately ten and a half years following the effective date of the

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

Development and Commercialization Agreement that the Company entered into with Novartis, or December 2013. The Company is recognizing revenue on the license fee payments over this period. If the estimated performance period changes, the Company will adjust the periodic revenue that is being recognized and will record the remaining unrecognized license fee payments over the remaining development period during which the Company’s performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results.

Stockholders’ Agreement

In connection with Novartis’ purchase of stock from the Company’s stockholders, the Company, Novartis and substantially all of the Company’s stockholders entered into a stockholders’ agreement which was amended and restated in 2004 in connection with the Company’s initial public offering of its common stock (the “Stockholders’ Agreement”). The Stockholders’ Agreement provides, among other things, that the Company will use its reasonable best efforts to nominate for election as a director at least two designees of Novartis for so long as Novartis and its affiliates own at least 35% of the Company’s voting stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of the Company’s voting stock. As long as Novartis and its affiliates continue to own at least 19.4% of the Company’s voting stock, Novartis will have approval rights over a number of corporate actions that the Company may take, including the authorization or issuance of additional shares of capital stock and significant acquisitions and dispositions.

Subject to certain exceptions, Novartis and its affiliates have contractually agreed not to acquire prior to May 8, 2008, additional shares of the Company’s voting stock unless a majority of the independent board members waive such contractual provision. Acquisitions of the Company’s voting stock by exercise of Novartis’ stock purchase rights under the Stockholders’ Agreement or acquisitions of voting stock to maintain a 51% ownership interest in the Company’s fully diluted common stock, exclusive of any shares formerly held by Novartis BioVentures, Ltd., are specifically excepted from this restriction.

Novartis’ Stock Purchase Rights

Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as is required to maintain its percentage ownership of the Company’s voting stock if the Company issues shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of the Company’s stock in any 24-month period. These purchase rights of Novartis remain in effect until the earlier of: a) the date that Novartis and its affiliates own less than 19.4% of the Company’s voting stock; or b) the date that Novartis becomes obligated to make the additional contingent payments of $357.0 million to holders of the Company’s stock who sold shares to Novartis on May 8, 2003.

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

In connection with the closing of the Company’s initial public offering in July 2004, Novartis terminated a common stock subscription right with respect to 1,399,106 shares of common stock issuable by the Company as a result of the exercise of stock options granted after May 8, 2003 pursuant to the 1998 Equity Incentive Plan. In exchange for Novartis’ termination of such right, the Company issued 1,100,000 shares of common stock to Novartis for a purchase price of $0.001 per share. The fair value of these shares was determined to be $15.4 million at the time of issuance. As a result of the issuance of these shares, Novartis’ rights to purchase additional shares as a result of future option grants and stock issuances under the 1998 Equity Incentive Plan are terminated, and no additional adjustments to revenue and deferred revenue will be required. Prior to the termination of the stock subscription rights under the 1998 Equity Incentive Plan, as the Company granted options that were subject to this stock subscription right, the fair value of the Company’s common stock that would be issuable to Novartis, less par

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

value, was recorded as an adjustment of the license fee and payments received from Novartis. The Company remains subject to potential revenue adjustments relating to grants of options and stock awards under its stock incentive plans other than the 1998 Equity Incentive Plan.

As of March 31, 2008, Novartis’ stock subscription rights have reduced the license fee by an aggregate of $2.1 million, which has been recorded to additional paid-in capital. Of this amount, $1.1 million has been recorded as a reduction of deferred revenue as of March 31, 2008 with the remaining amount of $1.0 million recorded as a reduction of revenue.

Manufacturing and Packaging Agreements

In June 2006, after completing a competitive bid process where Novartis had the right to match the best third-party offer, the Company entered into a commercial manufacturing agreement (the “Manufacturing Agreement”) with Novartis and a packaging agreement (the “Packaging Agreement”) with Novartis Pharmaceuticals Corporation, an affiliate of Novartis. Under the Manufacturing Agreement, Novartis would manufacture the commercial supply of Tyzeka^® that was intended for sale in the United States. The Packaging Agreement provided that the supply of Tyzeka^® intended for commercial sale in the United States would be packaged by Novartis Pharmaceuticals Corporation.

As a result of the 2007 Amendment, the Manufacturing Agreement was terminated and the Company will work with Novartis to terminate the Company’s rights and obligations to the Packaging Agreement. Effective October 1, 2007, Novartis is solely responsible for the manufacture and supply of Tyzeka^®/Sebivo^® on a worldwide basis. No penalties were incurred by the Company as a result of the termination.

Product Sales Arrangements

In connection with the Novartis license of product candidates under the Development and Commercialization Agreement, the Company has retained the right to co-promote or co-market all licensed products in the United States, United Kingdom, France, Germany, Italy and Spain. In the United States, the Company will act as the lead party and record revenue from product sales and share equally the net benefit from co-promotion from the date of product launch. In the United Kingdom, France, Germany, Italy and Spain, Novartis would act as the lead party, record revenue from product sales and share with the Company the net benefit from co-promotion and co-marketing. The net benefit was defined as net product sales minus related cost of sales. The amount of the net benefit that would be shared with the Company would start at 15% for the first 12-month period following the date of launch, increasing to 30% for the second 12-month period following the date of launch and 50% thereafter. In other countries, the Company would effectively sell products to Novartis for their further sale to third parties. Novartis would pay the Company for such products at a price that is determined under the terms of the Company’s supply agreement with Novartis.

In September 2007, the Company amended its Development and Commercialization Agreement with Novartis in which Novartis assumed sole responsibility for product sales of Tyzeka^®/Sebivo^® on a worldwide basis beginning on October 1, 2007. As a result, beginning in the fourth quarter of 2007, the Company no longer records product sales of Tyzeka^®.

6. MARKETABLE SECURITIES

The Company invests its excess cash in accounts held at large U.S. based financial institutions and considers its investment portfolio as marketable securities available-for-sale as defined in SFAS No. 115. Accordingly, these marketable securities are recorded at fair value based on Level 2 and Level 3 inputs as described by SFAS No. 157. The fair values of available-for-sale investments by type of security, contractual maturity and classification in the balance sheets as of March 31, 2008 and December 31, 2007 are as follows:

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED


	March 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
	(in thousands)
Type of security:
Money market funds	$	30,304	$	—	$	—		$	30,304
Certificates of deposit		5,003		7		—			5,010
Corporate debt securities		32,017		49		(201	)		31,865
U.S. government obligations		8,472		4		—			8,476
Auction rate securities		3,375		—		—			3,375
Accrued interest		613		—		—			613

	$	79,784	$	60	$	(201	)	$	79,643


	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
			(in thousands)
Type of security:
Money market funds	$	21,702	$	—	$	—		$	21,702
Commercial paper		1,993		—		—			1,993
Corporate debt securities		56,361		15		(109	)		56,267
Municipal bonds		1,990		—		—			1,990
Auction rate securities		11,050		—		—			11,050
Accrued interest		763		—		—			763

	$	93,859	$	15	$	(109	)	$	93,765


	March 31,		December 31,
	2008		2007
	(in thousands)
Contractual maturity:
Maturing in one year or less	$	66,313	$	69,883
Maturing after one year through two years		5,645		4,490
Maturing after two years through ten years		3,538		7,274
Maturing after ten years		4,147		12,118

	$	79,643	$	93,765

At March 31, 2008 and December 31, 2007, approximately $3.4 million and $11.1 million, respectively, of the Company’s investments in marketable securities were auction rate securities. These auction rate securities consisted entirely of municipal debt securities, and were classified as long-term based on contractual maturity. In the first quarter of 2008, certain of the Company’s municipal auction rate securities experienced failed auctions. As of April 25, 2008, the Company had liquidated all but $2.4 million of the Company’s auction rate securities, all of which were held at March 31, 2008. The liquidation of these auction rate securities did not result in any losses to the Company. As of March 31, 2008, $2.4 million of these municipal auction rate securities were rated AAA or Aaa by investment rating agencies, with the remaining auction rate security with a market value of $1.0 million rated A1/A+. In the event that a future auction is not able to be completed due to sell orders exceeding buy orders, the Company may not have the ability to quickly liquidate these investments. In the event that access to investments in these securities is necessary, the Company will not be able to do so until a future auction is successful, the issuer redeems the outstanding securities, a buyer is found outside the

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

auction process, or the securities mature. For all of the Company’s auction rate securities, the underlying maturity date is in excess of one year and can be as far as 37 years in the future.

A summary of the cash equivalents and marketable securities, current and non-current, at March 31, 2008 and December 31, 2007 is as follows:


	March 31,		December 31,
	2008		2007
	(in thousands)
Classification in balance sheets:
Cash equivalents	$	35,366	$	30,021
Marketable securities		30,947		39,862
Marketable securities, non-current		13,330		23,882

	$	79,643	$	93,765

7. RECEIVABLES FROM RELATED PARTY

Receivables from related party consist of the following:


	March 31,		December 31,
	2008		2007
	(in thousands)

Unbilled receivables from related party	$	940	$	11,196

Unbilled receivables from related party represent amounts under collaborative agreements in the normal course of business for reimbursement of development, regulatory and marketing expenditures that have not been billed at March 31, 2008 and December 31, 2007. The reimbursement of development and regulatory expenditures is billed quarterly. All related party receivables are due from Novartis.

8. INTANGIBLE ASSET, NET

The Company’s intangible asset relates to a settlement proposal which includes a full release of all claims by the University of Alabama at Birmingham Research Foundation (“UABRF”), an affiliate of the University of Alabama at Birmingham (“UA”, and collectively with UABRF, “UAB”) and related entities as described more fully in Note 12.

The Company is amortizing the $15.0 million accrued proposed settlement payment to UAB and related entities over the period of the expected economic benefit of the related asset. The amount of amortization each period is determined as the greater of straight line or economic consumption. Amortization expense pertaining to the asset was $0.3 million for the three months ended March 31, 2008, which was recorded in cost of sales. There was no expense for the three months ended March 31, 2007. As of March 31, 2008, accumulated amortization was $1.7 million. Amortization expense for this asset is anticipated to be $1.2 million per year through 2012 and $7.8 million through the remaining term of the expected economic benefit of the asset. However, if the proposed settlement is not completed on terms acceptable to the Company, the Company will resume its defense of the claims, including through the litigation process.

9. ACCRUED EXPENSES

Accrued expenses consist of the following:

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED


	March 31,		December 31,
	2008		2007
	(in thousands)
Research and development contract costs	$	1,443	$	2,050
Payroll and benefits		2,669		4,231
License fees		1,000		1,000
Professional fees		1,090		1,309
Restructuring		498		1,838
Accrued proposed settlement amount		4,000		4,000
Other		2,519		2,009

	$	13,219	$	16,437

The accrued restructuring liability represents costs associated with the Company’s announcement in September of 2007 that it would restructure its operations with the transfer of development, commercialization and manufacturing rights of telbivudine and obligations related to Novartis (Note 10).

The $4.0 million accrued proposed settlement amount is the short-term portion of the $15.0 million proposed settlement payment to UAB which is described more fully in Note 12.

10. RESTRUCTURING CHARGES

In September 2007, the Company announced a restructuring of its operations as a result of an agreement with Novartis in which the Company would transfer to Novartis all development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a worldwide basis effective October 1, 2007. As a result, the Company entered into a plan to enact a workforce reduction of approximately 100 positions, the majority of which had supported the development and commercialization of Tyzeka^®/Sebivo^® in the United States and Europe. The restructuring was a strategic decision on behalf of the Company to focus its resources on its HCV and HIV discovery and development programs.

A summary of the restructuring activity at March 31, 2008 was as follows:


	Current							Current
	Liability							Liability
	as of					Additional		as of
	December 31, 2007		Cash Payments			Expense		March 31, 2008
	(in thousands)
Employee severance, benefits and related costs	$	1,838	$	(1,600	)	$	260	$	498

11. SHARE-BASED COMPENSATION

The following table shows stock-based compensation expense as reflected in the Company’s consolidated statements of operations:


	Three Months Ended March 31,
	2008		2007
	(in thousands)
Research and development	$	660	$	1,168
Selling, general and administrative		880		1,237

Total stock-based compensation expense	$	1,540	$	2,405

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for grants issued during the three months ended March 31, 2008 and 2007:


	Three Months Ended March 31,
	2008			2007
Weighted average fair value of options	$	2.89		$	4.33
Risk-free interest rate		2.77	%		4.56	%
Expected dividend yield		—			—
Expected option term (in years)		5.14			5.05
Expected volatility		63.2	%		56.9	%

The expected option term and expected volatility were determined by examining the expected option term and expected volatilities of similarly sized biotechnology companies as well as expected term and expected volatility of the Company’s stock.

A summary of stock option activity under the Company’s stock option plans for the three months ended March 31, 2008 is as follows:


				Weighted
	Number of			Average Exercise
	Shares			Price per Share
Options outstanding at December 31, 2007		5,712,289		$	9.83
Granted		1,179,300		$	5.14
Cancelled		(418,065	)	$	14.15
Exercised		(116,819	)	$	1.66

Options outstanding at March 31, 2008		6,356,705		$	8.84

Options exercisable at March 31, 2008		3,115,898		$	11.48

The Company has an aggregate of $11.6 million of stock compensation as of March 31, 2008 remaining to be amortized over a weighted average life of 3.5 years.

12. LEGAL CONTINGENCIES

Hepatitis C Product Candidates

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

As a part of the settlement agreement, UAB agreed that neither UA nor UABRF has any right, title or ownership interest in the inventions and discoveries made or reduced to practice during the Leave Period or the related patents and patent applications. In exchange, the Company made a $2.0 million payment to UAB in May 2004. The Company also dismissed the pending litigation and agreed to make certain future payments to UAB. These future payments consist of: (i) a $1.0 million payment upon the receipt of regulatory approval to market and sell in the United States a product which relates to inventions and discoveries made by the CEO during the Sabbatical Period; and (ii) payments in an amount equal to 0.5% of worldwide net sales of such products with a minimum sales based payment to equal $12.0 million. The sales based payments (including the minimum amount) are contingent upon the commercial launch of products that relate to inventions and discoveries made by the CEO during the Sabbatical Period. The minimum amount is due within seven years after the later of the commercial launch in the United States or any of the United Kingdom, France, Germany, Italy or Spain, of a product that: (i) has within its approved product label a use for the treatment of HCV; and (ii) relates to inventions and discoveries made by the CEO during the Sabbatical Period, if sales based payments for such product have not then exceeded $12.0 million. At that time,

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

the Company will be obligated to pay to UAB the difference between the sales based payments then paid to date for such product and $12.0 million. The Company has no amounts accrued or payable under this settlement agreement at March 31, 2008 as the Company has had no sales of products relating to these inventions and discoveries by the CEO.

In October 2006, the Company entered into a two-year research collaboration agreement with Metabasis Therapeutics, Inc. or Metabasis. Under the terms of the agreement, Metabasis’ proprietary liver-targeted technology would have been applied to one of the Company’s compounds to develop second-generation nucleoside analog product candidates for the treatment of HCV. In July 2007, the Company notified Metabasis that it would exercise its option to terminate the research collaboration on the first anniversary of the agreement in October 2007. Prior to the termination of the agreement, Metabasis asserted that a certain scientific milestone was met and thus a $1.0 million payment under the collaboration agreement came due. The Company does not agree with Metabasis’ assessment that the scientific milestone has been met and therefore does not believe that it has any liability for this payment and initially so notified Metabasis. The Company is in the process of discussing with Metabasis a proposal relating to the application of certain Metabasis technology to one of the Company’s drug candidates.

Hepatitis B Product

In addition to the Leave Period matter noted above, the Company was notified in January 2004, February 2005 and June 2005, that UAB believes that patent applications which the Company has licensed from UAB can be amended to obtain broad patent claims that would generally cover the method of using telbivudine to treat HBV. In July 2005, UAB filed this continuation patent application.

In February 2006, UAB notified the Company that it and Emory University were asserting a claim, that as a result of filing a continuation patent application in July 2005 by UAB, the UAB license agreement covers the Company’s telbivudine technology and that the Company is obligated to pay to UAB, Emory University and the Centre National de la Recherché Scientifique (“CNRS”) (collectively, the “1998 licensors”) an aggregate of $15.3 million, comprised of 20% of the $75.0 million license fee that the Company received from Novartis in May 2003 in connection with the license of its HBV product candidates and a $0.3 million payment in connection with the submission to the United States Food and Drug Administration (“FDA”) of the investigational new drug application (“IND”) pursuant to which the Company conducted its clinical trials of telbivudine. The Company disagrees with the assertion made by UAB and Emory University and is actively defending against these assertions. Under the terms of the license agreement, the dispute will be resolved by arbitration under the rule of the American Arbitration Association before a panel of three arbitrators if the parties are unable to reach agreement after a period of negotiation and mediation. Pursuant to the terms of the dispute resolution procedure in the UAB license agreement, in September 2007 the Company’s CEO and the CEO of UABRF met and agreed to begin a mediation process. While the parties participated in a joint mediation session in January 2008, no final resolution of these matters has yet been reached. However, a non-binding settlement proposal has been discussed by the parties. Such settlement proposal remains subject to several terms and conditions, including a full release of all claims by UAB and related entities. The Company does not believe that the matters disputed by UAB and Emory University regarding the UAB license agreement will have any effect on either the cooperative agreement with CNRS and the University of Montpellier or the technology licenses, including the license for telbivudine, which have been granted to the Company pursuant to the cooperative agreement.

However, if we do not settle these disputes and it is determined that the license agreement does cover the Company’s telbivudine technology, the Company will become obligated to make payments to the 1998 licensors in the amounts and manner specified in the license agreement. While the Company disputes the demands made by UAB, even if liability were found to exist, UAB’s claims, in addition to those described above would likely include payments in the aggregate amount of $1.0 million due upon achievement of certain regulatory milestones, a 6% royalty on annual sales up to $50.0 million and a 3% royalty on annual sales greater than $50.0 million made by the Company or any affiliate of the Company. Additionally, if the Company sublicenses its rights to any entity other than one which holds or controls at least 50% of its capital stock, or if Novartis’ ownership interest in the Company declines below 50% of the Company’s outstanding shares of capital stock, UAB would likely contend that the Company is obligated to pay to the 1998 licensors 30% of all royalties received on sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration received from the sublicensee with respect to telbivudine.

IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED

In January 2007, the Board of Trustees of the University of Alabama and related entities filed a complaint in the United States District Court for the Northern District of Alabama, Southern Division against the Company, CNRS and the University of Montpellier. The complaint alleges that a former employee of UAB is a co-inventor of certain patents in the United States and corresponding foreign patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of the Company, CNRS and the University of Montpellier and which cover the use of Tyzeka^®/Sebivo^® for the treatment of HBV. The University of Alabama has included a demand for damages under various theories in its complaint, but did not specify the amount of damages that it alleges to have incurred. In response to the complaint in March 2007, the Company filed a motion to dismiss based upon lack of personal jurisdiction. In September 2007, the parties agreed to stay the action and pursue mediation relating to the disputes associated with the license agreement and this litigation. As a result of a joint mediation session held in January 2008, a non-binding settlement has been proposed by the parties which could potentially require the Company to make payments to UAB and related entities. The Company has assessed this settlement proposal under the provisions of SFAS No. 5, Accounting for Contingencies, (“SFAS No. 5”) and recorded a related liability of $15.0 million in the quarter ended December 31, 2007. There have been no changes to the recorded liability as of March 31, 2008. If the proposed settlement is not completed on terms acceptable to the Company, the Company will resume its defense of these claims, including through the litigation process. Accruals related to the settlement proposal may be adjusted in future periods if a settlement agreement is not reached. The Company cannot ascertain with certainty the likelihood this or any settlement proposal will be accepted by or entered into by the parties. If the Company is not able to reach a settlement agreement with the parties, it will continue to vigorously defend against claims made by UAB and related entities.

In December 2001, the Company retained the services of Clariant (subsequently acquired by Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a multiproject development and supply agreement. Under the terms of the agreement with Clariant, the Company would, on an “as needed” basis, utilize the Clariant process development and manufacture services in the development of certain of the Company’s product candidates, including telbivudine. After reviewing respective bids from each of Novartis and Clariant, the joint manufacturing committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, the Company transferred full responsibility to Novartis for the development, commercialization and manufacturing of telbivudine. As a result, in January 2008, the Company exercised its right under the agreement with Clariant to terminate the agreement effective July 2008. In February 2008, Clariant asserted that they should have been able to participate in the manufacturing process for telbivudine as a non-primary supplier and are due an unspecified amount. The Company does not agree with Clariant’s assertion and therefore has not recorded a liability associated with this potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are initiated, the Company intends to vigorously defend against such lawsuit.

Indemnification

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

13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2008, FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (“FSP FAS No. 157-2) was issued. FSP FAS No. 157-2 defers the effective date provision of SFAS No. 157 for certain non-financial assets and liabilities until fiscal years beginning after November 15, 2008. The Company is currently

evaluating the impact of adopting SFAS No. 157 for certain non-financial assets and liabilities that are recognized and disclosed at fair value in the Company’s financial statements on a non-recurring basis.

In December 2007, EITF Issue No. 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, (“EITF 07-01”) was issued. EITF 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of the Company’s collaborations existing after January 1, 2009. The Company is evaluating the impact this standard will have on its financial statements.

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

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs and expenses, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipate,” “believes,” “estimates,” “intends,” “may,” “plans,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements reflect our current views with respect to future events. We cannot guarantee that we actually will achieve the plans, intentions, or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the expressed or implied forward-looking statements we make. These important factors include our “critical accounting policies and estimates” and the risk factors set forth below in Part II, Item 1A — Risk Factors. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

Overview

Idenix is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral and other infectious diseases, with operations in the United States and Europe. Our current focus is on diseases caused by hepatitis C virus, or HCV, and human immunodeficiency virus, or HIV.

In May 2003, we entered into a collaboration with Novartis relating to the worldwide development and commercialization of our product candidates. The collaboration includes the development and commercialization agreement under which we collaborate with Novartis to develop, manufacture and commercialize product candidates which they license from us.

Prior to October 1, 2007, we developed, commercialized and manufactured telbivudine for the treatment of patients with chronic hepatitis B. Certain of these activities were done with Novartis Pharma AG, or Novartis. Telbivudine is marketed as Tyzeka^® in the United States and Sebivo^® outside the United States. In April 2007, Sebivo^® was approved in the European Union for the treatment of patients with chronic hepatitis B. To date, Tyzeka^®/Sebivo^® are approved in more than 50 countries world-wide, including China.

In September 2007, we entered into an amendment to the development and commercialization agreement, which we refer to as the 2007 Amendment. When we refer to the development and commercialization agreement, we mean the 2003 original agreement, 2007 Amendment and all prior amendments. We and Novartis also entered into a transition services agreement, or a TSA, as part of the 2007 Amendment. Pursuant to the 2007 Amendment, we transferred to Novartis our development, commercialization and manufacturing rights and obligations pertaining to telbivudine (Tyzeka^®/Sebivo^®) on a worldwide basis. Effective October 1, 2007, we began receiving royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage varies based upon the territory and the aggregate dollar amount of net sales.

In conjunction with the 2007 Amendment, we announced a restructuring of our operations in which we enacted a workforce reduction of approximately 100 positions, the majority of which had supported the development and commercialization of Tyzeka^®/Sebivo^® in the United States and Europe. The restructuring was a strategic decision

on our behalf to focus our resources on our HCV and HIV discovery and development programs. We estimate that this restructuring will result in annual cost savings of $40.0 million to $45.0 million, including associated third party and marketing costs.

The following table summarizes key information regarding Tyzeka^®/Sebivo^® and our pipeline of product candidates:


Indication		Product/Product Candidates/Programs	Description
HBV		Tyzeka^®/Sebivo^®* (telbivudine) (L- nucleoside)	Novartis has all development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a worldwide basis in exchange for royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®. Novartis is solely responsible for clinical trial costs and related expenditures associated with telbivudine.

		valtorcitabine (L-nucleoside)	During the third quarter of 2007, we discontinued development of valtorcitabine.

HCV		Discovery program	Preclinical evaluation of compounds from the HCV discovery program is in progress. This program is focused on the three primary classes of drugs for the treatment of HCV, which include nucleoside/nucleotide polymerase inhibitors, protease inhibitors and non-nucleoside polymerase inhibitors.

	•	Nucleoside/nucleotide polymerase inhibitors (IDX184 and IDX102)	The most advanced of these efforts is our research in next-generation nucleoside/nucleotide polymerase inhibitors. IDX184 and IDX102 are in late stage preclinical development. Data from a four day study of IDX184 in 5 HCV-infected chimps which demonstrated a median viral load reduction of 2.3 log10 was presented at the European Association for the Study of the Liver, or EASL, in April 2008. We expect to submit an IND in the United States and a CTA in Europe for at least one of these product candidates in 2008.

	•	Protease inhibitors	We are evaluating multiple scaffolds in our protease inhibitor discovery program. Clinical candidates from this program have been selected and IND-enabling pharmacology and toxicology studies are ongoing. Preliminary in vitro data from this program was presented at EASL in April 2008. We plan to select a lead clinical candidate and submit an IND in the United States and a CTA in Europe for one of these product candidates in the first half of 2009.

	•	Non-nucleoside polymerase inhibitors	We have an ongoing discovery effort in non-nucleoside HCV polymerase inhibitors.

HIV		IDX899 (Non-nucleoside reverse transcriptase inhibitor or NNRTI)	We are developing a non-nucleoside reverse transcriptase inhibitors, or NNRTIs, for use in combination therapy of HIV-1 infected patients. In February 2008, we reported positive data from the first cohort of an ongoing phase I/II study of IDX899. In the first dosing cohort of this study, eight HIV-1 infected treatment-naïve patients received 800 mg of IDX899 once-daily and achieved a median reduction in plasma virus levels of approximately 2.0 log10, or 99 percent, after seven days of treatment. The 400 mg cohort of this study is now complete and dosing has been initiated in the 200 mg cohort. To date, no serious adverse events have been reported and no patients have discontinued from the study. We have submitted data from this trial for presentation at scientific meetings this summer.

Under the collaboration with Novartis, they paid us a license fee of $75.0 million for our HBV product and product candidate, Tyzeka^®/Sebivo^® and valtorcitabine, respectively, provided development funding for Tyzeka^®/Sebivo^® and valtorcitabine and was obligated to make milestone payments, which could have totaled up to $35.0 million upon the achievement of specific regulatory approvals.

Of the $35.0 million in regulatory milestone payments, we received payment on two of these regulatory milestones in 2007. We achieved one of these regulatory milestones for $10.0 million in the first quarter of 2007 with the regulatory approval of Sebivo^® in China. We recognized this regulatory milestone payment in collaboration revenue from Novartis in the quarter ended March 31, 2007 as the milestone was deemed substantive. A second of these regulatory milestones for $10.0 million was achieved in April 2007 with the regulatory approval of Sebivo^® in the European Union. This milestone was deemed not to be substantive and we have included this milestone as part of the license fee which is being recorded as collaboration revenue from related party over the development period of our licensed product candidates. We do not expect to receive any additional regulatory milestones for telbivudine or valtorcitabine.

As part of the Development and Commercialization Agreement, Novartis also acquired an option to license the HCV and other product candidates. In March 2006, Novartis exercised its option to license valopicitabine, our lead HCV product candidate at that time. Under the development and commercialization agreement, Novartis agreed to pay us up to $500.0 million in license fees and regulatory milestone payments for an HCV product candidate. Of this amount and in connection with its option exercise, Novartis paid us a license fee of $25.0 million, paid us an additional $25.0 million payment based upon results from our phase I clinical trial and provided development funding for the product candidate. In July 2007, we announced that the FDA had placed on clinical hold in the United States our development program of valopicitabine for the treatment of HCV based on the overall risk/benefit profile observed in clinical testing. We subsequently discontinued the development of valopicitabine. As a result, we do not expect to receive any additional license fees or milestone payments for valopicitabine from Novartis.

We initially planned to co-promote or co-market with Novartis in the United States, United Kingdom, France, Germany, Italy and Spain all products Novartis licenses from us that are successfully developed and approved for commercial sales, including Tyzeka^®/Sebivo^®. Effective October 1, 2007, we transferred to Novartis our development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a world-wide basis in exchange for royalty payments equal to a percentage of net sales, with such percentage increasing according to specified tiers of net sales. The royalty percentage will vary based upon the territory and the aggregate dollar amount of net sales. We continue to have co-promotion and co-marketing rights with Novartis in the United States, United Kingdom, France, Germany, Italy and Spain on all other products, with the exception of Tyzeka^®/Sebivo^®, that Novartis licenses from us that are successfully developed and approved for commercial sales. Novartis has the exclusive right to promote and market these licensed products in the rest of the world.

Pursuant to the supply agreement, Novartis was appointed to finish and package licensed products for commercial sale. Novartis was also afforded the opportunity to manufacture active pharmaceutical ingredients for the commercial supply of licensed products if certain conditions and criteria were satisfied. In June 2006, after completing a competitive bid process where Novartis had the right to match the best third-party bid, we entered into a commercial manufacturing agreement with Novartis and a packaging agreement with Novartis Pharmaceuticals Corporation, an affiliate of Novartis. Under the commercial manufacturing agreement, Novartis would manufacture the commercial supply of Tyzeka^® that was intended for sale in the United States. The packaging agreement provided that the supply of Tyzeka^® intended for commercial sale in the United States would be packaged by Novartis Pharmaceuticals Corporation. As a result of the 2007 Amendment, the commercial manufacturing agreement and supply agreement were terminated as each related to telbivudine and we will work with Novartis to terminate our rights and obligations to the packaging agreement. Effective October 1, 2007, Novartis is solely responsible for the manufacture and supply of Tyzeka^®/Sebivo^® on a worldwide basis. No penalties were incurred by us as a result of the termination.

In addition to the collaboration described above, Novartis purchased approximately 54% of our outstanding capital stock in May 2003 from our then existing stockholders for $255.0 million in cash, with an additional aggregate amount of up to $357.0 million contingently payable to these stockholders if we achieve predetermined development milestones relating to an HCV product candidate. The future contingent payments are payable in cash

or, under certain circumstances, Novartis AG American Depository Shares. At present, Novartis owns approximately 56% of our outstanding common stock.

All of our product candidates are currently in preclinical development or clinical development. To commercialize any of our product candidates, we will be required to obtain marketing authorization approvals after successfully completing preclinical studies and clinical trials of such product candidates. Currently, Tyzeka^®/Sebivo^® has received regulatory approval for the treatment of patients with chronic hepatitis B in more than 50 countries around the world, including the United States, China, Switzerland and the European Union.

To date, our revenues have been derived from: license fees and milestone payments, development expense reimbursements received from Novartis, Tyzeka^® product sales in the United States prior to October 1, 2007, amounts associated with Sebivo^® product sales outside of the United States prior to October 1, 2007, royalty payments associated with sales of Tyzeka^®/Sebivo^®, and government grants. Effective October 1, 2007 with the recent transfer to Novartis of our development and commercial rights to telbivudine, we no longer recognize revenue from product sales of Tyzeka^® and instead we recognize royalty income associated with product sales of Tyzeka^®/Sebivo^®. We derived substantially all of our total revenues from Novartis in 2008 and 2007. We anticipate recognizing additional revenues from our collaboration with Novartis. These revenues include additional development expense funding for our HCV product candidate and other product candidates that Novartis may elect to subsequently license from us, as well as, regulatory milestones and, if products are approved for sale, commercialization milestones and revenues derived from sales by us or Novartis of our licensed product candidates.

We have incurred significant losses since our inception in May 1998 and expect such losses to continue in the foreseeable future. Historically, we have generated losses principally from costs associated with research and development activities, including clinical trial costs, and general and administrative activities. As a result of planned expenditures for future discovery and development activities, we expect to incur additional operating losses for the foreseeable future. We expect our near-term sources of funding to consist principally of the reimbursement of expenses we may incur in connection with the development of our licensed product and product candidates; potential license and other fees we may receive in connection with license agreements with third parties; and anticipated royalty payments associated with product sales of Tyzeka^®/Sebivo^®.

Our research and development expenses consist primarily of salaries and payroll-related expenses for research and development personnel, including stock-based compensation, fees paid to clinical research organizations and other professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with animal studies, costs of material used in research and development, costs of contract manufacturing consultants, occupancy costs associated with the use of our research facilities and equipment, consulting and license fees paid to third parties, and depreciation of property and equipment related to research and development. We incur the majority of our research and development spending on clinical, preclinical and manufacturing activity with third-party contractors relating to the development of our product candidates. We expense internal and external research and development costs as incurred. We expect our research and development expenses to increase from our base level as of January 1, 2008 as we continue to engage in research activities, further develop our potential product candidates and advance our clinical trials.

Pursuant to our development and commercialization agreement with Novartis, after it licenses a product candidate, Novartis is obligated to fund development expenses that we incur in accordance with development plans agreed upon by us and Novartis. The option we have granted to Novartis with respect to its exclusive right to license our product candidates generally requires that Novartis exercise the option for each such product candidate generally 90 days after early demonstration of activity and safety in a proof of concept clinical study. The expenses associated with phase III clinical trials generally are the most costly component in the development of a successful new product.

Our current estimates for additional research and development expenses are subject to risks and uncertainties associated with research, development, clinical trials and the FDA and foreign regulatory review and approval processes. The time and cost to complete development of our product candidates may vary significantly and depends upon a number of factors, including the requirements mandated by the FDA and other regulatory agencies, the success of our clinical trials, the availability of financial resources, our collaboration with Novartis and its participation in the manufacturing and clinical development of our product candidates.

Results of Operations

Comparison of Three Months Ended March 31, 2008 and 2007

Revenues

Total revenues for the three months ended March 31, 2008 and 2007 were as follows:


	Three Months Ended March 31,
	2008		2007
	(in thousands)
Collaboration revenue — related party:
Reimbursement of research and development costs	$	275	$	11,787
License fee		1,197		2,715
Royalty revenue		559		—
Milestone revenue		—		10,000
Product revenue — rest of world		—		30
Profit sharing to related party		—		(181	)

		2,031		24,351
Product sales, net		—		425
Government grants		13		30

Total revenues	$	2,044	$	24,806

Collaboration revenue-related party consists of revenue associated with our collaboration with Novartis for the worldwide development and commercialization of our product candidates. Effective October 1, 2007, as a result of the 2007 Amendment, collaboration revenue-related party is comprised of the following:

	•		reimbursement by Novartis for expenses we incur in connection with the development and registration of our licensed products and product candidates, net of certain qualifying costs incurred by Novartis;

	•		license and other fees received from Novartis for the license of HBV and HCV product candidates, net of reductions for Novartis stock subscription rights, which is being recognized over the development period of the licensed product candidates;

	•		milestone amounts from Novartis upon achievement of regulatory filings, certain marketing authorization approvals and other milestone payments; and

	•		royalty payments associated with product sales of Tyzeka^®/Sebivo^® made by Novartis.

Prior to October 1, 2007, collaboration revenue-related party that we have recognized from Novartis also included the following:

	•		product revenue — rest of world which was comprised of amounts that Novartis would pay us for the supply of licensed products in countries outside of the United States, United Kingdom, Germany, France, Spain and Italy. These amounts were recorded as revenue at a percentage of net sales; and

	•		profit sharing to related party which represented the net benefit amount paid to Novartis on licensed product sales in the United States in which we acted as the lead commercialization party. The net benefit, defined as net sales less cost of goods sold, was shared equally with Novartis on product sales in the United States. These amounts due to Novartis were recorded as a reduction of collaboration revenue.

Collaboration revenue — related party decreased $22.3 million to $2.0 million in the three months ended March 31, 2008. The majority of the decrease was due to $11.5 million in lower reimbursements of research and development costs from Novartis as a result of the commercialization of Tyzeka^®/Sebivo^{^®}in prior years and the discontinuation of our valtorcitabine and valopicitabine development activities in the third quarter of 2007. Milestone revenue also decreased due the recognition of a $10.0 million regulatory milestone payment received from Novartis upon achievement of marketing authorization of Sebivo^® in China in the first quarter of 2007 which was deemed substantive. No milestone revenue was recognized during the first quarter of 2008.

Research and Development Expenses

Research and development expenses were $14.9 million in the three months ended March 31, 2008 as compared to $22.6 million in the same period in 2007. The decrease was primarily due to $9.1 million lower development costs for Tyzeka^®/Sebivo^{^®}following the commercialization of the product in prior years and the discontinuation of our valtorcitabine and valopicitabine development activities in the third quarter of 2007. Offsetting this amount was an increase of $2.7 million in 2008 related to preclinical evaluation of compounds from our HCV discovery program.

While our research and development expenses for 2008 will be considerably less than that for 2007, we expect that research and development expenses for 2009 and beyond may increase as we expand our drug discovery and development efforts. We continue to devote substantial resources to our research and development activities, expand our research pipeline, and engage in future development activities as we continue to advance our product candidates and explore collaborations with other entities that we believe will create shareholder value.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $8.3 million in the three months ended March 31, 2008 as compared to $15.8 million in the same period in 2007. The decrease was primarily due to $4.5 million lower salaries and personnel related costs due to the reduction in headcount and consultants as part of the October 2007 restructuring. There were also $2.2 million lower sales and marketing expenses as a result of the transfer to Novartis in October 2007 of our commercialization rights to Tyzeka^®/Sebivo^®.

We expect our selling, general and administrative expenses to be less in 2008 as compared to 2007 due to the decrease of salary and personnel related costs related to the October 2007 restructuring as well as decreased sales and marketing expenses associated with the transfer of Tyzeka ^®/Sebivo ^® to Novartis.

Investment and Other Income, Net

Investment and other income, net was $0.9 million in the three months ended March 31, 2008 as compared with $2.0 million for the same period in 2007. The decrease was primarily the result of lower average cash and marketable securities balances held during the three months ended March 31, 2008 due to the use of cash for operations.

Income Taxes

Income tax benefit was $0.4 million in the three months ended March 31, 2008 as compared with $0.1 million for the same period in 2007. The increase was due to a higher amount of research and development credits our French subsidiary is expected to receive.

Liquidity and Capital Resources

Since our inception in 1998, we have financed our operations with proceeds obtained in connection with license and development arrangements and equity financings. The proceeds include:

	•		license, milestone, royalty and other payments from Novartis,

	•		reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the development of Tyzeka^®/Sebivo^®, valtorcitabine and valopicitabine,

	•		collections on sales of Tyzeka^® in the United States through September 30, 2007,

	•		net proceeds from Sumitomo for reimbursement of development costs,

	•		net proceeds from private placements of our convertible preferred stock,

	•		net proceeds from public offerings,

	•		net proceeds from concurrent private placements of our common stock in July 2004 and in October 2005, and

	•		proceeds from the exercise of stock options granted pursuant to our equity compensation plans.

We had $54.6 million and $48.3 million in cash and cash equivalents as of March 31, 2008 and December 31, 2007, respectively. We invest our excess cash balances in short-term and long-term marketable debt securities. All of our marketable securities are classified as available-for-sale. Our investments have an effective maturity not

greater than 24 months and investments with maturities greater than 12 months are classified as non-current marketable securities. As of March 31, 2008, we had $30.9 million in current marketable securities and $13.3 million in non-current marketable securities. As of December 31, 2007, we had $39.9 million in current marketable securities and $23.9 million in non-current marketable securities.

We invest our cash in instruments that meet high credit quality standards, as specified in our investment policy. Our investment policy also limits the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment policy.

We held approximately $3.4 million in municipal auction rate securities at March 31, 2008. Our investments in auction rate securities consist solely of municipal debt securities and none of the auction rate securities in our portfolio are mortgage-backed. During the first quarter of 2008, certain of our municipal auction rate securities experienced failed auctions. As of April 25, 2008 we had liquidated all but $2.4 million of our auction rate securities, all of which were held at March 31, 2008. The liquidation of these auction rate securities did not result in any losses to the Company. The continued uncertainty in the credit markets may cause additional auctions with respect to our auction rate securities to fail, which could prevent us from liquidating certain of our holdings of auction rate securities. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments to have a material impact on our financial condition or results of operation. However, due to the current lack of liquidity in these investments, we do not intend to invest in auction rate securities in the future.

Net cash used in operating activities was $12.7 million and $22.2 million in the three months ended March 31, 2008 and 2007, respectively. The $9.5 million decrease in cash used was primarily due to cash received from related parties, offset by an increase in net loss and changes in accounts payable and accrued expenses.

Net cash provided by investing activities was $18.6 million and $27.6 million in the three months ended March 31, 2008 and 2007, respectively. The $9.0 million decrease was primarily due to net proceeds from sales of our marketable securities to fund operations.

Net cash provided by financing activities was substantially unchanged in the three months ended March 31, 2008 compared to the same period in 2007. The net cash provided by financing activities in the three months ended March 31, 2008 and 2007 was due to proceeds received from the issuance of stock primarily from the exercise of employee stock options.

We believe that our current cash and cash equivalents and marketable securities together with anticipated royalty payments associated with product sales of Tyzeka^®/Sebivo^® will be sufficient to satisfy our cash needs through late 2009. At any time, it is possible that we may seek additional financing. We may seek such financing through a combination of public or private financing, collaborative relationships and other arrangements. Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, other than Novartis, which has the right to maintain its current ownership level. Moreover, any debt financing, if available, may involve restrictive covenants that would not be favorable to us. Our failure to obtain financing when needed may harm our business and operating results.

Contractual Obligations and Commitments

Set forth below is a description of our contractual obligations as of March 31, 2008:


	Payments Due by Period
			Less Than						After 5
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		Years
					(in thousands)
Operating leases	$	17,345	$	3,364	$	5,654	$	4,290	$	4,037
Consulting and other agreements		2,649		1,645		1,004		—		—

Total contractual obligations	$	19,994	$	5,009	$	6,658	$	4,290	$	4,037

In connection with certain of our operating leases, we have two letters of credit with a commercial bank totaling $1.2 million which expire at varying dates through December 31, 2013.

We have certain potential payment obligations relating to our HBV and HCV product and product candidates. These obligations are excluded from the contractual obligations table above, as further described below.

Pursuant to the license agreement, between us and UAB, or the UAB license agreement, we were granted an exclusive license to the rights that UAB, Emory University and the Centre National de la Recherche Scientifique, or CNRS, collectively the 1998 licensors, have to a 1995 U.S. patent application and progeny thereof and counterpart

patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of HBV infection.

In February 2006, UAB notified us that it and Emory University were asserting a claim that, as a result of the filing of a continuation patent application in July 2005 by UAB, the UAB license agreement covers our telbivudine technology. UAB contended that we are obligated to pay the 1998 licensors an aggregate of $15.3 million comprised of 20% of the $75.0 million license fee we received from Novartis in May 2003 in connection with the license of our HBV product candidates and a $0.3 million payment in connection with the submission to the FDA of the IND pursuant to which we have conducted clinical trials of telbivudine. We disagree with UAB’s contentions and advised UAB and Emory University that we will utilize the dispute resolution procedures set forth in the UAB license agreement for resolution of this dispute. Under the terms of that agreement, if resolution cannot be achieved through negotiations between the parties or mediation, it must be decided by binding arbitration under the rules of the American Arbitration Association before a panel of three arbitrators. Pursuant to the terms of the dispute resolution procedure in the UAB license agreement, in September 2007 our CEO and the CEO of UABRF met and agreed to begin a mediation process. While the parties participated in a joint mediation session in January 2008, no final resolution of these matters has yet been reached. However, a non-binding settlement proposal has been discussed by the parties. Such settlement proposal remains subject to several terms and conditions, including a full release of all claims by UAB and related entities. We do not believe that the matters disputed by UAB and Emory University regarding the UAB license agreement will have any effect on either the cooperative agreement with CNRS and the University of Montpellier or the technology licenses, including the license for telbivudine, which have been granted to us pursuant to the cooperative agreement.

However, if we do not settle these disputes and it were determined that the UAB license agreement does cover our technology, we will become obligated to make payments to the 1998 licensors in the amounts and manner specified in the UAB license agreement. While we dispute the demands made by UAB, if a liability were found to exist, UAB’s claims, in addition to those described above would likely include payments in the aggregate amount of $1.0 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50.0 million and a 3% royalty on annual sales greater than $50.0 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital stock, UAB would likely contend that we would be obligated to pay to the 1998 licensors 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

If it were determined that the UAB license agreement between us and UAB does cover our use of telbivudine to treat HBV, or we must otherwise rely upon a license agreement granted by the 1998 licensors to commercialize telbivudine, we may be in breach of certain of the representations and warranties we made in the development and commercialization agreement and the stock purchase agreement. For a further description see “Collaborations — Relationship with Novartis — Indemnification” and “Risk Factors — Factors Related to Our Relationship with Novartis” and “Factors Related to Patents and Licenses.”

Separately, we had a research collaboration with CNRS, one of the 1998 licensors. In May 2003, we and Novartis entered into an amended and restated cooperative agreement with CNRS and L’Universite Montpellier, or the University of Montpellier, pursuant to which we worked in collaboration with scientists from CNRS and the University of Montpellier to discover and develop technologies relating to antiviral substances. The agreement included provisions relating to the ownership and commercialization of the technology, which is discovered or obtained as part of the collaboration as well as rights regarding ownership or use of such technology upon termination of the agreement. This cooperative agreement expired in December 2006. We do not believe that the matters disputed by UAB and Emory University regarding the UAB license agreement will have any effect on either our cooperative agreement with CNRS and the University of Montpellier or the technology licenses, including the license for telbivudine, which have been granted to us pursuant to the cooperative agreement.

associated with the license agreement and this litigation. As a result of a joint mediation session held in January 2008, a non-binding settlement has been proposed by the parties which could potentially require Idenix to make payments to UAB and related entities. We have assessed this settlement proposal under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, (“SFAS No. 5”) and recorded a liability of $15.0 million as of December 31, 2007. There have been no changes to the recorded liability as of March 31, 2008. If the proposed settlement is not completed on terms acceptable to Idenix, we will resume the defense of these claims, including through the litigation process. Accruals related to the settlement proposal may be adjusted in future periods if a settlement agreement is not reached. We cannot ascertain with certainty the likelihood this or any settlement proposal will be accepted by or entered into by the parties. If we are not able to reach a settlement agreement with the parties, we will continue to vigorously defend against claims made by UAB and related entities (see Note 12).

Additionally, in connection with the resolution of matters relating to certain of our HCV product candidates we entered into a settlement agreement with UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also allows for payments in an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales based payment equal to $12.0 million.

Further, we have potential payment obligations under the license agreement with the University of Cagliari pursuant to which we have the exclusive worldwide right to make, use and sell valopicitabine and certain other HCV and HIV technology. We are liable for certain payments to the University of Cagliari if we receive from Novartis or another collaborator license fees or milestone payments with respect to such technology.

In March 2003, we entered into a final settlement agreement with Sumitomo Pharmaceuticals Corporation or Sumitomo, under which the rights to develop and commercialize telbivudine in Japan, China, South Korea and Taiwan previously granted to Sumitomo were returned to us. This agreement with Sumitomo became effective upon consummation of our collaboration with Novartis in May 2003. The settlement agreement which we entered into with Sumitomo provides for a $5.0 million milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan.

In October 2006, we entered into a two-year research collaboration agreement with Metabasis Therapeutics, Inc. or Metabasis. Under the terms of the agreement, Metabasis’ proprietary liver-targeted technology would have been applied to one of our compounds to develop second-generation nucleoside analog product candidates for the treatment of HCV. In July 2007, we notified Metabasis that we would exercise our option to terminate the research collaboration on the first anniversary of the agreement in October 2007. Prior to the termination of the agreement, Metabasis asserted that a certain scientific milestone was met and thus a $1.0 million payment under the collaboration agreement came due. We do not agree with Metabasis’ assessment that the scientific milestone has been met and therefore do not believe that we have any liability for this payment and initially so notified Metabasis. We are in the process of discussing with Metabasis a proposal relating to the application of certain Metabasis technology to one of our drug candidates.

In December 2001, we retained the services of Clariant (subsequently acquired by Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a multiproject development and supply agreement. Under the terms of the agreement with Clariant, we would, on an “as needed” basis, utilize the Clariant process development and manufacture services in the development of certain Idenix product candidates, including telbivudine. After reviewing respective bids from each of Novartis and Clariant, the joint manufacturing committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, we transferred full responsibility to Novartis for the development, commercialization and manufacturing of telbivudine. As a result, in January 2008, we exercised its right under the agreement with Clariant to terminate effective July 2008. In February 2008, Clariant asserted that they should have been able to participate in the manufacturing process for telbivudine as a non-primary supplier and are due an unspecified amount. We do not agree with Clariant’s assertion and therefore have not recorded a liability associated with this potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are initiated, we intend to vigorously defend against such lawsuit.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

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

Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. However, we believe that the following critical accounting policy related to fair value, adopted in the first quarter of 2008, is important to the understanding and evaluating our reported financial results.

As of January 1, 2008, we implemented SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”) for our financial assets and other items that are recognized or disclosed at fair value on a recurring basis. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumption, SFAS No. 157 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

	•		Level 1 — Observable inputs such as quoted prices in active markets;

	•		Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

	•		Level 3 — Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

With the exception of our holdings in auction rate securities, our marketable securities are generally valued using information provided by pricing services. Because our investment portfolio includes many fixed income securities that do not always trade on a daily basis, the pricing service applied other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, model processes were used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.

Since our investments in municipal auction rate securities typically do not actively trade except on auction dates, these securities were valued at par value based on information received from pricing services in conjunction with recently executed trades in the secondary market. We also considered the rating of the securities, whether or not the securities were insured, and to the extent information was available, the status of that insurance.

Recent Accounting Pronouncements

In February 2008, FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (“FSP SFAS No. 157-2”) was issued. FSP SFAS No. 157-2 defers the effective date provision of SFAS No. 157 for certain non-financial assets and liabilities until fiscal years beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 157 for certain non-financial assets and liabilities that are recognized and disclosed at fair value in our financial statements on a non-recurring basis.

In December 2007, the Emerging Issues Task Force (“EITF”) Issue No. 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, (“EITF 07-01”) was issued. EITF 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009. We are evaluating the impact this standard will have on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to changes in interest rates. The primary objective of our investment activities is to preserve capital, while maintaining liquidity, until it is required to fund operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest our excess cash in high quality financial instruments with active secondary or resale markets consisting primarily of money market funds, U.S. government guaranteed debt obligations, repurchase agreements with major financial institutions and certain corporate debt securities, with the dollar weighted average effective maturity of the portfolio less than 12 months and no security with an effective maturity in excess of 24 months, except for our auction rate securities. Since our investments have effective maturities that are short-term in duration and the investments are denominated in U.S. dollars, we believe that we are not subject to any material credit, market or foreign exchange risk exposure. We do not have any derivative financial instruments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We have conducted an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2008, our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2007 for a discussion of legal proceedings. There were no material developments in regard to such proceedings for the quarter ended March 31, 2008.

Item 1A. Risk Factors

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks we do not yet know of or we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results

of operations could suffer, and the trading price of our common stock could decline. You should consider the following risks, together with all of the other information in our Annual Report on Form 10-K for the year ended December 31, 2007, before deciding to invest in our securities.

Factors Related to Our Business

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

We have incurred significant losses since our inception in May 1998. We have generated limited revenue from the sale of telbivudine (Tyzeka^®/Sebivo^®) to date and are unable to make a meaningful assessment of potential future revenue associated with royalty payments of product sales. We will not be able to generate additional revenues from product sales until one of our other product candidates receives regulatory approval and we or a collaborative partner successfully introduce such product commercially. We expect to incur annual operating losses over the next several years as we expand our drug discovery and development efforts. We also expect that the net loss we will incur will fluctuate from quarter to quarter and such fluctuations may be substantial. To generate product revenue, regulatory approval for products we successfully develop must be obtained and we and/or Novartis or a future collaboration partner must effectively manufacture, market and sell such products. Even if we successfully commercialize product candidates that receive regulatory approval, we may not be able to realize revenues at a level that would allow us to achieve or sustain profitability. Accordingly, we may never generate significant revenue and, even if we do generate significant revenue, we may never achieve profitability.

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

Our cash, cash equivalents and marketable securities balance was approximately $98.9 million at March 31, 2008. We believe that this balance, any development funding we receive from Novartis relating to licensed compounds and the anticipated royalty payments associated with product sales of Tyzeka^®/Sebivo^® will be sufficient to satisfy our anticipated cash needs through late 2009. However, we may need or choose to seek additional funding within this period of time. Our drug development programs and the potential commercialization of our product candidates will require substantial cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review and future manufacturing and sales and marketing efforts.

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

	•		with respect to Tyzeka^®/Sebivo^®, the level of royalty payments received from Novartis is significant;

	•		with respect to our other product candidates, Novartis exercises its option to license other product candidates, and we receive related license fees, milestone payments and development expense reimbursement payments from Novartis; and with respect to our other product candidates not licensed by Novartis, we receive related license fees, milestone payments and development expense reimbursement payments from third parties.

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

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

	•		the amount of revenue that we may be able to realize from commercialization and sale of product candidates, if any, which are approved for commercial sale by regulatory authorities;

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

	•		the progress of our current preclinical and clinical development programs for HCV and HIV;

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

	•		the cost, timing and outcome of regulatory reviews;

	•		the cost of re-establishing sales and marketing functions;

	•		the commercial potential of our product candidates;

	•		the rate of technological advances in our markets;

	•		the cost of acquiring or in-licensing new discovery compounds, technologies, product candidates or other business assets;

	•		the magnitude of our general and administrative expenses;

	•		any costs we may incur under current and future licensing arrangements; and

	•		the costs of commercializing and launching other products, if any, which are successfully developed and approved for commercial sale by regulatory authorities.

We expect that we will incur significant costs to complete the clinical trials and other studies required to enable us to submit regulatory submissions with the FDA and/or the EMEA for our HCV and HIV product candidates as we continue development of each of these product candidates. The time and cost to complete clinical development of these product candidates may vary as a result of a number of factors.

We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us. Moreover, any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock.

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

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

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

Our failure to successfully acquire or develop and market additional product candidates or approved drugs would impair our ability to grow.

As part of our strategy, we intend to establish a franchise in the HCV and HIV market by developing product candidates for each therapeutic indication. The success of this strategy depends upon the development and commercialization of additional product candidates that we successfully discover, license or otherwise acquire.

Product candidates we discover, license or acquire will require additional and likely substantial development, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the

possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.

Proposing, negotiating and implementing acquisition or in-license of product candidates may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, if at all.

Our investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by the volatility in the U.S. credit markets.

Our investment portfolio included municipal auction rate securities which approximated $3.4 million as of March 31, 2008. Auction rate securities are generally debt instruments that are structured to allow for short-term interest rate resets but with contractual maturities that can be well in excess of ten years. At the end of each reset period which occurs every seven to 35 days, investors can sell or continue to hold the securities. The auction rate securities we held at December 31, 2007 reset in subsequent auctions in January 2008. Beginning mid-February 2008, certain of our municipal auction rate securities experienced failed auctions. As of April 25, 2008 we had liquidated all but $2.4 million of our auction rate securities, all of which were held at March 31, 2008. The liquidation of these auction rate securities did not result in any losses to the Company. The continued uncertainty in the credit markets could cause additional auctions with respect to our auction rate securities to fail, and could prevent us from liquidating certain of our holdings of auction rate securities because the amount of these securities submitted for sale has exceeded the amount of purchase orders for these securities. There is a risk that auctions related to our remaining auction rate securities may fail and that there could be a decline in value of these securities or any other securities which may ultimately be deemed to be other than temporary. In the future, should we experience additional auction failures and/or determine that these declines in value of auction rate securities are other than temporary, we would recognize a loss in our consolidated statement of operations, which could be material.

The condition of the credit markets remains dynamic. As a result, we may experience a reduction in value or loss of liquidity with respect to our investments in auction rate securities or our other investments. In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. These market risks associated with our investment portfolio may have an adverse effect on our financial condition.

The markets which we intend to enter are subject to intense competition. If we are unable to compete effectively, products we successfully develop and our product candidates may be rendered noncompetitive or obsolete.

We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are commercializing or pursuing the development of products that target viral diseases, including the same diseases we are targeting.

We face intense competition from existing products and we expect to face increasing competition as new products enter the market and advanced technologies become available. For the treatment of hepatitis B infection, we are aware of four other drug products, specifically, lamivudine, entecavir and adefovir dipivoxil, each nucleoside analogs, and pegylated interferon, which are approved by the FDA and commercially available in the United States or in foreign jurisdictions. These products have preceded Tyzeka^®/Sebivo^® into the marketplace and have gained acceptance with physicians and patients. For the treatment of chronic hepatitis C, the current standard of care is pegylated interferon in combination with ribavirin, a nucleoside analog. Currently, for the treatment of HIV infection, there are 25 antiviral therapies approved for commercial sale in the United States. Of these approved therapies, seven are nucleosides, four are non-nucleosides, eleven are protease inhibitors, one is an integrase inhibitor and two are entry inhibitors.

We believe that a significant number of product candidates that are currently under development may become available in the future for the treatment of HBV, HCV and HIV infections. Our competitors’ products may be more effective, have fewer side effects, lower costs or be better marketed and sold, than any of our products. Additionally, products our competitors successfully develop for the treatment of HCV and HIV may be marketed prior to any HCV or HIV product we successfully develop. Many of our competitors have:

•

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

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

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

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

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

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

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

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

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

The growth of our business and our success depends in large part on our ability to attract and retain key management and research and development personnel. Our key personnel include our senior officers, many of whom have very specialized scientific, medical or operational knowledge. The loss of the service of any of the key members of our senior management team may significantly delay or prevent our discovery of additional product candidates, the development of our product candidates and achievement of our other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success.

We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may be unable to attract and retain these individuals, and our failure to do so would have an adverse effect on our business.

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

Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the therapeutic indications for which such products may be used. In addition, product liability claims may distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay significant damages, which could prevent or interfere with commercialization efforts and could adversely affect our business. Claims of this nature would also adversely affect our reputation, which could damage our position in the marketplace.

For Tyzeka^®/Sebivo^®, product liability claims could be made against us based on the use of our product in people. For Tyzeka^®/Sebivo^® and our product candidates, product liability claims could be made against us based on the use of our product candidates in clinical trials. We have obtained product liability insurance for Tyzeka^®/Sebivo^® and maintain clinical trial insurance for our product candidates in development. Such insurance may not provide adequate coverage against potential liabilities. In addition, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain or increase current amounts of product liability

and clinical trial insurance coverage, obtain product liability insurance for other products, if any, that we seek to commercialize, obtain additional clinical trial insurance or obtain sufficient insurance at a reasonable cost. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products or conduct the clinical trials necessary to develop our product candidates. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts in damages. This could adversely affect our cash position and results of operations.

Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant, uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. We currently maintain general liability, property, workers’ compensation, products liability, directors’ and officers’, and employment practices insurance policies. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

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

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will not change.

One of these estimates is our estimate of the development period to amortize license fee revenue from Novartis which we review on a quarterly basis. As of March 31, 2008, we have estimated that the performance period during which the development of our licensed product and product candidates will be completed is a period of approximately ten and a half years following the effective date of the development and commercialization agreement that we entered into with Novartis, or December 2013. If the estimated development period changes, we will adjust periodic revenue that is being recognized and will record the remaining unrecognized license fees and other up-front payments over the remaining development period during which our performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different financial results. This, in turn, could adversely affect our stock price.

If we fail to design and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report in Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s registered independent public accounting firm must attest to the effectiveness of our internal controls over financial reporting.

We have completed an assessment and will continue to review in the future our internal controls over financial reporting in an effort to ensure compliance with the Section 404 requirements. The manner by which companies implement, maintain and enhance these requirements including internal control reforms, if any, to comply with Section 404, and how registered independent public accounting firm apply these requirements and test companies’ internal controls, is subject to change and will evolve over time. As a result, notwithstanding our efforts, it is possible that either our management or our registered independent public accounting firm may in the future determine that our internal controls over financial reporting are not effective.

A determination that our internal controls over financial reporting are ineffective could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements,

which ultimately could negatively impact the market price of our stock, increase the volatility of our stock price and adversely affect our ability to raise additional funding.

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

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

To date, we have limited experience marketing, distributing and selling any products. The success of our business depends primarily upon Novartis’ ability to commercialize Tyzeka^®/Sebivo^® and our ability, or that of any future collaboration partner, to successfully commercialize other products, if any, we successfully develop. We received approval from the FDA in the fourth quarter of 2006 to market and sell Tyzeka^® for the treatment of chronic hepatitis B in the United States. In April 2007, Sebivo^® was approved in the European Union for the treatment of patients with chronic hepatitis B. Effective October 1, 2007, we transferred to Novartis all of our development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a world-wide basis in exchange for royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage will vary based upon the territory and the aggregate dollar amount of net sales. Our other product candidates are in various earlier stages of development. All of our product candidates require regulatory review and approval prior to commercialization. Approval by regulatory authorities requires, among other things, that our product candidates satisfy rigorous standards of safety, including assessments of the toxicity and carcinogenicity of the product candidates we are developing, and efficacy. To satisfy these standards, we must engage in expensive and lengthy testing. As a result of efforts to satisfy these regulatory standards, our product candidates may not:

	•		offer therapeutic or other improvements over existing drugs;

	•		be proven safe and effective in clinical trials;

	•		meet applicable regulatory standards;

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

	•		be successfully commercialized.

Commercial availability of our product candidates is dependent upon successful clinical development and receipt of requisite regulatory approvals. Clinical data often are susceptible to varying interpretations. Many companies that have believed that their product candidates performed satisfactorily in clinical trials in terms of both safety and efficacy have nonetheless failed to obtain approval for such product candidates. Furthermore, the FDA may request from us, and the EMEA and regulatory agencies in other jurisdictions may request from Novartis, additional information including data from additional clinical trials, which may delay significantly any approval and these regulatory agencies ultimately may not grant marketing approval for any of our product candidates. For example, in July 2007, we announced that the FDA had placed on clinical hold in the United States our development program of valopicitabine for the treatment of HCV based on the overall risk/benefit profile observed in clinical testing. We subsequently discontinued the development of valopicitabine.

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

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

We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend clinical trials of a product candidate at any time if we or they believe the persons participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. As an example, in July 2007, we announced that the FDA had placed on clinical hold in the United States our development program of valopicitabine for the treatment of HCV based on the overall risk/benefit profile observed in clinical testing. We subsequently discontinued the development of valopicitabine. The observation of adverse side effects in a clinical trial may result in the FDA or foreign

regulatory authorities refusing to approve a particular product candidate for any or all indications of use. Additionally, adverse or inconclusive clinical trial results concerning any of our product candidates could require us to conduct additional clinical trials, result in increased costs, significantly delay the submission of applications seeking marketing approval for such product candidates, result in a narrower indication than was originally sought or result in a decision to discontinue development of such product candidates.

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

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials, delay or suspend patient enrollment into our clinical trials or delay the analysis of data from our completed or ongoing clinical trials. Delays in the development of our product candidates would delay our ability to seek and potentially obtain regulatory approvals, increase expenses associated with clinical development and likely increase the volatility of the price of our common stock.

Any of the following could suspend, terminate or delay the completion of our ongoing, or the initiation of our planned, clinical trials:

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

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

	•		delays enrolling participants into clinical trials;

	•		lower than anticipated retention of participants in clinical trials;

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

	•		serious or unexpected drug-related side effects experienced by participants in our clinical trials; or

	•		negative results of clinical trials.

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

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

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

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

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

Each of our product candidates is subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of our product candidates. Before any product candidate can be approved for sale, we must demonstrate that it can be manufactured in accordance with the FDA’s current good manufacturing practices, which are a rigorous set of requirements. In addition, facilities where the principal commercial supply of a product is to be manufactured must pass FDA inspection prior to approval. Satisfaction of these and other regulatory requirements is

costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we are currently developing will obtain the appropriate regulatory approvals necessary to permit commercial distribution.

The time required for FDA review and other approvals is uncertain and typically takes a number of years, depending upon the complexity of the product candidate. Our analysis of data obtained from preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action, changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

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

We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, and we, with Novartis, are subject to numerous foreign regulatory requirements relating to manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval processes include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by any one regulatory authority does not assure approval by regulatory authorities in other jurisdictions. Many foreign regulatory authorities, including those in the European Union and in China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our product candidates. Any failure or delay in obtaining such marketing authorizations for our product candidates would have a material adverse effect on our business.

Our products will be subject to ongoing regulatory review even after approval to market such products is obtained. If we fail to comply with applicable U.S. and foreign regulations, we could lose approvals we have been granted and our business would be seriously harmed.

Even after approval, any drug product we successfully develop will remain subject to continuing regulatory review, including the review of clinical results, which are reported after our product becomes commercially available. The marketing claims we are permitted to make in labeling or advertising regarding our marketed drugs in the United States will be limited to those specified in any FDA approval, and in other markets such as the European Union, regulatory approvals similar to FDA approval. Any manufacturer we use to make approved products will be subject to periodic review and inspection by the FDA or other similar regulatory authorities in the European Union and other jurisdictions. We are required to report any serious and unexpected adverse experiences and certain quality problems with our products and make other periodic reports to the FDA or other similar regulatory authorities in the European Union and other jurisdictions. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material at commercial scale or for our clinical trials. Our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on such manufacturers for regulatory compliance. Certain changes to an approved product, including the way it is manufactured or promoted, often require prior approval from regulatory authorities before the product as modified may be marketed.

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

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

The regulations governing drug product marketing authorization, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product marketing authorization approval is granted. In some

foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we or Novartis may obtain regulatory approval for a product in a particular country, but then be subject to price regulations, which may delay the commercial launch of the product and may negatively impact the revenues we are able to derive from sales of the product in that country.

Successful commercialization of our products will also depend in part on the extent to which reimbursement for our products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Any of our commercial products may not be considered cost effective and reimbursement may not be available or sufficient to allow sale of our products on a competitive basis. We may need to conduct expensive pharmacoeconomic studies to demonstrate to third-party payers the cost effectiveness of our product candidates. Sales of prescription drugs depend on the availability and level of reimbursement from third-party payers, such as government and private insurance plans. These third-party payers frequently require that drug companies provide predetermined discounts from list prices, and third-party payers are increasingly challenging the prices charged for medical products. If the reimbursement we receive for any of our products is inadequate in light of development and other costs, our profitability could be adversely affected.

We believe that the efforts of governments and third-party payers to contain or reduce the cost of healthcare will increase pressure on drug pricing and continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. If we fail to obtain adequate reimbursement for respective current or future products, healthcare providers may limit how much or under what circumstances they will prescribe or administer them, which could reduce the demand for and use of our products or cause us to reduce the price of our products.

If we fail to comply with ongoing regulatory requirements after receipt of approval to commercialize a product, we may be subject to significant sanctions imposed by the FDA, EMEA or other U.S. and foreign regulatory authorities.

The research, testing, manufacturing and marketing of product candidates and products are subject to extensive regulation by numerous regulatory authorities in the United States and other countries. Failure to comply with FDA or other applicable U.S. and foreign regulatory requirements may subject a company to administrative or judicially imposed sanctions. These enforcement actions may include without limitation:

	•		warning letters and other regulatory authority communications objecting to matters such as promotional materials and requiring corrective action such as revised communications to healthcare practitioners;

	•		civil penalties;

	•		criminal penalties;

	•		injunctions;

	•		product seizure or detention;

	•		product recalls;

	•		total or partial suspension of manufacturing; and

	•		FDA refusal to review or approve pending new drug applications or supplements to new drug applications for previously approved products, and/or similar rejections of marketing applications or supplements by foreign regulatory authorities.

The imposition of one or more of these sanctions could have a material adverse effect on our business.

If we violate healthcare statutes such as fraud and abuse laws, we could be subject to significant penalties and expenses.

Commercialization efforts in which we expect at a future time period to engage in the United States are subject to various federal and state laws pertaining to pharmaceutical promotion and healthcare fraud and abuse, including the

Food, Drug and Cosmetic Act, the Prescription Drug Marketing Act, federal and state anti-kickback laws and false claims laws. Our future efforts to comply with these laws will be time consuming and expensive.

Anti-kickback laws make it illegal for any prescription drug manufacturer to offer or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify specific safe harbors or exemptions for types of payment arrangements that do not violate the anti-kickback statutes. We intend to align our commercialization activities to such safe harbors, however, there can be no assurance that such activities will not be subject to scrutiny by government or private authorities. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services.

The activities in which we expect to engage relating to the sale and marketing of products, if any, that are approved for commercialization will be subject to scrutiny under these laws and regulations. Violations may be punishable by significant criminal and/or civil fines and other penalties, as well as the possibility of exclusion of the approved product from governmental healthcare programs (including Medicare and Medicaid). If the government were to allege against or convict us or any of our employees of violating these laws, there could be a material adverse effect on our business, including our stock price.

Our activities could be subject to challenge for many reasons, including the broad scope and complexity of these laws and regulations and the high degree of prosecutorial resources and attention being devoted to the sales practices of pharmaceutical companies by law enforcement authorities. During the last few years, several companies have agreed to enter into corporate integrity agreements and have paid multi-million dollar fines and settlements for alleged violation of these laws, and other companies are under active investigation.

We have limited marketing and sales experience, and we cannot assure you that we or our employees, directors or agents are or will be or will act in compliance with all applicable laws and regulations. If we fail to comply with any of these laws or regulations, various negative consequences could result, including the termination of clinical trials, the failure to gain regulatory approval of a product candidate, restrictions on our products or manufacturing processes, withdrawal of the approved product from the market, exclusion of the approved product from governmental healthcare programs (including Medicare and Medicaid), significant criminal and/or civil fines or other penalties, and costly litigation.

Additionally, Novartis has the right to terminate the development and commercialization agreement due to our uncured material breach, which could include our failure to comply with applicable laws and regulations relating to our efforts to commercialize products that we successfully develop and receive approval to commercialize.

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

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

Factors Related to Our Relationship with Novartis

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

As of March 31, 2008, Novartis owned approximately 56% of our outstanding common stock. For so long as Novartis owns at least a majority of our outstanding common stock, in addition to its contractual approval rights, Novartis has the ability to delay or prevent a change in control of Idenix that may be favored by other stockholders and otherwise exercise substantial control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including:

	•		the election of directors;

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

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

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

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

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

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

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

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

	•		the adoption of a three-year strategic plan;

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

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

	•		any decision that would result in a variance in excess of the greater of $10.0 million or 20% of our profit or loss target in the strategic plan or annual operating plan;

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

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

	•		the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2.0 million;

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

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

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

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

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

Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003, among us, Novartis and substantially all of our then existing stockholders, which we refer to as the stock purchase agreement, Novartis is required to make future contingent payments of up to $357.0 million to these stockholders if we achieve predetermined development milestones with respect to an HCV product candidate. As a result, in making determinations as to our annual operating plan and budget for the development of our product candidates, the interests of Novartis may be different than the interests of our other stockholders, and Novartis could exercise its approval rights in a manner that may not be in the best interests of all of our stockholders.

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

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

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

Novartis has the ability to exercise substantial control over our strategic direction, our research and development focus and other material business decisions. In connection with its initial purchase of our common stock, Novartis agreed not to acquire additional shares of our voting stock unless a majority of our independent directors approves or requests the acquisition. These restrictions will terminate on May 8, 2008.

We currently depend on Novartis for substantially all our revenues and for the commercialization of Tyzeka^{^®}/Sebivo^{^®} and for support in the development of product candidates Novartis has licensed from us. If our development, license and commercialization agreement with Novartis terminates, our business and, in particular, the development of our product candidates and the commercialization of any products that we successfully develop could be harmed.

In May 2003, we received a $75.0 million license fee from Novartis in connection with the license to Novartis of our then HBV product candidates, telbivudine and valtorcitabine. In April 2007, we received a $10.0 million milestone payment for regulatory approval of Sebivo^® in China and in June 2007 we received an additional $10.0 million milestone payment for regulatory approval of Sebivo^® in the European Union. Pursuant to the development and commercialization agreement, as amended, Novartis also acquired options to license valopicitabine and additional product candidates from us. In March 2006, Novartis exercised its option and acquired a license to valopicitabine. In exchange we received a $25.0 million license fee from Novartis and the right to receive up to an additional $45.0 million in license fee payments upon advancement of an HCV product candidate into phase III clinical trials. Assuming we continue to successfully develop and commercialize our product candidates (other than valopicitabine), under the terms of the development and commercialization agreement, we are entitled to receive reimbursement of expenses we incur in connection with the development of these product candidates and additional milestone payments from Novartis. Additionally, if any of the product candidates we have licensed to Novartis are approved for commercialization, we anticipate receiving proceeds in connection with the sales of such products. If Novartis exercises the option to license with respect to other product candidates that we discover, or in some cases, acquire, we are entitled to receive license fees and milestone payments as well as reimbursement of expenses we incur in the development of such product candidates in accordance with development plans mutually agreed with Novartis.

Under the existing terms of the development and commercialization agreement, we have the right to co-promote and co-market with Novartis in the United States, United Kingdom, Germany, Italy, France and Spain any products licensed by Novartis, including Tyzeka^®/Sebivo^®. For Tyzeka^®/Sebivo^®, we acted as lead commercial party in the United States. On September 28, 2007 we entered into an amendment to the development and commercialization agreement and a transition services agreement, both of which became effective on October 1, 2007, whereby we transferred to Novartis all of our development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka^®/Sebivo^®) on a world-wide basis in exchange for royalty payments equal to a percentage of net sales of Tyzeka^®/Sebivo^®, with such percentage increasing according to specified tiers of net sales. The royalty percentage will vary based upon the territory and the aggregate dollar amount of net sales. Novartis is solely responsible for development and commercialization expenses relating to telbivudine after October 1, 2007 and is

also responsible for certain costs associated with the transition of third party contracts and arrangements relating to telbivudine and certain intellectual property prosecution and enforcement activities. Pursuant to the transition services agreement, we will provide Novartis with certain services relating to telbivudine through June 2008 (or later if agreed to by the parties). We will be reimbursed for these services at an agreed upon rate.

As a result of the amendment to the development and commercialization agreement discussed above, our master manufacturing and supply agreement, dated May 2003, and our commercial manufacturing agreement, dated June 2006, between us and Novartis, were terminated without penalty as each related to telbivudine.

Novartis may terminate the development and commercialization agreement in any country or with respect to any product or product candidate licensed under the development and commercialization agreement for any reason with six months written notice. If the development and commercialization agreement is terminated in whole or in part and we are unable to enter similar arrangements with other collaborators or partners, our business would be materially adversely affected.

Novartis has the option to license from us product candidates we discover, or in some cases, acquire. If Novartis does not exercise its option with respect to a product candidate, our development, manufacture and/or commercialization of such product candidate may be substantially delayed or limited.

Our drug development programs and potential commercialization of our product candidates will require substantial additional funding. In addition to its license of Tyzeka^®/Sebivo^®, valtorcitabine and valopicitabine, Novartis has the option under the development and commercialization agreement to license our other product candidates. If Novartis elects not to exercise such option, we may be required to seek other collaboration arrangements to provide funds necessary to enable us to develop such product candidates.

If we are not successful in efforts to enter into a collaboration arrangement with respect to a product candidate not licensed by Novartis, we may not have sufficient funds to develop such product candidate internally. As a result, our business would be adversely affected. In addition, the negotiation of a collaborative agreement is time consuming, and could, even if successful, delay the development, manufacture and/or commercialization of a product candidate and the terms of the collaboration agreements may not be favorable to us.

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

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

In May 2004, we entered into a settlement agreement with UAB, relating to our ownership of our chief executive officer’s inventorship interest in certain of our patents and patent applications, including patent applications covering our HCV product candidates. Under the terms of the settlement agreement, we agreed to make payments to UAB, including an initial payment made in 2004 in the amount of $2.0 million, as well as regulatory milestone payments and payments relating to net sales of certain products. Novartis may seek to recover from us, and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our officers and directors, the losses it suffers as a result of any breach of the representations and warranties we made relating to our HCV product candidates and may assert that such losses include the settlement payments.

Novartis could also suffer losses in connection with any amounts we become obligated to pay relating to or under the terms of any license agreement, including the UAB license agreement, or other arrangements we may be required to enter into with UAB, Emory University and CNRS, each licensors under the UAB license agreement, to commercialize telbivudine. Novartis may seek to recover from us, and, under certain circumstances, us and those of

our officers, directors and other stockholders who sold shares to Novartis, such losses and other losses it suffers as a result of any breach of the representations and warranties we made relating to our HBV product candidates.

If we are required to rely upon the UAB license agreement to commercialize telbivudine, we will be obligated to make certain payments to UAB and the other licensors. Such amounts would include payments in the aggregate amount of $1.3 million due upon the achievement of regulatory milestones, a 6% royalty on annual sales up to $50.0 million and a 3% royalty on annual sales greater than $50.0 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to a non-affiliate sublicensee, which is defined as any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’s ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to UAB 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

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

We have significant obligations to Novartis under the development and commercialization agreement. The obligations to which we are subject include the responsibility for developing and, in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance with plans and budgets subject to Novartis’ approval. The covenants and agreements we made when entering into the development and commercialization agreement include covenants relating to payment of our required portion of development expenses under the development and commercialization agreement, compliance with certain third-party license agreements, the conduct of our clinical studies and activities relating to the commercialization of any products that we successfully develop. If we materially breach this agreement and are unable within an agreed time period to cure such breach, the agreement may be terminated and we may be required to grant Novartis an exclusive license to develop, manufacture and/or sell such products. Although such a license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and Novartis have stipulated that no such payments would permit the breaching party to receive more than 90% of the net benefit it was entitled to receive before the agreement were terminated. Accordingly, if we materially breach our obligations under the development and commercialization agreement, we may lose our rights to develop our product candidates or commercialize our successfully developed products and receive lower payments from Novartis than we had anticipated.

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

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

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

	•		the date that Novartis becomes obligated under the stock purchase agreement to make the additional future contingent payments of $357.0 million to our stockholders who sold shares to Novartis in May 2003.

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

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

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

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

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

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

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

Under the amended development and commercialization agreement, Novartis is solely responsible for the development, commercialization and manufacturing rights to telbivudine on a world-wide basis. We expect to co-promote or co-market with Novartis other products, if any, that Novartis has licensed or will license from us which are successfully developed and approved for commercialization. As a result, we will depend upon the success of the efforts of Novartis to manufacture, market and sell Tyzeka^® /Sebivo^® and our other products, if any, that we successfully develop. However, we have limited control over the resources that Novartis may devote to such manufacturing and commercialization efforts and, if Novartis does not devote sufficient time and resources to such efforts, we may not realize the commercial or financial benefits we anticipate, and our results of operations may be adversely affected.

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

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

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

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

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

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

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

Factors Related to Our Dependence on Third Parties

If we seek to enter into collaboration agreements for any product candidates other than those licensed to Novartis and we are not successful in establishing such collaborations, we may not be able to continue development of those product candidates.

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

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

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

	•		revenue from product sales could be delayed; or

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

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

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

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

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

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

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

third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

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

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

Factors Related to Patents and Licenses

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

Our success will depend in part on our ability to obtain and maintain patent protection both in the United States and in other countries for any products we successfully develop. The patents and patent applications in our patent portfolio are either owned by us, exclusively licensed to us, or co-owned by us and others and exclusively licensed to us. Our ability to protect any products we successfully develop from unauthorized or infringing use by third parties depends substantially on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for any products we successfully develop or provide sufficient protection to afford us a commercial advantage against our competitors or their competitive products or processes. In addition, we cannot guarantee that any patents will be issued from any pending or future patent applications owned by or licensed to us. Even if patents have been issued or will be issued, we cannot guarantee that the claims of these patents are, or will be, valid or enforceable, or provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

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

Since our HBV product, telbivudine, was a known compound before the filing of our patent applications covering the use of this product candidate to treat HBV infection, we cannot obtain patent protection on telbivudine itself. As

a result, we have obtained and maintain patents granted on the method of using telbivudine as a medical therapy for the treatment of hepatitis B infection.

Pursuant to the UAB license agreement, we were granted an exclusive license to the rights that the 1998 licensors have to a 1995 U.S. patent application and progeny thereof and counterpart patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of HBV infection.

In February 2006, UAB notified us that it and Emory University were asserting a claim that, as a result of the filing of a continuation patent application in July 2005 by UAB, the UAB license agreement covers our telbivudine technology. UAB contends that we are obligated to pay the 1998 licensors an aggregate of $15.3 million comprised of 20% of the $75.0 million license fee we received from Novartis in May 2003 in connection with the license of our HBV product candidates and a $0.3 million payment in connection with the submission to the FDA of the IND pursuant to which we conducted clinical trials of telbivudine. We disagree with UAB’s contentions and advised UAB and Emory University that we will utilize the dispute resolution procedures set forth in the UAB license agreement for resolution of this dispute. Under the terms of that agreement, if resolution cannot be achieved through negotiations between the parties or mediation, it must be decided by binding arbitration under the rules of the American Arbitration Association before a panel of three arbitrators. Pursuant to the terms of the dispute resolutions procedure in the UAB license agreement, in September 2007 the CEOs of UABRF and Idenix met and agreed to begin a process of mediation. While the parties participated in a joint mediation session in January 2008, no final resolution of these matters has yet been reached. However, a non-binding settlement proposal has been discussed by the parties. Such settlement proposal remains subject to several terms and conditions, including a full release of all claims by UAB and related entities.

If we do not settle these disputes and it is determined that the UAB license agreement does cover our use of telbivudine to treat HBV, we will be obligated to make payments to the 1998 licensors in the amounts and manner specified in the UAB license agreement. While we dispute the demands made by UAB, even if liability were found to exist, UAB’s claims, in addition to those described above would likely include payments in the aggregate amount of $1.0 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50.0 million and a 3% royalty on annual sales greater than $50.0 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital stock, UAB would likely contend that we would be obligated to pay to the 1998 licensors 30% of all royalties received on sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration received from the sublicensee with respect to telbivudine.

If we fail to perform our material obligations under the UAB license agreement, UAB, acting for the 1998 licensors, may attempt to terminate the UAB license agreement or render the license to us non-exclusive. We do not believe that we are in default of any of the material obligations to which we are subject under the UAB license agreement. Any attempt to terminate the agreement would be subject to binding arbitration. In the event UAB is successful in terminating the license agreement as a result of a breach by us after a period of arbitration, and the 1998 licensors obtain a valid enforceable claim that generally covers the use of telbivudine to treat hepatitis B, it may be necessary for us to obtain another license from the 1998 licensors. Such license may not be available to us on reasonable terms, on an exclusive basis or at all. This could materially adversely affect or preclude the commercialization of telbivudine.

If the 1998 licensors were instead to render the UAB license agreement to us non-exclusive, we would not be prohibited from using telbivudine to treat hepatitis B, but a non-exclusive license could be granted to one or more of our competitors by one or more of the 1998 licensors. In the event that the 1998 licensors exclusively or non-exclusively license any claims covering the use of telbivudine to treat HBV to a competitor, we believe that such a competitor would have to overcome substantial legal and commercial hurdles to successfully commercialize the product. For example, we have four U.S. patents covering the use of telbivudine to treat HBV, which we believe a competitor would likely infringe if it sought to commercialize telbivudine. Patent applications covering the use of telbivudine to treat HBV are also pending or have already been granted in numerous other countries. The FDA granted approval for the commercial use of Tyzeka^® on October 25, 2006 and also granted five years of marketing exclusivity, during which period the FDA will not approve the applications of any competitors who seek approval of telbivudine for the treatment of hepatitis B. We may also receive regulatory exclusivity periods in Europe and in other countries.

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

If the Board of Trustees of the University of Alabama and related entities are successful in the lawsuit against us, CNRS and the University of Montpellier, then UAB could obtain rights in certain patents in the United States and corresponding foreign patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV currently assigned to one or more of us, CNRS and the University of Montpellier and which cover the use of Tyzeka^®/Sebivo^®. The University of Alabama has included a demand for damages under various theories in its complaint, but did not specify the amount of damages that it alleges to have incurred. In response to the complaint, in March 2007, we filed a motion to dismiss based upon lack of personal jurisdiction. In September 2007, the parties agreed to stay the action and pursue mediation relating to the disputes associated with the license agreement and this litigation. As a result of a joint mediation session held in January 2008, a non-binding settlement has been proposed by the parties which could potentially require Idenix to make payments to UAB and related entities. We have assessed this settlement proposal under the provisions of SFAS No. 5, and recorded a related liability of $15.0 million in the quarter ended December 31, 2007. There have been no changes to the recorded liability as of March 31, 2008. If the proposed settlement is not completed on terms acceptable to Idenix, we will resume the defense of these claims, including through the litigation process. Accruals related to the settlement proposal may be adjusted in future periods if a settlement agreement is not reached. We cannot ascertain with certainty the likelihood this or any settlement proposal will be accepted by or entered into by the parties. If we are not able to reach a settlement agreement with the parties, we will continue to vigorously defend against claims made by UAB and related entities (see Note 12).

In accordance with our patent strategy, we are attempting to obtain patent protection for our HCV nucleoside/nucleotide polymerase inhibitor product candidates IDX184 and IDX102. We have filed U.S. and international patent applications related to IDX184 and IDX102 themselves, as well as to methods of treating HCV infection with IDX184 and IDX102. Further, we are prosecuting U.S. and international patent applications, and have been granted U.S. and foreign patents, claiming methods of treating HCV infection with nucleoside polymerase inhibitors including compounds that relate to IDX184 and IDX102.

We are aware that a number of other companies have filed patent applications attempting to cover broad classes of compounds and their use to treat HCV infection, or infection by any member of the Flaviviridae virus family to which the HCV virus belongs. These classes of compounds might relate to nucleoside polymerase inhibitors associated with IDX184 and IDX102. The companies include Merck & Co., Inc. together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned subsidiary of Valeant Pharmaceuticals International, Genelabs Technologies, Inc. and Biota, Inc., a subsidiary of Biota Holdings Ltd., or Biota. We believe that we were the first to file patent applications covering the use certain of these compounds to treat HCV infection. Because patents in countries outside the United States are awarded to the first to file a patent application covering an invention, we believe that we are entitled to patent protection in these countries. Notwithstanding this, a foreign country may grant patent rights covering our product candidates to one or more other companies, either because it is not aware of our patent filings or because the country does not interpret our patent filing as a bar to issuance of a patent to the other company in that country. If that occurs, we may need to challenge the third-party patent to enforce our proprietary rights, and if we do not or are not successful, we will need to obtain a license that may not be available at all or on commercially reasonable terms. In the United States, a patent is awarded to the first to invent the subject matter. The U.S. Patent Office could initiate an interference proceeding between us and any or all of Merck/Isis, Ribapharm, Genelabs, Biota or another company to determine the priority of invention of the use of these compounds to treat HCV infection. If such an interference proceeding is initiated and it is determined that we were not the first to invent

the use of these compounds in methods for treating HCV or other viral infection under U.S. law, we might need to obtain a license that may not be available on commercially reasonable terms or at all.

In accordance with our patent strategy, we are attempting to obtain patent protection for our HIV product candidate IDX899. We have filed U.S. and international patent applications directed to IDX899 itself, as well as methods of treating HIV infection with IDX899.

A number of companies have filed patent applications and have obtained patents covering general methods for the treatment of HBV, HCV and HIV infections that could materially affect the ability to develop and commercialize Tyzeka^®/Sebivo^®, and other product candidates we may develop in the future. For example, we are aware that Chiron Corporation, now a subsidiary of Novartis, and Apath, LLC have obtained broad patents covering HCV proteins, nucleic acids, diagnostics and drug screens. If we need to use these patented materials or methods to develop any of our HCV product candidates and the materials or methods fall outside certain safe harbors in the laws governing patent infringement, we will need to buy these products from a licensee of the company authorized to sell such products or we will require a license from one or more companies, which may not be available to us on commercially reasonable terms or at all. This could materially affect or preclude our ability to develop and sell our HCV product candidates.

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

Litigation and disputes related to intellectual property matters occur frequently in the biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our products from competition or we may be precluded from selling our products. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate. Such litigation could take place in the United States in a federal court or in the U.S. Patent Office. The litigation could also take place in a foreign country, in either the court or the patent office of that country.

Our success will depend in part on our ability to uphold and enforce patents or patent applications owned or co-owned by us or licensed to us, which cover products we successfully develop. Proceedings involving our patents or patent applications could result in adverse decisions regarding:

	•		ownership of patents and patent applications;

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

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

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

In May 2004, we and our chief executive officer, Dr. Sommadossi, entered into a settlement agreement with UAB resolving a dispute regarding ownership of inventions and discoveries made by Dr. Sommadossi during the period from November 1999 to November 2002, at which time Dr. Sommadossi was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed with respect to such inventions and discoveries include the patent applications covering valopicitabine.

Under the terms of the settlement agreement, we agreed to make a $2.0 million initial payment to UAB, as well as other potential contingent payments based upon the commercial launch of other HCV products discovered or invented by Dr. Sommadossi during his sabbatical and unpaid leave. In addition, UA and UABRF have each agreed that neither of them has any right, title or ownership interest in these inventions and discoveries. Under the development and commercialization agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding valopicitabine and our HCV program, including representations regarding our

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

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

	•		incur substantial monetary damages;

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

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

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

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

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

We, together with Novartis, entered into an amended and restated agreement with CNRS and the University of Montpellier, co-owners of the patents and patent applications covering Tyzeka^®/Sebivo^® and valtorcitabine. This agreement covers both the cooperative research program and the terms of our exclusive right to exploit the results of the cooperative research, including Tyzeka^®/Sebivo^® and valtorcitabine. The cooperative research program with CNRS and the University of Montpellier ended in December 2006 although many of the terms remain in effect for the duration of the patent life of the affected products. We, together with Novartis, have also entered into two agreements with the Universita degli Studi di Cagliari, which we refer to as the University of Cagliari, the co-owner of the patents and patent applications covering our HCV product candidates and certain HIV product candidates. One agreement with the University of Cagliari covers our cooperative research program and the other agreement is an exclusive license to develop and sell the jointly created HCV and HIV product candidates. Under the amended and restated agreement with CNRS and the University of Montpellier and the license agreement, as amended, with the University of Cagliari, we obtained from our co-owners the exclusive right to exploit these product candidates. Subject to certain rights afforded to Novartis, these agreements can be terminated by either party in circumstances such as the occurrence of an uncured breach by the non-terminating party. The termination of our rights, including patent rights, under the agreement with CNRS and the University of Montpellier or the license agreement, as amended, with the University of Cagliari would have a material adverse effect on our business and could prevent us from developing a product candidate or selling a product. In addition, these agreements provide that we pay the costs of patent prosecution, maintenance and enforcement. These costs could be substantial. Our inability or failure to pay these costs could result in the termination of the agreements or certain rights under them.

Under our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari, we and Novartis have the right to exploit and license our co-owned product candidates without the permission of the co-owners. However, our agreements with CNRS and the University of Montpellier and with the University of Cagliari are currently governed by, and will be interpreted

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

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

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

Our cooperative research agreement with the University of Cagliari, as amended, grants us the exclusive right to directly or indirectly use or license to Novartis or other third parties the results of research obtained from the cooperative effort, in exchange for a fixed royalty. If the cooperative research agreement is terminated, our exclusive right to use the research results will also terminate, unless those rights are also granted under a separate license agreement. Our cooperative agreement with the University of Cagliari currently expires in January 2011 and can only be renewed by the written consent of both parties. If the agreement is not renewed, there is no guarantee that the University of Cagliari will agree to transfer rights to any of the research results into a separate license agreement on termination of the research program, or that it will agree to do so on reasonable commercial terms.

Factors Related to Our Common Stock

Sales of additional shares of our common stock could result in dilution to existing stockholders and cause the price of our common stock to decline.

Sales of substantial amounts of our common stock in the public market, or the availability of such shares for sale, could adversely affect the price of our common stock. In addition, the issuance of common stock upon exercise of outstanding options could be dilutive, and may cause the market price for a share of our common stock to decline. As of April 25, 2008, we had 56,335,557 shares of common stock issued and outstanding, together with outstanding options to purchase approximately 6,269,643 shares of common stock with a weighted average exercise price of $8.82 per share.

Novartis and other holders of an aggregate of approximately 37,137,061 shares of common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

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

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

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

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

	•		adverse developments regarding the safety and efficacy of Tyzeka^®/Sebivo^®; or our product candidates;

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

	•		developments in the market with respect to competing products or more generally the treatment of HBV, HCV or HIV;

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

	•		the timing and success of the launch of products, if any, we successfully develop;

	•		future royalty payments received by us associated with sales of Tyzeka^®/Sebivo^®;

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

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

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

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

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

	•		our collaboration with Novartis;

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

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

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

	•		regulatory actions with respect to our product candidates or products or those of our competitors, including those relating to our clinical trials, marketing authorizations, pricing and reimbursement;

	•		the timing and success of launches of any product we successfully develop;

	•		future royalty payments received by us associated with sales of Tyzeka^®/Sebivo^®;

	•		the market acceptance of any products we successfully develop;

	•		significant changes to our existing business model;

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

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

In addition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be a significant impact on the market price of our common stock. Additionally, as we approach the announcement of important clinical data or other significant information and as we announce such results and information, we expect the price of our common stock to be particularly volatile, and negative results would have a substantial negative impact on the price of our common stock.

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

The stock market frequently experiences extreme price and volume fluctuations. In addition, the market prices of securities of companies in the biotechnology and pharmaceutical industry have been extremely volatile and have


	Page
Part I—Financial Information

Item 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007		3

Unaudited Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2008 and 2007		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2008 and 2007		5

Notes to the Unaudited Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

Part II—Other Information

Item 1. Legal Proceedings		31

Item 1A. Risk Factors		31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		55

Item 3. Defaults Upon Senior Securities		55

Item 4. Submission of Matters to a Vote of Security Holders		55

Item 5. Other Information		55

Item 6. Exhibits		55

Signatures

Exhibit Index

EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO



Date: May 5, 2008	By:	/s/ JEAN-PIERRE SOMMADOSSI
		Jean-Pierre Sommadossi
		Chairman and Chief Executive Officer (Principal Executive Officer)



Date: May 5, 2008	By:	/s/ RONALD C. RENAUD, JR.
		Ronald C. Renaud, Jr.
		Chief Financial Officer (Principal Accounting Officer)


Exhibit
No.		Description

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



	/s/ JEAN-PIERRE SOMMADOSSI
	Jean-Pierre Sommadossi
	Chief Executive Officer



	/s/ RONALD C. RENAUD, JR.
	Ronald C. Renaud, Jr.
	Chief Financial Officer

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.