UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009Or ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___________ to
  ___________








Commission
File No. 000-23143








PROGENICS
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            13-3379479(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer Identification Number)





777
Old Saw Mill River Road


Tarrytown,
NY 10591


(Address
of principal executive offices, including zip code)





Registrant’s
telephone number, including area code: (914) 789-2800








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 xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes oNo 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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:





Large
accelerated filer   ̈                                                                                                                      Accelerated
filer   x


Non-accelerated
filer     ̈  (Do not
check if a smaller reporting
company)                                              Smaller
reporting company    ̈





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





As of
November 4, 2009 there were 31,663,459shares
of common stock, par value $.0013 per share, of the registrant
outstanding.















PROGENICS PHARMACEUTICALS,
INC.





INDEX





Page
      No.Part
      I
            FINANCIAL
      INFORMATIONItem
      1.
            Financial Statements (Unaudited)CondensedConsolidatedBalance Sheets at
      December 31, 2008 and September 30, 2009
            3CondensedConsolidatedStatements of
      Operations for the Three and Nine Months Ended September 30, 2008 and
      2009
            4CondensedConsolidatedStatements of
      Stockholders’ Equity and Comprehensive Loss for the Nine Months Ended
      September 30, 2008
      and 2009
            5CondensedConsolidatedStatements of Cash
      Flows for the Nine Months Ended September 30, 2008 and 2009
            6Notes to
      CondensedConsolidatedFinancial
      Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            21Item
      3.
            Quantitative and
      Qualitative Disclosures about Market Risk
            40Item
      4.
            Controls and
      Procedures
            40PART
      II
            OTHER
      INFORMATIONItem
      1A.
            Risk Factors
            41Item
      6.
            Exhibits
            49Signatures
            50




















2
 INDEX




PART
I — FINANCIAL INFORMATION





Item
1. Financial Statements(Unaudited)





PROGENICS
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





(amounts
in thousands, except for par value and share amounts)


(Unaudited)





December
      31,
              2008
            
            
            September
      30,
              2009AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            56,186
            
            
            $
            101,446Marketable
      securities
            
            
            63,127
            
            
            
            1,518Accounts
      receivable
            
            
            1,337
            
            
            
            697Other
      current assets
            
            
            3,531
            
            
            
            1,163Total
      current assets
            
            
            124,181
            
            
            
            104,824Marketable
      securities
            
            
            22,061
            
            
            
            3,792Fixed
      assets, at cost, net of accumulated depreciation and
      amortization
            
            
            11,071
            
            
            
            8,080Restricted
      cash
            
            
            520
            
            
            
            350Total
      assets
            
            $
            157,833
            
            
            $
            117,046Liabilities and
      Stockholders’
      EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            6,496
            
            
            $
            6,341Deferred
      revenue - current
            
            
            31,645
            
            
            
            5,952Other
      current liabilities
            
            
            57
            
            
            
            57Total
      current liabilities
            
            
            38,198
            
            
            
            12,350Other
      liabilities
            
            
            266
            
            
            
            197Total
      liabilities
            
            
            38,464
            
            
            
            12,547Commitments
      and contingencies (Note 9)Stockholders’
      equity:Preferred
      stock, $.001 par value; 20,000,000 shares authorized; issued and
      outstanding — noneCommon
      stock, $.0013 par value; 40,000,000 shares authorized; issued — 30,807,387
      in 2008 and 31,718,607 in 2009
            
            
            40
            
            
            
            41Additional
      paid-in capital
            
            
            422,085
            
            
            
            436,186Accumulated
      deficit
            
            
            (298,718
            )
            
            
            (328,691
            )Accumulated
      other comprehensive loss
            
            
            (1,297
            )
            
            
            (296
            )Treasury
      stock, at cost (200,000 shares in 2008 and 2009)
            
            
            (2,741
            )
            
            
            (2,741
            )Total
      stockholders’ equity
            
            
            119,369
            
            
            
            104,499Total
      liabilities and stockholders’ equity
            
            $
            157,833
            
            
            $
            117,046





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


3
 INDEX


PROGENICS PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(amounts
in thousands, except net loss per share)


(Unaudited)





For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2009
            
            
            2008
            
            
            2009Revenues:Research
      and development
            
            $
            16,015
            
            
            $
            4,431
            
            
            $
            54,896
            
            
            $
            29,206Royalty
      income
            
            
            44
            
            
            
            509
            
            
            
            86
            
            
            
            976Research
      grants and contract
            
            
            1,377
            
            
            
            404
            
            
            
            5,689
            
            
            
            1,421Other
      revenues
            
            
            61
            
            
            
            75
            
            
            
            172
            
            
            
            189Total
      revenues
            
            
            17,497
            
            
            
            5,419
            
            
            
            60,843
            
            
            
            31,792Expenses:Research
      and development
            
            
            21,478
            
            
            
            11,345
            
            
            
            68,191
            
            
            
            39,055License
      fees - research and development
            
            
            305
            
            
            
            136
            
            
            
            1,788
            
            
            
            961General
      and administrative
            
            
            8,265
            
            
            
            5,844
            
            
            
            22,530
            
            
            
            19,758Royalty
      expense
            
            
            5
            
            
            
            51
            
            
            
            9
            
            
            
            98Depreciation
      and amortization
            
            
            1,166
            
            
            
            1,207
            
            
            
            3,427
            
            
            
            3,633Total
      expenses
            
            
            31,219
            
            
            
            18,583
            
            
            
            95,945
            
            
            
            63,505Operating
      loss
            
            
            (13,722
            )
            
            
            (13,164
            )
            
            
            (35,102
            )
            
            
            (31,713
            )Other income:Interest
      income
            
            
            1,502
            
            
            
            123
            
            
            
            5,028
            
            
            
            1,457Gain
      on sale of marketable securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            237Gain on disposal of fixed assets
            
            
            -
            
            
            
            27
            
            
            
            -
            
            
            
            46Total
      other income
            
            
            1,502
            
            
            
            150
            
            
            
            5,028
            
            
            
            1,740Net
      loss
            
            $
            (12,220
            )
            
            $
            (13,014
            )
            
            $
            (30,074
            )
            
            $
            (29,973
            )Net
      loss per share - basic and diluted
            
            $
            (0.40
            )
            
            $
            (0.41
            )
            
            $
            (1.00
            )
            
            $
            (0.97
            )Weighted-average shares - basic and diluted
            
            
            30,323
            
            
            
            31,428
            
            
            
            30,048
            
            
            
            31,060











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




4
 INDEX





PROGENICS PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009





(amounts
in thousands)


(Unaudited)





Common
      Stock
            
            
            Additional
            
            
            
            
            
            Accumulated
      Other
            
            
            Treasury
      StockShares
            
            
            Amount
            
            
            Paid-In
      Capital
            
            
            Accumulated
      Deficit
            
            
            Comprehensive
      Income
            
            
            Shares
            
            
            Amount
            
            
            TotalBalance
      at December 31,  2007
            
            
            29,754
            
            
            $
            39
            
            
            $
            401,500
            
            
            $
            (254,046
            )
            
            $
            6
            
            
            
            -
            
            
            $
            -
            
            
            $
            147,499Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (30,074
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (30,074
            )Net
      change in unrealized gain on marketable securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,656
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,656
            )Total
      comprehensive loss:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (32,730
            )Compensation
      expenses for share-based payment arrangements
            
            
            -
            
            
            
            -
            
            
            
            10,899
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,899Issuance
      of restricted stock, net of forfeitures
            
            
            164
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Sale
      of common stock under employee stock purchase plans and exercise of stock
      options
            
            
            638
            
            
            
            1
            
            
            
            5,144
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,145Treasury
      shares acquired under repurchase program
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (200
            )
            
            
            (2,741
            )
            
            
            (2,741
            )Balance
      at September 30, 2008
            
            
            30,556
            
            
            $
            40
            
            
            $
            417,543
            
            
            $
            (284,120
            )
            
            $
            (2,650
            )
            
            
            (200
            )
            
            $
            (2,741
            )
            
            $
            128,072








Common
      Stock
            
            
            Additional
            
            
            
            
            
            Accumulated
      Other
            
            
            Treasury
      StockShares
            
            
            Amount
            
            
            Paid-In
      Capital
            
            
            Accumulated
      Deficit
            
            
            Comprehensive
      (Loss) Income
            
            
            Shares
            
            
            Amount
            
            
            TotalBalance
      at December 31,  2008
            
            
            30,807
            
            
            $
            40
            
            
            $
            422,085
            
            
            $
            (298,718
            )
            
            $
            (1,297
            )
            
            
            (200
            )
            
            $
            (2,741
            )
            
            $
            119,369Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (29,973
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (29,973
            )Net
      change in unrealized loss on marketable securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,001
            
            
            
            -
            
            
            
            -
            
            
            
            1,001Total
      comprehensive loss:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (28,972
            )Compensation
      expenses for share-based payment arrangements
            
            
            -
            
            
            
            -
            
            
            
            10,281
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,281Issuance
      of restricted stock, net of forfeitures
            
            
            135
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Sale
      of common stock under employee stock purchase plans and exercise of stock
      options
            
            
            777
            
            
            
            1
            
            
            
            3,820
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,821Balance
      at September 30, 2009
            
            
            31,719
            
            
            $
            41
            
            
            $
            436,186
            
            
            $
            (328,691
            )
            
            $
            (296
            )
            
            
            (200
            )
            
            $
            (2,741
            )
            
            $
            104,499











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


5
 INDEX




PROGENICS PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





(amounts
in thousands)


(Unaudited)





For
      the Nine Months Ended
              September
      30,2008
            
            
            2009Cash
      flows from operating activities:Net
      loss
            
            $
            (30,074
            )
            
            $
            (29,973
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            3,427
            
            
            
            3,633Write-off
      of fixed assets, net of gain on disposal
            
            
            -
            
            
            
            194Amortization
      of discounts, net of premiums, on marketable securities
            
            
            620
            
            
            
            883Expenses
      for share-based compensation awards
            
            
            10,899
            
            
            
            10,281Gain
      on sale of marketable securities
            
            
            -
            
            
            
            (237
            )Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
            
            
            (4,837
            )
            
            
            640Decrease
      in other current assets
            
            
            322
            
            
            
            2,368Increase
      in other assets
            
            
            (6
            )
            
            
            -Decrease
      in accounts payable and accrued expenses
            
            
            (3,349
            )
            
            
            (155
            )Decrease
      in deferred revenue
            
            
            (9,849
            )
            
            
            (25,693
            )Decrease
      in other liabilities
            
            
            (69
            )
            
            
            (69
            )Net
      cash used in operating activities
            
            
            (32,916
            )
            
            
            (38,128
            )Cash
      flows from investing activities:Capital
      expenditures
            
            
            (2,020
            )
            
            
            (836
            )Sales/maturities
      of marketable securities
            
            
            96,734
            
            
            
            80,233Purchase
      of marketable securities
            
            
            (54,962
            )
            
            
            -Decrease
      in restricted cash
            
            
            32
            
            
            
            170Net
      cash provided by investing activities
            
            
            39,784
            
            
            
            79,567Cash
      flows from financing activities:Purchase
      of treasury stock
            
            
            (2,741
            )
            
            
            -Proceeds
      from the exercise of stock options and sale of common stock under the
      Employee Stock Purchase Plan
            
            
            5,145
            
            
            
            3,821Net
      cash provided by financing activities
            
            
            2,404
            
            
            
            3,821Net
      increase in cash and cash equivalents
            
            
            9,272
            
            
            
            45,260Cash
      and cash equivalents at beginning of period
            
            
            10,423
            
            
            
            56,186Cash
      and cash equivalents at end of period
            
            $
            19,695
            
            
            $
            101,446









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


6
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 (amounts
in thousands, except per share amounts and unless otherwise noted)


1.  Interim Financial Statements





Progenics
Pharmaceuticals, Inc. (“Progenics,” “we” or “us”) is a biopharmaceutical company
focusing on the development and commercialization of innovative therapeutic
products to treat the unmet medical needs of patients with debilitating
conditions and life-threatening diseases. Our principal programs are directed
toward supportive care, virology and oncology.





Progenics
commenced principal operations in 1988, became publicly traded in 1997 and
throughout has been engaged primarily in research and development efforts,
developing manufacturing capabilities, establishing corporate collaborations and
raising capital. We have only recently begun to derive revenue from a commercial
product. All of our operations are conducted at our facilities in Tarrytown, New
York.





Supportive
Care. Our first commercial product is RELISTOR®
(methylnaltrexone bromide) subcutaneous injection, a first-in-class therapy for
opioid-induced constipation  approved for sale in over 30 countries
worldwide, including the United States, European Union member states, Canada,
Australia, and Brazil. Marketing applications are pending elsewhere throughout
the world.





On
October 9, 2009, we and Wyeth Pharmaceuticals terminated our 2005 RELISTOR
collaboration, as a result of which we are regaining all worldwide rights to
RELISTOR. Under our Transition Agreement with Wyeth, there will be a transition
period during which Wyeth will continue to market and sell RELISTOR for a U.S.
Sales Period ending September 30, 2010 and an ex-U.S. Sales Period ending
December 31, 2010. After the transition period, we will assume full control of
and responsibility for future development and commercialization of RELISTOR. On
October 14, 2009, Wyeth and Pfizer Inc. completed their previously-announced
merger, and Wyeth is now a wholly owned subsidiary of Pfizer.





We are
pursuing a range of strategic alternatives for RELISTOR, including licensing,
collaboration, strategic alliances and U.S. commercialization or co-promotion
with our own sales force, as well as continuing to seek strategic collaborations
and other funding support for product candidates in our pipeline.





Under the
Transition Agreement, Wyeth has agreed to pay to us the sum of $10.0 million in
six quarterly installments and is continuing certain ongoing development efforts
for subcutaneous RELISTOR, at its expense, through September 30, 2010. Wyeth’s
international sales and marketing obligations during the ex-U.S. Sales Period
are subject to certain extension and early transition options available to us.
Wyeth will continue to pay royalties on worldwide sales as provided in the 2005
collaboration agreement except that no royalties will be payable in respect of
ex-U.S. sales during (i) the fourth quarter of 2010 to the extent certain
financial targets are not met or (ii) an extended ex-U.S. Sales Period in the
subject country.





We
regained control of the oral form of RELISTOR upon execution of the Transition
Agreement, and expect to continue development as the transition progresses.
Principal responsibility for regulatory submissions and interactions for all
other formulations and presentations of RELISTOR will be transferred during and
as part of the transition. Wyeth is also providing financial resources,
aggregating up to approximately $14.5 million, and/or other assistance with
respect to agreed-upon regulatory, manufacturing and supply matters. We have
agreed to purchase Wyeth’s remaining inventory of subcutaneous RELISTOR at the
end of the Sales Periods on agreed-upon terms and conditions.





Prior to
the Transition Agreement (including the periods covered by this report), we
received upfront, milestone and royalty payments from Wyeth, and were reimbursed
for expenses we incurred in connection with the development of RELISTOR;
manufacturing and commercialization expenses for RELISTOR were funded by
Wyeth.





Our October 2008 out-license to Ono
Pharmaceutical of the rights to subcutaneous RELISTOR in Japan is
unaffected by termination of the Wyeth collaboration. Under our License
Agreement with Ono, we received an upfront payment of $15.0 million, and are
entitled to receive potential milestones, upon achievement of development
responsibilities by Ono, of up to $20.0 million, commercial milestones and
royalties on sales by Ono of subcutaneous RELISTOR in Japan. Ono also has the
option to acquire from us the rights to develop and commercialize in Japan other
formulations of RELISTOR, including intravenous and oral forms, on terms to be
negotiated separately. In June 2009, Ono began clinical testing in Japan of
RELISTOR subcutaneous injection.


7
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
 (amounts
in thousands, except per share amounts and unless otherwise noted)


Future
royalty and milestone payments will depend on success in continued development
and commercialization of RELISTOR. This success will in turn be dependent on
many factors, such as the actions of Wyeth during the transition, Ono’s efforts,
decisions by the FDA and other regulatory bodies, the outcome of clinical and
other testing of RELISTOR, and our own efforts, as well as those of any business
partner(s) with which we may collaborate. Many of these matters are outside our
control. In particular, we cannot guarantee that we will be able to successfully
partner the RELISTOR franchise. We also cannot guarantee, in light of Wyeth’s
limited obligations under the Transition Agreement, its acquisition by Pfizer
and its limited ongoing commercial interest in the RELISTOR franchise, that
Wyeth’s efforts during the transition will achieve any particular level of
success in marketing and sales, regulatory approval or clinical development of
subcutaneous RELISTOR.





Virology.
In the area of virology, we are developing a viral-entry inhibitor -- a
humanized monoclonal antibody, PRO 140 -- for human immunodeficiency virus
(HIV), the virus that causes acquired immunodeficiency syndrome, or AIDS. We are
developing the subcutaneous form of PRO 140 for treatment of HIV infection,
which has the potential for weekly self-administration. In our hepatitis C virus
efforts, we are evaluating second-generation HCV-entry inhibitors as possible
development candidates. We are also engaged in research regarding prophylactic
vaccines against HIV infection.





Oncology.
In the area of prostate cancer, we are conducting a phase 1 clinical trial of a
fully human monoclonal antibody-drug conjugate (ADC) directed against prostate
specific membrane antigen (PSMA), a protein found at high levels on the surface
of prostate cancer cells and also on the neovasculature of a number of other
types of solid tumors. We are also developing therapeutic vaccines designed to
stimulate an immune response to PSMA. Our PSMA programs are conducted through
our wholly owned subsidiary, PSMA Development Company LLC.





Our
virology and oncology product candidates are not as advanced in development as
RELISTOR, and we do not expect any recurring revenues from sales or otherwise
with respect to these product candidates in the near term. To fund these
programs, we are currently in discussions with government agencies to obtain
pivotal-clinical-trial funding for PRO 140, and are pursuing strategic
collaborations with biopharmaceutical companies to support development of PSMA
ADC.





Funding and
Financial Matters. We will require additional funding to continue our
current programs to completion, which may involve collaboration agreements,
license or sale transactions or royalty sales or financings with respect to our
products and product candidates. We may also seek to raise additional capital
through sales of common stock or other securities, and expect to continue
funding some programs in part through government awards.





Progenics
has had recurring losses since inception. At September 30, 2009, we had cash,
cash equivalents and marketable securities, including non-current portion,
totaling $106.8 million which we expect will be sufficient to fund current
operations beyond one year. During the nine months ended September 30, 2009, we
had a net loss of $30.0 million and used $38.1 million of cash in operating
activities.At
September 30, 2009, we had an accumulated deficit of $328.7
million.





Pending
use in our business, our revenues and proceeds of financing activities are held
in cash, cash equivalents and marketable securities. Marketable securities,
which include corporate debt securities and auction rate securities, are
classified as available-for-sale.





In April
2008, our Board of Directors approved a share repurchase program to acquire up
to $15.0 million of our outstanding common shares, under which we have $12.3
million remaining available. Purchases may be discontinued at any time. We did
not repurchase any common shares during the nine months ended September 30,
2009.





Our
interim Condensed Consolidated Financial Statements included in this report have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of our financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, these financial statements reflect (1) all
adjustments, consisting primarily of normal recurring accruals, and (2) events
or transactions from the balance sheet date through November 9, 2009 (issuance
date), necessary for a fair statement of results for the periods presented. The
results of operations for interim periods are not necessarily indicative of the
results for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Terms
used but not defined herein have the meanings ascribed to them in that Annual
Report. The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America
(“GAAP”).


8
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




In July
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 168 (“FAS 168”) “The FASB Accounting
Standards Codification TM and
the Hierarchy of Generally Accepted Accounting Principles” which became the
source of authoritative accounting principles recognized by the FASB to be
applied to nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretative releases of the U.S.
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. We adopted FAS
168 on July 1, 2009 and the adoption changed the way GAAP is referenced in notes
to financial statements and management’s discussion
and analysis of financial condition and results of operations. Starting
with this Form 10-Q, GAAP references herein follow the FASB Accounting Standards
Codification TM
(“ASC”) structure.





2.  Revenue
Recognition





We are
recognizing revenue in connection with our collaborations under the SEC’s Staff
Accounting Bulletin (“SAB”) No. 104 (“SAB 104”) “Revenue Recognition” and apply
the substantive milestone method (“Substantive Milestone Method”). In accordance
with ASC 605 Revenue Recognition, all of our deliverables under the 2005 Wyeth
Collaboration Agreement, consisting of granting the license for RELISTOR,
transfer of supply contracts with third party manufacturers, transfer of
development and manufacturing know-how, and completion of development for the
subcutaneous and intravenous formulations of RELISTOR in the U.S., represented
one unit of accounting, since none of those components had standalone value to
Wyeth prior to regulatory approval of at least one product: that unit of
accounting comprised the development phase, through regulatory approval, for the
subcutaneous and intravenous formulations in the U.S.





Collaborations
may contain substantive milestone payments to which we apply the Substantive
Milestone Method. Substantive milestone payments are considered to be
performance payments that are recognized upon achievement of the milestone only
if all of the following conditions are met: (i) the milestone payment is
non-refundable, (ii) achievement of the milestone involves a degree of risk and
was not reasonably assured at the inception of the arrangement, (iii)
substantive effort is involved in achieving the milestone, (iv) the amount of
the milestone payment is reasonable in relation to the effort expended or the
risk associated with achievement of the milestone, and (v) a reasonable amount
of time passes between the upfront license payment and the first milestone
payment as well as between each subsequent milestone payment.





Royalty
revenue is recognized upon the sale of related products, provided that the
royalty amounts are fixed or determinable, collection of the related receivable
is reasonably assured and we have no remaining performance obligations under the
arrangement providing for the royalty. If royalties are received when we have
remaining performance obligations, they are attributed to the services being
provided under the arrangement and, therefore, recognized as such obligations
are performed under either the proportionate performance or straight-line
methods, as applicable, and in accordance with our policies.





Transition
Agreement with Wyeth – October 2009





The
Transition Agreement provides for the termination of the 2005 Wyeth
collaboration agreement and the transition to Progenics of responsibility for
the development and commercialization of RELISTOR. Under it, Wyeth’s license of
Progenics technology is terminated except as necessary for performance of
Wyeth’s obligations during the transition period and Wyeth has returned the
rights to RELISTOR that we had previously granted under the 2005 collaboration
agreement.





Wyeth is
obligated to pay all costs of commercialization of subcutaneous RELISTOR,
including manufacturing costs, and retains all proceeds from its sale of the
products, subject to royalties due to us, during the Sales Periods. Decisions
with respect to commercialization of the product during the transition period
are to be made solely by Wyeth.





Wyeth
Collaboration Agreement – December 2005 to October 2009





We
entered into the Wyeth Collaboration Agreement in 2005 for the purpose of
developing and commercializing RELISTOR. This agreement was in effect until
October 2009, which includes the periods covered by this report.





The Wyeth
Collaboration Agreement involved three formulations of RELISTOR: (i) a
subcutaneous formulation to be used in patients with opioid-induced
constipation ("OIC"), (ii) an intravenous formulation to be used in
patients with post-operative ileus (“POI”) and (iii) an oral formulation to be
used in patients with OIC.


9
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




The Wyeth
Collaboration Agreement established a Joint Steering Committee (“JSC”) and a
Joint Development Committee (“JDC”), each with an equal number of
representatives from both Wyeth and us. The JSC coordinated the companies’ key
activities, while the JDC coordinated the development of RELISTOR by Wyeth and
us. A Joint Commercialization Committee (“JCC”), composed of company
representatives in number and function according to our respective
responsibilities, facilitated open communication between Wyeth and us on
commercialization matters.





We
assessed the nature of our involvement with the committees. Our involvement in
the JSC and JDC was one of several obligations to develop the subcutaneous and
intravenous formulations of RELISTOR through regulatory approval in the U.S. We
combined the committee obligations with the other development obligations and
accounted for these obligations during the development phase as a single unit of
accounting. After the period during which we have developmental
responsibilities, however, we assessed that the nature of our involvement with
the committees as a right, rather than an obligation. We expected at the
beginning of the agreement, that the activities of the committees for that
period were to be focused on Wyeth’s development and commercialization
obligations. Our assessment was based upon the fact that we negotiated to be on
the committees as an accommodation for our granting the license for RELISTOR to
Wyeth.





Under the
Wyeth Collaboration Agreement, we granted to Wyeth an exclusive, worldwide
license, even as to us, to develop and commercialize RELISTOR and assigned the
agreements for the manufacture of RELISTOR by third parties to Wyeth. Wyeth
returned the rights with respect to Japan to us in connection with its election
not to develop RELISTOR there and the transaction with Ono discussed in Note 1,
above. We were responsible for developing the subcutaneous and intravenous
formulations in the U.S. until they receive regulatory approval, while Wyeth was
responsible for these formulations outside the U.S. other than Japan. Wyeth was
also responsible for the development of the oral formulation worldwide excluding
Japan. We transferred to Wyeth all existing supply agreements with third parties
for RELISTOR and sublicensed intellectual property rights to permit Wyeth to
manufacture RELISTOR, during the development and commercialization phases of the
Wyeth Collaboration Agreement, in both bulk and finished form for all products
worldwide. We had no further manufacturing obligations under the 2005
Collaboration. We transferred to Wyeth all know-how, as defined, related to
RELISTOR.





Upon
execution of the Collaboration Agreement, Wyeth made a non-refundable,
non-creditable upfront payment of $60.0 million, for which we deferred revenue
at December 31, 2005. As a result of the Transition Agreement, the period of our
development responsibilities under the 2005 agreement ceased in the fourth
quarter of 2009. We are recognizing revenue related to the upfront license
payment from the first quarter of 2006 to the fourth quarter of 2009, the period
during which the performance obligations are being performed using the
proportionate performance method. We are recognizing revenue using the
proportionate performance method since we can reasonably estimate the level of
effort required to complete our performance obligations under the Wyeth
Collaboration Agreement and such performance obligations are provided on a
best-efforts basis. Full-time equivalents are being used as the measure of
performance. Under the proportionate performance method, revenue related to the
upfront license payment is recognized in any period as the percent of actual
effort expended in that period relative to expected total effort, which is based
upon the most current budget and development plan approved by both us and Wyeth
and includes all of the performance obligations under the arrangement.
Significant judgment is required in determining the nature and assignment of
tasks to be accomplished by each of the parties and the level of effort required
for us to complete our performance obligations under the arrangement. The nature
and assignment of tasks to be performed by each party involves the preparation,
discussion and approval by the parties of a development plan and budget. With
the termination of the Wyeth Collaboration Agreement during the fourth quarter
of 2009, we will recognize all of the $5.2 million unamortized remainder, which
is included in deferred revenue – current, of the upfront payment during that
quarter.





The
amount of the upfront license payment that we recognized as revenue for each
fiscal quarter prior to the third quarter of 2007 was based upon several revised
approved budgets, although the revisions to those budgets did not materially
affect the amount of revenue recognized in those periods. During the third
quarter of 2007, the estimate of our total remaining effort to complete our
development obligations was increased significantly based upon a revised
development budget approved by both us and Wyeth. As a result, the period over
which our obligations were to extend, and over which the upfront payment was to
be amortized, was extended from the end of 2008 to the end of 2009. The
Transition Agreement between Wyeth and us shortened the obligation period from
the end of 2009 to October 2009.


10
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




From
January 2006 to October 2009, costs for the development of RELISTOR incurred by
Wyeth or us were paid by Wyeth. Wyeth had the right once annually to engage an
independent public accounting firm to audit expenses for which we had been
reimbursed during the prior three years. If the accounting firm concluded that
any such expenses had been understated or overstated, a reconciliation was to be
made. From January 2006 to October 2009, we are recognizing as research and
development revenue from collaborator, amounts received from Wyeth for
reimbursement of our development expenses for RELISTOR as incurred under the
development plan agreed to between us and Wyeth. In addition to the upfront
payment and reimbursement of our development costs, Wyeth made milestone
payments to us upon the achievement of specific milestones (development related
milestones for clinical and regulatory events). Upon achievement of defined
substantive development milestones by us for the subcutaneous and intravenous
formulations, the milestone payments were recognized as revenue.





During
the three and nine months ended September 30, 2009, we recognized $3.2 million
and $9.4 million, respectively, of revenue from the $60.0 million upfront
payment and $1.2 million and $4.7 million, respectively, as reimbursement for
our development costs, including our labor costs. During the three and nine
month periods ended September 30, 2008, we recognized $2.1 million and $8.1
million, respectively, of revenue from the $60 million upfront payment and $3.9
million and $21.8 million, respectively, as reimbursement for our development
costs, including our labor costs. In April and July 2008, we earned $15.0
million and $10.0 million in milestone payments upon the FDA approval of
subcutaneous RELISTOR in the U.S. and the EMEA approval of subcutaneous RELISTOR
for the European Union, respectively. We considered those milestones to be
substantive and recognized the payments as revenue in the periods
earned.





As for
royalties, during the three and nine months ended September 30, 2009, we earned
$497 and $1,264, respectively, based on the net sales of subcutaneous RELISTOR,
and we recognized $509 and $976, respectively, of royalty income. During the
three and nine months ended September 30, 2008, we earned royalties of $117 and
$438, respectively, and recognized $44 and $86, respectively, of royalty income.
As of September 30, 2009, we have recorded a cumulative total of $807 as
deferred revenue – current, which will be recognized as royalty income during
the fourth quarter of 2009, the period in which our development obligations
relating to RELISTOR terminated.





We
incurred $49 and $126, respectively, of royalty costs and recognized $51 and
$98, respectively, of royalty expenses during the three and nine months ended
September 30, 2009. We incurred $12 and $44, respectively, of royalty costs and
recognized $5 and $9, respectively, of royalty expenses during the three and
nine month periods ended September 30, 2008. As of September 30, 2009, we
recorded a cumulative total of $81 of deferred royalty costs from the royalty
costs incurred since we began earning royalties in the second quarter of 2008.
The $81 of deferred royalty costs will be recognized as royalty expense during
the fourth quarter of 2009, the period in which our development obligations
relating to RELISTOR terminated.





Ono
Agreement – October 2008





Ono is
responsible for developing and commercializing subcutaneous RELISTOR in Japan,
including conducting the clinical development necessary to support regulatory
marketing approval. Ono will own the subcutaneous filings and approvals relating
to RELISTOR in Japan. In addition to the $15.0 million upfront payment from Ono,
we are entitled to receive up to an additional $20.0 million, payable upon
achievement by Ono of its development milestones. Ono is also obligated to pay
to us royalties and commercialization milestones on sales by Ono of subcutaneous
RELISTOR in Japan. Ono has the option to acquire from us the rights to develop
and commercialize in Japan other formulations of RELISTOR, including intravenous
and oral forms, on terms to be negotiated separately. Ono may request us to
perform activities related to its development and commercialization
responsibilities beyond our participation in joint committees and specified
technology transfer-related tasks which will be at its expense, and payable to
us for the services it requests, at the time we perform services for them.
Revenue earned from activities we perform for Ono is recorded in research and
development revenue.





We
recognized the upfront payment of $15.0 million which we received from Ono in
November 2008 as research and development revenue during the first quarter of
2009, upon satisfaction of our performance obligations.


11
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




3.  Share-Based
Payment Arrangements





We
estimate the expected term of stock options granted to employees and officers
(excluding our Chief Executive Officer) and directors by using historical data
for these two groups. The expected term for options granted to these two groups
was 5.33 and 7.3 years, respectively, in 2008 and 5.3 and 7.3 years,
respectively, in the first nine months of 2009. The expected term of stock
options granted to our Chief Executive Officer, separately from stock options
granted to employees and officers, was 7.5 and 7.8 years in the first nine
months of 2008 and 2009, respectively. The expected term for stock options
granted to non-employee consultants was ten years, equal to the contractual term
of those options. In making these estimates, we calculated the expected
volatility based upon the period of the respective expected terms, using a
dividend rate of zero (since we have never paid and do not expect to pay
dividends in the future) and a risk-free rate for periods within the expected
term of the option based on the U.S. Treasury yield curve in effect at the time
of grant.





The
assumptions we used in the Black-Scholes option pricing model to estimate the
grant date fair values of stock options granted under our stock incentive plans
(the “Incentive Plans”) during the nine months ended September 30, 2008 and 2009
were as follows:





For
      the Nine Months Ended
              September
      30,2008
            
            2009Expected
      volatility
            
            66%
      – 91%
            
            71%
      – 91%Expected
      dividends
            
            zero
            
            zeroExpected
      term (years)
            
            5.33
      – 10
            
            5.3
      – 10Weighted
      average expected term (years)
            
            6.87
            
            7.41Risk-free
      rate
            
            2.44%
      –  3.79%
            
            1.78%
      –  3.22%





During the nine months ended September 30, 2008 and 2009, the fair value of
shares purchased under the two employee stock purchase plans (the “Purchase
Plans”) was estimated on the date of grant in accordance with ASC 718
Compensation – Stock Compensation via the same option valuation model used for
options granted under the Incentive Plans, but with the following
assumptions:





For
      the Nine Months Ended
              September
      30,2008
            
            2009Expected
      volatility
            
            83%
            
            57%
      – 100%Expected
      dividends
            
            zero
            
            zeroExpected
      term
            
            6
      months
            
            6
      monthsRisk-free
      rate
            
            1.72%
            
            0.08%
      – 0.38%





The total
fair value of shares under all of our share-based payment arrangements that
vested during the nine months ended September 30, 2008 and 2009 was $10.9
million and $10.3 million, respectively. In such periods, $5.3 million and $5.6
million, respectively, of such value was reported as research and development
expense, and $5.6 million and $4.7 million, respectively, of such value was
reported as general and administrative expense.





No tax
benefit was recognized related to such compensation cost during the nine months
ended September 30, 2008 and 2009 because we had net losses for each of those
periods and the related deferred tax assets were fully offset by a valuation
allowance. Accordingly, no amounts related to windfall tax benefits have been
reported in cash flows from operations or cash flows from financing activities
for the nine months ended September 30, 2008 and 2009.


12
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




In
applying the treasury stock method for the calculation of diluted earnings per
share (“EPS”), amounts of unrecognized compensation expense and windfall tax
benefits are required to be included in the assumed proceeds in the denominator
of the diluted EPS calculation unless they are anti-dilutive. We incurred net
losses for the three and nine months ended September 30, 2008 and 2009 and,
therefore, such amounts have not been included in the calculations for those
periods since they would be anti-dilutive. As a result, basic and diluted EPS
are the same for each period. We have made an accounting policy decision to
calculate windfall tax benefits/shortfalls, for purposes of diluted EPS
calculation, excluding the impact of pro forma deferred tax assets. This policy
decision will apply when we have net income.





4.  Fair
Value Measurements





Our
available-for-sale investment portfolio consists of marketable securities,
including corporate debt securities, securities of government-sponsored entities
and auction rate securities, and is recorded at fair value in the accompanying
condensed consolidated balance sheets in accordance with ASC 320 Investments –
Debt and Equity Securities. The change in the fair value of these marketable
securities is recorded as a component of other comprehensive
income.





Marketable
securities consisted of the following:





December
      31,
              2008
            
            
            September
      30,
              2009Short-termCorporate
      debt securities
            
            $
            63,127
            
            
            $
            1,518Total
      short-term marketable securities
            
            
            63,127
            
            
            
            1,518Long-termCorporate
      debt securities and securities of
              government-sponsored
      entities
            
            
            18,002
            
            
            
            -Auction
      rate securities
            
            
            4,059
            
            
            
            3,792Total
      long-term marketable securities
            
            
            22,061
            
            
            
            3,792Total
      marketable securities
            
            $
            85,188
            
            
            $
            5,310





We
adopted ASC 820 Fair Value Measurements and Disclosures effective January 1,
2008 and 2009, for financial assets and financial liabilities and nonfinancial
assets and nonfinancial liabilities, respectively. Fair value measurements and
disclosures define fair value as the price that would be received in selling an
asset or paid in transferring a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date, and
establish a framework to make the measurement of fair value more consistent and
comparable. The adoption of fair value measurements and disclosures did not have
a material impact on our financial position or results of
operations.





We use a
three-level hierarchy for fair value measurements that distinguishes between
market participant assumptions developed from market data obtained from sources
independent of the reporting entity (“observable inputs”) and the reporting
entity’s own assumptions about market participant assumptions developed from the
best information available in the circumstances (“unobservable inputs”). The
hierarchy level assigned to each security in our available-for-sale portfolio is
based on our assessment of the transparency and reliability of the inputs used
in the valuation of such instrument at the measurement date. The three hierarchy
levels are defined as follows:





·  Level 1 -
Valuations based on unadjusted quoted market prices in active markets for
identical securities.




·
            Level
      2 - Valuations based on observable inputs other than Level 1 prices, such
      as quoted prices for similar assets at the measurement date, quoted prices
      in markets that are not active or other inputs that are observable, either
      directly or indirectly.





·
            Level
      3 - Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, and involve management
      judgment.


13
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




The
following tables present our available-for-sale investments measured at fair
value on a recurring basis as of December 31, 2008 and September 30, 2009,
classified by valuation hierarchy (discussed above):





Fair
      Value Measurements at December 31, 2008Investment
      Type
            
            Balance
      at
              December
      31, 2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Money
      market funds
            
            $
            43,859
            
            
            $
            43,859
            
            
            $
            -
            
            
            $
            -Corporate
      debt securities and securities of government-sponsored
      entities
            
            
            81,129
            
            
            
            -
            
            
            
            81,129
            
            
            
            -Auction
      rate securities
            
            
            4,059
            
            
            
            -
            
            
            
            -
            
            
            
            4,059Total
            
            $
            129,047
            
            
            $
            43,859
            
            
            $
            81,129
            
            
            $
            4,059





Fair
      Value Measurements at September 30, 2009Investment
      Type
            
            Balance
      at
              September
      30, 2009
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Money
      market funds
            
            $
            98,156
            
            
            $
            98,156
            
            
            $
            -
            
            
            $
            -Corporate
      debt securities
            
            
            1,518
            
            
            
            -
            
            
            
            1,518
            
            
            
            -Auction
      rate securities
            
            
            3,792
            
            
            
            -
            
            
            
            -
            
            
            
            3,792Total
            
            $
            103,466
            
            
            $
            98,156
            
            
            $
            1,518
            
            
            $
            3,792





At
September 30, 2009 we hold $3.8 million (3.7% of total assets measured at fair
value) in auction rate securities which are classified as Level 3. The fair
value of these securities includes $2.9 million of securities
collateralizedby
student loan obligations subsidized by the U.S. government and $0.9 million of
investment company perpetual preferred stock, and do not include mortgage-backed
instruments. Auction rate securities are collateralized long-term instruments
that were intended to provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined intervals, typically every
7 to 35 days. Beginning in February 2008, auctions failed for certain of our
auction rate securities because sell orders exceeded buy orders, and we were
unable to dispose of those securities at auction. We will not realize cash in
respect of the principal amount of these securities until a successful auction
occurs, the issuer calls or restructures the security, the security reaches any
scheduled maturity and is paid (inapplicable to the perpetual preferred
mentioned above) or a buyer outside the auction process emerges. As of September
30, 2009, we have received all scheduled interest payments on these securities,
which, in the event of auction failure, are reset according to the contractual
terms in the governing instruments.





The
valuation of auction rate securities we hold is based on Level 3 unobservable
inputs which consist of our internal analysis of (i) timing of expected future
successful auctions, (ii) collateralization of underlying assets of the security
and (iii) credit quality of the security. We re-evaluated the valuation of these
securities as of September 30, 2009 and the temporary impairment amount
decreased $0.008 million from $0.316 million at December 31, 2008, to $0.308
million, which is reflected as a part of other comprehensive loss on our
accompanying condensed consolidated balance sheets. These securities are held
“available-for-sale” and the unrealized loss is included in other comprehensive
loss. Due to the uncertainty related to the liquidity in the auction rate
security market and therefore when individual positions may be liquidated, we
have classified these auction rate securities as long-term assets on our
accompanying condensed consolidated balance sheets.


14
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)


We
continue to monitor markets for our investments and consider the impact, if any,
of market conditions on the fair market value of our investments. If market
conditions for our investments do not recover or if we determine that it is more
likely than not that we are required to sell to fund our operations before the
investments recover, we may be required to record additional losses during the
remainder of 2009 or in 2010. We expect to recover the amortized cost of all of
our investments at maturity. Currently, we do not anticipate having to sell
these securities in order to operate our business and believe that it is not
more likely than not that we will be required to sell these securities prior to
recovering its cost. We do not believe the carrying values of our investments
are other than temporarily impaired and therefore expect the positions will
eventually be liquidated without significant loss.





For those
of our financial instruments with significant Level 3 inputs (all of which are
auction rate securities), the following table summarizes the activities for the
three and nine months ended September 30, 2008 and 2009:





Fair
      Value Measurements Using Significant
              Unobservable
      Inputs
              (Level
      3)Description
            
            For
      the Three Months Ended
              September
      30, 2008
            
            
            For
      the Three Months Ended
              September
      30, 2009Balance
      at beginning of period
            
            $
            6,042
            
            
            $
            4,059Transfers
      into Level 3
            
            
            -
            
            
            
            -Total
      realized/unrealized gains (losses)(1)Included
      in net loss
            
            
            -
            
            
            
            -Included
      in comprehensive income (loss)
            
            
            92
            
            
            
            8Settlements
            
            
            (800
            )
            
            
            (275
            )Balance
      at end of period
            
            $
            5,334
            
            
            $
            3,792(1)
      Total amount of unrealized gains (losses) for the period included in other
      comprehensive loss attributable to the change in fair market value of
      related assets still held at the reporting date
            
            $
            -
            
            
            $
            -





Fair
      Value Measurements Using Significant
              Unobservable
      Inputs
              (Level
      3)Description
            
            For
      the Nine Months Ended
              September
      30, 2008
            
            
            For
      the Nine Months Ended
              September
      30, 2009Balance
      at beginning of period
            
            $
            -
            
            
            $
            4,059Transfers
      into Level 3
            
            
            8,150
            
            
            
            -Total
      realized/unrealized gains (losses) (1)Included
      in net loss
            
            
            -
            
            
            
            -Included
      in comprehensive income (loss)
            
            
            (316
            )
            
            
            8Settlements
            
            
            (2,500
            )
            
            
            (275
            )Balance
      at end of period
            
            $
            5,334
            
            
            $
            3,792(1)Total amount of unrealized gains (losses) for the
      period  included in other comprehensive loss attributable to the
      change in fair market value of related assets still held at the reporting
      date
            
            $
            (316
            )
            
            $
            -





In April
2009, the FASB updated three ASCs related to (i) measuring fair value when
market activity declines, (ii) other-than-temporary impairments and (iii)
interim fair value disclosures.


15
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)





ASC 820
Fair Value Measurements and Disclosures provide additional guidance on (1)
estimating fair value of an asset or liability when the volume and level of
market activity for the asset or liability have significantly decreased and (2)
identifying transactions that are not orderly.





ASC 320
Investments – Debt and Equity Securities change the focus of the
other-than-temporary model from an entity’s ability and intent to hold a debt
security until recovery. Under this standard, an other-than-temporary impairment
occurs for debt securities if (1) an entity has the intent to sell the security,
(2) it is more likely than not that it will be required to sell the security
before recovery, or (3) it does not expect to recover the entire amortized cost
basis of the security.





ASC 825
Financial Instruments expand the disclosure requirements for financial
instruments to interim period financial statements and requires an entity to (1)
disclose the methods and significant assumptions used to estimate fair value and
(2) highlight any changes of the methods and significant assumptions from prior
periods.





All three
updates are effective for interim and annual reporting periods ending after June
15, 2009 and our adoption did not have a material effect on our financial
position or results of operations.





The
following table summarizes the amortized cost basis, the aggregate fair value
and gross unrealized holding gains and losses at December 31, 2008 and September
30, 2009:





Amortized
            
            
            Fair
            
            
            Unrealized
      HoldingCost
      Basis
            
            
            Value
            
            
            Gains
            
            
            (Losses)
            
            
            NetDecember
      31, 2008:Maturities
      less than one year:Corporate
      debt securities
            
            $
            63,982
            
            
            $
            63,127
            
            
            $
            114
            
            
            $
            (969
            )
            
            $
            (855
            )Maturities
      between one and five years:Corporate
      debt securities
            
            
            17,129
            
            
            
            16,995
            
            
            
            71
            
            
            
            (205
            )
            
            
            (134
            )Government-sponsored
      entities
            
            
            999
            
            
            
            1,007
            
            
            
            8
            
            
            
            -
            
            
            
            8Maturities
      greater than ten years:Auction
      rate securities
            
            
            3,200
            
            
            
            2,944
            
            
            
            -
            
            
            
            (256
            )
            
            
            (256
            )Investments
      without stated maturity dates:Auction
      rate securities
            
            
            1,175
            
            
            
            1,115
            
            
            
            -
            
            
            
            (60
            )
            
            
            (60
            )$
            86,485
            
            
            $
            85,188
            
            
            $
            193
            
            
            $
            (1,490
            )
            
            $
            (1,297
            )





Amortized
            
            
            Fair
            
            
            Unrealized
      HoldingCost
      Basis
            
            
            Value
            
            
            Gains
            
            
            (Losses)
            
            
            NetSeptember
      30, 2009:Maturities
      less than one year:Corporate
      debt securities
            
            $
            1,506
            
            
            $
            1,518
            
            
            $
            12
            
            
            $
            -
            
            
            $
            12Maturities
      greater than ten years:Auction
      rate securities
            
            
            3,100
            
            
            
            2,852
            
            
            
            -
            
            
            
            (248
            )
            
            
            (248
            )Investments
      without stated maturity dates:Auction
      rate securities
            
            
            1,000
            
            
            
            940
            
            
            
            -
            
            
            
            (60
            )
            
            
            (60
            )$
            5,606
            
            
            $
            5,310
            
            
            $
            12
            
            
            $
            (308
            )
            
            $
            (296
            )





Progenics
computes the cost of its investments on a specific identification basis. Such
cost includes the direct costs to acquire the securities, adjusted for the
amortization of any discount or premium.










16
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




The following table shows the gross unrealized losses and fair value of our
marketable securities with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at December 31, 2008 and September 30, 2009.


At
December 31, 2008:





Less
      than 12 Months
            
            
            12
      Months or Greater
            
            
            TotalDescription of Securities
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      LossesCorporate
      debt securities
            
            $
            57,567
            
            
            $
            (1,174
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            57,567
            
            
            $
            (1,174
            )Auction
      rate securities
            
            
            4,059
            
            
            
            (316
            )
            
            
            -
            
            
            
            -
            
            
            
            4,059
            
            
            
            (316
            )Total
            
            $
            61,626
            
            
            $
            (1,490
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            61,626
            
            
            $
            (1,490
            )





At
September 30, 2009:





Less
      than 12 Months
            
            
            12
      Months or Greater
            
            
            TotalDescription of Securities
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      LossesAuction
      rate securities
            
            $
            -
            
            
            $
            -
            
            
            $
            3,792
            
            
            $
            (308
            )
            
            $
            3,792
            
            
            $
            (308
            )Total
            
            $
            -
            
            
            $
            -
            
            
            $
            3,792
            
            
            $
            (308
            )
            
            $
            3,792
            
            
            $
            (308
            )





Other-than-temporary impairment
analysis on corporate debt securities.At December 31, 2008, we owned 34
securities maturing in less than one year, with a gross unrealized loss position
of $969 ($46,028 of the total fair value) and there were 9 securities in the
portfolio maturing between one and two years, with a gross unrealized loss
position of $205 ($11,539 of the total fair value). The severity of the
unrealized losses for the securities in an unrealized loss position at December
31, 2008 was between less than one percent and 17.67 percent below amortized
cost, and the weighted average duration of the unrealized losses of these
securities was 6.98 months.





We have
evaluated our individual corporate debt securities holdings for
other-than-temporary impairment and determined that the unrealized losses as of
December 31, 2008 are attributable to our purchase of corporate debt securities
which traded at a premium in early 2008, and have since declined in market
value. Because we do not intend to sell these securities, and believe it is not
more likely than not that we would be required to sell these securities before
recovery of principal, we do not consider these securities to be
other-than-temporarily impaired at December 31, 2008.





At
September 30, 2009, we owned one corporate debt security which is in an
unrealized gain position and, as a result of this security being in a gain
position; we do not believe it is temporarily impaired.





Other-than-temporary impairment
analysis on auction rate securities.The unrealized losses in our auction
rate securities investments were the result of an internal analysis of timing of
expected future successful auctions, collateralization of underlying assets of
the security and credit quality of the security. At December 31, 2008 and
September 30, 2009, there were three and two securities with a gross unrealized
loss position of $316 and $308 ($4,059 and $3,792 of the total fair value),
respectively.





The
severity of the unrealized losses for the auction rate securities at December
31, 2008 and September 30, 2009 was between 6 percent and 8 percent below
amortized cost, and the weighted average duration of the unrealized losses for
these securities was 9.25 and 19 months, respectively.





We have
evaluated our individual auction rate securities holdings for
other-than-temporary impairment and determined that the unrealized losses as of
September 30, 2009 are attributable to uncertainty in the liquidity of the
auction rate security market. Because we do not intend to sell these securities,
and believe it is not more likely than not that we would be required to sell
these securities before recovery of principal, we do not consider these
securities to be other-than-temporarily impaired at December 31, 2008 and
September 30, 2009.


17
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments at December 31, 2008 and September 30, 2009, for
which it is practicable to estimate that value:





Cash and cash
equivalents. We consider all highly liquid investments which have
maturities of three months or less, when acquired, to be cash equivalents. For
those short-term instruments, the carrying value is a reasonable estimate of
fair value.





Marketable
securities. Our marketable securities are considered to be
“available-for-sale” and include money market funds, corporate debt securities,
securities of government-sponsored entities and auction rate securities. These
securities are valued based on unadjusted quoted market prices in active markets
for identical securities, quoted prices for similar assets at the measurement
date or inputs that are unobservable and significant to the overall fair value
measurement, and involve management judgment and are recorded at fair value in
our financial statements, with any unrealized gains or losses reported in
comprehensive income (loss), and thus the carrying value is equal to the fair
value of those instruments.





Accounts
receivable. Our accounts receivable represent amounts due to Progenics
from research from collaborator, royalties, research grants and contract and the
sales of research reagents. These amounts are considered to be short-term as
they are expected to be collected within one year and we believe their carrying
value approximates fair value.





Other current
assets. This class of assets is comprised of financial instruments and
non-financial instruments. The financial instruments primarily consist of
interest and other receivables and we believe that their carrying value is a
reasonable estimate of the fair value as the receivables are expected to be
settled for cash within one year.





Restricted
cash. The restricted cash is collateral for a letter of credit securing
lease obligations. We believe that its carrying value approximates the fair
value.





Accounts payable
and accrued expenses. The carrying value of our accounts payable and
accrued expenses approximates the fair value, as it represents amounts due to
vendors and employees, which will be satisfied within one year.





The
estimated fair values of our financial instruments are as follows:





Fair
      Value Summary TableDecember
      31, 2008
            
            
            September
      30, 2009Carrying
              Value
            
            
            Estimated
      Fair Value
            
            
            Carrying
              Value
            
            
            Estimated
      Fair ValueAssets:Cash
      and cash equivalents
            
            $
            56,186
            
            
            $
            56,186
            
            
            $
            101,446
            
            
            $
            101,446Marketable
      securities
            
            
            85,188
            
            
            
            85,188
            
            
            
            5,310
            
            
            
            5,310Accounts
      receivable
            
            
            1,337
            
            
            
            1,337
            
            
            
            697
            
            
            
            697Other
      current assets (net of
      non-financial   instruments)
            
            
            2,036
            
            
            
            2,036
            
            
            
            127
            
            
            
            127Restricted
      cash
            
            
            520
            
            
            
            520
            
            
            
            350
            
            
            
            350Liabilities:Accounts
      payable and accrued expenses
            
            
            6,496
            
            
            
            6,496
            
            
            
            6,341
            
            
            
            6,341





5.  Accounts
Receivable





December
      31,
              2008
            
            
            September
      30,
              2009National
      Institutes of Health
            
            $
            1,107
            
            
            $
            183Royalties
            
            
            229
            
            
            
            497Research
      and development from collaborator
            
            
            -
            
            
            
            6Other
            
            
            1
            
            
            
            11Total
            
            $
            1,337
            
            
            $
            697





6.  Accounts
Payable and Accrued Expenses





December
      31,
              2008
            
            
            September
      30,
              2009Accounts
      payable
            
            $
            899
            
            $
            371Accrued
      consulting and clinical trial costs
            
            
            3,556
            
            
            2,735Accrued
      payroll and related costs
            
            
            1,093
            
            
            1,801Legal
      and professional fees
            
            
            925
            
            
            1,385Other
            
            
            23
            
            
            49Total
            
            $
            6,496
            
            $
            6,341





18
 INDEX





PROGENICS
PHARMACEUTICALS, INC.
  NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued (unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)


7.Net Loss Per
Share





Our basic
net loss per share amounts have been computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. For the
three and nine months ended September 30, 2008 and 2009, we reported net losses
and, therefore, potential common shares were not included since such inclusion
would have been anti-dilutive.





In June
2008, the FASB updated ASC 260 Earnings Per Share by requiring entities, when
calculating EPS, to allocate earnings to unvested and contingently issuable
share-based payment awards that have non-forfeitable rights to dividends or
dividend equivalents when calculating EPS and also present both basic EPS and
diluted EPS pursuant to the two-class method. The update to ASC 260 Earnings Per
Share is effective January 1, 2009 and requires retrospective application. We
adopted this update on January 1, 2009 and the adoption had no material impact
on basic and diluted earnings per share for the three and nine months ended
September 30, 2008 and 2009.





The
calculations of net loss per share, basic and diluted, are as
follows:





Net
      Loss
              (Numerator)
            
            
            Shares
              (Denominator)
            
            
            Per
      Share
              AmountThree
      months ended September 30, 2008Basic
      and diluted
            
            $
            (12,220
            )
            
            
            30,323
            
            
            $
            (0.40
            )Nine
      months ended September 30, 2008Basic
      and diluted
            
            $
            (30,074
            )
            
            
            30,048
            
            
            $
            (1.00
            )Three
      months ended September 30, 2009Basic
      and diluted
            
            $
            (13,014
            )
            
            
            31,428
            
            
            $
            (0.41
            )Nine
      months ended September 30, 2009Basic
      and diluted
            
            $
            (29,973
            )
            
            
            31,060
            
            
            $
            (0.97
            )





For the
three and nine months ended September 30, 2008 and 2009, potential common shares
which have been excluded from diluted per share amounts because their effect
would have been anti-dilutive include the following:





Three
      Months Ended September 30,2008
            
            2009Weighted
              Average
              Number
            Weighted
              Average
              Exercise
      Price
            
            Weighted
              Average
              Number
            Weighted
              Average
              Exercise
      PriceStock
      options
            5,071
            $17.87
            
            5,041
            $16.56Restricted
      stock
            20
            
            
            15Total
            5,091
            
            
            5,056





Nine
      Months Ended September 30,2008
            
            2009Weighted
              Average
              Number
            Weighted
              Average
              Exercise
      Price
            
            Weighted
              Average
              Number
            Weighted
              Average
              Exercise
      PriceStock
      options
            4,826
            $18.03
            
            4,624
            $17.85Restricted
      stock
            35
            
            
            28Total
            4,861
            
            
            4,652





19
 INDEX
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)





8.  Comprehensive
Loss





Comprehensive
loss represents the change in net assets of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Our comprehensive loss includes net loss adjusted for the change in net
unrealized gain or loss on marketable securities. For the three and nine months
ended September 30, 2008 and 2009, the components of comprehensive loss
were:





For
      the Three Months Ended
              September
      30,
            
            
            For
      the Nine Months Ended
              September
      30,2008
            
            
            2009
            
            
            2008
            
            
            2009Net
      loss
            
            $
            (12,220
            )
            
            $
            (13,014
            )
            
            $
            (30,074
            )
            
            $
            (29,973
            )Change
      in net unrealized loss on marketable securities
            
            
            (2,161
            )
            
            
            7
            
            
            
            (2,656
            )
            
            
            1,001Comprehensive
      loss
            
            $
            (14,381
            )
            
            $
            (13,007
            )
            
            $
            (32,730
            )
            
            $
            (28,972
            )





9.
Commitments and Contingencies





In the
ordinary course of our business, we enter into agreements with third parties,
such as business partners, clinical sites and suppliers that include
indemnification provisions which, in our judgment, are normal and customary for
companies in our industry sector. We generally agree to indemnify, hold harmless
and reimburse the indemnified parties for losses suffered or incurred by them
with respect to our products or product candidates, use of such products or
other actions taken or omitted by us. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
not limited. We have not incurred material costs to defend lawsuits or settle
claims related to these provisions. As a result, the estimated fair value of
liabilities relating to indemnification provisions is minimal. We have no
liabilities recorded for these provisions as of September 30, 2009.





10.Impact of Recently Issued Accounting
Standards





In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 to provide
guidance on measuring the fair value of liabilities under ASC 820 Fair Value
Measurements and Disclosures. This ASU clarifies the types of liabilities to be
used for a Level 1 measurement and the types of valuation techniques available
for a non-Level 1 measurement and is effective for the first interim or annual
period beginning after August 28, 2009. We are currently evaluating the impact
this ASU will have on our financial statements.





In
October 2009, the FASB issued ASU 2009-13 to address the accounting for
multiple-deliverable arrangements. In an arrangement with multiple deliverables,
the delivered items shall be considered a separate unit of accounting if both
(i) the delivered items have value to a collaborator on a stand-alone basis, in
that, the collaborator could resell the delivered items on a stand-alone basis,
and (ii) the arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item or items is
considered probable and substantially in our control. This ASU will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
We are currently evaluating the impact this ASU will have on our financial
statements.


20
 INDEX





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





Note
Regarding Forward-Looking Statements





This
document contains statements that do not relate strictly to historical fact, any
of which may be forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. When we use the words
“anticipates,” “plans,” “expects” and similar expressions, we are identifying
forward-looking statements. Forward-looking statements involve known and unknown
risks and uncertainties which may cause our actual results, performance or
achievements to be materially different from those expressed or implied by
forward-looking statements. While it is impossible to identify or predict all
such matters, these differences may result from, among other things, the
inherent uncertainty of the timing and success of, and expense associated with,
research, development, regulatory approval and commercialization of our products
and product candidates, including the risks that clinical trials will not
commence or proceed as planned; products appearing promising in early trials
will not demonstrate efficacy or safety in larger-scale trials; clinical trial
data on our products and product candidates will be unfavorable; our products
will not receive marketing approval from regulators or, if approved, do not gain
sufficient market acceptance to justify development and commercialization costs;
competing products currently on the market or in development might reduce the
commercial potential of our products; we, our collaborators or others might
identify side effects after the product is on the market; or efficacy or safety
concerns regarding marketed products, whether or not originating from subsequent
testing or other activities by us, governmental regulators, other entities or
organizations or otherwise, and whether or not scientifically justified, may
lead to product recalls, withdrawals of marketing approval, reformulation of the
product, additional pre-clinical testing or clinical trials, changes in labeling
of the product, the need for additional marketing applications, declining sales
or other adverse events.





We
are also subject to risks and uncertainties associated with the actions of our
corporate, academic and other collaborators and government regulatory agencies,
including risks from market forces and trends; potential product liability;
intellectual property, litigation, environmental and other risks; the risk that
we may not be able to enter into favorable collaboration or other relationships
or that existing or future relationships may not proceed as planned; the risk
that current and pending patent protection for our products may be invalid,
unenforceable or challenged, or fail to provide adequate market exclusivity, or
that our rights to in-licensed intellectual property may be terminated for our
failure to satisfy performance milestones; the risk of difficulties in, and
regulatory compliance relating to, manufacturing products; and the uncertainty
of our future profitability.





Risks
and uncertainties also include general economic conditions, including interest-
and currency exchange-rate fluctuations and the availability of capital; changes
in generally accepted accounting principles; the impact of legislation and
regulatory compliance; the highly regulated nature of our business, including
government cost-containment initiatives and restrictions on third-party payments
for our products; trade buying patterns; the competitive climate of our
industry; and other factors set forth in this document and other reports filed
with the U.S. Securities and Exchange Commission (SEC). In particular, we cannot
assure you that RELISTOR® will
be commercially successful or be approved in the future in other formulations,
indications or jurisdictions, or that any of our other programs will result in a
commercial product.





We
do not have a policy of updating or revising forward-looking statements, and we
assume no obligation to update any statements as a result of new information or
future events or developments. It should not be assumed that our silence over
time means that actual events are bearing out as expressed or implied in
forward-looking statements.





Overview





General.
We are a biopharmaceutical company focusing on the development and
commercialization of innovative therapeutic products to treat the unmet medical
needs of patients with debilitating conditions and life-threatening diseases.
Our principal programs are directed toward supportive care, virology and
oncology. Progenics commenced principal operations in 1988, became publicly
traded in 1997 and throughout has been engaged primarily in research and
development efforts, developing manufacturing capabilities, establishing
corporate collaborations and raising capital.





We have
only recently begun to derive revenue from a commercial product. With the
reacquisition of our rights to RELISTOR, we will be required either to enter
into collaboration or other arrangements with new partners or to commercialize
RELISTOR on our own. In order to commercialize RELISTOR and the other principal
products that we have under development, with one or more new partners or on our
own, we will be required, to the extent such tasks are not undertaken by our
partner(s), to continue to address technological, clinical and commercial
challenges and comply with comprehensive U.S. and ex-U.S. regulatory
requirements. This will be particularly the case with the oral formulation of
the drug, for which we are taking over development responsibilities as
part of the Wyeth collaboration termination. We expect to incur additional
operating losses, resulting in a higher cash burn rate, in the future, which
could increase significantly as we expand clinical trial and other product
development efforts that we choose or are obligated to
undertake.


21
 INDEX




Supportive Care.Our first commercial product is RELISTOR (methylnaltrexone bromide)
subcutaneous injection, a first-in-class therapy for opioid-induced
constipation, approved for sale in over 30 countries worldwide, including the
United States, European Union member states, Canada, Australia and Brazil.
Marketing applications are pending elsewhere throughout the world.





On
October 9, 2009, we and Wyeth Pharmaceuticals terminated our 2005 RELISTOR
collaboration, as a result of which we are regaining all worldwide rights to
RELISTOR. Under our Transition Agreement with Wyeth, there will be a transition
period during which Wyeth will continue to market and sell RELISTOR for a U.S.
Sales Period ending September 30, 2010 and an ex-U.S. Sales Period ending
December 31, 2010. After the transition period, we will assume full control of
and responsibility for future development and commercialization of RELISTOR. On
October 14, 2009, Wyeth and Pfizer Inc. completed their previously announced
merger, and Wyeth is now a wholly owned subsidiary of Pfizer.





We are
pursuing a range of strategic alternatives for RELISTOR, including licensing,
collaboration, strategic alliances and U.S. commercialization or co-promotion
with our own sales force, as well as continuing to seek strategic collaborations
and other funding support for product candidates in our pipeline.





Under the
Transition Agreement, Wyeth has agreed to pay to us the sum of $10.0 million in
six quarterly installments and is continuing certain ongoing development efforts
for subcutaneous RELISTOR, at its expense, through September 30, 2010. Wyeth’s
international sales and marketing obligations during the ex-U.S. Sales Period
are subject to certain extension and early transition options available to us.
Wyeth will continue to pay royalties on worldwide sales as provided in the 2005
collaboration agreement except that no royalties will be payable in respect of
ex-U.S. sales during (i) the fourth quarter of 2010 to the extent certain
financial targets are not met or (ii) an extended ex-U.S. Sales Period in the
subject country.





We
regained control of the oral form of RELISTOR upon execution of the Transition
Agreement, and expect to continue development as the transition progresses.
Principal responsibility for regulatory submissions and interactions for all
other formulations and presentations of RELISTOR will be transferred during and
as part of the transition. Wyeth is also providing financial resources,
aggregating up to approximately $14.5 million, and/or other assistance with
respect to agreed-upon regulatory, manufacturing and supply matters. We have
agreed to purchase Wyeth’s remaining inventory of subcutaneous RELISTOR at the
end of the Sales Periods on agreed-upon terms and conditions.





Our
October 2008 out-license to Ono Pharmaceutical of the rights to subcutaneous
RELISTOR in Japan is unaffected by termination of the Wyeth collaboration. In
June 2009, Ono began clinical testing in Japan of RELISTOR subcutaneous
injection.





In August
2009, we and Wyeth announced submission to U.S. and EU regulators of
applications for subcutaneous RELISTOR in a new pre-filled syringe delivery
system. Pre-filled syringes are designed to ease preparation and administration
for patients and caregivers and, if approved, could be available to
advanced-illness patients in the U.S. and Europe as early as the first half of
2010.





We are
also developing subcutaneous RELISTOR for treatment of opioid-induced
constipation (OIC) outside the advanced illness setting, in individuals with
chronic pain not related to cancer. We and Wyeth recently completed enrollment
in a one-year, open-label safety study, results from which, together with
results from a previous phase 3 efficacy trial will support planned supplemental
regulatory filings in the U.S., Europe and elsewhere for approval of RELISTOR to
treat OIC in the chronic-pain setting in early 2011.





Our 2005
collaboration with Wyeth was terminated by the Transition Agreement, but the
2005 Wyeth Collaboration Agreement was in effect during the periods covered by
this report. Prior to the Transition Agreement, we received upfront, milestone
and royalty payments from Wyeth, and were reimbursed for expenses we incurred in
connection with the development of RELISTOR; manufacturing and commercialization
expenses for RELISTOR were funded by Wyeth.





At
inception of the Wyeth collaboration, Wyeth paid to us a $60.0 million
non-refundable upfront payment. Wyeth made $39.0 million in milestone payments
thereafter. Costs for the development of RELISTOR incurred by Wyeth or us
starting January 1, 2006 through termination of the 2005 collaboration agreement
were paid by Wyeth. We were reimbursed by Wyeth for our development costs based
on the number of our full-time equivalent employees (FTEs) devoted to the
development project, all subject to Wyeth’s audit rights and possible
reconciliation. During the applicable royalty periods, Wyeth was obligated to
pay us royalties on net sales, as defined (which included specified sales
deductions), of RELISTOR by Wyeth throughout the world other than Japan, where
we licensed rights to subcutaneous RELISTOR to Ono.


22
 INDEX


We
recognized revenue from Wyeth for reimbursement of our development expenses for
RELISTOR as incurred during each quarter under the development plan agreed to by
us and Wyeth. We also recognized revenue for a portion of the $60.0 million
upfront payment we received from Wyeth, based on the proportion actually
performed of the expected total effort for us to complete our development
obligations, as reflected in the most recent development plan and budget
approved by us and Wyeth. Starting June 2008, we began recognizing royalty
income based on net sales of RELISTOR by Wyeth.





Under our
License Agreement with Ono, in November 2008 we received from Ono an upfront
payment of $15.0 million, and are entitled to receive potential milestones, upon
achievement of development responsibilities by Ono, of up to $20.0 million,
commercial milestones and royalties on sales by Ono of subcutaneous RELISTOR in
Japan. Ono also has the option to acquire from us the rights to develop and
commercialize in Japan other formulations of RELISTOR, including intravenous and
oral forms, on terms to be negotiated separately. Ono may request us to perform
activities related to its development and commercialization responsibilities
beyond our participation in joint committees and specified technology transfer
related tasks which will be at its expense, and payable to us for the services
it requests, at the time we perform services for them.





Future
royalty and milestone payments will depend on success in continued development
and commercialization of RELISTOR. This success will in turn be dependent on
many factors, such as the actions of Wyeth during the transition, Ono’s efforts,
decisions by the FDA and other regulatory bodies, the outcome of clinical and
other testing of RELISTOR, and our own efforts, as well as those of any business
partner(s) with which we may collaborate. Many of these matters are outside our
control. In particular, we cannot guarantee that we will be able to successfully
partner the RELISTOR franchise. We also cannot guarantee, in light of Wyeth’s
limited obligations under the Transition Agreement, its acquisition by Pfizer
and its limited ongoing commercial interest in the RELISTOR franchise, that
Wyeth’s efforts during the transition will achieve any particular level of
success in marketing and sales, regulatory approval or clinical development of
subcutaneous RELISTOR.





Virology.In the area of virology, we are developing a viral-entry inhibitor -- a
humanized monoclonal antibody, PRO 140 -- for human immunodeficiency virus
(HIV), the virus that causes acquired immunodeficiency syndrome, or AIDS. We are
developing the subcutaneous form of PRO 140 for treatment of HIV infection,
which has the potential for weekly self-administration. In our hepatitis C virus
infection efforts, we are evaluating second-generation HCV-entry inhibitors as
possible development candidates. We are also engaged in research regarding a
prophylactic vaccine against HIV infection.





Oncology.In the area of prostate cancer, we are conducting a phase 1 clinical
trial of a fully human monoclonal antibody-drug conjugate (ADC) directed against
prostate specific membrane antigen (PSMA), a protein found at high levels on the
surface of prostate cancer cells and also on the neovasculature of a number of
other types of solid tumors. We are also developing therapeutic vaccines
designed to stimulate an immune response to PSMA. Our PSMA programs are
conducted through our wholly owned subsidiary, PSMA Development Company
LLC.





Our
virology and oncology product candidates are not as advanced in development as
RELISTOR, and we do not expect any recurring revenues from sales or otherwise
with respect to these product candidates in the near term. To fund these
programs, we are currently in discussions with government agencies to obtain
pivotal-clinical-trial funding for PRO 140, and are pursuing strategic
collaborations with biopharmaceutical companies to support development of PSMA
ADC.





Results of
Operations(dollars in thousands)





Revenues:





Our
sources of revenue during the three and nine months ended September 30, 2008 and
2009 included our Collaboration with Wyeth, our License Agreement with Ono, our
research grants and contract from the National Institutes of Health (NIH) and,
to a small extent, our sale of research reagents. In June 2008, we began
recognizing royalty income from net sales by Wyeth of subcutaneous
RELISTOR.





Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,Sources
      of Revenue
            
            2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeResearch
      and development
            
            $      16,015
            
            $           4,431
            
            (72%)
            
            $ 
         54,896
            
            $       29,206
            
            (47%)Royalty
      income
            
            44
            
            509
            
            1057%
            
            86
            
            976
            
            1035%Research
      grants and contract
            
            1,377
            
            404
            
            (71%)
            
            5,689
            
            1,421
            
            (75%)Other
      revenues
            
            61
            
            75
            
            23%
            
            172
            
            189
            
            10%Total
            
            $      17,497
            
            $           5,419
            
            (69%)
            
            $ 
         60,843
            
            $ 
           31,792
            
            (48%)




23
 INDEX





Research
and development revenue:





Wyeth
Collaboration.During the three months ended September 30, 2008 and 2009,
we recognized $16,015 and $4,425, respectively, of revenue from Wyeth,
consisting of (i) $2,092 and $3,240, respectively, from amortization of the
$60,000 upfront payment we received upon entering into our Collaboration in
December 2005, (ii) $3,923 and $1,185, respectively, as reimbursement for our
development expenses, and (iii) $10,000 and $0, respectively, of non-refundable
milestone payments.





During
the nine months ended September 30, 2008 and 2009, we recognized $54,896 and
$14,153, respectively, of revenue from Wyeth, consisting of (i) $8,132 and
$9,417, respectively, from amortization of the $60,000 upfront payment we
received upon entering into our Collaboration in December 2005, (ii) $21,764 and
$4,736, respectively, as reimbursement for our development expenses, and (iii)
$25,000 and $0, respectively, of non-refundable milestone payments.





From the
inception of the Wyeth Collaboration through September 30, 2009, we recognized
$54,855 of revenue from the $60,000 upfront payment, $104,054 as reimbursement
for our development expenses, and a total of $39,000 for non-refundable
milestone payments. We do not expect to receive additional reimbursement revenue
due to termination of the Wyeth collaboration. Wyeth, at its expense, is
continuing certain ongoing development efforts for subcutaneous RELISTOR through
September 30, 2010.





We
recognize a portion of the upfront payment in a reporting period in accordance
with the proportionate performance method, which is based on the percentage of
actual effort performed on our development obligations in that period relative
to total effort expected for all of our performance obligations under the
arrangement, as reflected in the most recent development plan and budget
approved by Wyeth and us. During the third quarter of 2007, a revised budget was
approved, which extended our performance period to the end 2009 and, thereby,
decreased the amount of revenue we are recognizing through September 30, 2009.
The Transition
Agreement shortened the obligation period from the end of 2009 to October 2009
andwe will recognize the remaining $5.2 million of unamortized upfront
payment as revenue during the fourth quarter of 2009.





Ono
License Agreement.In October 2008, we
entered into aLicense Agreement with Ono and in November 2008, received
an upfront payment of $15,000. We are entitled to receive potential milestones
and royalty payments. During the three and nine months ended September 30, 2009,
we recognized $0 and $15,000 of the upfront payment as revenue, upon
satisfaction of our performance obligations and during the three and nine months
ended September 30, 2009, we recorded $6 and $53, respectively, of reimbursement
revenue for activities requested by Ono.





Royalty income.We began
earning royalties from net sales by Wyeth of subcutaneous RELISTOR in June 2008.
During the three
months ended September 30, 2008 and 2009, we earned royalties of $117 and $497,
respectively, based on net sales of RELISTOR andrecognized $44 and $509,
respectively, of royalty income. During the nine months ended September 30, 2008
and 2009, we earned royalties of $438 and $1,264, respectively, and recognized
$86 and $976, respectively, of royalty income. As of September 30, 2009, we have
recorded a cumulative total of $807 as deferred revenue – current. The $807 of
deferred royalty revenue will be recognized as royalty income during the fourth
quarter of 2009, the period in which our development obligations under the Wyeth
Collaboration Agreement terminated. Our royalties from net
sales by Wyeth of RELISTOR, as defined, are based on specified royalty rates
ranging up to 30% of U.S. and 25% of foreign net sales at the highest sales
levels, and increase on incremental sales as net sales in a calendar year exceed
specified levels.





Global
net sales of RELISTOR, which began last June, were $3.3 million for the third
quarter of 2009, compared to (i) $0.8 million in the third quarter of 2008, an
increase of 326% and (ii) $3.2 million in the second quarter of 2009, an
increase of 2%.





U.S.
RELISTOR net sales totaled $1.8 million in the third quarter of 2009, compared
to (i) $0.1 million in the third quarter of 2008, an increase of 1169% and (ii)
$2.0 million in the second quarter of 2009, a decrease of 10%. Non-U.S. RELISTOR
net sales totaled $1.5 million in the third quarter of 2009, compared to (i)
$0.7 million in the third quarter of 2008, an increase of 139% and (ii) $1.2
million in the second quarter of 2009, an increase of 22%.





Research
grants and contract.In 2003, we were awarded a contract by the NIH (NIH
Contract) to develop a prophylactic vaccine (ProVax) designed to prevent HIV
from becoming established in uninfected individuals exposed to the virus.
Funding under the NIH Contract provided for pre-clinical research, development
and early clinical testing. These funds were used principally in connection with
our ProVax HIV vaccine program. Through December 31, 2008, we had recognized
revenue of $15,509 from this contract, including $180 for the achievement of two
milestones. In June 2009, we were awarded, commencing in the second quarter, an
NIH grant for a five-year period totaling up to $14.5 million to continue this
work, subject to annual funding approvals and customary compliance
obligations.


24
 INDEX




Revenues
from research grants and contract from the NIH decreased from $1,377 for the
three months ended September 30, 2008 to $404 for the three months ended
September 30, 2009; $1,009 and $404 from grants and $368 and $0 from the NIH
Contract for the three months ended September 30, 2008 and 2009, respectively.
The decrease in grant and contract revenue resulted from fewer active grants and
reimbursable expenses in 2009 than in 2008, and the expiration of the NIH
Contract in December 2008.





Revenues
from research grants and contract from the NIH decreased from $5,689 for the
nine months ended September 30, 2008 to $1,421 for the nine months ended
September 30, 2009; $4,185 and $1,421 from grants and $1,504, and $0 from the
NIH Contract for the nine months ended September 30, 2008 and 2009,
respectively. The decrease in grant and contract revenue resulted from fewer
active grants and reimbursable expenses in 2009 than in 2008, and the expiration
of the NIH Contract in December 2008.





Other
revenues, primarily from orders for research reagents, increased from $61
for the three months ended September 30, 2008 to $75 for the three months ended
September 30, 2009. Other revenues, primarily from orders for research reagents,
increased from $172 for the nine months ended September 30, 2008 to $189 for the
nine months ended September 30, 2009.





Expenses:





Research and Development Expensesinclude scientific labor, supplies, facility costs, clinical trial costs,
product manufacturing costs, royalty payments and license fees. Research and
development expenses, including license fees and royalty expense, decreased from
$21,788 for the three months ended September 30, 2008 to $11,532 for the same
period of 2009, and decreased from $69,988 for the nine months ended September
30, 2008 to $40,114 for the same period of 2009, as follows:





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeSalaries
      and benefits (cash)
            
            $6,138
            
            $5,222
            
            (15%)
            
            $19,311
            
            $17,118
            
            (11%)





Three Months: Salaries and
benefits (cash) decreased due to a decline in average headcount from 195 to 168
for the three months ended September 30, 2008 and 2009, respectively, in the
research and development, manufacturing and clinical departments as part of our
efforts to manage costs.





Nine Months: Salaries and
benefits (cash) decreased due to a decline in average headcount from 197 to 179
for the nine months ended September 30, 2008 and 2009, respectively, in the
research and development, manufacturing and clinical departments as part of our
efforts to manage costs.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeShare-based
      compensation (non-cash)
            
            $1,789
            
            $1,766
            
            (1%)
            
            $5,246
            
            $5,610
            
            7%





Three Months: Share-based
compensation (non-cash) decreased due to lower restricted stock compensation and
employee stock purchase plan expenses partially offset by an increase in stock
option plans expenses for the three months ended September 30, 2009 compared to
the three months ended September 30, 2008. See Critical Accounting Policies −
Share-Based Payment Arrangements.





Nine
Months:Share-based
compensation (non-cash) increased due to higher restricted stock compensation
and stock option plans expenses partially offset by a decrease in employee stock
purchase plans expenses for the nine months ended September 30, 2009 compared to
the nine months ended September 30, 2008. SeeCritical Accounting
Policies − Share-Based Payment Arrangements.


25
 INDEX




Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeClinical
      trial costs
            
            $2,932
            
            $452
            
            (85%)
            
            $13,834
            
            $1,982
            
            (86%)





Three Months: Clinical
trial costs decreased primarily due to lower expenses for (i) RELISTOR ($1,424),
from reduced clinical trial activities, and (ii) HIV ($1,231), due to decreased
PRO 140 clinical trial activities, partially offset by an increase in expenses
for Cancer ($176), all for the three months ended September 30, 2009 compared to
the three months ended September 30, 2008.
 
 Nine Months: Clinical
trial costs decreased primarily due to lower expenses for (i) RELISTOR ($9,439),
from reduced clinical trial activities, and (ii) HIV ($2,469), due to decreased
PRO 140 clinical trial activities, partially offset by an increase in expenses
for Cancer ($57), all for the nine months ended September 30, 2009 compared to
the nine months ended September 30, 2008.


Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeLaboratory
      supplies
            
            $866
            
            $795
            
            (8%)
            
            $3,024
            
            $2,370
            
            (22%)





Three Months: Laboratory
supplies decreased due to lower expenses for (i) HIV ($349), from a decline in
the purchases of drug supplies, and (ii) Other projects ($21), partially offset
by an increase in Cancer ($299), due to higher expenses for PSMA, all for the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008.





Nine Months: Laboratory
supplies decreased due to lower expenses for (i) HIV ($1,358), from a decline in
the purchases of drug supplies, and (ii) Other projects ($113), partially offset
by an increase in Cancer ($816), due to higher expenses for PSMA, all for the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeContract
      manufacturing and subcontractors
            
            $7,393
            
            $1,424
            
            (81%)
            
            $18,547
            
            $6,055
            
            (67%)





Three Months: Contract
manufacturing and subcontractors decreased due to lower (i) HIV expenses
($5,621), from a decline in manufacturing expenses for PRO 140, (ii) Cancer
expenses ($241), due to a decline in contract manufacturing expenses for PSMA,
and (iii) RELISTOR expenses ($201), partially offset by an increase in Other
expenses ($94), all for the three months ended September 30, 2009 compared to
the three months ended September 30, 2008. These expenses are related to the
conduct of clinical trials, including manufacture by third parties of drug
materials, testing, analysis, formulation and toxicology services, and vary as
the timing and level of such services are required.





Nine Months: Contract
manufacturing and subcontractors decreased due to lower (i) HIV expenses
($12,084), from a decline in manufacturing expenses for PRO 140 and (ii)
RELISTOR expenses ($1,457), partially offset by increases in both Cancer ($446),
due to higher contract manufacturing expenses for PSMA, and Other ($603), all
for the nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008. These expenses are related to the conduct of clinical
trials, including manufacture by third parties of drug materials, testing,
analysis, formulation and toxicology services, and vary as the timing and level
of such services are required.


26
 INDEX


Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeConsultants
            
            $529
            
            $158
            
            (70%)
            
            $3,013
            
            $765
            
            (75%)


Three Months:Consultants expenses
decreased due to lower expenses for (i) RELISTOR ($206), and (ii) HIV
($173), partially offset by an increase in Other projects ($10), all for the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008. These expenses are related to the monitoring of clinical
trials as well as the analysis of data from completed clinical trials and vary
as the timing and level of such services are required.
 
 Nine Months:Consultants expenses
decreased due to lower expenses for (i) RELISTOR ($1,469), (ii) Cancer
($274), (iii) HIV ($275) and (iv) Other projects ($230), all for the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008.
These expenses are related to the monitoring of clinical trials as well as the
analysis of data from completed clinical trials and vary as the timing and level
of such services are required.


Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeLicense
      fees
            
            $305
            
            $136
            
            (55%)
            
            $1,788
            
            $961
            
            (46%)





Three Months: License fees
decreased primarily due to a decline in RELISTOR expenses ($188), partially
offset by an increase in HIV ($19), all for the three months ended September 30,
2009 compared to the three months ended September 30, 2008.





Nine Months: License fees
decreased primarily due to a decline in HIV expenses ($749) and RELISTOR
expenses ($212), partially offset by an increase in Cancer ($134), all for the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeRoyalty
      expense
            
            $5
            
            $51
            
            920%
            
            $9
            
            $98
            
            989%





Three Months: We
incurred $12 and $49, respectively, of royalty costs and recognized $5 and $51,
respectively, of royalty expenses during the three months ended September 30,
2008 and 2009. As of September 30, 2009, we recorded a cumulative total of $81
of deferred royalty charges from the royalty costs incurred since we began
earning royalties in the second quarter of 2008. The $81 of deferred royalty
charges will be recognized as royalty expense during the fourth quarter of 2009,
the period in which our development obligations relating to RELISTOR
terminated.
 
 Nine Months: We incurred
$44 and $126, respectively, of royalty costs and recognized $9 and $98,
respectively, of royalty expenses during the nine months ended September 30,
2008 and 2009. As of September 30, 2009, we recorded a cumulative total of $81
of deferred royalty charges from the royalty costs incurred since we began
earning royalties in the second quarter of 2008. The $81 of deferred royalty
charges will be recognized as royalty expense during the fourth quarter 2009,
the period in which our development obligations relating to RELISTOR
terminated.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeOther
      operating expenses
            
            $1,831
            
            $1,528
            
            (17%)
            
            $5,216
            
            $5,155
            
            (1%)





Three Months: Other
operating expenses decreased for the three months ended September 30, 2009
compared to the three months ended September 30, 2008, primarily due to a
decrease in computer expenses ($86), facilities ($6), travel ($46) and rent
($210), partially offset by an increase in other operating expenses ($11) and
insurance ($34).





Nine Months: Other
operating expenses decreased for the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008, primarily due to a
decrease in rent ($70), travel ($90), insurance ($70), facilities ($59) and
other operating expenses ($148), partially offset by an increase in computer
expenses ($376).


27
 INDEX




General and Administrative Expensesdecreased from $8,265 for the three months ended September 30, 2008 to
$5,844 for the same period of 2009 and decreased from $22,530 for the nine
months ended September 30, 2008 to $19,758 for the same period of 2009, as
follows:





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeSalaries
      and benefits (cash)
            
            $2,316
            
            $2,031
            
            (12%)
            
            $6,892
            
            $6,397
            
            (7%)





Three Months: Salaries
and benefits (cash) decreased due to lower bonus expenses and a decline in
salaries expenses resulting from a decrease in average headcount, from 55 to 48
for the three months ended September 30, 2008 and 2009, respectively, in the
general and administrative departments as part of our efforts to manage
costs.





Nine Months: Salaries
and benefits (cash) decreased due to lower bonus expenses for the nine months
ended September 30, 2008 and 2009, respectively, in the general and
administrative departments as part of our efforts to manage costs.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeShare-based
      compensation (non-cash)
            
            $2,324
            
            $1,235
            
            (47%)
            
            $5,654
            
            $4,671
            
            (17%)





Three Months: Share-based
compensation (non-cash) decreased due to decreases in stock option and employee
stock purchase plans expenses partially offset by higher restricted stock
compensation expenses for the three months ended September 30, 2009 compared to
the three months ended September 30, 2008. See Critical Accounting Policies
−Share-Based Payment Arrangements.





Nine Months: Share-based
compensation (non-cash) decreased due to a decrease in stock option and employee
stock purchase plans expenses partially offset by higher restricted stock
compensation expenses for the nine months ended September 30, 2009 compared to
the nine months ended September 30, 2008. See Critical Accounting Policies
−Share-Based Payment Arrangements.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeConsulting
      and professional fees
            
            $2,242
            
            $1,660
            
            (26%)
            
            $5,791
            
            $5,267
            
            (9%)





Three Months: Consulting and
professional fees decreased due to a decrease in consultant fees ($536), audit
and compliance fees ($228), legal fees ($250) and public relations ($52), which
were partially offset by an increase in patent fees ($459) and tax accounting
fees ($25), all for the three months ended September 30, 2009 compared to the
three months ended September 30, 2008.
 
 Nine Months: Consulting and
professional fees decreased due to a decrease in consulting fees ($122), patent
fees ($353), audit and compliance fees ($46) and public relations fees ($102),
which were partially offset by an increase in legal fees ($47) and tax
accounting and payroll fees ($52), all for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008.


28
 INDEX





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeOther
      operating expenses
            
            $1,383
            
            $918
            
            (34%)
            
            $4,193
            
            $3,423
            
            (18%)


Three Months:Other operating
expenses decreased due to lower spending on recruiting ($30), computer software
($110), travel ($30), taxes ($89), insurance ($54), rent ($67) and other
operating expenses ($107), partially offset by increases in conferences and
seminars ($5) and investor relations ($17), all for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008.





Nine Months:Other operating
expenses decreased due to lower spending on recruiting ($213), conferences and
seminars ($51), travel ($52), computer software ($172), taxes ($43), insurance
($10), rent ($20) and other operating expenses ($260), partially offset by an
increase in investor relations ($51), all for the nine months ended September
30, 2009 compared to the nine months ended September 30, 2008.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeDepreciation
      and amortization
            
            $1,166
            
            $1,207
            
            4%
            
            $3,427
            
            $3,633
            
            6%





Three Months:Depreciation
and amortization expense increased from $1,166 for the three months ended
September 30, 2008 to $1,207 for the three months ended September 30, 2009, due
to fixed asset purchases in 2008.





Nine Months:Depreciation and
amortization expense increased from $3,427 for the nine months ended September
30, 2008 to $3,633 for the nine months ended September 30, 2009, due to fixed
asset purchases in 2008.





Three
      Months Ended September 30,
            
            
            
            Nine
      Months Ended September 30,2008
            
            2009
            
            Percent
              Change
            
            2008
            
            2009
            
            Percent
              ChangeOther
      income
            
            $1,502
            
            $150
            
            (90%)
            
            $5,028
            
            $1,740
            
            (65%)





Three Months:Interest income
decreased from $1,502 for the three months ended September 30, 2008 to $123 for
the three months ended September 30, 2009. Interest income, as reported, is
primarily the result of investment income from our marketable securities,
decreased by the amortization of premiums we paid or increased by the
amortization of discounts we received for those marketable securities. For the
three months ended September 30, 2008 and 2009, investment income decreased from
$1,816 to $180, respectively, due to a decrease in interest rates and lower
average balance of cash equivalents and marketable securities in 2009 than in
2008. Amortization of premiums, net of discounts, was ($314) and ($57) for the
three months ended September 30, 2008 and 2009, respectively. In addition, other
income for the three months ended September 30, 2009 includes $27 of gains from
sale of fixed assets.





Nine Months:Interest income
decreased from $5,028 for the nine months ended September 30, 2008 to $1,457 for
the nine months ended September 30, 2009. Interest income, as reported, is
primarily the result of investment income from our marketable securities,
decreased by the amortization of premiums we paid or increased by the
amortization of discounts we received for those marketable securities. For the
nine months ended September 30, 2008 and 2009, investment income decreased from
$5,648 to $2,045, respectively, due to a decrease in interest rates and lower
average balance of cash equivalents and marketable securities in 2009 than in
2008. Amortization of premiums, net of discounts, was ($620) and ($588) for the
nine months ended September 30, 2008 and 2009, respectively. In addition, other
income for the nine months ended September 30, 2009 includes $237 of gains from
sale of marketable securities and $46 of gains from sale of fixed
assets.





Income
Taxes:





For the
three and nine months ended September 30, 2008 and 2009, we had losses both for
book and tax purposes.


29
 INDEX




Net
Loss:





Our net
loss was $12,220 for the three months ended September 30, 2008 compared to
$13,014 for the same period of 2009, and $30,074 for the nine months ended
September 30, 2008 compared to $29,973 for the same period of 2009.





Liquidity
and Capital Resources





We have
to date generated only modest amounts of product and royalty revenue, and
consequently have relied principally on external funding and our Collaboration
with Wyeth, from January 2006 to October 2009, to finance our operations. We
have funded our operations since inception primarily through private placements
of equity securities, payments received under collaboration agreements, public
offerings of common stock, funding under government research grants and
contracts, interest on investments, proceeds from the exercise of outstanding
options and warrants, sale of our common stock under our two employee stock
purchase plans (Purchase Plans) and a license agreement. We are currently in
discussions with government agencies to obtain pivotal-clinical-trial funding to
support our PRO 140 compound, and are pursuing strategic collaborations with
biopharmaceutical companies to support our development plan for PSMA
ADC.





At
September 30, 2009, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $106.8 million compared with $141.4
million at December 31, 2008. We expect that our existing cash, cash equivalents
and marketable securities at September 30, 2009 are sufficient to fund current
operations beyond one year. Our cash flow from operating activities was negative
for the nine months ended September 30, 2008 and 2009 due primarily to the
excess of expenditures on our research and development programs and general and
administrative costs related to those programs over cash received from
collaborators and government grants and contracts to fund such programs, as
described below.





Sources
of Cash





Operating
Activities.Our collaboration with Wyeth provided us with a $60.0 million
upfront payment in December 2005. In addition, from January 2006 to October
2009, Wyeth reimbursed us for development expenses we incurred related to
RELISTOR under the development plan agreed to between us. For the nine months
ended September 30, 2008 and 2009, we recorded $21.8 million and $4.7 million,
respectively, of such reimbursement. We will not receive additional
reimbursement revenue due to the termination of the Wyeth
collaboration.





Under the
Transition Agreement, Wyeth has agreed to pay us $10.0 million in six quarterly
installments, and its sales and marketing obligations during the transition will
continue in the United States through a U.S. Sales Period and worldwide
excluding Japan through the ex-U.S. Sales Period, in accordance with an
agreed-upon commercialization plan. The ex-U.S. Sales Period is subject to
certain extension and early transition options available to us. Wyeth will
continue to pay royalties as provided in the 2005 collaboration agreement except
that no royalties will be payable in respect of ex-U.S. sales during (i) the
fourth quarter of 2010 to the extent certain financial targets for that quarter
are not met or (ii) an extended international sale period in the subject
country. Wyeth is also continuing certain ongoing development efforts for
RELISTOR, at its expense, through September 30, 2010, and is providing financial
resources and/or other assistance, aggregating up to approximately $14.5
million, with respect to agreed-upon regulatory, manufacturing and supply
matters.





Under our
License Agreement with Ono, we received from Ono, in November 2008, an upfront
payment of $15.0 million, which was recognized as
revenue during the first quarter of 2009, upon satisfaction of our performance
obligations, and are entitled to receive potential milestone payments,
upon achievement of development responsibilities by Ono, of up to $20.0 million,
commercial milestones and royalties on sales of subcutaneous RELISTOR in Japan.
Ono is also responsible for development and commercialization costs for
subcutaneous RELISTOR in Japan.





We are
pursuing a range of strategic alternatives for RELISTOR, including licensing,
collaboration, strategic alliances and U.S. commercialization or co-promotion
with our own sales force, and may also enter into other collaboration
agreements, license or sale transactions or royalty sales or financings with
respect to other products and product candidates. We cannot forecast with any
degree of certainty, however, which products or indications, if any, will be
subject to future arrangements, or how they would affect our capital
requirements. The consummation of other agreements would further allow us to
advance other projects with current funds.





In 2003,
we were awarded a contract by the NIH to develop a prophylactic vaccine designed
to prevent HIV from becoming established in uninfected individuals exposed to
the virus. Funding under the NIH Contract provided for pre-clinical research,
development and early clinical testing. These funds were used principally in
connection with our ProVax HIV vaccine program. Through December 31, 2008, we
had recognized revenue of $15.5 million from this contract, including $0.2
million for the achievement of two milestones. In June 2009, we were awarded,
commencing in the second quarter, an NIH grant for a five-year period totaling
up to $14.5 million to continue this work, subject to annual funding approvals
and customary compliance obligations.


30
 INDEX




A
substantial portion of our revenues to date has been derived from federal
government grants. During the nine months ended September 30, 2008 and 2009, we
recognized as revenue awards made to us by the NIH between 2004 and 2009, to
partially fund some of our programs. For the nine months ended September 30,
2008 and 2009, we recognized $4.2 million and $1.4 million, respectively, of
revenue from all of our NIH grants.





Changes
in Accounts receivable and Accounts payable for the nine months ended September
30, 2008 and 2009 resulted from the timing of receipts from the NIH and Wyeth,
and payments made to trade vendors in the normal course of
business.





Other
than amounts to be received from Wyeth, Ono and from currently approved grants,
we have no committed external sources of capital. Other than revenues from
RELISTOR, we expect no significant product revenues for a number of years, as it
will take at least that much time, if ever, to bring our product candidates to
the commercial marketing stage.





Investing
Activities.We purchase and sell marketable securities in order to
provide funding for operations. Our marketable securities, which include
corporate debt securities and auction rate securities, are classified as
available-for-sale.





A
substantial portion of our cash and cash equivalents ($101.5 million) are
guaranteed by the U.S. Treasury or Federal Deposit Insurance Corporation’s
guarantee program. Our marketable securities ($5.3 million), which include
corporate debt securities and auction rate securities, are classified as
available for sale and include $2.9 million of securities collateralized by
student loan obligations subsidized by the U.S. government. These investments,
while rated investment grade by the Standard & Poor’s and Moody’s rating
agencies and predominantly having scheduled maturities greater than ten years,
are heavily concentrated in the U.S. financial sector, which continues to be
under extreme stress.





As a
result of recent changes in general market conditions, we determined to reduce
the principal amount of auction rate securities in our portfolio as they came up
for auction and invest the proceeds in other securities in accordance with our
investment guidelines. Beginning in February 2008, auctions failed for certain
of our auction rate securities because sell orders exceeded buy orders. As a
result, at September 30, 2009, we continue to hold approximately $3.8 million of
auction rate securities which, in the event of auction failure, are reset
according to the contractual terms in the governing instruments. To date, we
have received all scheduled interest payments on these securities. We will not
realize cash in respect of the principal amount of these securities until a
successful auction occurs, the issuer calls or restructures the underlying
security, the underlying security matures and is paid, or a buyer outside the
auction process emerges.





We
monitor markets for our investments, but cannot guarantee that additional losses
will not be required to be recorded. Valuation of securities is subject to
uncertainties that are difficult to predict, such as changes to credit ratings
of the securities and/or the underlying assets supporting them, default rates
applicable to the underlying assets, underlying collateral value, discount
rates, counterparty risk, ongoing strength and quality of market credit and
liquidity and general economic and market conditions. We do not believe the
carrying values of our investments are other than temporarily impaired and
therefore expect the positions will eventually be liquidated without significant
loss.





Our
marketable securities are purchased and, in the case of auction rate securities,
sold by third-party brokers in accordance with our investment policy guidelines.
Our brokerage account requires that all marketable securities be held to
maturity unless authorization is obtained from us to sell earlier. In fact,
prior to the second quarter of 2009, we have a history of holding all marketable
securities to maturity. During the second quarter of 2009, we decided to sell a
portion of our marketable securities which had scheduled maturities between the
fourth quarter of 2009 and the third quarter of 2010. The proceeds from the
sales were $24.8 million resulting in a gain of $0.2 million.





We expect
to recover the amortized cost of all of our investments at maturity. Because we
do not anticipate having to sell these securities in order to operate our
business and believe it is not more likely than not that we will be required to
sell these securities before recovery of principal, we do not consider these
marketable securities to be other than temporarily impaired at September 30,
2009.





Financing
Activities.During the nine months ended September 30, 2008 and 2009, we
received cash of $5.1 million and $3.8 million, respectively, from the exercise
of stock options by employees, directors and non-employee consultants and from
the sale of our common stock under our Purchase Plans. The amount of cash we
receive from these sources fluctuates commensurate with headcount levels and
changes in the price of our common stock on the grant date for options
exercised, and on the sale date for shares sold under the Purchase
Plans.


31
 INDEX




In 2008,
we obtained approvals from the FDA, as well as European Union, Canadian,
Australian, Venezuelan and other regulatory authorities, for our first
commercial product, RELISTOR. We continue development and clinical trials with
respect to RELISTOR and our other product candidates. Under the Transition
Agreement, Wyeth, at its expense, is continuing certain ongoing development
efforts for subcutaneous RELISTOR through September 30, 2010, and its sales and
marketing obligations during the transition will continue in the United States
through a U.S. Sales Period and worldwide excluding Japan through the ex-U.S.
Sales Period, in accordance with an agreed-upon commercialization plan. The
ex-U.S. Sales Period is subject to certain extension and early transition
options available to us. Wyeth will continue to pay royalties as provided in the
2005 collaboration agreement except that no royalties will be payable in respect
of ex-U.S. sales during (i) the fourth quarter of 2010 to the extent certain
financial targets for that quarter are not met or (ii) an extended international
sale period in the subject country.





Unless we
obtain regulatory approval from the FDA for additional product candidates and/or
enter into agreements with corporate collaborators with respect to the
development of RELISTOR and our additional technologies, we will be required to
fund our operations for periods in the future, by seeking additional financing
through future offerings of equity or debt securities, through collaborative,
license or royalty financing agreements, U.S. commercialization or co-promotion
with our own sales force or funding from additional grants and government
contracts. Adequate additional funding may not be available to us on acceptable
terms or at all. Our inability to raise additional capital on terms reasonably
acceptable to us may seriously jeopardize the future success of our
business.





Uses
of Cash





Operating
Activities.The majority of our cash has been used to advance our
research and development programs. We currently have major research and
development programs investigating supportive care, virology and oncology, and
are conducting several smaller research projects in the areas of virology and
oncology. Termination of our RELISTOR collaboration with Wyeth will require us
either to establish one or more new collaborative or other relationships to
continue developing and commercializing RELISTOR or to undertake those efforts
on our own. Wyeth is continuing certain ongoing development and commercial
efforts during the transition period for subcutaneous RELISTOR, and we have
assumed responsibility for development of the oral form of the drug, and
expect to continue development as the transition
progresses.





Our total
expenses for research and development from inception through September 30, 2009
have been approximately $518.6 million. For various reasons in addition to the
Wyeth collaboration termination, including the early stage of certain of our
programs, the timing and results of our clinical trials and our dependence in
certain instances on third parties, many of which are outside of our control, we
cannot estimate the total remaining costs to be incurred and timing to complete
all our research and development programs.





For the
nine months ended September 30, 2008 and 2009, research and development costs
incurred by project were as follows:





Nine
      Months Ended September 30,2008
            
            
            2009(in
      millions)RELISTOR
            
            $
            22.6
            
            
            $
            5.7HIV
            
            
            32.6
            
            
            
            9.9Cancer
            
            
            7.5
            
            
            
            15.3Other
      programs
            
            
            7.3
            
            
            
            9.2Total
            
            $
            70.0
            
            
            $
            40.1





We will
require additional funding to continue our research and product development
programs, conduct pre-clinical studies and clinical trials, fund operating
expenses, pursue regulatory approvals for our product candidates, file and
prosecute patent applications and enforce or defend patent claims, if any, and
fund product in-licensing and any possible acquisitions.





Under our
transition arrangements with Wyeth, manufacturing and commercialization expenses
for subcutaneous RELISTOR are funded by Wyeth in the U.S. through September 30,
2010 and outside the U.S. other than Japan through December 31, 2010; in Japan,
development, manufacturing and commercialization expenses are required to be
funded by Ono. Thereafter, we will be responsible for these activities, and,
have agreed to purchase Wyeth’s remaining inventory of subcutaneous RELISTOR at
the end of its sales periods on agreed-upon terms and
conditions.


32
 INDEX




We are
pursuing a range of strategic alternatives for RELISTOR, including licensing,
collaboration, strategic alliances and U.S. commercialization or co-promotion
with our own sales force. If we were to undertake development and
commercialization of RELISTOR or any other product candidate on our own without
a partner, however, we would be required to establish manufacturing and
marketing capabilities and fund a sales force, which we currently do not
have.





Our 2005
purchase of rights from our methylnaltrexone licensors extinguished our cash
payments that would have been due to those licensors in the future upon the
achievement of certain events, including sales of RELISTOR products. We are,
however, making royalty payments and are responsible for making other payments
to the University of Chicago upon the occurrence of certain events.





Investing
Activities.During the nine months ended September 30, 2008
and 2009, we spent $2.0 million and $0.8 million, respectively, on capital
expenditures, a reduction of $1.2 million as part of our efforts to
manage costs.These expenditures have been primarily related to the
purchase of laboratory equipment for our research and development
projects.





Contractual
Obligations





Our
funding requirements, both for the next 12 months and beyond, will include
required payments under operating leases and licensing and collaboration
agreements. The following table summarizes our contractual obligations as of
September 30, 2009 for future payments under these agreements:





Payments
      due by September 30,Total
            
            
            2010
            
            
            
            2011-2012
            
            
            
            2013-2014
            
            
            Thereafter(in
      millions)Operating
      leases
            
            $
            2.0
            
            
            $
            0.9
            
            
            $
            0.7
            
            
            $
            0.4
            
            
            $
            -License
      and collaboration agreements (1)
            
            
            88.2
            
            
            
            1.7
            
            
            
            4.7
            
            
            
            12.8
            
            
            
            69.0Total
            
            $
            90.2
            
            
            $
            2.6
            
            
            $
            5.4
            
            
            $
            13.2
            
            
            $
            69.0





(1)
            Assumes
      attainment of milestones covered under each agreement. The timing of the
      achievement of the related milestones is highly uncertain, and accordingly
      the actual timing of payments, if any, is likely to vary, perhaps
      significantly, relative to the timing contemplated by this
      table.





We
periodically assess the scientific progress and merits of each of our programs
to determine if continued research and development is commercially and
economically viable. Certain of our programs have been terminated due to the
lack of scientific progress and prospects for ultimate commercialization.
Because of the uncertainties associated with research and development in these
programs, the duration and completion costs of our research and development
projects are difficult to estimate and are subject to considerable variation.
Our inability to complete research and development projects in a timely manner
or failure to enter into collaborative agreements could significantly increase
capital requirements and adversely affect our liquidity.





Our cash
requirements may vary materially from those now planned because of results of
research and development and product testing, changes in existing relationships
or new relationships with licensees, licensors or other collaborators, changes
in the focus and direction of our research and development programs, competitive
and technological advances, the cost of filing, prosecuting, defending and
enforcing patent claims, the regulatory approval process, manufacturing and
marketing and other costs associated with the commercialization of products
following receipt of regulatory approvals and other factors.





The above
discussion contains forward-looking statements based on our current operating
plan and the assumptions on which it relies. There could be deviations from that
plan that would consume our assets earlier than planned.





Off-Balance
Sheet Arrangements and Guarantees





We have
no off-balance sheet arrangements and do not guarantee the obligations of any
other unconsolidated entity.


33
 INDEX





Critical
Accounting Policies





We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. Our significant accounting
policies are disclosed in Note 2 to our financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2008. The selection
and application of these accounting principles and methods requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. On an ongoing basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of our evaluation
form the basis for making judgments about the carrying values of assets and
liabilities that are not otherwise readily apparent. While we believe that the
estimates and assumptions we use in preparing the financial statements are
appropriate, these estimates and assumptions are subject to a number of factors
and uncertainties regarding their ultimate outcome and, therefore, actual
results could differ from these estimates.





We have
identified our critical accounting policies and estimates below. These are
policies and estimates that we believe are the most important in portraying our
financial condition and results of operations, and that require our most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
have discussed the development, selection and disclosure of these critical
accounting policies and estimates with the Audit Committee of our Board of
Directors.





Revenue
Recognition.We recognize revenue from all sources based on the
provisions of the SEC’s Staff Accounting Bulletin (SAB) No. 104 (SAB 104) and
ASC 605 Revenue Recognition.





Collaborations
may contain substantive milestone payments to which we apply the substantive
milestone method (Substantive Milestone Method). Substantive milestone payments
are considered to be performance payments that are recognized upon achievement
of the milestone only if all of the following conditions are met: (i) the
milestone payment is non-refundable, (ii) achievement of the milestone involves
a degree of risk and was not reasonably assured at the inception of the
arrangement, (iii) substantive effort is involved in achieving the milestone,
(iv) the amount of the milestone payment is reasonable in relation to the effort
expended or the risk associated with achievement of the milestone, and (v) a
reasonable amount of time passes between the upfront license payment and the
first milestone payment as well as between each subsequent milestone
payment.





Determination
as to whether a milestone meets the aforementioned conditions involves
management’s judgment. If any of these conditions are not met, the resulting
payment would not be considered a substantive milestone and, therefore, the
resulting payment would be considered part of the consideration and be
recognized as revenue as such performance obligations are performed under either
the proportionate performance or straight-line methods, as applicable, and in
accordance with the policies described above.





We
recognize revenue for payments that are contingent upon performance solely by
our collaborator immediately upon the achievement of the defined event if we
have no related performance obligations.





Reimbursement
of costs is recognized as revenue provided the provisions of ASC 605 Revenue
Recognition are met, the amounts are determinable and collection of the related
receivable is reasonably assured.





Amounts
received prior to satisfying the above revenue recognition criteria are recorded
as deferred revenue in the accompanying condensed consolidated balance sheets.
Amounts not expected to be recognized within one year of the balance sheet date
are classified as long-term deferred revenue. The estimate of the classification
of deferred revenue as short-term or long-term is based upon management’s
current operating budget with the collaborator for the total effort required to
complete our performance obligations under the arrangement.





Royalty
revenue is recognized based upon net sales of related licensed products, as
reported to us by Wyeth. Royalty revenue is recognized in the period the sales
occur, provided that the royalty amounts are fixed or determinable, collection
of the related receivable is reasonably assured and we have no remaining
performance obligations under the arrangement providing for the royalty. If
royalties are received when we have remaining performance obligations, they
would be attributed to the services being provided under the arrangement and,
therefore, recognized as such obligations are performed under either the
proportionate performance or straight-line methods, as applicable, and in
accordance with our policies.





During
the nine months ended September 30, 2008 and 2009, we also recognized revenue
from government research grants (and contract in the 2008 period), which are
used to subsidize a portion of certain of our research projects (Projects),
exclusively from the NIH. We also recognized revenue from the sale of research
reagents during those periods.


34
 INDEX




NIH grant
and contract revenue is recognized as efforts are expended and as related
subsidized project costs are incurred. We perform work under the NIH grants and
contract on a best-effort basis. The NIH reimburses us for costs associated with
projects in the fields of virology and cancer, including pre-clinical research,
development and early clinical testing of a prophylactic vaccine designed to
prevent HIV from becoming established in uninfected individuals exposed to the
virus, as requested by the NIH. Substantive at-risk milestone payments are
uncommon in these arrangements, but would be recognized as revenue on the same
basis as the Substantive Milestone Method.





Transition
Agreement with Wyeth – October 2009





The
Transition Agreement provides for the termination of the 2005 Wyeth
collaboration agreement and the transition to Progenics of responsibility for
the development and commercialization of RELISTOR. Under it, Wyeth’s license of
Progenics technology is terminated except as necessary for performance of
Wyeth’s obligations during the transition period and Wyeth has returned the
rights to RELISTOR that we had previously granted under the 2005 collaboration
agreement.





Wyeth is
obligated to pay all costs of commercialization of subcutaneous RELISTOR,
including manufacturing costs, and retains all proceeds from its sale of the
products, subject to royalties due to us. Decisions with respect to
commercialization of the product during the transition period are to be made
solely by Wyeth.





Wyeth
Collaboration Agreement – December 2005 to October 2009





The Wyeth
Collaboration Agreement was in effect until October 2009 which includes periods
covered by this report.





Our
license and co-development agreement with Wyeth included a non-refundable
upfront license fee, reimbursement of development costs, research and
development payments based upon our achievement of clinical development
milestones, contingent payments based upon the achievement by Wyeth of defined
events and royalties on product sales. We recognized research revenue from Wyeth
from January 1, 2006 to October 2009.





Non-refundable
upfront license fees are recognized as revenue when we have a contractual right
to receive such payment, the contract price is fixed or determinable, the
collection of the resulting receivable is reasonably assured and we have no
further performance obligations under the license agreement. Multiple element
arrangements, such as license and development arrangements are analyzed to
determine whether the deliverables, which often include a license and
performance obligations, such as research and steering or other committee
services, can be separated in accordance with ASC 605 Revenue Recognition. We
would recognize upfront license payments as revenue upon delivery of the license
only if the license had standalone value and the fair value of the undelivered
performance obligations, typically including research or steering or other
committee services, could be determined. If the fair value of the undelivered
performance obligations could be determined, such obligations would then be
accounted for separately as performed. If the license is considered to either
(i) not have standalone value, or (ii) have standalone value but the fair value
of any of the undelivered performance obligations could not be determined, the
upfront license payments would be recognized as revenue over the estimated
period of when our performance obligations are performed.





We must
determine the period over which our performance obligations are performed and
revenue related to upfront license payments are recognized. Revenue is
recognized using either a proportionate performance or straight-line method. We
recognize revenue using the proportionate performance method provided that we
can reasonably estimate the level of effort required to complete our performance
obligations under an arrangement and such performance obligations are provided
on a best-efforts basis. Direct labor hours or full-time equivalents will
typically be used as the measure of performance. Under the proportionate
performance method, revenue related to upfront license payments is recognized in
any period as the percent of actual effort expended in that period relative to
total effort for all of our performance obligations under the arrangement. We
are recognizing revenue related to the upfront license payment we received from
Wyeth using the proportionate performance method since we can reasonably
estimate the level of effort required to complete our performance obligations
under the Wyeth Collaboration based upon the most current budget approved by
both Wyeth and us. Such performance obligations are provided by us on a
best-efforts basis. Full-time equivalents are being used as the measure of
performance. Significant judgment is required in determining the nature and
assignment of tasks to be accomplished by each of the parties and the level of
effort required for us to complete our performance obligations under the
arrangement. The nature and assignment of tasks to be performed by each party
involves the preparation, discussion and approval by the parties of a
development plan and budget.


35
 INDEX




During
the course of a collaboration agreement, e.g., the Wyeth
collaboration, that involves a development plan and budget, the amount of the
upfront license payment that is recognized as revenue in any period increases or
decreases as the percentage of actual effort increases or decreases, as
described above. When a new budget is approved, the remaining unrecognized
amount of the upfront license fee is recognized prospectively, using the
methodology described above by applying the changes in the total estimated
effort or period of development that is specified in the revised approved
budget. The amount of the upfront license payment that we recognized as revenue
for each fiscal quarter prior to the third quarter of 2007 was based upon
several revised approved budgets, although the revisions to those budgets did
not materially affect the amount of revenue recognized in those periods. During
the third quarter of 2007, the estimate of our total remaining effort to
complete our development obligations was increased significantly based upon a
revised development budget approved by both us and Wyeth. As a result, the
period over which our obligations were to extend, and over which the upfront
payment was to be amortized, was extended from the end of 2008 to the end of
2009. The Transition Agreement between Wyeth and us shortened the obligation
period from the end of 2009 to October 2009. With the termination of the Wyeth
Collaboration Agreement during the fourth quarter, we will recognize all of the
remaining $5.2 million unamortized upfront payment during that
quarter.





If we
cannot reasonably estimate the level of effort required to complete our
performance obligations under an arrangement and the performance obligations are
provided on a best-efforts basis, then the total upfront license payments would
be recognized as revenue on a straight-line basis over the period we expect to
complete our performance obligations.





If we are
involved in a steering or other committee as part of a multiple element
arrangement, we assess whether our involvement constitutes a performance
obligation or a right to participate. For those committees that are deemed
obligations, we will evaluate our participation along with other obligations in
the arrangement and will attribute revenue to our participation through the
period of our committee responsibilities. In relation to the Wyeth
collaboration, we assessed the nature of our involvement with the Joint Steering
Committee, Joint Development Committee and Joint Commercialization Committee.
Our involvement in the first two such committees was one of several obligations
to develop the subcutaneous and intravenous formulations of RELISTOR through
regulatory approval in the U.S. We combined the committee obligations with the
other development obligations and accounted for these obligations during the
development phase as a single unit of accounting. After the period during which
we have developmental responsibilities, however, we assessed the nature of our
involvement with the committees as a right, rather than an obligation. Our
assessment was based upon the fact that we negotiated to be on these committees
as an accommodation for our granting of the license for RELISTOR to Wyeth.
Further, Wyeth had been granted by us an exclusive worldwide license, even as to
us, to develop and commercialize RELISTOR and we had assigned the agreements for
the manufacture of RELISTOR by third parties to Wyeth. Following regulatory
approval of the subcutaneous and intravenous formulations of RELISTOR, Wyeth was
required to continue to develop the oral formulation and to commercialize all
formulations as provided in the Wyeth Collaboration Agreement, for which it was
capable and responsible. We expected at the beginning of the agreement, that the
activities of these committees for the period were to be focused on Wyeth’s
development and commercialization obligations. As discussed in Overview – Supportive Care,
we and Wyeth terminated our collaboration in October 2009, as a result of which
we are regaining all worldwide rights to RELISTOR and our out-license to Ono,
with respect to Japan, is unaffected by the termination of the Wyeth
collaboration.





During
April 2008 and July 2008, we earned $15.0 million and $10.0 million,
respectively, upon achievement of non-refundable milestones anticipated in the
Wyeth Collaboration; the first for the FDA approval of subcutaneous RELISTOR and
the second for the European approval of subcutaneous RELISTOR. We considered
those milestones to be substantive based on the significant degree of risk at
the inception of the collaboration related to the conduct and successful
completion of clinical trials and, therefore, of not achieving the milestones;
the amount of the payment received relative to the significant costs incurred
since inception of the Wyeth collaboration and amount of effort expended or the
risk associated with the achievement of these milestones; and the passage of 28
and 31 months, respectively, from inception of the collaboration to the
achievement of those milestones. Therefore, we recognized the milestone payments
as revenue in the respective periods in which the milestones were
earned.





Ono
Agreement – October 2008





Ono is
responsible for developing and commercializing subcutaneous RELISTOR in Japan,
including conducting the clinical development necessary to support regulatory
marketing approval. Ono will own the subcutaneous filings and approvals relating
to RELISTOR in Japan. In addition to the $15.0 million upfront payment from Ono,
we are entitled to receive up to an additional $20.0 million, payable upon
achievement by Ono of its development milestones. Ono is also obligated to pay
to us royalties and commercialization milestones on sales by Ono of subcutaneous
RELISTOR in Japan. Ono has the option to acquire from us the rights to develop
and commercialize in Japan other formulations of RELISTOR, including intravenous
and oral forms, on terms to be negotiated separately. Ono may request us to
perform activities related to its development and commercialization
responsibilities beyond our participation in joint committees and specified
technology transfer-related tasks which will be at its expense, and payable to
us for the services it requests, at the time we perform services for them.
Revenue earned from activities we perform for Ono is recorded in research and
development revenue.


36
 INDEX




We
recognized the upfront payment of $15.0 million, which we received from Ono in
November 2008, as research and development revenue during the first quarter of
2009, upon satisfaction of our performance obligations.





Share-Based
Payment Arrangements.Our share-based compensation to employees includes
non-qualified stock options, restricted stock and shares issued under our
Purchase Plans, which are compensatory under ASC 718 Compensation – Stock
Compensation. We account for share-based compensation to non-employees,
including non-qualified stock options and restricted stock, in accordance with
ASC 505 Equity.





Compensation
cost for all share-based awards will be recognized in our financial statements
over the related requisite service periods; usually the vesting periods for
awards with a service condition. Compensation cost is based on the grant-date
fair value of awards that are expected to vest. As of September 30, 2009, there
was $11.8 million, $5.6 million and $0.03 million of total unrecognized
compensation cost related to non-vested stock options under the plans, the
non-vested shares and the Purchase Plans, respectively. Those costs are
expected to be recognized over weighted average periods of 2.89 years, 1.81
years and 0.04 years, respectively. We apply a forfeiture rate to the
number of unvested awards in each reporting period in order to estimate the
number of awards that are expected to vest. Estimated forfeiture rates are based
upon historical data on vesting behavior of employees. We adjust the total
amount of compensation cost recognized for each award, in the period in which
each award vests, to reflect the actual forfeitures related to that award.
Changes in our estimated forfeiture rate will result in changes in the rate at
which compensation cost for an award is recognized over its vesting period. We
have made an accounting policy decision to use the straight-line method of
attribution of compensation expense, under which the grant date fair value of
share-based awards will be recognized on a straight-line basis over the total
requisite service period for the total award.





Under ASC
718 Compensation – Stock Compensation, the fair value of each non-qualified
stock option award is estimated on the date of grant using the Black-Scholes
option pricing model, which requires input assumptions of stock price on the
date of grant, exercise price, volatility, expected term, dividend rate and
risk-free interest rate. For this purpose:





·
            We
      use the closing price of our common stock on the date of grant, as quoted
      on The NASDAQ Stock Market LLC, as the exercise
  price.





·
            Historical
      volatilities are based upon daily quoted market prices of our common stock
      on The NASDAQ Stock Market LLC over a period equal to the expected term of
      the related equity instruments. We rely only on historical volatility
      since it provides the most reliable indication of future volatility.
      Future volatility is expected to be consistent with historical; historical
      volatility is calculated using a simple average calculation; historical
      data is available for the length of the option’s expected term and a
      sufficient number of price observations are used consistently. Since our
      stock options are not traded on a public market, we do not use implied
      volatility. For the nine months ended September 30, 2008 and 2009, the
      volatility of our common stock has been high, 66%-91% and 71%-91%,
      respectively, which is common for entities in the biotechnology industry
      that do not have commercial products. A higher volatility input to the
      Black-Scholes model increases the resulting compensation
      expense.





·
            The
      expected term of options granted represents the period of time that
      options granted are expected to be outstanding. For the nine months ended
      September 30, 2008 and 2009, our expected term was calculated based upon
      historical data related to exercise and post-termination cancellation
      activity. Accordingly, for grants made to employees and officers
      (excluding our Chief Executive Officer) and directors, we are using
      expected terms of 5.33 and 7.3 years and 5.3 and 7.3 years, respectively.
      The expected term of stock options granted to our Chief Executive Officer
      separately from stock options granted to employees and officers, and the
      expected term was 7.5 years and 7.8 years in the nine months ended
      September 30, 2008 and 2009. Expected term for options granted to
      non-employee consultants was ten years, which is the contractual term of
      those options. For the July 1, 2008 award, the Compensation Committee of
      the Board of Directors modified the form of the grant used for stock
      incentive awards to provide for vesting of stock incentive awards granted
      on that date ratably over a three-year period and for acceleration of the
      vesting of such awards and all previously granted and outstanding awards
      for any employee in the event that, following a Change in Control, such
      employee’s employment is Terminated without Cause (as such terms are
      defined in our 2005 Stock Incentive
Plan).





·
            Since
      we have never paid dividends and do not expect to pay dividends in the
      future, our dividend rate is zero.





·
            The
      risk-free rate for periods within the expected term of the options is
      based on the U.S. Treasury yield curve in effect at the time of
      grant.


37
 INDEX





A portion
of the options granted to our Chief Executive Officer on July 1, 2002, 2003,
2004 and 2005, on July 3, 2006 and on July 2, 2007 cliff vests after nine years
and eleven months from the respective grant date. The July 1, 2002, 2003 and
2005 awards have fully vested. Vesting of a defined portion of each award will
occur earlier if a defined performance condition is achieved; more than one
condition may be achieved in any period. In accordance with ASC 718 Compensation
– Stock Compensation, at the end of each reporting period, we will estimate the
probability of achievement of each performance condition and will use those
probabilities to determine the requisite service period of each award. The
requisite service period for the award is the shortest of the explicit or
implied service periods. In the case of the executive’s options, the explicit
service period is nine years and eleven months from the respective grant dates.
The implied service periods related to the performance conditions are the
estimated times for each performance condition to be achieved. Thus,
compensation expense will be recognized over the shortest estimated time for the
achievement of performance conditions for that award (assuming that the
performance conditions will be achieved before the cliff vesting occurs). On
July 1, 2008 and 2009, we granted awards (consisting of options and restricted
stock in 2008 and options in 2009) to our Chief Executive Officer which vest on
the basis of the achievement of specified performance or market-based
milestones. The options have an exercise price equal to the closing price on our
common stock on the date of grant. The awards to our Chief Executive Officer are
valued using a Monte Carlo simulation and the expense related to these grants
will be recognized over the shortest estimated time for the achievement of the
performance or market conditions. The awards will not vest unless one of the
milestones is achieved or the market condition is met. Changes in the estimate
of probability of achievement of any performance or market condition will be
reflected in compensation expense of the period of change and future periods
affected by the change.





The fair
value of shares purchased under the Purchase Plans is estimated on the date of
grant in accordance with ASC 718 Compensation – Stock Compensation. The same
option valuation model is used for the Purchase Plans as for non-qualified stock
options, except that the expected term for the Purchase Plans is six months and
the historical volatility is calculated over the six month expected
term.





In
applying the treasury stock method for the calculation of diluted earnings per
share (EPS), amounts of unrecognized compensation expense and windfall tax
benefits are required to be included in the assumed proceeds in the denominator
of the diluted earnings per share calculation unless they are anti-dilutive. We
incurred net losses for the nine months ended September 30, 2008 and 2009, and,
therefore, such amounts have not been included for those periods in the
calculation of diluted EPS since they would be anti-dilutive. Accordingly, basic
and diluted EPS are the same for those periods. We have made an accounting
policy decision to calculate windfall tax benefits/shortfalls for purposes of
diluted EPS calculations, excluding the impact of pro forma deferred tax assets.
This policy decision will apply when we have net income.





For the
nine months ended September 30, 2008 and 2009, no tax benefit was recognized
related to total compensation cost for share-based payment arrangements
recognized in operations because we had net losses for those periods and the
related deferred tax assets were fully offset by a valuation allowance.
Accordingly, no amounts related to windfall tax benefits have been reported in
cash flows from operations or cash flows from financing activities for the nine
months ended September 30, 2008 and 2009.





Research and
Development Expenses Including Clinical Trial Expenses.Clinical trial
expenses, which are included in research and development expenses, represent
obligations resulting from our contracts with various clinical investigators and
clinical research organizations in connection with conducting clinical trials
for our product candidates. Such costs are expensed as incurred, and are based
on the expected total number of patients in the trial, the rate at which the
patients enter the trial and the period over which the clinical investigators
and clinical research organizations are expected to provide services. We believe
that this method best approximates the efforts expended on a clinical trial with
the expenses we record. We adjust our rate of clinical expense recognition if
actual results differ from our estimates. The Wyeth Collaboration Agreement in
which Wyeth had assumed all of the financial responsibility for further
development, mitigated those costs. In addition to clinical trial expenses, we
estimate the amounts of other research and development expenses, for which
invoices have not been received at the end of a period, based upon communication
with third parties that have provided services or goods during the
period.





Fair Value
Measurements.Our available-for-sale investment portfolio consists of
money market funds, corporate debt securities and auction rate securities, and
is recorded at fair value in the accompanying condensed consolidated balance
sheets in accordance with ASC 320 Investments – Debt and Equity Securities. The
change in the fair value of these investments is recorded as a component of
other comprehensive loss.





We
adopted ASC 820 Fair Value Measurements and Disclosures effective January 1,
2008 for financial assets and financial liabilities. Fair value measurements and
disclosures defines fair value as the price that would be received in selling an
asset or paid in transferring the liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date, and
establishes a framework to make the measurement of fair value more consistent
and comparable. The adoption of fair value measurements and disclosures did
not have a material impact on our financial position or results of
operations.


38
 INDEX





We use a
three-level hierarchy for fair value measurements that distinguishes between
market participant assumptions developed from market data obtained from sources
independent of the reporting entity (“observable inputs”) and the reporting
entity’s own assumptions about market participant assumptions developed from the
best information available in the circumstances (“unobservable inputs”). The
hierarchy level assigned to each security in our available-for-sale portfolio is
based on our assessment of the transparency and reliability of the inputs used
in the valuation of such instrument at the measurement date. The three hierarchy
levels are defined as follows:





·
            Level
      1 - Valuations based on unadjusted quoted market prices in active markets
      for identical securities.





·
            Level
      2 - Valuations based on observable inputs other than Level 1 prices, such
      as quoted prices for similar assets at the measurement date, quoted prices
      in markets that are not active or other inputs that are observable, either
      directly or indirectly.





·
            Level
      3 - Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, and involve management
      judgment.





Impact
of Recently Issued Accounting Standards





In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 to provide
guidance on measuring the fair value of liabilities under ASC 820 Fair Value
Measurements and Disclosures. This ASU clarifies the types of liabilities to be
used for a Level 1 measurement and the types of valuation techniques available
for a non-Level 1 measurement and is effective for the first interim or annual
period beginning after August 28, 2009. We are currently evaluating the impact
this ASU will have on our financial statements.





In
October 2009, the FASB issued ASU 2009-13 to address the accounting for
multiple-deliverable arrangements. In an arrangement with multiple deliverables,
the delivered items shall be considered a separate unit of accounting if both
(i) the delivered items have value to a collaborator on a stand-alone basis, in
that, the collaborator could resell the delivered items on a stand-alone basis,
and (ii) the arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item or items is
considered probable and substantially in our control. This ASU will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
We are currently evaluating the impact this ASU will have on our financial
statements.


39
 INDEX


Item
3.  Quantitative and Qualitative Disclosures about
Market Risk





Our
primary investment objective is to preserve principal while maximizing yield
without significantly increasing our risk. Our investments consist of money
market funds, taxable corporate debt securities and auction rate securities. Our
investments totaled $103.5 million at September 30, 2009. Approximately $1.5
million of these investments had fixed interest rates, and $102.0 million had
interest rates that were variable. Our marketable securities are classified as
available-for-sale.





Due to
the conservative nature of our short-term fixed-interest-rate investments, we do
not believe that we have a material exposure to interest-rate risk. Our
fixed-interest-rate long-term investments are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair values of
these investments due to differences between the market interest rate and the
rate at the date of purchase of the investment. A 100 basis point increase in
the September 30, 2009 market interest rates would result in a decrease of
approximately $0.01 million in the market values of these
investments.





As a
result of recent changes in general market conditions, we determined to reduce
the principal amount of auction rate securities in our portfolio as they came up
for auction and invest the proceeds in other securities in accordance with our
investment guidelines. Beginning in February 2008, auctions failed for certain
of our auction rate securities because sell orders exceeded buy orders. As a
result, at September 30, 2009, we continue to hold approximately $3.8 million
(3.7% of assets measured at fair value) of auction rate securities, in respect
of which we have received all scheduled interest payments, which, in the event
of auction failure, are reset according to the contractual terms in the
governing instruments. The principal amount of these remaining auction rate
securities will not be accessible until a successful auction occurs, the issuer
calls or restructures the underlying security, the underlying security matures
and is paid or a buyer outside the auction process emerges.





We
continue to monitor the market for auction rate securities and consider the
impact, if any, of market conditions on the fair market value of our
investments. If the auction rate securities market conditions do not recover or
if we determine that it is more likely than not that we are required to sell to
fund our operations before the investments recover, we may be required to record
additional losses during the remainder of 2009 or 2010, which may affect our
financial condition, cash flows and net loss. We believe that the failed
auctions experienced to date are not a result of the deterioration of the
underlying credit quality of these securities, although valuation of them is
subject to uncertainties that are difficult to predict, such as changes to
credit ratings of the securities and/or the underlying assets supporting them,
default rates applicable to the underlying assets, underlying collateral value,
discount rates, counterparty risk, ongoing strength and quality of market credit
and liquidity, and general economic and market conditions. We do not believe the
carrying values of these auction rate securities are other than temporarily
impaired and therefore expect the positions will eventually be liquidated
without significant loss.





The
valuation of the auction rate securities we hold is based on an internal
analysis of timing of expected future successful auctions, collateralization of
underlying assets of the security and credit quality of the security. We
re-evaluated the valuation of these securities as of September 30, 2009 and the
temporary impairment amount decreased $0.008 million from $0.316 million at
December 31, 2008 to $0.308 million. A 100 basis point increase to our internal
analysis would result in an increase of approximately $0.041 million in the
temporary impairment of these securities as of the nine months ended September
30, 2009.





Item
4.  Controls and Procedures





We
maintain disclosure controls and procedures, as such term is defined under Rules
13a-15(e) and 15d-15(e) promulgated under the U.S. Securities Exchange Act of
1934, that are designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance of achieving the desired control
objectives, and in reaching a reasonable level of assurance, our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We also established a
Disclosure Committee that consists of certain members of our senior
management.





The
Disclosure Committee, under the supervision and with the participation of our
senior management, including our Chief Executive Officer and Principal Financial
and Accounting Officer, carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Principal Financial and
Accounting Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.





There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


40
 INDEX




PART II —OTHER INFORMATION





Item
1A. Risk Factors





Our
business and operations entail a variety of serious risks and uncertainties,
including those described in Item 1A of our Form 10-K for the year ended
December 31, 2008 and our other public reports. In addition, the following risk
factors have changed during the quarter ended September 30, 2009:





The
Transition Agreement presents us with substantial new risks. For example, if we
are unable to establish satisfactory relationships with one or more partners to
develop and commercialize RELISTOR worldwide, we would need to make significant
investment to establish a sales and marketing infrastructure and related staff,
and in the meantime may be dependent on third parties for their expertise in
this area.





As a
result of the termination of the Wyeth collaboration, we continue to face all of
the risks to which we are currently subject as well the additional risks
attendant to establishing new collaborative or other relationships with one or
more partners to develop and commercialize RELISTOR or, if we are unable to do
so, having sole responsibility for developing and commercializing a regulated
pharmaceutical product. Even with a partner, significant investment, time and
managerial resources may be required to build a commercial infrastructure to
co-promote, co-market or otherwise market, sell and support a pharmaceutical
product. To the extent not funded from outside sources -- and in any case prior
to securing any such funding -- these efforts will increase our cash
requirements and result in a higher cash burn rate, which will have a material
adverse effect on our financial resources and profitability.





If, after
the end of Wyeth’s involvement with the product, we undertake development and
commercialization of RELISTOR without one or more partners, the financial and
managerial resources necessary to transition to a commercial organization would
require us to divert resources from our development efforts, including those for
oral RELISTOR and our product candidates, to commercial ones. Even if we
establish relationships with one or more partners for these tasks, we may have
to divert resources from these programs to the extent we do not fund commercial
activities in full from those external sources.





Should we
choose to commercialize RELISTOR directly, even in part of the world, we may not
be successful in developing an effective sales, marketing and distribution
infrastructure or in achieving sufficient market acceptance. Alternatively, we
may also consider contracting with a third party professional pharmaceutical
detailing and sales organization to perform all or certain marketing functions.
To the extent that we enter into distribution, co-marketing, co-promotion,
detailing or licensing arrangements for the marketing and sale of our products,
any revenues we receive will depend in substantial part or primarily on the
efforts of third parties. We may not be able to control the amount and timing of
marketing resources these third parties devote to our products.





We
are and will be dependent on Wyeth, Ono and other business partners to develop
and commercialize RELISTOR in their respective areas, exposing us to significant
risks. In particular, Wyeth has limited incentive to maximize the value of
RELISTOR during the transition.





We are
and will be dependent upon Wyeth (during the transition of its responsibilities
to us pursuant to the Transition Agreement), Ono and any other business
partner(s) with which we may collaborate in the future, in their respective
territories, to perform and fund development, including clinical testing of
RELISTOR, make related regulatory filings and manufacture and market products.
Revenues from the sale of RELISTOR currently depend almost entirely upon the
efforts of Wyeth and, in Japan, Ono. Wyeth, during the transition, and Ono have
significant discretion in determining the efforts and resources they apply to
sales of RELISTOR products in their territories and may not be effective in
marketing such products. These considerations may apply to other business
partners. Our business relationships with Wyeth, Ono and other partners may not
be scientifically, clinically or commercially successful.





As a
result of termination of our relationship with Wyeth, we intend to seek
alternative arrangements with one or more other parties to develop and
commercialize RELISTOR. We might also seek such alternative arrangements if our
relationship with Ono were to terminate. We may not be able to enter into such
an agreement with other suitable companies on acceptable terms or at all, in
which event, in order to continue to develop and commercialize RELISTOR on our
own, we would have to develop a sales and marketing organization and a
distribution infrastructure, neither of which we currently have. Developing
these resources would be an expensive and lengthy process and will have a
material adverse effect on our financial resources and profitability.
Termination of our relationship with Wyeth may also seriously compromise the
development program for RELISTOR and possibly our other product candidates, as
we may experience significant delays and may have to assume full funding and
other responsibility for development and commercialization. Any of these
outcomes would result in delays in our ability to distribute RELISTOR and would
increase our expenses.


41
 INDEX




Our
relationship with Wyeth has been, and during the transition continues to be,
multi-faceted and involves complex sharing of control over decisions,
responsibilities, costs and benefits. Wyeth’s development and commercialization
obligations during the transition period are limited by the Transition Agreement
and are less extensive than its obligations under the 2005 collaboration. In
addition, the recently completed acquisition of Wyeth by Pfizer, which has
resulted in management and personnel changes, together with the fact that by
returning our RELISTOR rights, Wyeth has a limited ongoing commercial interest
in the RELISTOR franchise, may affect Wyeth’s performance of its obligations
during the transition. We cannot guarantee that Wyeth’s efforts during the
transition will achieve any particular level of success in marketing and sale,
regulatory approval or clinical development of RELISTOR.





Our
relationship with Ono is also multi-faceted and involves complex sharing of
control over decisions, responsibilities, costs and benefits.





We have
had and may have future disagreements with Wyeth and Ono concerning product
development, marketing strategies, manufacturing and supply issues, and rights
relating to intellectual property. Both of them have significantly greater
financial and managerial resources than we do, which either could draw upon in
the event of a dispute. Disagreements between either of them and us could lead
to lengthy and expensive litigation or other dispute-resolution proceedings as
well as to extensive financial and operational consequences to us, and have a
material adverse effect on our business, results of operations and financial
condition. These considerations may apply to other business partners with which
we may collaborate in the future.





A
setback in clinical development programs could adversely affect us.





We and
Wyeth continue to conduct clinical trials of RELISTOR. If the results of these
or future trials are not satisfactory, we encounter problems enrolling subjects,
clinical trial supply issues or other difficulties arise, or we experience
setbacks in developing drug formulations, including raw material-supply,
manufacturing or stability difficulties, our entire RELISTOR development program
could be adversely affected, resulting in delays in trials or regulatory filings
for further marketing approval. Conducting additional clinical trials or making
significant revisions to our clinical development plan would lead to delays in
regulatory filings. If clinical trials indicate a serious problem with the
safety or efficacy of a RELISTOR product, we, Wyeth, Ono or another partner may
stop development or commercialization of affected products. Since RELISTOR is
our only approved product, any setback of these types could have a material
adverse effect on our business, results of operations and financial
condition.





Ono must
conduct clinical trials with Japanese patients to obtain regulatory approval in
Japan. We have not tested RELISTOR in Japanese patients, and there can be no
assurance that clinical trials of RELISTOR in Japanese patients will yield
results adequate for regulatory approval in Japan.





We are
conducting or planning clinical trials of PRO 140, PSMA ADC and prostate cancer
vaccine candidates. If the results of our future clinical studies of PRO 140 or
PSMA ADC or the pre-clinical and clinical studies involving the PSMA vaccine and
antibody candidates are not satisfactory, we would need to reconfigure our
clinical trial programs to conduct additional trials or abandon the program
involved. Because our vaccine product candidates may be deemed to involve gene
therapy, a relatively new technology that has not been extensively tested in
humans, regulatory requirements applicable to them may be unclear, or subject to
substantial regulatory review that delays the development and approval process
generally.





We
have a history of operating losses, and we may never be profitable.





We have
incurred substantial losses since our inception. As of September 30, 2009, we
had an accumulated deficit of $328.7 million. We have derived no significant
revenues from product sales or royalties. We may not achieve significant product
sales or royalty revenue for a number of years, if ever. We expect to incur
additional operating losses in the future, which could increase significantly if
we attempt to develop and commercialize RELISTOR without adequate collaboration
and/or financial arrangements and, at the same time, expand our clinical trial
programs and other product development efforts.





Our
ability to achieve and sustain profitability is dependent in part on obtaining
regulatory approval for and then commercializing our products, either alone or
with others. We may not be able to develop and commercialize products beyond
subcutaneous RELISTOR. Our operations may not be profitable even if any of our
other products under development are commercialized. Additional expenses we
incur in future development and commercialization of RELISTOR may cause our
losses to grow and to accelerate.




42
 INDEX


We
are likely to need additional financing, but our access to capital funding is
uncertain.





As of
September 30, 2009, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $106.8 million. During the nine months
ended September 30, 2009, we had a net loss of $30.0 million and cash used in
operating activities was $38.1 million. Additional expenses we incur in future
development and commercialization of RELISTOR will result in accelerating
diminution of our cash and growth of our losses to the extent those expenses are
not funded from outside sources.





Although
our spending on RELISTOR has been significant during 2007, 2008 and through the
third quarter of 2009, our expenses for RELISTOR have been reimbursed by Wyeth
under the Wyeth Collaboration Agreement. As a result of termination of our
collaboration with Wyeth, we will no longer receive such
reimbursement.





With
regard to both RELISTOR and our other product candidates, we expect to continue
to incur significant development expenditures for which we in most cases do not
have committed external sources of funding. These expenditures will initially be
funded from cash on hand, and we intend to seek additional external funding for
them, most likely through collaborative, license or royalty financing agreements
with one or more pharmaceutical companies, securities issuances or government
grants or contracts. We cannot predict when we will need additional funds, how
much we will need or if additional funds will be available, especially in light
of current conditions in global credit and financial markets. Our need for
future funding will depend on numerous factors, such as the availability of new
product development projects or other opportunities which we cannot predict, and
many of which are outside our control. In particular, we cannot assure you that
any currently-contemplated or future initiatives for funding our product
candidate programs will be successful.





Our
access to capital funding is always uncertain. Turmoil in international markets
is still affecting access to capital, exacerbating this uncertainty. Despite
previous experience, we may not be able at the necessary time to obtain
additional funding on acceptable terms, or at all. Our inability to raise
additional capital on terms reasonably acceptable to us would seriously
jeopardize the future success of our business.





If we
raise funds by issuing and selling securities, it may be on terms that are not
favorable to existing stockholders. If we raise funds by selling equity
securities, current stockholders will be diluted, and new investors could have
rights superior to existing stockholders. Raising funds by selling debt
securities often entails significant restrictive covenants and repayment
obligations.





A
substantial portion of our cash and cash equivalents are invested in U.S.
Treasury money market securities. Our marketable securities, which predominantly
include auction rate securities, are classified as available for sale. At
September 30, 2009, we continue to hold approximately $3.8 million of auction
rate securities which, in the event of auction failure, have been reset
according to the contractual terms in the governing instruments. To date, we
have received all scheduled interest payments on these securities. We will not
realize cash in respect of the principal amount of these securities until a
successful auction occurs, the issuer calls or restructures the underlying
security, the underlying security matures and is paid, or a buyer outside the
auction process emerges.





We
monitor markets for our investments, but cannot guarantee that additional losses
will not be required to be recorded. Valuation of securities is subject to
uncertainties that are difficult to predict, such as changes to credit ratings
of the securities and/or the underlying assets supporting them, default rates
applicable to the underlying assets, underlying collateral value, discount
rates, counterparty risk, ongoing strength and quality of market credit and
liquidity and general economic and market conditions.





Our
clinical trials could take longer than we expect.





Projections
that we publicly announce of commencement and duration of clinical trials may
not be certain. For example, we have experienced clinical trial delays in the
past as a result of slower than anticipated enrollment. These delays may recur.
Delays can be caused by, among other things:





·deaths or other adverse medical events involving subjects in our clinical
trials;





·regulatory or patent issues;





·interim or final results of ongoing clinical trials;





·failure to enroll clinical sites as expected;


43
 INDEX





·competition for enrollment from clinical trials conducted by others in
similar indications;





·scheduling conflicts with participating clinicians and clinical
institutions;





·disagreements, disputes or other matters arising from
collaborations;





·our inability to obtain additional funding when needed; and





·manufacturing problems.





We have
limited experience in conducting clinical trials, and we rely on others to
conduct, supervise or monitor some or all aspects of some of our clinical
trials. In addition, certain clinical trials for our product candidates may be
conducted by government-sponsored agencies, and consequently will be dependent
on governmental participation and funding. Under our 2005 collaboration
agreement with Wyeth, Wyeth had the responsibility to conduct some clinical
trials, including all trials outside of the United States other than Japan,
where Ono has the responsibility for clinical trials. Upon completion of the
transition, we will have responsibility for these trials, or will contract with
other parties to conduct them. We have less control over the timing and other
aspects of these clinical trials than if we conducted them entirely on our
own.





Uncertainty
over the timing of our clinical trials may impair investors’ confidence in our
ability to develop products and result in our stock price
declining.





We
are subject to extensive regulation, which can be costly and time consuming and
can subject us to unanticipated fines and delays.





We and
our products are subject to comprehensive regulation by the FDA and comparable
authorities in other countries. These agencies and other entities regulate the
pre-clinical and clinical testing, safety, effectiveness, approval, manufacture,
labeling, marketing, export, storage, recordkeeping, advertising, promotion and
other aspects of our products. If we violate regulatory requirements at any
stage, whether before or after marketing approval is obtained, we may be subject
to forced removal of a product from the market, product seizure, civil and
criminal penalties and other adverse consequences. We cannot guarantee that
approvals of proposed products, processes or facilities will be granted on a
timely basis, or at all. If we experience delays or failures in obtaining
approvals, commercialization of our product candidates will be slowed or
stopped. Even if we obtain regulatory approval, the approval may include
significant limitations on indicated uses for which the product could be
marketed or other significant marketing restrictions.





As a
result of termination of the Wyeth collaboration, we will be responsible for
complying with these regulations and will be required to develop an appropriate
infrastructure to do so, to the extent we are unable to have such tasks
performed by one or more business partners.





Our
product candidates may not obtain regulatory approvals needed for marketing, and
may face challenges after approval.





None of
our product candidates other than RELISTOR has been approved by applicable
regulatory authorities for marketing. The process of obtaining FDA and foreign
regulatory approvals often takes many years and can vary substantially based
upon the type, complexity and novelty of the products involved. We have had only
limited experience in filing and pursuing applications and other submissions
necessary to gain marketing approvals. Products under development may never
obtain the marketing approval from the FDA or any other regulatory authority
necessary for commercialization.





Even if
our products receive regulatory approval:





·They might not obtain labeling claims necessary to make the product
      commercially viable (in general, labeling claims define the medical
      conditions for which
              a drug product
      may be marketed, and are therefore very important to the commercial
      success of a product), or may be required to carry “black box” or
      other
              warnings that adversely affect their commercial
    success.





·Approval may be limited to uses of the product for treatment or
      prevention of diseases or conditions that are relatively less financially
      advantageous to us
              than approval of greater or different scope, or subject to an
      FDA-imposed Risk Evaluation and Mitigation Strategy (REMS) that limits the
      sources from and conditions
              under which they may be
dispensed.


44
 INDEX








·We or our collaborators might be required to undertake
      post-marketing trials to verify the product’s efficacy or
      safety.





·We,
      our collaborators or others might identify side effects after the product
      is on the market.





·Efficacy or safety concerns regarding marketed products may lead to
      product recalls, withdrawals of marketing approval, reformulation of the
      product, additional
              pre-clinical testing or clinical trials, changes in labeling of the
      product, the need for additional marketing applications, declining sales
      or other adverse events. For
              example, in early 2009 the FDA identified a potential RELISTOR safety
      issue involving gastrointestinal perforation. The agency is continuing to
      evaluate to determine
              the need for any regulatory action; the appearance of a drug on this FDA
      list does not mean that the agency has concluded that the drug has such a
      risk.  These
              potential consequences may occur whether or not the concerns originate
      from subsequent testing or other activities by us, governmental
      regulators, other entities or
              organizations or otherwise, and whether or not they are
      scientifically justified.





·We
      or our collaborators might experience manufacturing problems, which could
      have the same, similar or other
consequences.





·We and our collaborators will be subject to ongoing FDA obligations
      and continuous regulatory review.





If
products fail to receive marketing approval or lose previously received
approvals, our financial results would be adversely affected.





Competing
products may adversely affect our products.





We are
aware of the following potential competition to RELISTOR:





·An Adolor Corporation-GlaxoSmithKline PLC collaboration received
      FDA approval in 2008 for ENTEREG®
      (alvimopan), an oral opioid antagonist for postoperative
              ileus, with an indication “to accelerate the time to upper and lower
      gastrointestinal recovery following partial large or small bowel resection
      surgery with primary
              anastomosis.” Adolor is also re-evaluating an entry-stage compound
      for OIC in chronic-pain patients.





·A Sucampo Pharmaceuticals, Inc.-Takeda Pharmaceutical Company
      Limited collaboration recently announced top-line results of two phase 3
      pivotal clinical trials of
              AMITIZA®
      (lubiprostone) for opioid-induced bowel
  dysfunction.





·A Nektar Therapeutics-AstraZeneca PLC collaboration recently
      announced positive phase 2 results of an oral peripheral mu-opioid
      receptor antagonistin
      patients
              with OIC, and is developing a combination product based on this oral
      formulation, combining an opioid with its pegylated mu-opioid
      receptorantagonist.
      AstraZeneca
              is a leader in gastrointestinal medicine, and their collaboration
      may have a time-to-market advantage over us with respect to an oral
      therapyfor
      OIC in chronic-pain
              patients.





·Alkermes, Inc. is evaluating an oral mu-opioid receptor antagonist
      and combination product in phase 1 clinical
  testing.





·In Europe, Mundipharma International Limited markets TARGIN®
      (oxycodone/naloxone), a combination of an opioid and systemic opioid
      antagonist.





Any of
these drugs may achieve a significant competitive advantage relative to our
product. In any event, the considerable marketing and sales capabilities of
these competitors may impair our ability to compete effectively in the
market.





In the
case of PRO 140, five classes of products have been approved for marketing by
the FDA for the treatment of HIV infection and AIDS. These drugs have shown
efficacy in reducing the concentration of HIV in the blood and prolonging
asymptomatic periods in HIV-positive individuals. All have been required to show
efficacy in conjunction with other agents, which we have not demonstrated for
PRO 140. We are aware of two approved drugs designed to treat HIV infection by
blocking viral entry (Trimeris Inc.’s FUZEON® and
Pfizer’s SELZENTRYTM). We are also aware of various HCV drugs in pre-clinical or
clinical development.


45
 INDEX




Radiation
and surgery are two principal traditional forms of treatment for prostate
cancer, to which our PSMA-based development efforts are directed. If the disease
spreads, hormone (androgen) suppression therapy is often used to slow the
cancer’s progression. This form of treatment, however, can eventually become
ineffective. We are aware of several competitors who are developing alternative
treatments for castrate-resistant prostate cancer, some of which are directed
against PSMA.





If we are
unable to negotiate collaborative agreements, our cash burn rate could increase
and our rate of product development could decrease.





Our
business strategy includes entering into collaborations with pharmaceutical and
biotechnology companies to develop and commercialize product candidates and
technologies. We are pursuing significant collaborations, strategic partnerships
or other arrangements to continue worldwide development and commercialization of
RELISTOR following expiration of the transition period of the Transition
Agreement. We may not be successful in negotiating additional collaborative
arrangements. If we do not enter into new collaborative arrangements -- and in
any case prior to entering into any such arrangements -- we would have to devote
more of our resources to clinical product development and product-launch
activities, seeking additional sources of capital, and our cash burn rate would
increase or we would need to take steps to reduce our rate of product
development. These challenges will be substantial if we are not successful in
negotiating new arrangements with respect to the RELISTOR franchise. We cannot
assure you that any currently-contemplated or future collaboration or other
initiatives for funding our product candidate programs will be successfully
concluded.





We
are dependent on our patents and other intellectual property rights. The
validity, enforceability and commercial value of these rights are highly
uncertain.





Our
success is dependent in part upon obtaining, maintaining and enforcing patent
and other intellectual property rights. The patent position of biotechnology and
pharmaceutical firms is highly uncertain and involves many complex legal and
technical issues. There is no clear policy involving the breadth of claims
allowed, or the degree of protection afforded, under patents in this area.
Accordingly, patent applications owned by or licensed to us may not result in
patents being issued. We are aware of others who have patent applications or
patents containing claims similar to or overlapping those in our patents and
patent applications. We do not expect to know for several years the relative
strength or scope of our patent position. Patents that we own or license may not
enable us to preclude competitors from commercializing drugs, and consequently
may not provide us with any meaningful competitive advantage.





We own or
have licenses to several issued patents. The issuance of a patent, however, is
not conclusive as to its validity or enforceability, which can be challenged in
litigation. Our patents may be successfully challenged. We may incur substantial
costs in litigation seeking to uphold the validity of patents or to prevent
infringement. If the outcome of litigation is adverse to us, third parties may
be able to use our patented invention without payment to us. Third parties may
also avoid our patents through design innovation.





Most of
our product candidates, including RELISTOR, PRO 140 and our PSMA and HCV program
products, incorporate to some degree intellectual property licensed from third
parties. We can lose the right to patents and other intellectual property
licensed to us if the related license agreement is terminated due to a breach by
us or otherwise. Our ability, and that of our collaboration partners, to
commercialize products incorporating licensed intellectual property would be
impaired if the related license agreements were terminated.





The
license agreements from which we derive or out-license intellectual property
provide for various royalty, milestone and other payment, commercialization,
sublicensing, patent prosecution and enforcement, insurance, indemnification and
other obligations and rights, and are subject to certain reservations of rights.
While we generally have the right to defend and enforce patents licensed by us,
either in the first instance or if the licensor chooses not to do so, we must
usually bear the cost of doing so. As a result of the Transition Agreement, we
will be required to defend and enforce our RELISTOR patents, an obligation that
Wyeth undertook in the 2005 collaboration agreement. With respect to Japan, Ono
has certain limited rights to prosecute, maintain and enforce relevant
intellectual property. With most of our in-licenses, the licensor bears the cost
of engaging in all of these activities, although we may share in those costs
under specified circumstances.





We also
rely on unpatented technology, trade secrets and confidential information. Third
parties may independently develop substantially equivalent information and
techniques or otherwise gain access to our technology or disclose our
technology, and we may be unable to effectively protect our rights in unpatented
technology, trade secrets and confidential information. We require each of our
employees, consultants and advisors to execute a confidentiality agreement at
the commencement of an employment or consulting relationship with us. These
agreements may, however, not provide effective protection in the event of
unauthorized use or disclosure of confidential information.


46
 INDEX




We
are dependent upon third parties for a variety of functions. These arrangements
may not provide us with the benefits we expect.





We rely
in part on third parties to perform a variety of functions. We are party to
numerous agreements which place substantial responsibility on clinical research
organizations, consultants and other service providers for the development of
our products. We also rely on medical and academic institutions to perform
aspects of our clinical trials of product candidates. In addition, an element of
our research and development strategy is to in-license technology and product
candidates from academic and government institutions in order to minimize
investments in early research. We have entered into agreements under which we
have depended on Wyeth and Ono, respectively, for the commercialization and
development of RELISTOR. We may not be able to replace the benefits to us of the
Wyeth agreement on attractive terms. We may not be able to maintain our
relationships with Ono or new partners, or establish new ones on beneficial
terms. We may not be able to enter new arrangements without undue delays or
expenditures, and these arrangements may not allow us to compete
successfully.





If
we are unable to obtain sufficient quantities of the raw and bulk materials
needed to make our products, our product development and commercialization could
be slowed or stopped.





We
currently obtain supplies of critical raw materials used in production of our
product candidates from single sources. We do not have long-term contracts with
any of these suppliers. Wyeth during the transition, and thereafter we, may not
be able to fulfill manufacturing obligations for RELISTOR, either on our own or
through third-party suppliers. Our existing arrangements with suppliers for our
other product candidates may not result in the supply of sufficient quantities
of our product candidates needed to accomplish our clinical development
programs, and we may not have the right or capability to manufacture sufficient
quantities of these products to meet our needs if our suppliers are unable or
unwilling to do so. Any delay or disruption in the availability of raw materials
would slow or stop product development and commercialization of the relevant
product.





A
substantial portion of our funding comes from federal government grants and
research contracts. We cannot rely on these grants or contracts as a continuing
source of funds.





A
substantial portion of our revenues to date, albeit decreasing in 2007, 2008 and
2009, has been derived from federal government grants and research contracts.
During the years ended December 31, 2006, 2007, 2008 and the nine months ended
September 30, 2009, we generated revenues from awards made to us by the NIH
between 2003 and 2009, to partially fund some of our programs. We cannot rely on
grants or additional contracts as a continuing source of funds. Funds available
under these grants and contracts must be applied by us toward the research and
development programs specified by the government rather than for all our
programs generally. The government’s obligation to make payments under these
grants and contracts is subject to appropriation by the U.S. Congress for
funding in each year. It is possible that Congress or the government agencies
that administer these government research programs will decide to scale back
these programs or terminate them due to their own budgetary constraints.
Additionally, these grants and research contracts are subject to adjustment
based upon the results of periodic audits performed on behalf of the granting
authority. Consequently, the government may not award grants or research
contracts to us in the future, and any amounts that we derive from existing
awards may be less than those received to date. Therefore, we will need to
provide funding on our own or obtain other funding. In particular, we cannot
assure you that any currently-contemplated or future efforts to obtain funding
for our product candidate programs through government grants or contracts will
be successful, or that any such arrangements which we do conclude will supply us
with sufficient funds to complete our development programs without providing
additional funding on our own or obtaining other funding.





We
are exposed to product liability claims, and in the future we may not be able to
obtain insurance against these claims at a reasonable cost or at
all.





Our
business exposes us to product liability risks, which are inherent in the
testing, manufacturing, marketing and sale of pharmaceutical products. We may
not be able to avoid product liability exposure. If a product liability claim is
successfully brought against us, our financial position may be adversely
affected. Pursuant to the Transition Agreement, we will assume responsibility
for product liability risks arising from marketing and sales of RELISTOR, which
Wyeth had borne under our 2005 collaboration.





Product
liability insurance for the biopharmaceutical industry is generally expensive,
when available at all. We have obtained product liability insurance in the
amount of $10.0 million per occurrence, subject to a deductible and a $10.0
million annual aggregate limitation. Where local statutory requirements exceed
the limits of our existing insurance or where local policies of insurance are
required, we maintain additional clinical trial liability insurance to meet
these requirements. Our present insurance coverage may not be adequate to cover
claims brought against us. Some of our license and other agreements require us
to obtain product liability insurance. Adequate insurance coverage may not be
available to us at a reasonable cost in the future.


47
 INDEX




Our
stock price has a history of volatility. You should consider an investment in
our stock as risky and invest only if you can withstand a significant
loss.





Our stock
price has a history of significant volatility. Between January 1, 2007 and
September 30, 2009, our stock price has ranged from $4.33 to $30.31 per share.
Between October 1, 2009 and November 4, 2009, it has ranged from $3.72 to $5.48
per share. Historically, our stock price has fluctuated through an even greater
range. At times, our stock price has been volatile even in the absence of
significant news or developments relating to us. The stock prices of
biotechnology companies and the stock market generally have been subject to
dramatic price swings in recent years, and current financial and market
conditions have resulted in widespread pressures on securities of issuers
throughout the world economy. Factors that may have a significant impact on the
market price of our common stock include:





·
            the results of clinical trials and pre-clinical studies
      involving our products or those of our
  competitors;





·
            changes
      in the status of any of our drug development programs, including delays in
      clinical trials or program
terminations;





·
            developments
      regarding our efforts to achieve marketing approval for our
      products;





·
            developments
      in our relationships with Wyeth, Ono and any other business partner(s)
      with which we may collaborate in the future regarding the development and
      commercialization of RELISTOR;





·
            developments
      in current or future relationships with other collaborative partners with
      respect to other products and
candidates;





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





·
            developments
      in patent or other proprietary
rights;





·
            governmental
      regulation;





·
            changes
      in reimbursement policies or health care
  legislation;





·
            public
      concern as to the safety and efficacy of products developed by us, our
      collaborators or our competitors;





·
            our
      ability to fund ongoing operations;





·
            fluctuations
      in our operating results; and





·
            general
      market conditions.





Purchases
of our common shares pursuant to our share repurchase program may, depending on
their timing, volume and form, result in our stock price to be higher than it
would be in the absence of such purchases. If purchases under the program are
discontinued, our stock price may fall.





Our
principal stockholders are able to exert significant influence over matters
submitted to stockholders for approval.





At
September 30, 2009, our directors and executive officers and stockholders
affiliated with Tudor Investment Corporation together beneficially own or
control approximately one-fifth of our outstanding shares of common stock. At
that date, our five largest stockholders, excluding our directors and executive
officers and stockholders affiliated with Tudor, beneficially own or control in
the aggregate approximately 45% of our outstanding shares. Our directors and
executive officers and Tudor-related stockholders, should they choose to act
together, could exert significant influence in determining the outcome of
corporate actions requiring stockholder approval and otherwise control our
business. This control could have the effect of delaying or preventing a change
in control of us and, consequently, could adversely affect the market price of
our common stock. Other significant but unrelated stockholders could also exert
influence in such matters.


48
 INDEX




If
there are substantial sales of our common stock, the market price of our common
stock could decline.





Sales of
substantial numbers of shares of common stock could cause a decline in the
market price of our stock. We require substantial external funding to finance
our research and development programs and may seek such funding through the
issuance and sale of our common stock. In addition, some of our other
stockholders are entitled to require us to register their shares of common stock
for offer or sale to the public. We have filed Form S-8 registration statements
registering shares issuable pursuant to our equity compensation plans and
periodically seek to increase the amount of securities available under these
plans. Any sales by existing stockholders or holders of options, or other
rights, may have an adverse effect on our ability to raise capital and may
adversely affect the market price of our common stock.





Item
6. Exhibits





(a)
            Exhibits





Exhibit
      Number
            Description31.1
            Certification
      of Paul J. Maddon, M.D., Ph.D., Chief Executive Officer of the Registrant,
      pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities
      Exchange Act of 1934, as amended31.2
            Certification
      of Robert A. McKinney, Chief Financial Officer and Senior Vice President,
      Finance and Operations (Principal Financial and Accounting Officer) of the
      Registrant, pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the
      Securities Exchange Act of 1934, as amended32
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


49
 INDEX





SIGNATURES





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





PROGENICS
      PHARMACEUTICALS, INC.Date:
      November 9, 2009
            By:
            /s/
      Robert A. McKinneyRobert
      A. McKinney
              Chief
      Financial Officer
              Senior
      Vice President, Finance & Operations and Treasurer
              (Duly
      authorized officer of the Registrant and Principal Financial and
      Accounting Officer)