UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549






FORM
10-Q




(Mark
One)




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




For the
quarterly period ended September 30, 2008




OR




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




For the
transition period from ___________________ to ________________




Commission
file number 000-23143




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
      No.)





777
Old Saw Mill River Road


Tarrytown,
New York 10591


(Address
of principal executive offices)


(Zip
Code)




(914)
789-2800


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No o





Indicate
by check mark 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     ̈                                                        Smaller
reporting company    ̈


(Do not
check if a 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 5, 2008 there were 30,456,339shares
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 atSeptember30, 2008 and
      December 31, 2007
            3CondensedConsolidatedStatements of
      Operations for the Three andNineMonths endedSeptember30, 2008 and 2007
            4CondensedConsolidatedStatement of
      Stockholders’ Equity and Comprehensive Loss for theNineMonths endedSeptember30, 2008
            5CondensedConsolidatedStatements of Cash
      Flows for theNineMonths endedSeptember30, 2008 and 2007
            6Notes to
      CondensedConsolidatedFinancial
      Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            19Item
      3.
            Quantitative and
      Qualitative Disclosures about Market Risk
            37Item
      4.
            Controls and
      Procedures
            38PART
      II
            OTHER
      INFORMATIONItem
      1A.
            Risk Factors
            39Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            42Item
      6.
            Exhibits
            42Signatures
            43




















2
 table of contents











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)





September
      30,
              2008
            
            
            December
      31,
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            19,695
            
            
            $
            10,423Marketable
      securities
            
            
            83,946
            
            
            
            120,000Accounts
      receivable
            
            
            6,832
            
            
            
            1,995Other
      current assets
            
            
            2,789
            
            
            
            3,111Total
      current assets
            
            
            113,
      262
            
            
            
            135,529Marketable
      securities
            
            
            30,953
            
            
            
            39,947Fixed
      assets, at cost, net of accumulated depreciation and
      amortization
            
            
            12,104
            
            
            
            13,511Restricted
      cash
            
            
            520
            
            
            
            552Other
      assets
            
            
            6
            
            
            
            -Total
      assets
            
            $
            156,845
            
            
            $
            189,539Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            11,416
            
            
            $
            14,765Deferred
      revenue 3⁄4
      current
            
            
            14,177
            
            
            
            17,728Other
      current liabilities
            
            
            57
            
            
            
            57Total
      current liabilities
            
            
            25,650
            
            
            
            32,550Deferred
      revenue — long term
            
            
            2,833
            
            
            
            9,131Other
      liabilities
            
            
            290
            
            
            
            359Total
      liabilities
            
            
            28,773
            
            
            
            42,040Commitments
      and contingencies (Note 10)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 — 30,555,655
      in 2008 and 29,753,820 in 2007
            
            
            40
            
            
            
            39Additional
      paid-in capital
            
            
            417,543
            
            
            
            401,500Accumulated
      deficit
            
            
            (284,120
            )
            
            
            (254,046
            )Accumulated
      other comprehensive (loss) income
            
            
            (2,650
            )
            
            
            6Treasury
      stock, at cost (200,000 shares)
            
            
            (2,741
            )
            
            
            -Total
      stockholders’ equity
            
            
            128,072
            
            
            
            147,499Total
      liabilities and stockholders’ equity
            
            $
            156,845
            
            
            $
            189,539





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





3
 table of contents





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
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Research
      and development from collaborator
            
            $
            16,015
            
            
            $
            14,540
            
            
            $
            54,896
            
            
            $
            52,987Royalty
      income
            
            
            44
            
            
            
            -
            
            
            
            86
            
            
            
            -Research
      grants and contract
            
            
            1,377
            
            
            
            2,471
            
            
            
            5,689
            
            
            
            7,077Other
      revenues
            
            
            61
            
            
            
            7
            
            
            
            172
            
            
            
            48Total
      revenues
            
            
            17,497
            
            
            
            17,018
            
            
            
            60,843
            
            
            
            60,112Expenses:Research
      and development
            
            
            21,478
            
            
            
            24,263
            
            
            
            68,191
            
            
            
            69,166License
      fees – research and development
            
            
            305
            
            
            
            (16
            )
            
            
            1,788
            
            
            
            833General
      and administrative
            
            
            8,265
            
            
            
            9,275
            
            
            
            22,530
            
            
            
            21,746Royalty
      expense
            
            
            5
            
            
            
            -
            
            
            
            9
            
            
            
            -Depreciation
      and amortization
            
            
            1,166
            
            
            
            845
            
            
            
            3,427
            
            
            
            2,144Total
      expenses
            
            
            31,219
            
            
            
            34,367
            
            
            
            95,945
            
            
            
            93,889Operating
      loss
            
            
            (13,722
            )
            
            
            (17,349
            )
            
            
            (35,102
            )
            
            
            (33,777
            )Other
      income:Interest
      income
            
            
            1,502
            
            
            
            1,749
            
            
            
            5,028
            
            
            
            5,361Total
      other income
            
            
            1,502
            
            
            
            1,749
            
            
            
            5,028
            
            
            
            5,361Net
      loss
            
            $
            (12,220
            )
            
            $
            (15,600
            )
            
            $
            (30,074
            )
            
            $
            (28,416
            )Net
      loss per share - basic and diluted
            
            $
            (0.41
            )
            
            $
            (0.58
            )
            
            $
            (1.02
            )
            
            $
            (1.07
            )Weighted-average shares - basic and diluted
            
            
            29,820
            
            
            
            26,976
            
            
            
            29,553
            
            
            
            26,639







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




.





4
 table of contents








PROGENICS
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008




(amounts
in thousands)


(Unaudited)







Common
      Stock
            
            
            Additional
            
            
            
            
            
            Accumulated
      Other
            
            
            Treasury
      StockShares
            
            
            Amount
            
            
            Paid-In
      Capital
            
            
            Accumulated
      Deficit
            
            
            Comprehensive
      (Loss) 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
      expense for vesting of 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










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





5
 table of contents











PROGENICS
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS




(amounts
in thousands)


(Unaudited)





For
      the Nine Months Ended
              September
      30,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (30,074
            )
            
            $
            (28,416
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            3,427
            
            
            
            2,144Amortization
      of discounts, net of premiums, on marketable securities
            
            
            620
            
            
            
            (354
            )Vesting
      of share-based compensation awards
            
            
            10,899
            
            
            
            11,840Changes
      in assets and liabilities:Increase
      in accounts receivable
            
            
            (4,837
            )
            
            
            (505
            )Decrease
      in other current assets
            
            
            322
            
            
            
            626Increase
      in other assets
            
            
            (6
            )
            
            
            -(Decrease)
      increase in accounts payable and accrued expenses
            
            
            (3,349
            )
            
            
            3,761Decrease
      in deferred revenue
            
            
            (9,849
            )
            
            
            (14,252
            )(Decrease)
      increase in deferred lease liability
            
            
            (69
            )
            
            
            57Increase
      in other liabilities
            
            
            -
            
            
            
            232Net
      cash used in operating activities
            
            
            (32,916
            )
            
            
            (24,867
            )Cash
      flows from investing activities:Capital
      expenditures
            
            
            (2,020
            )
            
            
            (4,359
            )Sales/maturities
      of marketable securities
            
            
            96,734
            
            
            
            188,997Purchase
      of marketable securities
            
            
            (54,962
            )
            
            
            (170,565
            )Decrease
      (increase) in restricted cash
            
            
            32
            
            
            
            (5
            )Net
      cash provided by investing activities
            
            
            39,784
            
            
            
            14,068Cash
      flows from financing activities:Proceeds
      from sale of common stock in public offering
            
            
            -
            
            
            
            60,190Expenses
      related to the sale of common stock in public offering
            
            
            -
            
            
            
            (3,058
            )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
            
            
            
            6,107Repurchase
      of restricted stock
            
            
            -
            
            
            
            (19
            )Net
      cash provided by financing activities
            
            
            2,404
            
            
            
            63,220Net
      increase in cash and cash equivalents
            
            
            9,272
            
            
            
            52,421Cash
      and cash equivalents at beginning of period
            
            
            10,423
            
            
            
            11,947Cash
      and cash equivalents at end of period
            
            $
            19,695
            
            
            $
            64,368




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





6
 table of contents
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 (amounts
in thousands, except per share amounts or 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 gastroenterology, virology and oncology.





Progenics
was incorporated in Delaware in 1986 and commenced principal operations in late
1988. Currently, all of our operations are conducted at our facilities in
Tarrytown, New York. Our chief operating decision maker reviews financial
analyses and forecasts relating to all of our research programs as a single unit
and allocates resources and assesses performance of such programs as a whole. We
operate under a single research and development segment.





Gastroenterology





Our lead
product is RELISTOR®
(methylnaltrexone bromide). In April 2008, RELISTOR subcutaneous injection was
approved by the U.S. Food and Drug Administration (“FDA”) for sale in the United
States for the treatment of opioid-induced constipation (“OIC”) in patients with
advanced illness who are receiving palliative care, when response to laxative
therapy has not been sufficient. Our collaboration partner, Wyeth
Pharmaceuticals (“Wyeth”), commenced sales of RELISTOR subcutaneous injection in
the U.S. in June 2008.





Prior to
U.S. approval in April 2008, RELISTOR subcutaneous injection had received
marketing approval in March 2008 from Health Canada for the treatment of OIC in
patients with advanced illness receiving palliative care, and in July 2008, it
received marketing approval from the European Commission for the treatment of
OIC in advanced illness patients who are receiving palliative care when response
to usual laxative therapy has not been sufficient. Commercial launches have
begun in these areas. Marketing applications for RELISTOR subcutaneous injection
are also pending in Australia and other countries.





Development
and commercialization of RELISTOR is being conducted under a license and
co-development agreement (“Collaboration Agreement”) between us and Wyeth. Under
that agreement, we (i) have received an upfront payment from Wyeth, (ii) have
received, and are entitled to receive further, additional payments as certain
developmental milestones for RELISTOR are achieved, (iii) have been and will be
reimbursed by Wyeth for expenses we incur in connection with the development of
RELISTOR under an agreed-upon development plan and budget, and (iv) have
received and will receive royalties and commercialization milestone payments.
Manufacturing and commercialization expenses for RELISTOR are funded by Wyeth.
Wyeth has elected, as it was entitled to do under the Collaboration Agreement,
not to develop RELISTOR in Japan, and as provided in that Agreement returned to
us the rights to RELISTOR in Japan. As discussed below, we have out-licensed the
rights to subcutaneous RELISTOR in Japan which we reacquired from Wyeth as a
result of its election.





In May
2007, we earned $9.0 million in milestone payments under the Wyeth Collaboration
Agreement for having made filings seeking marketing approval for RELISTOR
subcutaneous injection in the U.S. and Europe. In April 2008, we earned a $15.0
million milestone payment from Wyeth for the FDA approval of subcutaneous
RELISTOR, and in July 2008, we earned a $10.0 million milestone payment from
Wyeth for European approval of subcutaneous RELISTOR.





We and
Wyeth are also developing intravenous and oral formulations of
RELISTOR.





In
October 2008, we entered into an exclusive license agreement with Ono
Pharmaceutical Co., Ltd. (“Ono”), Osaka, Japan under which we licensed to Ono
the rights to subcutaneous RELISTOR in Japan. Under that agreement, we are
entitled to receive from Ono an upfront payment of $15.0 million, potential
development milestones of up to $20.0 million, and 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.





7
 table of contents
 PROGENICS PHARMACEUTICALS,
INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
 (amounts
in thousands, except per share amounts or unless otherwise noted)




As a
result of the return of the Japanese rights, we will not receive from Wyeth
milestone payments that were to be triggered by the development of RELISTOR
formulations in Japan. These potential future milestone payments would have
totaled $22.5 million (of which $7.5 million related to the subcutaneous
formulation of RELISTOR and the remainder to the intravenous and oral
formulations). Taking these adjustments into account, we now have the
potential to receive a total of $334.0 million in development and
commercialization milestone payments from Wyeth under the Collaboration
Agreement, of which $39.0 million have been paid to date.





The
payments described above will depend on continued success in development and
commercialization of RELISTOR, which are in turn dependent on the actions of
Wyeth, Ono, the FDA and other regulatory bodies, as well as the outcome of
clinical and other testing of RELISTOR. Many of these matters are outside our
control.





Virology





In the
area of virology, we are developing viral-entry inhibitors for Human
Immunodeficiency Virus (“HIV”), the virus that causes AIDS, and for Hepatitis C
virus infection (“HCV”). These inhibitors are molecules designed to inhibit a
virus’ ability to enter certain types of immune cells and liver cells,
respectively. In May 2007, we announced positive results in HIV-infected
individuals from a phase 1b trial examining a single dose of an intravenous
formulation of our monoclonal antibody, PRO 140. We are also investigating a
subcutaneous formulation of PRO 140 with the goal of developing a long-acting,
self-administered therapy for HIV infection. In October 2008, we announced
positive interim results from two phase 2 studies, separately evaluating
intravenous and subcutaneous dosage forms of PRO 140. Results from all patients
enrolled in both of these studies are expected to be obtained in early 2009 and
the data are expected to be used to select a dosage form (intravenous or
subcutaneous) for further clinical development.





We are
also engaged in research regarding a product candidate for HCV, and in November
2008, announced the selection of a proprietary small-molecule drug candidate,
designated PRO 206, for clinical development as a treatment of HCV infection.
The candidate, an orally available viral-entry inhibitor designed to prevent HCV
from entering and infecting healthy liver cells, achieved favorable results in
pre-clinical and in
vitro studies.





Oncology





In the
area of prostate cancer, we are developing a human monoclonal antibody-drug
conjugate (“ADC”), consisting of a selectively targeted cytotoxic antibody
directed against prostate specific membrane antigen (“PSMA”), a protein found on
the surface of prostate cancer cells. In September 2008, we announced the
initiation of a phase 1 dose-escalation clinical study to assess PSMA ADC’s
safety, tolerability and initial clinical activity. 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 (“PSMA 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. As a result of
Wyeth’s agreement to reimburse us for RELISTOR development expenses, we are able
to devote our current and future resources to our other research and development
programs.





Corporate-Related
Matters





We may
require additional funding to continue our operations. As a result, we may enter
into a collaboration agreement, license or sale transaction or royalty sales or
financings with respect to our products and product candidates. We may also seek
to raise additional capital through the sale of our common stock or other
securities and expect to fund certain aspects of our operations through
government grants and contracts.





We have
had recurring losses since our inception. At September 30, 2008, we had an
accumulated deficit of $284.1 million and had cash, cash equivalents and
marketable securities, including non-current portion, totaling $134.6 million.
We expect that cash, cash equivalents and marketable securities at September 30,
2008 will be sufficient to fund current operations beyond one year. During the
nine months ended September 30, 2008, we had a net loss of $30.1 million and
used cash in operating activities of $32.9 million.





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




On April
24, 2008, we announced that our Board of Directors had approved a share
repurchase program to acquire up to $15.0 million of our outstanding common
shares, funding for which will come from the $15.0 million milestone payment we
received from Wyeth for receiving U.S. marketing approval for RELISTOR.
Purchases under the program will be made at our discretion subject to market
conditions in the open-market or otherwise, and will be made in accordance with
the regulations of the U.S. Securities and Exchange Commission, including Rule
10b-18. During the three months ended September 30, 2008, we have repurchased
200,000 of our outstanding common shares. Purchases may be discontinued at any
time. Reacquired shares will be held in treasury until redeployed or retired. We
have $12.3 million remaining available for purchases under the
program.





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





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 all adjustments,
consisting primarily of normal recurring accruals, 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, 2007. 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. Certain amounts have been reclassified
in prior years’ financial statements to conform to the current presentation.
This included the reclassification of license fees from “Research and
development” to “License fees – research and development” which had no effect on
total expenses as previously reported.





2.  Share-Based
Payment Arrangements





On
January 1, 2007, we began to estimate the expected term of stock options granted
to employees and officers and directors by using historical data for each of
those two groups. The expected term for options granted to the two groups
mentioned above was 5.33 and 7.3 years, respectively, in 2008 and 5.25 and 7.5
years, respectively, in 2007. Beginning in the third quarter of 2008, we
estimated the expected term of stock options granted to our Chief Executive
Officer to be 7.5 years. The expected term for stock options granted to
non-employee consultants was ten years, which was equal to the contractual term
of those options. The expected volatility of stock options granted to each group
was calculated based upon the periods of the respective expected terms. We have
never paid dividends and do not expect to pay dividends in the future.
Therefore, our dividend rate is zero. The risk-free rate for periods within the
expected term of the option is 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 2007
were as follows:





For
      the Nine Months Ended
              September
      30,2008
            
            2007Expected
      volatility
            
            66%
      – 91%
            
            52%
      – 85%Expected
      dividends
            
            zero
            
            zeroExpected
      term (years)
            
            5.33
      – 10
            
            5.25
      – 10Weighted
      average expected term (years)
            
            6.87
            
            6.75Risk-free
      rate
            
            2.44%
      –  3.79%
            
            4.77%
      –  4.93%








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




During
the nine months ended September 30, 2008 and 2007, 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 FASB Technical Bulletin No.
97-1 “Accounting under Statement 123 for Certain Employee Stock Purchase Plans
with a Look-Back Option,” using the same option valuation model used for options
granted under the Incentive Plans, except that the assumptions noted in the
following table were used for the Purchase Plans:





For
      the Nine Months Ended
              September
      30,2008
            
            2007Expected
      volatility
            
            83%
            
            43%Expected
      dividends
            
            zero
            
            zeroExpected
      term
            
            6
      months
            
            6
      monthsRisk-free
      rate
            
            1.72%
            
            4.78%





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 2007 was $10.9
million and $11.8 million, respectively. In such periods; $5.3 million and $5.0
million, respectively, of such value was reported as research and development
expense, and $5.6 million and $6.8 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 2007 because we had a net loss 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 2007.





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 a net loss for the three and nine months ended September 30, 2008 and
2007 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 each of those periods. 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.





3.  Fair
Value Measurements





Our
available-for-sale investment portfolio consists of marketable securities, which
include 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 Financial Accounting
Standards Board (“FASB”) Statement No. 115 (“FAS 115”) “Accounting for
Certain Investments in Debt and Equity Securities.” The change in the fair value
of these investments is recorded as a component of other comprehensive
income.





Investments
consisted of the following:





September
      30,
              2008
            
            
            December
      31,
              2007Short-termCorporate
      debt securities and securities of government-sponsored
      entities
            
            $
            82,796
            
            
            $
            81,170Auction
      rate securities
            
            
            1,150
            
            
            
            38,830Total short-term investments
            
            
            83,946
            
            
            
            120,000Long-termCorporate
      debt securities and securities of government-sponsored
      entities
            
            
            26,769
            
            
            
            39,947Auction rate securities
            
            
            4,184
            
            
            
            -Total long-term investments
            
            
            30,953
            
            
            
            39,947Total
      investments
            
            $
            114,899
            
            
            $
            159,947








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




We
adopted FASB Statement No. 159 (“FAS 159”) “The Fair Value Option of Financial
Assets and Financial Liabilities” effective January 1, 2008, which provides
companies with an option to report certain financial assets and liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. FAS 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The objective of FAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. We have elected not to apply the
fair value option to any of our financial assets or liabilities.





We also
adopted FASB Statement No. 157 (“FAS 157”) “Fair Value Measurements” effective
January 1, 2008 for financial assets and financial liabilities. FAS 157 defines
fair value as the price that would be received to sell an asset or would be paid
to transfer a 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. In accordance with Financial Accounting Standards Board Staff
Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” we will defer
the adoption of FAS 157 for our nonfinancial assets and nonfinancial liabilities
until January 1, 2009. We are currently evaluating the impact of FAS 157 for
nonfinancial assets and nonfinancial liabilities, and currently do not expect
the adoption of this statement to have a material effect on our financial
position or results of operations. The partial adoption of FAS 157 did not have
a material impact on our fair value measurements.





FAS 157
established a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reporting entity (“observable
inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on 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.





The
following table presents our available-for-sale investments measured at fair
value on a recurring basis as of September 30, 2008 classified by the FAS 157
valuation hierarchy (as previously discussed):





Fair
      Value Measurements at Reporting Date UsingDescription
            
            Balance
      at
              September
      30, 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
            
            $
            16,477
            
            
            $
            16,477
            
            
            $
            -
            
            
            $
            -Corporate
      debt securities and securities of government-sponsored
      entities
            
            
            109,565
            
            
            
            -
            
            
            
            109,565
            
            
            
            -Auction
      rate securities
            
            
            5,334
            
            
            
            -
            
            
            
            -
            
            
            
            5,334Total
            
            $
            131,376
            
            
            $
            16,477
            
            
            $
            109,565
            
            
            $
            5,334








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




At
September 30, 2008 we hold $5.3 million in auction rate securities that were
originally issued with Aaa/AAA credit ratings, which are classified as Level 3
(4% of total assets measured at fair value). Auction rate securities are
collateralized long-term instruments that 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. The
funds associated with these failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the security, the
security matures and is paid or a buyer outside the auction process emerges. The
fair value of the auction rate securities we hold includes $4.1 million of
securities collateralizedby student loan
obligations subsidized by the U.S. government and $1.2 million of investment
company preferred stock, and do not include mortgage-backed instruments. As of
September 30, 2008, 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.





We
continue to monitor the market for auction rate securities and consider its
effect (if any) on the fair market value of our investments. If market
conditions for these securities do not recover, we may be required to record
additional unrealized losses in 2008. We believe we will have the ability to
hold any auction rate securities for which auctions fail until their markets
recover. We do not anticipate having to sell these securities in order to
operate our business. We do not believe the carrying values of these auction
rate securities are permanently impaired and therefore expect the positions will
eventually be liquidated without significant loss.





The
valuation of auction rate securities we hold is based on Level 3 unobservable
inputs which consist of internal analysis of timing of expected future
successful auctions, collateralization of underlying assets of the security and
credit quality of the security. As a result of the estimated fair value, we have
determined a temporary impairment in the valuation of these securities of $0.3
million, recorded for the three months ended March 31, 2008, which is reflected
as a part of other comprehensive loss on our balance sheet. These securities are
held “available-for-sale” in conformity with FAS 115 and the unrealized loss is
included in other comprehensive loss in the current period. 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 balance sheet.





For those
financial instruments with significant Level 3 inputs (all of which are auction
rate securities), the following tables summarize the activities for the three
and nine month periods ended September 30, 2008:





Fair
      Value Measurements Using Significant
              Unobservable
      Inputs
              (Level
      3)Description
            
            For
      the Three Months Ended
              September
      30, 2008
            
            
            For
      the Nine Months Ended
              September
      30, 2008Balance
      at beginning of period
            
            $
            6,042
            
            
            $
            -Transfers
      into Level 3
            
            
            -
            
            
            
            8,150Total
      realized/unrealized gains (losses)Included
      in net loss
            
            
            -
            
            
            
            -Included
      in comprehensive income (loss)
            
            
            92
            
            
            
            (316
            )Settlements
            
            
            (800
            )
            
            
            (2,500
            )Balance
      at end of period
            
            $
            5,334
            
            
            $
            5,334Total
      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
            
            $
            92
            
            
            $
            (316
            )








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




4.  Prepaid
Research and Development





On
January 1, 2008, we adopted Emerging Issues Task Force Issue 07-3 (“EITF 07-3”)
“Accounting for Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities.” Prior to January 1, 2008, under FASB
Statement No. 2, “Accounting for Research and Development Costs,” non-refundable
advance payments for future research and development activities for materials,
equipment, facilities and purchased intangible assets that had no alternative
future use were expensed as incurred. Beginning January 1, 2008, we have been
capitalizing such non-refundable advance payments and expensing them as the
goods are delivered or the related services are performed. EITF 07-3 applies to
new contracts entered into after the effective date of January 1, 2008. The
adoption of EITF 07-3 did not have a material impact on our financial position
or results of operations.





5.  Accounts
Receivable





September
      30,
              2008
            
            December
      31,
              2007Research
      and development from collaborator
            
            $
            5,898
            
            $
            -Royalties
            
            
            117
            
            
            -National
      Institutes of Health
            
            
            804
            
            
            1,956Other
            
            
            13
            
            
            39Total
            
            $
            6,832
            
            $
            1,995





6.  Accounts
Payable and Accrued Expenses




September
      30,
              2008
            
            
            December
      31,
              2007Accounts payable
            
            $
            942
            
            $
            1,158Accrued consulting and clinical trial costs
            
            
            6,769
            
            
            10,848Accrued payroll and related costs
            
            
            2,633
            
            
            1,489Legal and professional fees
            
            
            1,055
            
            
            1,127Other
            
            
            17
            
            
            143Total
            
            $
            11,416
            
            $
            14,765





7.  Revenue
Recognition





On
December 23, 2005, we entered into the Collaboration Agreement with Wyeth for
the purpose of developing and commercializing RELISTOR. The Collaboration
Agreement involves three formulations of RELISTOR: (i) a subcutaneous
formulation to be used in patients with opioid-induced constipation, (ii) an
oral formulation to be used in patients with opioid-induced constipation, and
(iii) an intravenous formulation to be used in patients with post-operative
ileus.





The
collaboration is being administered by a Joint Steering Committee (“JSC”) and a
Joint Development Committee (“JDC”), each with equal representation by the
parties. The JSC is responsible for coordinating the key activities of Wyeth and
us under the Collaboration Agreement. The JDC is responsible for overseeing,
coordinating and expediting the development of RELISTOR by the parties. In
addition, a Joint Commercialization Committee (“JCC”) and Joint Communications
Committee (“JComm”) were established, composed of representatives of both Wyeth
and us in number and function according to each of our responsibilities. These
committees are responsible for facilitating open communication between Wyeth and
us on matters relating to the commercialization of RELISTOR approved products
and communication about RELISTOR approved products or RELISTOR product
candidates in development.





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




We have
assessed the nature of our involvement with the committees. Our involvement in
the JSC and JDC is one of several obligations to develop the subcutaneous and
intravenous formulations of RELISTOR through regulatory approval in the U.S. We
have combined the committee obligations with the other development obligations
and are accounting for these obligations during the development phase as a
single unit of accounting. After the period during which we have developmental
responsibilities, however, we have assessed that the nature of our involvement
with the committees will be a right, rather than an obligation. Our assessment
is based upon the fact that we negotiated to be on the committees as an
accommodation for our granting of the license for RELISTOR to Wyeth. Wyeth has
been granted by us an exclusive license (even as to us) to the technology and
know-how regarding RELISTOR and has been assigned the agreements for the
manufacture of RELISTOR by third parties. During that period, the activities of
the committees will be focused on Wyeth’s development and commercialization
obligations.





Under the
Collaboration Agreement, we granted to Wyeth an exclusive, worldwide license,
even as to us, to develop and commercialize RELISTOR. 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 and
Wyeth are responsible for developing the subcutaneous and intravenous
formulations in the U.S., until the drug formulations receive regulatory
approval. We have transferred to Wyeth all existing supply agreements with third
parties for RELISTOR and have sublicensed intellectual property rights to permit
Wyeth to manufacture or have manufactured RELISTOR, during the development and
commercialization phases of the Collaboration Agreement, in both bulk and
finished form for all products worldwide. We have no further manufacturing
obligations under the Collaboration Agreement. We have and will continue to
transfer to Wyeth all know-how, as defined, related to RELISTOR. Based upon our
research and development programs, such period will cease upon completion of our
development obligations under the Collaboration Agreement.





Wyeth is
responsible for the development of the oral formulation worldwide excluding
Japan and, the intravenous and subcutaneous formulations outside the U.S., other
than Japan. In the event the JSC approves for development any formulation of
RELISTOR other than subcutaneous, intravenous or oral or any other indication
for a product using any formulation of RELISTOR, Wyeth will be responsible for
development of such products, including conducting clinical trials and obtaining
and maintaining regulatory approval. Wyeth is also responsible for the
commercialization of the subcutaneous, intravenous and oral products, and any
other methylnaltrexone based products developed upon approval by the JSC,
throughout the world excluding Japan. Wyeth will pay all costs of
commercialization of all products, including manufacturing costs, and will
retain all proceeds from the sale of the products, subject to the royalties
payable by Wyeth to us. Decisions with respect to commercialization of any
products developed under the Collaboration Agreement will be made solely by
Wyeth.





Wyeth
granted to us an option (the “Co-Promotion Option”) to enter into a Co-Promotion
Agreement to co-promote any of the products developed under the Collaboration
Agreement, at any time, subject to certain conditions. We may exercise this
option on an annual basis. We did not exercise the option in connection with the
initial commercialization of RELISTOR, and as of September 30, 2008 have not
determined when we will exercise it, if at all. The extent of our co-promotion
activities and the fee that we will be paid by Wyeth for these activities will
be established if, as and when we exercise our option. Wyeth will record all
sales of products worldwide (including those sold by us, if any, under a
Co-Promotion Agreement). Wyeth may terminate any Co-Promotion Agreement if a top
15 pharmaceutical company acquires control of us. Our potential right to
commercialize any product, including our Co-Promotion Option, is not essential
to the usefulness of the already delivered products or services (i.e., our development
obligations) and our failure to fulfill our co-promotion obligations would not
result in a full or partial refund of any payments made by Wyeth to us or reduce
the consideration due to us by Wyeth or give Wyeth the right to reject the
products or services previously delivered by us.





We are
recognizing revenue in connection with the Collaboration Agreement under the
Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB
104”) “Revenue Recognition” and will apply the Substantive Milestone Method. In
accordance with the Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”)
“Accounting for Revenue Arrangements with Multiple Deliverables,” all of our
deliverables under the Collaboration Agreement, consisting of granting the
license for RELISTOR, transfer of supply contracts with third party
manufacturers of RELISTOR, transfer of know-how related to RELISTOR development
and manufacturing, and completion of development for the subcutaneous and
intravenous formulations of RELISTOR in the U.S., represent one unit of
accounting since none of those components has standalone value to Wyeth prior to
regulatory approval of at least one product; that unit of accounting comprises
the development phase, through regulatory approval, for the subcutaneous and
intravenous formulations in the U.S.





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




Within
five business days of execution of the Collaboration Agreement, Wyeth made a
non-refundable, non-creditable upfront payment of $60 million, for which we
deferred revenue at December 31, 2005. Subsequently, we are recognizing revenue
related to the upfront license payment over the period during which the
performance obligations, noted above, are being performed using the
proportionate performance method. We expect that period to extend through 2009.
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 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. The total effort expected is based upon the most current budget and
development plan which is 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. Since we have no obligation to develop
the subcutaneous and intravenous formulations of RELISTOR outside the U.S. or
the oral formulation at all and have no significant commercialization
obligations for any product, recognition of revenue for the upfront payment is
not required during those periods, if they extend beyond the period of our
development obligations. If Wyeth terminates the Collaboration Agreement in
accordance with its terms, we will recognize any unamortized remainder of the
upfront payment at the time of the termination.





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 will extend, and over which the upfront payment will be
amortized, was extended from the end of 2008 to the end of 2009. Consequently,
the amount of revenue recognized from the upfront payment during the three and
nine months ended September 30, 2008 declined relative to that in the comparable
periods of 2007.





Beginning
in January 2006, costs for the development of RELISTOR incurred by Wyeth or us
are being paid by Wyeth. Wyeth has the right once annually to engage an
independent public accounting firm to audit expenses for which we have been
reimbursed during the prior three years. If the accounting firm concludes that
any such expenses have been understated or overstated, a reconciliation will be
made. 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 has made or will make the following payments to us, provided specific
milestones, including clinical, regulatory and sales events, are reached, and
taking in to account the modifications made in connection with the Ono
transaction discussed in Note 1, above: (i) development and sales milestones and
contingent payments, consisting of defined non-refundable, non-creditable
payments, totaling $334.0 million, in respect of clinical and regulatory events
and, for each form approved as a commercial product, combined annual worldwide
(excluding Japan) net sales, as defined, and (ii) sales royalties during each
calendar year during the royalty period, as defined, based on certain
percentages of net sales in the U.S. and worldwide (excluding Japan). Upon
achievement of defined substantive development milestones by us for the
subcutaneous and intravenous formulations, the milestone payments will be
recognized as revenue. Recognition of revenue for developmental contingent
events related to the oral formulation, which is the responsibility of Wyeth,
will be recognized as revenue when Wyeth achieves those events, if they occur
subsequent to completion by us of our development obligations, since we would
have no further obligations related to those products. Otherwise, if Wyeth
achieves any of those events before we have completed our development
obligations, recognition of revenue for the Wyeth contingent events will be
recognized over the period from receipt of the milestone payment to the
completion of our development obligations. All sales milestones will be
recognized as revenue when earned.





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




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 out-of-pocket development costs, including our labor costs. In May 2007,
April 2008 and July 2008, we earned $9.0 million, $15.0 million and $10.0
million, respectively, in milestone payments upon the submission and approval
for review of applications for marketing in the U.S. and European Union of the
subcutaneous formulation of RELISTOR in patients receiving palliative care, the
FDA approval of subcutaneous RELISTOR in the U.S. and the European approval of
subcutaneous formulation of RELISTOR, respectively. We considered those
milestones to be substantive based on (i) the significant degree of risk, at the
inception of the Collaboration Agreement, related to the conduct and successful
completion of clinical trials and, therefore, of not achieving the milestones,
(ii) the amount of the payment received relative to the significant costs
incurred since inception of the Collaboration Agreement and amount of effort
expended to achieve the milestones, and (iii) the passage of 17, 28 and 31
months, respectively, from inception of the Collaboration Agreement to the
achievement of those milestones. Therefore, we recognized the milestone payments
as revenue in the respective periods in which the milestones were earned. As of
September 30, 2008, relative to the $60 million upfront license payment received
from Wyeth, we have recorded $13.9 million as deferred revenue – current and
$2.8 million as deferred revenue – long term, which is expected to be recognized
as revenue over the period of our development obligations relating to RELISTOR.
In addition, at September 30, 2008, we recorded $5.9 million as revenue
receivable related to reimbursements from Wyeth for development
costs.





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 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 the policies
above.





In
addition, during the three and nine months ended September 30, 2008, we earned
$117 and $438 of royalty receivables, based on the net sales of subcutaneous
RELISTOR, as defined. During the three and nine months ended September 30, 2008,
we recognized $44 and $86, respectively, of royalty income. As of September 30,
2008, we have recorded a cumulative total of $352 as deferred revenue ($293 in
deferred revenue – current and $59 in deferred revenue – long term). The $352 of
deferred royalty revenue is expected to be recognized as royalty income over the
period of our development obligations relating to RELISTOR. We incurred $12 and
$44, respectively, of royalty costs during the three and nine month periods
ended September 30, 2008. During the three and nine months ended September 30,
2008, we recognized $5 and $9, respectively, of royalty expenses and recorded a
cumulative total of $35 of deferred royalty charges as of September 30, 2008.
The $35 of deferred royalty charges are expected to be recognized as royalty
expense over the period of our development obligations relating to
RELISTOR.





The
Collaboration Agreement extends, unless terminated earlier, on a
country-by-country and product-by-product basis, until the last to expire
royalty period, as defined, for any product. We may terminate the Collaboration
Agreement at any time upon 90 days written notice to Wyeth (30 days in the case
of breach of a payment obligation) upon material breach that is not cured. Wyeth
may, with or without cause, following the second anniversary of the first
commercial sale, as defined, of the first commercial product in the U.S.,
terminate the Collaboration Agreement by providing us with at least 360 days
prior written notice of such termination. Wyeth may also terminate the agreement
(i) upon 30 days written notice following one or more serious safety or efficacy
issues that arise, as defined, and (ii) at any time, upon 90 days written notice
of a material breach that is not cured by us. Upon termination of the
Collaboration Agreement, the ownership of the license we granted to Wyeth will
depend on the party that initiates the termination and the reason for the
termination.





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




8.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 respective
periods. For the three and nine months ended September 30, 2008 and 2007, we
reported a net loss and, therefore, potential common shares were not included
since such inclusion would have been anti-dilutive. 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
            )
            29,820
            
            $
            (0.41
            )Nine
      months ended September 30, 2008Basic
      and Diluted
            
            $
            (30,074
            )
            29,553
            
            $
            (1.02
            )Three
      months ended September 30, 2007Basic
      and Diluted
            
            $
            (15,600
            )
            26,976
            
            $
            (0.58
            )Nine
      months ended September 30, 2007Basic
      and Diluted
            
            $
            (28,416
            )
            26,639
            
            $
            (1.07
            )





For the
three and nine months ended September 30, 2008 and 2007, potential common
shares, which have been excluded from diluted per share amounts because their
effect would have been anti-dilutive, include the following:





For
      the Three Months Ended September 30,2008
            
            2007Wtd.
      Avg. Number
            
            Wtd.
      Avg. Exercise Price
            
            Wtd.
      Avg. Number
            
            Wtd.
      Avg. Exercise PriceStock
      options
            
            
            5,071
            
            $
            17.87
            
            
            4,832
            
            $
            17.90Nonvested
      shares
            
            
            534
            
            
            
            
            
            512Total
            
            
            5,605
            
            
            
            
            
            5,344





For
      the Nine Months Ended September 30,2008
            
            2007Wtd.
      Avg. Number
            
            Wtd.
      Avg. Exercise Price
            
            Wtd.
      Avg. Number
            
            Wtd.
      Avg. Exercise PriceStock
      options
            
            
            4,826
            
            $
            18.03
            
            
            4,688
            
            $
            17.36Nonvested
      shares
            
            
            518
            
            
            
            
            
            428Total
            
            
            5,344
            
            
            
            
            
            5,116








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




9.  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 2007, the components of comprehensive loss
were:




For
      the Three Months Ended September 30,
            
            For
      the Nine Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      loss
            
            $
            (12,220)
            
            $
            (15,600)
            
            $
            (30,074)
            
            $
            (28,416)Change
      in net unrealized loss on marketable securities
            
            
            (2,161)
            
            
            206
            
            
            (2,656)
            
            
            136Comprehensive
      loss
            
            $
            (14,381)
            
            $
            (15,394)
            
            $
            (32,730)
            
            $
            (28,280)





10. Commitments and
Contingencies





In the
ordinary course of our business, we enter into agreements with third parties
that include indemnification provisions which, in our judgment, are normal and
customary for companies in our industry sector. These agreements are typically
with business partners, clinical sites and suppliers. Pursuant to these
agreements, we generally agree to indemnify, hold harmless and reimburse the
indemnified parties for losses suffered or incurred by the indemnified parties
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 indemnification provisions. As a result, the estimated
fair value of liabilities relating to these provisions is minimal. Accordingly,
we have no liabilities recorded for these provisions as of September 30,
2008.





11.Impact of Recently Issued Accounting
Standards





In March
2008, the FASB issued SFAS No. 161 (“FAS 161”) “Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No. 133,”
which is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures. The enhanced disclosure
conveys the purpose of derivative use to enable investors a better understanding
of their effects on an entity's financial position, financial performance and
cash flows. Entities are required to provide enhanced disclosures about (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. We do not expect the impact
of the adoption of FAS 161 to have a material effect on our financial position
or results of operations.





In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 (“FSP FAS
157-3”), “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS 157
in a market that is not active and illustrates how an entity should determine
fair value when the market for a financial asset is not active. FSP FAS 157-3
provides guidance on how an entity’s own assumptions about cash flows and
discount rates should be considered when measuring fair value when relevant
market data do not exist, how observable market information in an inactive or
dislocated market affects fair value measurements and how the use of broker and
pricing service quotes should be considered when applying fair value
measurements. FSP FAS 157-3 is effective immediately as of September 30, 2008
and for all interim and annual periods thereafter. The adoption of FSP FAS 157-3
did not have a material effect on our financial position or results of
operations.







18
 table of contents




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





Special
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 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, this
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; 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;
potential product liability; intellectual property, litigation, environmental
and other risks; the risk that licenses to 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 our Annual Report on Form 10-K and other reports filed with the U.S.
Securities and Exchange Commission. In particular, we cannot assure you that our
lead product, 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
assume no obligation to update any statements as a result of new information or
future events or developments. Thus, 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
and Outlook





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 gastroenterology, virology and oncology. We
commenced principal operations in late 1988, and since that time we have been
engaged primarily in research and development efforts, development of our
manufacturing capabilities, establishment of corporate collaborations and
raising capital. We have only recently begun to derive revenue from a commercial
product. In order to commercialize the principal products that we have under
development, we have been and continue to address a number of technological and
clinical challenges and comply with comprehensive U.S. and non-U.S. regulatory
requirements. We expect to incur additional operating losses in the future,
which could increase significantly as we expand our clinical trial programs and
other product development efforts.





Gastroenterology





Our lead
product is RELISTOR (methylnaltrexone bromide). In April 2008 RELISTOR
subcutaneous injection was approved by the U.S. Food and Drug Administration
(“FDA”) for sale in the United States for the treatment of opioid-induced
constipation (“OIC”) in patients with advanced illness who are receiving
palliative care, when response to laxative therapy has not been sufficient. Our
collaboration partner, Wyeth Pharmaceuticals (“Wyeth”), launched the sale of
RELISTOR subcutaneous injection in the U.S. in June 2008.





19
 table of contents




Prior to
U.S. approval in April 2008, RELISTOR subcutaneous injection had received
marketing approval in March 2008 from Health Canada for the treatment of OIC in
patients with advanced illness receiving palliative care, and in July 2008, it
received marketing approval from the European Commission for the treatment of
OIC in advanced illness patients who are receiving palliative care when response
to usual laxative therapy has not been sufficient. Commercial launches have
begun in these areas. Marketing applications for RELISTOR subcutaneous injection
are also pending in Australia and other countries.





Development
and commercialization of RELISTOR is being conducted under a license and
co-development agreement (“Collaboration Agreement”) between us and Wyeth. Under
that agreement, we (i) have received an upfront payment from Wyeth, (ii) have
received, and are entitled to receive, further additional payments as certain
developmental milestones for RELISTOR are achieved, (iii) have been, and will
be, reimbursed by Wyeth for expenses we incur in connection with the development
of RELISTOR under an agreed-upon development plan and budget, and (iv) have
received, and will receive, royalties and commercialization milestone payments.
These payments will depend on continued success in development and
commercialization of RELISTOR, which are in turn dependent on the actions of
Wyeth and the FDA and other regulatory bodies, as well as the outcome of
clinical and other testing of RELISTOR. Many of these matters are outside our
control. Manufacturing and commercialization expenses for RELISTOR are funded by
Wyeth. Wyeth has elected, as it was entitled to do under the Collaboration
Agreement, not to develop RELISTOR in Japan, and as provided in that Agreement
returned to us the rights to RELISTOR in Japan. As discussed below, we have
out-licensed the rights to subcutaneous RELISTOR in Japan which we reacquired
from Wyeth as a result of its election.





In May
2007, we earned $9.0 million in milestone payments under Wyeth Collaboration
Agreement for having made filings seeking marketing approval for RELISTOR
subcutaneous injection in the U.S. and Europe. In April 2008, we earned a $15.0
million milestone payment from Wyeth for the FDA approval of subcutaneous
RELISTOR, and in July 2008, we earned a $10.0 million milestone payment from
Wyeth for European approval of subcutaneous RELISTOR.





We are
also developing, in collaboration with Wyeth, an intravenous formulation of
RELISTOR for the management of post-operative ileus (“POI”), a temporary
impairmentof the
gastrointestinal tract function. Development of the intravenous formulation of
RELISTOR for POI has been granted “Fast Track” status from the FDA, which
facilitates development and expedites regulatory review of drugs intended to
address an unmet medical need for serious or life-threatening
conditions.




We and
Wyeth have conducted two global pivotal phase 3 clinical trials to evaluate the
safety and efficacy of intravenous RELISTOR for the treatment of POI in patients
recovering from segmental colectomy surgical procedures. In October 2006, we
earned a $5.0 million milestone payment under the Collaboration Agreement in
connection with the initiation of the first phase 3 clinical trial.




In March
2008, we reported that preliminary results from the phase 3 segmental colectomy
clinical trial conducted by Wyeth showed that treatment did not achieve the
primary end point of the study: a reduction in time to recovery of
gastrointestinal function (i.e., time to first bowel
movement) as compared to placebo. The study also did not show that secondary
measures of surgical recovery, including time to discharge eligibility, were
superior to placebo. We led the second phase 3 trial of intravenous
methylnaltrexone for management of POI, which was similar in design to the Wyeth
study. As previously announced, this second study did not meet the primary or
secondary end points, confirming the earlier findings of the Wyeth phase 3
intravenous POI study. Progenics and Wyeth are analyzing the results of both
studies to determine whether and how to continue development of this formulation
of RELISTOR for this indication.




In
addition, the companies are currently conducting a third phase 3 trial
evaluating an intravenous formulation of RELISTOR in patients following
abdominal hernia repair.




We and
Wyeth are also developing an oral formulation of RELISTOR for the treatment of
OIC in patients with chronic pain. In March 2007, Wyeth began clinical testing
of a new oral formulation of methylnaltrexone for the treatment of OIC, and in
July 2007, we and Wyeth announced positive preliminary results from this phase 1
clinical trial. Commencing in October 2007, two proprietary oral formulations of
RELISTOR were tested in separate four-week, double-blind, randomized,
placebo-controlled phase 2 trials each consisting of approximately 120 patients
with chronic, non-malignant pain who were receiving opioids for pain management.
In comparing the activity and tolerability of these oral formulations of
RELISTOR, both were generally well tolerated; however, one formulation was
identified as having a more favorable clinical profile, while the other did not
demonstrate sufficient clinical activity to warrant its continued study. As
previously announced, the formulation with the more favorable clinical profile
demonstrated statistically significant results after once daily dosing, as
assessed by the occurrence of spontaneous bowel movements and other efficacy
measures. Further improvement upon this oral formulation through clinical
optimization studies is ongoing, with next steps in the development plan for
oral RELISTOR to be decided in early 2009.




enrollment
was completed in a phase 3 clinical study of the subcutaneous form of RELISTOR
for the treatment of OIC in patients with chronic pain not related to cancer,
such as chronic severe back pain.





20
 table of contents




At
inception of the Collaboration Agreement, Wyeth paid to us a $60 million
non-refundable upfront payment. Wyeth has made $39.0 million in milestone
payments since that time and is obligated to make up to $295.0 million in
additional payments to us upon the achievement of milestones and contingent
events in the development and commercialization of RELISTOR, taking into account
the Ono transaction discussed below and in Note 1, above. Costs for the
development of RELISTOR incurred by Wyeth or us starting January 1, 2006 are
paid by Wyeth. We are being reimbursed for our out-of-pocket development costs
by Wyeth and receive reimbursement for our efforts based on the number of our
full-time equivalent employees devoted to the development project. Wyeth has the
right once annually to engage an independent public accounting firm to audit
expenses for which we have been reimbursed during the prior three years. If the
accounting firm concludes that any such expenses have been understated or
overstated, a reconciliation will be made. Wyeth is obligated to pay to us
royalties on the net sales of RELISTOR by Wyeth throughout the world during the
applicable royalty periods.





In
January 2006, we began recognizing 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 began recognizing revenue
for a portion of the $60 million upfront payment we received from Wyeth, based
on the proportion 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, that was actually performed during that
quarter. Starting June 2008, we began recognizing royalty income based on the
net sales of RELISTOR, as defined, by Wyeth.





In
October 2008, we entered into an exclusive license agreement with Ono
Pharmaceutical Co., Ltd. (“Ono”), Osaka, Japan under which we licensed to Ono
the rights to subcutaneous RELISTOR in Japan. Under that agreement, we are
entitled to receive from Ono an upfront payment of $15.0 million, potential
development milestones of up to $20.0 million, and commercial milestones and
royalties on sales by Ono of subcutaneous RELISTOR in Japan. These payments will
depend on continued success in development and commercialization of RELISTOR,
which are in turn dependent on the actions of Wyeth, Ono, the FDA and other
regulatory bodies, as well as the outcome of clinical and other testing of
RELISTOR. Many of these matters are outside our control. 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. Supervision of and consultation with respect to Ono’s
development and commercialization responsibilities will be carried out by joint
committees consisting of members from both Ono and us.





As a
result of the return of the Japanese rights, we will not receive from Wyeth
milestone payments that were to be triggered by the development of RELISTOR
formulations in Japan. These potential future milestone payments would have
totaled $22.5 million (of which $7.5 million related to the subcutaneous
formulation of RELISTOR and the remainder to the intravenous and oral
formulations). Taking these adjustments into account, we now have the
potential to receive a total of $334.0 million in development and
commercialization milestone payments from Wyeth under the Collaboration
Agreement, of which $39.0 million have been paid to date.





Virology





In the
area of virology, we are developing viral-entry inhibitors for Human
Immunodeficiency Virus (“HIV”), the virus that causes AIDS, and for Hepatitis C
virus infection (“HCV”). These inhibitors are molecules designed to inhibit a
virus’ ability to enter certain types of immune cells and liver cells,
respectively. In May 2007, we announced positive results in HIV-infected
individuals from a phase 1b trial examining a single dose of an intravenous
formulation of our monoclonal antibody, PRO 140. We are also investigating a
subcutaneous formulation of PRO 140 with the goal of developing a long-acting,
self-administered therapy for HIV infection. In October 2008, we announced
positive interim results from two phase 2 studies, separately evaluating
intravenous and subcutaneous dosage forms of PRO 140. Results from all patients
enrolled in both of these studies are expected to be obtained in early 2009 and
the data are expected to be used to select a dosage form (intravenous or
subcutaneous) for further clinical development.





We are
also engaged in research regarding a product candidate for HCV, and in November
2008, announced the selection of a proprietary small-molecule drug candidate,
designated PRO 206, for clinical development as a treatment of HCV infection.
The candidate, an orally available viral-entry inhibitor designed to prevent HCV
from entering and infecting healthy liver cells, achieved favorable results in
pre-clinical and in
vitro studies.





21
 table of contents




Oncology





In the
area of prostate cancer, we are developing a human monoclonal antibody-drug
conjugate (“ADC”), consisting of a selectively targeted cytotoxic antibody
directed against prostate specific membrane antigen (“PSMA”), a protein found on
the surface of prostate cancer cells. In September 2008, we announced the
initiation of a phase 1 dose-escalation clinical study to assess PSMA ADC’s
safety, tolerability and initial clinical activity. 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 (“PSMA LLC”).





In the
second quarter of 2007, we discontinued our GMK melanoma vaccine program. An
independent data monitoring committee recommended that treatment in the
European-based phase 3 trial, which began in 2001, be stopped because lack of
efficacy was observed after an interim analysis. We have subsequently terminated
our license agreement with Memorial Sloan-Kettering Cancer Center relating to
this program.





Results of
Operations(amounts in thousands)





Revenues:





Our
sources of revenue during the three and nine months ended September 30, 2008 and
2007 included our collaboration with Wyeth, which was effective on January 1,
2006, our research grants and contract from the National Institutes of Health
(the “NIH”), royalty income from sales of RELISTOR, and, to a small extent, our
sale of research reagents.





For
      the Three Months Ended
                September
      30,
              
              
              For
      the Nine Months Ended
                September
      30,2008
              
              
              2007
              
              
              Percent
                Change
              
              
              2008
              
              
              2007
              
              
              Percent
                ChangeSources
      of RevenueResearch
      from collaborator
              
              $
              16,015
              
              
              $
              14,540
              
              
              
              10%
              
              
              $
              54,896
              
              
              $
              52,987
              
              
              
              4%Royalty
      income
              
              
              44
              
              
              
              -
              
              
              
              N/A
              
              
              
              86
              
              
              
              -
              
              
              
              N/AResearch
      grants and contract
              
              
              1,377
              
              
              
              2,471
              
              
              
              (44%)
              
              
              
              5,689
              
              
              
              7,077
              
              
              
              (20%)Other
      revenues
              
              
              61
              
              
              
              7
              
              
              
              771%
              
              
              
              172
              
              
              
              48
              
              
              
              258%Total
              
              $
              17,497
              
              
              $
              17,018
              
              
              
              3%
              
              
              $
              60,843
              
              
              $
              60,112
              
              
              
              1%





Research
revenue from collaborator





Research
revenue from collaborator relates to our Collaboration Agreement with Wyeth.
From the inception of the Collaboration Agreement through September 30, 2008 we
recognized as revenue: (i) in October 2006, $5,000 milestone payment in
connection with the initiation of the first phase 3 clinical trial of
intravenous RELISTOR, (ii) in May 2007, $9,000 in milestone payments related to
the acceptance for review of applications submitted for marketing approval of a
subcutaneous formulation of RELISTOR in the U.S and European Union, (iii) in
April 2008, $15,000 milestone payment related to the FDA approval of
subcutaneous RELISTOR and (iv) in July 2008, $10,000 milestone payment related
to the European approval of subcutaneous formulation of RELISTOR. We have
analyzed the facts and circumstances of the five milestones achieved since
inception of the Collaboration Agreement through September 30, 2008, and believe
that they met those criteria for revenue recognition upon achievement of the
respective milestones. See Critical Accounting Policies
–Revenue Recognition, below.





During
the three months ended September 30, 2008 and 2007, we recognized $16,015 and
$14,540, respectively, of revenue from Wyeth, consisting of (i) $2,092 and
$3,219, respectively, of the $60,000 upfront payment we received upon entering
into the Collaboration Agreement in December 2005, (ii) and $3,923 and $11,321,
respectively, as reimbursement of our development expenses, and (iii) $10,000 of
non-refundable milestone payment in July 2008.





During
the nine months ended September 30, 2008 and 2007, we recognized $54,896 and
$52,987, respectively, of revenue from Wyeth, consisting of (i) $8,132 and
$13,138, respectively, of the $60,000 upfront payment we received upon entering
into the Collaboration Agreement, (ii) $21,764 and $30,849, respectively, as
reimbursement of our development expenses, and (iii) $25,000 and $9,000,
respectively, of non-refundable milestone payments.





From the
inception of our Collaboration Agreement through September 30, 2008, we
recognized $43,341 of revenue from the $60,000 upfront payment, $96,425 as
reimbursement for our development costs, and a total of $39,000 for
non-refundable milestone payments.





22
 table of contents




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 of 2009 and, thereby,
decreased the amount of revenue we are recognizing in each reporting period. As
a result, the amount of revenue recognized from the upfront payment in the first
three quarters of 2008 declined by $5,006 as compared to the first three
quarters of 2007.





Royalty
income





We began
earning royalties from net sales by Wyeth of subcutaneous RELISTOR in June 2008.
During the three and
nine month periods ended September 30, 2008, we earned $117 and $438,
respectively, of royalty receivables, based on the net sales of RELISTOR, as
defined.During the three and nine months ended September 30, 2008, we
recognized $44 and $86, respectively, of royalty income. As of September 30,
2008, we have recorded a cumulative total of $352 as deferred revenue ($293 in
deferred revenue – current and $59 in deferred revenue – long term). The $352 of
deferred royalty revenue is expected to be recognized as royalty income over the
period of our development obligations relating to RELISTOR. Our royalties from net
sales by Wyeth of RELISTOR, as defined, are based on royalty rates under our
Collaboration Agreement. These rates can range up to 30% of U.S. and 25% of
foreign net sales at the highest sales levels. Royalty rates will increase on
incremental sales as net sales in a calendar year exceed specified
levels.





Research
grants and contract





In
September 2003, we were awarded a contract (the “NIH Contract”) by the NIH 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 provides for pre-clinical research, development and early clinical
testing. These funds are being used principally in connection with our ProVax
HIV vaccine program. The NIH Contract originally provided for up to $28,562 in
funding to us, subject to annual funding approvals and compliance with its
terms, over five years. The total of our approved award under the NIH Contract
through December 2008 is $15,509. Funding under this contract includes the
payment of an aggregate of $1,617 in fees, subject to achievement of specified
milestones. Through September 30, 2008, we had recognized revenue of $14,804
from this contract, including $180 for the achievement of two milestones. We
have been informed by the NIH that it has decided to fund the NIH Contract only
through December 2008. To continue to develop the HIV vaccine after that time,
therefore, we will need to provide funding on our own or obtain new governmental
or other funding. If we choose not to provide our own or cannot secure
governmental or other funding, we will discontinue this project.





Revenues
from research grants and contract from the NIH decreased to $1,377 for the three
months ended September 30, 2008 from $2,471 for the same period of 2007; these
amounts consisted of $1,009 and $1,676, respectively, from grants and $368 and
$795, respectively, from the NIH Contract for the three months ended September
30, 2008 and 2007. The decrease in grant and contract revenue resulted from
fewer reimbursable expenses in 2008 than in 2007 on new and continuing
grants.





Revenues
from research grants and contract from the NIH decreased to $5,689 for the nine
months ended September 30, 2008 from $7,077 for the same period of 2007; these
amounts consisted of $4,185 and $4,256, respectively, from grants and $1,504 and
$2,821, respectively, from the NIH Contract for the nine months ended September
30, 2008 and 2007. The decrease in grant and contract revenue resulted from
fewer reimbursable expenses in 2008 than in 2007 on new and continuing
grants.





Other
revenues





Other
revenues primarily from higher orders for research reagents increased to $61 for
the three months ended September 30, 2008 from $7 for the three months ended
September 30, 2007. Other revenues primarily from higher orders for research
reagents increased to $172 for the nine months ended September 30, 2008 from $48
for the nine months ended September 30, 2007.





23
 table of contents




Expenses:





Research
and Development Expenses:





Research
and development expenses include scientific labor, supplies, facility costs,
clinical trial costs, product manufacturing costs, royalty payments and license
fees. Research and development expenses decreased to $21,788 for the three
months ended September 30, 2008 from $24,247 for the same period of 2007, and
decreased to $69,988 for the nine months ended September 30, 2008 from $69,999
for the same period of 2007, as follows:





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Salaries and benefits (cash)
            
            $
            6,138
            
            
            $
            5,939
            
            
            
            3
            %
            
            $
            19,311
            
            
            $
            17,876
            
            
            
            8
            %





Three Months:The increase
was due to company-wide compensation increases and an increase in average
headcount to 195 from 189 for the three months ended September 30, 2008 and
2007, respectively, in the research and development, manufacturing and clinical
departments.





Nine Months:The increase was
due to compensation increases and an increase in average headcount to 197 from
186 for the nine months ended September 30, 2008 and 2007, respectively, in the
same departments.





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Share-based
      compensation (non-cash)
            
            $
            1,789
            
            
            $
            1,829
            
            
            
            (2
            %)
            
            $
            5,246
            
            
            $
            5,004
            
            
            
            5
            %




Three Months:The decrease
was due to non-vested restricted stock award cancellations partially offset by
the vesting of awards. (See Critical Accounting Policies −
Share-Based Payment Arrangements,below).





Nine Months: The increase was
due to restricted stock award vesting partially offset by non-vested
cancellations. (See Critical
Accounting Policies − Share-Based Payment Arrangements,below).





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Clinical
      trial costs
            
            $
            2,932
            
            
            $
            6,124
            
            
            
            (52
            %)
            
            $
            13,834
            
            
            $
            14,520
            
            
            
            (5
            %)





Three Months:Decrease in
RELISTOR ($4,153), due to reduced clinical trial activities in the 2008 period
and termination of the GMK study in 2007 ($438). These decreases were partially
offset by an increase in HIV ($1,399) due to increased PRO 140 clinical trial
activities in the 2008 period.





Nine Months: Decrease
primarily related to RELISTOR ($3,041) and Cancer ($671) due to decreased
RELISTOR clinical trial activities in the 2008 period and termination of the GMK
study in 2007. These decreases were partially offset by an increase in HIV
($3,026) due to increased PRO 140 clinical trial activities in the 2008
period.





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Laboratory supplies
            
            $
            866
            
            
            $
            1,322
            
            
            
            (35
            %)
            
            $
            3,024
            
            
            $
            3,969
            
            
            
            (24
            %)








24
 table of contents








Three Months:Decrease in HIV
($354), due to purchase of less drug supplies in the 2008 period compared to
2007, Cancer ($20), due to fewer expenses for PSMA and GMK and Other projects
($82).





Nine Months: Decrease in HIV
($567), due to purchase of less drug supplies in the 2008 period compared to
2007, Cancer ($281), due to fewer expenses for PSMA and GMK, Other projects
($79) and RELISTOR-related costs ($18).





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Contract
      manufacturing and subcontractors
            
            $
            7,393
            
            
            $
            6,008
            
            
            
            23
            %
            
            $
            18,547
            
            
            $
            17,906
            
            
            
            4
            %





Three Months: Increase in HIV
($3,528) due to manufacturing expenses for PRO 140 in the third quarter of 2008
but not in 2007, partially offset by decreases in Cancer ($1,077), primarily due
to contract manufacturing expenses for PSMA in the third quarter of 2007 but not
in 2008, RELISTOR ($906), and Other ($160). 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: Increase in HIV
($6,515) due to manufacturing expenses for PRO 140 in the 2008 period but not in
2007, and Other projects ($552), partially offset by decreases in Cancer
($5,370) primarily due to contract manufacturing expenses for PSMA in the nine
months of 2007 but not in 2008 and RELISTOR ($1,056). 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.





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Consultants
            
            $
            529
            
            
            $
            934
            
            
            
            (43
            %)
            
            $
            3,013
            
            
            $
            3,636
            
            
            
            (17
            %)





Three Months:Decreases in
RELISTOR ($295), Cancer ($20), HIV ($57) and Other projects ($33). These
expenses are related to the monitoring of clinical trials as well as analysis of
data from completed clinical trials and vary as the timing and level of such
services are required. During the remainder of 2008, consultant expenses are
expected to change approximately proportionately with spending levels for all of
our research and development programs.





Nine Months:Decrease in
RELISTOR ($973) and Other ($7), partially offset by increases in Cancer ($244)
and HIV ($113). These expenses are related to the monitoring of clinical trials
as well as analysis of data from completed clinical trials and vary as the
timing and level of such services are required. During the remainder of 2008,
consultant expenses are expected to change approximately proportionately with
spending levels for all of our research and development
programs.





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007License fees
            
            $
            305
            
            
            $
            (16
            )
            
            
            2,006
            %
            
            $
            1,788
            
            
            $
            833
            
            
            
            115
            %





Three Months: Increase
primarily due to HIV ($133) and RELISTOR ($188) expenses in 2008 and a reduction
in the amount due in 2007 related to our HIV program.





Nine Months: Increase
primarily related to payments in the 2008 period related to HIV ($1,108) and
RELISTOR ($231), partially offset by a decrease in Cancer
($384).





25
 table of contents








Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Royalty expense
            
            $
            5
            
            
            
            -
            
            
            
            N/A
            
            
            $
            9
            
            
            
            -
            
            
            
            N/A





Three Months: We incurred $12
of royalty costs and recognized $5 of royalty expenses during the three months
ended September 30, 2008. As of September 30, 2008, we recorded a cumulative
total of $35 of deferred royalty charges from the royalty costs incurred in the
second and third quarters of 2008. The $35 of deferred royalty charges are
expected to be recognized as royalty expense over the period of our development
obligations relating to RELISTOR.





Nine Months: We incurred $44
of royalty costs and recognized $9 of royalty expenses during the nine month
period ended September 30, 2008. As of September 30, 2008, we recorded a
cumulative total of $35 of deferred royalty charges from the royalty costs
incurred in the second and third quarters of 2008. The $35 of deferred royalty
charges are expected to be recognized as royalty expense over the period of our
development obligations relating to RELISTOR.





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Other operating expenses
            
            $
            1,831
            
            
            $
            2,107
            
            
            
            (13
            %)
            
            $
            5,216
            
            
            $
            6,255
            
            
            
            (17
            %)





Three Months:Decrease
primarily in computer expenses ($150), facilities ($26), insurance ($75) and
travel ($74), partially offset by an increase in other operating expenses ($45)
and rent ($4).





Nine Months:Decrease
primarily in computer expenses ($1,295), insurance ($251) and other ($72)
partially offset by an increase in rent ($579).





A major
portion of our spending has been, and we expect will continue to be, associated
with RELISTOR, although beginning in 2006, Wyeth has been reimbursing us for
development expenses we incur related to RELISTOR under the development plan
agreed to between us and Wyeth.





General
and Administrative Expenses:





General
and administrative expenses decreased to $8,265 for the three months ended
September 30, 2008 from $9,275 for the same period of 2007 and increased to
$22,530 for the nine months ended September 30, 2008 from $21,746 for the same
period of 2007, as follows:





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Salaries and benefits (cash)
            
            $
            2,316
            
            
            $
            1,641
            
            
            
            41
            %
            
            $
            6,892
            
            
            $
            5,418
            
            
            
            27
            %





Three Months:Increase due to
compensation increases and an increase in average headcount to 55 from 42 in the
general and administrative departments between the periods.





Nine Months:Increase due to
compensation increases and an increase in average headcount to 52 from 42 in the
general and administrative departments between the periods.





26
 table of contents








Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Share-based
      compensation (non-cash)
            
            $
            2,324
            
            
            $
            4,337
            
            
            
            (46
            %)
            
            $
            5,654
            
            
            $
            6,836
            
            
            
            (17
            %)





Three and Nine Months: The
decrease was due to non-vested restricted stock award cancellations partially
offset by the vesting of awards. (See Critical Accounting Policies −
Share-Based Payment Arrangements,below).





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Consulting
      and professional fees
            
            $
            2,220
            
            
            $
            1,656
            
            
            
            34
            %
            
            $
            5,734
            
            
            $
            5,009
            
            
            
            15
            %





Three Months: Increase due
primarily to increases in consulting ($703), audit and tax fees ($64) and other
($54), partially offset by a decrease in legal and patent fees
($257).





Nine Months:Increase due
primarily to increases in consulting ($465), legal and patent fees ($192) and
miscellaneous costs ($98), partially offset by a decrease in audit and tax fees
($30).





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Other operating expenses
            
            $
            1,405
            
            
            $
            1,641
            
            
            
            (14
            %)
            
            $
            4,250
            
            
            $
            4,483
            
            
            
            (5
            %)





Three Months: Decrease in
facility costs ($188), recruiting ($152), conferences and seminars ($22) and
investor relations ($25), partially offset by increases in insurance ($47),
taxes ($57) and other ($47).





Nine Months: Decrease in
facility costs ($279), investor relations ($55) and other ($142), partially
offset by increases in rent ($189), conferences and seminars ($21) and taxes
($33).





Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Depreciation and amortization
            
            $
            1,166
            
            
            $
            845
            
            
            
            38
            %
            
            $
            3,427
            
            
            $
            2,144
            
            
            
            60
            %





Three Months: Depreciation
expense increased to $1,166 for the three months ended September 30, 2008 from
$845 for the same period of 2007, due to purchases of capital assets and
additional leasehold improvements made after September 30, 2007.





Nine Months: Depreciation
expense increased to $3,427 for the nine months ended September 30, 2008 from
$2,144 for the same period of 2007 due to purchases of capital assets and
additional leasehold improvements made after September 30, 2007.





27
 table of contents








Three
      Months Ended
              September
      30,
            
            
            Percent
              Change
            
            
            Nine
      Months Ended
              September
      30,
            
            
            Percent
              Change2008
            
            
            2007
            
            
            
            
            
            2008
            
            
            2007Other
      income
            
            $
            1,502
            
            
            $
            1,749
            
            
            
            (14
            %)
            
            $
            5,028
            
            
            $
            5,361
            
            
            
            (6
            %)





Three Months: Interest income
decreased to $1,502 for the three months ended September 30, 2008 from $1,749
for the same period of 2007. 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 2007, investment income increased to $1,816 from $1,618,
respectively, due to a higher average balance of cash equivalents and marketable
securities in 2008 than in 2007. Amortization of discounts net of premiums,
which is included in interest income, decreased to ($314) from $131 for the
three months ended September 30, 2008 and 2007, respectively.





Nine Months:Interest income
decreased to $5,028 for the nine months ended September 30, 2008 from $5,361 for
the same period of 2007. 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 2007, investment income increased to $5,648 from $5,007,
respectively, due to a higher average balance of cash equivalents and marketable
securities in 2008 than in 2007. Amortization of discounts net of premiums,
which is included in interest income, decreased to ($620) from $354 for the nine
months ended September 30, 2008 and 2007, respectively.





Net
Loss:





Net loss
was $12,220 for the three months ended September 30, 2008 compared to $15,600
for the same period of 2007, and $30,074 for the nine months ended September 30,
2008 compared to $28,416 for the same period of 2007.





Liquidity
and Capital Resources





Overview





We have
to date generated only modest amounts of product and royalty revenue, and
consequently have relied principally on external funding and our Collaboration
Agreement with Wyeth to finance our operations. We have funded 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 and sale of our
common stock under our two employee stock purchase plans (the “Purchase Plans”).
At September 30, 2008, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $134.6 million compared with $170.4
million at December 31, 2007. We expect that our existing cash, cash equivalents
and marketable securities at September 30, 2008 will be sufficient to fund
current operations for at least one year. Our cash flow from operating
activities was negative for the nine-month periods ended September 30, 2008 and
2007 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 current collaboration with Wyeth provided us
with a $60 million upfront payment in December 2005. In addition, since January
2006, Wyeth has been reimbursing us for development expenses we incur related to
RELISTOR under the development plan agreed to between us, which is currently
expected to continue through 2009. For the nine months ended September 30, 2008
and 2007, we received $21.8 million and $30.8 million, respectively, of such
reimbursement. Since inception of the Collaboration Agreement, Wyeth has made
$39.0 million in milestone payments to us upon the achievement of certain
events. In May 2007, we earned $9.0 million of milestone payments related to the
acceptance for review of applications submitted for marketing approval of a
subcutaneous formulation of RELISTOR for the treatment of opioid-induced
constipation in patients receiving palliative care in the U.S. and the European
Union. Approval of the U.S. application in April 2008 resulted in our earning a
$15.0 million milestone payment, which was recognized in the second quarter of
2008. In July 2008, we earned $10.0 million milestone payment for the European
approval of subcutaneous RELISTOR. Wyeth has also submitted applications for the
marketing of RELISTOR in Australia and Canada, the latter of which was approved
in March 2008. In October 2006, we earned a $5.0 million milestone payment in
connection with the start of a phase 3 clinical trial of intravenous RELISTOR
for the treatment of post-operative ileus. Wyeth is obligated to make up to $295
million in additional payments to us upon the achievement of milestones and
other contingent events in the development and commercialization of RELISTOR.
Wyeth is also responsible for all commercialization activities related to
RELISTOR products, other than that to be conducted by Ono. We will receive
royalty payments from Wyeth as the product is sold in the various countries
(other than Japan) where marketing approval has been obtained. We will also
receive royalty payments upon the sale of all other products developed under the
Collaboration Agreement.





28
 table of contents




Under our
license agreement with Ono, we are entitled to receive from Ono the upfront and
milestone payments described above, as well as royalties on sales of
subcutaneous RELISTOR in Japan. Ono is also responsible for development and
commercialization costs for subcutaneous RELISTOR in Japan.





The
funding by Wyeth and Ono of development costs for RELISTOR generally enhances
our ability to devote current and future resources to other research and
development programs. We may also enter into other collaboration agreements,
license or sale transactions or royalty sales or financings with respect to our
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
September 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 are
being used principally in connection with our ProVax HIV vaccine program. The
NIH Contract originally provided for up to $28.6 million in funding to us,
subject to annual funding approvals and compliance with its terms, over five
years. The total of our approved award under the NIH Contract through December
2008 is $15.5 million. Funding under this contract includes the payment of an
aggregate of $1.6 million in fees, subject to achievement of specified
milestones. Through September 30, 2008, we had recognized revenue of $14.8
million from this contract, including $0.2 million for the achievement of two
milestones. We have been informed by the NIH that it has decided to fund this
contract only through December 2008. To continue to develop the HIV vaccine
after that time, therefore, we will need to provide funding on our own or obtain
new government or other funding. If we choose not to provide our own or cannot
secure governmental or other funding, we will discontinue this
project.





We have
also been awarded grants from the NIH which provide ongoing funding for a
portion of our virology and cancer research programs. Among those grants were an
aggregate of $4.4 million in grants made in 2006 and 2007 which extend over two-
and three-year periods. Two awards made during 2005, provide for up to $3.0
million and $9.7 million in support of our HCV research program and PRO 140 HIV
development programs to be awarded over a three year and a three and a half year
period, respectively. Funding under all of our NIH grants is subject to
compliance with their terms, and is subject to annual funding approvals. For the
nine months ended September 30, 2008 and 2007, we recognized $4.2 million and
$4.3 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 from the same period of 2007 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
and contracts, 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, securities of government-sponsored entities
and auction rate securities, are classified as available-for-sale.





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, 2008, we continue to hold approximately $5.3 million
(4% of total 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 instrument. 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 its
effect (if any) on the fair market value of our investments. If market
conditions for these securities do not recover, we may be required to record
additional unrealized losses in 2008, 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 and ongoing strength and quality of market credit and liquidity. We do not
believe the carrying values of these auction rate securities are permanently
impaired and therefore expect the positions will eventually be liquidated
without significant loss.





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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, other than
auction rate securities, be held to maturity unless authorization is obtained
from us to sell earlier. In fact, we have a history of holding all marketable
securities, other than auction rate securities, to maturity. We, therefore,
consider that we have the intent and ability to hold any securities with
unrealized losses until a recovery of fair value (which may be maturity), and we
do not consider these marketable securities to be other than temporarily
impaired at September 30, 2008.





Financing
Activities.During the nine months ended September 30, 2008
and 2007, we received cash of $5.1 million and $63.2 million, respectively, from
the exercise of stock options by employees, directors and non-employee
consultants, from the sale of our common stock under our Purchase Plans and from
sale of common stock in public offering in 2007. 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.





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 relating to our gastroenterology, virology and oncology
product candidates, and are conducting several smaller research projects in the
areas of virology and oncology. Our total expenses for research and development
from inception through September 30, 2008 have been approximately $487.4
million. For various reasons, many of which are outside of our control,
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, we
cannot estimate the total remaining costs to be incurred and timing to complete
our research and development programs. Under our Collaboration Agreement with
Wyeth, we are able to estimate that those remaining costs for the subcutaneous
and intravenous formulations of RELISTOR, based upon the development plan and
budget approved by us and Wyeth, which defines the totality of our obligations,
are $21.1 million over the period from October 1, 2008 to December 31,
2009.





For the
nine months ended September 30, 2008 and 2007, research and development costs
incurred by project were as follows:





For
      the Nine Months Ended September 30,2008
            
            
            2007(in
      millions)RELISTOR
            
            $
            22.6
            
            
            $
            30.9HIV
            
            
            32.6
            
            
            
            19.1Cancer
            
            
            7.5
            
            
            
            13.5Other
      programs
            
            
            7.3
            
            
            
            6.5Total
            
            $
            70.0
            
            
            $
            70.0





We may
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. Manufacturing and
commercialization expenses for RELISTOR will be funded by Wyeth in the U.S. and
outside the U.S. except for Japan, where development, manufacturing and
commercialization expenses will be funded by Ono. However, if we exercise our
option to co-promote RELISTOR products in the U.S., which must be approved by
Wyeth, we will be required to establish and fund a sales force, which we
currently do not have. If we commercialize any other product candidate other
than with a collaborator, we would also require additional funding to establish
manufacturing and marketing capabilities.





Our
purchase of rights from our methylnaltrexone licensors in December 2005 has
extinguished the obligation to make 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 continue to be responsible to make payments
(including royalties) to the University of Chicago upon the occurrence of
certain events. See Results of
Operations – Royalty expenses, above.





We are
continuing to conduct the PSMA research and development projects on our own
subsequent to our acquisition of PSMA LLC and are required to fund the entire
amount of such efforts, thus increasing our cash expenditures. We are funding
PSMA-related research and development efforts from internally-generated cash
flows. We are also continuing to receive funding from the NIH for a portion of
our PSMA-related research and development costs.





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Investing
Activities.During the nine months ended September 30, 2008
and 2007, we have spent $2.0 million and $4.4 million, respectively, on capital
expenditures related to the expansion of office, laboratory and manufacturing
facilities and the purchase of more laboratory equipment for ongoing and future
research and development projects, including the purchase of a second 150-liter
bioreactor in February 2007 for the manufacture of research and clinical
products.





Financing
Activities.On
April 24, 2008, we announced that our Board of Directors had approved a share
repurchase program to acquire up to $15.0 million of our outstanding common
shares, funding for which will come from the $15.0 million milestone payment we
received from Wyeth for receiving U.S. marketing approval for RELISTOR.
Purchases under the program will be made at our discretion subject to market
conditions in the open-market or otherwise, and will be made in accordance with
the regulations of the U.S. Securities and Exchange Commission, including Rule
10b-18. During the three months ended September 30, 2008, we have repurchased
200,000 of our outstanding common shares for a total of $2.7 million. Purchases
may be discontinued at any time. Reacquired shares will be held in treasury
until redeployed or retired. We have $12.3 million remaining available for
purchases under the program.





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, 2008 for future payments under these agreements:





Payments
      due by September 30,Total
            
            
            2009
            
            
            
            2010-2011
            
            
            
            2012-2013
            
            
            Thereafter(in
      millions)Operating
      leases
            
            $
            5.7
            
            
            $
            3.1
            
            
            $
            1.7
            
            
            $
            0.7
            
            
            $
            0.2License
      and collaboration agreements (1)
            
            
            89.3
            
            
            
            2.0
            
            
            
            5.9
            
            
            
            13.6
            
            
            
            67.8Total
            
            $
            95.0
            
            
            $
            5.1
            
            
            $
            7.6
            
            
            $
            14.3
            
            
            $
            68.0




(1)
            Assumes
      attainment of milestones covered under each agreement, including those by
      PSMA LLC. Timing of achievement of 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 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.







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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, 2007. 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 Securities and
Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”) “Revenue
Recognition,” Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”)
“Accounting for Revenue Arrangements with Multiple Deliverables” and EITF Issue
No. 99-19 (“EITF 99-19”) “Reporting Revenue Gross as a Principal Versus Net as
an Agent.” Our license and co-development agreement with Wyeth includes 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 began recognizing research revenue
from Wyeth on January 1, 2006. During the nine months ended September 30, 2008
and 2007, we also recognized revenue from government research grants and
contract, which are used to subsidize a portion of certain of our research
projects, exclusively from the NIH. We also recognized revenue from the sale of
research reagents during those periods.





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 EITF 00-21. 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 will be performed
and revenue related to upfront license payments will be recognized. Revenue will
be 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 Collaboration Agreement 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. Since we have no obligation to develop the
subcutaneous and intravenous formulations of RELISTOR outside the U.S. or the
oral formulation at all and have no significant commercialization obligations
for any product, recognition of revenue for the upfront payment is not required
during those periods, if they extend beyond the period of our development
obligations.





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During
the course of a collaboration agreement, e.g., the Collaboration
Agreement, that involves a development plan and budget, the amount of the
upfront license payment that is recognized as revenue in any period will
increase or decrease as the percentage of actual effort increases or decreases,
as described above. When a new budget is approved, generally annually, the
remaining unrecognized amount of the upfront license fee will be recognized
prospectively, using the methodology described above and applying any changes in
the total estimated effort or period of development that is specified in the
revised approved budget. The amounts of the upfront license payment that we
recognized as revenue for each fiscal quarter prior to the third quarter of 2007
were based upon several revised approved budgets, although the revisions to
those budgets did not materially affect the amounts 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 will extend, and over
which the upfront payment will be amortized, was extended from the end of 2008
to the end of 2009. Consequently, the amount of revenue recognized from the
upfront payment in the first quarter of 2008 declined relative to that in the
comparable period of 2007. Due to the significant judgments involved in
determining the level of effort required under an arrangement and the period
over which we expect to complete our performance obligations under the
arrangement, further changes in any of those judgments are reasonably likely to
occur in the future which could have a material impact on our revenue
recognition. If a collaborator terminates an agreement in accordance with the
terms of the agreement, we would recognize any unamortized remainder of an
upfront payment at the time of the termination.





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 Collaboration
Agreement, we have assessed the nature of our involvement with the JSC, JDC, JCC
and JComm. Our involvement in the first two such committees is one of several
obligations to develop the subcutaneous and intravenous formulations of RELISTOR
through regulatory approval in the U.S. We have combined the committee
obligations with the other development obligations and are accounting for these
obligations during the development phase as a single unit of accounting. After
the development period, however, we have assessed the nature of our involvement
with the committees to be a right, rather than an obligation. Our assessment is
based upon the fact we negotiated to be on these committees as an accommodation
for our granting of the license for RELISTOR to Wyeth. Further, Wyeth has been
granted by us an exclusive license (even as to us) to the technology and
know-how regarding RELISTOR and has been assigned the agreements for the
manufacture of RELISTOR by third parties. Following regulatory approval of the
subcutaneous and intravenous formulations of RELISTOR, Wyeth will continue to
develop the oral formulation and to commercialize all formulations, for which it
is capable and responsible. During those periods, the activities of these
committees will be focused on Wyeth’s development and commercialization
obligations. As discussed in Overview – Gastroenterology,
Wyeth returned the rights to RELISTOR with respect to Japan to us in connection
with its election not to develop RELISTOR there and the transaction with Ono. As
a result, Wyeth is now responsible for the development of the oral formulation
worldwide excluding Japan and the intravenous and subcutaneous formulations
outside the U.S., other than Japan.





Collaborations
may also contain substantive milestone payments. 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
(the “Substantive Milestone Method”). During October 2006, May 2007, April 2008
and July 2008, we earned $5.0 million, $9.0 million, $15.0 million and $10.0
million, respectively, upon achievement of non-refundable milestones anticipated
in the Collaboration Agreement; the first in connection with the commencement of
a phase 3 clinical trial of the intravenous formulation of RELISTOR, the second
in connection with the submission and acceptance for review of an NDA for a
subcutaneous formulation of RELISTOR with the FDA and a comparable submission in
the European Union, the third for the FDA approval of subcutaneous RELISTOR and
the fourth 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 Agreement 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 Collaboration Agreement and amount of effort
expended or the risk associated with the achievement of these milestones; and
the passage of ten, 17, 28 and 31 months, respectively, from inception of the
Collaboration Agreement to the achievement of those milestones. Therefore, we
recognized the milestone payments as revenue in the respective periods in which
the milestones were earned.





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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 will
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 EITF 99-19 are met,
the amounts are determinable and collection of the related receivable is
reasonably assured.





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 the policies described above.





Amounts
received prior to satisfying the above revenue recognition criteria are recorded
as deferred revenue in the accompanying 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 for the Wyeth Collaboration Agreement for our total effort
required to complete our performance obligations under that arrangement. That
estimate may change in the future and such changes to estimates would be
accounted for prospectively and would result in a change in the amount of
revenue recognized in future periods.





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.





Share-Based
Payment Arrangements





Our
share-based compensation to employees includes non-qualified stock options,
restricted stock (non-vested shares) and shares issued under our Purchase Plans,
which are compensatory under Statement of Financial Accounting Standards No. 123
(revised 2004) (“SFAS No. 123(R)”) “Share-Based Payment.” We account for
share-based compensation to non-employees, including non-qualified stock options
and restricted stock (non-vested shares), in accordance with Emerging Issues
Task Force Issue No. 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Connection with Selling, Goods or
Services.”





We
adopted SFAS No. 123(R) using the modified prospective application, under which
compensation cost for all share-based awards that were unvested as of January 1,
2006, the adoption date, and those newly granted or modified after the adoption
date 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. 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.





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Under
SFAS No. 123(R), 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 2007, the
      volatility of our common stock has been high, 66% - 91% and 52% - 85%,
      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 2007, our expected term was calculated based upon
      historical data related to exercise and post-termination cancellation
      activity for each of two groups of recipients of stock options: employees,
      and officers and directors. Accordingly, for grants made to each of the
      groups mentioned above, we are using expected terms of 5.33 and 7.3 years
      and 5.25 and 7.5 years, respectively. Beginning in the third quarter of
      2008, we estimated the expected term of stock options granted to our Chief
      Executive Officer to be 7.5 years. Expected term for options granted to
      non-employee consultants was ten years, which is the contractual term of
      those options. A shorter expected term would result in a lower
      compensation expense. 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.





A portion
of the options granted to our Chief Executive Officer on July 1, 2004, 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 been
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 SFAS No. 123(R), 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, we granted options and restricted stock
to our employees, including grants to our Chief Executive Officer. The options
have an exercise price equal to the closing price on our common stock on the
date of grant and vest ratably over a three-year period (except in the case of
our Chief Executive Officer, which vest on the basis of the achievement of
specified performance based milestones). Compensation expense, for the July 1,
2008 award, will be recognized ratably over the vesting period, however, the
portion of the award to our Chief Executive Officer will be recognized over the
shortest estimated time for the achievement of the performance or market
conditions. 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.





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 table of contents




The fair
value of shares purchased under the Purchase Plans is estimated on the date of
grant in accordance with FASB Technical Bulletin No. 97-1 “Accounting under
Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back
Option.” 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 a net loss for the nine months ended September 30, 2008 and 2007, 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, no tax benefit was recognized related to
total compensation cost for share-based payment arrangements recognized in
operations because we had a net loss for the period 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.





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 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 Collaboration Agreement with Wyeth
in which Wyeth has assumed all of the financial responsibility for further
development, will mitigate 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.





On
January 1, 2008, we adopted Emerging Issues Task Force Issue 07-3 (“EITF 07-3”)
“Accounting for Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities.” Prior to January 1, 2008, under FASB
Statement No. 2, “Accounting for Research and Development Costs,” non-refundable
advance payments for future research and development activities for materials,
equipment, facilities and purchased intangible assets that had no alternative
future use were expensed as incurred. Beginning January 1, 2008, we have been
capitalizing such non-refundable advance payments and expensing them as the
goods are delivered or the related services are performed. EITF 07-3 applies to
new contracts entered into after the effective date of January 1, 2008. The
adoption of EITF 07-3 did not have a material impact on the financial position
or results of operations.





Fair
Value Measurements





Our
available-for-sale investment portfolio consists of marketable securities, which
include 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 Financial Accounting
Standards Board (“FASB”) Statement No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The change in the fair value of
these investments is recorded as a component of other comprehensive
loss.





We
adopted FASB Statement No. 159 (“FAS 159”) “The Fair Value Option of
Financial Assets and Financial Liabilities” effective January 1, 2008,
which provides companies with an option to report certain financial assets and
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. FAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The objective of FAS 159 is to
reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. We have elected not to apply the fair value option to any of our
financial assets or liabilities.





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We also
adopted FASB Statement No. 157 (“FAS 157”) “Fair Value Measurements”
effective January 1, 2008 for financial assets and financial liabilities.
FAS 157 defines fair value as the price that would be received to sell an
asset or would be paid to transfer a 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. In accordance with Financial Accounting Standards Board
Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” we will
defer the adoption of FAS 157 for our nonfinancial assets and nonfinancial
liabilities until January 1, 2009. We are currently evaluating the impact of FAS
157 for nonfinancial assets and nonfinancial liabilities, and currently do not
expect the adoption of this statement to have a material effect on our financial
position or results of operations. The partial adoption of FAS 157 did not have
a material impact on our fair value measurements.





FAS 157
established a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reporting entity (“observable
inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on 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 March
2008, the FASB issued SFAS No. 161 (“FAS 161”) “Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No. 133,”
which is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures. The enhanced disclosure
conveys the purpose of derivative use to enable investors a better understanding
of their effects on an entity's financial position, financial performance, and
cash flows. Entities are required to provide enhanced disclosures about (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. We do not expect the effect
of the adoption of FAS 161 to have a material effect on our financial position
or results of operations.





In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 (“FSP FAS
157-3”), “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS 157
in a market that is not active and illustrates how an entity should determine
fair value when the market for a financial asset is not active. FSP FAS 157-3
provides guidance on how an entity’s own assumptions about cash flows and
discount rates should be considered when measuring fair value when relevant
market data do not exist, how observable market information in an inactive or
dislocated market affects fair value measurements and how the use of broker and
pricing service quotes should be considered when applying fair value
measurements. FSP FAS 157-3 is effective immediately as of September 30, 2008
and for all interim and annual periods thereafter. The adoption of FSP FAS 157-3
did not have a material effect on our financial position or results of
operations.





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 taxable
corporate debt securities, securities of government sponsored entities and
auction rate securities. Our investments totaled $131.4 million at September 30,
2008. Approximately $109.6 million of these investments had fixed interest
rates, and $21.8 million had interest rates that were variable. Our marketable
securities are classified as available-for-sale.





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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, 2008 market interest rates would result in a decrease of
approximately $0.07 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, 2008, we continue to hold approximately $5.3 million
(4% 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 its
effect (if any) on the fair market value of our investments. If the auction rate
securities market conditions do not recover, we may be required to record
additional impairment charges in 2008, which may affect our financial condition,
cash flows and earnings. 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 and ongoing strength and quality of market credit and liquidity. We do not
believe the carrying values of these auction rate securities are permanently
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. As a
result of the estimated fair value, we have determined a temporary impairment in
the valuation of these securities of $0.3 million for the nine months ended
September 30, 2008. A 100 basis point increase to our internal analysis would
result in an increase of approximately $0.042 million in the valuation of these
securities as of the nine months ended September 30, 2008.





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.




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.





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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, 2007 and our other public reports. In addition, the following risk
factors have changed during the quarter ended September 30, 2008:





Our product development programs are inherently
risky.





We are
subject to the risks of failure inherent in the development of product
candidates based on new technologies.





We have
received marketing approvals in the U.S. and other countries for the sale of
RELISTOR subcutaneous injection for the treatment of OIC in patients with
advanced illness who are receiving palliative care, when response to laxative
therapy has not been sufficient. We continue to develop RELISTOR subcutaneous
injection for other indications, and, together with Wyeth, are also developing
intravenous and oral formulations of RELISTOR. We will have to complete
successfully additional clinical trials and obtain regulatory approvals for
these additional formulations and indications. With respect to our recent
license agreement with Ono for development and commercialization of subcutaneous
RELISTOR in Japan, we will be reliant on Ono to conduct successful clinical
trials and obtain regulatory approval in that country. Our other research and
development programs, including those related to PSMA, involve novel approaches
to human therapeutics. For example, our principal HIV product candidate, the
monoclonal antibody PRO 140, is designed to block viral entry. To our knowledge,
there are two approved drugs designed to treat HIV infection by blocking viral
entry (Trimeris’ FUZEONTM and Pfizer’s SELZENTRYTM) that have been approved for
marketing in the U.S., but neither are monoclonal antibodies. There is little
precedent for the successful commercialization of products based on our
technologies. There are a number of technological challenges that we must
overcome to complete most of our development efforts. We may not be able
successfully to develop further any of our products.





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





As of
September 30, 2008, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $134.6 million. During the nine months
ended September 30, 2008, we had a net loss of $30.1 million and cash used in
operating activities was $32.9 million. Our accumulated deficit is expected to
increase in the future.





Under our
agreement with Wyeth, Wyeth is responsible for all future development and
commercialization costs relating to RELISTOR starting January 1, 2006. As a
result, although our spending on RELISTOR has been significant during the three
quarters of 2008 and 2007 and is expected to continue at a similar level in the
future, our net expenses for RELISTOR have been and will continue to be
reimbursed by Wyeth. Under our agreement with Ono, Ono is responsible for
development and commercialization costs for subcutaneous RELISTOR in
Japan.





With
regard to our other product candidates, we expect that we will continue to incur
significant expenditures for their development, and we do not have committed
external sources of funding for most of these projects. These expenditures will
be funded from our cash on hand, or we may seek additional external funding for
these expenditures, most likely through collaborative agreements, license or
sale transactions or royalty sales or financings, with one or more
pharmaceutical companies, through the issuance and sale of securities or through
additional government grants or contracts. We cannot predict with any certainty
when we will need additional funds or how much we will need or if additional
funds will be available to us. Our need for future funding will depend on
numerous factors, many of which are outside our control.





Our
access to capital funding is always uncertain. 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 may 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 our existing stockholders. If we raise additional funds by selling
equity securities, our current stockholders will be diluted, and new investors
could have rights superior to our existing stockholders. If we raise funds by
selling debt securities, we could be subject to restrictive covenants and
significant repayment obligations.





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We
believe that existing balances of cash, cash equivalents and marketable
securities and cash generated from operations are sufficient to finance our
current operations and working capital requirements on both a short-term and
long-term basis. We cannot, however, predict the amount or timing of our need
for additional funds under various circumstances, which could include new
product development projects, other opportunities or other factors that may
require us to raise additional funds in the future. Purchases of our common
shares pursuant to our recently announced $15.0 million share repurchase program
would reduce the amount of cash on hand available for unforeseen
needs.





Our
marketable securities, which include corporate debt securities, securities of
government-sponsored entities and auction rate securities, are classified as
available-for-sale.





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, 2008, we continue to hold approximately $5.3 million
(4% of total 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 its
effect (if any) on the fair market value of our investments. If the market
conditions for these securities do not recover, we may be required to record
additional unrealized losses in 2008, 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 and ongoing strength and quality of market credit and liquidity. We do not
believe the carrying values of these auction rate securities are permanently
impaired and therefore expect the positions will eventually be liquidated
without significant loss.





One
or more competitors developing an opioid antagonist may reach the market ahead
of us and adversely affect the market potential for RELISTOR.





We are
aware that Adolor Corporation, in collaboration with GlaxoSmithKline (“GSK”),
received FDA approval in May 2008 for ENTEREG® (alvimopan), an oral form of an
opioid antagonist, for postoperative ileus, ”to accelerate the time to upper and
lower gastrointestinal recovery following partial large or small bowel resection
surgery with primary anastomosis”, and is developing the oral form of alvimopan
for opioid-induced bowel dysfunction (which we believe is perceived in the
marketplace as being substantially equivalent to “opioid-induced constipation”),
which has been the subject of phase 3 clinical trials. We are also aware that
Sucampo Pharmaceuticals, Inc., in collaboration with Takeda Pharmaceutical
Company Limited, is currently conducting phase 3 pivotal clinical trials of
AMITIZA®
(lubiprostone) for the treatment of opioid-induced bowel dysfunction. Either
drug may achieve a significant competitive advantage relative to our product. In
any event, the considerable marketing and sales capabilities of GSK and Takeda
may impair our ability to compete effectively in the market.





Under the
terms of our collaboration with Wyeth with respect to RELISTOR, Wyeth is
developing the oral formulation of RELISTOR worldwide excluding Japan. We and
Wyeth are responsible for the U.S. development of the subcutaneous and
intravenous formulations of RELISTOR, while Wyeth is leading development of
these parenteral products outside the U.S. other than in Japan, where Ono is
developing subcutaneous RELISTOR. Under the Wyeth collaboration, decisions
regarding the timelines for development of the three RELISTOR formulations are
being be made by a JDC, and endorsed by the JSC, each committee formed under the
terms of the license and co-development agreement, consisting of members from
both Wyeth and Progenics. With respect to our collaboration with Ono in Japan,
supervision of and consultation regarding Ono’s development and
commercialization responsibilities will be carried out by joint committees
consisting of members from both Ono and us.





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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, 2006 and
September 30, 2008, our stock price has ranged from $4.33 to $30.83 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 relationship with Wyeth regarding the development and
      commercialization of RELISTOR;





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





·
            developments
      in our relationships with other collaborative
  partners;





·
            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 on-going
operations;





·
            fluctuations
      in our operating results; and





·
            general
      market and financial conditions.





Purchases
of our common shares pursuant to our recently announced $15.0 million 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 not initiated or are discontinued, our stock
price may fall.





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





On April
24, 2008, we announced that our Board of Directors had approved a share
repurchase program to acquire up to $15.0 million of our outstanding common
shares, funding for which will come from the $15.0 million milestone payment we
received from Wyeth for receiving U.S. marketing approval for RELISTOR.
Purchases under the program will be made at our discretion subject to market
conditions in the open-market or otherwise, and will be made in accordance with
the regulations of the U.S. Securities and Exchange Commission, including Rule
10b-18. During the three months ended September 30, 2008, we have repurchased
200,000 of our outstanding common shares. Purchases may be discontinued at any
time. Reacquired shares will be held in treasury until redeployed or retired. We
have $12.3 million remaining available for purchases under the program. The
following table summarizes the purchases made under this program during the
three months ended September 30, 2008:







Month
            
            Total
      Number
              of
      Shares Purchased
            
            
            Average
      Price Paid per Share (Includes Commissions)
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced
    Plan
            
            
            Maximum
      Amount That May Yet Be Purchased Under the PlanJuly
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -August
            
            
            200,000
            
            
            
            13.70
            
            
            
            200,000
            
            
            
            12,259,300September
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            200,000
            
            
            $
            13.70
            
            
            
            200,000
            
            
            $
            12,259,300





Item
6. Exhibits




(a)
            Exhibits





Exhibit
      Number *
            Description10.6.1(1)
            Form
      of Non-Qualified Stock Option Award Agreement10.6.2(1)
            Form
      of Restricted Stock Award Agreement31.1
            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




*          Exhibits
footnoted as previously filed have been filed as an exhibit to the document of
the Registrant referenced in the footnote below, and are incorporated by
reference herein.




(1)        Previously
filed in Current Report on Form 8-K filed on July 8, 2008.





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SIGNATURES




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




PROGENICS
      PHARMACEUTICALS, INC.Date:
      November 10, 2008
            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)