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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

**FORM10­-Q**
|   | **ý** | **Quarterly****report pursuant to Section 13 or 15 (d) of the Securities** |
|--------|------------|----------------------------------------------------------------------------|
|   |       | **Exchange Act of  1934**                                                  |

** **

**         ****FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2001**

**or**
|   | **o**  | **Transition****report pursuant to Section 13 or 15 (d) of the Securities** |
|--------|--------|-----------------------------------------------------------------------------|
|   |   | **Exchange Act of  1934**                                                   |

** **

**For the transition period from               to         **

** **

**COMMISSION FILE NUMBER 0-29993**

**INTRABIOTICS PHARMACEUTICALS,INC.**(Exact name of Registrant as specified inits charter)

 

| **DELAWARE**                              | **94-3200380**         |
|-------------------------------------------|------------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer       |
| incorporation or  organization)           | Identification Number) |
|                                      |                   |
|                                      |                   |
| **1245  TERRA BELLA AVE., MT. VIEW, CA**  | **94043**              |
| (Address of principal  executive offices) | (zip code)             |

**(650) 526-6800**(Registrant’s telephone number includingarea code)

 

Indicateby check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yesý                        No o

Therewere 29,413,940 shares of the Company’s Common Stock, par value $.001,outstanding on July 31, 2001.

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INTRABIOTICSPHARMACEUTICALS, INC.

FORM10-QQUARTER ENDED JUNE 30, 2001

TABLEOF CONTENTS

 

 

| PART  I.   | FINANCIAL INFORMATION                                                            |   |
|------------|----------------------------------------------------------------------------------|--------|
|       |                                                                             |   |
| Item  1.   | Financial  Statements:                                                           |   |
|       |                                                                             |   |
|       | Balance  Sheets as of June 30, 2001 and December 31, 2000                        |   |
|       |                                                                             |   |
|       | Statements  of Operations for the Three and Six Month Periods                    |   |
|       | Ended  June 30, 2001 and June 30, 2000                                           |   |
|       |                                                                             |   |
|       | Statements  of Cash Flows for the Six Month Periods Ended                        |   |
|       | June  30, 2001 and June 30, 2000                                                 |   |
|       |                                                                             |   |
|       | Notes  to Financial Statements                                                   |   |
|       |                                                                             |   |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of |   |
|       | Operations                                                                       |   |
|       |                                                                             |   |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                      |   |
|       |                                                                             |   |
| PART  II   | OTHER  INFORMATION                                                               |   |
|       |                                                                             |   |
| Item  1.   | Legal  Proceedings                                                               |   |
|       |                                                                             |   |
| Item  2.   | Changes  in Securities and Use of Proceeds                                       |   |
|       |                                                                             |   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                             |   |
|       |                                                                             |   |
| Item  6.   | Exhibits  and Reports on Form 8-K                                                |   |
|       |                                                                             |   |
| SIGNATURES |                                                                             |

 

INTRABIOTICS PHARMACEUTICALS, INC.BALANCE SHEETS(IN THOUSANDS)

(UNAUDITED)

 

|                                     | JUNE 30,                                                  |       | DECEMBER 31, |       |
|------------------------------------------|-----------------------------------------------------------|------------|--------------|------------|
|                                     | 2001                                                      |       | 2000         |       |
|                                     |                                                           |       |              |       |
|                                     |                                                      |       | (Note 1)     |       |
| **Assets**                               |                                                      |       |         |       |
| Current  assets:                         |                                                      |       |         |       |
|                                     | Cash  and cash equivalents                                | $          | 27,757       |       | $ | 38,983 |   |
|                                     | Restricted  cash deposits                                 | 4,971      |         | 1,371      |   |
|                                     | Short-term  investments                                   | 18,420     |         | 45,711     |   |
|                                     | Other  current assets, primarily prepayments and deposits | 7,797      |         | 10,101     |   |
|                                     |                                                      |       |         |       |
|                                     | Total  current assets                                     | 58,945     |         | 96,166     |   |
|                                     |                                                      |       |         |       |
|                                     |                                                      |       |         |       |
| Property  and equipment, net             | 2,787                                                     |       | 12,056       |       |
|                                     |                                                      |       |         |       |
| Other  assets                            | 44                                                        |       | 66           |       |
|                                     |                                                      |       |         |       |
|                                     | Total  assets                                             | $          | 61,776       |       | $ | 108,288 |   |
|                                     |                                                      |       |         |       |
| **Liabilities and Stockholders' Equity** |                                                      | ** ** |         | ** ** |
| Current  liabilities:                    |                                                      |       |         |       |
|                                     | Accounts  payable                                         | $          | 38           |       | $ | 1,680 |   |
|                                     | Accrued  clinical costs                                   | 599        |         | 3,236      |   |
|                                     | Accrued  employee liabilities                             | 978        |         | 625        |   |
|                                     | Accrued  restructuring charges                            | 8,580      |         | -          |   |
|                                     | Other  accrued liabilities                                | 1,443      |         | 854        |   |
|                                     | Current  financing obligations                            | 3,890      |         | 3,629      |   |
|                                     |                                                      |       |         |       |
|                                     | Total  current liabilities                                | 15,528     |         | 10,024     |   |
|                                     |                                                      |       |         |       |
| Long-term  financing obligations         | 7,385                                                     |       | 8,309        |       |
|                                     |                                                      |       |         |       |
| **Stockholders' equity:**                |                                                      | ** ** |         | ** ** |
| Common  stock                            | 29                                                        |       | 29           |       |
| Additional  paid-in capital              | 198,671                                                   |       | 198,388      |       |
| Deferred  stock compensation             | (8,481                                                    | )          | (10,198      | )          |
| Accumulated  other comprehensive income  | 121                                                       |       | 186          |       |
| Accumulated  deficit                     | (151,477                                                  | )          | (98,450      | )          |
|                                     |                                                      |       |         |       |
|                                     | Total  stockholders' equity                               | 38,863     |         | 89,955     |   |
|                                     |                                                      |       |         |       |
|                                     | Total  liabilities and stockholders' equity               | $          | 61,776       |       | $ | 108,288 |   |
|                                     |                                                      |       |         |       |
|                                     |                                                      |       |         |       |
|                                     |                                                      |       |         |       |
| See accompanying notes.                  |                                                      |
|                                     |                                                      |       |         |       |
|                                          |                                                           |            |              |            |  |  |  |  |  |

 

INTRABIOTICS PHARMACEUTICALS, INCSTATEMENTS OF OPERATIONS(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

|                                                                   | THREE MONTHS ENDED               |    | SIX MONTHS ENDED |    |
|------------------------------------------------------------------------|----------------------------------|---------|------------------|---------|
|                                                                   | JUNE 30,                         |    | JUNE 30,         |    |
|                                                                   |                             |    |             |    |
|                                                                   | 2001                             |    | 2000             |    | 2001 |   | 2000 |   |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   |                             |    |             |    |   |   |   |   |
| Operating  expenses:                                                   |                             |    |             |    |   |   |   |   |
|                                                                   | Research  and development        | $       | 9,997            |    | $ | 10,594 |   | $ | 25,521 |   | $ | 16,032 |   |
|                                                                   | General  and administrative      | 2,836   |             | 2,646   |   | 6,944 |   | 4,809 |   |
|                                                                   | Restructuring  and other charges | 21,956  |             | -       |   | 21,956 |   | - |   |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   | Total  operating expenses        | 34,789  |             | 13,240  |   | 54,421 |   | 20,841 |   |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   | Operating  loss                  | (34,789 | )                | (13,240 | ) | (54,421 | ) | (20,841 | ) |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   | Interest  income                 | 770     |             | 1,921   |   | 1,997 |   | 2,334 |   |
|                                                                   | Interest  expense                | (295    | )                | (102    | ) | (603 | ) | (212 | ) |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   | Net  loss                        | $       | (34,314          | )       | $ | (11,421 | ) | $ | (53,027 | ) | $ | (18,719 | ) |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                   |                             |    |             |    |   |   |   |   |
| Basic  and diluted net loss per share                                  | $                                | (1.17   | )                | $       | (0.39 | ) | $ | (1.81 | ) | $ | (1.18 | ) |
|                                                                   |                             |    |             |    |   |   |   |   |
| Shares  used to compute basic and diluted net loss per share           | 29,344                           |    | 29,012           |    | 29,302 |   | 15,910 |   |
|                                                                   |                             |    |             |    |   |   |   |   |
| Pro  forma basic and diluted net loss per share                        |                             |    |             |    |   |   | $ | (0.74 | ) |
|                                                                   |                             |    |             |    |   |   |   |   |
| Shares  used to compute pro forma basic and diluted net loss per share |                             |    |             |    |   |   | 25,347 |   |
|                                                                   |                             |    |             |    |   |   |   |   |
|                                                                        |                                  |         |                  |         |  |  |  |  |  |  |  |  |  |  |  |

See accompanying notes.

 

INTRABIOTICS PHARMACEUTICALS, INC.STATEMENTS OF CASH FLOWS(IN THOUSANDS)

 

(UNAUDITED)

|                                                    | SIX MONTHS ENDED JUNE 30,                      |    |
|---------------------------------------------------------|------------------------------------------------|---------|
|                                                    |                                                |    |
|                                                    | 2001                                           |    | 2000 |   |
|                                                    |                                                |    |  |   |
| **Operating activities**                                |                                           |    |   |   |
| Net  loss                                               | $                                              | (53,027 | ) | $ | (18,719 | ) |
|                                                    |                                           |    |   |   |
| Adjustments  to reconcile net loss to net cash          |                                           |    |   |   |
|                                                    | used  in operating activities:                 |    |   |   |   |
|                                                    | Depreciation  and amortization                 | 1,023   |   | 624 |   |
|                                                    | Amortization  of deferred stock compensation   | 1,320   |   | 1,589 |   |
|                                                    | Write  down of fixed assets                    | 11,746  |   | - |   |
|                                                    | Fair  value of warrants issued                 | 560     |   | - |   |
|                                                    |                                           |    |   |   |   |
|                                                    | Change  in assets and liabilities              |    |   |   |   |
|                                                    | Other  assets                                  | 2,326   |   | (6,094 | ) |
|                                                    | Accounts  payable                              | (1,642  | ) | (1,464 | ) |
|                                                    | Accrued  clinical liabilities                  | (2,637  | ) | 552 |   |
|                                                    | Accrued  employee liabilities                  | 353     |   | - |   |
|                                                    | Accrued  restructuring charges                 | 8,669   |   | - |   |
|                                                    | Other  accrued liabilities                     | 589     |   | 659 |   |
|                                                    | Amount  payable to contract partner            | -       |   | (1,677 | ) |
|                                                    |                                           |    |   |   |   |
| Net  cash (used in) operating activities                | (30,720                                        | )       | (24,530 | ) |
|                                                    |                                           |    |   |   |
| **Investing activities**                                |                                           |    |   |   |
|                                                    | Capital  expenditures                          | (3,589  | ) | (1,246 | ) |
|                                                    | Purchase  of long-term investments             | -       |   | (25,747 | ) |
|                                                    | Purchase  of short-term investments            | (5,013  | ) | (4,662 | ) |
|                                                    | Maturities  of short-term investments          | 28,639  |   | 9,065 |   |
|                                                    |                                           |    |   |   |   |
| Net  cash provided by / (used in) investing activities  | 20,037                                         |    | (22,590 | ) |
|                                                    |                                           |    |   |   |
| **Financing activities**                                |                                           |    |   |   |
|                                                    | Proceeds  from issuance of common stock        | 120     |   | 103,603 |   |
|                                                    | Proceeds  from financing obligations           | 1,209   |   | 1,166 |   |
|                                                    | Payments  on financing obligations             | (1,872  | ) | (550 | ) |
|                                                    |                                           |    |   |   |   |
| Net  cash (used in) / provided by financing activities  | (543                                           | )       | 104,219 |   |
|                                                    |                                           |    |   |   |
| Net  (decrease) / increase in cash and cash equivalents | (11,226                                        | )       | 57,099 |   |
|                                                    |                                           |    |   |   |
| Cash  and cash equivalents at beginning of period       | 38,983                                         |    | 18,862 |   |
|                                                    |                                           |    |   |   |
| Cash  and cash equivalents at end of period             | $                                              | 27,757  |   | $ | 75,961 |   |
|                                                    |                                           |    |   |   |
| Supplemental  disclosure of cash flow information       |                                           |    |   |   |
|                                                    | Interest  paid                                 | $       | 603 |   | $ | 239 |   |
|                                                    |                                           |    |   |   |
| Supplemental  disclosure of non-cash information        |                                           |    |   |   |
|                                                    | Conversion  of preferred stock to common stock | $       | - |   | $ | 79,609 |   |
|                                                    |                                           |    |   |   |   |
|                                                    | Deferred  compensation (termination)           | $       | (397 | ) | $ | 722 |   |
|                                                    |                                           |    |   |   |
| See accompanying notes.                                 |                                           |
|                                                    |                                           |    |   |   |
|                                                         |                                                |         |  |  |  |  |  |  |  |  |  |  |

 

INTRABIOTICS PHARMACEUTICALS, INC.NOTES TO FINANCIAL STATEMENTS(Unaudited)

Note1. Basis of Presentation

             Theaccompanying condensed financial statements are unaudited and have beenprepared by the Company in accordance with the rules and regulations of theSecurities and Exchange Commission for interim financial information, and inaccordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.

             Certaininformation and footnote disclosures normally included in the Company’s annualaudited financial statements (as required by generally accepted accountingprinciples) have been condensed or omitted. The interim financial statements, in the opinion of management, reflectall adjustments (consisting of normal recurring accruals) necessary for a fairstatement of the Company’s financial position as of June 30, 2001 and December31, 2000, and the results of its operations and cash flows for the three andsix month periods ended June 30, 2001 and 2000.

             Theresults of operations of the interim periods are not necessarily indicative ofthe results of operations to be expected for the fiscal year.  These interim financial statements should beread in conjunction with the audited financial statements for the year endedDecember 31, 2000, which are contained in the Company’s Annual Report on Form 10-K,as amended, and filed with the Securities and Exchange Commission.  The accompanying condensed Balance Sheet asof December 31, 2000 is derived from such audited financial statements.

             Comprehensive loss is primarilycomprised of net loss and net unrealized gains or losses on available-for-salesecurities.  There is no materialdifference between the reported net loss and the comprehensive loss for allperiods presented.

Note2. Lease Commitments and Equipment Financing Arrangements

             The Company leases its facilitiesunder operating lease agreements, which expire in July 2004 and April 2011. AtJune 30, 2001 and December 31, 2000, the Company had restricted cash of$1,971,000 and $1,371,000, respectively, in connection with these leases.

             InDecember 2000, the Company entered into an equipment financing agreement tofinance up to $7.6 million of equipment. The interest rate varies according to U.S. Treasury rates.  In December 2000, the Company completed twodraws against this arrangement.  Thefirst draw was for $3.8 million with a loan term of 36 months and an averageannual interest rate of 9.98%.  Thesecond draw was for $945,000 with a term of 48 months and an average annualinterest rate of 9.64%.  In March 2001,the Company completed a third draw for $1.2 million with a loan term of 48 monthsand an average annual interest rate of 9.64%. The remaining balance available under this agreement of $1.7 millionexpired on July 31, 2001.

             AtJune 30, 2001, the Company had outstanding equipment financing obligations of$7.1 million and a term loan obligation of $4.1 million.  These obligations include various financialcovenants and a restriction on paying dividends.  As Of June 30, 2001, the Company was out of compliance with thesefinancial covenants.  The Company hascorrected the default of these covenant violations by establishing restrictedcash deposits of $1.2 million under the equipment financing obligations on July20, 2001 and $4.3 million under the term loan agreement on July 17, 2001.

Note 3. Cash, Cash Equivalents and Short-term Investments

             TheCompany invests its excess cash in short-term money market funds and commercialpaper. The following is a summary of the Company's cash, cash equivalents,restricted cash deposits and investments by major security type at their fairmarket value which approximates carrying value based on quoted market values:

|                                                                        | JUNE  30,      |   | DECEMBER  31, |   |
|-----------------------------------------------------------------------------|----------------|--------|---------------|--------|
|                                                                        | 2001           |   | 2000          |   |
|                                                                        |                |   |               |   |
|                                                                        | (IN THOUSANDS) |   |
|                                                                        |           |   |          |   |
|                                                                        | (UNAUDITED)    |   |
|                                                                        |           |   |          |   |
|                                                                        |           |   |          |   |
| Operating cash                                                              | $              | -      |          | $      | 723 |   |
| Money market                                                                | 27,757         |   | 38,260        |   |
| Certificates of deposit  – restricted cash                             | 4,971          |   | 1,371         |   |
| Commercial paper                                                            | 18,420         |   | 45,711        |   |
|                                                                        |           |   |          |   |
|                                                                        | $              | 51,148 |          | $      | 86,065 |   |
|                                                                        |           |   |          |   |
|                                                                        |           |   |          |   |
| Amounts included in  cash and cash equivalents andrestricted  cash deposits | $              | 32,728 |          | $      | 40,354 |   |
| Amounts included in  short-term investments                                 | 18,420         |   | 45,711        |   |
|                                                                        |           |   |          |   |
|                                                                        | $              | 51,148 |          | $      | 86,065 |   |
|                                                                        |           |   |          |   |

The Company classifies all securities aseither cash and cash equivalents or available for sale.  The restricted cash of $5.0 million consistsof $3.0 million pledged to PolyPeptide Laboratories, A/S for drug supply and$2.0 million pledged as security deposits on our leased facilities.

Note4. Net Loss Per Common Share

             Netloss per share has been computed according to Financial Accounting StandardsBoard Statement No. 128, “Earnings Per Share” (“SFAS 128”), which requiresdisclosure of basic and diluted earnings per share.  Basic and diluted earnings per share is calculated using theweighted-average number of shares of common stock outstanding during theperiod, less shares subject to repurchase. Diluted earnings per share include the impact of potentially dilutivesecurities.  As the Company’spotentially dilutive securities (convertible preferred stock, stock options,and warrants) were antidilutive for all periods, they were not included in thecomputation of weighted-average shares used in computing diluted net loss pershare.

             Proforma net loss per share has been computed as described above and also giveseffect to the conversion of convertible preferred shares not included abovethat automatically converted into common stock upon completion of the Company’sinitial public offering of common stock from the original date of issuance.

             Thefollowing is a reconciliation of the numerator and denominator of basic anddiluted net loss per share (in thousands, except per share amounts):

|                                                       | THREE MONTHS ENDED                                       |   | SIX MONTHS ENDED |   |
|------------------------------------------------------------|----------------------------------------------------------|--------|------------------|--------|
|                                                       | JUNE 30,                                                 |   | JUNE 30,         |   |
|                                                       |                                                     |   |             |   |
|                                                       | 2001                                                     |   | 2000             |   | 2001 |   | 2000 |   |
|                                                       |                                                     |   |             |   |   |   |   |   |
|                                                       |                                                     |   | (UNAUDITED)      |   |   |   |
|                                                       |                                                     |   |             |   |   |   |   |   |
| Basic  and diluted:                                        |                                                     |   |             |   |   |   |   |   |
|                                                       | Net  loss                                                | $      | (34,314          | )      | $ | (11,421 | ) | $ | (53,027 | ) | $ | (18,719 | ) |
|                                                       |                                                     |   |             |   |   |   |   |   |   |
|                                                       | Weighted-average  shares used in computing basic and     |   |             |   |   |   |   |   |   |
|                                                       | diluted  net loss per share                              | 29,344 |             | 29,012 |   | 29,302 |   | 15,910 |   |
|                                                       |                                                     |   |             |   |   |   |   |   |
| Basic  and diluted net loss per share                      | $                                                        | (1.17  | )                | $      | (0.39 | ) | $ | (1.81 | ) | $ | (1.18 | ) |
|                                                       |                                                     |   |             |   |   |   |   |   |
| Pro  forma basic and diluted:                              |                                                     |   |             |   |   |   |   |   |
|                                                       | Shares  used above                                       |   |             |   |   |   |   | 15,910 |   |
|                                                       | Pro  forma adjustment to reflect weighted-average effect |   |             |   |   |   |   |   |   |
|                                                       | of  conversion of preferred stock from the date of       |   |             |   |   |   |   |   |   |
|                                                       | issuance                                                 |   |             |   |   |   |   | 9,437 |   |
|                                                       |                                                     |   |             |   |   |   |   |   |
| Total  weighted-average shares of common stock outstanding |                                                     |   |             |   |   |   | 25,347 |   |
|                                                       |                                                     |   |             |   |   |   |   |   |
| Pro  forma basic and diluted net loss per share            |                                                     |   |             |   |   |   | $ | (0.74 | ) |
|                                                       |                                                     |   |             |   |   |   |   |   |
|                                                            |                                                          |        |                  |        |  |  |  |  |  |  |  |  |  |  |

Note5. Agreements

             OnMay 29, 2001, the Company amended its licensing and development agreement forits late stage ramoplanin program with Biosearch Italia, S.p.A.  Under the new terms of the agreement,IntraBiotics will be reimbursed for ongoing clinical trial expenses during athree-month transition period, starting June 1 and ending August 31, 2001.  At the end of this period, which may beextended by mutual consent, Biosearch will assume responsibility for theclinical development of ramoplanin oral powder at its own expense and retainworldwide rights to the product.  Inexchange for its clinical development expenses and efforts to date,IntraBiotics will receive a royalty on future net sales of ramoplanin oral inNorth America, if it is successfully developed.

             Furthermore,the agreement specifies that IntraBiotics retains its license to topical usesof ramoplanin unless certain clinical development milestones are not met.  The agreement also allows for IntraBioticsto regain North American rights to the ramoplanin oral powder program undercertain conditions and by paying certain fees to Biosearch Italia.

             On June 7, 2001, the Company terminated its researchcollaboration agreement with Cetek Corporation (Cetek).  There were no charges associated with thistermination agreement.

             OnJune 21, 2001, the Company terminated its collaborative research and technologyagreement with New Chemical Entities, Inc. (now Albany Molecular Research,Inc.) (AMRI). Under the terms of this termination agreement, IntraBiotics paidAMRI $300,000.

             OnJune 27, 2001, the Company entered into a binding term sheet related totermination of the discovery, development and license agreement with DiversaCorporation and on July 27, 2001, the Company entered into the finaltermination agreement.  Under the termsof this termination agreement, IntraBiotics will pay an aggregate of $2,450,000to Diversa during the second half of 2001. In addition, the Company issued a warrant to purchase 700,000 shares ofits common stock at an exercise price of $2.00 per share, exercisableimmediately for a period of four years.

Note 6. Restructuring and other charges

             OnMay 31, 2001, the Company implemented a restructuring plan intended to conservecapital and help direct financial and human resources to the development of itslead product, iseganan HCl oral solution for the prevention of oral mucositisin cancer patients. IntraBiotics incurred restructuring charges of $10.1million and asset write down charges of $11.8 million for a total of $21.9million in charges associated with its restructuring plan in the second quarterof 2001. In June 2001, the Company paid $1.0 million of the restructuringcosts, primarily in ongoing severance costs to approximately 90 employees andexpensed $560,000 for warrants issued as part of a collaboration agreementtermination. At June 30, 2001, approximately $8.6 million remains in accruedrestructuring charges.

             Thestrategic restructuring included a reduction in force of approximately 90positions in research and administration, or 71% of our workforce preceding thereduction in force of 127 employees. Eighty-five of the terminated employees have left the Company and fiveremain as of July 31, 2001. Following the restructuring, the Company willretain approximately 37 full-time employees largely focusing on drugdevelopment of iseganan HCl, including a small support staff.

             Therestructuring also includes the termination of certain research and developmentcollaborations and the consolidation of operations into one existing facilityin Mountain View, California.  TheCompany vacated three facilities in Mountain View, California with 142,000square feet and continues to occupy one facility with 16,000 square feet.

             The2001 restructuring charges consist of the following (in thousands):

|                           | Costs for  terminated  employees |   | Facilities  consolidation |   | Terminated  collaboration  agreements  and other |   | Total  |   |
|--------------------------------|----------------------------------|--------|---------------------------|--------|--------------------------------------------------|--------|--------|--------|
|                           |                             |   |                      |   |                                             |   |   |   |
| Restructuring  charges         | $                                | 2,911  |                      | $      | 3,150                                            |   | $      | 4,060  |   | $ | 10,121 |   |
|                           |                             |   |                      |   |                                             |   |   |   |
| Cash  payments                 | (646                             | )      | -                         |   | (335                                             | )      | (981   | )      |
|                           |                             |   |                      |   |                                             |   |   |   |
| Non-cash  expenses             | -                                |   | -                         |   | (560                                             | )      | (560   | )      |
|                           |                             |   |                      |   |                                             |   |   |   |
| Accrued  restructuring charges | $                                | 2,265  |                      | $      | 3,150                                            |   | $      | 3,165  |   | $ | 8,580 |   |
|                           | at  June 30, 2001                |   |                      |   |                                             |   |   |   |   |   |   |   |   |
|                           |                             |        |                      |        |                                             |        |   |        |   |
|                                |                                  |        |                           |        |                                                  |        |        |        |  |  |  |  |  |  |

 

Additionally, theCompany wrote down to fair value, leasehold improvements, laboratory equipment,computers and other assets of $11.8 million that are no longer being used aspart of the restructuring plan.

ITEM2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations contains forward-looking statements, which involve risksand uncertainties.  The Company’s actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth under “RISKS RELATED TO OUR BUSINESS” below.  The following discussion should be read inconjunction with the financial statements and notes included elsewhere herein.  Except as required by law, IntraBioticsdisclaims any obligation to update any of the forward-looking statementscontained in this report to reflect any future events or developments.

**OVERVIEW**

             IntraBiotics Pharmaceuticals, Inc.has a mission to develop new antibiotics, which address important unmet medicalneeds.  We have focused our efforts anduse of resources on our lead product, iseganan HCl oral solution for oralmucositis, which is in the third and final stage of human clinical testingprior to registration.   A contractor’serror damaged the first of two planned phase III trials, causing us to conducta third phase III trial.  During thepast quarter, IntraBiotics chose to restructure its business to ensure adequatehuman and capital resources to finish these phase III trials and to maximizethe likelihood of success in registering this potential product.  In turn, we have reduced our work force,consolidated operations, terminated research projects, out-licensed ramoplaninoral powder, our other phase III program, and most importantly, delayed thephase II trials for two other important iseganan containing products untiladditional capital resources become available.

             OnJanuary 17, 2001, we announced our discovery of damage to the first phase IIItrial of iseganan HCl for oral mucositis in patients receivingchemotherapy.  The results wereannounced on May 14, 2001, after the trial was concluded, the final dataanalyzed and the extent of damage assessed. The primary endpoint of ulceration did not achieve the statisticalstrength of evidence typically required for product registration (p=0.067compared to p<0.05 which is the usual standard for statisticalsignificance).  On May 31, 2001,IntraBiotics announced its plans to restructure its business as a result of thedamage by a third party contractor’s error to the first phase III trial of itslead product, iseganan HCl for oral mucositis in patients receivingchemotherapy.  Oral mucositis is apotentially debilitating side effect of certain anti-cancer therapies resultingin infected ulcers in the mouth.

             Severalother clinically meaningful endpoints did succeed with statistical significance(all with p<0.05) in spite of the contractor’s error in this trial.  These endpoints include reduction in mouthpain, throat pain, difficulty swallowing and pain with swallowing, and theseverity of stomatitis, or in inflammation of the mouth.  We then completed additional analyses of theresults that indicate that the error caused the trial to underestimate the truebenefit of iseganan HCl oral solution on each of these measures of oral pain,oral function and ulceration.  Takentogether, IntraBiotics believes that a repeat of the clinical trial has a veryhigh likelihood of success (statistical significance with a p<0.05).

             Basedon these conclusions, we chose to restructure our business to enable us to useour current capital resources and key personnel to conduct and complete anotherphase III trial in this chemotherapy patient population (in addition to an ongoingand half-completed trial in radiotherapy patients) in order to attempt to provethe efficacy and safety of the product. The next phase III trial in chemotherapy patients is expected to startin the fourth quarter of 2001 and conclude in the fourth quarter of 2002.  The ongoing phase III trial in radiotherapypatients is expected to finish on schedule in the second quarter of 2002.

              Wehave also completed two earlier stage trials for other indications of theantibiotic iseganan: the first, to prevent infections in patients usingbreathing assistance from a mechanical ventilator, called ventilator-associatedpneumonia (VAP) and the second, to treat respiratory infections in patientswith Cystic Fibrosis. We obtained data from a human clinical trial that testedfor preliminary efficacy and safety, known as a phase IIa trial, for isegananHCl oral solution in patients on ventilators. We also obtained data from ahuman clinical trial that tested for preliminary safety, known as a phase Itrial, for iseganan HCl solution for inhalation, previously referred to asProtegrin IB-367 Aerosol, in patients with Cystic Fibrosis. The data from eachof these trials support the advancement to the next stage of human clinicaltesting, phase II trials, for each of these two products, but we currently planto obtain sufficient capital and human resources before proceeding to thesenext trials.
             Weamended our licensing and development agreement for our late stage ramoplaninprogram with Biosearch Italia, S.p.A., on May 29, 2001. Under the new terms ofthe agreement, we will be reimbursed for ongoing clinical trial expenses duringa three-month transition period, starting June 1 and ending August 31,2001.  Consistent with the agreement,Biosearch has paid the June and July installments to us, but they have not yetpaid the August installment.  At the endof this period, which may be extended by mutual consent, Biosearch will assumeresponsibility for the clinical development of ramoplanin oral powder at itsown expense and retain worldwide rights to the product.  In exchange for our clinical developmentexpenses and efforts to date, we will receive a royalty on future net sales oframoplanin oral powder in North America, if it is successfully developed.  In addition, the agreement specifies that weretain our license to topical uses of ramoplanin unless certain clinicaldevelopment milestones are not met.

             Since commencing operations in1994, we have not generated any revenue from product sales, and we have fundedour operations primarily from the proceeds of public and private placements ofsecurities. We have incurred a loss in each year since inception, and we expectto incur substantial losses for at least the next several years.  At June 30, 2001, our accumulated deficit wasapproximately $151.5 million and our cash balance was approximately $51.1million including restrictedcash deposits of approximately $5.0 million in connection with drug supplyagreements and standby letters of credit for leased facilities.

**RESULTSOF OPERATIONS**

*Threeand six month periods ended June 30, 2001 and 2000*

             IntraBioticshad no product sales or contract revenue for the six-month periods ended June30, 2001 and 2000.  The Company does notanticipate any product revenue in the near future.

             OnMay 31, 2001, IntraBiotics announced that it would implement a restructuringplan intended to conserve capital and help direct financial and human resourcesto the development of its lead product, iseganan HCl oral solution for theprevention of oral mucositis in cancer patients. As a result, we incurredrestructuring charges of $10.1 million and asset write down charges of $11.8million for a total of $21.9 million in the second quarter of 2001.

             This$10.1 million restructuring charge is for costs to be incurred in reducing ourworkforce, terminating collaboration agreements and downsizing facilities. Inthe six months ended June 30, 2001, we paid $1.0 million of the restructuringcosts, primarily in ongoing severance costs and expensed $560,000 for warrantsissued as part of a collaboration agreement termination. At June 30, 2001,approximately $8.6 million remains in accrued restructuring charges.

             Thestrategic restructuring included a reduction in force of approximately 90positions in research and administration, or 71% of our current workforce of127 employees.  Eighty-five of theterminated employees have left the Company and five remain as of July 31, 2001.Following the restructuring, we will retain approximately 37 full-timeemployees largely focusing on drug development of iseganan HCl.

             Therestructuring also includes the termination of certain research and developmentcollaborations and the consolidation of operations into one existing facilityin Mountain View, California.  We havevacated three facilities in Mountain View, California with 142,000 square feetand we continue to occupy one facility with 16,000 square feet.

             Additionally,we wrote down to fair value, $11.8 million of leasehold improvements,laboratory equipment, computers and other assets that are no longer being usedas part of the restructuring plan.

             Asa result of implementing our restructuring plan, we anticipate significantlylower total operating expenses in the range of $7.0 million to $10.0 millionper quarter for the remainder of 2001 as compared to $12.8 million in the threemonths ended June 30, 2001.

             Researchand development expenses decreased to $10.0 million in the three-month periodended June 30, 2001 from $10.6 million for the same period in 2000.  Research and development expenses increasedto $25.5 million in the six-month period ended June 30, 2001 from $16.0 millionfor the same period in 2000.  Theincrease was attributable to higher personnel and payroll expenses, technologyaccess fees, clinical trial activity, facilities and consulting expenses. Weanticipate that because of our restructuring plan, we will reduce research anddevelopment spending in the future.

             Generaland administrative expenses increased to $2.8 million and $6.9 million in thethree and six-month periods ended June 30, 2001 from $2.6 million and $4.8million for the same periods in 2000. The increase was primarily attributed to increased personnel and payrollexpenses, consulting, legal, professional, travel and other expenses associatedwith increased business development activities. We anticipate that because ofour restructuring plan, we will reduce general and administrative spending inthe future.

             Inconnection with the grant of certain stock options to employees, we recorded nodeferred compensation in the three and six-month period ended June 30, 2001compared to none in the three-month period ended June 30, 2000 and $2.6 millionin the six-month period ended June 30, 2000. Deferred compensation representsthe difference between the deemed fair value of the common stock for financialreporting purposes and the exercise price of these options at the date ofgrant.  Deferred compensation ispresented as a reduction of stockholders’ equity and is amortized over thevesting period of the applicable options. In the three and six-month periods ended June 30, 2001, there was areduction in deferred compensation of $215,000 and $398,000 due to employeeterminations.

             Weexpensed $671,000 and $1.3 million of deferred compensation during the threeand six-month periods ended June 30, 2001, compared to $794,000 and $1.6million of deferred compensation for the same periods in 2000.  The decrease in deferred compensationexpense was due to the cancellation of options for terminated employees.  These amounts were expensed to research anddevelopment and to general and administrative expense based on the deferredcompensation liability attributed to each department.  The research and development deferred compensation amortizationexpense in the three and six-month periods ended June 30, 2001 was $388,000 and$764,000, down from $460,000 and $920,000 for the same periods in 2000.  The general and administrative deferredcompensation amortization expense in the three and six-month periods ended June30, 2001 was $283,000 and $556,000, down from $335,000 and $669,000 for thesame periods in 2000.   We expect thatdeferred compensation expense will decrease in the future as a result of ourreduction in workforce.

             Interestincome decreased to $770,000 and $2.0 million in the three and six-monthperiods ended June 30, 2001 from $1.9 million and $2.3 million for the sameperiods in 2000.  The decrease ininterest income resulted from the decrease in average cash and investment.  Interest expense increased to $295,000 and$603,000 for the three and six-month period ended June 30, 2001 from $102,000and $212,000 for the same periods in 2000. The increase was primarily attributed to additional equipment financingobligations and the term loan.

**LIQUIDITYAND CAPITAL RESOURCES**

             AtJune 30, 2001, we had cash, cash equivalents and short-term investments of$51.1 million including restricted cash deposits of approximately $5.0 millionin connection with standby letters of credit for leased facilities and drugsupply agreements.  The Companyregularly invests excess funds in short-term money market funds and commercialpaper.

             Netcash used in operating activities for the six-month periods ended June 30, 2001and 2000 was $30.7 million and $24.5 million, respectively.  Cash used inoperating activities in the six-month period ended June 30, 2001 was primarilythe result of net losses, write-off of assets and accrued liabilitiesassociated with the Company’s restructuring plan, decreased prepaid expensesprimarily for clinical trials, decreases in accounts payable and accruedclinical liabilities, increase in accrued employee liabilities, assetdepreciation and amortization and deferred stock compensation amortization. Cashused in operating activities in the six-month period ended June 30, 2000 wasprimarily the result of net losses, decreased prepaid expenses primarily forclinical trials, decreases in accounts payable, increases in accrued clinicalliabilities and decreases in amounts payable to contract partner, assetdepreciation and amortization and deferred revenue amortization.

             Netcash provided by investing activities for the six-month period ended June 30,2001 was $20.0 million. Net cash used in investing activities for the six-monthperiod ended June 30, 2000 was $22.6 million. Cash provided by investing activities in the six-month period ended June30, 2001 was due to the maturities of short-term investments of $28.6 millionpartially offset by the purchase of short term investments of $5.0 million andcapital expenditures of $3.6 million. Cash used in investing activities in thesix-month period ended June 30, 2000 was due to the purchase of long terminvestments of $25.7 million, maturities of short-term investments of $9.1million partially offset by the purchase of short term investments of $4.7million and capital expenditures of $1.2 million.

             Netcash used in financing activities for the six-month period ended June 30, 2001was $543,000. Net cash provided by financing activities for the six-monthperiod ended June 30, 2000 was $104.2 million. Cash used in financingactivities for the six-month period ended June 30, 2001 for payments onfinancing obligations was $1.9 million partially offset by $1.2 million inadditional financing obligations and $120,000 from the issuance of commonstock. Cash provided by financing activities for the three-month period endedJune 30, 2000, was due to net proceeds from the issuance of common stock of$103.6 million from the initial public offering, and net proceeds of $616,000from financing obligations.

             Weexpect to continue to incur substantial operating losses.  We believe that existing capital resourcesand interest income will be sufficient to fund our operations for at least thenext 12 months.

             Ourfuture capital requirements will depend on many factors, including:

             - thetiming, cost, extent and results of clinical trials;

             -payments to third parties for manufacturing scale up;

             - thecosts and timing of regulatory approvals;

             - thecosts of acquiring technologies or assets that compliment our business;

             - thecosts of establishing sales, marketing and distribution capabilities;

             - theprogress of our research and development activities;

             -availability of technology in-licensing opportunities; and

             -future opportunities for raising capital.

             Until we can generate sufficientcash from our operations, which we do not anticipate in the foreseeable future,we will need to finance future cash needs through private and publicfinancings, including equity financings. We cannot be certain that additionalfunding will be available when needed or on favorable terms. If funding is notavailable, we may need to delay or curtail our development andcommercialization activities to a significant extent.

**RISKS RELATED TO OUR BUSINESS**

             *Our business faces significant risks and the risksdescribed below may not be the only risks we face.  Additional risks that we do not knowof or that we currently believe are immaterial may also impair our businessoperations.  If any of the events orcircumstances described in the following risks actually occurs, our business,financial condition, or results of operations could be materially adverselyaffected and the trading price of our common stock could decline.*

**We expect to continue to incur future operating losses andmay never achieve profitability.**

             We have never generated revenuefrom product sales and have incurred significant net losses in each year sinceinception. We incurred net losses of $23.1 million in 1999, $45.6 million in2000 and $53.0 million in the six-months ended June 30, 2001.  Our accumulated deficit was approximately$151.5 million as of June 30, 2001. We expect to continue to incur substantialadditional losses for the foreseeable future primarily as a result of ourclinical trial expense costs, and we may never become profitable. In addition,we will continue to have expenses for development costs to commercializeiseganan HCl oral solution, including expenses for an additional phase IIItrial in chemotherapy patients. To date, we have financed our operationsprimarily through the private sale of equity securities, funds received from aterminated collaboration agreement, the proceeds of equipment financingarrangements and our initial public offering of common stock in March 2000. Wewill receive product revenues only if we complete clinical trials with respectto one or more products, receive regulatory approvals and successfullycommercialize such products.

**We maybe forced to raise capital sooner than currently anticipated and if we fail toobtain the capital necessary to fund our operations, we will be unable todevelop our drug candidates and may have to cease operations.**

             We are focusing our resources onone product candidate, iseganan HCl, in late stages of development. We believethat our current cash, cash equivalents and restricted cash deposits ofapproximately $32.7 million, short-term investments of approximately $18.4million and interest income are sufficient to meet our operating and capitalrequirements for at least the next 12 months. However, we have based thisestimate on assumptions that may prove to be wrong. For the six months endedJune 30, 2001 and the years ended December 31, 2000, 1999 and 1998, net cashused for operating activities was $30.7 million, $50.4 million, $25.1 millionand $9.3 million, respectively.  Ourfuture liquidity and capital requirements will depend on many factors,including the timing, cost, extent and results of clinical trials, paymentsassociated with manufacturing scale-up, the costs and timing of regulatoryapprovals, costs associated with researching drug candidates, securingin-licensing opportunities and conducting pre-clinical research. Also, ourcurrent cash resources may not be adequate to complete the clinical trials necessaryfor product registration with the FDA. If we are unable to successfullycomplete our current and planned phase III clinical trials for this product, wemay be unable to continue operations.

             Anyadditional equity financing may be dilutive to stockholders, and debtfinancing, if available, may involve restrictive covenants. Collaborativearrangements may require us to relinquish our rights to certain of ourtechnologies, drug candidates or marketing territories. We believe thatadditional financing may be required in the future to fund our operations. Wedo not know whether additional financing will be available when needed or onacceptable terms, if at all. If we are unable to raise additional financingwhen necessary, we may have to delay some or all of our product developmentefforts or be forced to cease operations.

**Wedepend on the outcome of our clinical trials and if they are unsuccessful, wemay not be able to commercialize our products and generate product revenue.**

             Beforeobtaining regulatory approvals for the commercial sale of any products, we mustdemonstrate through preclinical research and clinical trials that our drugcandidates are safe and effective for use in humans. We currently have one drugcandidate in phase III clinical trials, isegananHCl oral solution.  If this drugcandidate fails to establish safety and efficacy in phase III clinical trials,we would be unable to obtain regulatory approval from the FDA or tocommercialize the drug candidate, and we will be unable to generate productrevenue from that candidate. Clinical trials are expensive and time-consumingto conduct, and the outcome of these trials is uncertain. A number of new drugshave shown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals. A number of companies have suffered significant setbacks in advancedclinical trials, even after promising results in earlier trials.

             In addition, if we have delays inclinical trials or the FDA approval process or if we need to perform more orlarger clinical trials, our product development costs will increase and ourability to generate product revenue will be delayed.

             Our commencement and completion ofclinical trials may be delayed by many factors, including:

             -slower than expected rate of patient recruitment;

             -inability to adequately obtain data about patients after their treatment;

             -additional regulatory requests;

             -inability to manufacture sufficient quantities of materials used for clinicaltrials; or

             -unforeseen safety issues.

**If ourcollaborative partners assisting in our clinical trials fail to appropriatelymanage our clinical trials, the trials could be delayed or could fail.**

             We have limited experience in conductingand managing clinical trials. We rely on several contract researchorganizations, including PharmaNet, Inc., to assist us in managing andmonitoring our clinical trials. The FDA may inspect some of our clinicalinvestigational sites, our collaborative partner’s records and our facility andfiles to determine if the clinical trials were conducted according to goodclinical practices. If the FDA determines that the trials were not incompliance, we may be required to repeat the clinical trials. If our contractresearch organizations fail to perform under our agreements with them, we mayface delays in completing our clinical trials or failure of our clinicalprogram.

**If oursingle-source third party manufacturers fail to produce clinical or commercialquantities of our drug candidate, we may not have sufficient quantities of ourdrug candidate to meet demand.**

             We rely on PolyPeptide tomanufacture iseganan HCl on a commercial scale. While we maintain a limitedinventory of iseganan HCl, we depend on this single-source contractmanufacturer to produce our product for use in our clinical trials. Ourcontract manufacturer has limited experience in manufacturing iseganan HCl inquantities sufficient for commercialization and may have difficulty in scalingup production. If our contract manufacturer is unable or fails to produce therequired quantities of iseganan HCl for clinical use or commercial sale on atimely basis, at commercially reasonable prices and with sufficient purity, wewill not have sufficient quantities of iseganan HCl to complete current andfuture clinical trials, or to meet commercial demand. In addition, we intend tocontract with third parties for the manufacture of the final formulation. Wecannot guarantee that we will be able to contract with a reliable manufactureron commercially reasonable terms.

             Our third-party manufacturer and we are required toregister manufacturing facilities with the FDA and foreign regulatoryauthorities. If these facilities become unavailable for any reason or if ourcontract manufacturer fails to comply with the FDA’s current good manufacturingpractices or if our contract manufacturer terminates their agreement with us,we would have to find an alternative source for manufacturing our drugcandidate. There are, on a worldwide basis, a limited number of contractfacilities in which our drug candidates can be produced according to currentgood manufacturing practice regulations. In addition, the manufacturingprocesses for iseganan HCl is extremely complex and proprietary. If we areunable to continue having iseganan HCl manufactured by our current contractmanufacturer, we do not know if we could engage another contract manufacturerwhen needed or on acceptable terms, if at all.

**If wefail to obtain FDA approvals for our products, we will be unable tocommercialize our drug candidates.**

             We do not have a drug candidateapproved for sale in the United States or any foreign market. We must obtainapproval from the FDA in order to sell our drug candidates in the United Statesand from foreign regulatory authorities in order to sell our drug candidates inother countries. We must successfully complete our phase III clinical trialsand demonstrate manufacturing capability before we can file with the FDA forapproval to sell our products. The FDA could require us to repeat clinicaltrials as part of the regulatory review process. In addition, the FDA mayrequire a review of our new drug application by an advisory panel, which mayrequest additional information. Delays in obtaining or failure to obtainregulatory approvals may:

             - delay or prevent the successfulcommercialization of any of our drug candidate;

             - diminish our competitiveadvantage; and

             - defer or decrease our receipt ofrevenues or royalties.

             The regulatory review and approvalprocess is lengthy, expensive and uncertain. Extensive preclinical and clinicaldata and supporting information must be submitted to the FDA for eachindication to establish safety and effectiveness in order to secure FDAapproval. We have limited experience in obtaining such approvals, and cannot becertain when, if ever, we will receive these regulatory approvals.

             In addition to initial regulatoryapproval, our drug candidates will be subject to extensive and rigorous ongoingdomestic and foreign government regulation. Any approvals, once obtained, may be withdrawn if compliance withregulatory requirements is not maintained or safety problems are identified.Failure to comply with these requirements may subject us to stringent penalties.

**Thefailure to recruit and retain key personnel may delay our ability to complete,develop and commercialize iseganan HCl oral solution.**

             Weare highly dependent on our management and technical staff. Competition forpersonnel is intense. We recently reduced our workforce and consolidatedoperations as part of our recent restructuring. If we are unable to retain ourkey employees due to our restructuring plan, we may have to delay our clinicaltrials. If we lose the services of any of our senior management, which may bemore likely following implementation of our restructuring plan, we may bedelayed in our product development and commercialization efforts. We do notmaintain key person life insurance and do not have employment agreements withour management and technical staff. In order to pursue product development,marketing and commercialization plans, we may need to hire additional qualifiedscientific personnel. We may need to hire personnel with expertise in clinicaltesting, government regulation, manufacturing, marketing and finance. We maynot be able to attract and retain personnel on acceptable terms given thecompetition for such personnel among biotechnology, pharmaceutical and othercompanies.

             In addition, we rely on consultantsto assist us in formulating our research and clinical development strategy. Allof our consultants are employed by other entities. They may have commitmentsto, or relationships with, other entities that may limit their availability tous. The loss of the services of these personnel may delay our research anddevelopment efforts.

**Developmentand commercialization of competitive products could reduce or prevent sales ofour products and reduce revenue.**

             We may be unable to competesuccessfully in the marketplace if other companies develop and commercializecompetitive products that are less expensive, more effective, have fewer sideeffects or are easier to administer than our drug candidates. If we are unableto compete successfully with our drug candidates, physicians may not recommendand patients may not buy our drugs, which would cause our product revenue todecline.

             There are several drugscommercially available or under development that might compete with isegananHCl oral solution. For oral mucositis, there is one approved device, RadiacareÒ, and several drugs in early and late stage clinicaltrials. These include growth factors such as keratinocyte growth factor (KGF),G-CSF and interleukin-11, as well as several small molecular entities includingEthyolÒ, amlexanox and glutamine. The companies sponsoringthese trials have successfully commercialized products in the past. Inaddition, there may be products under development, which we are unaware for thetreatment of oral mucositis.

             Manyof our competitors and related private and public research and academicinstitutions have substantially greater experience, financial resources andlarger research and development staffs than we do. In addition, many of thesecompetitors, either alone or together with their collaborative partners, havesignificantly greater experience than we do in developing drugs, obtainingregulatory approvals and manufacturing and marketing products. We also competewith these organizations and other companies for in-licensing opportunities forfuture drug candidates, and for attracting scientific and management personnel.

**If weare unable to adequately protect our intellectual property, we may be unable tosell our products or to compete effectively.**

             We rely on a combination ofpatents, trade secrets and contractual provisions to protect our intellectualproperty. If we fail to adequately protect our intellectual property, othercompanies or individuals may prevent us from selling our products or maydevelop competing products based on our technology. Our success depends in parton our ability to:

             - obtain patents;

             - protect trade secrets;

             - operate without infringing uponthe proprietary rights of others; and

             - prevent others from infringing onour proprietary rights.

             We will be able to protect ourproprietary rights from unauthorized use by third parties only to the extentthat our proprietary rights are covered by valid and enforceable patents or areeffectively maintained as trade secrets.

             We try to protect our proprietaryposition by filing U.S. and foreign patent applications related to ourproprietary technology, inventions and improvements that are important to thedevelopment of our business. For example, we own or have rights to sevenpatents and two pending patent applications in the U.S. However, the patentposition of biopharmaceutical companies involves complex legal and factualquestions. We cannot predict the enforceability or scope of any issued patentsor those that may issue in the future. Patents, if issued, may be challenged,invalidated or circumvented. Consequently, if any patents that we own orlicense from third parties do not provide sufficient protection, ourcompetitive position would be weakened. Furthermore, others may independentlydevelop similar technologies or duplicate any technology that we havedeveloped.  In addition, we may not beissued patents for our pending patent applications, those we may file in thefuture, or those we may license from third parties.

             In addition to patents, we rely ontrade secrets and proprietary know-how. Our contract manufacturer performs the manufacturing processes coveredby these trade secrets. Accordingly, our contract manufacturer and we mustmaintain confidentiality. We have confidentiality and proprietary informationagreements with our contract manufacturer and with our employees. Theseagreements may not provide meaningful protection or adequate remedies for ourtechnology in the event of unauthorized use or disclosure of confidential andproprietary information.

**We maybe subject to intellectual property litigation that could be costly andtime-consuming.**

             The biotechnology andpharmaceutical industries have been characterized by extensive litigationregarding patents and other intellectual property rights.  Although we are not currently a party to anyintellectual property lawsuits, third parties may assert infringement or otherintellectual property claims against us. We may have to pay substantialdamages, including treble damages, for past infringement if it is ultimatelydetermined that our products infringe a third party’s proprietary rights. Thedefense and prosecution of intellectual property suits, U.S. Patent andTrademark Office interference proceedings and related legal and administrativeproceedings in the United States and internationally are costly andtime-consuming to pursue and their outcome is uncertain. If we become involvedin any of these proceedings, we will incur substantial expense and the effortsof our technical and management personnel will be significantly diverted. Anadverse determination may result in the invalidation of our patents, subject usto significant liabilities or require us to seek licenses that may not beavailable from third parties on satisfactory terms, or at all. Our stock pricecould decline based on any public announcements related to litigation orinterference proceedings initiated or threatened against us.

**Ifphysicians and patients do not accept our products, we may be unable togenerate significant revenue, if any.**

             Our drug candidates may not gainmarket acceptance among physicians, patients and the medical community. If anyof our drug candidates fail to achieve market acceptance, we may be unable tosuccessfully market and sell the product, which would limit our ability togenerate revenue. The degree of market acceptance of any drug candidate dependson a number of factors, including:

             - demonstration of clinicalefficacy and safety;

             - cost-effectiveness;

             - convenience and ease ofadministration;

             - potential advantage overalternative treatment methods; and

             - marketing and distributionsupport.

             Currently, we have one drugcandidate in phase III clinical trials and do not have any drug candidateapproved by the FDA. Physicians will not recommend our products until such timeas clinical data or other factors demonstrate the safety and efficacy of ourdrugs as compared to other treatments. In practice, competitors may be moreeffective in marketing their drugs. Even if the clinical safety and efficacy ofour antibiotic products is established, physicians may elect not to recommendproducts. For example, physicians may be reluctant to prescribe widespread useof our products because of concern about developing bacterial strains that areresistant to our drugs.

**If weare unable to establish sales, marketing and distribution capabilities or enterinto agreements with third parties to perform these services, we will be unableto commercialize our drug product.**

             We do not currently have marketing,sales or distribution capabilities. Initially we intend to establish a directmarketing and sales force in the United States and Canada. If we fail toestablish successful marketing and sales capabilities or fail to entersuccessful marketing arrangements with third parties, we would be unable tocommercialize our drug product. We must develop a marketing and sales forcewith technical expertise and distribution capabilities to market our productdirectly.  We intend to enter intoarrangements with third parties to market and sell most of our products outsideof the United States and Canada. To the extent that we enter into marketing andsales arrangements with other companies, our revenues will be lower than if wemarketed the products directly.

**Directors,executive officers, principal stockholders and affiliated entities own asignificant portion of our capital stock and will have substantial control overour activities.**

             Our directors, executive officers,principal stockholders and affiliated entities beneficially own, in the aggregate,approximately 51% of our outstanding common stock. These stockholders, ifacting together, will be able to significantly influence all matters requiringapproval by our stockholders, including the election of directors and theapproval of mergers or other business combination transactions.

**Antitakeoverprovisions in our charter documents and under Delaware law may make anacquisition of us more difficult.**

             Provisions of our certificate ofincorporation and bylaws could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our stockholders.

These provisions:

- provide for a classified board of directors of whichapproximately one third of the directors will be elected each year;

- allow the authorized number of directors to be changedonly by resolution of the board of directors;

- require that stockholder actions must be effected at aduly called stockholder meeting and prohibit stockholder action by writtenconsent;

- establish advance notice requirements for nominationsto the board of directors or for proposals that can be acted on at stockholdermeetings; and

             - limit who may call stockholdermeetings.

             In addition, because we areincorporated in Delaware, we are governed by the provisions of Section 203 ofthe Delaware General Corporation Law, which may prohibit large stockholdersfrom consummating a merger with, or acquisition of us. These provisions mayprevent a merger or acquisition that would be attractive to stockholders andcould limit the price that investors would be willing to pay in the future forour common stock.

**Ourstock price may be volatile, and the value of your investment may decline.**

             The market prices for securities ofbiotechnology companies in general have been highly volatile and our stock maybe subject to volatility. The following factors, in addition to the other riskfactors described in this section, may have a significant impact on the marketprice of our common stock:

             - announcements of technologicalinnovations or new commercial products by our competitors or us;

             - developments concerningproprietary rights;

             -publicity regarding actual or perceived changesin program timelines or results obtained in our clinical trials

             - publicity regarding actual or perceived adverseevents in our clinical trials or relating to products under development by our              competitors;

             - regulatory developments in theUnited States or foreign countries;

             - litigation;

             - significant short selling in ourcommon stock;

             - economic and other externalfactors; and

             - period-to-period fluctuations inour financial results and changes in analysts’ recommendations.

 

ITEM3.  QUANTITATIVEAND QUALITATIVE DISCLOSURE REGARDING MARKET RISK

             Theprimary objective of our investment activities is to preserve our capital untilit is required to fund operations at the same time maximizing the income wereceive from our investments without significantly increasing risk.  We own financial instruments that aresensitive to market risks as part of our investment portfolio.  To minimize this risk, we maintain aportfolio of cash equivalents and short-term investments in a variety ofsecurities, including money market funds and commercial paper.  The average maturity of all our investmentsin the first half of 2001 was less than one year.  Due to the short-term nature of these investments, a 50 basispoint movement in market interest rates would not have a material impact on thefair value of our portfolio as of June 30, 2001 and the fiscal years December31, 2000 and 1999. We have no investments denominated in foreign countrycurrencies and therefore our investments are not subject to foreign currencyexchange risk.

PART IIOTHER INFORMATION

ITEM1. LEGAL PROCEEDINGS

             OnApril 5, 2001, we commenced arbitration proceedings against InteractiveClinical Technologies, Inc. and Galen Holdings regarding the previouslydisclosed error in the drug dispensing for our phase III clinical trials.  We are seeking damages, including the costsof the previous phase III trial and the costs of 26 patients in the ongoingclinical trial who were rendered unevaluable by the error.  On July 2, 2001, Galen Holdings suedIntraBiotics in the State of New Jersey Federal Court seeking an injunctionbarring the arbitration as to Galen. Galen is not seeking damages from IntraBiotics and the only issue raisedby the complaint is arbitrability.  Weexpect both the arbitration and the associated litigation to be resolved by theend of the year.

ITEM 2. CHANGES INSECURITIES AND USE OF PROCEEDS

             OurRegistration Statement on Form S-1 filed pursuant to the Securities Act of 1933(No. 333-95461) was declared effective on March 27, 2000.  The net offering proceeds to us after allexpenses was approximately $103.3 million. From the effective date of the registration statement through June 30,2001, $28.9 of the net proceeds have been used for our clinical trials, $4.6for the development and scale up of manufacturing processes by our contractmanufacturers, $25.7 million for research and development, $22.0 million forrestructuring charges and $15.9 million for working capital and other generalpurposes.

             OnJuly 27, 2001, we issued to Diversa Corporation a warrant to purchase up to700,000 shares of our common stock at an exercise price of $2.00 per share in connectionwith the termination of the Discovery, Development and License Agreement withDiversa.  The sale and issuance of thewarrant was made in reliance on Section 4(2) of the Securities Act of 1933 as atransaction not involving a public offering.

ITEM4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

             TheCompany’s Annual Meeting of Stockholders was held on June 1, 2001.  Of the 29,281,909 shares outstanding andeligible to vote as of the record date, 18,768,388 were present or representedby proxy at the meeting.  The results ofthe voting on the matters submitted to the stockholders are as follows:

(1)         Toelect the following three directors to hold office until the 2004 AnnualMeeting of Stockholders:
NameForWithheld Michael  F. Bigham17,051,0181,717,370Liza  Page Nelson18,754,54213,846Jack  S. Remington18,754,24214,146
 

(2)         Toratify the selection of Ernst & Young LLP as independent auditors of theCompany for its fiscal year ending             December 31,2001:
Votes  for:18,660,018Votes  against:100,070Votes  abstaining8,300
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)   List  of Exhibits  4.2Registration  Rights Agreement with Diversa Corporation dated July 27, 200110.2Amended  and Restated 1995 Stock Option Plan.10.3*2000  Equity Incentive Plan, as amended.10.23°Letter  Agreement with Biosearch Italia dated May 18, 200110.24First Amendment to Research and Technology  Agreement between IntraBiotics and Albany Molecular Research Inc.(successor  to New Chemical Entities Inc.) dated April 13, 2001.10.25Letter  Agreement with Albany Molecular Research Inc. (successor to New Chemical  Entities Inc.) dated June 21, 2001.10.26Senior  Executive Severance Benefit Plan10.27Executive  Severance Benefit Plan10.28Summary  of Officer Incentive Bonus Plan10.29Letter  to John Fiddes, dated June 1, 200110.30Letter  to Chee-liang Leo Gu, dated June 1, 200110.31Letter to Sandra Wrobel, dated June  11, 200110.32°Release  Agreement with Diversa Corporation dated July 27, 200110.33Warrant  to purchase common stock dated July 27, 2001 to Diversa Corporation
*           Incorporatedby reference from IntraBiotics Registration Statement on Form S-8 (No.333-65616 ) filed with the              Securities and ExchangeCommission on July 23, 2001.

°            Confidentialtreatment has been requested with respect to certain portions of thisexhibit.  Omitted portions have been              filed separately with the Securities and Exchange Commission.
 (b)Reports on Form 8-K     The Company filed  reports on Form 8-K on May 30, 2001 in connection with a press release  announcing an amendment to the License and Supply Agreement with Biosearch  Italia S.p.A. and on June 1, 2001 in connection with its restructuring plan.    
             
             Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
  IntraBiotics  Pharmaceuticals, Inc.       /s/  Kenneth J. Kelley   August 13, 2001Kenneth J. Kelley    Chairman  of the Board,  President  and Chief Executive Officer        /s/  Gary S. Titus   August  13, 2001Gary  S. Titus  Senior  Director, Finance  (Chief  Accounting Officer)