##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
 For the quarterly period ended September 30, 2006
 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 in its charter)
 DELAWARE
    
    94-3200380(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 1009 Oak Hill Rd., Suite 201
Lafayette, CA 94549
  (925) 906-5331
  þ o
  o o þ
 þ o




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TABLE OF CONTENTS
 INTRABIOTICS PHARMACEUTICALS, INC.
 FORM 10-Q
 QUARTER ENDED SEPTEMBER 30, 2006
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Condensed Statements of Operations for the Three and Nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATION
    
    
    17Item 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURES
    
    
    19EXHIBIT INDEX
    
    
    20EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 32.1
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 INTRABIOTICS PHARMACEUTICALS, INC.
 
 CONDENSED BALANCE SHEETS
 (Dollars In thousands, except per share data)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,156
    
    
    $
    2,772Short-term investments
    
    
    36,884
    
    
    
    46,058Prepaid expenses and other current assets
    
    
    465
    
    
    
    341Total assets
    
    $
    49,505
    
    
    $
    49,171LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19
    
    
    $
    58Accrued clinical liabilities
    
    
    7
    
    
    
    99Other accrued liabilities
    
    
    189
    
    
    
    194Total current liabilities
    
    
    215
    
    
    
    351Stockholders equity:Convertible preferred stock, $0.001 par value: 5,000,000
shares authorized;
300 shares outstanding and $3,000 aggregate
liquidation preference at September 30, 2006 and
December 31, 2005, respectively
    
    
    1,634
    
    
    
    1,634Common stock, $0.001 par value: 70,000,000 shares
authorized at September 30, 2006 and December 31,
2005; 9,338,333 and 9,287,685 shares outstanding at
September 30, 2006 and December 31, 2005, respectively
    
    
    9
    
    
    
    9Additional paid-in capital
    
    
    283,354
    
    
    
    282,828Deferred stock compensation
    
    
    
    
    
    
    (45
    )Accumulated other comprehensive loss
    
    
    (5
    )
    
    
    (36
    )Accumulated deficit
    
    
    (235,702
    )
    
    
    (235,570
    )Total stockholders equity
    
    
    49,290
    
    
    
    48,820Total liabilities and stockholders equity
    
    $
    49,505
    
    
    $
    49,171
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INTRABIOTICS PHARMACEUTICALS, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating expenses:Research and development
    
    $
    
    
    
    $
    7
    
    
    $
    7
    
    
    $
    255General and administrative
    
    
    463
    
    
    
    560
    
    
    
    1,677
    
    
    
    2,605Restructuring charge
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    648Total operating expenses
    
    
    463
    
    
    
    540
    
    
    
    1,684
    
    
    
    3,508Operating loss
    
    
    (463
    )
    
    
    (540
    )
    
    
    (1,684
    )
    
    
    (3,508
    )Other income
    
    
    4
    
    
    
    1
    
    
    
    2
    
    
    
    1Interest income
    
    
    635
    
    
    
    395
    
    
    
    1,731
    
    
    
    1,043Net Income (loss)
    
    
    176
    
    
    
    (144
    )
    
    
    49
    
    
    
    (2,464
    )Non-cash dividends on Series A preferred stock
    
    
    (60
    )
    
    
    (60
    )
    
    
    (180
    )
    
    
    (180
    )Net income (loss) applicable to common stockholders
    
    $
    116
    
    
    $
    (204
    )
    
    $
    (131
    )
    
    $
    (2,644
    )Basic net income (loss) per share applicable to
common stockholders
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.29
    )Diluted net income (loss) per share applicable to
common stockholders
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.29
    )Shares used to compute basic net income (loss) per share
applicable to common stockholders
    
    
    9,334
    
    
    
    9,180
    
    
    
    9,316
    
    
    
    9,087Shares used to compute diluted net income (loss) per share
applicable to common stockholders
    
    
    11,560
    
    
    
    9,180
    
    
    
    9,316
    
    
    
    9,087
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INTRABIOTICS PHARMACEUTICALS, INC.
 
 CONDENSED
STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activitiesNet income (loss)
    
    $
    49
    
    
    $
    (2,464
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Stock compensation for directors
    
    
    393
    
    
    
    (43
    )Amortization of deferred stock compensation
    
    
    
    
    
    
    39Stock compensation for consultant services
    
    
    2
    
    
    
    141Depreciation and amortization
    
    
    
    
    
    
    9Loss on disposal of property and equipment
    
    
    
    
    
    
    27Change in assets and liabilities:Prepaid expenses and other current assets
    
    
    (124
    )
    
    
    (104
    )Accounts payable
    
    
    (39
    )
    
    
    (100
    )Accrued clinical liabilities
    
    
    (92
    )
    
    
    (62
    )Accrued employee liabilities
    
    
    
    
    
    
    (38
    )Accrued restructuring charges
    
    
    
    
    
    
    (5
    )Other accrued liabilities
    
    
    (5
    )
    
    
    (115
    )Net cash provided by (used in) operating activities
    
    
    184
    
    
    
    (2,715
    )Investing activitiesProceeds from sale of property and equipment
    
    
    
    
    
    
    10Purchase of short term investments
    
    
    (156,069
    )
    
    
    (116,672
    )Proceeds from sale or maturity of short-term investments
    
    
    165,269
    
    
    
    117,613Net cash provided by investing activities
    
    
    9,200
    
    
    
    951Financing activityProceeds from issuance of common stock, net of issuance costs
    
    
    
    
    
    
    497Net cash provided by financing activities
    
    
    
    
    
    
    497Net increase (decrease) in cash and cash equivalents
    
    
    9,384
    
    
    
    (1,267
    )Cash and cash equivalents at beginning of the period
    
    
    2,772
    
    
    
    1,755Cash and cash equivalents at end of the period
    
    $
    12,156
    
    
    $
    488Supplemental disclosure of non-cash information:Issuance of common stock dividend on Series A preferred stock
    
    $
    (180
    )
    
    $
    (180
    )Issuance of common stock upon conversion of Series A preferred stock
    
    $
    
    
    
    $
    (137
    )
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INTRABIOTICS PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1. Basis of Presentation and Summary of Significant Accounting Policies
    Use of Estimates
   Note 2. Stock-Based Compensation
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Adoption of SFAS No. 123 (R)
  Stock Compensation Expense
    7




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Determining Fair Value
 Valuation
and amortization method
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
 Estimated Forfeiture
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    n/a
    
    
    
    n/a
    
    
    
    4.60
    %
    
    
    3.79
    %Volatility
    
    
    n/a
    
    
    
    n/a
    
    
    
    0.20
    
    
    
    0.89Dividend yield
    
    
    n/a
    
    
    
    n/a
    
    
    
    0.00
    %
    
    
    0.00
    %Expected life of option
    
    
    n/a
    
    
    
    n/a
    
    
    
    6.2
    
    
    
    6.1
  Stock Options and Awards Activities
  Outstanding OptionsWeighted Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Contract Life
    
    
    Value (000's)Balance at December 31, 2005
    
    
    570,667
    
    
    $
    8.92
    
    
    
    7.08Granted
    
    
    37,500
    
    
    $
    3.50Exercised
    
    
    0
    
    
    $
    Forfeitures and cancellations
    
    
    (119,000
    )
    
    $
    10.13Balance at September 30, 2006
    
    
    489,167
    
    
    $
    8.13
    
    
    
    6.21
    
    
    $
    231,892Vested and expected to Vest at September 30, 2006
    
    
    489,167
    
    
    $
    8.13
    
    
    
    6.21
    
    
    $
    231,892Exercisable at September 30, 2006
    
    
    357,911
    
    
    $
    7.69
    
    
    
    5.7
    
    
    $
    199,553
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Options Outstanding
    
    
    Options ExercisableOptions Outstanding
    
    
    Options exercisableWeighted-Average
    
    
    Weighted
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    Number of
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number of
    
    
    ExercisePrices
    
    Shares
    
    
    (years)
    
    
    Price
    
    
    Shares
    
    
    Price$  2.40
    
    
    8,333
    
    
    
    0.06
    
    
    
    2.40
    
    
    
    8,333
    
    
    $
    2.40$  2.76
    
    
    203,334
    
    
    
    4.26
    
    
    
    2.76
    
    
    
    182,495
    
    
    $
    2.76$  3.50
    
    
    37,500
    
    
    
    9.37
    
    
    
    3.50
    
    
    
    
    
    
    $
    3.50$  4.08
    
    
    20,000
    
    
    
    8.26
    
    
    
    4.08
    
    
    
    20,000
    
    
    $
    4.08$13.06
    
    
    100,000
    
    
    
    7.60
    
    
    
    13.06
    
    
    
    58,333
    
    
    $
    13.06$13.93
    
    
    40,000
    
    
    
    7.70
    
    
    
    13.93
    
    
    
    30,000
    
    
    $
    13.93$16.49
    
    
    80,000
    
    
    
    7.34
    
    
    
    16.49
    
    
    
    58,750
    
    
    $
    16.49Totals
    
    
    489,167
    
    
    
    6.21
    
    
    
    8.13
    
    
    
    357,911
    
    
    $
    7.69
 Pro-forma Disclosures
  (In thousands, except per share amounts)Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net loss applicable to common stockholders, as reported
    
    $
    (204
    )
    
    $
    (2,644
    )Add:
Stock-based employee compensation expense (recovery) included in reported net loss applicable to common stockholders
    
    
    16
    
    
    
    (4
    )Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (280
    )
    
    
    (1,643
    )Net loss applicable to common stockholders, pro forma
    
    $
    (468
    )
    
    $
    (4,291
    )Net loss per share applicable to common stockholders:Basic and diluted  as reported
    
    $
    (0.02
    )
    
    $
    (0.29
    )Basic and diluted  pro forma
    
    $
    (0.05
    )
    
    $
    (0.47
    )
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Note 3. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    176
    
    
    $
    (144
    )
    
    $
    49
    
    
    $
    (2,464
    )Unrealized gain (loss) on available-for-sale securities
    
    
    6
    
    
    
    9
    
    
    
    31
    
    
    
    7Comprehensive income (loss)
    
    $
    182
    
    
    $
    (135
    )
    
    $
    80
    
    
    $
    (2,457
    )
 Note 4. Net Income (Loss) Per Share
 Earnings Per Share,
 Note 5. Stockholders Equity
     10




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Note 6. Commitments
  Note 7. Legal Proceedings
  
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our financial statements and related notes included in our quarterly
report on this Form 10-Q and in our annual report on Form 10-K for the year ended December 31,
2005. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including but not limited to those
set forth in Part1, Item 1A  Risk Factors of our Form 10-K for the year ended December 31, 2005.
All forward-looking statements included in this document are based on information available to us
on the date of this document and we assume no obligation to update any forward-looking statements
contained in this Form 10-Q .
 Overview
   11




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Critical Accounting Policies and Estimates
   Stock-Based Compensation
 Accounting
for Stock-Based Compensation, Accounting
for Stock-Based Compensation  Transition and Disclosure,
  12




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Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services
 Results of Operations
 Three and Nine months ended September 30, 2006 and 2005
 Research and Development
  General and Administrative
  13




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Restructuring Charges
  Interest Income
  Net Income (Loss) Applicable to Common Stockholders
  Liquidity and Capital Resources
     14




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Contractual Obligations
   Off-Balance Sheet Arrangements
  Indemnifications
  
 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
  
 ITEM 4. Controls and Procedures
  15




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Disclosure Controls and Procedures
  Scope of the Controls Evaluation
  Future requirements
   16




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Directors, principal stockholders and affiliated entities beneficially own or control at least 51%
of our capital stock outstanding and may be able to exert control over our activities, and the
results of our operations and financial condition may suffer.
  We may continue to incur net operating losses.
  Our stock price has been, and will be volatile, and the value of your investment may continue to
decline.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  17




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  18




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SIGNATURES
  IntraBiotics Pharmaceuticals, Inc.November 7, 2006
    
    /s/ Denis HickeyDenis HickeyChief Executive Officer and Chief Financial Officer
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EXHIBIT INDEX
 10.1
    
    Third Amendment to Services Agreement, dated as of November 1, 2006,
by and between IntraBiotics Pharmaceuticals, Inc. and Hickey & Hill,
Inc.*31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Rules 13a-14(a) or 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.*32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer
as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).*
 
 
 20