##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20459
 þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 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 number0-20713 ENTREMED, INC. 
  Delaware
    
    58-1959440(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 9640 Medical Center DriveRockville, Maryland(Address of principal executive offices)
 20850(Zip code)
 (240) 864-2600(Registrants telephone number, including area code)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
o   No
þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ   No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the most recent practicable date. Class
    
    Outstanding at May 3, 2005Common Stock $.01 Par Value
    
    49,819,284
   1




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ENTREMED, INC.
Table of Contents PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4    Controls and Procedures
    
    
    17Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    18Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3  Defaults upon Senior Securities
    
    
    18Item 4  Submission of Matters to Vote of Security Holders
    
    
    18Item 5  Other Information
    
    
    18Item 6  Exhibits
    
    
    18SIGNATURES
    
    
    19
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains and incorporates by reference certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be
identified by forward-looking words such as may, will, expect, anticipate or similar words.
These forward-looking statements include, among others, statements regarding the timing of our
clinical trials and the expected increases in our expenses. Our forward-looking statements are based on information available to us today, and we will not
update these statements. Our actual results may differ significantly from those discussed in our
forward-looking statements due to, among other factors, operating losses and anticipation of future
losses; the value of our common stock; uncertainties relating to our technological approach;
uncertainty of our product candidate development; our need for additional capital and uncertainty
of additional funding; our dependence on collaborators and licensees; intense competition and rapid
technological change in the biopharmaceutical industry; uncertainties relating to our patent and
proprietary rights; uncertainties relating to clinical trials, government regulation and
uncertainties of obtaining regulatory approval on a timely basis or at all; our dependence on key
personnel, research collaborators and scientific advisors; uncertainties relating to health care
reform measures and third-party reimbursement; risks associated with product liability; and other
factors discussed in our other filings with the Securities and Exchange Commission. 2




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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EntreMed, Inc.
Consolidated Balance Sheets March 31, 2005
    
    
    December 31, 2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,068,790
    
    
    $
    20,425,495Short-term investments
    
    
    22,521,099
    
    
    
    14,114,021Accounts receivable
    
    
    313,314
    
    
    
    3,250,783Interest receivable
    
    
    129,191
    
    
    
    85,089Prepaid expenses and other
    
    
    259,722
    
    
    
    367,222Total current assets
    
    
    44,292,116
    
    
    
    38,242,610Property and equipment, net
    
    
    1,026,719
    
    
    
    1,150,087Other assets
    
    
    15,306
    
    
    
    11,305Total assets
    
    $
    45,334,141
    
    
    $
    39,404,002LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,294,952
    
    
    $
    1,550,413Payable to related parties
    
    
    1,777,000
    
    
    
    200,321Accrued liabilities
    
    
    532,235
    
    
    
    1,416,444Current portion of deferred revenue
    
    
    167,118
    
    
    
    95,496Total current liabilities
    
    
    4,771,305
    
    
    
    3,262,674Deferred revenue, less current portion
    
    
    
    
    
    
    95,496Deferred rent
    
    
    319,293
    
    
    
    324,106Minority interest
    
    
    16,982
    
    
    
    16,972Stockholders equity:Convertible preferred stock, $1.00 par and $1.50 liquidation
value:5,000,000 shares authorized, 3,350,000 issued and
outstanding at March 31, 2005 and December 31, 2004, respectively
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 50,694,283 and 43,628,173 shares
issued and outstanding at March 31, 2005 and December 31, 2004,
Respectively
    
    
    506,943
    
    
    
    436,282Additional paid-in capital
    
    
    295,294,901
    
    
    
    285,387,288Treasury stock, at cost: 874,999 shares held at March 31, 2005 and
December 31, 2004, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (250,891,039
    )
    
    
    (245,434,572
    )Total stockholders equity
    
    
    40,226,561
    
    
    
    35,704,754Total liabilities and stockholders equity
    
    $
    45,334,141
    
    
    $
    39,404,002
 See accompanying notes. 3




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EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited) Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Revenues:Licensing
    
    $
    23,874
    
    
    $
    96,602Royalties
    
    
    1,375
    
    
    
    1,36525,249
    
    
    
    97,967Costs and expenses:Research and development
    
    
    4,379,356
    
    
    
    3,056,970General and administrative
    
    
    1,260,822
    
    
    
    2,092,9395,640,178
    
    
    
    5,149,909Investment income
    
    
    158,461
    
    
    
    84,594Net loss
    
    $
    (5,456,468
    )
    
    $
    (4,967,348
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (5,707,718
    )
    
    $
    (5,218,598
    )Net loss per share (basic and diluted)
    
    $
    (0.13
    )
    
    $
    (0.14
    )Weighted
average number of common shares outstanding (basic and
diluted)
    
    
    43,345,118
    
    
    
    36,973,012
 See accompanying notes. 4




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EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited) THREE MONTH PERIOD ENDEDMARCH 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (5,456,468
    )
    
    $
    (4,967,348
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    127,825
    
    
    
    248,817Minority interest
    
    
    10
    
    
    
    (43
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,937,469
    
    
    
    276,193Interest receivable
    
    
    (44,102
    )
    
    
    195,309Prepaid expenses and other
    
    
    103,500
    
    
    
    179,807Deferred rent
    
    
    (4,813
    )
    
    
    1,893Accounts payable
    
    
    744,539
    
    
    
    (2,227,215
    )Payable to related parties
    
    
    1,576,679
    
    
    
    Accrued liabilities
    
    
    (884,209
    )
    
    
    (158,074
    )Deferred revenue
    
    
    (23,874
    )
    
    
    301,398Net cash used in operating activities
    
    
    (923,444
    )
    
    
    (6,149,263
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (8,407,078
    )
    
    
    (2,270,348
    )Purchases of furniture and equipment
    
    
    (4,457
    )
    
    
    (93,377
    )Net cash used in investing activities
    
    
    (8,411,535
    )
    
    
    (2,363,725
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from sale of common stock
    
    
    9,978,274
    
    
    
    Net cash provided by financing activities
    
    
    9,978,274
    
    
    
    Net increase
(decrease) in cash and cash equivalents
    
    
    643,295
    
    
    
    (8,512,988
    )Cash and cash equivalents at beginning of period
    
    
    20,425,495
    
    
    
    34,811,847Cash and cash equivalents at end of period
    
    $
    21,068,790
    
    
    $
    26,298,859
 See accompanying notes. 5




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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (unaudited) 1. Basis of Presentation Our accompanying 2005 unaudited consolidated financial information includes the accounts of
our controlled subsidiary, Cytokine Sciences, Inc. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such
consolidated financial statements do not include all of the information and disclosures required by
generally accepted accounting principles for complete financial statements. In the opinion of our
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month period ended March 31,
2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. For further information, refer to our audited consolidated financial statements
and footnotes thereto included in our Form 10-K for the year ended December 31, 2004 . 2. Recent Accounting Standards In October 2004, the FASB concluded that SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which would require all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value, would be effective for interim or annual
periods beginning after June 15, 2005. SFAS 123R provides two tentative adoption methods. The first
method is a modified prospective transition method whereby a company would recognize share-based
employee costs from the beginning of the fiscal period in which the recognition provisions are
first applied as if the fair-value-based accounting method had been used to account for all
employee awards granted, modified, or settled after the effective date and to any awards that were
not fully vested as of the effective date. Measurement and attribution of compensation cost for
awards that are unvested as of the effective date of SFAS 123R would be based on the same estimate
of the grant-date fair value and the same attribution method used previously under SFAS 123. The
second adoption method is a modified retrospective transition method whereby a company would
recognize employee compensation cost for periods presented prior to the adoption of SFAS 123R in
accordance with the original provisions of SFAS 123; that is, an entity would recognize employee
compensation costs in the amounts reported in the pro forma disclosures provided in accordance with
SFAS 123. A company would not be permitted to make any changes to those amounts upon adoption of
SFAS 123R unless those changes represent a correction of an error. For periods after the date of
adoption of SFAS 123R, the modified prospective transition method described above would be applied. 6




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In April 2005, the SEC announced that it would provide for a phased-in implementation process
for FASB Statement No. 123(R); therefore, the Company currently expects to adopt SFAS 123R in the
quarter ended March 31, 2006, using the modified prospective method, although the Company continues
to review its options for adoption under this new pronouncement. The adoption of Statement 123R
is expected to have a material impact on the Companys results of operations. 3. Short-Term Investments Short-term investments consist primarily of corporate debt securities, all of which mature
within one year. The Company has classified these investments as available for sale. Such
securities are carried at aggregate cost which approximates market. The cost of securities sold is
calculated using the specific identification method. Unrealized gains and losses on these
securities, if any, are reported as accumulated other comprehensive income (loss), which is a
separate component of stockholders equity. There were no unrealized gains or losses as of March
31, 2005. Realized gains and losses and declines in value judged to be other than temporary on
securities available for sale, if any, are included in operations. Short-term investments are
principally uninsured and subject to normal credit risk. 4. Stock-Based Compensation The Company recognizes expense for stock-based compensation arrangements in accordance with
the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess
of the estimated fair value of the stock at the grant date over the exercise price, if any. The
Company accounts for equity instruments issued to non-employees in accordance with EITF 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring Or in
Conjunction with Selling, Goods, or Services. Disclosures regarding alternative fair values of measurement and recognition methods prescribed by
Statement of Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosureand Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123) are presented in the table below. 7




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The following table illustrates the effect on net loss if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based compensation: Three months ended March 31,2005
    
    
    2004Actual net loss
    
    $
    (5,456,468
    )
    
    $
    (4,967,348
    )Deduct: Stock-based employee
compensation expense if SFAS No
123 had been applied to all
awards
    
    
    (692,891
    )
    
    
    (1,295,913
    )Add: Stock-based employee
compensation included in
reported net loss
    
    
    
    
    
    
    Proforma net loss
    
    $
    (6,149,359
    )
    
    $
    (6,263,261
    )Dividend on Series A convertible
preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Proforma net loss per share
available to common shareholders
    
    $
    (6,400,609
    )
    
    $
    (6,514,511
    )Basic and diluted  as reported
    
    $
    (0.13
    )
    
    $
    (0.14
    )Basic and diluted  pro forma
    
    $
    (0.15
    )
    
    $
    (0.18
    )
 The effect of applying SFAS No. 123 on a pro forma net loss as stated above is not necessarily
representative of the effect on reported net loss for future years due to, among other things, the
vesting period of the stock options and the fair value of additional options to be granted in
future years. 5. License Agreements In March 2005, we entered into an exclusive worldwide license agreement with Celgene
Corporation for the development and commercialization of Celgenes small molecule tubulin inhibitor
compounds for the treatment of cancer. Under the terms of the agreement, Celgene received an
upfront licensing fee and may receive additional payments upon successful completion of certain
clinical, regulatory and sales milestones. EntreMed will assume responsibility for preclinical and
clinical development of the tubulin inhibitors for oncology applications. Tubulin inhibitors
comprise a broad family of compounds that bind to tubulin and disrupt microtubules, resulting in
programmed cell death (apoptosis). In in vitroand in vivostudies, Celgenes tubulin inhibitors
have been shown to inhibit tumor cell proliferation in a dose-dependent manner and, in in vitro
studies, to inhibit angiogenesis. Celgenes tubulin inhibitors are covered by issued and pending
patents. We believe that tubulin inhibition and angiogenesis inhibition are two of the principal
mechanisms by which our lead product candidate, 2-methoxyestradiol or 2ME2, exerts its anticancer
effects. The Celgene tubulin inhibitor compounds provide an opportunity for us to expand our
pipeline of dual-mechanism anticancer drugs. The upfront license fee
of $1,000,000 was recorded as a component of research and development
expense in the Consolidated Statement of Operations for the three
months ended March 31, 2005. 8




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6. Related Party Transactions The Company receives legal services from a law firm with which one of the Companys officers
is associated. During the three months ended March 31, 2005 these services totaled $238,000, the majority of the costs
representing patent work and related diligence, which is reflected as research and development
expense. During the three months ended March 31, 2005 we entered into a licensing agreement with Celgene Corporation,
our largest shareholder. Pursuant to our license of Celgenes tubulin inhibitor program, our
research and development expenses for the quarter reflect a $1 million upfront licensing fee, which
was paid to Celgene in April 2005. Our first quarter research and development expenses also
reflect a $200,000 success fee relating to the licensing transaction. The fee is payable to
Ferghana Partners, Inc., a provider of corporate financial advice to firms in the Life Sciences
field. The Companys chairman also serves as non-executive chairman of Ferghana Partners, Inc.
The Companys chairman and CEO both hold a de minimis ownership interest in Ferghana Partners, Inc.
Additionally, pursuant to the exercise of warrants purchased in 2002 by Celgene, we received gross
proceeds of $10,500,000 and incurred a success fee payable to
Ferghana Partners, Inc. in the amount of $525,000.
This fee results from a 2002 agreement under which we made payments
to Ferghana relating to
Celgenes purchase of Preferred Stock and our Thalidomide Analog program in December 2002. The fee
was recorded as an offset against gross equity transaction proceeds and, as such, is not reflected
as expense in the current period. At March 31, 2005 amounts payable to these parties are reflected
on our balance sheet as payable to related parties in the amount of $1,777,000. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW EntreMed, Inc. (EntreMed or the Company) (Nasdaq: EMND) is a clinical-stage pharmaceutical
company focused on developing the next generation of multi-mechanism oncology and antiinflammatory
drugs that target disease cells directly and the blood vessels that nourish them. We are focused on
developing drugs that are safe and convenient, and provide the potential for improved patient
outcomes. Panzem®(2-methoxyestradiol or 2ME2), our lead drug candidate, is currently
in clinical trials for cancer, as well as in preclinical development for non-oncology indications. EntreMeds goal is to develop and commercialize new compounds based on our expertise in the
science of angiogenesis, cell cycle regulation and inflammation  processes vital to the treatment
of cancer and other diseases. Our expertise has led to the identification of new molecules,
including analogs of 2ME2, modulators of fibroblast growth factor-2 (FGF-2) activity, tissue factor
pathway inhibitor (TFPI) peptides, and proteinase activated receptor-2 (PAR-2) antagonists. We are
developing these potential drug candidates for either in-house advancement or external partnering.
In order to advance EntreMeds commercial objectives, we intend to seek strategic alliances,
licensing relationships and co-development partnerships with other companies to develop compounds
for both oncology and non-oncology therapeutic areas. 9




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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the amounts
reported in our consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates. Our critical accounting policies, including the items in
our financial statements requiring significant estimates and judgments, are as follows:  -
    Licensing Revenue  The Company has recognized licensing revenues resulting from the
January 2002 five-year strategic alliance with Allergan, to develop and commercialize small
molecule angiogenic inhibitors for treatment and prevention of diseases and conditions of
the eye. The initial net fee has been amortized to revenue over the five-year license
term. In April 2005, Allergan terminated the license in accordance with its terms, which
will result in the acceleration of deferred revenue in the reporting period ending June 30,
2005. In February 2004 the Company transferred rights to the proteins, endostatin and
angiostatin, in an agreement with Childrens Medical Center Corporation and Alchemgen
Therapeutics. Under the agreement, Alchemgen received rights to market endostatin and
angiostatin in Asia. In exchange, the Company receives upfront and future cash payments
and royalties. The upfront cash payment was fully amortized in 2004, as the Company had
completed its obligations to transfer data and material. Future cash payments received
under this agreement, if any, will be recorded as revenue when
received, and/or when collectibility is reasonably assured.-
    Research and Development  Research and development expenses consist primarily of
compensation and other expenses related to research and development personnel, research
collaborations, costs associated with pre-clinical testing and clinical trials of our
product candidates, including the costs of manufacturing the product candidates, and
facilities expenses. Research and development costs are expensed as incurred.-
    Stock-Based Compensation  We have stock option plans under which options to purchase shares of our common stock may be granted to employees, consultants and directors at a
price no less than the fair market value on the date of grant. We account for our
stock-based compensation in accordance with the provisions of APB No. 25, Accounting for
Stock Issued to Employees(APB No. 25). Under APB No. 25, compensation expense is based
on the difference, if any, on the date of the grant between the fair value of the Companys
stock and the exercise price of the option and is recognized ratably over the vesting
period of the option. Because our options must be granted at fair market value, we
recognize no compensation expense in accordance with APB No. 25. If we were to adopt SFAS
No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), we would recognize
compensation expense based upon the fair value at the grant date for awards under the plans
using the fair value method. The Company currently expects to adopt SFAS No. 123R in the
quarter ended March 31, 2006, using the modified prospective method, although the Company
continues to review its options for adoption under this new pronouncement. We expense
equity instruments issued to nonemployees in accordance with SFAS No. 123 and EITF
96-18, Accounting for Equity Instruments that are issued to other than employees for
acquiring, or in conjunction with selling goods or services. 10




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RESULTS OF OPERATIONS For the Three Months Ended March 31, 2005 and March 31, 2004. - Revenues.Revenues decreased to $25,000 in the three month period ending March 31, 2005
compared to $98,000 in the corresponding 2004 period. Licensing revenues during the quarter ended
March 31, 2005 decreased to $24,000 from $97,000 in the corresponding 2004 period. This decrease
results from the absence of licensing revenues from the February 2004 agreement with Alchemgen.
The upfront cash payment was fully amortized in 2004, as the Company had completed its obligations
to transfer data and material. Future cash payments received under this agreement, if any, will be
recorded as revenue when received and/or when collectibility is
reasonably assured. Effective during April 2005, Allergan terminated our January
2002 license agreement granting Allergan the right to develop and commercialize the local delivery
of our small molecule angiogenic inhibitors for treatment and prevention of diseases and conditions
of the eye. As a result, we will recognize the deferred portion of the upfront licensing fee of
approximately $167,000 in the reporting period ending June 30, 2005. As previously reported, we
did not control Allergans development program or the receipt of milestone payments under it. We
do not believe that the termination of this license will have a material effect on our business or
strategies. At a future date, we may seek other licensees to develop local or systemic treatments
using our small molecule angiogenesis inhibitors for ophthalmic indications, based on prior
preclinical data and our continuing understanding of the mechanisms-of-action for these drug
candidates. At the present time, however, we intend to focus our resources on the cancer and
anti-inflammatory indications for our angiogenesis inhibitors. - Research and Development Expenses. From inception through March 31, 2005, we have incurred
research and development expenses of $225,534,000. At March 31, 2005, accumulated direct project
expenses for PanzemÒ, our lead drug candidate, totaled $29,080,000. Reflected in our R&D
expenses totaling $4,379,000 for the three-month period ended March 31, 2005 are direct project
expenses for PanzemÒ of $1,380,000 and $810,000 related to our 2ME2 analog program. Research
and development expenses for the corresponding 2004 period were $3,057,000, which included
$1,209,000 direct project expenses for PanzemÒ and $306,000 related to the Endostatin and
Angiostatin compounds, programs that have been discontinued. Our 2005 R&D expenses for the period
ended March 31, 2005 also include a $1,000,000 upfront fee pursuant to the March 2005 license of
Celgenes small molecule tubulin inhibitor compounds for the treatment of cancer. The balance of our R&D expenditures includes facilities costs and other departmental overhead,
and expenditures related to the advancement of our pre-clinical pipeline. Those costs totaled
$1,189,000 and $1,542,000 for the three-month period ended March 31, 2005 and 2004, respectively. 11




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##### 



The expenditures that will be necessary to execute our business plan are subject to numerous
uncertainties, which may adversely affect our liquidity and capital resources. As of March 31,
2005, our proprietary product candidate, PanzemÒ, is in Phase I and Phase II clinical trials.
Completion of clinical trials may take several years or more, but the length of time generally
varies substantially according to the type, complexity, novelty and intended use of a product
candidate. We estimate that clinical trials of the type we generally conduct are typically completed over
the following timelines: ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    
    PERIODPhase I
    
    
    1 YearPhase II
    
    
    1-2 YearsPhase III
    
    
    2-4 Years
 The duration and the cost of clinical trials may vary significantly over the life of a project
as a result of differences arising during the clinical trial protocol, including, among others, the
following:  -
    the number of patients that ultimately participate in the trial;-
    the duration of patient follow-up that seems appropriate in view of the results;-
    the number of clinical sites included in the trials; and-
    the length of time required to enroll suitable patient subjects. We test our potential product candidates in numerous pre-clinical studies to identify
indications for which they may be product candidates. We may conduct multiple clinical trials to
cover a variety of indications for each product candidate. As we obtain results from trials, we
may elect to discontinue clinical trials for certain product candidates or for certain indications
in order to focus our resources on more promising product candidates or indications. Our proprietary product candidates also have not yet achieved FDA regulatory approval, which
is required before we can market them as therapeutic products. In order to proceed to subsequent
clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our
clinical data establish safety and efficacy. Historically, the results from pre-clinical testing
and early clinical trials have often not been predictive of results obtained in later clinical
trials. A number of new drugs and biologics have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory
approvals. 12




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An important element of our business strategy is to pursue the research and development of a
range of product candidates for a variety of oncology and non-oncology indications. This
allows us to diversify the risks associated with our research and development expenditures.
As a result, we intend to pursue development of our existing product candidates internally or
through development partnerships, as well as through the acquisition and subsequent development of
promising candidates. The goal is to align our future capital requirements with multiple product
candidates and to increase the likelihood that our future financial success is not substantially
dependent on any one product candidate. To the extent we are unable to maintain a broad range of
product candidates, our dependence on the success of one or a few product candidates would
increase. Furthermore, our business strategy includes the option of entering into collaborative
arrangements with third parties to complete the development and commercialization of our products.
In the event that third parties take over the clinical trial process for one of our product
candidates, the estimated completion date would largely be under the control of that third party
rather than us. We cannot forecast with any degree of certainty which proprietary products or
indications, if any, will be subject to future collaborative arrangements, in whole or in part, and
how such arrangements would affect our capital requirements. As a result of the uncertainties discussed above, among others, we are unable to estimate the
duration and completion costs of our research and development projects. Our inability to complete
our research and development projects in a timely manner or our failure to enter into collaborative
agreements, when appropriate, could significantly increase our capital requirements and could
adversely impact our liquidity. These uncertainties could force us to seek additional, external
sources of financing from time to time in order to continue with our business strategy. Our
inability to raise additional capital, or to do so on terms reasonably acceptable to us, would
jeopardize the future success of our business. Research and development expenses consist primarily of compensation and other expenses related
to research and development personnel, research collaborations, costs associated with internal and
contract pre-clinical testing and clinical trials of our product candidates, including the costs of
manufacturing the product candidates, and facilities expenses. Research and development expenses
increased to $4,379,000 in the quarter ended March 31, 2004 from $3,057,000 for the corresponding
period in 2003. The increase in 2005 reflects continuing preclinical costs and the January 2005
initiation of two Phase Ib clinical trials for reformulated PanzemÒNCD. The 2005
amount also includes increased costs associated with further development of various drug
candidates, including analogs of 2ME2 and a $1 million upfront fee associated with the license of
Celgenes small molecule tubulin inhibitor compounds for the treatment of cancer. The overall
increase in R&D expenses during the quarter ended March 31, 2005 was specifically impacted by the
following:  -
    Outside Services  We utilize outsourcing to conduct our product development
activities. Larger-scale small molecule synthesis, in vivo testing and data analysis are
examples of the services that we outsource. In the three-month period ending March 31,
2005, we expended $482,000 on these activities versus $365,000 in the same 2004 period.
The increase results from continued preclinical work on our 2ME2 analog program and our
other preclinical pipeline programs. 13




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-
    Collaborative Research Agreements  We made payments to our collaborators of $105,000
and $265,000 for the three months ended March 31, 2005 and 2004 respectively. Sponsored
research payments to academic collaborators include payments to Childrens Hospital, Boston
of $75,000 in 2005 and 2004. Our collaborative efforts are primarily directed towards
further exploration of PanzemÒ mechanism-of-action (MOA) and non-oncology applications.-
    Clinical Trial Costs  Clinical costs decreased to $201,000 in the three months ended
March 31, 2005, from $454,000 in the three-month period ending March 31, 2004. The 2005
amount reflects the initiation of two Phase Ib clinical trials for reformulated
PanzemÒNCD. The prior year amount resulted from a Phase Ia clinical trial
to test various dosing approaches for reformulated Panzem® conducted in the first quarter
of 2004. Costs of such trials include the clinical site fees, monitoring costs and data
management costs. In addition, we contribute PanzemÒ clinical material in tablet
form under our Collaborative Research and Development Agreement (CRADA) to the NCI, which
is conducting trials collaboratively with EntreMed.-
    Contract Manufacturing Costs  The costs of manufacturing the material used in clinical
trials for our product candidates is reflected in contract manufacturing. These costs
include bulk manufacturing, encapsulation and fill finish services, and product release
costs. Contract manufacturing costs for the three months ended March 31 increased to
$879,000 in 2005 from $295,000 in 2004. The increase reflects the scale-up of manufacturing
of the 2ME2 analog, ENMD-1198, for pre-IND tox studies and the purchase of additional bulk
2ME2 to support future PanzemÒNCD trials. Also included in our 2005 research and development expenses is an upfront payment of
$1,000,000 to Celgene Corporation for the license of tubulin inhibitor compounds. In connection
with this license agreement, we paid a $200,000 success fee to Ferghana Partners, Inc. Also reflected in our 2005 research and development expenses are personnel costs of $751,000,
patent costs of $121,000 and facility and related expenses of $336,000. In the corresponding 2004
period, these expenses totaled $819,000, $112,000 and $382,000, respectively. General and Administrative Expenses. General and administrative expenses include compensation
and other expenses related to finance, business development and administrative personnel,
professional services and facilities. General and administrative expenses decreased to $1,260,000 in the three-month period ended
March 31, 2005 from $2,093,000 in the corresponding 2004 period. The 2005 decrease is primarily due
to reduced professional fees, personnel costs and insurance expense.
Included in our 2004 G&A
expenses were the costs of settling certain disputes and severance and relocation costs associated
with management changes. Investment income. Investment income increased by 86% in the period ending March 31, 2005 to
$158,000 from $85,000 in the corresponding 2004 period as a result of higher yields on
higher invested balances in interest bearing cash accounts and investments during the 2005
period. 14




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Dividends on Series A convertible preferred stock. The Consolidated Statement of Operations
for the periods ended March 31, 2005 and 2004 reflect a dividend of $251,250 relating to Series A
Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated
December 31, 2002. The holders of Series A Preferred Stock will accumulate dividends at a rate of
6% and will participate in dividends declared and paid on the common stock, if any. All accumulated
dividends must be paid before any dividends may be declared or paid on the Common Stock. The
Company has no plans to pay any dividends in the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES To date, we have been engaged primarily in research and development activities. As a result,
we have incurred and expect to continue to incur operating losses for 2005 and the foreseeable
future before we commercialize any products. In addition, under the terms of the license agreement
for 2ME2 and our recent license of Celgenes tubulin inhibitor program, we must be diligent in
bringing potential products to market and may be required to make future milestone payments. If we
fail to comply with the milestones or fail to make any required sponsored research or milestone
payment, we could face the termination of the relevant sponsored research or license agreements. At March 31, 2005, we had cash and short term investments of approximately
$43,590,000 with working capital of approximately $39,592,000. These balances reflect Celgene
Corporations March 2005 purchase of 7,000,000 shares of common stock through the exercise of
warrants acquired in December 2002. As a result of the warrant exercise, we received gross
proceeds of $10,500,000 and paid Ferghana Partners, Inc. a fee of $525,000, pursuant to a prior
agreement in connection with the sale of warrants to Celgene in December 2002. We invest our capital resources with the primary objective of capital preservation. As a
result of trends in interest rates in 2005, we have invested in some securities with maturity dates
of more than 90 days to enhance our investment yields. As such, some of our invested balances are
classified as short-term investments rather than cash equivalents in our consolidated financial
statements at March 31, 2005. To accomplish our business plans, we will be required to continue to conduct substantial
development activities for all of our proposed products. Under our current operating plans, results
of operations are expected to reflect a net loss of approximately $20,000,000 in 2005. We expect
that the majority of our 2005 revenues will be from royalties on the sale of Thalomid®. As a
result of the satisfaction of certain provisions of a purchase agreement dated June 14, 2001 by and
between Bioventure Investments kft (Bioventure) and the Company, beginning in 2005 we are
entitled to share in the royalty payments received by Royalty Pharma Finance Trust, successor to
Bioventure, on annual Thalomid® sales above a certain threshold. Based on the licensing agreement
royalty formula, annual royalty sharing commences with Thalomid® annual
sales of approximately $235 million. Pursuant to public guidance provided by Celgene for
Thalomid® sales in 2005, we expect to record royalty sharing revenues in excess of $4.0 million in
2005. Under our licensing agreement with Oxford Biomedica, PLC and Oxford Biomedica (UK) Limited
Oxford, we are entitled to receive payments upon the achievement of certain milestones. We do not
control the drug development efforts of Oxford and have no control over when or whether such
milestones will be reached. We do not believe that we will receive any such milestone payments
under these agreements in 2005. 15




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Based on our assessment of our current capital resources coupled with anticipated inflows, in
the absence of additional financing, we believe that we will have adequate resources to fund
operations into 2007. Our estimate may change, however, based on our decisions with respect to
future clinical trials related to Panzem®, the timing of receipt of milestone payments,
developments in our business including the acquisition of additional intellectual property, other
investments in new or complimentary technology, and our success in executing our current business
plan. To address our long-term capital needs, we intend to continue to pursue strategic
relationships that would provide resources for the further development of our product candidates.
There can be no assurance, however, that these discussions will result in relationships or
additional funding. In addition, we may continue to seek capital through the public or private sale
of securities, if market conditions are favorable for doing so. If we are successful in raising
additional funds through the issuance of equity securities, stockholders will likely experience
substantial dilution, or the equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. If we raise funds through the issuance of debt
securities, those securities would have rights, preferences and privileges senior to those of our
common stock. There can be no assurance that we will be successful in seeking additional capital. INFLATION AND INTEREST RATE CHANGES Management does not believe that our working capital needs are sensitive to inflation and
changes in interest rates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve our capital until it is
required to fund operations while at the same time maximizing the income we receive from our
investments without incurring investment market volatility risk. Our investment income is
sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on our cash and cash equivalents. Due to the short term
nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not
materially impact on the total fair market value of our portfolio as of March 31, 2005. 16




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ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under
the Exchange Act of 1934 as of the end of the first quarter of 2005. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in timely alerting them to material information required to be included in
the periodic SEC filings for the Company (including its consolidated subsidiary). There was no change in internal control over financial reporting that occurred during the
first quarter of 2005 that has materially affected or is reasonably likely to materially affect the
Companys internal control over financial reporting. 17




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PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS EntreMed is subject in the normal course of business to various legal proceedings in which
claims for monetary or other damages may be asserted. Management does not believe such legal
proceedings, except as otherwise disclosed herein, are material. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS Exhibits 10.25
    
    License Agreement By and Between EntreMed, Inc. and Celgene
Corporation effective March 23, 2005*31.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Rule 13a-14(b) Certification by President and Chief Executive Officer32.2
    
    Rule 13a-14(b) Certification by Chief Financial Officer
    Through its website at www.entremed.com, the Company makes available, free of charge, its annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all
amendments thereto, as soon as reasonably practicable after such reports are filed with or
furnished to the Securities and Exchange Commission. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. ENTREMED, INC.(Registrant)Date: May 5, 2005
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: May 5, 2005
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 19