**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| (Mark One)                                            | ** ** | ** **                                                                                              |
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| **x**                                                 | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
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| For the fiscal  year ended **December 31, 2007** |
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| or                                                    |
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| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

Forthe transition periodfrom                  to                 

 

Commissionfile number: **001-15070**

 

**RegeneRxBiopharmaceuticals, Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                               | ** ** | **52-1253406**       |
|------------------------------------------------------------|------------|----------------------|
| State or other  jurisdiction of                            |       | (I.R.S. Employer     |
| incorporation or  organization                             |       | Identification  No.) |
|                                                       |       |                 |
| **3  Bethesda Metro Center, Suite 630, Bethesda, MD** | ** ** | **20814**            |
| (Address of  principal executive offices)                  |       | (Zip Code)           |

 

Registrant’stelephone number, including area code**: 301-280-1992**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of  each class**      | ** ** | **Name of  each exchange on which registered** |
|-------------------------------|------------|------------------------------------------------|
| Common Stock $0.001 par value |       | American Stock Exchange                        |

 

Securitiesregistered pursuant to section 12(g) of the Act:  **None.**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes  x No

 

Indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or Section 15(d) of theAct. o Yes  x No

 

**Note** — Checking the box above will not relieve anyregistrant required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934 from their obligations under thoseSections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.       x Yes  o No

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’ s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10- K                                       o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See definitions of “accelerated filer,” “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theSecurities Exchange Act of 1934. (Check one):

 

| Large accelerated filer  o                |   | Accelerated filer  o         |
|------------------------------------------------|--------|-----------------------------------|
| Non-accelerated filer  o                  |   | Smaller reporting company  x |
| (Do not check if  a smaller reporting company) |   |                              |

 

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

 

As of June 30, 2007, the aggregate market valueof the voting stock held by non-affiliates of the registrant was approximately$49.8 million. Such aggregate market value was computed by reference to theclosing price of the Common Stock as reported on the American Stock Exchange onJune 30, 2007.

 

The number of shares outstanding of the registrant’scommon stock, as of March 17, 2008 was 51,553,527.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

**None.**

 

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**PART I**

 

*This Annual Report on Form 10-K, including the section entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” contains forward-looking statements regarding us and our business,financial condition, results of operations and prospects within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements may be identified by the words “project,” “believe,” “anticipate,”“plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,”“may” or other similar expressions.**In addition, any statements thatrefer to projections of our future financial performance,**our clinicaldevelopment programs and schedules, our anticipated growth and trends in ourbusiness, the anticipated approval of shares under our additional listingapplication with Amex, and other characterizations of future events orcircumstances are forward-looking statements.**Wecannot guarantee that we will achieve the plans, intentions or expectationsexpressed or implied in our forward-looking statements.  There are a number of important factors thatcould cause actual results, levels of activity, performance or events to differmaterially from those expressed or implied in the forward-looking statements wemake, including those described under “Risk Factors” set forth below. Inaddition, any forward-looking statements we make in this document speak only asof the date of this document, and we do not intend to update any suchforward-looking statements to reflect events or circumstances that occur afterthat date.*

 

**Item 1.Business.**

 

**General**

 

                RegeneRx Biopharmaceuticals, Inc.(the “Company”, “we”, “us”, “our” or “RegeneRx”), is a biopharmaceuticalcompany focused on the discovery and development of novel molecules to promotetissue and organ repair.  Currently, wehave formulated three drug products based on Thymosin beta 4 (“Tβ4”),a 43 amino acid peptide.  Current research suggests that these drugproducts may prove efficacious for multiple medical indications whenadministered either topically or systemically. Therefore, we are developing several Tβ4-based therapeutic drug candidates:  RGN-137, a topically applied gel product forhard-to-heal chronic dermal wounds; RGN-259, a sterile, preservative-freetopical eye drop for ophthalmic wounds; and RGN-352, a parenteral (injectable)formulation for systemic delivery for treatment of patients with an acute myocardial infarction (“AMI”), orheart attack.. We holdmore than 60 world-wide patents and patent applications related to dermal,ophthalmic, and other organ and tissue repair. Under three Investigational New Drug Applications (“INDs”),cleared by the U.S. Food and Drug Administration (“FDA”), we are sponsoring, inparallel, three Phase II dermal wound healing clinical trials for RGN-137, aPhase II ophthalmic wound healing trial for RGN-259 and a Phase I clinicaltrial utilizing RGN-352 in support of our cardiovascular clinical program.  Under one of our INDs and with Europeanregulatory approval, an affiliate of Sigma-Tau Finanziaria S.p.A., orSigma-Tau, our largest stockholder and a leading international pharmaceuticalcompany, is conducting one of the Phase II dermal wound healing clinical trialsin venous stasis ulcers in Italy and Poland. Sigma-Tau has assumed all associated costs.

 

Weutilize an outsourcing business strategy, as we believe this helps us tocontrol costs while focusing on the clinical development of Tb4-based productcandidates.  We use this model forcertain research and development programs, nonclinical pharmacology andtoxicology studies, clinical trials, and manufacturing operations, as well asother administrative functions such as legal and accounting services.  In tandem with an experienced managementstaff, we believe this approach enhances our ability to allocate resourcesrapidly to different projects while reducing the need for expensive infrastructure.  The strategy utilizes vendors and contractmanufacturers to supply clinical grade material and to formulate andmanufacture each drug candidate.  It alsoincludes utilizing third-party 

 

 

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contractresearch organizations to perform pre-clinical studies and/or clinical trialsin accordance with our designed protocols.

 

**Primary Commercial Development Focus — Thymosin Beta 4**

 

                *General.* Originally isolated from the thymus gland, Tb4 is a chemicallysynthesized copy of a naturally-occurring 43-amino acid peptide that is foundin a majority of tissue types with the highest concentrations in bloodplatelets and white blood cells.  Tb4 is also foundextracellularly in blood plasma, wound fluid and tears. It plays a vital rolein cell structure and motility and in the protection, regeneration, remodelingand healing of tissues.  Although it isrecognized that wound healing is a complex process, most companies working todevelop new drugs in this area have focused primarily on adding differentgrowth factors to stimulate healing and have, to date, failed to demonstratedramatic improvements in the healing process. Unlike those growth factors, numerous studies, published by independentresearchers, have identified several important biological activities involvingTb4 that make itunique as a wound healing agent.

 

Tb4 regulates actin, whichcomprises up to 10% of the protein of non-muscle cells and plays a central rolein cell structure (formation of the cytoskeleton) and in the movement of cellsthroughout the body.  Research studiesfrom the National Institutes of Health (“NIH”) established that Tb4 stimulates the migrationof human keratinocytes (skin cells) and the migration of human endothelialcells.  Endothelial cells are the majorcell types responsible for the formation of blood vessels, a process known asangiogenesis, and other tissues. These studies were the first to document theimportant role of Tb4 in wound healing.

 

Tb4 also reduces inflammationand stimulates the formation of collagen and up-regulates the expression of asubepithelial membrane protein, laminin-5. Both substances are central to healthy tissues and prevention ofdisease.   In combination, these variousmechanisms of action work together to play a vital role in the healing ofinjured or damaged tissues.

 

Tb4 has also been shown toprevent apoptosis (programmed cell death) in both the cornea (eye) andmyocardium (heart).  Further, *in vivo* preclinical studies have shown Tb4 to be active bothtopically and systemically to accelerate wound healing in the skin to becardioprotective in the ischemic heart failure.   In combination, these various mechanisms ofaction work together to play a vital role in the healing of injured or damaged tissues.

 

Basedon the foregoing biological activities, in addition to others, we believe Tb4 to be an essentialcompound in the wound-healing process and as such will have many potentialmedical applications.  Tb4 therefore is the basis ofour clinical programs from which we intend to develop unique medical productsand investigate its broad clinical potential.

 

*Product Development.*  With time, we have learned more about Tb4’s therapeutic potentialand its underlying mechanisms of action, and have expanded our clinicaldevelopment program beyond the chronic dermal wound indications initiallytargeted.  Tb4’s role in healing dermalwounds in pre-clinical *in vivo* modelswas initially established by the National Institutes of Health (“NIH”).  These data led management to license Tb4 from the NIH, a licensediscussed in more detail under *Proprietary Rights*below, and to launch a clinical development program that targeted promisingindications, all of which were related to chronic dermal wounds.  Researchers at Wayne State University and theKresge Eye Institute subsequently published pre-clinical *in-vivo*data that suggested Tb4 may have significanthealing potential in the cornea.  Thesefindings were followed by results 

 

 

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publishedin Nature, November 25, 2004, based on research conducted by theUniversity of Texas — Southwestern Medical Center, that suggested Tb4 may prevent damage ofmyocardium (heart tissue) immediately after an acute myocardial infarction (“AMI”)in pre-clinical *in vivo* models.

 

Theseindependent foundational research efforts have guided our current clinicaldevelopment program for chronic dermal wounds, ophthalmic injuries andAMIs.  Management and our Board ofDirectors, or our Board, are focused on proving human efficacy of Tb4 in these areas.  And, while we are not currently initiatingadditional clinical programs, we continually monitor all of the scientificresearch surrounding Tb4 to confirm our clinicalstrategy and to evaluate additional indications we might target at a futuredate.  For instance, a study published in*Nature*, November 15, 2006 bythe collective efforts of scientists from University College — London,Massachusetts General Hospital, and Baylor University identified Tb4 as the triggering factorto stimulate adult epicardial progenitor or stem cells to mature into bloodvessels and being responsible for normal fetal heart development andmaintenance of a healthy adult heart. Further, on November 5, 2007, at an American Heart Associationmeeting in Orlando, Florida, researchers from the University of Munich,Vanderbilt University, and the University of Texas - Southwestern MedicalCenter reported Tb4’s cardio-protective effects in an ischemic-reperfusion model, thus, closely replicatingthe human procedure for unblocking arteries and then utilizing Tb4 to protect the heart.  These results, as well as others, providesignificant evidence to suggest that Tb4’s collective mechanisms ofaction and its anti-apoptotic properties in particular, could providetherapeutic relief in other ischemic conditions elsewhere in the body.

 

*Clinical Development. *In December of2002, following the submission of our first IND, the FDA allowed us to beginPhase I human dermal clinical trials with RGN-137.  The Phase I trial was successfully completedin September of 2003.  In November 2004,January 2005 and February 2005, we were cleared to initiate our firstof three dermal Phase II wound healing clinical trials using our dermalproduct, RGN-137.  The first Phase IItrial assess the safety and effectiveness of RGN-137 in the treatment ofpatients with chronic pressure ulcers, more commonly referred to as bedsores.  Based on the latest enrollmentinformation, we believe full patient enrollment should be completed in thesecond quarter of 2008 and we expect to report data in the third quarter of2008.  The second trial is designed toassess safety and effectiveness of RGN-137 in the treatment of patients withepidermolysis bullosa (“EB”), a genetic defect manifested by the presence offragile skin and other tissues that can blister at the slightest trauma orfriction. We also believe this trial should be complete enrollment in thesecond quarter of 2008 The third Phase II trial targets the treatment ofpatients with venous stasis ulcers that result from poor blood circulation(venous insufficiency).  The venousstasis trial is being co-managed by RegeneRx and Sigma-Tau, is paid for in itsentirety by Sigma-Tau, and is being conducted pursuant to our U.S. IND.  Of our three current Phase II trials, EB hasbeen designated as an “orphan” indication due to a prevalence in the U.S. ofless than 200,000 patients. Additionally, RegeneRx was awarded a $545,000 grant from the Office ofOrphan Drug Products at the FDA to support the EB clinical trial.  We expect patient accrual to be completedlater in the fourth quarter of 2008 or the first quarter of 2009, with thereporting of data as soon as practicable thereafter.  For additional information regarding the regulatoryapproval process for our product candidates, see “Government Regulation” below.

 

In2005, based on the reported results of pre-clinical studies indicating Tb4’s ability to acceleratecorneal wound healing in the eye and its healing and protective properties inthe heart, we decided to expand our development program to include thefollowing additional clinical indications. We are currently enrolling diabetic patients who undergo cornealepithelial debridement (removing the outer layer of the eye) during vitrectomysurgery and, due to their diabetes, often heal slowly or incompletely.  The design of the study allows us to assessthe safety and effectiveness of RGN-259 in this patient population in a highlycontrolled manner. Therefore, we believe this to be an excellent 

 

 

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modelwith which to measure the efficacy and safety of our ophthalmic productcandidate, RGN-259.  However, we do notview this model as a significant commercial indication, but rather aproof-of-concept trial, after which we will target other ophthalmic indicationswith larger market potential.  We expectto complete enrollment in the fourth quarter of 2008 or the first quarter of2009, with the reporting of data as soon as practicable thereafter.  It is possible, however, that due to thedeclining number of debridement procedures in general with this type ofsurgery, patient accrual could be slower than we have targeted.

 

Wehave also conducted a series of pre-clinical studies and are sponsoring a PhaseI clinical trials in healthy volunteers for parenteral administration ofRGN-352 to support future use in Phase II clinical trials in patients withAMIs.  In 2006 we held a pre-IND meetingwith the FDA and subsequently filed an IND for this indication at the end ofthe first quarter of 2007.  The FDAcleared us to initiate a Phase I clinical trial, beginning with Phase IAfollowed by Phase IB. This clinical trial is currently being initiated.  We expect the Phase IA to complete enrollmentin the second quarter of calendar year 2008 and report data in the later partof the third quarter of 2008.

 

Allof our efforts to develop these applications will likely require substantialadditional capital to undertake or complete. There can be no assurance that we will be able to obtain capital insufficient amounts, or on acceptable terms, or at all.  If we raise funds by selling additionalshares of our common stock or securities convertible into our common stock, theownership interest of our existing stockholders may be significantly diluted.In addition, if additional funds are raised through the issuance of preferredstock or debt securities, these securities are likely to have rights,preferences and privileges senior to our common stock and may involvesignificant fees, interest expense, restrictive covenants and the granting ofsecurity interests in our assets. Our failure to successfully address ongoingliquidity requirements would have a material negative impact on our business,including:  the possibly of surrenderingour rights to some technologies or product opportunities, delaying our clinicaltrials, or ceasing operations.  For additional information regarding ourfinancial resources, see “Liquidity and Capital Resources under Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” below.  For additionalinformation regarding our efforts to commercialize Tb4, see “Proprietary Rights”below.

 

*LicensingEfforts.*  We also are continuing to focus on findingone or more third-party pharmaceutical companies to license our technology andto help us continue the development of our product candidates.  We believe that having such partners wouldenable us to both defray the costs associated with the development of ourproduct candidates and accelerate the speed with which we may be able tocomplete development of and obtain regulatory approval for our productcandidates and commercialize such products. However, we can offer no assurance that we will be able to enter intolicense and development agreements with third-party pharmaceutical companies orthat any such relationships would in fact decrease our costs or accelerate ourproduct development efforts.  

 

**Manufacturing**

 

Weuse an outside contract manufacturer to produce bulk Tb4, i.e., the activepharmaceutical ingredient (“API”) via an established and proven manufacturingprocess known as solid-phase peptide synthesis. We are in the process of qualifying other manufacturers.  Currently, we do not have any long-termsupply agreements in place.  Therefore,we intend to establish a long-term supply arrangement with at least one ofthese manufacturers in the near future, followed by a second manufacturer atthe earliest practicable time.  Noassurance can be given, however, that such agreements will be negotiated onfavorable terms, or at all.  Contractorsare selected on the basis of their supply capability, ability to produce a drugsubstance in accordance with current Good Manufacturing Practice (“GMP”) requirementsof the FDA, and ability to meet our established specifications.

 

Wealso use outside contract manufacturers to formulate bulk Tb4 into a final drugproduct.  We have finished theformulation and development work for RGN-137 used in our three Phase II chronicdermal wound trials currently underway. We have completed formulation of a sterile eye drop, RGN-259, that weare using in our ophthalmic (“DV”) trial. And, we have completed the formulation development of RGN-352, asterile, parenteral (injectable) solution we will use in our Phase I and AMItrials.  All of these formulations mayrequire additional studies and undergo various modifications as we move throughour clinical development programs.

 

 

 

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**Competition**

 

Weare engaged in a business that is highly competitive.  Research and development activities for thedevelopment of new drugs to treat patients with our targeted indications arebeing sponsored or conducted by private and public institutions and by majorpharmaceutical companies located in the United States and a number of foreigncountries.  Most of these entities havefinancial and human resources that are substantially greater than ours, andspecifically with regard to the conduct of clinical research and developmentactivities, clinical testing and in obtaining the regulatory approvalsnecessary to market pharmaceutical products.

 

Withrespect to dermal wound healing, Johnson & Johnson has marketedRegranexTM for this purpose in patients with diabetic foot ulcers.  Othercompanies, such as Novartis, are developing and marketing artificial skins,which could compete with our product candidates in dermal wound healingareas.  Moreover, dermal wound healing isa large and highly fragmented marketplace attracting many companies, large andsmall, to develop therapeutic products and medical devices for treating acuteand chronic dermal wounds including, for example, honey-based ointments and lowfrequency cavitational ultrasound.

 

There are numerous companies and institutionsengaged in research, development and marketing of products for ophthalmic woundhealing and treatment of ophthalmic disorders where Tb4 may be useful.  Most specialty ophthalmic companies havevarious products on the market that could compete with Tb4 or be modified to competewith our product candidates.  Othercompanies market antibiotics and steroids to treat certain conditions withinour area of focus.

 

Currently,there are no approved pharmaceutical products for preventing or repairingcardiac damage resulting from an AMI. However, the market for a product of this type is significant and manypharmaceutical companies and research organizations are exploring products andtechnologies that may prevent such damage or improve cardiac function after anAMI.  Furthermore, if we were tosuccessfully develop RGN-352 for other cardiovascular indications, such asacute or chronic congestive heart failure, such a product would have to competewith other drugs currently marketed by large pharmaceutical companies for suchindications.

 

**Government Regulation**

 

In the United States, the Federal Food, Drug,and Cosmetic Act, as amended, and the regulations promulgated thereunder, andother federal and state statutes and regulations govern, among other things,the testing, manufacturing, labeling, storing, recordkeeping, approving,advertising, and promoting of our product candidates.  Regulation by governmental authorities in theUnited States and foreign countries will be a significant factor in themanufacturing and marketing of our product candidates and in our ongoingresearch and product development activities. Any product candidate we develop will require regulatory approval bygovernmental agencies prior to commercialization.  In particular, human therapeutic products aresubject to rigorous pre-clinical studies and clinical trials and other approvalprocedures by the FDA and similar health authorities in foreign countries.  The process of obtaining these approvals andsubsequent compliance with appropriate federal and state statutes andregulations require the expenditure of substantial resources.

 

Pre-clinicalstudies must ordinarily be conducted to evaluate the potential efficacy bypharmacology studies and the safety of an investigational new drug bytoxicology studies.  The results of thesestudies, among other things are submitted to the FDA as part of anInvestigational New Drug 

 

 

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Application,or IND, which must be reviewed and allowed to go into effect by the agencybefore clinical trials can begin. Typically, clinical evaluation involves a three-stage process.  In Phase I clinical trials are typicallyconducted with a small number of healthy volunteers to determine thesafety  profile, the pattern of drugdistribution, metabolism and excretion, and to assess the drugs affect on thesubject.  In Phase II (therapeuticexploratory), trials are conducted with somewhat larger groups of patients, whoare selected by a relatively narrow criteria yielding a relatively homogenouspopulation that are afflicted with the target disease, in order to determinepreliminary efficacy, optimal dosages and expanded evidence of safety. Phase IIstudies should allow for the determination of the dose to be used in PhaseIII.  In Phase III (therapeuticconfirmatory), large scale, multi-center, comparative trials are conducted withpatients afflicted with a target disease in order to provide enough data forthe statistical proof of safety and efficacy and safety required by the FDA andother regulatory authorities. The primary objective of Phase III clinicaltrials is to show that the drug confers therapeutic benefit.

 

Theresults of all of these pre-clinical studies and clinical trials, along withdetailed information on manufacturing, are submitted to the FDA in the form ofa New Drug Application, or NDA, for approval to commence commercial sales.  In responding to an NDA, the FDA may grantmarketing approval, request additional information or deny the application ifthe FDA determines that the application does not satisfy its regulatoryapproval criteria.  Therefore, even if wecomplete Phase III clinical trials for certain of our product candidates, andsubmit an NDA to the FDA, there can be no assurance that the FDA will grantmarketing approvals, or if granted, that they will be granted on a timelybasis.  If the FDA does approve a productcandidate, it may require, among other things, post-marketing testing,including potentially expensive Phase IV studies (efficacy studies in thepatient population after marketing), and surveillance to monitor the safety andeffectiveness of the drug.  In addition,the FDA may in some circumstances impose restrictions on the use of the drugthat may be difficult and expensive to administer.  Product approvals may be withdrawn ifcompliance with regulatory requirements is not maintained or if problems occurafter the product reaches the market.

 

Amongthe conditions for an NDA approval, is the requirement that the applicablemanufacturing, clinical, pharmacovigilance, quality control and manufacturingprocedures conform on an ongoing basis with current Good Clinical Practices,Good Laboratory Practices, current Good Manufacturing Practices, and computerinformation system validation standards. Before approval of an NDA, the FDA will perform a prelicensinginspection of clinical sites, manufacturing facilities and the related qualitycontrol records to determine its compliance with these requirements.  To assure compliance, applicants mustcontinue to expend time, money and effort in the area of training, productionand quality control.  After the applicantis licensed for the manufacture of any product, manufacturers are subject toperiodic inspections by the FDA.  If acompany fails to comply with FDA regulatory requirements, FDA may pursue a widerange of remedial actions.

 

Inrecent years, an increasing number of legislative proposals have beenintroduced or proposed in Congress related to the regulation of drug products,and we cannot predict the outcome or effect of such legislation on ourbusiness.

 

In June 2004, we received Orphan Drugdesignation from the FDA for Tb4 for the treatment of Epidermolysis Bullosa, a rare genetic diseasecharacterized by the presence of extremely fragile skin and other tissues,resulting in recurrent blisters from minor mechanical friction or trauma.  Under the Act, the FDA may designate aproduct or products as having Orphan Drug status to treat “a rare disease orcondition” which is a disease or condition that affects populations of lessthan 200,000 individuals in the United States, or, if victims of a diseasenumber more than 200,000, the sponsor establishes that it does not realisticallyanticipate its product sales will be sufficient to recover its costs.  If a product candidate is designated as anOrphan Drug, then the sponsor is entitled to receive certain 

 

 

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incentivesto undertake the development and marketing of the product, including grants forclinical trials.  In 2006, we received atwo-year grant for $545,000 from the FDA’s office of Orphan Products.     Another such incentive, once approved, ismarketing exclusivity for a period of seven years.  There may be multiple designations of OrphanDrug status for a given drug and for different indications.  The sponsor of the first approved NDA for agiven drug for its use in treating a rare disease may receive marketing exclusivityfor that specific use.  Orphan Drugdesignation does not guarantee that a product candidate will be approved by theFDA for marketing for the designation, and even if a sponsor of a productcandidate for an indication for use with an Orphan Drug designation is thefirst to obtain FDA approval of an NDA for that designation and obtainsmarketing exclusivity, another sponsor’s application for the same drug productmay be approved by the FDA during the period of exclusivity if the FDAconcludes that it is clinically superior. In this instance, the orphan designation and marketing exclusivityoriginally granted would be lost in favor of the clinically superior product.

 

**Proprietary Rights**

 

Weentered into a Material Transfer — Cooperative Research and DevelopmentAgreement with the NIH during the second quarter of 1997.  Under this agreement, we received an optionto elect an exclusive or non-exclusive commercialization license from the NIHfor any patent rights that might result from the NIH research study that relateto the use of Tb4 as a tissuegrowth and repair factor.  A provisionalpatent application was filed by NIH in July 1998, with a PatentCooperation Treaty application filed in July 1999, pertaining to the workperformed on Tb4.  On February 6, 2001, we executed anagreement with the NIH giving us an exclusive worldwide license from the NIHfor all claims to Tb4 within the patentapplication.  In exchange for theexclusive license, we must make certain royalty and milestone payments to theNIH.  Through December 31, 2007 wehave complied with these requirements.

 

 No assurance can be given as to whether orwhen certain patents will be issued, or as to any claims that may be includedor excluded within the patent, or subsequent to its issuance   We have also filed numerous additional patentapplications covering various compositions, uses, formulations and othercomponents of Tb4, as well asto novel peptides resulting from our research efforts.  During2007, we were issued a patent in Europe and the U.S. related to theoriginal NIH patent that expires twenty years from the filing date July 29,1999.  Corresponding patents have beengranted in Hong Kong, Australia and China. The issued European Patent is being opposed by a third party at the EuropeanPatent Office.  In addition, we hold aU.S. patent relating to the treatment of an autoimmune skin disease thatresults in hair loss, Alopecia.  Thepatent, No. 6,030,948, entitled “Hair Regeneration Compositions forTreatment of Alopecia and Method of Application Related Thereto,” issued February 29,2000 and expires in December of 2017, with corresponding patents grantedin Europe and Singapore which expire December 18, 2018.  In February 2006, we were issued apatent in China entitled “Treating Epidermolysis Bullosa with Thymosin b4,” which expires May 16,2022. There can be no assurance that these, or any other future patentapplications under which we have rights, will result in the issuance of apatent or that any patent issued will not be subject to challenge oropposition.  In the case of a claim ofpatent infringement by or against us, there can be no assurance that we will beable to afford the expense of any litigation that may be necessary to enforce ourproprietary rights.

 

Undera research agreement with The George Washington University (“GWU”), we funded Tb4 research at GWU and weregranted a sole and exclusive world-wide license to any patents that resultedfrom such research.  While we no longerfund research under this agreement, we remain obligated to pay GWU a royalty of4% of the net sales, if any, of specified products covered by patents issued inconnection with the agreement.  Pursuantto the research agreement, we have exclusive rights 

 

 

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topatent applications filed in the United States and in Europe disclosing the useof Tb4 for thetreatment of septic shock and associated syndromes, including Adult RespiratoryDistress Syndrome.  Two U.S. patents havebeen issued.  The first patent, No. 5,578,570,entitled “Method of Treating Septic Shock Using Tb4,” issued on November 26,1996 and expires in November 2013 and the second patent, No. 5,593,964,entitled “Method of Treating Septic Shock By Preventing Actin Polymerization,”issued on January 14, 1997 and expires in October 2014.  No sales have occurred and as a result, noroyalty payments have yet been incurred or paid to GWU pursuant to the researchagreement.  We have also filed otherpatent applications related to Tb4 and related compounds andindications for their use in countries throughout the world.

 

**Material Agreements**

 

*Licensing Agreements. *As noted in *Proprietary Rights* above, we are obligated to pay royaltiesto the NIH and GWU.  While the NIHagreement calls for a minimum annual royalty of $25,000, other obligations willbe triggered only upon the sale or license of our technology to a third-party.

 

*Defiante Farmaceutica, LDA. *We haveexclusively licensed certain internal and external wound healing Europeanrights to Tb4 to DefianteFarmaceutica, LDA, or Defiante, a Portuguese company that is a wholly ownedsubsidiary of Sigma-Tau, a pharmaceutical company headquartered in Rome, Italyand our largest stockholder.  Theserights include indications relative to all of our current dermal clinicaltrials and AMIs, but exclude ophthalmic indications and other indications thatare disease-based and not the result of a wound. Defiante will develop Tb4 for internal and externalwounds in Europe and certain other contiguous and geographically relevantcountries.  The Agreement expires on acountry-by-country basis upon the later of the expiration of the last to expireof any granted patent in the territory having at least one valid claim coveringthe products then on the market, the expiration of any other exclusive orproprietary marketing rights or twelve years from the effective date of theagreement (which was in January 2004).

 

Underthe Agreement, Defiante will pay us a royalty on commercial sales and we willsupply all required Tb4.  When at least one positive Phase II clinicaltrial is completed, Defiante must either pay us $5 million or initiate aPivotal****Phase III clinical trial to maintainthe license.  Defiante also will beobligated to attain future clinical and regulatory milestones in the licensedterritory.  As those milestones areattained, certain performance criteria regarding commercial registration andminimum annual royalties will be required in each licensed country.  The agreement does not prevent us fromsublicensing the technology in countries outside the licensed territory, andhas no impact on any U.S. rights.

 

**Clinical Development Agreements**

 

Weentered into various agreements with a variety of outside service providers forthe manufacture and development of Tb4, formulation of productcandidates, the conduct of pre-clinical safety, toxicology and efficacy studiesin animal models, and management/execution of clinical trials in humans.  Terms of these agreements vary, in that theycan last from a few months to more than a year in duration.  Certain of these agreements require initialup front payments ranging from 25% to 50% of the total estimated cost.  For additional information regarding the costsincurred for our clinical development over the past two years, see “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” below.

 

 

 

 

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**Employees**

 

To balance costs and optimize control, weutilize an outsourcing business strategy, whereby our internal, experiencedmanagement experts, tightly control outsourced activities for many of ourresearch and development and administrative functions. Recognizing the periodicspikes in costs associated with a focused clinical development effort, complicatedfurther by the constant variation in skills needed at any one time, rangingfrom chemical drug formulation to pre-clinical studies to clinical trialmanagement, we believe that the use of outside contractors as and when neededis more cost-effective than directly employing and maintaining facilities tosupport these varied efforts.  Wecurrently have ten full-time employees.

 

**Corporation Information**

 

Wewere organized as a Delaware corporation in 1982.  Our principal executive offices are locatedat 3 Bethesda Metro Center, Suite 630, Bethesda, Maryland 20814.

 

**Available Information**

 

Formore information about us, visit our web site at www.regenerx.com. Ourelectronic filings with the U.S. Securities and Exchange Commission (includingour annual report on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K, and any amendments to these reports) areavailable free of charge through our web site as soon as reasonably practicableafter we have electronically filed such information with, or furnished suchinformation to, the Securities and Exchange Commission (the “SEC”).  In addition, the public may read and copy anymaterials we filed with the SEC at the SEC’s Public Reference Room at 100F Street, NE, Washington, DC, 20549, on official business days during the hoursof 10:00 a.m. to 3:00 p.m.  Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.  TheSEC also maintains an Internet site at http://www.sec.gov that containsreports, proxy and information statements, and other information regarding ourelectronic filings with the SEC.

 

 

 

 

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**Item 1A****.****Risk Factors****,**

 

**RisksRelated to Our Business**

 

***We have incurred losses since inception and expectto incur significant losses in the foreseeable future and may never becomeprofitable.***

 

Wehave sustained operating losses since our inception in 1982. We believe theselosses will continue for the foreseeable future as we pursue our productdevelopment efforts related to Tβ4. As of December 31, 2007, ouraccumulated deficit totaled $67.4 million and our cash and cash equivalentstotaled $8.3 million.

 

Weanticipate substantial and increasing operating losses over the next severalyears as we continue our research and development efforts and seek to obtainregulatory approval of our product candidates to make them commercially viable.Our ability to generate additional revenues and potential to become profitablewill depend largely on our ability, alone or through the efforts of third-partylicensees, to efficiently and successfully complete the development of ourproduct candidates, obtain necessary regulatory approvals forcommercialization, scale-up commercial quantity manufacturing capabilitieseither internally or through third-party suppliers, and market our productcandidates. There can be no assurance that these objectives will occur or thatwe will ever become profitable or be able to maintain profitability. Even if wedo achieve profitability, we cannot predict the level of such profitability. Ifwe sustain losses over an extended period of time and are not otherwise able toraise necessary funds to continue our development efforts and maintain ouroperations, we may be forced to cease operations.

 

*** We will needsubstantial additional capital to develop our******product candidates******and for our future operations. If we are unable to obtain such funds whenneeded, we may have to delay, scale back or terminate our product developmentefforts or our business.***

 

Weanticipate that substantial new capital resources will be required to continueour independent development efforts, including any and all follow-on trialsthat will result from our current clinical programs, and increasingly scaled-upmanufacturing processes for RGN-137, RGN-259 and RGN-352. The actual amount offunds that we will need will be determined by many factors, some of which arebeyond our control. These factors include, without limitation;

 

·             the scope of our clinical trials, which issignificantly influenced by the quality of clinical data achieved as trialscomplete and the requirements established by regulatory authorities,

·             the speed with which we complete our clinical trialscomplete, which depends on the speed with which we can attract and enrollqualifying patients and the quality of the work performed by our clinicalinvestigators,

·             the time required to prosecute, enforce and defendour intellectual property rights, which depends on evolving patent legalregimes and claims/infringement assertions that may arise between us andthird-parties,

·             the ability to manufacture at scales sufficient tosupply commercial quantities, which may require levels of effort not currentlyanticipated and

·             the successful commercialization of our drugcandidates, which will depend on our ability to either create or partner withan effective commercialization organization and which could be delayed orprevented by the emergence of equal or more effective therapies.

 

 

 

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Potentialsources of outside capital include entering into strategic businessrelationships, public or private sales of shares of our capital stock, or debt,or other similar financial instruments. While we recently closed a privateplacement of $5 million in common stock and warrants to purchase common stockinvolving certain of our existing investors, we do not have any other committedsources of outside capital at this time. Consequently, there can be noassurance that we will be able to obtain capital in sufficient amounts, or onacceptable terms, or at times critical to the uninterrupted execution of ourbusiness strategy.

 

Onepotential source of capital often capitalized on by emerging biotechnologycompanies similar to RegeneRx is through licensing certain intellectualproperty rights to other biotechnology or pharmaceutical enterprises, i.e. a“strategic partner.”   If we raiseadditional capital through such a strategic business relationship, we may haveto give up valuable short- and/or long-term rights to intellectualproperty.  In addition and as thebusiness priorities of the strategic partner change over time, the possibilityexists that the interests of the strategic partner may shift causing a materialnegative impact on the value of our interest in the licensed products. If weraise funds by selling additional shares of our common stock or securitiesconvertible into our common stock, the ownership interest of our existingstockholders may be significantly diluted. In addition, if additional funds areraised through the issuance of preferred stock or debt securities, thesesecurities are likely to have rights, preferences and privileges senior to ourcommon stock and may involve significant fees, interest expense, restrictivecovenants and the granting of security interests in our assets.

 

Ourfailure to successfully address ongoing liquidity requirements would have amaterial negative impact on our business, including:  the possibly of surrendering our rights tosome technologies or product opportunities, delaying our clinical trials, orceasing operations.

 

*** Our businessprospects are difficult to evaluate because we are developing complex and novelmedical******productcandidates******.***

 

Sinceour product candidates rely on complex technologies, it may be difficult foryou to assess our growth, partnering and earnings potential. It is likely wewill face many of the difficulties that new technology companies often face.These include, among others:

 

·             limited financial resources,

·             developing novel, commercial grade drug substances,

·             testing and evaluating a new chemical entity and itseffects in highly-complex biological systems,

·             marketing new products for which a market is not yetestablished and may never become established,

·             challenges related to the approval and acceptance ofdrug candidates by Federal and International regulatory authorities,

·             delays inherent in and increasingly more common inthe execution of clinical trials,

·             high product development costs that result from allof these factors; competition from other therapies and drug candidates promotedby entities with significantly more capital resources and marketing expertiseand

·             difficulty recruiting qualified employees formanagement and other positions.

 

Wewill likely face these and other difficulties in the future, some of which maybe beyond our control. If we are unable to successfully address thesedifficulties as they arise, our future growth and earnings will be negativelyaffected. We cannot be certain that our product candidates will prove safe and 

 

 

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efficacious,that our business strategies will be successful or that we will successfullyaddress any and all problems that may arise.

 

***We may not successfully establish and maintaindevelopment and testing relationships with third parties, which could adverselyaffect our ability to develop our product candidates.***

 

Wehave only limited resources, experience with and capacity to conduct requisitetesting and clinical trials of our drug candidates. As a result, we rely andexpect to continue to rely on third-party service providers and collaborators,including corporate partners, licensors and contract research organizations(“CROs”), to perform a number of activities relating to the development of ourdrug candidates, including the design and conduct of clinical trials, andpotentially the obtaining of regulatory approvals.  For example, we currently rely on severalthird-party contractors to manufacture Tβ4; formulate RGN-137, RGN-259 andRGN-352 into the drug candidates RGN-137, RGN-259 and RGN-352; developrequisite assays to assess Tβ4’s affect in complex biological systems,recruit investigators and sites to participate in our trials; manage theclinical trial process; and collect, evaluate and report clinical results.

 

Wemay not be able to maintain or expand our current arrangements with thirdparties or maintain such relationships on favorable terms.  Our agreements with these third parties mayalso contain provisions that restrict our ability to develop and test ourproduct candidates or that give third parties rights to control aspects of ourproduct development and clinical programs. In addition, conflicts may arisewith our collaborators, such as conflicts concerning the interpretation ofclinical data, the achievement of milestones, the interpretation of financialprovisions or the ownership of intellectual property developed during thecollaboration. If any conflicts arise with our existing or futurecollaborators, they may act in their self-interest, which may be adverse to ourbest interests.  Any failure to maintainour collaborative agreements and any conflicts with our collaborators coulddelay or prevent us from developing our product candidates.  We and our collaborators may fail to developproducts covered by our present and future collaborations if, among otherthings:

 

·             we do not achieve our objectives under ourcollaboration agreements;

·             we or our collaborators are unable to obtain patentprotection for the products or proprietary technologies we develop in ourcollaborations;

·             we are unable to manage multiple simultaneousproduct discovery and development collaborations;

·             our collaborators become competitors of ours orenter into agreements with our competitors;

·             we or our collaborators encounter regulatory hurdlesthat prevent commercialization of our product candidates; or

·             we develop products and processes or enter intoadditional collaborations that conflict with the business objectives of ourother collaborators.

 

Wealso have less control over the timing and other aspects of our clinical trialsthan if we conducted the monitoring and supervision entirely on our own. Thirdparties may not perform their responsibilities for our clinical trials on ouranticipated schedule or consistent with a clinical trial protocol or applicableregulations. We also rely on clinical research organizations to perform much ofour data management and analysis. They may not provide these services asrequired or in a timely manner. If any of these parties do not meet deadlinesor follow proper procedures, including procedures required by law, thepre-clinical studies and clinical trials may take longer than expected, may bedelayed or may be terminated, which would have a materially negative impact onour product 

 

 

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developmentefforts. If we were forced to find a replacement entity to perform any of ourpre-clinical studies or clinical trials, we may not be able to find a suitableentity on favorable terms or at all. Even if we were able to find areplacement, resulting delays in the tests or trials may result in significantadditional expenditures and delays in obtaining regulatory approval for drugcandidates, which could have a material adverse impact on our results ofoperations and business prospects.

 

***We are subject to intense government regulation andwe may not receive regulatory approvals for our new drug candidates.***

 

Ourproduct candidates will require regulatory approvals prior to sale. Inparticular, therapeutic agents are subject to stringent approval, prior tocommercial marketing, by the FDA and by comparable agencies in most foreigncountries.  The process of obtaining FDAand corresponding foreign approvals is costly and time consuming and we cannotassure you that such approvals will be granted. Also, the regulations we are subject to change frequently, and suchchanges could cause delays in the development of our product candidates.  In addition, the timing of clinical trials isdependent on, among other things, FDA and investigational review board (“IRB”)reviews, clinical site approvals, successful manufacturing of clinicalmaterials, sufficient funding and other factors outside of our control. Therecan be no assurance that our clinical trials will in fact demonstrate, to thesatisfaction of the FDA and others, that our product candidates aresufficiently safe or effective. The FDA or we may also restrict or suspend ourclinical trials at any time if either believes that we are exposing thesubjects participating in the trials to unacceptable health risks.

 

Asa consequence, we may need to perform more or larger clinical trials thanplanned, for reasons such as the following:

 

·             the FDA or other health regulatory authorities, orinstitutional review boards, do not approve a clinical trial protocol or placea clinical trial on hold;

·             suitable patients do not enroll in a clinical trialin sufficient numbers or at the expected rate, or data is adversely affected bytrial conduct or patient drop out;

·             patients experience serious adverse events,including adverse side effects of our drug candidates;

·             patients die during a clinical trial for a varietyof reasons that may or may not be related to our product candidates, includingthe advanced stage of their disease and medical problems;

·             patients in the placebo or untreated control groupexhibit greater than expected improvements or fewer than expected adverseevents;

·             third-party clinical investigators do not performthe clinical trials on the anticipated schedule or consistent with the clinicaltrial protocol and good clinical practices, or other third-party organizationsdo not perform data collection and analysis in a timely or accurate manner;

·             service providers, collaborators or co-sponsors donot adequately perform their obligations in relation to the clinical trial orcause the trial to be delayed or terminated;

·             regulatory inspections of manufacturing facilities,which may, among other things, require us or a co-sponsor to undertakecorrective action or suspend the clinical trials;

·             the interim results of the clinical trial areinconclusive or negative;

·             the clinical trial, although approved and completed,generates data that is not considered by the FDA or others to be sufficient todemonstrate safety and efficacy; and

·             changes in governmental regulations oradministrative actions affect the conduct of the clinical trial or theinterpretation of its results.

 

 

 

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Anyfailure to obtain or any delay in obtaining regulatory approvals would have amaterial adverse impact on our ability to develop and commercialize our productcandidates.

 

***We may not be able to enterinto strategic relationships with third parties related to the development andcommercialization of our product candidates***

*** ***

One of our strategicfocuses is to enter into relationships with one or more third-partypharmaceutical companies to license our technology and to help us continue thedevelopment of our product candidates. We believe that having such partners would enable us to both defray thecosts associated with the development of our product candidates and acceleratethe speed with which we may be able to complete development of and obtainregulatory approval for our product candidates and commercialize suchproducts.  However, we can offer noassurance that we will be able to enter into license and development agreementswith third-party pharmaceutical companies or that any such relationships wouldin fact decrease our costs or accelerate our product development efforts. If weare unable to enter into such relationships, our product development effortsmay  be slowed or related costs mayincrease.  In addition, any such relationshipswould require us to give up significant rights in our product candidates, whichrights may, over time, have been worth more to us if we had been able tocommercialize such product candidates without entering into third-partyagreements.

 

***Mauro Bove, a member of our Board, is also adirector and officer of Sigma-Tau, our largest stockholder, which could giverise to a conflict of interest involving Mr. Bove.***

 

MauroBove, a member of our Board, is also adirector and officer****of Sigma-Tau,our largest stockholder and our partner in Europe with respect to thedevelopment of certain of our drug candidates.  We recently issued sharesof common stock and common stock warrants to certain affiliates of Sigma-Tau ina private placement that gave us the right to repurchase the shares undercertain circumstances.  Also, in 2004, welicensed Tβ4 to Defiante Farmaceutica S.p.A., a wholly-owned subsidiary ofSigma-Tau, for internal and external wound healing for the European Union.  Upon the successful completion of a Phase IItrial Defiante is obligated to either make a $5 million milestone payment orinitiate and pay for a Pivotal Phase III trial. As a result of Mr. Bove’s relationship with Sigma-Tau, there couldbe a conflict of interest between Mr. Bove and our stockholders other thanSigma-Tau with respect to these and other agreements and circumstances that mayrequire the exercise of the Board’s discretion with respect to Sigma-Tau.

 

***We******areheavily reliant on our license from the National Institutes of Health and maybe unable to maintain our license.***

 

Wehave received an exclusive world-wide license to intellectual propertydiscovered at the National Institutes of Health, or NIH, pertaining to woundhealing and tissue repair. This license terminates upon the last to expire ofthe patent applications that are filed in connection with the license. Thislicense requires us to pay a minimum annual royalty to the NIH, regardless ofthe success of our product development efforts, plus certain other royalties uponthe sale of products created by the intellectual property granted under thelicense. We rely on this license for a significant portion of our business.This license may be terminated for a number of reasons, including non-paymentof the royalty or lack of continued product development, among others.  The loss of this license would have amaterial adverse effect on our business and business prospects and may requireus to cease development of our current line of product candidates.

 

*** All of ourdrug candidates are based on a single compound that has yet to be proveneffective.***

 

Ourcurrent primary business focus is the development of Tβ4, and itsanalogues, derivatives and fragments, for the treatment of non-healing woundsand other conditions. While we have in the past explored and may in the futureexplore the use of other compounds for the treatment of other medicalconditions, we presently have no immediate plans to develop products for suchpurposes. Unlike many pharmaceutical companies that have a number of uniquechemical entities in development, we are dependent on a single molecule, formulatedfor different administrations, for the success of our company. As a result, anycommon safety or efficacy concerns for Tβ4-based products that crossformulations, would have a much greater impact on our business prospects thanif we were more diversified.

 

Ournew drug candidates are still in research and development, and we do not expectthem to be commercially available for the foreseeable future, if at all. Only asmall number of research and development programs ultimately result incommercially successful drugs. Potential products that appear to be promisingat early stages of development may not reach the market for a number ofreasons. These reasons include the possibility that the potential products may:

 

 

 

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·             be found ineffective or cause harmful side effectsduring pre-clinical studies or clinical trials,

·             fail to receive necessary regulatory approvals,

·             be precluded from commercialization by proprietaryrights of third parties,

·             be difficult to manufacture on a large scale or

·             be uneconomical or otherwise fail to achieve marketacceptance.

Ifany of these potential problems occurs, we may never successfully marketTβ4-based products.

 

***We have no manufacturing or formulation capabilities and are dependentupon third-party suppliers******to provide us withour product candidates. If these suppliers do not manufacture******our product candidates in sufficientquantities, at acceptable******quality levels and at acceptable cost and if we are unableto identify suitable******replacement suppliers, our clinical development******efforts could bedelayed, prevented or impaired.***

 

We do not own or operatemanufacturing facilities and have little experience in manufacturingpharmaceutical products. We currently rely, and expect to continue to rely,primarily on one of the leading peptide manufacturers to supply us withTβ4 for further formulation into our product candidates.  We have engaged three separate smaller drugformulation contractors for the formulation of clinical grade product candidates,one each for RGN-137, RGN-259 and RGN-352. We currently do not have an alternative source of supply for eitherTβ4 or the individual drug candidates. If these suppliers, together orindividually, are not able to supply us with either Tβ4 or individualproduct candidates on a timely basis, in sufficient quantities, at acceptablelevels of quality and at a competitive price; and, if we are unable to identifya replacement manufacturer to perform these functions on acceptable terms, ourdevelopment programs, collectively or individually, could be seriouslyjeopardized.

 

The risks of relying solelyon single suppliers for our product candidates include:

 

·             Their respective abilities to ensure quality andcompliance with regulations relating to the manufacture of pharmaceuticals;

·             Their manufacturing capacity may not be sufficientor available to produce the required quantities of our product candidates basedon our planned clinical development schedule, if at all;

·             They may not have access to the capital necessary toexpand their manufacturing facilities in response to our needs;

·             Commissioning replacement suppliers would bedifficult and time consuming;

·             Individual suppliers may have used substantialproprietary know-how relating to the manufacture of our product candidates and,in the event we must find a replacement or supplemental supplier, our abilityto transfer this know-how to the new supplier could be an expensive and/or timeconsuming process;

·             An individual supplier may experience events, suchas a fire or natural disaster, that force it to stop or curtail production foran extended period;

·             An individual supplier could encounter significant increasesin labor, capital or other costs that would make it difficult for them toproduce our products cost-effectively;

·             An individual supplier may not be able to obtain theraw materials or validated drug containers in sufficient quantities, at acceptablecosts or in sufficient time to complete the manufacture, formulation anddelivery of our product candidates.

 

 

 

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***If any of our key executives discontinue theirservices with us, our efforts to develop our business may be delayed.***

 

Weare highly dependent on the principal members of our management team and theloss of our chairman, Allan Goldstein, or chief executive officer,J.J. Finkelstein, could prevent or significantly delay the achievement ofour goals. We have employment agreements with Dr. Goldstein and Mr. Finkelstein.However, we cannot assure you that such agreements would prevent them fromterminating their employment with or without good reason.  In addition, we do not maintain a key man lifeinsurance policy with respect to Dr. Goldstein or Mr. Finkelstein. Inthe future, we anticipate that we will need to add additional management andother personnel. Competition for qualified personnel in our industry isintense, and our success will depend in part on our ability to attract andretain highly skilled personnel. We cannot assure you that our efforts toattract or retain such personnel will be successful.

 

*** We aresubject to intense competition from companies with greater resources and moremature products.***

 

Weare engaged in a business that is highly competitive. Research and developmentactivities for the development of drugs to treat indications within our focusare being sponsored or conducted by private and public institutions and bymajor pharmaceutical companies located in the United States and a number offoreign countries. Most of these companies and institutions have financial andhuman resources that are substantially greater than our own, and that haveextensive experience in conducting research and development activities andclinical trials and in obtaining the regulatory approvals necessary to marketpharmaceutical products. With respect to wound healing, Johnson &Johnson is marketing RegranexTM for this purpose in patients with diabetic footulcers. Other companies, such as Novartis, are developing and marketingartificial skins which could compete with our product candidates in certainwound healing areas. Moreover, wound healing is a large and highly fragmentedmarketplace attracting many companies, large and small, to develop products fortreating acute and chronic wounds, forexample honey-based ointments and low frequency cavitational ultrasound.Additionally, most large pharmaceutical companies and many smaller biomedicalcompanies are vigorously pursuing therapeutics to treat patients after heartattacks and other cardiovascular indications.

 

*** We face therisk of product liability claims, which could adversely affect our business andfinancial condition.***

 

Wemay be subject to product liability claims as a result of our testing,manufacturing, and marketing of drugs. In addition, the use of our productcandidates, when and if developed and sold, will expose us to the risk ofproduct liability claims. Product liability may result from harm to patientsusing our product candidates, such as a complication that was either notcommunicated as a potential side effect or was more extreme than communicated.We will require all patients enrolled in our clinical trials to sign consents,which explain various risks involved with participating in the trial. However,patient consents provide only a limited level of protection, and it may bealleged that the consent did not address or did not adequately address a riskthat the patient suffered. Additionally, we will generally be required toindemnify the clinical product manufacturers, clinical trial centers, medicalprofessionals and other parties conducting related activities in connectionwith losses they may incur through their involvement in the clinical trials.

 

Ourability to reduce our liability exposure for human clinical trials andcommercial sales of Tβ4 is dependent in part on our ability to obtainsufficient product liability insurance or to collaborate with 

 

 

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corporatepartners that have adequate insurance. Although we intend to obtain productliability insurance coverage, we cannot guarantee that product liabilityinsurance will continue to be available to us on acceptable terms, or at all,or that its coverage will be sufficient to cover all claims against us. Aproduct liability claim, even one without merit or for which we havesubstantial coverage, could result in significant legal defense costs, therebypotentially exposing us to expenses significantly in excess of our revenues.

 

***Governmental and third-party payers may subject any******product candidates******we develop to sales and pharmaceutical pricing controls that could limit ourproduct revenues and delay profitability.***

 

Thesuccessful commercialization of our product candidates will likely depend onour ability to obtain reimbursement for the cost of the product and treatment.Government authorities, private health insurers and other organizations, suchas health maintenance organizations, are increasingly seeking to lower theprices charged for medical products and services. Also, the trend towardmanaged health care in the United States, the growth of healthcareorganizations such as HMOs, and legislative proposals to reform healthcare andgovernment insurance programs could have a significant influence on thepurchase of healthcare services and products, resulting in lower prices andreducing demand for our product candidates. The cost containment measures thathealthcare providers are instituting and any healthcare reform could reduce ourability to sell our product candidates and may have a material adverse effecton our operations. We cannot assure that reimbursement in the United States orforeign countries will be available for any of our product candidates, that anyreimbursement granted will be maintained, or that limits on reimbursementavailable from third-party payors will not reduce the demand for, or the priceof, our product candidates. The lack or inadequacy of third-partyreimbursements for certain of our product candidates would decrease thepotential profitability of our operations. We cannot forecast what additionallegislation or regulation relating to the healthcare industry or third-partycoverage and reimbursement may be enacted in the future, or what effect thelegislation or regulation would have on our business.

 

***Clinical trials could be delayed or fail to showefficacy, resulting in additional cost or failure to commercialize ourtechnology platform.***

 

Allof our drug candidates are currently in the clinical stage and we cannot becertain that a collaborator or we will successfully complete the clinicaltrials necessary to receive regulatory product approvals. This process islengthy, unpredictable and expensive. To obtain regulatory approvals, acollaborative partner or we must ultimately demonstrate to the satisfaction ofthe FDA and others that our product candidates are sufficiently safe andeffective for their proposed use.  Manyfactors, known and unknown, can adversely impact clinical trials and theability to evaluate a product candidate’s safety and efficacy, includingunexpected delays in the initiation of clinical sites, slower than projectedenrollment, competition with ongoing clinical trials and scheduling conflictswith participating clinicians, regulatory requirements, limits on manufacturingcapacity and failure of a product candidate to meet required standards foradministration to humans. Such factors may have a negative impact on ourbusiness by making it difficult to advance product candidates or by reducing oreliminating their potential or perceived value. Further, if we are forced tocontribute greater financial and clinical resources to a study, valuableresources will be diverted from other areas of our business.

 

Clinicaltrials for product candidates such as ours are often conducted with patientswho have more advanced forms of a particular condition and/or other unrelatedconditions. For example, in clinical trials for our lead product candidateRGN-137, we expect to study patients who are not only suffering from chronicepidermal wounds but are also older and much more likely to have other seriousadverse conditions. During the course of treatment, these patients could die orsuffer other adverse 

 

 

 

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eventsfor reasons that may or may not be related to the drug candidate being tested.Furthermore, and as a consequence that all of our drug candidates are based on Tβ4cross-over risk exists, that is a patient in one trial may be adverselyimpacted by one drug candidate and that adverse event may have implications toour other trials and other drug candidates. However, even if unrelated to ourproduct candidates, such events can nevertheless adversely impact our clinicaltrials. As a result, our business and ability to ultimately develop and marketthe product candidates and obtain revenues would suffer.

 

Ourability to complete clinical trials depends on many factors, includingobtaining adequate clinical supplies and having a sufficient rate of patientrecruitment. For example, patient recruitment is a function of many factors,including: the size of the patient population; the proximity of patients toclinical sites; the eligibility criteria for the trial; the perceptions ofinvestigators and patients regarding safety; and the availability of othertreatment options. Even if patients are successfully recruited, we cannot besure they will complete the treatment process. Delays in patient enrollment ortreatment in clinical trials may result in increased costs, program delays, orfailure, any of which can substantially affect our business or perceived value.

 

Anumber of factors, including unexpected delays in the initiation of clinicalsites, slower than projected enrollment, competition with ongoing clinicaltrials and scheduling conflicts with participating clinicians, regulatoryrequirements, limits on manufacturing capacity and failure of a productcandidate to meet required standards for administration to humans may causesignificant delays in the completion of our clinical trials. In addition, itmay take longer than we expect to achieve study endpoints and complete dataanalysis for a trial. We may not complete our clinical trials when or asprojected or commence or complete clinical trials involving any of our otherproduct candidates as projected or may not conduct them successfully.

 

Ifwe fail to complete or if we experience material delays in completing the PhaseII trials as currently planned, or we otherwise fail to commence or complete,or experience delays in, any of our other present or planned clinical trials,including as a result of the actions of third parties upon which we rely forthese functions, our ability to conduct our business as currently planned couldmaterially suffer. Development costs will increase if we experience any futuredelays in our clinical trials or if we need to perform more or larger clinicaltrials than we currently plan. If the delays or costs are significant, ourfinancial results and our ability to commercialize our product candidates willbe adversely affected.

 

***We have no marketing experience, sales force ordistribution capabilities. If our******productcandidates******are approved, and we are unableto recruit key personnel to perform these functions, we may not be able tocommercialize them successfully.***

 

Althoughwe do not currently have any marketable products, our ability to producerevenues ultimately depends on our ability to sell our product candidates ifand when they are approved by the FDA and other regulatory authorities. Wecurrently have no experience in marketing or selling pharmaceutical productsand we do not have a marketing and sales staff or distribution capabilities.Developing a marketing and sales force is also time consuming and could delaythe launch of new products or expansion of existing product sales. In addition,we will compete with many companies that currently have extensive andwell-funded marketing and sales operations. If we fail to establish successfulmarketing and sales capabilities or fail to enter into successful marketingarrangements with third parties, our ability to generate revenues will suffer.

 

***Even if approved for marketing, our technologiesand product candidates are relatively novel and unproven and they may fail togain market acceptance.***

 

 

 

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Ourdrug candidates which are all based on the molecule Tβ4****are new and rapidly evolving and have not been shown to beeffective on a widespread basis.  Ourproduct candidates, and the technology underlying them, are new and unprovenand there is no guarantee that health care providers or patients will be interestedin our product candidates even if they are approved for use. Our success willdepend in part on our ability to demonstrate sufficient clinical benefits,reliability, safety, and cost effectiveness of our product candidates andtechnology relative to other approaches, as well as on our ability to continueto develop our product candidates to respond to competitive and technologicalchanges. If the market does not accept our product candidates or productcandidates, when and if we are able to commercialize them, then we may neverbecome profitable. Factors that could delay or inhibit market acceptance of ourproduct candidates may include:

 

·                  the timing andreceipt of marketing approvals;

·                  the safety andefficacy of the products;

·                  the emergenceof equivalent or superior products;

·                  thecost-effectiveness of the products; and

·                  effectivemarketing.

 

Itis difficult to predict the future growth of our business, if any, and the sizeof the market for our product candidates because the market and technology arecontinually evolving. There can be no assurance that our technologies andproduct candidates will prove superior to technologies and products that maycurrently be available or may become available in the future or that ourtechnologies or research and development activities will result in anycommercially profitable products.

 

***Our technologies and product candidates may haveunacceptable side effects that could delay or prevent product approval.***

 

Possibleside effects of therapeutic technologies may be serious and life threatening.The occurrence of any unacceptable side effects with our product candidates,during or after pre-clinical studies and clinical trials, or the perception orpossibility that our product candidates cause or could cause such side effects,could delay or prevent approval of our product candidates and negatively impactour business.

 

***Our suppliers use hazardous and biologicalmaterials in our business. Any claims relating to improper handling, storage ordisposal of these materials could be time consuming and costly******, and we are not insured against such claims******.***

 

Ourproduct candidates and processes****involve thecontrolled storage, use and disposal by our suppliers of certain hazardous andbiological materials and waste products. We and our suppliers and othercollaborators are subject to federal, state and local regulations governing theuse, manufacture, storage, handling and disposal of materials and wasteproducts. Even if we and these suppliers and collaborators comply with thestandards prescribed by law and regulation, the risk of accidentalcontamination or injury from hazardous materials cannot be completely eliminated.In the event of an accident, we could be held liable for any damages thatresult, and we do not carry insurance for this type of claim.****We may also incur significant costs to comply with currentor future environmental laws and regulations.

 

***To the extent we enter markets outside the UnitedStates our business will be subject to political, economic, legal and socialrisks in those markets, which could adversely affect our business.***

 

 

 

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Thereare significant regulatory and legal barriers in markets outside the UnitedStates that we must overcome to the extent we enter or attempt to enter marketsin countries other than the United States. We currently intend to market anyapproved products in the United States, Europe, Japan, India  and territories surrounding the Pacific Rim.We will be subject to the burden of complying with a wide variety of nationaland local laws, including multiple and possibly overlapping and conflictinglaws. We also may experience difficulties adapting to new cultures, businesscustoms and legal systems. Any sales and operations outside the United Stateswould be subject to political, economic and social uncertainties including,among others:

 

·                  changes andlimits in import and export controls;

·                  increases incustom duties and tariffs;

·                  changes incurrency exchange rates;

·                  economic andpolitical instability;

·                  changes ingovernment regulations and laws;

·                  absence in somejurisdictions of effective laws to protect our intellectual property rights;and

·                  currencytransfer and other restrictions and regulations that may limit our ability tosell certain product candidates or repatriate profits to the United States.

 

Anychanges related to these and other factors could adversely affect our businessto the extent we enter markets outside the United States.

 

***We may not be able to obtain orphan drugexclusivity for our product candidates. If our competitors are able to obtainorphan drug exclusivity for a product that is competitive with one or more ofour product candidates and we cannot show that our product candidate isclinically superior, we may not be able to have competing products approved bythe applicable regulatory authority for a significant period of time.***

 

Regulatory authorities insome jurisdictions, including Europe and the United States, may designate drugsthat target relatively small patient populations as orphan drugs. In June 2004, we received Orphan Drugdesignation from the FDA for Tb4 for the treatment of Epidermolysis Bullosa, or EB, a rare genetic diseasecharacterized by the presence of extremely fragile skin and other tissues,resulting in recurrent blisters from minor mechanical friction or trauma, andwe may pursue orphan drug designation for additional product candidates.Generally, if a product with an orphan drug designation subsequently receivesthe first marketing approval for the indication for which it has suchdesignation, the product is entitled to a period of marketing exclusivity. Theexclusivity applies only to the indication for which the drug has beendesignated and approved. The applicable exclusivity period is seven years inthe United States, but this period may be interrupted if a sponsor of acompetitive product that is otherwise the same drug for the same use can showthat its drug is clinically superior to our orphan drug candidate. The Europeanexclusivity period is ten years, but may be reduced to six years if a drug nolonger meets the criteria for orphan drug designation, including where it isshown that the drug is sufficiently profitable so that market exclusivity is nolonger justified. In addition, European regulations establish that acompetitor’s marketing authorization for a similar product with the sameindication may be granted if there is an insufficient supply of the product orif another applicant can establish that its product is safer, more effective orotherwise clinically superior. If a competitor obtains orphan drug exclusivityfor a product competitive with EB before we do and if the competitor’s productis the same drug with the same indication as ours, we would be excluded fromthe market, unless we can show that our drug is safer, more effective orotherwise clinically superior. Even 

 

 

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if we obtain orphan drugexclusivity for EB for these indications, we may not be able to maintain it ifa competitor with a product that is otherwise the same drug can establish thatits product is clinically superior.

 

**Risks Related To Our Intellectual Property**

 

***If we are not able to maintain adequate patentprotection for our******product candidates******and product candidates,we may be unable to prevent our competitors from using our technology ortechnology that we license.***

 

Oursuccess also will depend in substantial part on our ability to obtain, defendand enforce patents, maintain trade secrets and operate without infringing uponthe proprietary rights of others, both in the United States and abroad. Pursuantto a research agreement with The George Washington University, we have rightsto two U.S. patents relating to the treatment of septic shock. We also ownpatents related to the use of Tβ4, among other thymic peptides, for thestimulation of hair growth. Pursuant to an exclusive world-wide license fromthe NIH, we have exclusive rights under a patent application filed by the NIHfor the use of Tβ4 in the treatment of non-healing wounds. While thispatent has issued in certain countries, we cannot guarantee whether or when thepatent will be issued or as to the scope of the patent issued in othercountries.  We have attempted to create asubstantial intellectual property portfolio, submitting patent applications forvarious compositions of matter, methods of use and fragments and derivatives ofTβ4.  We have also in-licensed otherintellectual property rights from third parties that could be subject to thesame risks as our own patents.  If any ofthese patent applications do not issue, or do not issue in certain countries,or are not enforceable, the ability to commercialize Tβ4 in variousmedical indications could be substantially limited or eliminated.

 

Inaddition, the patent positions of the technologies being developed by us andour collaborators involve complex legal and factual uncertainties. As a result,we cannot assure you that any patent applications filed by us, or by othersunder which we have rights, will result in patents being issued in the UnitedStates or foreign countries. In addition, there can be no assurance that (i) anypatents will be issued from any pending or future patent applications of oursor our collaborators; (ii) the scope of any patent protection will besufficient to provide us with competitive advantages; (iii) any patentsobtained by us or our collaborators will be held valid if subsequentlychallenged; or (iv) others will not claim rights in or ownership of thepatents and other proprietary rights we or our collaborators may hold.Unauthorized parties may try to copy aspects of our product candidates andtechnologies or obtain and use information we consider proprietary. Policingthe unauthorized use of our proprietary rights is difficult. We cannotguarantee that no harm or threat will be made to our or our collaborators’intellectual property. In addition, changes in, or different interpretationsof, patent laws in the United States and other countries may also adverselyaffect the scope of our patent protection and our competitive situation.

 

Dueto the significant time lag between the filing of patent applications and thepublication of such patents, we cannot be certain that our licensors were thefirst to file the patent applications we license or, even if they were thefirst to file, also were the first to invent, particularly with regards topatent rights in the United States. In addition, a number of pharmaceutical andbiotechnology companies and research and academic institutions have developedtechnologies, filed patent applications or received patents on varioustechnologies that may be related to our operations. Some of these technologies,applications or patents may conflict with our or our licensors’ technologies orpatent applications. A conflict could limit the scope of the patents, if any,that we or our licensors may be able to obtain or result in denial of our orour licensors’ patent applications. If patents that cover our 

 

 

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activitiesare issued to other companies, we may not be able to develop or obtainalternative technology.

 

Additionally,there is certain subject matter that is patentable in the United States but notgenerally patentable outside of the United States. Differences in whatconstitutes patentable subject matter in various countries may limit theprotection we can obtain outside of the United States. For example, methods oftreating humans are not patentable in many countries outside of the UnitedStates. These and other issues may prevent us from obtaining patent protectionoutside of the United States, which would have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***Changes to U.S. patent laws could materially reduceany value our patent portfolio may have.***

 

Thevalue of our patents depends in part on their duration. A shorter period of patentprotection could lesson the value of our rights under any patents that may beobtained and may decrease revenues derived from its patents. The United Statespatent laws were amended in 1995 to change the term of patent protection 17years from patent issuance to 20 years from the earliest effective filing dateof the application. Because the time from filing to issuance of biotechnologyapplications may be more than three years depending on the subject matter, a20-year patent term from the filing date may result in substantially shorterpatent protection. This would shorten our period of patent exclusivity and maydecrease the revenues that we might derive from the patents and the value ofour patent portfolio.

 

***We may not have adequate protection for ourunpatented proprietary information, which could adversely affect ourcompetitive position.***

 

Inaddition to our patents, we also rely on trade secrets, know-how, continuingtechnological innovations and licensing opportunities to develop and maintain ourcompetitive position. However, others may independently develop substantiallyequivalent proprietary information and techniques or otherwise gain access toour trade secrets or disclose our technology. To protect our trade secrets, wemay enter into confidentiality agreements with employees, consultants andpotential collaborators. However, we may not have such agreements in place withall such parties and, where we do, these agreements may not provide meaningfulprotection of our trade secrets or adequate remedies in the event ofunauthorized use or disclosure of such information. Also, our trade secrets orknow-how may become known through other means or be independently discovered byour competitors. Any of these events could prevent us from developing orcommercializing our product candidates.

 

***We may be subject to claims that we or ouremployees have wrongfully used or disclosed alleged trade secrets of formeremployers.***

 

Asis commonplace in the biotechnology industry, we employ now, and may hire inthe future, individuals who were previously employed at other biotechnology orpharmaceutical companies, including competitors or potential competitors.Although there are no claims currently pending against us, we may be subject toclaims that we or certain employees have inadvertently or otherwise used ordisclosed trade secrets or other proprietary information of former employers.Litigation may be necessary to defend against these claims. Even if we aresuccessful in defending against these claims, litigation could result insubstantial costs and would be a significant distraction to management.

 

**Risks Related To Our Securities**

 

 

 

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***Our common stock price is volatile, our stock ishighly illiquid, and any investment in our stock could decline substantially invalue.***

 

Duringthe year ended December 31, 2007, our closing stock price has ranged from$1.00 to $2.75 with an average daily trading volume of 23,543 shares. In lightof our small size and limited resources, as well as the uncertainties and risksthat can affect our business and industry, our stock price is expected tocontinue to be highly volatile and can be subject to substantial drops, with oreven in the absence of news affecting our business. The following factors, inaddition to the other risk factors described in this report, and thepotentially low volume of trades in our common stock, may have a significantimpact on the market price of our common stock, some of which are beyond ourcontrol:

 

·                  results ofpre-clinical studies and clinical trials;

·                  commercialsuccess of approved products;

·                  corporatepartnerships;

·                  technologicalinnovations by us or competitors;

·                  changes in lawsand government regulations both in the U.S. and overseas;

·                  changes in keypersonnel at our company;

·                  developmentsconcerning proprietary rights, including patents and litigation matters;

·                  publicperception relating to the commercial value or safety of any of our productcandidates;

·                  future sales ofour common stock;

·                  future issuanceof our common stock causing dilution;

·                  anticipated orunanticipated changes in our financial performance; and

·                  general trendsrelated to the biopharmaceutical and biotechnological industries; and generalconditions in the stock market.

 

Thestock market in general has recently experienced relatively large price andvolume fluctuations. In particular, the market prices of securities of smallerbiotechnology companies have experienced dramatic fluctuations that often havebeen unrelated or disproportionate to the operating results of these companies.Continued market fluctuations could result in extreme volatility in the priceof the common stock, which could cause a decline in the value of the commonstock. You should also be aware that price volatility may be worse if thetrading volume of the common stock remains limited or declines.

 

***We have never paid dividends on our common stock.***

 

Wehave paid no cash dividends on any of our classes of capital stock to date, andwe currently intend to retain our future earnings, if any, to fund thedevelopment and growth of our business. In addition, the terms of any futuredebt or credit facility may preclude or limit our ability to pay any dividends.As a result, capital appreciation, if any, of our common stock will be yoursole source of potential gain for the foreseeable future.

 

***Our principal stockholders have significant votingpower and may take actions that may not be in the best interests of our otherstockholders.***

 

Asof March 17, 2008, our officers, directors and principal stockholderstogether control approximately 53% of our outstanding common stock. Included inthis group is Sigma-Tau and its affiliates which together hold outstandingshares representing 41% of our outstanding common stock.  Certain shares of common stock held bySigma-Tau and its affiliates, representing 13% of our 

 

 

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outstandingcommon stock, are subject to voting agreements under which our Board controlsthe voting power of such stock.  Wecannot assure you that such voting agreements would prevent Sigma-Tau and itsaffiliates from taking actions not in your best interests and effectivelyexercising control over us.  In addition,these voting agreements expire with respect to securities representing 10% ofour outstanding common stock on February 22, 2011 and with respect tosecurities representing 3% of our outstanding common stock on June 23,2010.  After such time, we will have nocontrol over the voting and disposition of these securities, including withrespect to the election of directors and approval of significant corporatetransactions. This concentration of ownership may have the effect of delayingor preventing a change in control and might adversely affect the market priceof our common stock. This concentration of ownership may not be in the bestinterest of our other stockholders.

 

***A sale of a substantial number of shares of ourcommon stock may cause the price of our common stock to decline.***

 

Currently,we are authorized to issue up to 100,000,000 shares of our common stock, and asof March 17, 2008, there were issued and outstanding 51,553,527 shares ofour common stock. The authorized but unissued shares may be issued by us insuch transactions and at such times as our Board considers appropriate, whetherin public or private offerings, as stock splits or dividends or in connectionwith mergers and acquisitions or otherwise. Sales of a substantial number ofshares of our common stock in the public market could harm the market price ofour common stock. As of March 17, 2008, directors, officers and tenpercent (10%) stockholders hold 27,456,290 shares of our common stock andmay sell such shares at their discretion subject to certain contractual andregulatory limitations.

 

*** The exerciseof options and warrants and other issuances of shares of common stock orsecurities convertible into common stock will dilute your interest.***

 

Asof March 17, 2008, there were outstanding options to purchase an aggregateof 3,545,000 shares of our common stock at prices ranging from $0.28 per shareto $3.80 per share, of which options to purchase 2,153,416 shares wereexercisable as of such date. As of March 17, 2008, there were outstandingwarrants to purchase 3,855,878 shares of our common stock, at a weightedaverage exercise price of $3.12.  Theexercise of options and warrants at prices below the market price of our commonstock could adversely affect the price of shares of our common stock.Additional dilution may result from the issuance of shares of our capital stockin connection with collaborations or manufacturing arrangements or inconnection with other financing efforts.

 

Anyissuance of our common stock that is not made solely to then-existingstockholders proportionate to their interests (as in a stock dividend or stocksplit) will result in dilution to each stockholder by reducing his or herpercentage ownership of the total outstanding shares.  Moreover, to the extent that we issue optionsor warrants to purchase our common stock in the future and those options orwarrants are exercised or we issue restricted stock, stockholders mayexperience further dilution. Holders of shares of our common stock have nopreemptive rights that entitle them to purchase their pro rata share of anyoffering of shares of any class or series.

 

*** Ourcertificate of incorporation, our rights agreement and Delaware law containprovisions that could discourage a takeover, even if such a transaction wouldbe in your best interests.***

 

Ourcertificate of incorporation provides our Board with the power to issue sharesof preferred stock without stockholder approval. In addition, under our rightsagreement, our Board has the discretion to issue certain rights to purchase ourcapital stock when a person acquires in excess of 25% 

 

 

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ofour outstanding common shares.  Theseprovisions may make it more difficult for stockholders to take corporateactions and may have the effect of delaying or preventing a change in control,even if such actions or change in control would be in your best interests. Inaddition, we are subject to the anti-takeover provisions of Section 203 ofthe Delaware General Corporation Law. Subject to specified exceptions, thissection provides that a corporation may not engage in any business combinationwith any interested stockholder during the three-year period following the timethat such stockholder becomes an interested stockholder. This provision couldhave the effect of delaying or preventing a change of control of our company.The foregoing factors could reduce the price that investors or an acquirermight be willing to pay in the future for shares of our common stock.

 

**Item lB.Unresolved Staff Comments.**

 

Weare not currently involved in, nor are there any pending, material legalproceedings.

 

**Item 2.Properties.**

 

Our corporate headquartersare located in Bethesda, Maryland where we lease office space.  Our lease was extended in January 2008for twenty-four (24) months through December 31, 2009.  We currently are exploring other facilitiesfor our corporate headquarters and believe that there are larger and moresuitable properties available requiring financial commitments that are notmaterially different than our current location.

 

**Item 3.Legal Proceedings.**

 

Weare not currently involved in, nor are there pending, any material legalproceedings.

 

**Item 4.Submission of Matters to a Vote of Security Holders.**

 

None

 

 

 

 

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** **

**PART II**

 

**Item 5.  Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Securities.**

 

Ourcommon stock trades on the American Stock Exchange under the symbol RGN.

 

Thefollowing table sets forth the high and low bid prices for our common stock forthe periods indicated.

 

| ** **     | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 2.41       |       | $          | 2.06 |   | $ | 3.41 |   | $ | 2.85 |   |
| Second Quarter |       | $          | 2.75       |       | $          | 2.00 |   | $ | 3.05 |   | $ | 2.52 |   |
| Third Quarter  |       | $          | 2.18       |       | $          | 0.93 |   | $ | 2.75 |   | $ | 1.79 |   |
| Fourth Quarter |       | $          | 1.75       |       | $          | 0.94 |   | $ | 2.96 |   | $ | 1.97 |   |

 

 

                As of March 21, 2008, therewere approximately 894****holders ofrecord of our common stock, one of which is Cede & Co., a nominee forDepository Trust Corporation (or “DTC”). All of the shares of Common Stock held by brokerage firms, banks andother financial institutions as nominees for beneficial owners are depositedinto participant accounts at DTC, and are therefore considered to be held ofrecord by Cede & Co. as one stockholder.

 

                We have never paid a cash dividendon our common stock and since all of our funds are committed to clinicalresearch we do not anticipate that any cash dividends will be paid on ourcommon stock in the foreseeable future.

 

**Item6.  Selected Financial Data.**

 

Not Applicable.

 

 

 

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**Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operation.**

 

*You**shouldread**the following discussion andanalysis together**with our**consolidated**financial statements**and therelated notes**included elsewhere**inthis annual report.*

 

**Overview**

 

Ouroperations consist primarily of pre-clinical studies and clinical trialsrelated to the development of product candidates based on Thymosin beta 4(“Tβ4”), a 43 amino acid peptide. Currently, we are developingthree Tβ4-based drug formulations including:  RGN-137, a topically applied gel productcandidate for chronic dermal wounds; RGN-259, a sterile eye drop for ophthalmicinjuries; and RGN-352, a parenteral (injectable) formulation for systemicdelivery anticipatedto be used in our planned Phase II acute myocardial infarction (“AMI”), orheart attack trial.  We arecurrently sponsoring, in parallel, three Phase II dermal wound healing clinicaltrials using RGN-137, a Phase II ophthalmic wound healing trial using RGN-259,and a Phase IA clinical trial utilizing RGN-352 to support our cardiovascularclinical program.  Under our Phase IIInvestigational New Drug Application (“IND”), an affiliate of our largeststockholder is conducting one of the Phase II dermal wound healing clinicaltrials in the European Union and has assumed all associated costs.  Accordingly, we are primarily responsible forthe costs associated with the other four trials.

 

Wehave never generated revenues, and we do not expect to generate revenues untilthe FDA approves one of our product candidates, if ever, and we begin marketingit. We expect to invest increasingly significant amounts in the furtherance ofour current clinical programs and may add additional pre-clinical studies andnew clinical trials as we explore the potential of our current productcandidates in other indications and/or explore new formulations ofTβ4-based product candidates. Consequently, we expect to incur substantial and increasing losses forat least the next several years. Accordingly, we will need to generate significant revenues to achieveand then maintain profitability.  Also,we expect that we will need to raise substantial additional outside capital inorder to meet these capital requirements. We cannot assure you that such capital will be available when needed, onacceptable terms, or at all.

 

Mostof our expenditures to date have been for Research and Development activities(“R&D”) and General and Administrative (“G&A”) activities.  R&D costs include all of thewholly-allocable costs associated with our various clinical programs passedthrough to us by our outsourced vendors. Those costs include: manufacturing Tb4; formulation of Tb4 into the various productcandidates; stability for both Tb4 and the variousformulations; pre-clinical toxicology, safety and pharmacokinetic studies;clinical trial management; medical oversight; laboratory evaluations;statistical data analysis, regulatory compliance, quality assurance, and otherrelated activities.  R&D alsoincludes cash and non-cash compensation, employee benefits, travel and othermiscellaneous costs of our internal R&D personnel, seven persons in total,who are wholly dedicated to R&D efforts. R&D also includes a pro-ration of our common infrastructure costsfor office space, and communications.  Weexpense our R&D costs as they are incurred.

 

R&D expenditures are subject to the risks and uncertaintiesassociated with clinical trials and the FDA review and approval process. As aresult, these expenses could exceed our expectations, possibly materially. Weare uncertain as to what we expect to incur in future research and developmentcosts for our pre-clinical studies as these amounts are subject to the outcomeof current pre-clinical studies, management’s continuing assessment of theeconomics of each individual research and development project and the internalcompetition for project funding.

 

 

 

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G&Acosts include outside professional fees for legal, audit and accountingservices, including the costs to maintain our intellectual property portfolio;review, draft and negotiate various financing, manufacturing and othercorporate documents; research and conclude on appropriate financial reportingissues, Sarbanes-Oxley compliance, and financial audits required by theSecurities and Exchange Commission. G&A also includes cash and non-cash compensation, employee benefits,travel and other miscellaneous costs of our internal G&A personnel, threein total, who are wholly dedicated to G&A efforts.  G&A includes a proration of our commoninfrastructure costs for office space, and communications.

 

                *CriticalAccounting Policies. *Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States. Such accounting principles requirethat our management make estimates and assumptions that affect the amountsreported in our financial statements and accompanying notes. Our actual resultscould differ materially from those estimates. The items in our financialstatements that have required us to make significant estimates and judgmentsare as follows:

 

·                  Share-basedpayment.  Effective January 1,2006, we adopted the fair value recognition provisions Statement of FinancialAccounting Standards No. 123R (“SFAS No. 123R”), using the modifiedprospective transition method, and therefore have not restated results forprior periods. Under this method we recognize compensation expense for allshare-based payments granted to employees after January 1, 2006 and priorto but not yet vested as of January 1, 2006, in accordance with Statement No. 123R.Under the fair value recognition provisions of Statement No. 123R, werecognize stock-based compensation net of an estimated forfeiture rate and onlyrecognize compensation cost for those shares expected to vest on astraight-line basis over the requisite service period of the award. Prior toStatement No. 123R adoption, we accounted for share-based payments to employeesunder Accounting Principles Board Opinion No. 25, Accounting for StockIssued to Employees (“APB 25”) and accordingly, generally recognizedcompensation expense only when we granted options with a discounted exerciseprice.

 

Determiningthe appropriate fair value model and calculating the fair value of share-basedpayment awards require the input of highly subjective assumptions, includingthe expected life of the share-based payment awards and stock price volatility.Since our historical data is limited, the expected life was determined inaccordance with Staff Accounting Bulletin No. 107 guidance for “plainvanilla” options.  Since our historicaltrading volume is relatively low, we estimated the expected volatility based onmonthly closing prices for a period consistent with the expected life of theoption.  The assumptions used incalculating the fair value of share-based payment awards represent management’sbest estimates, but these estimates involve inherent uncertainties and theapplication of management judgment. As a result, if factors change and we usedifferent assumptions, our stock-based compensation expense could be materiallydifferent in the future. In addition, we are required to estimate the expectedforfeiture rate and only recognize expense for those shares expected to vest.If our actual forfeiture rate is materially different from our estimate, thestock-based compensation expense could be significantly different from what wehave recorded in the current period. See Note 2 to the Financial Statements fora further discussion on stock-based compensation and the relative ranges of ourhistorical, underlying assumptions.

 

·                  Costs of pre-clinicalstudies and clinical trials.  We accrue estimated costs for pre-clinicalstudies and clinical trials conducted by contract research organizations andparticipating hospitals.  These costs area significant component of research and development expenses.  We 

 

 

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accruecosts for pre-clinical studies and clinical trials performed by contractresearch organizations based on estimates of work performed under thecontracts.  Costs of setting up hospitalsites for participation in trials are accrued immediately.  Hospital costs related to patient enrollmentare accrued as patients are entered in the trial.

 

·                  Recent accountingpronouncements.

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement 109” (“FIN 48”). This statement clarifies thecriteria that an individual tax position must satisfy for some or all of thebenefits of that position to be recognized in a company’s financial statements.FIN 48 prescribes a recognition threshold of more-likely-than-not, and ameasurement attribute for all tax positions taken or expected to be taken on atax return, in order for those tax positions to be recognized in the financialstatements. Effective January 1, 2007, we adopted the provisions of FIN48, and determined that the impact had no material effect on our financialstatements.

 

InSeptember 2006, and February 2007 the FASB issued FASB Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (“FAS157”), and Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (“FAS 159”),respectively.  Both standards prescribechanges to fair value measurements of certain assets and liabilities and areeffective for fiscal years beginning after November 15, 2007. We do notanticipate the adoption of these standards will have a material impact on ourfinancial statements.

 

InSeptember 2007, the Emerging Issues Task Force (“EITF”) reached aconsensus on EITF Issue No. 07-03, “Accounting for Nonrefundable AdvancePayments for Goods or Services to Be Used in Future Research and DevelopmentActivities.” EITF 07-03 concludes that non-refundable advance payments forfuture research and development activities should be deferred and capitalizeduntil the goods have been delivered or the related services have beenperformed. If and when an entity no longer expects to receive the goods orservices contracted, any remaining capitalized, nonrefundable, advance paymentsshould then be charged to expense. This consensus is effective for fiscal yearsbeginning after December 15, 2007. Historically we expense nonrefundableadvance payments when paid.   We havedetermined that approximately $35,000 in qualifying transactions requirecapitalization in accordance with EITF 07-03 as of January 1, 2008.  In order to adopt the provisions of thisstatement, we will recognize a cumulative-effect adjustment to retainedearnings as of that date.

 

In December 2007, theFASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”).SFAS 141(R) requires the acquiring entity in a business combinationto recognize the full fair value of assets acquired and liabilities assumed inthe transaction (whether a full or partial acquisition); establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed; requires expensing of most transaction andrestructuring costs; and requires the acquirer to disclose to investors andother users all of the information needed to evaluate and understand the natureand financial effect of the business combination. SFAS No. 141(R) appliesto all transactions or other events in which the Company obtains control of oneor more businesses, including those sometimes referred to as “true mergers” or“mergers of equals” and combinations achieved without the transfer ofconsideration, for example, by contract alone or through the lapse of minorityveto 

 

 

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rights. SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter January 1, 2009.

 

        InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of AccountingResearch Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160requires reporting entities to present noncontrolling (minority) interests asequity (as opposed to as a liability or mezzanine equity) and provides guidanceon the accounting for transactions between an entity and noncontrolling interests.SFAS No. 160 applies prospectively as of January 1, 2009, except forthe presentation and disclosure requirements which will be appliedretrospectively for all periods presented.

 

**Results of Operations**

 

***Comparison of years ended December 31, 2007 and 2006***

 

*Revenues*.  For the year ended December 31, 2007,our revenue decreased by approximately $32,000 or 12%, to approximately$240,000, versus approximately $272,000 in 2006.  Our revenue in 2007 consisted entirely ofcosts recoverable as revenue through our grant from the NIH for the orphanindication EB, which amounted to $32,000 less than they were in 2006.  The reduced level of costs recoverable wasprimarily due to the fact that in 2006 the recoverable costs were a combinationof both CRO and site initiation expenses as well as patient treatmentexpenses.  In 2007 the majority of siteshad previously been initiated so the costs were primarily a function of patientcare and ongoing trial management.  Wehave approximately $32,000 remaining to be claimed under this grant and expectto claim those costs during 2008.

 

*Expenses— Research and development*.  For the year ended December 31, 2007,our R&D, expenditures increased by approximately $2.5 million, or 39%, toapproximately $8.9 million, versus approximately $6.4 million in 2006.  Outsourced R&D expenditures, those costsincurred to make and formulate our drug candidates and manage our pre-clinicaland clinical activities, accounted for approximately $1,800,000 of the overallincrease, rising 37% to approximately $6.7 million.  Outsource R&D expenditures includedincreases of approximately $1,000,000 related to our ophthalmic trial, $400,000for the purchase of Tb4, $200,000 for our Phase Iparenteral trial, $200,000 for research projects and $100,000 for clinical drugsupply.  These increases were offset by a($100,000) decrease in expenses related to two of our Phase II dermal trials.

 

 In addition, cash and non-cash compensationexpenses and employee benefits, increased by approximately $600,000, or 50%, in2007 to a total of approximately $1,800,000, including approximately $422,000of non-cash compensation expense. This increase is in line with our weightedaverage increase in full time equivalent (“FTE”) employees, which increased 52%during the same period.  During 2007 wehired a Director of Product Manufacturing to oversee non-GMP and GMPmanufacturing of our various drug formulations, and a clinical researchassociate to oversee our clinical site operations.  These new employees in combination with afull year’s worth of employment of R&D personnel hired mid-2006 account forthe FTE increase.

 

Inaddition, other miscellaneous R&D costs increased by approximately$100,000, or 28%, in 2007 to a total of approximately $400,000.  This increase is attributable primarily toincreases in costs associated with outside consulting, overhead allocations andtravel,****which each increased by****

 

 

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approximately $35,000,$45,000 and $20,000, respectively. Outside consulting costs rose as we expanded our clinical programs andwe placed certain research experts on retainer to advise us on our clinicaldevelopment.  Overhead allocations roseas a function of the increase in our R&D personnel relative to our general andadministrative personnel. This yielded a higher allocation of our coreinfrastructure costs to R&D. Finally, with an increase in the number of clinical sites, the expansionof our clinical programs, and the addition of a clinical research associate whotravels frequently, our travel costs have increased.

 

*Expenses— General and administrative*.  For the year ended December 31, 2007,our G&A, expenses increased by approximately $532,000, or 20%, toapproximately $3.2 million, versus approximately $2.7 million in 2006.  The majority, approximately $500,000, of theincrease was attributable to increased outside professional fees.  These increased costs were due to increasedcosts to maintain our increasing intellectual property portfolio.  Cash and non-cash compensation expenses andemployee benefits increased in 2007 by approximately $190,000, or 17%, to atotal of approximately $1,300,000, including $612,000 of non-cash compensationexpense.  Approximately $110,000 of thisincrease in compensation expense is due to the increase in non-cashcompensation expenses recognized as a result of the issuance of stock optionsin the first quarter of 2007.  Theremaining increase in compensation expense of $80,000 is attributable to a costof living increase in salaries of 4% and slightly higher discretionary andnon-discretionary bonus payments in 2007.  All other G&A costs in 2007 decreased by approximately $158,000, or24%, due primarily to a reduction in outside investor relation services.

 

***Comparison of years ended December 31, 2006 and 2005***

 

*Revenues*.  For the year ended December 31, 2006,our revenues totaled approximately $272,000. We did not have revenues in 2005. In 2006, we were awarded a grant from the NIH for our orphan indicationEB.  Consequently, we were able to claimreimbursement for qualifying costs incurred under this grant during 2006 whichamounted to $272,000.  Those qualifyingcosts were incurred from May 15, 2006 through December 31, 2006 andrelated to trial management by our CRO, site initiations and patient care.

 

*Expenses— Research and development*.  For the year ended December 31, 2006,our R&D expenditures increased by approximately $3.2 million, or 103%, toapproximately $6.4 million, versus approximately $3.2 million in 2005.  This increase resulted from the increasedR&D activities that we undertook in 2006 as clinical developmentprogressed.  During 2005, somepre-clinical activities were active in the first half of the year, clinicaldrug formulation activities concluded on our dermal gel product candidate, andPhase II clinical dermal trials commenced in the later half of the year.  During 2006 we continued to manage our PhaseII clinical dermal trials throughout the year and expanded our clinicaldevelopment program into the cardiac and ophthalmic areas.  Specifically, drug formulation, protocoldevelopment, contractor selection, and site qualification were commenced during2006 for our planned myocardial infarction and ophthalmic wound healing trials.  To manage these expanding research efforts,we increased our research staffing from a weighted average 2.5 FTEs in 2005 to5.1 FTEs in 2006, a 103% increase. Coincident with our expanded development was the need to supplyincreasingly larger amounts of Tb4, along with a significantincrease in outsourced contract activity. All of these expanded efforts increased our research and developmentcosts.

 

*Expenses— General and administrative*.  For the year ended December 31, 2006,our G&A expenditures increased by approximately $152,000, or 6%, toapproximately $2.7 million.  During April of2005, we hired a chief financial officer, which increased our weighted-averageFTEs from 2.7 to 3.0 in 2006, a 10% increase. We also implemented employee benefits in 2006 in order to help 

 

 

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attract employees.  The resulting increase in payroll andbenefits cash expenses for these items, along with the annual cost of livingincrease amounted to approximately $129,000, or 26%, over 2005.  As a direct result of our implementation ofSFAS 123r, non-cash equity compensation expense increased by approximately$314,000 to approximately $502,000 in 2006. Offsetting these increases was adecrease in the amount of legal fees expended in support of our patent portfolioof approximately ($383,000).  All othercosts of a general and administrative nature for 2006 increased byapproximately $92,000, or 6%.

 

**Liquidity and Capital Resources**

 

We had cash, cash equivalents and short-term investments totaling $8.2million and $17.0 million for the years ending December 31, 2007 and 2006,respectively.  The decrease in 2007 isprimarily due to the fact that we had just completed a sale of common stock atthe end of 2006 and used the proceeds from that transaction to finance operationsthroughout 2007.  In February 2008we concluded a $5 million private placement of common stock with affiliates ofSigma-Tau (see Note 12 to the Notes to the Financial Statements for moredetails).

 

***Cash Flows***

 

**Net Cash Used in Operating Activities. **Net cash used in operating activities was approximately $8.8 millionand $7.2 million for the years ended December 31, 2007 and 2006,respectively.  Our net loss in 2007 wasapproximately $2.4 million higher than our net cash used in operating activitiesin the same period.  Our net loss in 2006was approximately $1.1 million higher than our net cash used in operatingactivities in the same period.  The $1.3million increase in 2007 of our net operating loss over net cash used inoperations was due primarily to the following: (i) we purchased andexpensed approximately $900,000 of Tb4 at the end of 2007 andpaid for that purchase in the first quarter of 2008, (ii) our non-cashcompensation expenses for 2007 were approximately $240,000 more than 2006 and (iii) werecorded approximately $190,000 more in grant revenue in 2007 than we receivedin cash.

 

**Net Cash Used in Investing Activities. **Net cash used in investing activities was $600,000 and $1.3 million forthe years ended December 31, 2007 and 2006, respectively.  In both years the level of fixed assetinvestment was less than $20,000, leaving the net remainder attributable toinvestments in and sales of short-term, highly-liquid, investment-gradefinancial instruments.  Depending onwhether these financial instruments have a maturity date, at time of purchase,of more than 90 days from the date of purchase, the financial instrument iseither classified as a short-term investment on our balance sheet (which isreflected in investing activities), or it is classified as a cash equivalent(which is not so reflected).  We had morenet qualifying short-term investments in 2006 than in 2007 as a result of ourcash management activity.

 

**Net Cash Provided by Financing Activities. **Net cash provided byfinancing activities totaled approximately $46,000 and $16.7 million for theyears ended December 31, 2007 and 2006, respectively.  The amounts provided in 2007 relate solely tothe exercise of warrants.  In 2006, wecompleted two issuances of common stock that netted approximately $16 millionafter deducting the costs of the transactions. In 2006, we also received proceeds of $774,000 upon the exercise ofwarrants.

 

 

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***Future Funding Requirements***

 

Theexpenditures that will be necessary to execute our business plan are subject tonumerous uncertainties, which may adversely affect our liquidity and capitalresources. As of December 31, 2007, we have three proprietary productcandidates in clinical trials, development of which is primarily accomplishedthrough cancellable third-party contracts. We are committed under an office space lease that expires on December 31,2009 that requires monthly rental payments of $7,072 scheduled to increase by3% in calendar 2009.  We expect ourR&D expenses to trend higher as our product candidates advance through thevarious stages of clinical development. The length of time required forclinical trials varies substantially according to the type, complexity, noveltyand intended use of a product candidate. Some of the factors that could impactour liquidity and capital needs include, but are not limited to:

 

·                  the progress of our clinical trials,

·                  the progress of our research activities,

·                  the number and scope of our research programs,

·                  the progress of our pre-clinical developmentactivities,

·                  the costs involved in preparing, filing,prosecuting, maintaining, enforcing and defending patent and other intellectualproperty claims,

·                  the costs related to development andmanufacture of pre-clinical, clinical and validation lots for regulatorypurposes and commercialization of drug supply associated with our productcandidates,

·                  our ability to enter into corporatecollaborations and the terms and success of these collaborations,

·                  the costs and timing of regulatory approvals,and

·                  The costs of establishing manufacturing,sales and distribution capabilities.

 

Inaddition, the duration and the cost of clinical trials may vary significantlyover the life of a project as a result of differences arising during theclinical trial protocol, including, among others, the following:

 

·                  the number ofpatients that ultimately participate in the trial,

·                  the duration ofpatient follow-up that seems appropriate in view of the results,

·                  the number ofclinical sites included in the trials, and

·                  the length oftime required to enroll suitable patient subjects.

 

Also,we test our potential product candidates in numerous pre-clinical studies toidentify indications for which they may be product candidates. We may conductmultiple clinical trials to cover a variety of indications for each productcandidate. As we obtain results from trials, we may elect to discontinueclinical trials for certain product candidates or for certain indications inorder to focus our resources on more promising product candidates orindications.

 

Also,our proprietary product candidates also have not yet achieved FDA regulatoryapproval, which is required before we can market them as therapeutic products.In order to proceed to subsequent clinical trial stages and to ultimatelyachieve regulatory approval, the FDA must conclude that our clinical dataestablish safety and efficacy. Historically, the results from pre-clinicalstudies and early clinical trials have often not been predictive of resultsobtained in later clinical trials. A number of new drugs and biologics haveshown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.

 

Wehave not commercialized any of our product candidates to date and, since ourinception we have primarily financed our operations through the issuance ofcommon stock and common stock 

 

 

34

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warrants in private andpublic financings.  Since a number ofsignificant budgeted items are discretionary and based on our capital resourcesas of the date of this report and including the proceeds of a $5 millionprivate placement of common stock with affiliates of Sigma-Tau (see Note 12 inthe Notes to the Financial Statements for more details), we believe that wehave adequate resources to fund our operations through the fourth quarter of2008, without considering the benefits of any potential future milestonepayments that we may receive under our current collaborations, see “Material Agreements in Item 1.Business.”** **However, there can be noassurance that we will be able to attain such milestones and generate any suchpayments.  Accordingly, we expect tocontinue to seek funding through public and private financings in thefuture.  However, as a result of theuncertainties discussed above, among others, we are unable to estimate theduration and completion costs of our research and development projects.

 

Potentialsources of outside capital include entering into strategic businessrelationships, public or private sales of shares of our capital stock, or debt,or other similar financial instruments. While we recently closed a privateplacement of $5 million in common stock and warrants to purchase common stockinvolving certain of our existing investors, we do not have any other committedsources of outside capital at this time. Consequently, there can be noassurance that we will be able to obtain capital in sufficient amounts, onacceptable terms, or at all.  If we raiseadditional capital through such a strategic business relationship, we may haveto give up valuable short- and/or long-term rights to intellectual property.  If we raise funds by selling additionalshares of our common stock or securities convertible into our common stock, theownership interest of our existing stockholders may be significantly diluted.In addition, if additional funds are raised through the issuance of preferredstock or debt securities, these securities are likely to have rights,preferences and privileges senior to our common stock and may involvesignificant fees, interest expense, restrictive covenants and the granting ofsecurity interests in our assets.

 

Ourfailure to successfully address ongoing liquidity requirements would have amaterially negative impact on our business, including the possibility ofsurrendering our rights to some technologies or product opportunities, delayingour clinical trials, or ceasing operations.

 

**Off Balance Sheet Arrangements.**

 

*               *We do not haveany off-balance sheet arrangements, as such term is defined in Item 303(a)(4) ofRegulation S-K.

 

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk.**

 

Ourinvestments in marketable securities, which are composed primarily ofinvestment-grade corporate bonds, U.S. government agency debt securities andasset-backed securities, are subject to default, changes in credit rating andchanges in market value. These investments are also subject to interest raterisk and will decrease in value if market interest rates increase. As of December 31,2007, cash, cash equivalents and short-term investments were $8.3 million. Dueto the short-term nature of these investments, if market interest rates were toincrease immediately and uniformly by 10% from levels as of December 31,2007, the decline in fair value would not be material.

 

**Item 8.Financial Statements and Supplementary Data.**

 

The consolidated financialstatements required by this item are included beginning on page F-1 ofthis report.

 

 

 

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**Item 9.Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure.**

 

None.

 

**Item 9A.Controls and Procedures.**

 

Disclosurecontrols and procedures are controls and procedures that are designed to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and timelyreported as provided in SEC rules and forms. We periodically review thedesign and effectiveness of our disclosure controls and procedures, includingcompliance with various laws and regulations that apply to our operations. Wemake modifications to improve the design and effectiveness of our disclosure controlsand procedures, and may take other corrective action, if our reviews identify aneed for such modifications or actions. In designing and evaluating thedisclosure controls and procedures, we recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.

 

Wehave carried out an evaluation, under the supervision and the participation ofour management, including our principal executive officer and our principalfinancial officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e) under the Exchange Act), as of the year ended December 31,2007. Based upon that evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective as of December 31, 2007.

 

**Item 9A(T).Management’s Annual Report on InternalControl over Financial Reporting.**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework set forth in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation, managementhas concluded that our internal control over financial reporting was effectiveas of December 31, 2007.

 

ThisAnnual Report does not include an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by ourindependent registered public accounting firm pursuant to temporary rules ofthe SEC that permit us to provide only management’s report in this AnnualReport on Form 10-K.

 

Therewere no changes in our internal control over financial reporting during thethree months ended December 31, 2007, that have materially affected, orare reasonably likely to materially affect our internal control over financialreporting.

 

**Item 9B.Other Information.**

 

On March 27, 2008, we received a warning letter fromthe American Stock Exchange, or Amex citing a minor violation, in connectionwith our recently announced private placement of securities completed onFebruary 29, 2008, of Section 301 of the Amex Company Guide, which providesthat a listed company may not issue, or authorize its transfer agent orregistrar to issue or register, additional securities of a listed class untilit has filed an application for the listing of such additional securities andreceived notification from Amex that the securities have been approved forlisting.  We filed an application onMarch 21, 2008, for the listing of the additional securities referenced in thenotification from Amex.   As of the datehereof, we had not yet received approval to list the additional shares althoughwe expect to receive such approval upon completion of the application review byAmex within approximately two weeks.

 

 

 

 

 

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** **

**PART III**

 

**Item 10. Directors, Executive Officers andCorporate Governance.**

** **

Our Board of Directors consists of six directors.  Our bylaws allow for not less than three andnot more than seven directors.  Directorsare elected annually to serve one-year terms.

 

Thefollowing sets forth, with respect to each director and executive officer, hisname and age, the year in which he first joined our Board, if applicable, andhis principal occupation and business experience during the past five years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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| **Name**         | ** ** | **Age** | ** ** | **Principal Occupation/Position Held**                                                                                                                                                                                | ** ** | **Director  since** |
|------------------|------------|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| Allan Goldstein  |       | 70      |       | Chairman of the Department of Biochemistry and  Molecular Biology, The George Washington University School of Medicine and  Health Sciences. Founder of RegeneRx, Chairman of the Board and Chief  Scientific Advisor |       | 1982                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| J.J. Finkelstein |       | 55      |       | President and Chief Executive Officer of RegeneRx                                                                                                                                                                     |       | 2002                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| Rick Hindin      |       | 65      |       | Principle stockholder, Chicken Out Rotisserie Inc.                                                                                                                                                                    |       | 2002                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| Joseph McNay     |       | 74      |       | Chairman, Chief Investment Officer and Managing  Principal of Essex Investment Management Company, LLC                                                                                                                |       | 1987                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| Mauro Bove       |       | 52      |       | Head of Corporate & Business Development and Director  of Sigma-Tau Finanziaria S.p.A., and certain Sigma-Tau affiliates                                                                                          |       | 2004                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| Thompson Bowles  |       | 76      |       | Retired, thoracic surgeon and former Dean of  Medicine and Professor of Surgery at The George Washington University School  of Medicine and Health Sciences                                                           |       | 2006                     |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| David Crockford  |       | 62      |       | Vice President Clinical and Regulatory Affairs of  RegeneRx                                                                                                                                                           |       | N/A                      |
|             |       |    |       |                                                                                                                                                                                                                  |       |                     |
| C. Neil Lyons    |       | 50      |       | Chief Financial Officer of RegeneRx, certified  public accountant                                                                                                                                                     |       | N/A                      |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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**Dr. Goldstein** has served as the Chairmanof our Board of Directors and our Chief Scientific Advisor since he founded ourcompany in 1982.  Dr. Goldstein hassince 1978 served as a Professor of Biochemistry and Chairman of the Departmentof Biochemistry and Molecular Biology at the George Washington UniversitySchool of Medicine and Health Sciences (“George Washington”). Dr. Goldsteinis a recognized expert in the field of immunology and protein chemistry, havingauthored more than 428 scientific articles in professional journals.  He is also the inventor on over 15 U.S.Patents.  Dr. Goldstein discoveredseveral important compounds, including Tα1 and Tβ4, that are eitherin clinical trials and/or marketed in certain countries around the world. Dr. Goldsteinhas served on the Board of Trustees of the Sabin Vaccine Institute since 2000 andon the Board of Trustees of the Richard B. and Lynne V. Cheney CardiovascularInstitute since 2006.  Dr. Goldsteinhas also done pioneering work in the area of medical education, developingdistance learning programs offered through “Frontiers in Medicine,” a medicaleducation series that Dr. Goldstein developed and utilized in connectionwith his work at George Washington.

 

**Mr. Finkelstein** has served as our Presidentand Chief Executive Officer and a member of our Board of Directors since2002.  Mr. Finkelstein also servedas our Chief Executive Officer from 1984 to 1989 and as the Vice Chairman ofour Board of Directors from 1989 to 1991. Mr. Finkelstein has worked as an executive officer and consultantin the bioscience industry for the past 25 years, including serving from 1989to 1996 as chief executive officer of Cryomedical Sciences, Inc., apublicly-traded medical device company. Mr. Finkelstein has significantexperience in developing early-stage companies. He has been responsible for the regulatory approval and marketing ofseveral medical devices in the U.S. and abroad and has raised more than $80million in capital to finance these ventures. Mr. Finkelstein has servedon the executive committee of the Board of Directors of the Technology Councilof Maryland since 2006 and MdBio, Inc. since 1998, non-profit****entities that support bioscience development and educationin the State of Maryland.  Mr. Finkelsteinreceived a business degree from the University of Texas where he majored infinance.

 

**Mr. Hindin** has served asa member of our Board of Directors since 2002 and as our Secretary since 2004. Mr. Hindinis the principal stockholder of Chicken Out Rotisserie, Inc., whichoperates 21 restaurants in four states and the District of Columbia. In 1967, Mr. Hindinco-founded Britches of Georgetown, Inc., a clothing retailer specializingin the sale of upscale men’s and women’s apparel and accessories.  Mr. Hindin has served since 1987 as amember and since 1989 as the chairman of the board of directors of TheInstitute for Advanced Studies in Aging & Geriatric Medicine, IASIA, anon-profit corporation that specializes in disseminating medical information tothe public as well as providing the pharmaceutical industry with an independentsource for testing vaccines and drugs for the elderly. Since 1990, Mr. Hindinhas also served as Chairman of the Board of Hinsilblon Laboratories Ltd., acompany based in Cape Coral, Florida which sells odor neutralization productsand delivery systems. Since 1987, Mr. Hindin has also served as Presidentof Adworks Inc, a Washington D.C.-based advertising and marketing consultingagency.

 

**Mr. McNay**has served as a member of our Board ofDirectors since 2002.  He is currentlyChairman, Chief Investment Officer and Managing Principal of Essex InvestmentManagement Company, LLC, positions he has held since 1976 when he foundedEssex. He has direct portfolio management responsibilities on a variety offunds and on behalf of private clients. He is also a member of the firm’s Management Board.  Prior to founding Essex, Mr. McNay wasExecutive Vice President and Director of Endowment Management &Research Corp. from 1967.  Prior to that,Mr. McNay was Vice President and Senior Portfolio Manager at theMassachusetts Company.  Currently he isserving as Trustee of National Public Radio, Trustee of the Dana Farber CancerInstitute, and is a Trustee and member of the Children’s Hospital InvestmentCommittee.  He received his A.B. degreefrom Yale University and his M.B.A. degree from the Wharton School of Finance.

 

 

 

 

 

 

 

 

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**Mr. Bove** has served as a member of our Board ofDirectors since 2004.  Mr. Bove iscurrently the Head of Corporate & Business Development and serves onthe board of Sigma-Tau Finanziaria S.p.A., a leading internationalpharmaceutical company, and certain Sigma-Tau affiliates, positions he has heldfor more than five years.  Mr. Bovehas also held a number of senior positions in business, licensing and corporatedevelopment within Sigma-Tau, which has subsidiaries in most European countriesand the United States.  Mr. Bove hasmore than 20 years of business and management experience within thepharmaceutical industry.  Mr. Boveobtained his law degree at the University of Parma, Italy, in 1980.  In 1985, he attended the Academy of Americanand International Laws at the International and Comparative Law Center, Dallas,Texas.  Sigma-Tau Finanziaria andaffiliates are our largest stockholder.

 

**Dr. Bowles** has served as a member of our Board ofDirectors since 2006.  He retired fromhis career as a thoracic surgeon in 1988. Dr. Bowles served as Dean ofMedicine and Professor of Surgery at The George Washington University (“GWU”)School of Medicine and Health Sciences from 1976 to 1988 and as Vice Presidentfor Medical Affairs and Executive Dean of the GWU Medical Center from 1988 to1992.  Dr. Bowles previously servedas President of the National Board of Medical Examiners, the medicalaccrediting organization, from 1992 to 2000. He has also been a member of theNational Academy of Sciences Institute of Medicine since 1988 and currentlyserves as a member of several other national medical societies including:  The American College of Surgeons, TheAmerican Association for Thoracic Surgery, The Society of Thoracic Surgeons,The American College of Chest Physicians, The American Gerontological Society,The Society of Medical Administrators, The College of Physicians ofPhiladelphia, and The Washington Academy of surgeons.  Dr. Bowles has served on the editorialboard of a number of medical journals, including the Journal of MedicalEducation and continued on as chairman of its newly revised updated version,Academic Medicine.  Dr. Bowles hasbeen President of the District of Columbia’s medical licensing board called theHealing Arts Commission (1977-1979), and was a member of the National Libraryof Medicine’s Board of Regents (1982-1986), chairman (1984-1986), member of theSpecial Medical Advisory Group of Veterans Administration (now Dept. ofVeterans Affairs) 1984-1992, chairman 1992-1994. Dr. Bowles was alsochairman of the National Committee on Foreign Medical Education andAccreditation, 1994-1996.  Dr. Bowles received his medical degreefrom Duke University and his Ph.D. from New York University.

 

**Mr. Crockford** has served as our VicePresident of Clinical and Regulatory Affairs, since March 1, 2005 and wasa consultant to the Company from 2000 until his appointment as Vice President..He has more than 25 years of experience in the biotechnology and pharmaceuticalindustries. During his career as a clinical and regulatory affairsprofessional, Mr. Crockford established strategic plans, implemented andobtained marketing approval for 18 drug products, including one of the firsthuman growth hormone preparations sold in the U.S., 17 in vitro diagnostictests, and an intraoperative medical device to detect and treat cancer.  Mr. Crockford’s other clinical andregulatory achievements include the cost-effective and timely development of anumber of innovative investigational drugs. Mr. Crockford has a number of publications and is an inventor orco-inventor on more than a dozen patents.

 

**Mr. Lyons** has served as our Chief Financial Officerand Treasurer since 2005, providing seasoned leadership in the areas of financeand administration. With more than 25 years of experience, Mr. Lyons hasdeveloped expertise related to operations, finance, SEC regulations, complextransactions, strategy, information systems and corporate governance. From 1979to 1990, Mr. Lyons practiced with Deloitte, providing assurance andadvisory services to several public companies in the Washington, D.C. metroarea. Following that, Mr. Lyons served as a senior financial executivewith HFS, Inc. (a major Department of Defense contractor) from 1990 to1996, with Bell Atlantic from 

 

 

 

 

 

 

 

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1996 to 1998, with SkyBridge LP (an international satellite broadbandstart-up affiliated with Alcatel) from 1998 to 2003, and consulting with areabusinesses regarding the initial implementations of the Sarbanes-Oxley Act from2003 to 2005. Mr. Lyons is a certified public accountant (“CPA”) andreceived a Bachelor of Science degree, magna cum laude, from Florida SouthernCollege where he majored in accounting.

 

**Compliancewith Section 16(a) of the Exchange Act**

 

Section 16(a) of the Exchange Act requiresour directors and executive officers, and persons who own more than 10% of ourcommon stock, to report to the SEC their initial ownership of our common stockand any subsequent changes in that ownership. Specific due dates for these reports have been established by the SECand we are required to disclose any late filings or failures to file.

 

To our knowledge, based solely on our review of thecopies of such reports furnished to us, or written representations that nofilings were necessary, we believe that during the past fiscal year ourofficers, directors and greater than ten percent (10%) beneficial ownerscomplied with all filing requirements.

 

**Corporate Governance**

 

The Board expects all directors, as well as ourofficers and employees, to act ethically at all times and to adhere to thepolicies outlined in our Corporate Code of Conduct and Ethics.  The Board also expects the PrincipalExecutive Officer (our Chief Executive Officer or CEO), and the PrincipalFinancial Officer (our Chief Financial Officer or CFO) to adhere to our Code ofEthics for the Principal Executive Officer and Principal Financial Officer.  These documents, as well as our charters forstanding committees of our Board can be found at www.regenerx.com.  These documents are also available in printto any security holder who requests it by contacting our Investor Relationsdepartment at RegeneRx Biopharmaceuticals, Inc., 3 Bethesda Metro Center,Suite 630, Bethesda, Maryland 20814, or by phone at 301-280-1992, or by e-mail to info@regenerx.com.

 

**Communication with the Board ofDirectors**

 

We have established procedures for our securityholders to communicate directly with the Board on a confidential basis.Security holders who wish to communicate with the Board or with a particulardirector may send a letter to the Secretary of the Company at 3 Bethesda MetroCenter, Suite 630, Bethesda, Maryland 20814. The mailing envelope mustcontain a clear notation indicating that the enclosed letter is a “SecurityHolder-Board Communication” or “Security Holder-Director Communication.” Allsuch letters must identify the author as a security holder and clearly statewhether the intended recipients are all members of the Board or just certainspecified individual directors. The Secretary will make copies of all suchletters and circulate them to the directors addressed. If a security holderwishes the communication to be confidential, such security holder must clearlyindicate on the envelope that the communication is “confidential.”  The Secretary will then forward suchcommunication, unopened, to the individual indicated.

 

## **Audit Committee Matters**

##  

The Audit Committee of the Board consists ofMessrs. Hindin, McNay and Bowles, with Mr. Hindin acting as theChair.  Mr. Hindin was appointed theChair of the Audit Committee on July 26, 2006.  The Audit Committee meets no less thanquarterly with management and the independent registered public accountingfirm, both jointly and separately, has sole authority to hire and fire ourindependent registered public accounting firm, and reviews our financialreporting process on behalf of 

 

 

 

 

 

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the Board.  The Audit Committeeoperates under a formal written charter available on the Company’s website atwww.regenerx.com.

 

Each member of the Audit Committee is an independentmember director in accordance with both Section 121A of the American StockExchange Company Guide, and Rule 10A-3 of the Exchange Act.  Furthermore, the Board has determined thatMessrs. Hindin and McNay qualify as “audit committee financial experts” asdefined under SEC rules.

 

The Audit Committee pre-approves all audit and non-auditengagement fees, and terms and services. On an ongoing basis, management communicates specific projects andcategories of services for which advance approval of the Audit Committee isrequired.  The Audit Committee reviewsthese requests and advises management and the independent auditors if the AuditCommittee pre-approves the engagement of the independent auditors for suchprojects and services.  On a periodicbasis, the independent auditors report to the Audit Committee the actualspending for such projects and services compared to the approved amounts.

** **

**Item 11. Executive Compensation.**

** **

The following table shows for the fiscal years endedDecember 31, 2007 and 2006, compensation awarded to or paid to, or earnedby, our CEO and the next two highest paid executive officers during 2007 (the“Named Executive Officers”).

 
| **Name and Principal Position**                      | ** ** | **Year**   | ** ** | **Salary****(1)** | ** ** | **Bonus****(2)** | ** ** | **Option Awards****(3)** | ** ** | **Non-Equity   Incentive Plan  Compensation****(4)** | ** ** | **All Other Compensation****(5)** | ** ** | **Total**        |
|------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|------------------|
| ** **                                           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                                           | ** ** | ** **                        | ** ** | ** **       |
| J.J. Finkelstein,                                    |       | 2007       |       | $                 | 299,520    |             | $          | 22,464                   |       | $                                                    | 116,808    |                              | $          | 22,464           |   | 17,322 |   | $ | 478,578 |
| Chief Executive Officer                              |       | 2006       |       | 288,000           |       | 15,000           |       | 72,500                   |       | —                                               |       | 15,990                            |       | 391,490          |
|                                                 |       |       |       |              |       |             |       |                     |       |                                                 |       |                              |       |             |
| Neil Lyons,  Chief Financial Officer                 |       | 2007

2006 |       | 194,432

182,053  |       | 11,798

9,454    |       | 145,424

118,840         |       | 11,798

—                                       |       | 8,094

7,268                      |       | 371,546

317,615 |
|                                                 |       |       |       |              |       |             |       |                     |       |                                                 |       |                              |       |             |
| David Crockford,  VP Clinical and Regulatory Affairs |       | 2007

2006 |       | 202,792

192,708  |       | 12,246

9,813    |       | 120,574

72,500          |       | 12,246

—                                       |       | 11,425

10,552                    |       | 359,283

285,573 |
|                                                      |            |            |            |                   |            |                  |            |                          |            |                                                      |            |                                   |            |                  |  |  |  |  |  |

----

(1)                  Reflects base salary before pretax contributionsand therefore includes compensation deferred under our 401(k) plan.

 

(2)                  Reflects the discretionary portion of ourbonus plan.

 

(3)                  These amounts reflect expense recognized byus for a portion of the current and prior year option awards to our namedexecutive officers, or NEOs, adjusted to assume no forfeitures of theawards.  Reference is made to Note 2“Summary of Significant Accounting Policies” in this Form 10-K for theperiod ended December 31, 2007, which identifies assumptions made in thevaluation of option awards in accordance with SFAS 123R.

 

(4)                  Reflects amounts earned under our bonus plansubject to the achievement of corporate performance goals.

 

(5)                  Primarily reflects our match of executivecompensation deferrals into our 401(k) plan, along with supplemental lifeand disability insurance premiums.  Noneof the individual items exceeded $10,000.

 

 

 

42

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**Outstanding Equity Awards at December 31,2007**

** **

The following information outlines outstandingequity awards held by the named executive officers as of December 31,2007.  All of these outstanding equityawards are in the form of stock option awards and none of our named executiveofficers hold any stock awards.  Allstock option awards reflected in the table below were granted from our Amendedand Restated 2000 Stock Option and Incentive Plan.

 
| ** **                            | ** ** | **Option Awards**                                   | ** **              |
|---------------------------------------|------------|-----------------------------------------------------|-------------------------|
| **Name and Principal Position**       | ** ** | **Option Grant Date**                               | ** **              | **Number of Securities Underlying Unexercised Options (#) Exercisable** | ** ** | **Number of Securities Underlying Unexercised Options (#) Unexercisable** | ** ** | **Option   Exercise   Price ($/sh)** | ** ** | **Option   Expiration   Date** | ** ** |
| ** **                            | ** ** | ** **                                          | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| J.J. Finkelstein,                     |       | 1/1/2002                                            | (1)                     | 500,000 |   |   |   | $ | 0.33 |   | 1/1/2012 |   |
| Chief Executive Officer               |       | 4/1/2005

3/15/2007                                 | (2)

(2)                | 50,000

— |   | 50,000

125,000 |   | 3.21

2.34 |   | 4/1/2015

3/15/2014 |   |
|                                  |       |                                                |                    |   |   |   |   |   |   |   |   |   |   |
| Neil Lyons,   Chief Financial Officer |       | 4/7/2005

3/15/2007                                 | (3)

(2)                | 66,667

— |   | 133,333

75,000 |   | 3.10

2.34 |   | 4/7/2015

3/15/2014 |   |
|                                  |       |                                                |                    |   |   |   |   |   |   |   |   |   |   |
| David Crockford,                      |       | 7/1/2003                                            | (4)                     | 15,000 |   |   |   | 1.07 |   | 7/1/2013 |   |
| VP Clinical and Regulatory Affairs    |       | 1/1/2004

4/1/2005

5/25/2005

1/16/2007

3/15/2007 | (5)

(5)

(5)

(2)

(2) | 56,250

25,000

6,250

—

— |   | 68,750

75,000

18,750

50,000

75,000 |   | 0.86

3.21

3.82

2.15

2.34 |   | 1/1/2014

4/1/2015

5/25/2015

1/16/2014

3/15/2014 |   |
|                                       |            |                                                     |                         |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                  The options vest and become exercisable inequal installments on the first three anniversaries of the grant date.

 

(2)                  The options vest and become exercisable inequal installments on the first four anniversaries of the grant date.

 

(3)                  The options vest and become exercisable inequal installments on the first six anniversaries of the grant date.

 

(4)                  The options fully vested upon issuance.

 

(5)                  The options vest and become exercisable onthe first five anniversaries of the grant date in the following order:  10%, 15%, 20%, 25%, 30%.

 

**EmploymentAgreements**

 

We have entered into employment contracts with each ofour named executive officers, including J.J. Finkelstein, David Crockford, andNeil Lyons our President and Chief Executive Officer; Vice President of Clinicaland Regulatory Affairs; and Chief Financial Officer, respectively.Mr. Finkelstein’s employment agreement was entered into January 1,2002 and had an initial term of three years. The agreement is automaticallyextended for successive one-year terms unless we or Mr. Finkelstein electnot to extend the agreement. Messrs. Crockford and Lyons’ employmentagreements 

 

43

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were entered into on March 1, 2005 and April 12, 2007,respectively, and both have initial terms of one year and are automaticallyextended for successive one-year terms unless we or Messrs. Crockford andLyons elect not to extend the agreement. Pursuant to their respectiveemployment agreements, Messrs. Finkelstein, Crockford and Lyons are entitledto participate in and receive all standard employee benefits and to participatein all of our applicable incentive plans, including stock option, stock, bonus,savings and retirement plans.

 

At any time during the terms ofMessrs. Finkelstein, Crockford and Lyons’ employment agreements, the Boardmay terminate their employment with or without cause.  If Mr. Finkelstein is terminated withoutcause, then we are obligated to pay him a lump sum payment in an amount equalto his then annual base salary (less federal and state tax withholding) asseverance pay. If Mr. Crockford is terminated without cause, then we areobligated to pay him a lump sum payment in an amount equal to 9 months of histhen annual base salary (less federal and state tax withholding) as severancepay. If Mr. Lyons is terminated without cause, then we are obligated topay him a lump sum payment in an amount equal to 6 months of his then annualbase salary (less federal and state tax withholding) as severance pay.  For both Mr. Crockford andMr. Lyons their severance benefit increases to 100% of their then annualbase salary after their third anniversary dates which will occur inMarch and April 2008, respectively. If their respective termination is for cause, thenMessrs. Finkelstein, Crockford and Lyons are not entitled to receive anypayment under their employment agreements beyond the date of theirtermination.  For purposes of eachemployment agreement, “cause” is defined as: (i) refusal, failure or neglect to perform the material duties ofhis employment under this Agreement (other than by reason of the Executive’sphysical or mental illness or impairment); (ii) committing willfuldishonesty, fraud, embezzlement or misconduct with respect to the business oraffairs of the Company; (iii) indictment or conviction of a felony or ofany crime involving dishonesty or moral turpitude; or (iv) the executive’srefusal to abide by or comply with the directives of the Board or ChiefExecutive Officer (as applicable), so long as those directives are lawful andethical.

 

**Potential Payments UponTermination or Change in Control**

 

If employment had been terminated on December 31,2007 without cause for any of our named executive officers, the individualwould have been entitled to severance of six months in the case ofMr. Lyons, nine months in the case of Mr. Crockford, and one year inthe case of Mr. Finkelstein.  AfterMessrs Crockford and Lyons attain their third anniversary dates with us, whichwill be in March and April 2008, respectively, they too will beeligible for a one year severance benefit. Additionally, if the individual terminates his employment for any reasonwithin 12 months after a change of control event, we are obligated to pay theindividual a lump sum severance payment of like amount.  For purposes of the employment agreements,change of control is defined as any of the following events:  (a) the dissolution or liquidation ofthe Company; (b) the sale of all or substantially all of the assets of theCompany to an unrelated person or entity; (c) a merger, reorganization orconsolidation in which the holders of the Company’s outstanding voting powerimmediately prior to such transaction do not own a majority of the outstandingvoting power of the surviving or resulting entity immediately upon completionof such transaction; (d) the sale of all of the outstanding securities ofthe Company to an unrelated person or entity; (e) if any “individual,firm, corporation, or other entity, or any group (as defined in Section 13(d) ofthe Exchange Act) other than (1) a trustee or other fiduciary holdingsecurities of the Company under an employee benefit plan of the Company or(2) the executive becomes the “beneficial owner” (as defined inRule 13d-3 under the Exchange Act), directly or indirectly, of securitiesof the Company representing 50% or more of (A) the outstanding shares ofcommon stock of the Company, or (B) the combined voting power of theCompany’s then-outstanding securities entitled to vote generally in theelection of directors; or (f) any other transaction in which the owners ofthe Company’s outstanding voting power prior to such transaction do not own atleast a 

 

 

 

 

 

 

44

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majority of the outstanding voting power of the relevant entity afterthe transaction, in each case, regardless of the form thereof.

 

Our named executive officers are also entitled tocontinuation of health and welfare benefits for their respective severanceperiod.  The following table sets forthour potential payments upon termination or change in control as ofDecember 31, 2007.

 
| **Name**                                             | ** ** | **Lump Sum   Cash   Severance   Payment** | ** ** | **Continuing   Health and   Welfare   Benefits** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------|------------|
|                                                 |       |                                      |       |                                             |       |
| J.J. Finkelstein                                     |       | $                                         | 299,520    |                                             | $          | 8,322 |   |
| David Crockford                                      |       | 153,075                                   |       | 10,413                                           |       |
| Neil Lyons                                           |       | 98,319                                    |       | 8,382                                            |       |
|                                                 |       |                                      |       |                                             |       |
| Severance entitlement  after third anniversary date: |       |                                      |       |                                             |       |
|                                                 |       |                                      |       |                                             |       |
| David Crockford                                      |       | 210,223                                   |       | 13,884                                           |       |
| Neil Lyons                                           |       | 202,537                                   |       | 16,764                                           |       |
|                                                      |            |                                           |            |                                                  |            |  |  |

 

**Equity Compensation PlanInformation**

 

The following table gives information about ourCommon Stock that may be issued upon the exercise of options, warrants andrights under all existing equity compensation plans as of December 31,2007.

 
| **Plan category**                                         | ** ** | **Number of securities   to be issued upon   exercise of   outstanding options,   warrants and rights** | ** ** | **Weighted-average   exercise price of   outstanding options,   warrants and rights** | ** ** | **Number of securities   remaining available for   future issuance under   equity compensation   plans (excluding   securities reflected in   first column)** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                      |       |                                                                                                    |       |                                                                                  |       |                                                                                                                                                          |       |
| Equity  compensation plans   approved by stockholders     |       | 3,545,000                                                                                               |       | $                                                                                     | 1.80       |                                                                                                                                                          | 620,000    |   |
|                                                      |       |                                                                                                    |       |                                                                                  |       |                                                                                                                                                          |       |
| Equity  compensation plans not   approved by stockholders |       | —                                                                                                  |       | —                                                                                |       | —                                                                                                                                                        |       |
|                                                      |       |                                                                                                    |       |                                                                                  |       |                                                                                                                                                          |       |
| Total                                                     |       | 3,545,000                                                                                               |       | $                                                                                     | 1.80       |                                                                                                                                                          | 620,000    |   |

 

**2007 Director Compensation**

 

The following table provides the compensation paidto our directors, including annual board and committee retainer fees, andmeeting attendance fees for the fiscal year ended December 31 2007.  Information related to Mr. Finkelstein’scompensation is detailed in the “Compensation of Named Executive Officers”section in this Annual Report on Form 10–K.  Mr. Finkelstein does not receive anyadditional compensation for his services as a director.

 

45

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| **Name**                | ** ** | **Fees earned  or paid in  cash** | ** ** | **Option   awards****(2)** | ** ** | **All other compensation** | ** ** | **Total** | ** ** |
|-------------------------|------------|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|-----------|------------|
| Employee Director:      |       |                              |       |                       |       |                       |       |      |       |
| Allan Goldstein         |       | $                                 | —     |                       | $          | 99,084                     |       | $         | 203,840    | (3) | $ | 302,924 |   |
|                    |       |                              |       |                       |       |                       |       |      |       |
| Non-employee Directors: |       |                              |       |                       |       |                       |       |      |       |
| Richard Hindin          |       | 42,000                            |       | 59,692                     |       | —                     |       | 101,692   |       |
| Thompson Bowles         |       | 20,650                            |       | 89,980                     |       | —                     |       | 110,630   |       |
| Joseph McNay            |       | 19,450                            |       | 59,692                     |       | —                     |       | 79,142    |       |
| Mauro Bove              |       | 18,300                            |       | 59,692                     |       | —                     |       | 77,992    |       |
|                         |            |                                   |            |                            |            |                            |            |           |            |  |  |  |  |

----

(1)                      In 2007, eachnon-employee director was eligible to receive an annual cash retainer fee of$13,500 per year.  In addition, thechairman of the Audit Committee and the chairman of the Compensation Committee,each receive an annual retainer of $10,000 for the committee chairmanship.  In 2007 Mr. Hindin served as thechairman of both committees.  Boardmembers were eligible to receive $1,250 for each Board meeting at which thedirector was present in person, and $400 for each meeting the directorparticipated by telephone.  Board membersare also eligible to receive $500 for each committee meeting attended, whetherin person or by telephone.

 

(2)                      These amountsreflect expense recognized by us in 2007 for a portion of the current and prioryear option awards to directors, adjusted to assume no forfeiture of theawards.  Reference is made to Note 2“Summary of Significant Accounting Policies” in this Annual Report on Form 10–Kfor the period ended December 31, 2007 which identifies assumptions madein the valuation of option awards in accordance with SFAS No. 123R.  Beginning in 2007 and annually thereafter,our independent directors are eligible to receive a stock option to purchase15,000 shares of our Common Stock.  For2007, those awards were granted on March 15, 2007.  Starting with the 2008 Annual Meeting ofStockholders, those options will be granted upon re-election to the Board.  These options vest annually over a four yearperiod, in equal amounts, at each subsequent anniversary date of thegrant.  Newly elected independentdirectors will receive an option to purchase 35,000 shares of the Company’sCommon Stock upon appointment to our Board. At December 31, 2007 Messrs. Hindin, McNay and Bove each held190,000 unexercised stock options, Dr. Bowles held 115,000 unexercisedstock options, and Dr. Goldstein held 475,000 unexercised stock options.

 

(3)                      In addition tobeing Chairman of our Board, Dr. Goldstein also serves as the Company’sChief Scientific Advisor.  In thiscapacity, Dr. Goldstein received compensation of $182,000 for 2007 andparticipates in the Company’s bonus program. For 2007, Dr. Goldstein received a bonus of $10,920 based on theachievement of corporate performance goals and a discretionary cash bonus of$10,920.  Dr. Goldstein is alsoentitled to receive his annual salary as severance, which was $182,000 at December 31,2007.  Dr. Goldstein is not entitledto receive any continuing health and welfare benefits as part of our severanceobligation to him.

 

**2000 Stock Option and IncentivePlan, as amended.**

 

The 2000 Stock Option and Incentive Plan wasapproved under which the Board may grant options to purchase shares of ourcommon stock.  Options may only begranted to our directors, officers, employees, consultants or advisors, and nosingle participant can receive more than 450,000 shares in any one year.  The exercise price and term of any grant isto be determined by the Board but 

 

46

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shall never be less than thefair market value of our Common Stock on the date of the grant, and the term ofthe option shall not exceed ten years. Presently, the authorized shares reserved for issuance under the plan is4,200,000.  We currently anticipateissuing new shares to fill any and all options that are exercised.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

 

The following table shows, as of March 17,2008, the beneficial ownership of the Company’s common stock by (a) eachsecurity holder known to us to beneficially own more than 5% of our CommonStock, (b) each of our directors, (c) each of our Named ExecutiveOfficers, and (d) all of our directors and executive officers as a group.

 

In general, “Beneficial Ownership” refers to sharesthat an individual or entity has the power to vote or dispose of, and anyrights to acquire Common Stock that are currently exercisable or will becomeexercisable within 60 days of March 17, 2008 (“Acquirable Within 60Days.”)  Unless otherwise indicated, eachperson named below holds sole investment and voting power, other than thepowers that may be shared with the person’s spouse under applicable law.  The Percent of Common Stock Outstandingrepresents the respective Beneficial Ownership amount as compared to the totalof the Company’s outstanding stock on March 17, 2008 which was 51,553,527plus the respective individual’s amount of shares Acquirable Within 60 Days.

 

47

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| ** **                                                    | ** ** | **Beneficial Ownership** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|
| **Name of Beneficial Owner**                                  | ** ** | **Common Stock**         | ** ** | **Acquirable within 60 days** | ** ** | **Total** | ** ** | **Percent of   class** | ** ** |
|                                                          |       |                     |       |   |   |   |   |   |   |
| Directors:                                                    |       |                     |       |   |   |   |   |   |   |
| J.J. Finkelstein                                              |       | 1,451,638                |       | 606,250 |   | 2,057,888 | (1) | 3.9 | % |
| Allan Goldstein                                               |       | 1,805,446                |       | 393,750 |   | 2,199,196 |   | 4.2 | % |
| Rick Hindin                                                   |       | 1,592,710                |       | 160,000 |   | 1,752,710 |   | 3.4 | % |
| Joseph McNay                                                  |       | 1,339,111                |       | 160,000 |   | 1,499,111 |   | 2.9 | % |
| Mauro Bove                                                    |       | —                   |       | 160,000 |   | 160,000 |   | * |   |
| Thompson Bowles                                               |       | —                   |       | 70,416 |   | 70,416 |   | * |   |
|                                                          |       |                     |       |   |   |   |   |   |   |
| Executive  officers who are not   Directors:                  |       |                     |       |   |   |   |   |   |   |
| David Crockford                                               |       | —                   |       | 185,000 |   | 185,000 |   | * |   |
| Neil Lyons                                                    |       | 10,000                   |       | 118,749 |   | 128,749 |   | * |   |
| All  directors, and executive officers as a group (8 persons) |       | 6,198,905                |       | 1,854,165 |   | 8,053,070 |   | 15.1 | % |
|                                                          |       |                     |       |   |   |   |   |   |   |
| More  than 5% stockholders:                                   |       |                     |       |   |   |   |   |   |   |
| Sigma-Tau Finanziaria, S.p.A.                                 |       | 21,257,385               |       | 1,880,837 |   | 23,138,222 | (2) | 43.3 | % |
|                                                          |       |                     |       |   |   |   |   |   |   |

----

* – less than 1%.

 

(1)          Consists of (i) 1,413,138****shares owned directly by Mr. Finkelstein over which hehas sole voting and dispositive powers; and (ii) 8,500 shares held by Mr. Finkelstein’sminor daughter****with respect to which Mr. Finkelsteinshares voting and dispositive powers.

 

(2)          Consists of (i) 984,615shares and 246,154 shares underlying warrants owned by Sigma–Tau and (ii) 20,272,770shares and 1,634,683 shares underlying warrants owned by affiliates of Sigma–Tau,including 12,011,185 shares and 589,481 shares underlying warrants owned byDefiante Farmaceutica LDA, 3,705,600 shares and 522,601 shares underlyingwarrants owned by Inverlochy Consultodoria & Servicos LDA, and4,555,985 shares and 522,601 shares underlying warrants owned by Chaumiere–Consultadoria &Servicos SDC Unipessoal LDA.

 

**Item 13.Certain Relationships and Related Transactions, and Director Independence.**

 

OnFebruary 29, 2008, we closed agreements with two affiliates of Sigma–Tau,who are both accredited investors, with respect to the sale of 5,000,000 sharesof our common stock at a price per share of $1.00 for gross proceeds of$5,000,000.  In connection with theoffering, we also issued warrants to purchase an additional 1,000,000 shares ofcommon stock with an exercise price of $1.60 per share.  Under the terms of the offering, we may, inour sole discretion, repurchase the shares subject to the offering at any timeuntil December 31, 2009, for $2.00 per share or, at any time between January 1,2010 and December 31, 2010, for $2.50 per share.  Our repurchase right terminates after December 31,2010.  In addition, the purchasers haveagreed to vote the shares subject to the offering, and any additional sharesissued pursuant to the exercise of the warrants, with our Board of Directorsuntil December 31, 2010.  Thewarrants have a term of three years. One-third of the warrants vested 

 

48

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uponthe closing of the offering, one-third is scheduled to vest on December 31,2008, and one-third is scheduled to vest on December 31, 2009.  However, should we repurchase all of theshares subject to the offering prior to December 31, 2009, any unvestedwarrants would terminate as of the date we complete the repurchase.

 

OnDecember 13, 2007, we approved amending the terms of certain warrants heldby Sigma–Tau and other investors which were scheduled to expire between December 31,2007 and January 7, 2008 to extend the expiration date of each Warrant to March 31,2008 and to eliminate the cashless exercise provisions of these Warrants.  None of the Warrant Holders paid anyadditional consideration for these amendments.

 

Eachof the foregoing transactions were approved unanimously by the Board ofDirectors following disclosure of the transactions, including the related partybenefits, if any.

 

**Item 14.Principal Accounting Fees and Services.**

 

Fees paid to the Reznick Group, P.C., our independent registered publicaccounting firm, for the last two fiscal years ended December 31 were asfollows:

 

| ** **              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Audit fees              |       | $        | 46,000     |     | $          | 43,000 |   |
|                    |       |     |       |     |       |
| Audit–related fees |       | 2,850    |       | 3,750    |       |
|                    |       |     |       |     |       |
| Tax fees                |       | 7,000    |       | —   |       |
|                    |       |     |       |     |       |
| All other fees          |       | 10,000   |       | —   |       |
|                         |            |          |            |          |            |  |  |

----

 

| Audit fees include fees for our annual financial  statement audit, along with fees associated with the review of our quarterly  financial statements. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                  |
| Audit–related fees include fees for reviews  and consents necessary to engage in equity transactions that we have, from  time to time, executed. |
|                                                                                                                                                  |
| Tax fees include the preparation and filing of our  corporate federal and state income tax returns.                                                   |
|                                                                                                                                                  |
| All other fees include an executive compensation  survey                                                                                              |

 

 

All audit relatedservices, tax services and other services were pre-approved by the AuditCommittee, which concluded that the provision of such services by ReznickGroup, P.C. was compatible with the maintenance of that firm’s independence inthe conduct of its auditing functions.

 

49

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**PART IV**

 

**Item 15.Exhibits, Financial Statement Schedules.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                      | ** ** | **Reference***                                                                                                                                        |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 3.1                  |       | Restated Certificate of Incorporation of the Company                                                                                                            |       | Exhibit 3.1 to Registration Statement No. 33-9370, Amendment  No. 1 (filed November 26, 1986)                                     |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 3.2                  |       | Certificate  of Amendment of Restated Certificate of Incorporation of Company                                                                                   |       | Exhibit 3.2  to the Company’s Transitional Report on Form 10–K, File No. 0–15070  (filed March 18, 1991)           |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 3.3                  |       | Amendment to Restated Certificate of Incorporation of Company                                                                                                   |       | Exhibit 3.3 to the Company’s Form 10–KSB, File No. 0–15070  (filed April 2, 2001)                                  |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 3.4                  |       | Amended  and Restated Bylaws of Company                                                                                                                         |       | Exhibit 3.4  to the Company’s Quarterly Report on Form 10–Q for the quarter ended  June 30,2007 (filed August 14, 2006) |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.1                  |       | Form of  Stock Certificate                                                                                                                                 |       | Exhibit 4.1  to Registration Statement No. 33–9370, Amendment No. 1 (filed  November 26, 1986)                               |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.2                  |       | Rights  Agreement, dated as of April 29, 1994, between the Company and American  Stock Transfer & Trust Company, as Rights Agent                  |       | Exhibit 1  to the Company’s Current Report on Form 8–K, File No. 0–15070  (filed May 2, 1994)                      |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.3                  |       | Amendment  No. 1 to Rights Agreement, dated March 4, 2004, between the Company  and American Stock Transfer & Trust Company, as Rights Agent |       | Exhibit 4.3  to the Company’s Annual Report on Form 10–KSB, File No. 1–15070  (filed March 31, 2006)               |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.4                  |       | Warrant  Agreement, dated March 12, 1997                                                                                                                   |       | Exhibit 4.3  to the Company’s Annual Report on Form 10–K, File No. 0–15070  (filed March 31, 1997)                 |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.5                  |       | Warrant  Agreement, dated January 23, 2004                                                                                                                 |       | Exhibit 4.4  to the Company’s Registration Statement on Form SB–2, File No. 333–113417  (filed March 9, 2004)      |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.6                  |       | Form of  Warrant Agreement                                                                                                                                 |       | Exhibit 4.1  to the Company’s Current Report on Form 8–K (filed on January 6,  2005)                                         |
|                 |       |                                                                                                                                                            |       |                                                                                                                                                  |
| 4.7                  |       | Warrant  Agreement, dated December 31, 2004                                                                                                                |       | Exhibit 4.2  to the Company’s Current Report on Form 8–K (filed on January 6,  2005)                                         |

 

50

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| 4.8    |   | Form of  Warrant                                                                               |   | Exhibit 4.1  to the Company’s Current Report on Form 8–K (filed on March 7,  2006)                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                |   |                                                                                                                                                    |
| 4.9    |   | Form of  Warrant                                                                               |   | Exhibit 4.1  to the Company’s Current Report on Form 8–K (filed on December 18,  2006)                                         |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 4.10   |   | Form of  Warrant                                                                               |   | Exhibit 4.1  to the Company’s Current Report on Form 8–K (filed on  February 27, 2008)                                         |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.1   |   | Patent  License Agreement — Exclusive, between the U.S. Public Health Service and the  Company |   | Exhibit 10.1  to the Company’s Form 10–KSB, File No.   0–15070 (filed April 2, 2001)**                               |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.2^  |   | Amended  and Restated Directors Stock Option Plan                                                   |   | Exhibit 10.25  to the Company’s Annual Report on Form 10–K, File No. 0–15070  (filed March 26, 1993)                 |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.3^  |   | Amended  and Restated 2000 Stock Option and Incentive Plan                                          |   | Exhibit 10.3  to the Company’s Quarterly Report on Form 10–Q for the quarter ended  June 30, 2006 (filed August 14, 2006) |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.4^  |   | Unit  Purchase Agreement dated March 12, 1997                                                  |   | Exhibit 10.25  to the Company’s Annual Report on Form 10–K, File No. 0–15070  (filed March 31, 1997)                 |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.5   |   | Registration  Rights Agreement, dated March 12, 1997                                           |   | Exhibit 10.26  to the Company’s Annual Report of Form 10–K, File No. 0–15070  (filed March 31, 1997)                 |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.6   |   | Lease  Agreement dated April 5, 2002 between the Company and HQ Global  Workplaces, Inc.  |   | Exhibit 10.7  to the Company’s Annual Report on Form   10–KSB, File No. 0–15070 (filed March 31, 2003)               |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.7^  |   | Employment  Agreement                                                                               |   | Exhibit 10.8  to the Company’s Registration Statement on Form SB–2, File No. 333–113417  (filed March 9, 2004)       |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.8^  |   | Employment  Agreement                                                                               |   | Exhibit 10.9  to the Company’s Registration Statement on Form SB–2, File No. 333–113417  (filed March 9, 2004)       |
|   |   |                                                                                                |   |                                                                                                                                                    |
| 10.9   |   | License  and Supply Agreement                                                                       |   | Exhibit 10.10  to the Company’s Registration Statement on Form SB–2, File No. 333–113417  (filed March 9, 2004)**    |

 

51

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| 10.10  |   | Securities  Purchase Agreement                                 |   | Exhibit 10.11  to the Company’s Registration Statement on Form SB–2, File No. 333–113417  (filed March 9, 2004)                        |
|--------|--------|----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.11  |   | Master  Services Agreement                                     |   | Exhibit 10.12  to the Company’s Registration Statement on Form SB–2, Amendment  No. 1, File No. 333–113417 (filed April 23, 2004) |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.12  |   | Form of  Purchase Agreement                               |   | Exhibit 99.2  to the Company’s Current Report on Form 8–K (filed on January 6,  2005)                                                            |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.13  |   | Form of  Stock Purchase Agreement                         |   | Exhibit 99.2  to the Company’s Current Report on Form 8–K (filed on June 23,  2005)                                                              |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.14  |   | Form of  Securities Purchase Agreement                    |   | Exhibit 10.1  to the Company’s Current Report on Form 8–K (filed on March 7,  2006)                                                              |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.15  |   | Form of  Securities Purchase Agreement                    |   | Exhibit 10.1  to the Company’s Current Report on Form 8–K (filed on December 18,  2006)                                                          |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.16  |   | Form of  Registration Rights Agreement                    |   | Exhibit 10.2  to the Company’s Current Report on Form 8–K (filed on December 18,  2006)                                                          |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.17  |   | Form of  Securities Purchase Agreement                    |   | Exhibit 10.1  to the Company’s Current Report on Form 8–K (filed on March 7,  2006)                                                              |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.18  |   | Amendment  No. 1 to Employment Agreement of C. Neil Lyons |   | Exhibit 10.1  to the Company’s Current Report on Form 8–K (filed on December 17,  2007)                                                          |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.19  |   | Form of  Securities Purchase Agreement                    |   | Exhibit 10.1  to the Company’s Current Report on Form 8–K (filed on December 18,  2007)                                                          |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.20  |   | Form of  Registration Rights Agreement                    |   | Exhibit 10.2  to the Company’s Current Report on Form 8–K (filed on December 18,  2007)                                                          |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.21  |   | Form of  Amendment to Investor Warrant                    |   | Exhibit 99.1  to the Company’s Current Report on Form 8–K (filed on  January 7, 2008)                                                            |
|   |   |                                                           |   |                                                                                                                                                                      |
| 10.22  |   | Form of  Amendment to Placement Agent Warrant             |   | Exhibit 99.2  to the Company’s Current Report on Form 8–K (filed on  January 7, 2008)                                                            |

 

52

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| 10.23                 |   | Form of  Securities Purchase Agreement               |   | Exhibit 99.1  to the Company’s Current Report on Form 8–K (filed on  February 27, 2008)                                          |
|-----------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                      |   |                                                                                                                                                      |
| 23.1                  |   | Consent of Independent  Registered Public Accounting Firm |   | Filed herewith                                                                                                                                            |
|                  |   |                                                      |   |                                                                                                                                                      |
| 31.1 &  31.2 |   | Certifications  dated March 28, 2008                 |   | Certifications  Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 (filed  herewith)                                                     |
|                  |   |                                                      |   |                                                                                                                                                      |
| 32.1 &  32.2 |   | Certifications  dated March 28, 2008                 |   | Certifications  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes–Oxley Act of 2002 (filed herewith) |

----

| *      |   | Except where noted, the  exhibits referred to in this column have heretofore been filed with the  Securities and Exchange Commission as exhibits to the documents indicated and  are hereby incorporated by reference thereto. The Registration Statements  referred to are Registration Statements of the Company. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| **     |   | Portions of this document  have been omitted pursuant to a request for confidential treatment.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                |
| ***    |   | Compensatory plan,  contract or arrangement.                                                                                                                                                                                                                                                                        |

 

 

 

53

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**RegeneRx Biopharmaceuticals, Inc.**

**Index to Financial Statements**

 
|                                                     | Page |
|----------------------------------------------------------|------|
| Report of Independent Registered Public Accounting  Firm | 55   |
| Balance  Sheets                                          | 56   |
| Statements  of Operations                                | 57   |
| Statements of Stockholders Equity                        | 58   |
| Statements  of Cash Flows                                | 59   |
| Notes  to Financial Statements                           | 60   |

 

 

54

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

RegeneRx Biopharmaceuticals, Inc.

 

We have audited the accompanying balance sheets ofRegeneRx Biopharmaceuticals, Inc. as of December 31, 2007 and 2006,and the related statements of operations, stockholders’ equity, and cash flowsfor each of the years ended December 31, 2007 and 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicAccounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion.  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of RegeneRxBiopharmaceuticals, Inc. as of December 31, 2007 and 2006, and theresults of its operations and its cash flows for each of the years ended December 31,2007 and 2006, in conformity with accounting principles generally accepted inthe United States of America.

 

As discussed in Note 2 to the financial statements, the Company adoptedStatement of Financial Accounting Standards No. 123R, *Share*–*BasedPayment*, as of January 1, 2006

 

/s/ Reznick Group, P.C.

 

Bethesda, Maryland

March 27, 2008

 

55

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**RegeneRxBiopharmaceuticals, Inc.**

**Balance Sheets**

 
| ** **                                                                                                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                | ** ** | **2007**         | ** ** | **2006**         | ** ** |
|                                                                                                                      |       |             |       |             |       |
| ASSETS                                                                                                                    |       |             |       |             |       |
| Current assets                                                                                                            |       |             |       |             |       |
| Cash and cash equivalents                                                                                                 |       | $                | 3,696,878  |             | $          | 13,052,308 |   |
| Short-term investments                                                                                                    |       | 4,579,592        |       | 4,000,000        |       |
| Accounts receivable                                                                                                       |       | 26,951           |       | 272,491          |       |
| Prepaid expenses and other current assets                                                                                 |       | 268,244          |       | 111,679          |       |
| Total current assets                                                                                                      |       | 8,571,665        |       | 17,436,478       |       |
| Fixed assets, net of  accumulated depreciation of $62,227 and $41,030                                                     |       | 44,435           |       | 53,398           |       |
| Other non-current assets                                                                                                  |       | 5,693            |       | 11,749           |       |
| Total assets                                                                                                              |       | $                | 8,621,793  |             | $          | 17,501,625 |   |
|                                                                                                                      |       |             |       |             |       |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                                                                     |       |             |       |             |       |
| Current liabilities                                                                                                       |       |             |       |             |       |
| Accounts payable                                                                                                          |       | $                | 273,561    |             | $          | 362,402 |   |
| Accrued expenses                                                                                                          |       | 2,195,508        |       | 886,888          |       |
| Total current liabilities                                                                                                 |       | 2,469,069        |       | 1,249,290        |       |
| Commitments                                                                                                               |       | —           |       | —           |       |
|                                                                                                                      |       |             |       |             |       |
| Stockholders' equity                                                                                                      |       |             |       |             |       |
| Preferred stock, $.001 par value per share, 1,000,000 authorized; no  shares issued                                       |       | —           |       | —           |       |
| Common stock, par value $.001 per share, 100,000,000 shares  authorized; 46,553,527 and 46,096,477 issued and outstanding |       | 46,554           |       | 46,096           |       |
| Additional paid-in capital                                                                                                |       | 73,513,292       |       | 72,433,660       |       |
| Accumulated other comprehensive loss                                                                                      |       | (1,543           | )          | —           |       |
| Accumulated deficit                                                                                                       |       | (67,405,579      | )          | (56,227,421      | )          |
| Total stockholders' equity                                                                                                |       | 6,152,724        |       | 16,252,335       |       |
| Total liabilities and stockholders' equity                                                                                |       | $                | 8,621,793  |             | $          | 17,501,625 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**RegeneRxBiopharmaceuticals, Inc.**

**Statements of Operations**

 
| ** **                                            | ** ** | **Years ended December 31,** | ** **  |
|-------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                            | ** ** | **2007**                     | ** **  | **2006** | ** ** |
| Revenues                                              |       | $                            | 240,324     |   | $ | 272,491 |   |
|                                                  |       |                         |        |   |   |
| Operating expenses:                                   |       |                         |        |   |   |
| Research and development                              |       | 8,887,255                    |        | 6,396,524 |   |
| General and administrative                            |       | 3,197,685                    |        | 2,665,652 |   |
| Total operating expenses                              |       | 12,084,940                   |        | 9,062,176 |   |
| Loss from operations                                  |       | (11,844,616                  | )           | (8,789,685 | ) |
| Interest income                                       |       | 666,458                      |        | 522,704 |   |
| Net loss                                              |       | $                            | (11,178,158 | ) | $ | (8,266,981 | ) |
|                                                  |       |                         |        |   |   |
| Basic and diluted net loss  per common share          |       | $                            | (0.24       | ) | $ | (0.21 | ) |
| Weighted average number of  common shares outstanding |       | 46,465,982                   |        | 40,116,367 |   |

 

 

The accompanying notes are an integral part of these financialstatements.

 

 

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**RegeneRxBiopharmaceuticals, Inc.**

**Statements of Changes in Stockholders' Equity**

**Yearsended December 31, 2007 and 2006**

 
| ** **                                                   | ** ** | ** **        | ** ** | ** **     | ** ** | ** **           | ** ** | ** **        | ** ** | **Accumulated**   | ** **  | ** **  | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------------|------------|-------------------|------------|-------------------|-------------|-------------|------------|
| ** **                                                   | ** ** | ** **        | ** ** | ** **     | ** ** | ** **           | ** ** | ** **        | ** ** | **other**         | ** **  | **Total**   | ** ** |
| ** **                                                   | ** ** | **Common  stock** | ** ** | **Additional** | ** ** | **Accumulated**      | ** ** | **Comprehensive** | ** ** | **stockholders'** | ** **  |
| ** **                                                   | ** ** | **Shares**        | ** ** | **Amount**     | ** ** | **Paid-in  capital** | ** ** | **Deficit**       | ** ** | **Income/(loss)** | ** **  | **equity**  | ** ** |
|                                                         |       |              |       |           |       |                 |       |              |       |              |        |        |       |
| Balance, December  31, 2005                                  |       | 37,629,024        |       | $              | 37,629     |                 | $          | 54,936,362        |       | $                 | (47,960,440 | )           | $          | (3,044 | ) | $ | 7,010,507 |   |
| Issuance of common  stock, net of offering costs of $896,889 |       | 7,897,509         |       | 7,897          |       | 15,928,615           |       | —            |       | —            |        | 15,936,512  |       |
| Issuance of common stock  upon exercise of warrants          |       | 569,944           |       | 570            |       | 773,680              |       | —            |       | —            |        | 774,250     |       |
| Share-based compensation  expense                            |       | —            |       | —         |       | 795,003              |       | —            |       | —            |        | 795,003     |       |
| Net loss                                                     |       | —            |       | —         |       | —               |       | (8,266,981        | )          | —            |        | (8,266,981  | )          |
| Unrealized gain on  available for sale securities            |       | —            |       | —         |       | —               |       | —            |       | 3,044             |        | 3,044       |       |
| Total comprehensive loss                                     |       |              |       |           |       |                 |       |              |       |              |        | (8,263,937  | )          |
| Balance, December 31,  2006                                  |       | 46,096,477        |       | 46,096         |       | 72,433,660           |       | (56,227,421       | )          | —            |        | 16,252,335  |       |
| Issuance of common stock  upon exercise of warrants          |       | 457,050           |       | 458            |       | 45,248               |       | —            |       |              |        | 45,706      |       |
| Share-based compensation  expense                            |       | —            |       | —         |       | 1,034,384            |       | —            |       | —            |        | 1,034,384   |       |
| Net loss                                                     |       | —            |       | —         |       | —               |       | (11,178,158       | )          | —            |        | (11,178,158 | )          |
| Unrealized loss on  available for sale securities            |       | —            |       | —         |       | —               |       | —            |       | (1,543            | )           | (1,543      | )          |
| Total comprehensive loss                                     |       |              |       |           |       |                 |       |              |       |              |        | (11,179,701 | )          |
| Balance, December 31,  2007                                  |       | 46,553,527        |       | $              | 46,554     |                 | $          | 73,513,292        |       | $                 | (67,405,579 | )           | $          | (1,543 | ) | $ | 6,152,724 |   |

 

 

The accompanying notes are an integral part of these financialstatements.

 

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**RegeneRxBiopharmaceuticals, Inc.**

**Statements of Cash Flows**

 
| ** **                                                                   | ** ** | **For the Years Ended December 31** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                            | ** **  | **2006** | ** ** |
|                                                                         |       |                                |        |   |   |
| Operating activities:                                                        |       |                                |        |   |   |
| Net loss                                                                     |       | $                                   | (11,178,158 | ) | $ | (8,266,981 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                |        |   |   |
| Depreciation and amortization                                                |       | 21,197                              |        | 18,112 |   |
| Non-cash share-based compensation                                            |       | 1,034,384                           |        | 795,003 |   |
| Changes in operating assets and liabilities:                                 |       |                                |        |   |   |
| Accounts receivable                                                          |       | 245,540                             |        | (272,491 | ) |
| Prepaid expenses and other current assets                                    |       | (156,565                            | )           | (38,785 | ) |
| Due from related party                                                       |       | —                              |        | 4,592 |   |
| Other non-current assets                                                     |       | 6,056                               |        | 5,329 |   |
| Accounts payable                                                             |       | (88,841                             | )           | 174,736 |   |
| Accrued expenses                                                             |       | 1,308,620                           |        | 360,427 |   |
| Net cash used in operating activities                                        |       | (8,807,767                          | )           | (7,220,058 | ) |
|                                                                         |       |                                |        |   |   |
| Investing activities:                                                        |       |                                |        |   |   |
| Purchase of short-term, available-for-sale investments                       |       | (20,681,135                         | )           | (5,580,424 | ) |
| Proceeds from sales/maturities of short-term investments                     |       | 20,100,000                          |        | 4,263,161 |   |
| Purchase of fixed assets                                                     |       | (12,234                             | )           | (17,276 | ) |
| Net cash used in investing activities                                        |       | (593,369                            | )           | (1,334,539 | ) |
|                                                                         |       |                                |        |   |   |
| Financing activities:                                                        |       |                                |        |   |   |
| Net proceeds from issuance of common stock                                   |       | —                              |        | 15,936,512 |   |
| Preceeds from exercise of warrants                                           |       | 45,706                              |        | 774,250 |   |
| Net cash provided by financing activities                                    |       | 45,706                              |        | 16,710,762 |   |
| Net increase (decrease) in cash and cash equivalents                         |       | (9,355,430                          | )           | 8,156,165 |   |
| Cash and cash equivalents:                                                   |       |                                |        |   |   |
| Beginning of period                                                          |       | 13,052,308                          |        | 4,896,143 |   |
| End of period                                                                |       | $                                   | 3,696,878   |   | $ | 13,052,308 |   |

 

 

The accompanying notes are an integral part of these financialstatements.

 

59

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1.          ORGANIZATION AND BUSINESS

 

*Organization and Nature of Operations.*  RegeneRx Biopharmaceuticals, Inc. (the“Company”, “We”, “Us”, “Our”), a Delaware corporation, was incorporated in1982.  We are focused on the discoveryand development of novel molecules to accelerate tissue and organrepair.  We view our operations and manage our business as onesegment, the development and marketing of Thymosin Beta 4 (“Tβ4”) –basedproduct candidates. Factors used to identify our single operating segmentinclude the financial information available for evaluation by the chiefoperating decision maker in making decisions about how to allocate resourcesand assess performance.

 

*Management Plans to Address Operating Conditions.*  We anticipate incurring additional losses inthe future as we continue to explore the potential clinical benefits ofTβ4–based product candidates over multiple indications.  To achieve profitability we must successfullyconduct pre–clinical studies and clinical trials, obtain required regulatoryapprovals and successfully manufacture and market those pharmaceutical we wishto commercialize. The time required to reach profitability is highly uncertain,and there can be no assurance that we will be able to achieve sustainedprofitability, if at all.

 

We have incurred negative cash flows from operations since inception,and expect to continue to expend substantial funds to complete our plannedproduct development efforts. Additionally, we continually refine our operatingstrategy and evaluate alternative clinical uses of Tβ4.  We expect that our existing capitalresources, including those received after December 31, 2007 as more fullydescribed in Note 12, will be sufficient to fund our projected operations intothe fourth quarter of 2008.  However,substantial additional resources will be needed before we will be able toachieve sustained profitability. Consequently, we continually evaluate alternative sources of financingand/or sharing development costs through strategic collaboration agreements.There can be no assurance that our financing efforts will be successful, and ifwe are not able to obtain sufficient levels of financing, we would delay certainclinical and/or research activities, and our financial condition would bematerially and adversely affected.  Evenif we are able to obtain sufficient funding, other factors includingcompetition, dependence on third–parties, uncertainty regarding patents,protection of proprietary rights, manufacturing of peptides and technologyobsolescence could have a significant impact on us and our operations.

 

2.               SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

*Financial Statement Preparation*  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

*Cash and Cash Equivalents.*  Cash and cash equivalents consist of cash andhighly–liquid investments with original maturities of three months or less whenpurchased.

 

*Short*–*term Investments. *In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 115, “Accounting for CertainDebt and Equity Securities,” short–term investments 

 

 

60

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are classified as available–for–sale.  We define short–term investments as income–yieldingsecurities that can be readily converted to cash.  These securities are carried at fair value,with unrealized gains and losses reported as accumulated other comprehensiveincome. The cost of debt securities is adjusted for amortization of premiumsand accretion of discounts to maturity. Such amortization and accretion isincluded in calculating interest income. Realized gains and losses and declinesin securities judged to be other than temporary are included in other income orexpense. The cost of securities sold is based on the specific identificationmethod. Interest and dividends on available–for–sale securities are included ininterest income. Investments held as of December 31, 2007 consist ofcorporate notes and municipal or state bonds.

 

*Fair Value of Financial Instruments.*  Cash and cash equivalents, accountsreceivable, accounts payable and accrued expenses are carried at cost, whichmanagement believes approximates fair value due to the short–term maturity ofthese instruments. Short–term investments are carried at fair value.

 

*Concentration of Credit Risk. *Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash, cash equivalents and short–term investments.We limit our exposure to credit loss by placing our cash and investments withhigh quality financial institutions and, in accordance with our investmentpolicy, debt that is rated investment grade.

 

*Fixed Assets.*  Fixedassets consist of office furniture and equipment, and are stated at cost anddepreciated over the estimated useful lives of the assets (generally two tofive years) using the straight–line method. Expenditures for maintenance and repairs which do not significantly prolongthe useful lives of the assets are charged to expense as incurred.  Depreciation expense was $21,197 and $18,112for the years ended December 31, 2007 and 2006, respectively.

 

*Long–lived Assets. *In accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long–LivedAssets,” we review the recoverability of long–lived and finite–lived intangibleassets when circumstances indicate that the carrying amount of assets may notbe recoverable. This evaluation is based on various analyses includingundiscounted cash flow projections. In the event undiscounted cash flowprojections indicate an impairment, we would record an impairment loss, if any,based on the fair value of the assets. We did not record any impairments orwrite–offs of long–lived assets in the years ended December 31, 2007 or2006.

 

*Derivative Financial Instruments. *We do not use derivative instruments to hedge exposures to cash flow,market, or foreign currency risks.

 

In connection with the sale of equity instruments, we may issuefreestanding options or warrants. Additionally, we may issue options orwarrants to non–employees in connection with consulting or other services theyprovide.  In the event we issue optionsor warrants with terms that provide for net–cash settlement under circumstancesthat may be deemed to be outside of our control, we may be required to accountfor these securities as derivative financial instrument liabilities, ratherthan as equity.

 

Derivative financial instruments are required to be initially measuredat their fair value. For derivative financial instruments that shall beaccounted for as liabilities, the derivative instrument is initially recordedat its fair value and is then re–valued at each reporting date, with changes inthe fair value reported as charges or credits to income.

 

61

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To the extent that the fair value of the freestanding derivativeinstrument liability exceeds the total proceeds received, an immediate chargeto income is required to be recognized, in order to initially record thederivative instrument liability at its fair value.

 

We review the classification of derivative instruments, includingwhether such instruments should be recorded as liabilities or as equity, at theend of each reporting period. Derivative instrument liabilities are required tobe classified in the balance sheet as current or non–current based on whetheror not net–cash settlement of the derivative instrument could be requiredwithin 12 months of the balance sheet date. We currently do not have anyderivative instruments that are required to be bifurcated and recorded asliabilities.

 

*Registration Rights Agreements. *In connectionwith the sale of certain equity instruments, we have entered into RegistrationRights Agreements. Generally, these Agreements require us to file registrationstatements with the Securities and Exchange Commission to register commonshares to permit re–sale of common shares previously sold under an exemptionfrom registration or to register common shares that may be issued on exerciseof outstanding options or warrants.

 

The Agreements usually require us to pay penalties for any time delayin filing the required registration statements, or in the registrationstatements becoming effective, beyond dates specified in the Agreement. Thesepenalties are usually expressed as a fixed percentage, per month, of theoriginal amount we received on issuance of the common shares, options orwarrants. While we have not recognized any penalties under these agreements, ifa penalty is determined to be probable we would recognize the amount as acontingent liability and not as a derivative instrument.

 

*Government Grants.*We receive non–refundablegrants under available government programs. Government grants towards currentexpenditures are recorded as revenue when there is reasonable assurance that wehave complied with all conditions necessary to receive the grants,collectibility is reasonably assured, and as the expenditures are incurred.

 

*Research and Development.*  Research and development costs, which consistof primarily of costs associated with external pre–clinical study and clinicaltrial fees, manufacturing costs and other related expenses, are expensed asincurred.

 

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*Clinical Trial Expenses. *We accrueclinical trial expenses based on work performed. We rely on estimates of totalcosts incurred based on enrollment of subjects, completion of studies and otherevents. We follow this method because reasonably dependable estimates of thecosts applicable to various stages of a clinical trial can be made. Accruedclinical costs are subject to revisions as clinical trials progress, and anyrevisions are recorded in the period in which the facts that give rise to therevisions become known.

 

*Patent Costs.*  Legalcosts related to filing and protecting patent applications are expensed togeneral and administrative as incurred as recoverability of such expendituresis uncertain.

 

*Income Taxes.*  In accordance with SFAS No. 109,“Accounting for Income Taxes,” a deferred tax asset or liability is determinedbased on the difference between the financial statement and tax basis of assetsand liabilities as measured by enacted tax rates which will be in effect whenthese differences reverse.  We provide avaluation allowance against net deferred tax assets unless, based upon theavailable evidence, it is more likely than not that the deferred tax assetswill be realized.

 

*Comprehensive Income.*  In accordance with SFAS No. 130,“Reporting Comprehensive Loss,” all components of comprehensive loss, includingnet loss, are reported in the financial statements in the period in which theyare recognized. Comprehensive loss is defined as the change in equity during a periodfrom transactions and other events and circumstances from non–owner sources.

 

*Net Loss Per Share. *Basic and diluted net lossper share are presented in conformity with SFAS No. 128, “Earnings perShare,” for all periods presented. In accordance with SFAS No. 128, basicand diluted net loss per share has been computed using the weighted–averagenumber of shares of common stock outstanding during the period, less any sharessubject to repurchase or forfeiture.

 

We have excluded all outstanding stock options and warrants from thecalculation of basic and diluted net loss per share because these securitiesare antidilutive for all years presented. Securities that could potentially dilute basic net loss per share in thefuture, and that were not included in the calculation of diluted net loss pershare, are as follows:

 
| ** **                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                          | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                                                                |       |             |       |   |   |
| Outstanding stock options                                                           |       | 3,545,000        |       | 2,685,000 |   |
| Warrants                                                                            |       | 3,522,544        |       | 3,979,594 |   |
| Total potential common  shares excluded from diluted net loss per share computation |       | 7,067,544        |       | 6,664,594 |   |

 

*Share–Based Compensation.*  Effective January 1, 2006 we adopted thefair value provisions of SFAS No. 123 (revised 2005), “Share–BasedPayment” (or “FAS 123R”), using the modified–prospective transition method. Underthe modified prospective transition method, compensation cost recognized inperiods subsequent to 2005 includes: (i) compensation cost for all 

 

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equity–based payments granted prior to, butnot vested as of, January 1, 2006, and (ii) compensation cost for allequity–based payments granted subsequent to January 1, 2006, all based onthe grant–date fair value, estimated in accordance with the provisions of SFAS No. 123R.Transactions with nonemployees in which consideration is received for theissuance of equity instruments are accounted for based on the fair value of theconsideration received or the fair value of the equity instruments issued,whichever is more reliably measurable in accordance with EITF 96–18, Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods and Services.

 

A summary of compensation expense related to stock options follows:

 
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **2007**                     | ** ** | **2006** | ** ** |
|                             |       |                         |       |   |   |
| Employees                        |       | $                            | 649,227    |   | $ | 452,571 |   |
| Non–employees               |       | 385,157                      |       | 342,432 |   |
|                             |       |                         |       |   |   |
| Total compensation expense       |       | $                            | 1,034,384  |   | $ | 795,003 |   |
|                             |       |                         |       |   |   |
| Research and development         |       | $                            | 422,721    |   | $ | 293,297 |   |
| General and administrative       |       | 611,663                      |       | 501,706 |   |
|  Total compensation expense |       |                         |       |   |   |
|                             |       | $                            | 1,034,384  |   | $ | 795,003 |   |

 

The fair value of each option is estimated on the date of grant usingthe Black–Scholes option–pricing model with the following range of assumptionsfor stock options granted during the years ended December 31, 2007 and2006:

 

| ** **               | ** ** | **2007**        | ** ** | **2006**        | ** ** |
|--------------------------|------------|-----------------|------------|-----------------|------------|
|                     |       |            |       |            |       |
| Dividend yield           |       | 0.0             | %          | 0.0             | %          |
| Risk free rate of return |       | 3.9  – 5.1 | %          | 4.3  – 5.0 | %          |
| Expected life in years   |       | 3.0  – 5.0 |       | 6.0  – 6.5 |       |
| Volatility               |       | 68  – 75   | %          | 100  – 333 | %          |

 

We use the Black–Scholes option pricing model (the “Black–ScholesModel”) for the purpose of determining the estimated fair value of stock–basedpayment awards on the date of grant under SFAS 123R. The Black–Scholes Modelrequires the input of certain assumptions that involve judgment. Because ourstock options have characteristics significantly different from those of tradedoptions, and because changes in the input assumptions can materially affect thefair value estimate, existing models may not provide reliable measures of fairvalue of our stock options. We will continue to assess the assumptions andmethodologies used to calculate estimated fair value of stock–basedcompensation. If circumstances change, and additional data becomes availableover time, we may change our assumptions and methodologies, which maymaterially impact our fair value determination.

 

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The fair value of our options was estimated using the Black–ScholesModel. This model requires the input of assumptions regarding a number ofcomplex and subjective variables that will usually have a significant impact onthe fair value estimate. These variables include, but are not limited to, thevolatility of our stock price and employee exercise behaviors. The assumptionsand variables used for the current period grants were developed based on SFAS123R and SEC guidance contained in SAB 107. There were no material changes madeduring 2007 to the methodology used to determine the assumptions.

 

We based our estimate of expected volatility for the twelve monthsended December 31, 2007 on the sequential historical monthly trading dataof our common stock for a period equal to the expected life of the optionsgranted. The selection of the historical volatility approach was based onavailable data indicating our historical volatility is as equallyrepresentative of our future stock price trends as is implied volatility. Wehave no reason to believe the future volatility of our stock price is likely todiffer from its past volatility.

 

The risk–free interest rate assumption is based upon implied yields ofU.S. Treasury zero–coupon bonds on the date of grant having a remaining termequal to the expected life of the options granted. The dividend yield is basedon our historical and expected dividend payouts.

 

The expected life of our stock options is based upon historicalexercise and cancellation activity of our previous stock–based grants with aten–year contractual term.

 

Stock–based compensation expense recognized in our Statement ofOperations for the twelve months ended December 31, 2007 is based onoptions ultimately expected to vest, and has been reduced for estimatedforfeitures. These estimates were based upon historical experience.  Compensation expense related to share–basedawards, which is recognized on a straight–line basis over the vesting period,is included in research and development and in general and administrativeexpenses in the accompanying statements of operations.

 

At December 31, 2007, total compensation cost related to non–vestedstock options not yet recognized was approximately $2,035,000, which isexpected to be recognized over the next 1.4 years on a weighted average basis.

 

*Effect of new accounting standards.*  In September 2006, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement 109” (“FIN 48”). This statement clarifies the criteria that anindividual tax position must satisfy for some or all of the benefits of thatposition to be recognized in a company’s financial statements. FIN 48prescribes a recognition threshold of more–likely–than–not, and a measurementattribute for all tax positions taken or expected to be taken on a tax return,in order for those tax positions to be recognized in the financial statements.Effective January 1, 2007, we adopted the provisions of FIN 48, and determinedthat the impact had no material effect on our financial statements.

 

In September 2006, and February 2007 theFASB issued FASB Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (“FAS 157”), and Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“FAS 159”), respectively.  Both standards prescribe changes to fairvalue measurements of certain assets and liabilities and are effective forfiscal years beginning after November 15, 2007. We do not anticipate theadoption of these standards will have a material impact on our financialstatements.

 

 

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In September 2007, the Emerging Issues TaskForce (“EITF”) reached a consensus on EITF Issue No. 07–03, “Accountingfor Nonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities.” EITF 07–03 concludes that non–refundableadvance payments for future research and development activities should bedeferred and capitalized until the goods have been delivered or the relatedservices have been performed. If and when an entity no longer expects toreceive the goods or services contracted, any remaining capitalized,nonrefundable, advance payments should then be charged to expense. Thisconsensus is effective for fiscal years beginning after December 15, 2007.Historically we expense nonrefundable advance payments when paid.    We have determined that there were approximately$35,000 in qualifying transactions requiring capitalization in accordance withEITF 07–03 as of January 1, 2008. In order to adopt the provisions of this statement, we will recognize acumulative–effect adjustment to retained earnings as of that date.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations” (“SFAS No. 141(R)”). SFAS 141(R) requires theacquiring entity in a business combination to recognize the full fair value ofassets acquired and liabilities assumed in the transaction (whether a full orpartial acquisition); establishes the acquisition–date fair value as themeasurement objective for all assets acquired and liabilities assumed; requiresexpensing of most transaction and restructuring costs; and requires theacquirer to disclose to investors and other users all of the information neededto evaluate and understand the nature and financial effect of the businesscombination. SFAS No. 141(R) applies to all transactions or otherevents in which the Company obtains control of one or more businesses,including those sometimes referred to as “true mergers” or “mergers of equals”and combinations achieved without the transfer of consideration, for example,by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter January 1, 2009.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of AccountingResearch Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160requires reporting entities to present noncontrolling (minority) interests asequity (as opposed to as a liability or mezzanine equity) and provides guidanceon the accounting for transactions between an entity and noncontrollinginterests. SFAS No. 160 applies prospectively as of January 1, 2009,except for the presentation and disclosure requirements which will be appliedretrospectively for all periods presented.

 

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3.               CASH, CASH EQUIVALENTS &SHORT–TERM INVESTMENTS

 

The following is a summary of the Company’s available–for–saleinvestments at December 31, 2007 and 2006, all of which are due within oneyear:

 
| ** **                | ** ** | **Net amortized   cost** | ** ** | **Unrealized   gain** | ** ** | **Unrealized   loss** | ** ** | **Estimated   fair value** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------------|------------|
| December  31, 2007        |       |                     |       |                  |       |                  |       |                       |       |
| Corporate notes           |       | $                        | 2,581,135  |                  | $          | —                |       | $                          | (1,543     | ) | $ | 2,579,592 |   |
| Municipal Bonds           |       | 2,000,000                |       | —                |       | —                |       | 2,000,000                  |       |
|                      |       |                     |       |                  |       |                  |       | $                          | 4,579,592  |   |
| Reported as:              |       |                     |       |                  |       |                  |       |                       |       |
| Short-term investments    |       | $                        | 4,581,135  |                  |       |                  | $          | (1,543                     | )          | 4,579,592 |   |
|                      |       |                     |       |                  |       |                  |       | $                          | 4,579,592  |   |
|                      |       |                     |       |                  |       |                  |       |                       |       |
| December  31, 2006        |       |                     |       |                  |       |                  |       |                       |       |
| Corporate notes           |       | $                        | 13,330,341 |                  | $          | —                |       | $                          | —     |   | $ | 13,330,341 |   |
| Municipal bonds           |       | 3,000,000                |       | —                |       | —                |       | 3,000,000                  |       |
|                      |       |                     |       |                  |       |                  |       | $                          | 16,330,341 |   |
| Reported as:              |       |                     |       |                  |       |                  |       |                       |       |
| Cash and cash equivalents |       |                     |       |                  |       |                  |       | $                          | 12,330,341 |   |
| Short-term investments    |       |                     |       |                  |       |                  |       | 4,000,000                  |       |
|                      |       |                     |       |                  |       |                  |       | $                          | 16,330,341 |   |

 

4.               LICENSES, AND INTELLECTUALPROPERTY

 

On February 6, 2001, we executed an agreement with the NationalInstitutes of Health (“NIH”) giving us an exclusive worldwide license for allclaims to Tb4 within theirbroadly–defined patent application.  Inexchange for this exclusive license, we must make certain royalty and milestonepayments to the NIH.  Through December 31,2005 we have complied with these requirements. No assurance can be given as to whether or when a patent will be issued,or as to any claims that may be included or excluded within the patent.   We have also filed numerous additionalpatent applications covering various compositions, uses, formulations and othercomponents of Tb4, as well asto novel peptides resulting from our research efforts.  Someof these patents have issued, while many patent applications are still pending.

 

Wehave entered into a License and Supply Agreement (the Agreement) with DefianteFarmaceutica, LDA, (“Defiante”) a Portuguese company that is a wholly ownedsubsidiary of Sigma–Tau, S.p.A., (“Sigma–Tau”) a pharmaceutical companyheadquartered in Rome, Italy.  ThisAgreement grants the exclusive right to use Tβ4 to conduct research anddevelopment activities in Europe, to Defiante. Under the Agreement, we will receive fees and royalty payments based ona percentage of sales of Tβ4–related products by Defiante, asdefined.  The term of the Agreement isthe later of the expiration of any patents developed under the Agreement, anymarketing rights, or 2016.  Sigma–Tau isour largest stockholder.

 

5.               RELATED PARTY TRANSACTIONS

 

In September 2003, we entered into a consulting agreement with oneof our outside directors for general business strategy and financialadvice.   This agreement was terminatedduring 2006.  Under this agreement weincurred expenses of $0 and $28,000 during the years ended December 31,2007 and 2006, respectively.

 

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As described in Note 4, we entered into an agreement to use Tβ4 toconduct research and development activities in Europe with Defiante.

 

6.               COMPOSITION OF CERTAINFINANCIAL STATEMENT CAPTIONS

 

Accrued expenses consist of the following:

 

                        

| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------|------------|
| ** **                                | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                      |       |             |       |   |   |
| Contract/clinical research  organizations |       | $                | 1,915,132  |   | $ | 450,066 |   |
| Professional fees/Lawyer  fees            |       | 148,962          |       | 373,800 |   |
| Employee bonuses                          |       | 83,002           |       | 4,875 |   |
| Vacation                                  |       | 43,745           |       | 33,687 |   |
| Other                                     |       | 4,667            |       | 7,166 |   |
| 401(k) contributions                      |       | —           |       | 17,294 |   |
|                                      |       | $                | 2,195,508  |   | $ | 886,888 |   |

 

7.               EMPLOYEE BENEFIT PLANS

 

We have a definedcontribution retirement plan that complies with Section 401(k) of theInternal Revenue Code. All employees of the Company are eligible to participatein the plan. The Company matches 100% of each participant’s voluntarycontributions, subject to a maximum Company contribution of 4% of theparticipant’s compensation. The Company’s matching portion, totaled $47,873 and$11,414 for the years ended December 31, 2007 and 2006, respectively.

 

8.               STOCKHOLDERS’ EQUITY

 

*Shareholders Rights Plan. *Our Board of Directorsadopted a Rights Agreement, dated April 29, 1994, as amended, as a tool toprevent an unsolicited take over.  Ingeneral, if an entity acquires more than a 25% ownership interest in ourcompany without the endorsement of our Board of Directors, then our currentstockholders (other than the acquiring entity) will be issued a significantnumber of new shares which would encumber an acquisition.

 

*Sales of Common Stock.*

 

During 2007 we issued 457,050 shares of our common stock pursuant tothe exercise of warrants for an average price of $0.10 per share, generatingapproximately $45,706 in gross proceeds.

 

During 2006 we sold 7,897,509 shares of our common stock for an averageprice of $2.13 per share, generating approximately $16.8 million in grossproceeds.  In connection with thesesales, we issued 3,059,736 warrants to purchase our common stock at an averageprice of $3.14 per share.  These warrantsare exercisable until 2011.

 

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* *

*2000 Stock Option and Incentive Plan, as amended. *The 2000 Stock Option andIncentive Plan was approved under which the Board may grant options to purchaseshares of our common stock.  Options mayonly be granted to our directors, officers, employees, consultants or advisors,and no single participant can receive more than 450,000 shares in any oneyear.  The exercise price and term of anygrant is to be determined by the Board but shall never be less than the fair marketvalue of our Common Stock on the date of the grant, and the term of the optionshall not exceed ten years.  Presently,the authorized shares reserved for issuance under the plan is 4,200,000.  We currently anticipate issuing new shares tofill any and all options that are exercised.

 

A summary of the status of the Company’s stock option plan is presentedbelow for the years ended December 31, 2007 and 2006:

 
| ** **        | ** ** | ** **                       | ** ** | **Options outstanding** | ** ** |
|-------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **        | ** ** | **Shares  available for  grant** | ** ** | **Number of  shares**   | ** ** | **Exercise price  range** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **        | ** ** | ** **                       | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31, 2005 |       | 695,000                          |       | 2,470,000               |       | $ | 0.28  - 3.82 |   | $ | 1.54 |   |
| Grants            |       | (215,000                         | )          | 215,000                 |       | 2.50  - 3.16 |   | 2.94 |   |
| Exercises         |       | —                           |       | —                  |       | — |   | — |   |
| Cancellations     |       | —                           |       | —                  |       | — |   | — |   |
| Newly authorized  |       | 1,000,000                        |       | —                  |       | — |   | — |   |
| December 31, 2006 |       | 1,480,000                        |       | 2,685,000               |       | 0.28  - 3.82 |   | 1.66 |   |
| Grants            |       | (860,000                         | )          | 860,000                 |       | — |   | 2.24 |   |
| Exercises         |       | —                           |       | —                  |       | — |   | — |   |
| Cancellations     |       | —                           |       | —                  |       | — |   | — |   |
| December 31, 2007 |       | 620,000                          |       | 3,545,000               |       | $ | 0.28  - $3.82 |   | $ | 1.80 |   |

 

 
| ** **                                                                                                                | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Weighted average estimated  fair value of options granted, based on the assumptions in the Black-Scholes  valuation model |       | $                                    | 1.37       |   | $ | 2.47 |   |
|                                                                                                                      |       |                                 |       |   |   |
| Intrinsic value of options  exercised                                                                                     |       | $                                    | —     |   | $ | — |   |
|                                                                                                                      |       |                                 |       |   |   |
| Estimated fair value of  shares vested, based on the fair value assigned to the shares at the time of  grant              |       | $                                    | 3,500      |   | $ | 752,058 |   |

 

 

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Forvarious price ranges, weighted average characteristics of outstanding andexercisable options as of December 31, 2007 were as follows:

 

 

 
| ** **                                                                                   | ** ** | **Outstanding options**            | ** ** | **Exerciseable options**                                           | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Range of exercise prices**                                                                 | ** ** | **Number of  shares  outstanding** | ** ** | **Weighted-  average  remaining  contractual  life**(in years**)** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Number of  shares  outstanding** | ** ** | **Weighted-  average  remaining  contractual  life**(in years) | ** ** | **Weighted-  average  exercise  price** | ** ** |
|                                                                                         |       |                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| $ 0.28 - $0.86                                                                          |       | 1,290,000                          |       | 4.2                                                                |       | $ | 0.38 |   | 1,221,250 |   | 4.1 |   | $ | 0.36 |   |
| $ 1.07 - $1.93                                                                          |       | 280,000                            |       | 6.2                                                                |       | $ | 1.50 |   | 261,250 |   | 6.3 |   | $ | 1.47 |   |
| $ 2.02 - $2.68                                                                          |       | 900,000                            |       | 6.4                                                                |       | $ | 2.27 |   | 11,750 |   | 8.7 |   | $ | 2.54 |   |
| $ 3.00 - $3.82                                                                          |       | 1,075,000                          |       | 7.4                                                                |       | $ | 3.19 |   | 434,583 |   | 7.3 |   | $ | 3.19 |   |
|                                                                                         |       | 3,545,000                          |       |                                                               |       |   |   | 1,928,833 |   |   |   |   |   |
|                                                                                         |       |                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Intrinsic value of  in-the-money options, using the December 31, 2007 closing price of $1.00 |       | $                                  | 796,200    |                                                               |       |   |   |   | $ | 786,575 |   |   |   |   |   |
|                                                                                              |            |                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

Warrants to Purchase CommonStock

 

The following table summarizes our warrant activity for 2006 and 2007:

 
| ** **        | ** ** | **Warrants outstanding** | ** ** |
|-------------------|------------|--------------------------|------------|
| ** **        | ** ** | **Number of  shares**    | ** ** | **Exercise price  range** | ** ** | **Weighted  average exercise  price** | ** ** |
| ** **        | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31, 2005 |       | 1,546,815                |       | $ | 0.10  - $4.06 |   | $ | 1.80 |   |
| Grants            |       | 3,059,736                |       | 2.75  - 4.06 |   | 3.14 |   |
| Exercises         |       | (578,272                 | )          | 0.10  - 1.50 |   | 1.36 |   |
| Cancellations     |       | (48,685                  | )          | 1.50 |   | 1.50 |   |
| December 31, 2006 |       | 3,979,594                |       | $ | 0.10  - $4.06 |   | 2.90 |   |
| Grants            |       | —                   |       | — |   | — |   |
| Exercises         |       | (457,050                 | )          | 0.10 |   | 0.10 |   |
| Cancellations     |       | —                   |       | — |   | — |   |
| December 31, 2007 |       | 3,522,544                |       | $ | 2.75-$4.06 |   | $ | 3.26 |   |

 

 

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9.               INCOME TAXES

 

Significant components of the Company’s deferred tax assets at December 31,2007 and 2006 are shown below, in thousands. A valuation allowance of approximately$23.0 million and $20.1 million has been recognized to offset the netdeferred tax assets as of December 31, 2007 and 2006, respectively, asrealization of such assets is uncertain. The valuation allowance increased byapproximately $2.8 million in 2007 compared to 2006, primarily due to anincrease in the Company’s net operating loss.

 

 

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                             |       |             |       |   |   |
| Deferred tax assets:                             |       |             |       |   |   |
| Net operating loss carryforwards                 |       | 20,491,000       |       | 18,423,000 |   |
| Research and development tax credit carryforward |       | 1,649,000        |       | 1,174,000 |   |
| Charitable contribution carryforward             |       | 42,000           |       | 35,000 |   |
| Accrued vacation                                 |       | 8,000            |       | 11,000 |   |
| Accrued expenses                                 |       | 93,000           |       | — |   |
| Amortization                                     |       | 6,000            |       | 7,000 |   |
| Other                                            |       | 677,000          |       | 436,000 |   |
|                                             |       | 22,966,000       |       | 20,086,000 |   |
| Less - valuation allowance                       |       | (22,963,000      | )          | (20,083,000 | ) |
| Net deferred tax asset                           |       | 3,000            |       | 3,000 |   |
|                                             |       |             |       |   |   |
| Deferred tax liabilities:                        |       |             |       |   |   |
| Depreciation                                     |       | (3,000           | )          | (3,000 | ) |
|                                             |       |             |       |   |   |
| Net deferred tax amounts                         |       | $                | —     |   | $ | — |   |
|                                                  |            |                  |            |  |  |  |  |

 

 

At December 31, 2007, we had net operating losscarryforwards for income tax purposes of approximately $53.1 million, which areavailable to offset future federal and state taxable income, if any; and,research and development tax credit carryforwards of approximately $1.7million. The carryforwards, if not utilized, will expire in increments through2027.  Section 382 of the InternalRevenue Code limits the utilization of net operating losses when ownershipchanges, as defined by that section, are greater than 50%. The effects, if any,of potential ownership changes have not been analyzed by the Company. Management believes that in the event that there have been significantownership changes, these would not have an impact on the financialstatements.  Utilization of the netoperating losses and credits may also be subject to an annual limitation asprovided by the Internal Revenue Code of 1986, and there can be no guaranteethat such NOLs and tax credits will ever be fully utilized.  As a result of these uncertainties and cumulativelosses, we have recorded a full valuation allowance against our net deferredtax assets as we believe it is more likely than not that the assets will not berealizable.

 

 

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The provision for income taxes on earnings subject to income taxesdiffers from the statutory Federal rate at December 31, 2007 and 2006, dueto the following:

 

 

 

| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|
| ** **                                                | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Tax benefit at statutory  rate                            |       | $                | (3,800,000 | ) | $ | (2,811,000 | ) |
| State taxes                                               |       | (516,000         | )          | (382,000 | ) |
| Permanent M-1s                                            |       | 673,000          |       | (32,000 | ) |
| Expired net operating loss  carryforwards                 |       | 1,378,000        |       | 1,033,000 |   |
| Expired research and  development tax credit carryforward |       | 80,000           |       | 64,000 |   |
| Research and development  tax credit carryforward         |       | (695,000         | )          | (398,000 | ) |
| Change in valuation  allowance                            |       | 2,880,000        |       | 2,526,000 |   |
|                                                      |       | $                | —     |   | $ | — |   |

 

 

10.         COMMITMENTS

 

*Lease*.  Our rentexpense, related solely to office space, for 2007 and 2006 was $83,361 and$77,886, respectively.  We are committedunder an office space lease that expires on December 31, 2009 that requiresmonthly rental payments of $7,072 scheduled to increase by 3% in calendar 2009.

 

*Employment Continuity Agreements.*  We have entered into employment contractswith our executive officers which provide for severance if the executive isdismissed without cause or under certain circumstances after a change ofcontrol in our ownership.  At December 31,2007 these obligations, if triggered, could amount to $781,000.

 

11.         QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

 

The following table sets forth unaudited quarterly statement ofoperations data for each of the eight quarters in the two year period ended December 31,2007. In the opinion of management, this information has been prepared on thesame basis as the audited financial statements appearing elsewhere in this Form 10-K,and all necessary adjustments, consisting only of normal recurring adjustments,have been included in the amounts stated below to present fairly the unauditedquarterly results of operations.

 

 

 

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| ** **                        | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **2007**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                           |       | $          | —     |       | $          | —     |       | $          | 213,373    |   | $ | 26,951 |   |
| Net Loss                          |       | $          | (3,002,767 | )          | $          | (2,552,671 | )          | $          | (2,081,702 | ) | $ | (3,541,018 | ) |
| Basic and diluted loss per  share |       | $          | (6.00      | )          | $          | (0.05      | )          | $          | (0.04      | ) | $ | (0.08 | ) |
|                              |       |       |       |       |       |       |       |       |       |
| **2006**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                           |       | $          | —     |       | $          | —     |       | $          | —     |   | $ | 272,491 |   |
| Net Loss                          |       | $          | (1,324,903 | )          | $          | (3,437,157 | )          | $          | (1,935,573 | ) | $ | (1,569,348 | ) |
| Basic and diluted loss per  share |       | $          | (0.03      | )          | $          | (0.09      | )          | $          | (0.05      | ) | $ | (0.04 | ) |

 

 

The loss per share was calculated for each three-month period on astand-alone basis. As a result, the sum of the loss per share for the fourquarters does not equal the loss per share for the respective twelve-monthperiod.

 

12.         SUBSEQUENT EVENT

 

On February 29, 2008 we sold 5,000,000 shares of the Company’scommon stock at a price per share of $1.00 (the “Shares”) to affiliates ofSigma-Tau, for gross proceeds of $5,000,000 (the “Offering”). In connectionwith the Offering, we have also agreed to issue warrants to purchase anadditional 1,000,000 shares of its common stock with an exercise price of $1.60per share (the “Warrants”). There were no discounts or brokerage feesassociated with the Offering.

 

Under the terms of the Offering, we may, in our sole discretion,repurchase the Shares at any time until December 31, 2009, for $2.00 pershare or, at any time between January 1, 2010 and December 31, 2010,for $2.50 per share. Our repurchase right terminates after December 31,2010. In addition, the Investors have agreed to vote the Shares, and anyadditional shares issued pursuant to the exercise of the Warrants, with our Boardof Directors until December 31, 2010. The Warrants have a term of threeyears. One-third of the Warrants will vest upon the closing of the Offering,one-third is scheduled to vest on December 31, 2008, and one-third isscheduled to vest on December 31, 2009. However, should we repurchase allof the Shares prior to December 31, 2009, any unvested Warrants wouldterminate as of the date of repurchase.

 

 

 

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Exchange Act, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      | RegeneRx Biopharmaceuticals, Inc. |
|---------------------------|----------------------------------------|
|                      | (Registrant)                           |
|                      |                                   |
|                      |                                   |
|                      |                                   |
|                      |                                   |
| Date: March 28, 2008 | /s/J.J.Finkelstein                     |
|                      | J.J. Finkelstein                       |
|                      | President  and Chief Executive Officer |
|                      |                                   |
|                      |                                   |
|                      |                                   |
|                      |                                   |
|                      | /s/C.  Neil Lyons                      |
|                      | C.  Neil Lyons                         |
|                      | Chief  Financial Officer               |

 

Pursuant to the requirements of the Exchange Act, this report has been signedbelow by the following persons on behalf of the registrant and in thecapacities and on the dates indicated. In addition, each of the followingpersons hereby constitutes and appoints J.J. Finkelstein and C. Neil Lyons, andeach of them, as his true and lawful attorneys-in-fact and agents, each withthe full power of substitution, for him and in his name, to sign any amendmentsto this report, and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite andnecessary to be done in and about the premises, as fully to all intents and purposesas he might or could do in person, hereby ratifying and confirming all thatsaid attorneys-in-fact and agents, or their substitute or substitutes, maylawfully do or cause to be done by virtue hereof.:

 

 

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| **Signature**          | ** ** | **Title**                           | ** ** | **Date**            |
|------------------------|------------|-------------------------------------|------------|---------------------|
|                   |       |                                |       |                |
| /s/Allan L. Goldstein  |       | Chairman  of the Board, Chief       |       | March 28, 2008 |
| Allan L. Goldstein     |       | Scientific  Advisor, and Director   |       |                |
|                   |       |                                |       |                |
| /s/J.J. Finkelstein    |       | President,  Chief Executive         |       | March 28, 2008 |
| J.J. Finkelstein       |       | Officer,  and Director (Principal ) |       |                |
|                   |       | Executive  Officer                  |       |                |
|                   |       |                                |       |                |
|                   |       |                                |       |                |
| /s/C.  Neil Lyons      |       | Chief  Financial Officer and        |       | March 28, 2008 |
| C.  Neil Lyons         |       | Treasurer  (Principal Financial     |       |                |
|                   |       | Officer  and Principal Accounting   |       |                |
|                   |       | Officer)                            |       |                |
|                   |       |                                |       |                |
|                   |       |                                |       |                |
| /s/Richard  J. Hindin  |       | Secretary  and Director             |       | March 28, 2008 |
| Richard  J. Hindin     |       |                                |       |                |
|                   |       |                                |       |                |
|                   |       |                                |       |                |
| /s/Joseph  C. McNay    |       | Director                            |       | March 28, 2008 |
| Joseph  C. McNay       |       |                                |       |                |
|                   |       |                                |       |                |
|                   |       |                                |       |                |
| /s/Mauro  Bove         |       | Director                            |       | March 28, 2008 |
| Mauro  Bove            |       |                                |       |                |
|                   |       |                                |       |                |
|                   |       |                                |       |                |
| /s/L.  Thompson Bowles |       | Director                            |       | March 28, 2008 |
| L.  Thompson Bowles    |       |                                |       |                |
|                   |       |                                |       |                |

 

 

 

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