** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                     |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|
|                                                                                                                                                           |   |                                                                                              |
| **For  Quarter Ended March 31, 2003**                                                                                                                          |
|                                                                                                                                                           |   |                                                                                              |
| **Or**                                                                                                                                                         |
|                                                                                                                                                           |   |                                                                                              |
| **o**                                                                                                                                                          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF****1934** |
|                                                                                                                                                           |   |                                                                                              |
| **For the  transition period  from          to          ** |
|                                                                                                                                                           |   |                                                                                              |
| **Commission  file number 33-90516**                                                                                                                           |

 

 

| **NEOPHARM,  INC.**                                             |
|-----------------------------------------------------------------|
| (Exact name of Registrant as specified in  its charter)         |
|                                                            |   |   |
| **Delaware**                                                    |   | **51-0327886** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |   |
| **150 Field  Drive  Suite 195  Lake Forest, Illinois 60045**    |
| (Address of principal executive offices) (Zip Code)             |
|                                                            |   |   |
| **(847)  295-8678**                                             |
| (Registrant’s telephone number, including area code)       |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý   No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes ý  No o

 

Asof April 17, 2003 the number of shares outstanding of each of the issuer’sclasses of common stock was as follows:

 

| **Title of each class**            |   | **Number of shares outstanding** |
|------------------------------------|--------|----------------------------------|
| Common Stock ($.0002145 par value) |   | 16,371,529                       |

 

 

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NEOPHARM, INC.

(A DELAWARECORPORATION)

FORM 10Q

INDEX

 
| PART I. FINANCIAL  INFORMATION            |
|-------------------------------------------|
|                                      | Item 1. | Financial Statements |
|                                      |   | Balance Sheets as of March 31, 2003  (Unaudited) and December 31, 2002 |
|                                      |   | Statements  of Operations for the three months ended March 31, 2003 and March 31, 2002  (Unaudited) |
|                                      |   | Statements  of Cash Flows for the three months ended March 31, 2003 and March 31, 2002  (Unaudited) |
|                                      |   | Notes to Financial  Statements (Unaudited) |
|                                      | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                      | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk |
|                                      | Item 4 | Controls and  Procedures |
| PART II. OTHER INFORMATION                |
|                                      | Item  1. | Legal  Proceedings |
|                                      | Item  2. | Changes  in Securities and Use of Proceeds |
|                                      | Item 3. | Defaults  Upon Senior Securities |
|                                      | Item  4. | Submission  of Matters to a Vote of Security-Holders |
|                                      | Item 5. | Other Information |
|                                      | Item 6. | Exhibits and  Reports on Form 8-K |
| SIGNATURE PAGE                            |
| CERTIFICATION OF  CHIEF EXECUTIVE OFFICER |
| CERTIFICATION  OF CHIEF FINANCIAL OFFICER |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item1 - Financial Statements**

 

**NEOPHARM,INC.(A Delaware Corporation)Balance Sheets**

 
|                                                                                                                                      |   | **March 31, 2003** |       | **December 31,****2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------------|--------|
|                                                                                                                                      |   | **(Unaudited)**    |       |                     |   |
| **ASSETS**                                                                                                                                |   |               |       |                     |   |
| Current assets:                                                                                                                           |   |               |       |                     |   |
| Cash and cash equivalents                                                                                                                 |   | $                  | 78,715,977 |                     | $      | 87,591,975 |   |
| Short-term investment in marketable securities                                                                                            |   | 1,878,000          |       | 3,508,222                |   |
| Prepaid expenses                                                                                                                          |   | 376,726            |       | 454,893                  |   |
| Other receivables                                                                                                                         |   | 303,468            |       | 137,954                  |   |
| Total current assets                                                                                                                      |   | 81,274,171         |       | 91,693,044               |   |
| Equipment and furniture:                                                                                                                  |   |               |       |                     |   |
| Equipment                                                                                                                                 |   | 4,373,329          |       | 4,192,551                |   |
| Furniture                                                                                                                                 |   | 812,358            |       | 801,783                  |   |
| Leasehold improvements                                                                                                                    |   | 492,501            |       | 428,708                  |   |
| Less accumulated depreciation                                                                                                             |   | (1,428,889         | )          | (1,178,765               | )      |
| Total equipment and furniture, net                                                                                                        |   | 4,249,299          |       | 4,244,277                |   |
| Total assets                                                                                                                              |   | $                  | 85,523,470 |                     | $      | 95,937,321 |   |
|                                                                                                                                      |   |               |       |                     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                             |   |               |       |                     |   |
| Current liabilities:                                                                                                                      |   |               |       |                     |   |
| Accrued legal expenses                                                                                                                    |   | $                  | 1,741,576  |                     | $      | 1,018,414 |   |
| Accrued clinical trial expense                                                                                                            |   | 1,509,970          |       | 1,611,100                |   |
| Accrued compensation                                                                                                                      |   | 657,176            |       | 478,026                  |   |
| Accounts payable                                                                                                                          |   | 566,280            |       | 492,816                  |   |
| Other accrued expenses                                                                                                                    |   | 372,714            |       | 427,971                  |   |
| Total current liabilities                                                                                                                 |   | $                  | 4,847,716  |                     | $      | 4,028,327 |   |
|                                                                                                                                      |   |               |       |                     |   |
| Stockholders’ equity:                                                                                                                |   |               |       |                     |   |
| Preferred stock, $0.01 par value; 15,000,000 shares  authorized: 0 shares issued and outstanding                                          |   | —             |       | —                   |   |
| Common stock, $0.0002145 par value; 50,000,000 shares  authorized: 16,371,529 and 16,351,529 shares issued and outstanding,  respectively |   | 3,509              |       | 3,509                    |   |
| Additional paid-in capital                                                                                                                |   | 170,839,705        |       | 170,805,705              |   |
| Accumulated deficit                                                                                                                       |   | (90,167,460        | )          | (78,900,220              | )      |
| Total stockholders’ equity                                                                                                           |   | $                  | 80,675,754 |                     | $      | 91,908,994 |   |
| Total liabilities and stockholders’ equity                                                                                           |   | $                  | 85,523,470 |                     | $      | 95,937,321 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**NEOPHARM,INC.(A Delaware Corporation)Statements of OperationsThree Months Ended March 31, 2003 and 2002**(Unaudited)

 
|                                       |   | **Three  Months Ended** |        |
|--------------------------------------------|--------|-------------------------|-------------|
|                                       |   | **March 31, 2003**      |        | **March 31, 2002** |   |
| Revenues                                   |   | $                       | —      |   | $ | — |   |
| Expenses:                                  |   |                    |        |   |   |
| Research and development                   |   | 7,108,556               |        | 5,073,608 |   |
| General and administrative                 |   | 4,404,384               |        | 1,287,733 |   |
| Related party expenses                     |   | 39,192                  |        | 36,091 |   |
| Total expenses                             |   | 11,552,132              |        | 6,397,432 |   |
| Loss from operations                       |   | (11,552,132             | )           | (6,397,432 | ) |
|                                       |   |                    |        |   |   |
| Interest income                            |   | 284,892                 |        | 593,469 |   |
| Net loss                                   |   | $                       | (11,267,240 | ) | $ | (5,803,963 | ) |
| Net loss per share —                  |   |                    |        |   |   |
| Basic and diluted                          |   | $                       | (0.60       | ) | $ | (0.31 | ) |
| Weighted average shares outstanding — |   |                    |        |   |   |
| Basic and diluted                          |   | 18,809,625              |        | 18,686,501 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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**NEOPHARM,INC.(A Delaware Corporation)Statements of Cash FlowsThree Months Ended March 31, 2003 and 2002**(Unaudited)

 
|                                                                         |   | **Three Months Ended** |        |
|------------------------------------------------------------------------------|--------|------------------------|-------------|
|                                                                         |   | **March 31, 2003**     |        | **March 31, 2002** |   |
| Cash flows used in operating activities:                                     |   |                   |        |   |   |
| Net loss                                                                     |   | $                      | (11,267,240 | ) | $ | (5,803,963 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities: |   |                   |        |   |   |
| Depreciation and amortization                                                |   | 250,124                |        | 273,840 |   |
| Compensation expense from issuance of stock options to  non-employees        |   | 34,000                 |        | — |   |
| Changes in assets and liabilities:                                           |   |                   |        |   |   |
| Increase in other assets                                                     |   | (87,347                | )           | (783,320 | ) |
| Increase in current liabilities                                              |   | 819,389                |        | 685,132 |   |
| Net cash and cash equivalents used in operating  activities                  |   | (10,251,074            | )           | (5,628,311 | ) |
|                                                                         |   |                   |        |   |   |
| Cash flows provided by/(used in) investing activities:                       |   |                   |        |   |   |
| Proceeds from maturities of marketable securities                            |   | 2,008,485              |        | — |   |
| Purchase of marketable securities                                            |   | (378,263               | )           | (1,743,796 | ) |
| Purchase of equipment and furniture                                          |   | (255,146               | )           | (619,308 | ) |
| Net cash and cash equivalents provided by/(used in)  investing activities    |   | 1,375,076              |        | (2,363,104 | ) |
|                                                                         |   |                   |        |   |   |
| Cash flows from financing activities:                                        |   |                   |        |   |   |
| Proceeds from issuance of common stock                                       |   | —                 |        | 110,483 |   |
| Net cash and cash equivalents provided by financing  activities              |   | —                 |        | 110,483 |   |
|                                                                         |   |                   |        |   |   |
| Net decrease in cash and cash equivalents                                    |   | (8,875,998             | )           | (7,880,932 | ) |
| Cash and cash equivalents, beginning of period                               |   | 87,591,975             |        | 106,525,864 |   |
| Cash and cash equivalents, end of period                                     |   | $                      | 78,715,977  |   | $ | 98,644,932 |   |
|                                                                         |   |                   |        |   |   |
| Supplemental disclosure of cash paid for:                                    |   |                   |        |   |   |
| Interest                                                                     |   | $                      | —      |   | $ | — |   |
| Income taxes                                                                 |   | $                      | —      |   | $ | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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**NEOPHARM,INC.(A Delaware Corporation)NOTES TO FINANCIAL STATEMENTSMarch 31, 2003**

 

**Note 1  Basis ofPresentation**

 

The financial informationherein is unaudited. The Balance Sheet as of December 31, 2002 is derived fromaudited financial statements.

 

The accompanyingunaudited financial statements of NeoPharm, Inc. (the “Company”) have been preparedin accordance with generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X. Accordingly, they do not contain all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of theCompany, the accompanying unaudited interim financial statements contain alladjustments (consisting of normal recurring adjustments) necessary to presentfairly the Company’s financial position as of March 31, 2003, and the resultsof its operations and its cash flows for the three months ended March 31, 2003and 2002.

 

While the Companybelieves that the disclosures presented are adequate to make the informationnot misleading, it is suggested that these financial statements be read inconjunction with the financial statements and notes included in the Company’s2002 Annual Report on Form 10-K filed with the Securities and ExchangeCommission.

 

**Note 2  Stock BasedCompensation**

 

The Company applies APBOpinion No. 25 “Accounting for Stock Issued to Employees” in accounting forqualifying options granted to its employees under its 1998 Equity IncentivePlan and applies Statement of Financial Accounting Standards No. 123“Accounting for Stock Issued to Employees” (“SFAS 123”) for disclosure purposesonly.  The SFAS 123 disclosures includepro forma net income and earnings per share as if the fair value-based methodof accounting had been used.  Stockissued to non-employees is accounted for in accordance with SFAS 123 andrelated interpretations.

 

If compensation foremployee options had been determined based on SFAS 123, the Company’s pro formanet loss, and pro forma loss per share for the three months ended March 31,would have been as follows:

 
|                                                                                                            |   | **2003**   |        | **2002**   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------|-------------|------------|--------|
|                                                                                                            |   |       |        |       |   |
| Net loss, as reported                                                                                           |   | $          | (11,267,240 | )          | $      | (5,803,963 | ) |
| Add stock-based employee compensation expense included  in reported net loss                                    |   | —     |        | —     |   |
| Deduct total stock-based employee compensation expense  determined under fair-value-based method for all awards |   | (1,905,787 | )           | (3,246,155 | )      |
| Pro forma net loss                                                                                              |   | $          | (13,173,027 | )          | $      | (9,050,118 | ) |
|                                                                                                            |   |       |        |       |   |
| Basic and diluted loss per share of common stock                                                                |   |       |        |       |   |
| As reported                                                                                                     |   | $          | (0.60       | )          | $      | (0.31 | ) |
| Pro forma                                                                                                       |   | (0.70      | )           | (0.48      | )      |
|                                                                                                                 |        |            |             |            |        |  |  |  |  |

 

Per share information hasbeen restated for the effects of the stock dividend discussed in Note 8.

 

6

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The effects of applyingSFAS 123 in this pro forma disclosure are not indicative of futureamounts.  SFAS 123 did not apply toawards prior to 1995.  Additional awardsin future years are anticipated.

 

**Note 3  Loss Per Share**

 

The following table setsforth the computation of the basic and diluted net loss per share:

 
|                                 |   | **For the  three months ended:** |        |
|--------------------------------------|--------|----------------------------------|-------------|
|                                 |   | **March 31,  2003**              |        | **March 31,  2002** |   |
| Numerator:                           |   |                             |        |   |   |
| Net  loss                            |   | $                                | (11,267,240 | ) | $ | (5,803,963 | ) |
|                                 |   |                             |        |   |   |
| Denominator:                         |   |                             |        |   |   |
| Weighted  average shares outstanding |   | 18,809,625                       |        | 18,686,501 |   |
|                                 |   |                             |        |   |   |
| Loss  per share - basic and diluted  |   | $                                | (0.60       | ) | $ | (0.31 | ) |
|                                 |   |                             |        |   |   |
| Potential  common share equivalents: |   |                             |        |   |   |
| Stock  options                       |   | 3,312,517                        |        | 2,798,568 |   |

 

As the Company hasincurred a net loss for all periods presented, basic and diluted per shareamounts are equivalent as the effect of potential common share equivalents isanti-dilutive.

 

Per share information hasbeen restated for the effects of the stock dividend discussed in Note 8.

 

**Note 4  Transactionswith Related Parties**

 

The following tableprovides further detail of the related party expenses reflected in thestatements of operations.

 
|                          |   |              |   | **For the  three months ended:** |   |
|-------------------------------|--------|-------------------|--------|----------------------------------|--------|
| **Related Party**             |   | **Expense  Type** |   | **March 31,  2003**              |   | **March 31,  2002** |   |
| Akorn, Inc.                   |   | Consulting        |   | $                                | 7,669  |   | $ | 3,919 |   |
| E.J. Financial Enterprises    |   | Consulting        |   | 31,250                           |   | 31,250 |   |
| E.J.  Financial Enterprises   |   | Direct Expenses   |   | 273                              |   | 922 |   |
|                          |   |              |   |                             |   |   |   |
| Total  related party expenses |   |              |   | $                                | 39,192 |   | $ | 36,091 |   |

 

In December 2001,following approval by the Company’s Board of Directors, the Company loaned$3,250,000 to Akorn, Inc., an independent publicly traded company, toassist Akorn in the completion of its lyophilized products manufacturingfacility in Decatur, Illinois. The note receivable issued to Akorn is due inDecember 2006, and accrues interest at a rate equal to that received onthe Company’s investments in marketable securities, which is lower than theinterest rate paid by Akorn on its other outstanding debt. In exchange, theCompany has entered into a manufacturing processing agreement that grants theCompany access to at least 15% of the annual lyophilization manufacturingcapacity at Akorn at a discounted price, upon completion of the facility. Atthe time the agreement with Akorn was reached, Akorn anticipated the facilitycoming on line in 2003, at approximately the time that NeoPharm anticipated itwould need to manufacture the Company’s lyophilized products forPhase II/III clinical trials. The Company now estimates that it will notneed this capacity until 2004. In 2001, the Company recorded the note receivablenet of a valuation allowance of $1,266,619 reflecting the difference betweenthe actual loan amount and the present value of the loan using an estimatedmarket interest rate of 10%. The valuation allowance was fully expensed in 2001and will be amortized over the life of the loan. As of December 31, 2002,Akorn had not yet published financial statements for the third or fourthquarter of 2002, and NeoPharm, therefore, elected to record a non-cash chargeto fully reserve for the note receivable and accrued interest as a result ofthe Company’s inability to adequately assess the probability of collection ofthe note, as of December 31, 2002. As of March 31, 2003, Akorn has stillnot published financial statements for the third or fourth quarter of 2002.  The Company has not received notificationfrom Akorn that it will be unable to repay the note at maturity in 2006. Akorncontinues to be contractually obligated to complete the expansion of itsDecatur facility, to manufacture NeoPharm’s NeoLipidTM products, and to repaythe note.

 

**Note 5  Investments**

 

The Company considers allhighly liquid investments purchased with an original maturity of three monthsor less to be cash equivalents. The carrying value of these investmentsapproximates the fair market value. Short -term investment in marketablesecurities includes liquid investments purchased with an original maturity ofbetween three months and one year while long-term investment in marketablesecurities includes liquid investments purchased with an original maturity ofgreater than one year but less than two years. As provided by SFASNo. 115, the Company has elected to treat all of its investments inmarketable securities as “available-for-sale”, which requires these investmentsto be recorded at fair market value. Unrealized gains and losses, net ofrelated 

 

7

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tax effect, on availablefor sale securities deemed to be temporary are excluded from earnings and arereported as a separate component of other comprehensive income until realized.Realized gains and losses from the sale of available-for-sale securities aredetermined on a specific identification basis. A decline in market value ofavailable-for-sale securities that is deemed to be other than temporary, resultsin the reduction of the carrying amount to fair value. The impairment ischarged to earnings and a new cost basis for the security is established. AtMarch 31, 2003, the Company’s investments in marketable securities consistedprimarily of commercial paper, which are recorded at cost plus accrued interestas this approximated the fair market value of the securities held. Dividend andinterest income are recognized when earned. No investments were sold during thethree month period ended March 31, 2003 or 2002.

 

**Note6  Contingencies**

 

On April 19, 2002,the Company filed a Demand for Arbitration with the American ArbitrationAssociation in accordance with the terms of its License Agreement datedFebruary 19, 1999 (the “License Agreement”) with Pharmacia Corporation,Pharmacia and Upjohn, Inc. and Pharmacia and Upjohn Company (collectively,“Pharmacia”), for the purpose of resolving a dispute with Pharmacia concerningdelays in the development programs for LEP (Liposome Encapsulated Paclitaxel)and LED (Liposome Encapsulated Doxorubicin) which were being conducted byPharmacia. The Company contends that Pharmacia failed in its duty under theLicense Agreement to use reasonable efforts to develop LEP and LED and thatsuch failure constitutes a breach of the License Agreement. The Company furthercontends that Pharmacia breached its duty to consult with NeoPharm on theprogress of the drug development program and thereby impaired NeoPharm’sability to monitor the development of these compounds. The Company is seekingall damages to which it is entitled. NeoPharm believes that these damages aresubstantial. On May 16, 2002, Pharmacia responded by denying the Company’sallegations, asserting various counterclaims and seeking restitution of moniespaid, reimbursement of out-of-pocket expenses and substantial punitive damages.Subsequently, Pharmacia stated in a letter dated November 19, 2002, thatit did not intend to move forward with the clinical development of NeoPharm’sNeoLipidTM LEP (LEP-ETU) because of its contention that NeoPharm had notprovided Pharmacia with sufficient product data and test samples, a claim whichNeoPharm denies. Pharmacia also stated that it would not continue to developthe earlier formulations of LEP and LED. Although Pharmacia indicated that itdid not intend to continue with the clinical development of LEP and LED,Pharmacia did not indicate that it had terminated the License Agreement. As aresult, in November 2002, NeoPharm terminated the License Agreement inorder to allow NeoPharm to continue with the further development of NeoLipidTMformulations of LEP, as well as LED. Pharmacia disputes the propriety of thetermination and has included the termination as part of the arbitrationhearing. In January 2003, NeoPharm reached an agreement with Pharmaciathat allows NeoPharm to reference Pharmacia’s LEP Investigational New Drugapplication (IND) and start human clinical trials with LEP-ETU. The arbitrationproceeding is currently ongoing and no prediction can be made as to the outcomeof the claims that the Company and Pharmacia have asserted against each other,or the amounts, if any, which either party may be awarded against the other,which recoveries or liabilities could be substantial. The arbitration hearingis scheduled to begin on May 28, 2003 and be conducted over 23 days ofhearings.

 

Under the LicenseAgreement, NeoPharm incurred expenses during 2002 related to its efforts todevelop a NeoLipidTM formulation for LEP, at Pharmacia’s request. The terms ofthe License Agreement entitle NeoPharm to be reimbursed for these expenses, andthe Company has sent invoices totaling over $1,500,000 to Pharmacia for workconducted by NeoPharm to develop LEP-ETU. NeoPharm has not received payment onthe invoices sent to Pharmacia and these amounts have not been included in theresults of operations.   NeoPharmasserts that it is entitled to payments on these invoices.

 

On October 4, 2002,Pharmacia Corporation and Pharmacia and Upjohn, Inc. filed a lawsuit inDelaware Chancery Court to enjoin the Company from arbitrating claims againstthem. Specifically, following NeoPharm’s initiation of the arbitration,Pharmacia Corporation and Pharmacia and Upjohn, Inc. filed the lawsuitagainst NeoPharm in Delaware Chancery Court seeking a declaration that theywere not bound to arbitrate certain disputes with NeoPharm. In their lawsuit,Pharmacia Corporation and Pharmacia and Upjohn, Inc. claimed that neitherPharmacia and Upjohn, Inc., the parent of the Pharmacia subsidiary thatentered into the License Agreement (Pharmacia and Upjohn Company), norPharmacia Corporation, as the ultimate parent company, were proper parties tothe ongoing arbitration between NeoPharm and Pharmacia and Upjohn Company.NeoPharm, in its response and counterclaim filed against Pharmacia onOctober 31, 2002, asked the Delaware Chancery Court to compel bothPharmacia Corporation and Pharmacia and Upjohn, Inc. to arbitrate thedispute with the Company. In February 2003, Pharmacia’s motion for summaryjudgment was denied. In March 2003, NeoPharm reached an agreement withPharmacia Corporation and Pharmacia and Upjohn, Inc. to settle theDelaware lawsuit. Under the terms of the settlement, NeoPharm will continuewith its ongoing arbitration claim against Pharmacia and Upjohn Company, but willnot proceed against the parent companies in the arbitral forum. NeoPharm,however, has reserved the right to pursue claims against Pharmacia Corporationand Pharmacia and Upjohn, Inc. in a court proceeding. NeoPharm issatisfied that Pharmacia and Upjohn Company has sufficient assets to pay outany potential award to NeoPharm that may result from the arbitration hearing.

 

The Company was alsonamed in several putative class action lawsuits (the “Class Action Suits”) eachof which alleges various violations of the federal securities laws inconnection with the Company’s public statements during the period fromSeptember 25, 2000 through April 19, 2002 as they relate to theCompany’s LEP drug. The original lawsuits also named as individual defendantsJohn N. Kapoor, Chairman of the Company, and James M. Hussey, the Company’sPresident and CEO, and Dr. Aquilur Rahman, a former director and executiveofficer of the Company. The first of these Class Action Suits was filed onApril 26, 2002 and all of the Class Action Suits have been filed in theUnited States District Court for the Northern District of Illinois, EasternDivision. On 

 

8

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September 16, 2002,a consolidated amended complaint was filed against NeoPharm in this matter. Theamended complaint shortened the class period to October 31, 2001 throughApril 19, 2002, removed Dr. Rahman as a defendant, and addedDr. Imran Ahmad, the Company’s current Chief Scientific Officer and SeniorVice President of Research and Development, as a defendant. The Company intendsto vigorously defend each and every claim in the class action suits and, onNovember 4, 2002, moved to have the complaint dismissed. The Company’s motion to dismiss was granted inpart and denied in part in February 2003. Dr. Kapoor was dismissed from the lawsuit at that time.  No trial date has been set. In the opinionof management, resolution of this litigation is not currently expected to havea material adverse impact on the results of operations or financial position ofthe Company, as the Company currently maintains insurance covering its officersand directors.

 

The pharmaceuticalindustry has traditionally experienced difficulty in maintaining productliability insurance coverage at desired levels. To date, no significant productliability suit has ever been filed against the Company. However, if a suit werefiled and a judgment entered against the Company, it could have a materialadverse effect upon the Company’s operations and financial condition. While theCompany maintains insurance to cover the use of its products in clinicaltrials, the Company does not maintain insurance covering the sale of itsproducts nor is there any assurance that it will be able to obtain or maintainsuch insurance on acceptable terms or with adequate coverage against potentialliabilities.

 

**Note7  Guarantees**

 

In November 2002, theFinancial Accounting Standards Board (FASB) issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others, aninterpretation of FASB Statements No. 5, 57, and 107 and Rescission ofFASB Interpretation No. 34.” FIN 45 elaborates on the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also requires thata guarantor recognize, at the inception of a guarantee, a liability for thefair value of certain guarantees. The initial recognition and measurementprovisions of FIN 45 are applicable on a prospective basis to guarantees issuedor modified after December 31, 2002.

 

Under its Certificate ofIncorporation and By-laws (the “Organization Documents”), the Company hasagreed to indemnify any person who is made a party to any action or threatenedwith any action as a result of such person’s serving or having served as anofficer or director of the Company or having served, at the Company’s request,as an officer or director of another company, to the maximum extent and in themanner permitted by the General Corporation Law of Delaware (the “GCLD”). Underthe GCLD, the indemnification does not apply if the person is determined not tohave acted in good faith and in the reasonable belief that his or her actionswere in the best interests of the Company. The indemnification obligationsurvives termination of the indemnified party’s involvement with the Company,but only as to those claims arising from such person’s role as an officer ordirector. The Company has separate indemnification agreements with certain ofits officers and directors that do not provide any greater coverage than thatfound in the Organization Documents. The maximum potential amount of futurepayments that the Company could be required to make under the OrganizationDocuments and the corresponding indemnification agreements is unlimited;however, the Company has Director and Officer insurance policies that, in mostcases, would limit its exposure and enable it to recover a portion of anyfuture amounts paid. The estimated fair value of these indemnificationprovisions is minimal. Most of these indemnification provisions weregrandfathered under the provisions of FIN 45 as they were in effect prior toDecember 31, 2002. Accordingly, we have no liabilities recorded for theseprovisions as of March 31, 2003.

 

The Company enters intoindemnification provisions under its agreements with other companies in itsordinary course of business, typically with business partners, contractors,clinical sites and customers. Under these provisions the Company generallyindemnifies and holds harmless the indemnified party for losses suffered orincurred by the indemnified party as a result of the Company’s activities.These indemnification provisions generally survive termination of theunderlying agreement. The maximum potential amount of future payments theCompany could be required to make under these indemnification provisions isunlimited. The Company has not incurred material costs to defend lawsuits orsettle claims related to these indemnification agreements. As a result, theestimated fair value of these agreements is minimal. Accordingly, the Companyhas no liabilities recorded for these agreements as of March 31, 2003.

 

**Note8  Subsequent Event**

 

On May 13, 2003 theCompany's Board of Directors declared a 15% common stock dividend payable onJune 10, 2003 to stockholders of record on June 3, 2003.  Basic and diluted loss per share informationhas been restated for all periods presented to reflect the stock dividend.

 

**Item2 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

The following should beread in conjunction with the financial statements and related footnotes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in the Company’s Annual Report on Form 10-K.  The results discussed below are notnecessarily indicative of the results to be expected in any future periods.  The following discussion containsforward-looking statements that are subject to risks and uncertainties whichcould cause actual results to differ from statements made.  See "Forward Looking Statements"below.

 

**Overview**

 

We are a biopharmaceuticalcompany engaged in the research, development and commercialization of drugs forthe treatment of various cancers. Our corporate strategy is to become a leaderin the research, development and commercialization of new and innovativeanti-cancer treatments. Since we began doing business in June 1990, wehave devoted our resources primarily to funding research and 

 

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product development programs. We expect to continue to incur losses aswe continue our research and development activities, which include thesponsorship of human clinical trials for our compounds.

 

During the quarter ended March31, 2003, we continued to advance our Phase I/II compounds towards Phase II/IIIclinical trials. The compounds currently in Phase I/II clinical trials include:IL13-PE38 for the treatment of glioblastoma multiforme; LE-SN38 (liposomalSN38) for the treatment of colorectal and other cancers; LEM (liposomalmitoxantrone) for the treatment of prostate cancer; and, LErafAON (liposomalcraf antisense oligonucleotide) for the treatment of radiation and/orchemotherapy resistant tumors. In addition, we submitted an Investigational NewDrug application (IND) to the FDA for LEP-ETU, our new NeoLipidTM formulation ofliposomal paclitaxel, and expect to start Phase I human clinical trials byAugust 2003.  We continue to anticipatebeginning a pivotal Phase II/III clinical trial for our lead compound,IL13-PE38, in 2003.

 

Although research and developmentexpenses increased by approximately 40% in the first quarter of 2003 ascompared to the first quarter of 2002, we currently do not anticipate increasedannual spending on research and development expenses in fiscal 2003. We havetaken measures to conserve our resources in order to allow us to complete thePhase III development of our lead compound, IL13-PE38.  While research and development expenses inthe first quarter of 2003 exceeded the prior year’s level, research anddevelopment expenses are approximately 3% lower than in the fourth quarter of2002, and approximately 21% lower than the peak level incurred in the thirdquarter of 2002. At this time, we anticipate that we will be able to continuethe Phase III development of IL13-PE38 without a partner in the U.S. or Europe,and believe that our current cash resources can support our IL13-PE38development activities through 2005. In addition, we remain committed to thecommercialization of all of our compounds currently under development, and areconsidering various options to fund the clinical development of the multiple compoundsusing our proprietary NeoLipidTM liposomal technology.  At this time, we are actively seeking partners for all of thecompounds currently under development and continue to closely monitor all ofour development programs to insure that only projects that show activity inhuman clinical trials continue to receive financial support.

 

Theincrease in general and administrative expenses in the first quarter of 2003 ascompared with the first quarter of 2002 was almost entirely related to expensesincurred in connection with prosecuting our arbitration claim against Pharmaciaand Upjohn Company (see Part II Item 1. Legal Proceedings). We incurredapproximately $2.9 million in arbitration related expenses during the firstquarter of 2003 and, at this time, anticipate an additional $4 million inarbitration related expenses in the second quarter of 2003.  The arbitration hearing is expected to becompleted during June 2003, and we do not anticipate incurring significantexpenses related to the arbitration after the hearing is complete.

 

**Results of Operations – Three Months Ended March 31, 2003 vs.Three Months Ended March 31, 2002.**

 

The Company recorded norevenue for the three months ended March 31, 2003 or for the three months endedMarch 31, 2002.

 

Research and developmentexpense for the three months ended March 31, 2003 was $7,108,556 compared to$5,073,608 for the same period in 2002. During the first quarter of 2003, wecontinued to advance our compounds in Phase I/II clinical development towardsPhase II/III clinical trials and we also continued to make progress on thepre-clinical research being conducted to prepare for the initiation of clinicaltrials for our other compounds under development.  As a result, the overall increase in research and developmentcosts was the result of increased expenses of approximately $997,000 related tothe clinical and pre-clinical development of our compounds, increased payrolland consulting expense of approximately $916,000 related to increases in ourresearch and development staff, and an increase of approximately $122,000 inexpenses incurred for the operation of the research and development facility inWaukegan, Illinois.

 

General andadministrative expenses (including related party expenses) for the three monthsended March 31, 2003 were $4,443,576 compared to $1,323,824 for the same periodin 2002. The overall increase in general and administrative expenses was theresult of increased professional and legal fees of approximately $2,985,000primarily due to work done on the arbitration claim filed against Pharmacia (see Part II Item 1. Legal Proceedings),increased insurance expense of approximately $103,000 for the Company’sdirectors and officers liability insurance and commercial insurance premiums,and an increase in general office expenses of approximately $32,000.

 

The Company generatedinterest income on cash and investments of $284,892 and $593,469 for the threemonths ended March 31, 2003 and March 31, 2002, respectively.  The decrease in interest income for thefirst quarter of 2003 was primarily due to a decrease in short-term interestrates earned on the Company’s investment portfolio between the first quarter of2002 and the first quarter of 2003, combined with a reduction in the total cashavailable for investing during the first quarter of 2003 as the Company usedits cash to fund the development of its compounds.

 

Net loss for the threemonths ended March 31, 2003 was $11,267,240, or $<0.60> per share basicand diluted, compared to net loss of $5,803,963, or $<0.31> per sharebasic and diluted, for the three months ended March 31, 2002.

 

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**Liquidity and Capital Resources**

 

At March 31, 2003, we hadapproximately $78,716,000 in cash and cash equivalents and net working capitalof approximately $76,426,000. We believe that our cash and cash equivalentsshould be adequate to fund operations for approximately the next33 months. However, we can offer no assurances that additional fundingwill not be required during that period. All excess cash has been invested inshort-term investments and marketable securities with less than two years tomaturity.

 

Our assets at March 31, 2003were approximately $85,523,000 compared to $95,937,000 at December 31,2002. This decrease in assets was primarily due to a decrease of cash and cashequivalents and investments in short-term marketable securities ofapproximately $10,506,000 as a result of cash used in operating activitiesduring the first quarter of 2003.

 

Our liabilities at March 31,2003 increased to approximately $4,848,000 from approximately $4,028,000 atDecember 31, 2002. This increase was primarily attributable to increasedaccrued legal expenses of approximately $723,000 as a result of the arbitrationwith Pharmacia.  Other factors includedan increase in accrued compensation of approximately $179,000, a decrease inaccrued clinical trial expenses of approximately $101,000, an increase in tradepayables of approximately $73,000, and a decrease in other accrued expenses ofapproximately $55,000.

 

Wemay seek to satisfy our future funding requirements through public or privateofferings of securities, with collaborative or other arrangements withcorporate partners or from other sources. Additional financing may not beavailable when needed or on terms acceptable to us. If adequate financing isnot available, we may be required to delay, scale back or eliminate certain ofour research and development programs, relinquish rights to certain of ourtechnologies, cancer drugs or products, or license third parties tocommercialize products or technologies that we would otherwise seek to developourselves.

 

**Critical Accounting Policies**

 

In preparing the Company’sfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management must make a variety ofdecisions which impact the reported amounts and related disclosures. Suchdecisions include the selection of the appropriate accounting principles to beapplied, the assumptions on which to base accounting estimates, and theconsistent application of those accounting principles. Due to the type ofindustry in which the Company operates and the nature of its business, thefollowing accounting policies are those that management believes are mostimportant to the portrayal of the Company’s financial condition and results andthat require management’s most difficult, subjective or complex judgments,often as a result of the need to make estimates about the effect of matters thatare inherently uncertain.

 

*Cash Equivalents and Investments*

 

The Company considers all highlyliquid investments purchased with an original maturity of three months or lessto be cash equivalents. The carrying value of these investments approximatesthe fair market value. Short-term investment in marketable securities includesliquid investments purchased with an original maturity of between three monthsand one year while long-term investment in marketable securities includesliquid investments purchased with an original maturity of greater than one yearbut less than two years. As provided by SFAS No. 115, the Company haselected to treat all of its investments in marketable securities as“available-for-sale”, which requires these investments to be recorded at fairmarket value. Unrealized gains and losses, net of related tax effect, onavailable for sale securities are excluded from earnings and are reported as aseparate component of other comprehensive income until realized. Realized gainsand losses from the sale of available-for-sale securities are determined on aspecific identification basis. A decline in market value of available-for-salesecurities that is deemed to be other than temporary, results in the reductionof the carrying amount to fair value. The impairment is charged to earnings anda new cost basis for the security is established.

 

*Income Taxes*

 

Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. Management provides valuationallowances against the deferred tax asset for amounts which are not considered“more likely than not” to be realized.

 

In assessing the realizability ofdeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment.

 

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*Stock-Based Compensation*

 

The Company applies theintrinsic-value-based method of accounting prescribed by Accounting PrinciplesBoard (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations includingFASB Interpretation No. 44, *Accountingfor Certain Transactions Involving Stock Compensation, an Interpretation of APBOpinion No. 25*, issued in March 2000, to account for itsfixed-plan stock options. Under this method, compensation cost is recorded onthe date of grant only if the current market price of the underlying stockexceeded the exercise price. SFAS No. 123, *Accounting for Stock-Based Compensation*, establishedaccounting and disclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans. As allowed by SFASNo. 123, the Company has elected to continue to apply theintrinsic-value-based method of accounting described above, and has adoptedonly the disclosure requirements of SFAS No. 123.

 

*Research and Development*

 

Research and development costsare expensed when incurred. These costs include, among other things, consultingfees and costs reimbursed to third parties under license and researchagreements. Payments related to the acquisition of technology rights, for whichdevelopment work is in process, are expensed and considered a component ofresearch and development costs. The Company also allocates indirect costs,consisting primarily of operational costs for administering research anddevelopment activities, to research and development expenses.

 

**Forward Looking Statements**

 

Anystatements made by NeoPharm, Inc. (“we”, “us”, “our”, or the “Company”) in thisquarterly report that are forward looking are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  The Company cautions readers that importantfactors may affect the Company’s actual results and could cause such results todiffer materially from forward-looking statements made by or on behalf of theCompany.  Such factors include, but arenot limited to, those risks and uncertainties relating to difficulties ordelays in development, testing, regulatory approval, production and marketingof the Company’s drug candidates, uncertainty regarding the outcome of damagesclaims made by or against the Company, unexpected adverse side effects orinadequate therapeutic efficacy of the Company’s drug candidates that couldslow or prevent products coming to market, the uncertainty of patent protectionfor the Company’s intellectual property or trade secrets, and other factorsreferenced under “Risk Factors” in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2002.

 

**Item3 – Quantitative and Qualitative Disclosures about MarketRisk**

 

As March 31, 2003, we didnot own any derivative instruments, but we were exposed to market risks,primarily changes in U.S. interest rates. As of March 31, 2003, we held total cash and investments of $80,593,977.  Maturities range from less than one month toapproximately 10 months.  Declines ininterest rates over time will reduce our interest income from ourinvestments.  Based upon our balance ofcash, cash equivalents and marketable securities as of March 31, 2003, adecrease in interest rates of 1.0% would cause a corresponding decrease in ourannual interest income of approximately $806,000.

 

**Item4 – Controls and Procedures**

 

Within the 90 days prior tothe date of this Form 10-Q, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on thatevaluation, our management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that our disclosure controls and procedures areoperating effectively as designed.

 

We are committed to a continuingprocess of identifying, evaluating and implementing improvements to theeffectiveness of our disclosure and internal controls and procedures. Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our controls and procedures will prevent all errors.However, a control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of a simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of thecontrols. The design of any system of controls is also based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in any controlsystem, misstatements due to error or violations of law may occur and not bedetected.

 

There have been no significantchanges in our internal controls or in other factors that could significantlyaffect internal controls subsequent to the date we carried out our evaluation.

 

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**PART II - OTHER INFORMATION**

 

Item 1.                                                           LegalProceedings

 

OnApril 19, 2002, the Company filed a Demand for Arbitration with theAmerican Arbitration Association in accordance with the terms of its LicenseAgreement dated February 19, 1999 (the “License Agreement”) with PharmaciaCorporation, Pharmacia and Upjohn, Inc. and Pharmacia and Upjohn Company(collectively, “Pharmacia”), for the purpose of resolving a dispute withPharmacia concerning delays in the development programs for LEP (LiposomeEncapsulated Paclitaxel) and LED (Liposome Encapsulated Doxorubicin) which werebeing conducted by Pharmacia. The Company contends that Pharmacia failed in itsduty under the License Agreement to use reasonable efforts to develop LEP andLED and that such failure constitutes a breach of the License Agreement. TheCompany further contends that Pharmacia breached its duty to consult withNeoPharm on the progress of the drug development program and thereby impairedNeoPharm’s ability to monitor the development of these compounds. The Companyis seeking all damages to which it is entitled. NeoPharm believes that thesedamages are substantial. On May 16, 2002, Pharmacia responded by denyingthe Company’s allegations, asserting various counterclaims and seekingrestitution of monies paid, reimbursement of out-of-pocket expenses andsubstantial punitive damages. Subsequently, Pharmacia stated in a letter datedNovember 19, 2002, that it did not intend to move forward with theclinical development of NeoPharm’s NeoLipidTM LEP (LEP-ETU) because of itscontention that NeoPharm had not provided Pharmacia with sufficient productdata and test samples, a claim which NeoPharm denies. Pharmacia also statedthat it would not continue to develop the earlier formulations of LEP and LED.Although Pharmacia indicated that it did not intend to continue with theclinical development of LEP and LED, Pharmacia did not indicate that it hadterminated the License Agreement. As a result, in November 2002, NeoPharmterminated the License Agreement in order to allow NeoPharm to continue withthe further development of NeoLipidTM formulations of LEP, as well as LED.Pharmacia disputes the propriety of the termination and has included thetermination as part of the arbitration hearing. In January 2003, NeoPharmreached an agreement with Pharmacia that allows NeoPharm to referencePharmacia’s LEP IND and start human clinical trials with LEP-ETU. Thearbitration proceeding is currently ongoing and no prediction can be made as tothe outcome of the claims that the Company and Pharmacia have asserted againsteach other, or the amounts, if any, which either party may be awarded againstthe other, which recoveries or liabilities could be substantial. Thearbitration hearing is scheduled to begin on May 28, 2003 and be conductedover 23 days of hearings.

 

Underthe License Agreement, NeoPharm incurred expenses during 2002 related to itsefforts to develop a NeoLipidTM formulation for LEP, at Pharmacia’s request. Theterms of the License Agreement entitle NeoPharm to be reimbursed for theseexpenses, and the Company has sent invoices totaling over $1,500,000 toPharmacia for work conducted by NeoPharm to develop LEP. NeoPharm has notreceived payment on the invoices sent to Pharmacia and these amounts have notbeen included in the Company’s Statements of Operations.  NeoPharm asserts that it is entitled topayment on these invoices.

 

OnOctober 4, 2002, Pharmacia Corporation and Pharmacia and Upjohn, Inc.filed a lawsuit in Delaware Chancery Court to enjoin the Company fromarbitrating claims against them. Specifically, following NeoPharm’s initiationof the arbitration, Pharmacia Corporation and Pharmacia and Upjohn, Inc.filed the lawsuit against NeoPharm in Delaware Chancery Court seeking adeclaration that they were not bound to arbitrate certain disputes withNeoPharm. In their lawsuit Pharmacia Corporation and Pharmacia andUpjohn, Inc. claimed that neither Pharmacia and Upjohn, Inc., theparent of the Pharmacia subsidiary that entered into the License Agreement(Pharmacia and Upjohn Company), nor Pharmacia Corporation, as the ultimateparent company, were proper parties to the ongoing arbitration between NeoPharmand Pharmacia and Upjohn Company. NeoPharm, in its response and counterclaimfiled against Pharmacia on October 31, 2002, asked the Delaware ChanceryCourt to compel both Pharmacia Corporation and Pharmacia and Upjohn, Inc.to arbitrate the dispute with the Company. In February 2003, Pharmacia’smotion for summary judgment was denied. In March 2003, NeoPharm reached anagreement with Pharmacia Corporation and Pharmacia and Upjohn, Inc. tosettle the Delaware lawsuit. Under the terms of the settlement, NeoPharm willcontinue with its ongoing arbitration claim against Pharmacia and UpjohnCompany, but will not proceed against the parent companies in the arbitral forum.NeoPharm, however, has reserved the right to pursue claims against PharmaciaCorporation and Pharmacia and Upjohn, Inc. in a court proceeding. NeoPharmis satisfied that Pharmacia and Upjohn Company has sufficient assets to pay outany potential award to NeoPharm that may result from the arbitration hearing.

 

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TheCompany was also named in several putative class action lawsuits (the “ClassAction Suits”) each of which alleges various violations of the federalsecurities laws in connection with the Company’s public statements during theperiod from September 25, 2000 through April 19, 2002 as they relateto the Company’s LEP drug. The original lawsuits also named as individualdefendants John N. Kapoor, Chairman of the Company, and James M. Hussey, theCompany’s President and CEO, and Dr. Aquilur Rahman, a former director andexecutive officer of the Company. The first of these Class Action Suits wasfiled on April 26, 2002 and all of the Class Action Suits have been filedin the United States District Court for the Northern District of Illinois,Eastern Division. On September 16, 2002, a consolidated amended complaintwas filed against NeoPharm in this matter. The amended complaint shortened theclass period to October 31, 2001 through April 19, 2002, removedDr. Rahman as a defendant, and added Dr. Imran Ahmad, the Company’scurrent Chief Scientific Officer and Senior Vice President of Research andDevelopment, as a defendant. The Company intends to vigorously defend each andevery claim in the class action suits and, on November 4, 2002, moved tohave the complaint dismissed. The Company’s motion to dismiss was granted inpart and denied in part in February 2003. Dr. Kapoor was dismissed from the lawsuit at that time.  No trial date has been set.

 

Item 2.                                                           Changesin Securities and Use of ProceedsNone

 

Item 3.                                                           DefaultsUpon Senior SecuritiesNone

 

Item 4.                                                           Submissionof Matters to a Vote of Security-HoldersNone

 

Item 5.                                                           OtherInformationNone

 

Item 6.                                                           Exhibitsand Reports on Form 8-K

 

(a)          Exhibits

 

Exhibit 99.1       Certificate of Company Chief Executive Officerand Chief Financial Officer pursuant to section 906 of the Sarbanes – Oxley Actof 2002.

 

(b)         Reports on Form 8-K

 

OnMarch 17, 2003, the Company filed a report on Form 8-K incorporating a pressrelease reporting the Company’s financial results for the fourth quarter andfull year ended December 31, 2002.

 

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**SIGNATUREPAGE**

 

**Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.**

 
|               | NEOPHARM, INC. |
|--------------------|----------------|
| Date: May 15, 2003 | By:            | /s/  Lawrence A. Kenyon |
|               |           | Lawrence A. Kenyon, |
|               |           | *Chief Financial Officer  (Principal Accounting Officer and  Principal Financial Officer)* |

 

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**CERTIFICATIONS**

 

 

I, James M. Hussey, ChiefExecutive Officer and President of NeoPharm, Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of NeoPharm, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a.               Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s Board of Directors:

a.               All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated:  May 15, 2003 | /s/  James M. Hussey              |   |
|---------------------------|----------------------------------------|--------|
|                      | James M. Hussey,                       |
|                      | Chief Executive Officer  and President |

 

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I, Lawrence A.Kenyon, Chief Financial Officer and Secretaryof NeoPharm, Inc., certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of NeoPharm, Inc.;

 

2.     Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a.               Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s Board of Directors:

a.               All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Dated:  May 15, 2003 | /s/  Lawrence A. Kenyon           |   |
|---------------------------|----------------------------------------|--------|
|                      | Lawrence A. Kenyon,                    |
|                      | Chief Financial Officer  and Secretary |

 

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