**UNITED STATES**

**SECURITIES 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 September 30, 2002**                                                                                                                      |
|                                                                                                                                                           |
| **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)       |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý   No o

 

As of October 31, 2002 the number of sharesoutstanding of each of the issuer’s classes of common stock was as follows:

 
| **Title of each class**             |   | **Number of shares outstanding** |
|-------------------------------------|--------|----------------------------------|
| Common  Stock ($.0002145 par value) |   | 16,351,529                       |

 

 

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NEOPHARM, INC.

(A DELAWARE CORPORATION)

FORM 10Q

INDEX

 
| PART I. FINANCIAL  INFORMATION            |
|-------------------------------------------|
|                                      | Item 1. | Financial Statements |
|                                      |   | Balance Sheets as of September 30, 2002  (Unaudited) and December 31, 2001 |
|                                      |   | Statements of Operations for  the three and nine months ended September 30, 2002 and September 30, 2001 (Unaudited) |
|                                      |   | Statements of Cash Flows for  the nine months ended September 30, 2002 and September 30, 2001 (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 |

 

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**PARTI - FINANCIAL INFORMATION**

 

**Item1 - Financial Statements**

 

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

 
|                                                                                                                                                                   |   | **September 30, 2002** |        | **December 31,****2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|--------------------------|--------|
|                                                                                                                                                                   |   | **(Unaudited)**        |        |                     |   |
| **ASSETS**                                                                                                                                                             |   |                   |        |                     |   |
| Current assets:                                                                                                                                                        |   |                   |        |                     |   |
| Cash and cash equivalents                                                                                                                                              |   | $                      | 95,905,225  |                     | $      | 106,525,864 |   |
| Short-term investment in marketable securities                                                                                                                         |   | 5,999,551              |        | 15,030,045               |   |
| Prepaid expenses                                                                                                                                                       |   | 1,446,515              |        | 469,862                  |   |
| Other receivables                                                                                                                                                      |   | 111,562                |        | 131,718                  |   |
| Total current assets                                                                                                                                                   |   | 103,462,853            |        | 122,157,489              |   |
| Equipment and furniture:                                                                                                                                               |   |                   |        |                     |   |
| Equipment                                                                                                                                                              |   | 3,948,462              |        | 2,260,949                |   |
| Furniture                                                                                                                                                              |   | 803,212                |        | 486,658                  |   |
| Leasehold improvements                                                                                                                                                 |   | 423,286                |        | 254,096                  |   |
| Less accumulated depreciation                                                                                                                                          |   | (1,664,611             | )           | (686,061                 | )      |
| Total equipment and furniture, net                                                                                                                                     |   | 3,510,349              |        | 2,315,642                |   |
| Long-term investment in marketable securities                                                                                                                          |   | —                 |        | 2,738,563                |   |
| Related party note receivable, net                                                                                                                                     |   | 2,135,885              |        | 1,983,381                |   |
| Total assets                                                                                                                                                           |   | $                      | 109,109,087 |                     | $      | 129,195,075 |   |
|                                                                                                                                                                   |   |                   |        |                     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                          |   |                   |        |                     |   |
| Current liabilities:                                                                                                                                                   |   |                   |        |                     |   |
| Accrued clinical trial expense                                                                                                                                         |   | $                      | 3,149,399   |                     | $      | 632,365 |   |
| Accrued compensation                                                                                                                                                   |   | 1,179,100              |        | 221,862                  |   |
| Accounts payable                                                                                                                                                       |   | 535,867                |        | 537,465                  |   |
| Other accrued expenses                                                                                                                                                 |   | 971,390                |        | 459,833                  |   |
| Total current liabilities                                                                                                                                              |   | $                      | 5,835,756   |                     | $      | 1,851,525 |   |
|                                                                                                                                                                   |   |                   |        |                     |   |
| Stockholders’ equity:                                                                                                                                             |   |                   |        |                     |   |
| Preferred stock, $0.01 par value; 15,000,000 and 0  shares authorized, respectively: 0 and 0 shares issued and outstanding,  respectively                              |   | —                 |        | —                   |   |
| Common stock, $0.0002145 par value; 50,000,000 and  25,000,000 shares authorized, respectively: 16,351,529 and 16,237,779 shares  issued and outstanding, respectively |   | 3,510                  |        | 3,484                    |   |
| Additional paid-in capital                                                                                                                                             |   | 170,765,903            |        | 169,748,547              |   |
| Accumulated deficit                                                                                                                                                    |   | (67,496,082            | )           | (42,408,481              | )      |
| Total stockholders’ equity                                                                                                                                        |   | $                      | 103,273,331 |                     | $      | 127,343,550 |   |
| Total liabilities and stockholders’ equity                                                                                                                        |   | $                      | 109,109,087 |                     | $      | 129,195,075 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

2

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**NEOPHARM, INC.(A Delaware Corporation)Statements of OperationsThree and Nine Months Ended September 30, 2002 and 2001**(Unaudited)

 
|                                       |   | **Three Months Ended**  |        | **Nine Months Ended**   |   |
|--------------------------------------------|--------|-------------------------|-------------|-------------------------|--------|
|                                       |   | **September 30,  2002** |        | **September 30,  2001** |   | **September 30,  2002** |   | **September 30,  2001** |   |
| Revenues                                   |   | $                       | —      |                    | $      | — |   | $ | — |   | $ | — |   |
| Expenses:                                  |   |                    |        |                    |   |   |   |   |   |
| Research and development                   |   | 8,978,572               |        | 4,091,492               |   | 21,620,967 |   | 8,657,050 |   |
| General and administrative                 |   | 1,841,795               |        | 1,015,778               |   | 5,197,662 |   | 2,957,221 |   |
| Related party expenses                     |   | 45,798                  |        | 39,006                  |   | 157,351 |   | 136,178 |   |
| Total expenses                             |   | 10,866,165              |        | 5,146,784               |   | 26,975,980 |   | 11,750,449 |   |
| Loss from operations                       |   | (10,866,165             | )           | (5,146,276              | )      | (26,975,980 | ) | (11,750,449 | ) |
| Other income                               |   | —                  |        | —                  |   | — |   | 8,049 |   |
| Interest income                            |   | 602,200                 |        | 1,269,527               |   | 1,888,379 |   | 4,775,282 |   |
| Net loss                                   |   | $                       | (10,263,965 | )                       | $      | (3,876,749 | ) | $ | (25,087,601 | ) | $ | (6,967,118 | ) |
| Net loss per share —                  |   |                    |        |                    |   |   |   |   |   |
| Basic and diluted                          |   | $                       | (0.63       | )                       | $      | (0.24 | ) | $ | (1.54 | ) | $ | (0.43 | ) |
| Weighted average shares outstanding — |   |                    |        |                    |   |   |   |   |   |
| Basic and diluted                          |   | 16,273,094              |        | 16,128,021              |   | 16,262,006 |   | 16,126,470 |   |
|                                            |        |                         |             |                         |        |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**NEOPHARM,INC.(A Delaware Corporation)Statements of Cash FlowsNine Months Ended September 30, 2002 and 2001**(Unaudited)

 
|                                                                         |   | **Nine Months Ended**   |        |
|------------------------------------------------------------------------------|--------|-------------------------|-------------|
|                                                                         |   | **September 30,  2002** |        | **September 30,  2001** |   |
| Cash flows used in operating activities:                                     |   |                    |        |   |   |
| Net loss                                                                     |   | $                       | (25,087,601 | ) | $ | (6,967,118 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities: |   |                    |        |   |   |
| Depreciation and amortization                                                |   | 978,550                 |        | 375,748 |   |
| Compensation expense from non-employee stock options                         |   | 79,600                  |        | 111,550 |   |
| Increase in other assets                                                     |   | (1,109,001              | )           | (140,890 | ) |
| Increase in current liabilities                                              |   | 3,984,231               |        | 1,656,432 |   |
| Net cash and cash equivalents used in operating  activities                  |   | (21,154,221             | )           | (4,964,278 | ) |
|                                                                         |   |                    |        |   |   |
| Cash flows provided by/(used in) investing activities:                       |   |                    |        |   |   |
| Proceeds from maturities of marketable securities                            |   | 25,981,513              |        | — |   |
| Proceeds from sales of marketable securities                                 |   | 9,168,783               |        | — |   |
| Purchase of marketable securities                                            |   | (23,381,239             | )           | (11,777,365 | ) |
| Purchase of equipment and furniture                                          |   | (2,173,257              | )           | (2,124,993 | ) |
| Net cash and cash equivalents provided by/(used in)  investing activities    |   | 9,595,800               |        | (13,902,358 | ) |
|                                                                         |   |                    |        |   |   |
| Cash flows from financing activities:                                        |   |                    |        |   |   |
| Proceeds from issuance of common stock                                       |   | 937,782                 |        | 84,618 |   |
| Net cash and cash equivalents provided by financing  activities              |   | 937,782                 |        | 84,618 |   |
|                                                                         |   |                    |        |   |   |
| Net decrease in cash and cash equivalents                                    |   | (10,620,639             | )           | (18,782,018 | ) |
| Cash and cash equivalents, beginning of period                               |   | 106,525,864             |        | 139,777,330 |   |
| Cash and cash equivalents, end of period                                     |   | $                       | 95,905,225  |   | $ | 120,995,312 |   |
|                                                                         |   |                    |        |   |   |
| Supplemental disclosure of cash paid for:                                    |   |                    |        |   |   |
| Interest                                                                     |   | $                       | —      |   | $ | — |   |
| Income taxes                                                                 |   | $                       | —      |   | $ | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**NEOPHARM,INC.(A Delaware Corporation)NOTES TO FINANCIAL STATEMENTSSeptember 30, 2002**

 

**Note1  Basis of Presentation**

 

The financial information herein is unaudited, other than the BalanceSheet at December 31, 2001, which is derived from the audited financialstatements.

 

The accompanying unaudited financial statements of NeoPharm, Inc. (the“Company”) have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of the Company, the accompanying unaudited interim financialstatements contain all adjustments (consisting of normal recurring adjustments)necessary to present fairly the Company’s financial position as of September30, 2002, the results of operations for the three and nine months endedSeptember 30, 2002 and 2001, and the cash flows for the nine month periodsended September 30, 2002 and 2001.

 

While the Company believes that the disclosures presented are adequateto make the information not misleading, it is suggested that these financialstatements be read in conjunction with the financial statements and notesincluded in the Company’s 2001 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

 

**Note2  Loss Per Share**

 

The following table sets forth the computation of the basic and dilutednet loss per share:

 
|                                 |   | **For the  three months ended:** |        | **For the  nine months ended:** |   |
|--------------------------------------|--------|----------------------------------|-------------|---------------------------------|--------|
|                                 |   | **September  30,  2002**         |        | **September  30,  2001**        |   | **September  30,  2002** |   | **September  30,  2001** |   |
| Numerator:                           |   |                             |        |                            |   |   |   |   |   |
| Net  loss                            |   | $                                | (10,263,965 | )                               | $      | (3,876,749 | ) | $ | (25,087,601 | ) | $ | (6,967,118 | ) |
|                                 |   |                             |        |                            |   |   |   |   |   |
| Denominator:                         |   |                             |        |                            |   |   |   |   |   |
| Weighted average  shares outstanding |   | 16,273,094                       |        | 16,128,021                      |   | 16,262,006 |   | 16,126,470 |   |
|                                 |   |                             |        |                            |   |   |   |   |   |
| Loss per share -  basic and diluted  |   | $                                | (0.63       | )                               | $      | (0.24 | ) | $ | (1.54 | ) | $ | (0.43 | ) |
|                                 |   |                             |        |                            |   |   |   |   |   |
| Potential common  share equivalents: |   |                             |        |                            |   |   |   |   |   |
| Stock options                        |   | 474,306                          |        | 750,460                         |   | 608,311 |   | 846,974 |   |

 

As the Company has incurred a net loss for all periods presented, basicand diluted per share amounts are equivalent as the effect of potential commonshare equivalents is anti-dilutive.

 

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**Note3  Transactions with Related Parties**

 

The following table provides further detail of therelated party expenses reflected in the statements of operations.

 
|                             |   |              |   | **For the  three months ended:** |   | **For the  nine months ended:** |   |
|----------------------------------|--------|-------------------|--------|----------------------------------|--------|---------------------------------|--------|
| **Related  Party**               |   | **Expense  Type** |   | **September  30,  2002**         |   | **September  30,  2001**        |   | **September  30,  2002** |   | **September  30,  2001** |   |
| Akorn, Inc.                      |   | Consulting        |   | $                                | 7,669  |                            | $      | 7,669 |   | $ | 23,006 |   | $ | 40,661 |   |
| E.J. Financial Enterprises       |   | Consulting        |   | 31,250                           |   | 31,250                          |   | 93,750 |   | 93,750 |   |
| E.J. Financial  Enterprises      |   | Direct Expenses   |   | 54                               |   | 88                              |   | 1,216 |   | 1,767 |   |
| Unicorn Pharma  Consulting, Inc. |   | Consulting        |   | 6,825                            |   | —                          |   | 39,379 |   | — |   |
| Total related  party expenses    |   |              |   | $                                | 45,798 |                            | $      | 39,006 |   | $ | 157,351 |   | $ | 136,178 |   |

 

In December 2001, followingapproval by the Company’s Board of Directors, the Company loaned $3,250,000 toAkorn, Inc., an independent publicly traded company, to assist Akorn in the completion of its lyophilization manufacturingfacility in Decatur, Illinois.  The notereceivable issued to Akorn, and all interest thereon, is due in December 2006,and accrues interest at a rate equal to that received on the Company’sinvestments in marketable securities, which is lower than the interest ratepaid by Akorn on its other outstanding debt. In exchange, the Company has entered into a manufacturing processingagreement that grants the Company access to at least 15% of the annuallyophilization manufacturing capacity at Akorn at a discounted price, uponcompletion of the facility.  Dr. John N.Kapoor, Chairman of the Board and a principal shareholder of the Company, isalso Chairman, CEO and a principal shareholder of Akorn.  The Company has recorded the note receivablenet of a discount reflecting the difference between the actual loan amount andthe present value of the loan using an estimated market interest rate of10%.  The discount is being amortizedover the life of the loan.   During thethird quarter of 2002, the Company recorded $67,095 in interest income fromthis note receivable, comprised of $15,000 of accrued interest on the notereceivable and $52,095 of discount amortization.  For the first nine months of 2002, the Company recorded $200,585in interest income from this note receivable, comprised of $48,082 of accruedinterest on the note receivable and $152,503 of discount amortization.

 

**Note 4  Investments**

 

The Company considers all highlyliquid investments purchased with an original maturity of three months or lessto be cash equivalents.  The carryingvalue of these investments approximates their 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 SFAS No. 115, the Company has elected to treat all of itsinvestments in marketable securities as “available-for-sale”, which requiresthese investments to be recorded at fair market value.  At September 30, 2002, the Company recordedits investments in marketable securities using cost plus accrued interest asthis approximated the fair market value of the securities held.  Realized gain on investments sold during thethree and nine months ended September 30, 2002 was $3,117 and realized loss oninvestments sold during the three and nine month periods ended September 30, 2002was $29,873.  No investments were soldduring the three or nine month periods ended September 30, 2001.  The Company uses the specific identificationmethod to determine gain or loss on investments sold.

 

**Note 5  Contingencies**

 

On April 19, 2002, NeoPharm filed for arbitrationagainst Pharmacia Corporation, Pharmacia and Upjohn, Inc. and Pharmacia andUpjohn Company (collectively, “Pharmacia”) to resolve a dispute with Pharmaciaconcerning the development programs for LEP (Liposome Encapsulated Paclitaxel)and LED (Liposome Encapsulated Doxorubicin), which are being conducted byPharmacia under a license agreement with NeoPharm.  Pharmacia subsequently responded and filed a counter claimalleging various breaches of the license agreement by NeoPharm and seekingarbitration of its claims against the Company. Each party’s claims against the other are substantial.  The arbitration hearing has been scheduledfor May 28, 2003 through June 30, 2003. On October 4, 2002, Pharmacia Corporation and Pharmacia and Upjohn, Inc.filed a lawsuit in Delaware Chancery Court to

 

6

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enjoin the Company from arbitrating claims against them.  NeoPharm, in its response and counterclaimfiled against Pharmacia on October 31, 2002, asked the Delaware Chancery Courtto compel both Pharmacia Corporation and Pharmacia and Upjohn, Inc. toarbitrate the dispute with the Company. Neither party has requested monetary relief in the Delaware case.

 

In addition, subsequent to the Company’s announcementof its arbitration demand with Pharmacia, the Company was named in severalclass action suits alleging various violations of the federal securities lawsin connection with public statements made by the Company concerning LEP.  The Company intends to vigorously defendeach and every claim in the class action suits and, on November 4, 2002, movedto have the complaint dismissed.  Thedecision on the Company’s motion to dismiss is expected in February 2003.  The Company anticipates further increases inlegal expenses during the remainder of 2002 as it pursues its objectives in thearbitration and the class action suits, but, at this time, the Company isunable to determine with any precision the amount or timing of these futurelegal expenses.  In addition, theCompany is unable to predict the outcome or potential liability related to thearbitration or class action suits at this time.

 

             Under the licenseagreement between NeoPharm and Pharmacia, the company incurred expenses duringthe nine months ended September 30, 2002 related to its efforts to develop aNeoLipid formulation for LEP.  Under theterms of the license agreement, NeoPharm is entitled to be reimbursed for theseexpenses and has sent invoices totaling over $1,500,000 to Pharmacia for workconducted by NeoPharm to develop LEP. NeoPharm has not received payment on the invoices sent to Pharmacia.

 

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

 

The following should be read in conjunction with thefinancial statements and related footnotes and Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in theCompany’s Annual Report on Form 10-K. The results discussed below are not necessarily indicative of theresults to be expected in any future periods. The following discussion contains forward-looking statements that aresubject to risks and uncertainties which could cause actual results to differfrom the statements made.

 

**Overview**

 

We are a biopharmaceutical company engaged in theresearch, development and commercialization of drugs for the treatment ofvarious cancers. We currently have a portfolio of five anti-cancer compounds,four of which are in, or are about to begin, clinical trials. In addition, twoother NeoPharm compounds have been licensed to Pharmacia.  We have built our drug portfolio based onour two novel proprietary technology platforms: the NeoLipidTM liposomal drugdelivery platform and a tumor-targeting toxin platform. Our corporate strategyis to become a leader in the research, development and commercialization of newand innovative anti-cancer treatments.

 

During the third quarter of 2002, NeoPharm continuedto advance the four Phase I/II compounds under development towards Phase II/IIIclinical trials.  The compounds currentlyin Phase I/II clinical trials include: IL13-PE38 for the treatment of glioblastoma multiforme; LEM (LiposomalMitoxantrone) for the treatment of prostate cancer; and, LErafAON (Liposomalcraf Antisense Oligonucleotide) for the treatment of radiation and/orchemotherapy resistant tumors.  TheCompany has scheduled a meeting with the FDA in December 2002 to determine therequirements to begin Phase II/III clinical trials for IL13-PE38.  In addition, the Company submitted an INDfor LE-SN38 (Liposomal SN-38) in late June and anticipates initiating PhaseI/II clinical trials for LE-SN38 during the fourth quarter of 2002.

 

We also ended our participation in the developmentprogram for SS1-PE38 since the compound had not achieved NeoPharm’srequirements to advance into previously anticipated Phase II clinicaltrials.  As a result, NeoPharm has givennotice that it will terminate the Cooperative Research and DevelopmentAgreement with the National Cancer Institute to develop the compound, effectiveas of the end of 2002.

 

As progress is made in the clinical development of ourcompounds, we anticipate increases in our research and developmentexpenses.  NeoPharm has indicatedpreviously that we anticipate 2002 total research and development expenses toincrease by approximately 100% over 2001 total research and developmentexpenses.  As of the date of thisreport, we continue to anticipate that total 2002 research and developmentexpenses will meet expectations.

 

On April 19, 2002, NeoPharm filed for arbitration againstPharmacia Corporation, Pharmacia and Upjohn, Inc. and Pharmacia and UpjohnCompany (collectively, “Pharmacia”) to resolve a dispute with Pharmacia

 

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concerning the development programs for LEP (Liposome EncapsulatedPaclitaxel) and LED (Liposome Encapsulated Doxorubicin), which are beingconducted by Pharmacia under a license agreement with NeoPharm.  Pharmacia subsequently responded and filed acounter claim alleging various breaches of the license agreement by NeoPharmand seeking arbitration of its claims against the Company.  The arbitration hearing has been scheduledfor May 28, 2003 through June 30, 2003. On October 4, 2002, Pharmacia Corporation and Pharmacia and Upjohn, Inc.filed a lawsuit in Delaware Chancery Court to enjoin the Company fromarbitrating claims against them. NeoPharm, in its response and counterclaim filed against Pharmacia onOctober 31, 2002, asked the Delaware Chancery Court to compel both PharmaciaCorporation and Pharmacia and Upjohn, Inc. to arbitrate the dispute with theCompany.  Neither party has requestedmonetary relief in the Delaware case.

 

In addition, subsequent to the Company’s announcementof its arbitration demand with Pharmacia, the Company was named in severalclass action suits alleging various violations of the federal securities lawsin connection with public statements made by the Company concerning LEP.  The Company intends to vigorously defendeach and every claim in the class action suits and, on November 4, 2002, movedto have the complaint dismissed.  Thedecision on the Company’s motion to dismiss is expected in February 2003.  The Company anticipates further increases inlegal expenses during the remainder of 2002 as it pursues its objectives in thearbitration and the class action suits, but, at this time, the Company isunable to determine with any precision the amount or timing of these futurelegal expenses.  During the nine monthsended September 30, 2002, the Company experienced an increase in legal expensesof approximately $862,000 as compared with the nine months ended September 30,2001.  We anticipate that theseincreased legal expenses will contribute to a larger than expected net loss for2002.  The Company is unable to predictthe outcome or potential liability related to the arbitration or class actionsuits at this time.

 

**Resultsof Operations – Three Months Ended September 30, 2002 vs. Three Months EndedSeptember 30, 2001.**

 

The Company recorded no revenue for the three monthsended September 30, 2002 or for the three months ended September 30, 2001.

 

Research and development expense for the three monthsended September 30, 2002 was $8,978,572 compared to $4,091,492 for the sameperiod in 2001. During the third quarter of 2002, we continued to advance ourcompounds in Phase I/II clinical development towards Phase II/III clinicaltrials and we also continued to make progress on the pre-clinical researchbeing conducted to prepare for the initiation of clinical trials for certainother compounds under development.  As aresult, the overall increase in research and development costs was the resultof increased expenses of approximately $3,101,000 related to the clinical andpre-clinical development of our compounds, increased payroll and consultingexpense of approximately $1,470,000 related to increases in our research anddevelopment staff, and an increase of approximately $316,000 in expensesincurred for the operation of the research and development facility inWaukegan, Illinois.

 

General and administrative expenses (including relatedparty expenses) for the three months ended September 30, 2002 were $1,887,593compared to $1,054,784 for the same period in 2001. The overall increase ingeneral and administrative expenses was the result of increased legal fees ofapproximately $492,000 primarily due to work done on the arbitration withPharmacia and to prepare a defense in the class action suits, an increase ofapproximately $116,000 for payroll and consulting expenses related to increasesin our administrative staff, an increase in general office expenses ofapproximately $114,000 including rent, and increased insurance expense ofapproximately $111,000 for the Company’s directors and officers liabilityinsurance and commercial insurance premiums.

 

The Company generated interest income on cash andinvestments of $602,200 and $1,269,527 for the three months ended September 30,2002 and September 30, 2001, respectively. The decrease in interest income for the third quarter of 2002 was primarilydue to a decrease in short-term interest rates earned on the Company’sinvestment portfolio between the third quarter of 2001 and the third quarter of2002, combined with a reduction in the total cash available for investingduring the third quarter of 2002 as the Company used its cash to fund thedevelopment of its compounds.

 

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Net loss for the three months ended September 30, 2002was $10,263,965, or $<0.63> per share basic and diluted, compared to netloss of $3,876,749, or $<0.24> per share basic and diluted, for the threemonths ended September 30, 2001.

 

**Resultsof Operations – Nine Months Ended September 30, 2002 vs. Nine Months EndedSeptember 30, 2001.**

 

The Company recorded no revenue for the nine monthsended September 30, 2002 or for the nine months ended September 30, 2001.

 

Research and development expense for the nine monthsended September 30, 2002 was $21,620,967 compared to $8,657,050 for the sameperiod in 2001. The overall increase in research and development costs was theresult of increased expenses of approximately $7,802,000 related to theclinical and pre-clinical development of our products, increased payroll andconsulting expense of approximately $4,189,000 related to increases in ourresearch and development staff, and an increase of approximately $973,000 inexpenses incurred for the operation of the research and development facilitythe Company opened in Waukegan, Illinois during February 2001.

 

General and administrative expenses (including relatedparty expenses) for the nine months ended September 30, 2002 were $5,355,013compared to $3,093,399 for the same period in 2001. The overall increase ingeneral and administrative expenses was the result of increased legal fees of approximately$1,085,000 primarily due to work done on the arbitration with Pharmacia and toprepare a defense in the class action suits, an increase of approximately$515,000 for payroll and consulting expenses related to increases in ouradministrative staff, an increase in general office expenses of approximately$225,000, increased insurance expense of approximately $205,000 for theCompany’s directors and officers liability insurance and commercial insurancepremiums, an increase in rent expense of approximately $118,000 due to thelease of additional space in our Lake Forest, Illinois offices to accommodateour staff expansion in 2002, and an increase of approximately $114,000 inpatent and licensing expenses for potential new products using our technology.

 

The Company generated interest income on cash andinvestments of $1,888,379 and $4,775,282 for the nine months ended September30, 2002 and September 30, 2001, respectively. The decrease in interest income for the nine months ended September 30,2002 was primarily due to a decrease in short-term interest rates earned on theCompany’s investment portfolio between the fourth quarter of 2000 and the thirdquarter of 2002, combined with a reduction in the total cash available forinvesting during the nine months ended September 30, 2002 as the Company usedits cash to fund the development of its compounds.

 

Net loss for the nine months ended September 30, 2002was $25,087,601, or $<1.54> per share basic and diluted, compared to netloss of $6,967,118, or $<0.43> per share basic and diluted, for the ninemonth period ended September 30, 2001.

 

**LiquidityAnd Capital Resources**

 

At September 30, 2002, we had $95,905,225 in cash andcash equivalents and net working capital of $97,627,097. We believe that our cashand equivalents should be adequate to fund our immediate needs. However, we canoffer no assurances that additional funding will not be required in theforeseeable future. All excess cash has been invested in short-term investmentsand marketable securities which mature in less than two years.

 

Our assets at September 30, 2002 were $109,109,087compared to $129,195,075 at December 31, 2001. Our liabilities at September 30,2002 increased to $5,835,756 from $1,851,525 at December 31, 2001. Thisincrease in liabilities was attributable to an increase in accrued clinicaltrial expenses of approximately $2,517,000 incurred in conducting our PhaseI/II clinical trials due to increased patient enrollment and the initiation ofadditional studies designed to assist in the commercialization of our products,an increase in accrued compensation of approximately $957,000 relating toaccrued vacation time and sick leave as of September 30, 2002 and bonusespayable at the end of the year if certain employee performance milestones areachieved, and an increase in other accrued expenses of approximately $512,000.

 

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We may seek to satisfy our future funding requirementsthrough public or private offerings of securities, with collaborative or otherarrangements with corporate partners or from other sources. Additionalfinancing may not be available when needed or be available on terms that areacceptable to us. If adequate financing is not available, we may be required todelay, scale back or eliminate certain of our research and developmentprograms, relinquish rights to certain of our technologies, cancer drugs orproducts, or license third parties to commercialize products or technologiesthat we would otherwise seek to develop ourselves.

 

**ForwardLooking Statements**

 

Any statements made byNeoPharm, Inc. (“we”, “us”, “our”, or the “Company”) in this quarterly reportthat are forward looking are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  The Company cautions readers that important factors may affectthe Company’s actual results and could cause such results to differ materiallyfrom forward-looking statements made by or on behalf of the Company.  Such factors include, but are not limited tothose risks and uncertainties relating to difficulties or delays indevelopment, testing, regulatory approval, production and marketing of theCompany’s drug candidates, uncertainty regarding the outcome of damages claimsmade by or against the Company, unexpected adverse side effects or inadequatetherapeutic efficacy of the Company’s drug candidates that could slow orprevent products coming to market, the uncertainty of patent protection for theCompany’s intellectual property or trade secrets, and other factors referencedunder “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2001.

 

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

 

As of September 30, 2002, we did not own anyderivative instruments but we were exposed to market risks, primarily changesin U.S. interest rates.  As of September30, 2002, cash and investment of $101,904,776. Maturities range from less than one month to approximately 12months.  Declines in interest rates overtime will reduce our interest income from our investments.  Based upon our balance of cash, cashequivalents and marketable securities as of September 30, 2002, a decrease ininterest rates of 1.0% would cause a corresponding decrease in our annualinterest income of approximately $1 million.

 

**Item4 – Controls and Procedures**

 

(a) Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation ofour management, including the Company's Chief Executive Officer and ChiefFinancial Officer, we evaluated the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a - 14(c) underthe Exchange Act) as of a date (the "Evaluation Date") within 90 daysprior to the filing date of this report. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclsure controls and procedures are effective in timelyalerting them to the material information relating to us required to beincluded in our periodic SEC filings.

 

(b) Changes in internal controls.

 

There were no significant changes made in our internalcontrols during the period covered by this report or, to our knowledge, inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

 

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**PARTII - OTHER INFORMATION**

 

Item 1.                                                             LegalProceedings

 

On April 19, 2002, the Company filed a Demand for Arbitrationwith the American Arbitration Association in accordance with the terms of itsLicense Agreement dated February 19, 1999 (the “License Agreement”) withPharmacia Corporation, Pharmacia and Upjohn, Inc. and Pharmacia and UpjohnCompany (collectively, “Pharmacia”), for the purpose of resolving a disputewith Pharmacia concerning delays in the development programs for LEP (LiposomeEncapsulated Paclitaxal) and LED (Liposome Encapsulated Doxorubicin) which arebeing conducted by Pharmacia.  TheCompany contends that Pharmacia failed in its duty under the License Agreementto use reasonable efforts to develop LEP and LED and that such failureconstitutes a breach of the License Agreement. The Company further contends that Pharmacia breached its duty to consultwith NeoPharm on the progress of the drug development program and therebyimpaired NeoPharm’s ability to monitor the development of these compounds.  The Company is seeking all damages to whichit is entitled, which include, but are not limited to, loss of co-promotion androyalty revenues that would have been received if LEP and LED had not beendelayed, and milestone payments that would have been received if the programshad been properly conducted by Pharmacia. NeoPharm believes that these damages are substantial.  NeoPharm is not currently seeking atermination of the License Agreement as part of the arbitration.  On May 16, 2002 Pharmacia responded byfiling its own response denying the Company’s allegations, asserting variouscounterclaims and seeking restitution of monies paid, reimbursement ofout-of-pocket expenses and substantial punitive damages.  The Company has been informed that thearbitration hearing will be conducted between May 28, 2003 and June 30, 2003.

 

On October 4, 2002, Pharmacia Corporation andPharmacia and Upjohn, Inc. filed a lawsuit in Delaware Chancery Court to enjointhe Company from arbitrating claims against them.  NeoPharm, in its response and counterclaim filed against Pharmaciaon October 31, 2002, asked the Delaware Chancery Court to compel both PharmaciaCorporation and Pharmacia and Upjohn, Inc. to arbitrate the dispute with theCompany.  Neither party has requestedmonetary relief in the Delaware case.

 

The Company was also named in several putative classaction lawsuits (the “Class Action Suits”) each of which alleges variousviolations of the federal securities laws in connection with the Company’spublic statements during the period from September 25, 2000 through April 19,2002 as they relate to the Company’s LEP drug. The original lawsuits also named as individual defendants John N.Kapoor, Chairman of the Company, and James M. Hussey, the Company’s Presidentand CEO, and Dr. Aquilur Rahman, a former director and executive officer of theCompany.  The first of these ClassAction Suits was filed on April 26, 2002 and all of the Class Action Suits havebeen filed in the United States District Court for the Northern District ofIllinois, Eastern Division.  OnSeptember 16, 2002, a consolidated amended complaint was filed against NeoPharmin this matter.  The amended complaintshortened the class period to October 31, 2002 through April 19, 2002, removedDr. Rahman as a defendant, and added Dr. Imran Ahmad, the Company’s currentChief Scientific Officer and Senior Vice President of Research and Development,as a defendant.  The Company intends tovigorously defend each and every claim in the class action suits and, onNovember 4, 2002, moved to have the complaint dismissed.  The decision on the Company’s motion to dismissis expected in February 2003.

 

Item 2.                                                             Changesin Securities and Use of ProceedsNone

 

Item 3.                                                             DefaultsUpon Senior SecuritiesNone

 

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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                      Certificateof Company Chief Executive Officer and Chief Financial Officer pursuant tosection 906 of the Sarbanes **–** Oxley Act of 2002.

 

(b)         Reports on Form 8-K

 

On July 3, 2002, theCompany filed a report on Form 8-K reporting that the Company had appointedKPMG LLP as the Company’s independent accountants.

 

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**SIGNATURE PAGE**

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.**

 
|                    |   | NEOPHARM, INC. |
|-------------------------|--------|----------------|
| Date: November 14, 2002 |   | By:            | /s/  Lawrence  A. Kenyon |
|                    |   |           | Lawrence A. Kenyon, |
|                    |   |           | *Chief  Financial Officer  (Principal Accounting Officer and  Principal Financial Officer)* |

 

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**CERTIFICATIONS**

 

**ChiefExecutive Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002**

 

I, James M. Hussey, 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 establishingand maintaining 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:   November 14, 2002 | /s/  James M.  Hussey |   |
|---------------------------------|----------------------------|--------|
|                            | James M. Hussey,           |
|                            | Chief Executive Officer    |

 

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**ChiefFinancial Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002**

 

I, Lawrence A. Kenyon, certify that:

 

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

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect 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:   November 14, 2002 | /s/  Lawrence  A. Kenyon |   |
|---------------------------------|-------------------------------|--------|
|                            | Lawrence A. Kenyon,           |
|                            | Chief Financial Officer       |

 

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