**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**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 June 30, 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)       |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes  ý  No  o

 

As of July 18, 2003 the numberof shares outstanding of each of the issuer’s classes of common stock was asfollows:

 

| **Title of each class**            |   | **Number of shares outstanding** |
|------------------------------------|--------|----------------------------------|
| Common Stock ($.0002145 par value) |   | 18,826,670                       |

 

 

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NEOPHARM, INC.

(A DELAWARE CORPORATION)

FORM 10Q

INDEX

 
| PART I. FINANCIAL INFORMATION |
|-------------------------------|
|                          | Item 1. | Financial Statements |
|                          |   | Balance  Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 |
|                          |   | Statements of Operations for the three and six months ended June 30,  2003 and June 30, 2002 (Unaudited) |
|                          |   | Statements of Cash Flows for the six months ended June 30, 2003 and  June 30, 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               |

 

2

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**PART I - FINANCIALINFORMATION**

 

**Item 1 - FinancialStatements**

 

**NEOPHARM,INC.**

**(ADelaware Corporation)**

**Balance Sheets**

 
|                                                                                                                                      |   | **June 30, 2003** |       | **December 31,****2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|--------------------------|--------|
|                                                                                                                                      |   | **(Unaudited)**   |       |                     |   |
| **ASSETS**                                                                                                                                |   |              |       |                     |   |
| Current assets:                                                                                                                           |   |              |       |                     |   |
| Cash and cash  equivalents                                                                                                                |   | $                 | 65,402,625 |                     | $      | 87,591,975 |   |
| Short-term  investment in marketable securities                                                                                           |   | 881,362           |       | 3,508,222                |   |
| Prepaid  expenses                                                                                                                         |   | 1,125,151         |       | 454,893                  |   |
| Other  receivables                                                                                                                        |   | 451,172           |       | 137,954                  |   |
| Total current assets                                                                                                                      |   | 67,860,310        |       | 91,693,044               |   |
| Equipment and  furniture:                                                                                                                 |   |              |       |                     |   |
| Equipment                                                                                                                                 |   | 4,462,563         |       | 4,192,551                |   |
| Furniture                                                                                                                                 |   | 835,217           |       | 801,783                  |   |
| Leasehold  improvements                                                                                                                   |   | 580,521           |       | 428,708                  |   |
| Less  accumulated depreciation                                                                                                            |   | (1,701,096        | )          | (1,178,765               | )      |
| Total equipment  and furniture, net                                                                                                       |   | 4,177,205         |       | 4,244,277                |   |
| Total assets                                                                                                                              |   | $                 | 72,037,515 |                     | $      | 95,937,321 |   |
|                                                                                                                                      |   |              |       |                     |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                            |   |              |       |                     |   |
| Current  liabilities:                                                                                                                     |   |              |       |                     |   |
| Accrued legal  expenses                                                                                                                   |   | $                 | 3,973,409  |                     | $      | 1,018,414 |   |
| Accrued  clinical trial expense                                                                                                           |   | 1,478,083         |       | 1,611,100                |   |
| Accrued  compensation                                                                                                                     |   | 996,574           |       | 478,026                  |   |
| Accounts  payable                                                                                                                         |   | 466,547           |       | 492,816                  |   |
| Other accrued  expenses                                                                                                                   |   | 753,078           |       | 427,971                  |   |
| Total current  liabilities                                                                                                                |   | 7,667,691         |       | 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: 18,826,670 and 16,351,529  shares issued and outstanding, respectively |   | 4,036             |       | 3,509                    |   |
| Additional  paid-in capital                                                                                                               |   | 170,962,076       |       | 170,805,705              |   |
| Accumulated  deficit                                                                                                                      |   | (106,596,288      | )          | (78,900,220              | )      |
| Total  stockholders’ equity                                                                                                          |   | 64,369,824        |       | 91,908,994               |   |
| Total  liabilities and stockholders’ equity                                                                                          |   | $                 | 72,037,515 |                     | $      | 95,937,321 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**NEOPHARM,INC.**

**(ADelaware Corporation)**

**Statements ofOperations**

**Threeand Six Months Ended June 30, 2003 and 2002**(Unaudited)

 
|                                        |   | **Three Months Ended** |        | **Six Months Ended** |   |
|---------------------------------------------|--------|------------------------|-------------|----------------------|--------|
|                                        |   | **June 30,  2003**     |        | **June 30,  2002**   |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Revenues                                    |   | $                      | —      |                 | $      | — |   | $ | — |   | $ | — |   |
| Expenses:                                   |   |                   |        |                 |   |   |   |   |   |
| Research and  development                   |   | 8,767,286              |        | 7,568,786            |   | 15,875,842 |   | 12,642,395 |   |
| General and  administrative                 |   | 7,880,687              |        | 2,075,634            |   | 12,285,071 |   | 3,363,367 |   |
| Related party  expenses                     |   | 35,409                 |        | 67,964               |   | 74,601 |   | 104,054 |   |
| Total expenses                              |   | 16,683,382             |        | 9,712,384            |   | 28,235,514 |   | 16,109,816 |   |
| Loss from  operations                       |   | (16,683,382            | )           | (9,712,384           | )      | (28,235,514 | ) | (16,109,816 | ) |
|                                        |   |                   |        |                 |   |   |   |   |   |
| Interest income                             |   | 254,554                |        | 692,710              |   | 539,446 |   | 1,286,179 |   |
| Net loss                                    |   | $                      | (16,428,828 | )                    | $      | (9,019,674 | ) | $ | (27,696,068 | ) | $ | (14,823,637 | ) |
| Net loss per  share —                  |   |                   |        |                 |   |   |   |   |   |
| Basic and  diluted                          |   | $                      | (0.87       | )                    | $      | (0.48 | ) | $ | (1.47 | ) | $ | (0.79 | ) |
| Weighted  average shares outstanding — |   |                   |        |                 |   |   |   |   |   |
| Basic and  diluted                          |   | 18,826,670             |        | 18,691,558           |   | 18,817,902 |   | 18,694,825 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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

**Statements of CashFlows**

**SixMonths Ended June 30, 2003 and 2002**(Unaudited)

 
|                                                                         |   | **Six Months Ended** |        |
|------------------------------------------------------------------------------|--------|----------------------|-------------|
|                                                                         |   | **June 30, 2003**    |        | **June 30, 2002** |   |
| Cash flows from  operating activities:                                       |   |                 |        |   |   |
| Net loss                                                                     |   | $                    | (27,696,068 | ) | $ | (14,823,637 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                 |        |   |   |
| Depreciation  and amortization                                               |   | 522,331              |        | 528,701 |   |
| Stock-based  compensation expense                                            |   | 165,958              |        | 79,600 |   |
| Changes in  assets and liabilities:                                          |   |                 |        |   |   |
| Increase in  current assets                                                  |   | (983,476             | )           | (1,121,307 | ) |
| Increase in  current liabilities                                             |   | 3,639,364            |        | 2,501,562 |   |
| Net cash and  cash equivalents used in operating activities                  |   | (24,351,891          | )           | (12,835,081 | ) |
|                                                                         |   |                 |        |   |   |
| Cash flows from  investing activities:                                       |   |                 |        |   |   |
| Proceeds from  maturities of marketable securities                           |   | 3,005,123            |        | 21,719,019 |   |
| Purchase of  marketable securities                                           |   | (378,263             | )           | (18,722,616 | ) |
| Purchase of  equipment and furniture                                         |   | (455,259             | )           | (845,758 | ) |
| Net cash and  cash equivalents provided by investing activities              |   | 2,171,601            |        | 2,150,645 |   |
|                                                                         |   |                 |        |   |   |
| Cash flows from  financing activities:                                       |   |                 |        |   |   |
| Cash paid in  lieu of fractional shares for stock dividend                   |   | (9,060               | )           | — |   |
| Proceeds from  issuance of common stock                                      |   | —               |        | 110,483 |   |
| Net cash and  cash equivalents (used in)/provided by financing activities    |   | (9,060               | )           | 110,483 |   |
|                                                                         |   |                 |        |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (22,189,350          | )           | (10,573,953 | ) |
| Cash and cash  equivalents, beginning of period                              |   | 87,591,975           |        | 106,525,864 |   |
| Cash and cash  equivalents, end of period                                    |   | $                    | 65,402,625  |   | $ | 95,951,911 |   |
|                                                                         |   |                 |        |   |   |
| Supplemental  disclosure of cash paid for:                                   |   |                 |        |   |   |
| Interest                                                                     |   | $                    | —      |   | $ | — |   |
| Income taxes                                                                 |   | $                    | —      |   | $ | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

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

**NOTES TO FINANCIALSTATEMENTS**

**June30, 2003**

 

**Note 1  Basis of Presentation**

 

The financial information herein is unaudited. The balance sheet as ofDecember 31, 2002 is derived from audited financial statements.

 

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 June 30,2003, and the results of its operations and its cash flows for the three andsix months ended June 30, 2003 and 2002.

 

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 2002 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

 

On May 13, 2003, the Company’s Board of Directors declared a 15% commonstock dividend to stockholders of record on June 3, 2003, which was issued onJune 10, 2003.  All share information forprior periods has been restated to reflect the stock dividend.

 

**Note 2  Stock-based Compensation**

 

The Company applies APB Opinion No. 25 “Accounting for Stock Issued toEmployees”, and related interpretations, in accounting for stock options andrestricted stock granted to its employees under its 1998 Equity Incentive Planand applies the disclosure requirements of Statement of Financial AccountingStandards No. 123 “Accounting for Stock Issued to Employees” (“SFAS 123”).  Equity instruments issued to non-employeesare accounted for in accordance with SFAS 123.

 

The following table illustrates the effect on net loss and loss pershare for the three and six months ended June 30, 2003 and 2002 if the Companyhad applied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation.

 
|                                                                                                             |   | **For the  three months ended:** |        | **For the  six months ended:** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|--------|
|                                                                                                             |   | **June 30,  2003**               |        | **June 30,  2002**             |   | **June 30,  2003** |   | **June 30,  2002** |   |
|                                                                                                             |   |                             |        |                           |   |   |   |   |   |
| Net loss, as  reported                                                                                           |   | $                                | (16,428,828 | )                              | $      | (9,019,674 | ) | $ | (27,696,068 | ) | $ | (14,823,637 | ) |
| Add stock-based  employee compensation expense included in reported net loss                                     |   | 97,958                           |        | —                         |   | 97,958 |   | — |   |
| Deduct total  stock-based employee compensation expense determined under fair-value-based  method for all awards |   | (1,929,433                       | )           | (1,420,106                     | )      | (3,835,220 | ) | (4,666,261 | ) |
| Pro forma net  loss                                                                                              |   | $                                | (18,260,303 | )                              | $      | (10,439,780 | ) | $ | (31,433,330 | ) | $ | (19,489,898 | ) |
|                                                                                                             |   |                             |        |                           |   |   |   |   |   |
| Basic and  diluted loss per share of common stock                                                                |   |                             |        |                           |   |   |   |   |   |
| As reported                                                                                                      |   | $                                | (0.87       | )                              | $      | (0.48 | ) | $ | (1.47 | ) | $ | (0.79 | ) |
| Pro forma                                                                                                        |   | $                                | (0.97       | )                              | $      | (0.56 | ) | $ | (1.67 | ) | $ | (1.04 | ) |

 

The effects of applying SFAS 123 in this pro forma disclosure are notindicative of future amounts.  SFAS 123did not apply to awards prior to 1995. Additional awards in future periods are anticipated.

 

6

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**Note 3  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  six months ended:** |   |
|-------------------------------------|--------|----------------------------------|-------------|--------------------------------|--------|
|                                |   | **June 30,  2003**               |        | **June 30,  2002**             |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Numerator:                          |   |                             |        |                           |   |   |   |   |   |
| Net loss                            |   | $                                | (16,428,828 | )                              | $      | (9,019,674 | ) | $ | (27,696,068 | ) | $ | (14,823,637 | ) |
|                                |   |                             |        |                           |   |   |   |   |   |
| Denominator:                        |   |                             |        |                           |   |   |   |   |   |
| Weighted average shares outstanding |   | 18,826,670                       |        | 18,691,558                     |   | 18,817,902 |   | 18,694,825 |   |
|                                |   |                             |        |                           |   |   |   |   |   |
| Loss per share - basic and diluted  |   | $                                | (0.87       | )                              | $      | (0.48 | ) | $ | (1.47 | ) | $ | (0.79 | ) |
|                                |   |                             |        |                           |   |   |   |   |   |
| Potential common share equivalents: |   |                             |        |                           |   |   |   |   |   |
| Stock options                       |   | 3,294,901                        |        | 2,954,613                      |   | 3,284,447 |   | 2,847,743 |   |

 

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

 

**Note 4  Transactions with Related Parties**

 

The following table provides further detail of the related partyexpenses reflected in the statements of operations.

 
|                            |   |              |   | **For the  three months ended:** |   | **For the  six months ended:** |   |
|---------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Related Party**               |   | **Expense  Type** |   | **June 30,  2003**               |   | **June 30,  2002**             |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Akorn,  Inc.                    |   | Consulting        |   | $                                | 3,750  |                           | $      | 3,919 |   | $ | 11,419 |   | $ | 7,838 |   |
| E.J.  Financial Enterprises     |   | Consulting        |   | 31,250                           |   | 31,250                         |   | 62,500 |   | 62,500 |   |
| E.J. Financial Enterprises      |   | Direct Expenses   |   | 409                              |   | 241                            |   | 682 |   | 1,162 |   |
| Unicorn Pharma Consulting, Inc. |   | Consulting        |   | —                           |   | 32,554                         |   | — |   | 32,554 |   |
| Total related party expenses    |   |              |   | $                                | 35,409 |                           | $      | 67,964 |   | $ | 74,601 |   | $ | 104,054 |   |

 

In December of 2001, the Boardof Directors of the Company appointed a committee composed of the independentmembers of the Board of Directors (the “Special Committee”) to consider apotential transaction between Akorn, Inc., a publicly traded company, andNeoPharm.  Dr. John N. Kapoor,NeoPharm’s Chairman of the Board of Directors, is also the Chairman of theAkorn Board of Directors and holds a substantial stock position in bothcompanies.  In December 2001, followinga recommendation by the Special Committee and approval by the Board ofDirectors, the Company loaned $3,250,000 to Akorn to assist Akorn in thecompletion of its lyophilized products manufacturing facility in Decatur,Illinois.  In connection with thistransaction, the Special Committee recommended, and the Board of Directorsapproved, the following agreements: Promissory Note, dated December 20, 2001, in the original principalamount of $3,250,000 by Akorn to NeoPharm; Processing Agreement, dated December20, 2001, by and between Akorn and NeoPharm; Subordination and IntercreditorAgreement, dated December 20, 2001, by and between John N. Kapoor, as Trusteeunder The John N. Kapoor Trust, dated September 20, 1989 and NeoPharm; and aSubordination, Standby and Intercreditor Agreement, dated December 20, 2001, byand among Akorn, Akorn (New Jersey), Inc., The Northern Trust Company andNeoPharm.  The Promissory Note issued byAkorn is due in December 2006, and accrues interest at a rate equal to thatreceived on the Company’s investments in marketable securities, which is lowerthan the interest rate paid by Akorn on its other outstanding debt.  The Processing Agreement grants the Companyaccess to at least 15% of the annual lyophilization manufacturing capacity atAkorn at a discounted price, upon completion of the facility.  At the time the agreement with Akorn wasreached, Akorn anticipated the facility coming on line in 2003, atapproximately the time that NeoPharm anticipated it would need to manufacturethe Company’s lyophilized products for Phase II/III clinical trials.  The Processing Agreement provided that Akornwas to begin providing lyophilization services on or before June 30, 2003.  In 2001, the Company recorded the PromissoryNote net of a valuation allowance of $1,266,619 reflecting the differencebetween the actual loan amount and the present value of the loan using anestimated market interest rate of 10%. As of December 31, 2002, Akorn had not published financial statementsfor the third or fourth quarter of 2002. As a result of NeoPharm’s inability to adequately assess the probabilityof collection of the Promissory Note, the Company elected to record a charge tofully reserve for the Promissory Note and accrued interest as of December 31,2002.  In May 2003, Akorn publishedfinancial statements for the periods through March 31, 2003.  As of June 30, 2003, Akorn had not advisedNeoPharm of its ability to begin providing lyophilization services.  As such, NeoPharm believes that Akorn may bein breach of the June 30, 2003 performance deadline in the ProcessingAgreement.  A breach of the ProcessingAgreement would also create an Event of Default under the Promissory Note.  Because the carrying value of the PromissoryNote is zero, there would be no financial statement impact as a result of anyevent of default under or non-payment of the Promissory Note.  Akorn continues to be contractuallyobligated to complete the expansion of its Decatur facility, to manufactureNeoPharm’s NeoLipidTM products, and to repay the Promissory Note.  The Company now estimates that it will notneed the capacity provided under the Processing Agreement until 2004.

 

7

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**Note 5  Investments**

 

The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents. The carryingvalue of these investments approximates the fair market value. Short -terminvestment in marketable securities includes liquid investments purchased withan original maturity of between three months and one year. 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 tax effect, on available-for-sale securities deemed to be temporary areexcluded from earnings and are reported as a separate component of othercomprehensive income until realized. Realized gains and losses from the sale ofavailable-for-sale securities are determined on a specific identificationbasis. A decline in market value of available-for-sale securities that isdeemed to be other than temporary, results in the reduction of the carryingamount to fair value. The impairment is charged to earnings and a new costbasis for the security is established. At June 30, 2003, the Company’sinvestments in marketable securities consisted primarily of commercial paper,which are recorded at cost plus accrued interest as this approximated the fairmarket value of the securities held. Dividend and interest income arerecognized when earned. No investments were sold during the three and six monthperiods ended June 30, 2003 or 2002.

 

**Note 6 Contingencies**

 

On April 19, 2002, the Company filed a Demand for Arbitration withthe American Arbitration Association in accordance with the terms of itsLicense Agreement dated February 19, 1999 (the “License Agreement”) withPharmacia Corporation (recently acquired by Pfizer), Pharmacia andUpjohn, Inc. and Pharmacia and Upjohn Company (collectively, “Pharmacia”),for the purpose of resolving a dispute with Pharmacia concerning delays in thedevelopment programs for LEP (Liposome Encapsulated Paclitaxel) and LED(Liposome Encapsulated Doxorubicin) which were being conducted by Pharmacia.The Company contends that Pharmacia failed in its duty under the LicenseAgreement to use reasonable efforts to develop LEP and LED and that suchfailure 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 hearingbegan on May 28, 2003, was adjourned on June 27, 2003, and will reconveneon August 25, 2003. The Arbitral Panel has indicated that the taking ofevidence will conclude no later than October 7, 2003. A total of 15 additionaldays have been set aside to complete the hearing between August 25, 2003 andOctober 7, 2003. NeoPharm has completed presenting its case to the panel.

 

Under the License Agreement, NeoPharm incurred expenses during 2002related to its efforts to develop a NeoLipidTM formulation for LEP, atPharmacia’s request. The terms of the License Agreement entitle NeoPharm to bereimbursed for these expenses, and the Company has sent invoices totaling over$1,500,000 to Pharmacia for work conducted by NeoPharm to develop LEP-ETU.NeoPharm has not received payment on the invoices sent to Pharmacia and theseamounts have not been included in the results of operations.   NeoPharm asserts that it is entitled topayment on these invoices.

 

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The Company was also named in several putative class action lawsuits(the “Class Action Suits”) each of which alleges various violations of thefederal securities laws in connection with the Company’s public statementsduring the period from September 25, 2000 through April 19, 2002 asthey relate to the Company’s LEP drug. The original lawsuits also named asindividual defendants John N. Kapoor, Chairman of the Company, and James M.Hussey, the Company’s President and CEO, and Dr. Aquilur Rahman, a formerdirector and executive officer of the Company. The first of these Class ActionSuits 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. On September 16, 2002, a consolidated amendedcomplaint was filed against NeoPharm in this matter. The amended complaintshortened the class period to October 31, 2001 through April 19,2002, removed Dr. Rahman as a defendant, and added Dr. Imran Ahmad,the Company’s current Chief Scientific Officer and Senior Vice President ofResearch and Development, as a defendant. The Company intends to vigorouslydefend each and every claim in the class action suits and, on November 4,2002, moved to have the complaint dismissed. TheCompany’s motion to dismiss was granted in part and denied in part inFebruary 2003.  Dr. Kapoor wasdismissed from the lawsuit at that time. No trial date has been set. In the opinion of management, resolution ofthis litigation is not currently expected to have a material adverse impact onthe results of operations or financial position of the Company, as the Companycurrently maintains insurance covering its officers and directors.

 

The pharmaceutical industry has traditionally experienced difficulty inmaintaining product liability insurance coverage at desired levels. To date, nosignificant product liability suit has ever been filed against the Company.However, if a suit were filed and a judgment entered against the Company, itcould have a material adverse effect upon the Company’s operations andfinancial condition. While the Company maintains insurance to cover the use ofits products in clinical trials, the Company does not maintain insurancecovering the sale of its products nor is there any assurance that it will beable to obtain or maintain such insurance on acceptable terms or with adequatecoverage against potential liabilities.

 

**Note 7 Guarantees**

 

In November 2002, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtednessof Others, an interpretation of FASB Statements No. 5, 57, and 107 andRescission of FASB Interpretation No. 34.” FIN 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.It also requires that a guarantor recognize, at the inception of a guarantee, aliability for the fair value of certain guarantees. The initial recognition andmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.

 

The Company enters into indemnification provisions under its agreementswith other companies in its ordinary course of business, typically withbusiness partners, contractors, clinical sites and customers. Under theseprovisions the Company generally indemnifies and holds harmless the indemnifiedparty for losses suffered or incurred by the indemnified party as a result ofthe Company’s activities. These indemnification provisions generally survivetermination of the underlying agreement. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions is unlimited. The

 

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Company has not incurred material costs to defend lawsuits or settleclaims related to these indemnification agreements. As a result, the estimatedfair value of these agreements is minimal. Accordingly, the Company has noliabilities recorded for these agreements as of June 30, 2003.

 

**Note 8 Subsequent Event**

 

On July 1, 2003, the Company’s Board of Directors adopted a StockholderRights Plan. Under the plan, NeoPharm issued a dividend of one right for eachshare of its common stock held by stockholders of record as of the close ofbusiness on July 28, 2003.  Each rightwill initially entitle stockholders to purchase a fractional share ofNeoPharm’s preferred stock for $112.00. However, the rights are not immediatelyexercisable and will become exercisable only upon the occurrence of certainevents. If a person or group acquires, or announces a tender or exchange offerthat would result in the acquisition of 15% or more of NeoPharm’s common stockwhile the stockholder rights plan remains in place, then, unless the rights areredeemed by NeoPharm for $0.001 per right, the rights will become exercisableby all rights holders except the acquiring person or group for shares ofNeoPharm or shares of the third party acquirer having a value of twice theright’s then-current exercise price.

 

**Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

The following should be read in conjunction with the financialstatements and related footnotes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in the Company’s AnnualReport on Form 10-K.  The resultsdiscussed below are not necessarily indicative of the results to be expected inany future periods.  The followingdiscussion contains forward-looking statements that are subject to risks anduncertainties which could cause actual results to differ from statements made.See “Forward Looking Statements” below.

 

**Overview**

 

We are a biopharmaceutical company engaged in the research, developmentand commercialization of drugs for the treatment of various cancers. Ourcorporate strategy is to become a leader in the research, development andcommercialization of new and innovative anti-cancer treatments. Since we begandoing business in June 1990, we have devoted our resources primarily tofunding research and product development programs. We expect tocontinue to incur losses as we continue our research and developmentactivities, which include the sponsorship of human clinical trials for our compounds.

 

During the quarter ended June 30, 2003, we continued to advance ourPhase I/II compounds towards Phase II/III clinical trials. The compoundscurrently in Phase I/II clinical trials include: IL13-PE38 for the treatment ofglioblastoma multiforme; LE-SN38 (liposomal SN38) for the treatment ofcolorectal and other cancers; LEM (liposomal mitoxantrone) for the treatment ofprostate cancer; and, LErafAON (liposomal craf antisense oligonucleotide) forthe treatment of radiation and/or chemotherapy resistant tumors. In addition,we expect to begin a Phase I bridging study in August 2003 for LEP-ETU, our newNeoLipidTM formulation of liposomal paclitaxel. We anticipate the initiation of the pivotal Phase III clinical trial forour lead compound, IL13-PE38, in 2003.

 

Research and development expenses increased by approximately 16% in thesecond quarter of 2003 as compared to the second quarter of 2002, and increasedapproximately 26% during the first half of 2003 versus the first half of 2002.  The Company’s original estimates for 2003planned for total research and development expenses to be unchanged during thefirst half of 2003 as compared to the same period of 2002.  The difference between projected and actualresearch and development expenses was due to higher than planned expendituresfor the clinical development of our compounds, primarily IL13-PE38.  The larger than planned IL13-PE38 clinicalexpenses were a result of faster than anticipated enrollment in the currentPhase I/II studies and expenses incurred to prepare for the planned Phase IIIclinical trials, including the production of the Phase III drug supply during2003 instead of 2004, as previously planned. IL13-PE38 expenses are anticipated to be incurred in excess of plan forthe remainder of 2003.  However, most ofthese expenses are related to IL13-PE38 Phase III expenses which werepreviously expected to be incurred in 2004. In addition, enrollment of patients in the Phase I clinical trial forLE-SN38 was faster than planned, resulting in expenses in excess of previousestimates for the first half of 2003.

 

The increase in general and administrative expenses in the secondquarter and first half of 2003 as compared with the same periods in 2002 wasalmost entirely related to expenses incurred in connection with prosecuting ourarbitration claim against Pharmacia and Upjohn Company (see Part II Item 1.Legal Proceedings). We have incurred approximately $9 million in arbitrationrelated expenses during 2003 and, at this time, anticipate at least $2 millionin additional arbitration related expenses for the remainder of 2003 due to theextension of time granted by the arbitral panel to hear the remainder of thecase.  Previous estimates assumed thatarbitration related expenses would total approximately $7 million in 2003 andthat the hearing would be concluded by June 30, 2003.  While we do not currently anticipate incurring furtherarbitration related expenses after 2003, this could change if the arbitrationhearing is extended again.

 

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As a result of the additional arbitration expenses incurred in thesecond quarter of 2003, anticipated arbitration related expenses in the secondhalf of 2003 and new estimates relating to the timing of research anddevelopment expenses related to the clinical development of our compounds, weare currently projecting a net loss for 2003 in the range of approximately$2.66 - $2.70 per share as compared to previous estimates of $1.56 - $1.74 pershare.  Previous estimates did not fullyanticipate the size of the arbitration related expenses necessary to conductthe arbitration hearing during the second quarter, the extension of the date tocomplete the hearing from June 30, 2003 until October 7, 2003, and the 2003 componentof expenses for conducting the Phase III clinical trial for IL13-PE38previously planned to be incurred in 2004. In addition, the Company had previously intended to slow the developmentof its NeoLipidTM compounds, if necessary, to offset increases in 2003 expensesrelated to arbitration related expenses and expenses incurred in 2003 forIL13-PE38 Phase III drug supply production previously anticipated for2004.  The Company, however, has decidedthat the progress being made in the NeoLipidTM development programs,specifically for LE-SN38 and LEP, should not be jeopardized by delays, at thistime.  At the currently planned level ofexpenditures, we estimate that we have sufficient cash resources to continuedevelopment of our products for at least the next 18 months.  We remain committed to the commercializationof all of our compounds currently under development, and are consideringvarious options to fund the clinical development of the multiple compounds usingour proprietary NeoLipidTM liposomal technology. We continue to closely monitorall of our development programs to insure that only projects that show activityin human clinical trials continue to receive financial support.

 

**Results of Operations– Three Months Ended June 30, 2003 vs. Three Months Ended June 30, 2002.**

 

The Companyrecorded no revenue for the three months ended June 30, 2003 or for the threemonths ended June 30, 2002.

 

Research anddevelopment expense for the three months ended June 30, 2003 was $8,767,286compared to $7,568,786 for the same period in 2002. During the second quarterof 2003, we continued to advance our compounds in Phase I/II clinicaldevelopment towards Phase II/III clinical trials and we also continued to makeprogress on the pre-clinical research being conducted to prepare for theinitiation of clinical trials for our other compounds under development.  As a result, the overall increase inresearch and development costs was the result of increased expenses ofapproximately $546,000 related to the clinical and pre-clinical development ofour compounds, increased payroll and consulting expense of approximately$481,000 related to increases in our research and development staff, and anincrease of approximately $172,000 in expenses incurred for the operation of theresearch and development facility in Waukegan, Illinois.

 

General and administrative expenses (including related party expenses)for the three months ended June 30, 2003 were $7,916,096 compared to $2,143,598for the same period in 2002. The overall increase in general and administrativeexpenses was the result of increased expenses of approximately $5,651,000 dueto work done on the arbitration claim filed against Pharmacia (see Part II Item 1. Legal Proceedings), anincrease of approximately $248,000 in other legal and professional fees due tothe Company’s efforts to improve its intellectual property position and complywith new securities laws and regulations, increased insurance expense ofapproximately $100,000 for the Company’s directors and officers liabilityinsurance and commercial insurance premiums, increased general andadministrative payroll expenses of approximately $60,000 and a decrease ingeneral office expenses of approximately $287,000 resulting from the Company’sefforts to cut expenses.

 

The Companygenerated interest income on cash and investments of $254,554 and $692,710 forthe three months ended June 30, 2003 and June 30, 2002, respectively.  The decrease in interest income for thesecond quarter of 2003 was primarily due to a decrease in short-term interestrates earned on the Company’s investment portfolio between the second quarterof 2002 and the second quarter of 2003, combined with a reduction in the totalcash available for investing during the second quarter of 2003 as the Companyused its cash to fund the development of its compounds.

 

Net loss forthe three months ended June 30, 2003 was $16,428,828, or $<0.87> pershare basic and diluted, compared to net loss of $9,019,674, or $<0.48>per share basic and diluted, for the three months ended June 30, 2002.

 

**Results of Operations– Six Months Ended June 30, 2003 vs. Six Months Ended June 30, 2002.**

 

The Companyrecorded no revenue for the six months ended June 30, 2003 or for the sixmonths ended June 30, 2002.

 

Research anddevelopment expense for the six months ended June 30, 2003 was $15,875,842compared to $12,642,395 for the same period in 2002. The overall increase inresearch and development costs was the result of increased expenses ofapproximately $1,548,000 related to the clinical and pre-clinical developmentof our compounds, increased payroll and consulting expense of approximately$1,397,000 related to increases in our research and development staff, and anincrease of approximately $288,000 in expenses incurred for the operation ofthe research and development facility in Waukegan, Illinois.

 

 

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General and administrative expenses (including related party expenses)for the six months ended June 30, 2003 were $12,359,672 compared to $3,467,421for the same period in 2002. The overall increase in general and administrativeexpenses was the result of increased expenses of approximately $8,595,000 dueto work done on the arbitration claim filed against Pharmacia (see Part II Item 1. Legal Proceedings), anincrease of approximately $289,000 in other legal and professional fees due tothe Company’s efforts to improve its intellectual property position and complywith new securities laws and regulations, increased insurance expense ofapproximately $203,000 for the Company’s directors and officers liabilityinsurance and commercial insurance premiums, increased general andadministrative payroll expenses of approximately $74,000 and a decrease ingeneral office expenses of approximately $269,000 resulting from the Company’sefforts to cut expenses.

 

The Company generated interest income on cash and investments of$539,446 and $1,286,179 for the six months ended June 30, 2003 and June 30,2002, respectively.  The decrease ininterest income for the first half of 2003 was primarily due to a decrease inshort-term interest rates earned on the Company’s investment portfolio betweenthe first half of 2002 and the first half of 2003, combined with a reduction inthe total cash available for investing during the first half of 2003 as theCompany used its cash to fund the development of its compounds.

 

Net loss for the six months ended June 30,2003 was $27,696,068, or $<1.47> per share basic and diluted, compared tonet loss of $14,823,637, or $<0.79> per share basic and diluted, for thesix months ended June 30, 2002.

 

**Liquidity and CapitalResources**

 

At June 30, 2003, we had approximately $66,284,000 in cash and cashequivalents and short-term investments and net working capital of approximately$60,193,000. We believe that our cash and cash equivalents and short-terminvestments should be adequate to fund operations for at least the next18 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 twelve monthsto maturity.

 

Our assets at June 30, 2003 were approximately $72,038,000 compared to$95,937,000 at December 31, 2002. This decrease in assets was primarilydue to a decrease of cash and cash equivalents and investments in short-termmarketable securities of approximately $24,816,000 as a result of cash used inoperating activities during the first six months of 2003.

 

Our liabilities at June 30, 2003 increased to approximately $7,668,000from approximately $4,028,000 at December 31, 2002. This increase wasprimarily attributable to increased accrued legal expenses of approximately$2,955,000 as a result of the arbitration with Pharmacia.  Other factors included an increase inaccrued compensation of approximately $519,000, a decrease in accrued clinicaltrial expenses of approximately $133,000, a decrease in trade payables ofapproximately $26,000, and an increase in other accrued expenses ofapproximately $325,000.

 

We may seek to satisfy our future funding requirements through publicor private offerings of securities, with collaborative or other arrangementswith corporate 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 AccountingPolicies**

 

In preparing the Company’s financial statements in conformity withaccounting principles generally accepted in the United States of America,management must make a variety of decisions which impact the reported amountsand related disclosures. Such decisions include the selection of theappropriate accounting principles to be applied, the assumptions on which tobase accounting estimates, and the consistent application of those accountingprinciples. Due to the type of industry in which the Company operates and thenature of its business, the following accounting policies are those that managementbelieves are most important to the portrayal of the Company’s financialcondition and results and that require management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

 

*Cash Equivalents andInvestments*

 

The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents. The carryingvalue of these investments approximates the fair market value. Short-terminvestment in marketable securities includes liquid investments purchased withan original maturity of between three months and one year. 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 

 

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berecorded at fair market value. Unrealized gains and losses, net of related taxeffect, on available-for-sale securities 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,results in the reduction of the carrying amount to fair value. The impairmentis charged to earnings and a new cost basis for the security is established.

 

*Income Taxes*

 

Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. Management provides valuation allowances against the deferredtax asset for amounts which are not considered “more likely than not” to berealized.

 

In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment.

 

*Stock-BasedCompensation*

 

The Company applies the intrinsic-value-based method of accountingprescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations including FASB Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB Opinion No. 25*, issuedin March 2000, to account for its fixed-plan stock options. Under this method,compensation cost is recorded on the date of grant only if the current marketprice of the underlying stock exceeded the exercise price. SFAS No. 123, *Accounting for Stock-Based Compensation*,established accounting and disclosure requirements using a fair-value-basedmethod of accounting for stock-based employee compensation plans. As allowed bySFAS No. 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 andDevelopment*

 

Research and development costs are expensed when incurred. These costsinclude, among other things, consulting fees and costs reimbursed to thirdparties under license and research agreements. Payments related to theacquisition of technology rights, for which development work is in process, areexpensed and considered a component of research and development costs. TheCompany also allocates indirect costs, consisting primarily of operationalcosts for administering research and development activities, to research anddevelopment expenses.

 

**Forward LookingStatements**

 

Any statements made by NeoPharm, Inc. (“we”, “us”, “our”, or the“Company”) in this quarterly report that are forward looking are made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995.  The Company cautions readersthat important factors may affect the Company’s actual results and could causesuch results to differ materially from forward-looking statements made by or onbehalf of the Company.  Such factorsinclude, but are not limited to, those risks and uncertainties relating todifficulties or delays in development, testing, regulatory approval, productionand marketing of the Company’s drug candidates, uncertainty regarding theoutcome of damages claims made by or against the Company, unexpected adverseside effects or inadequate therapeutic efficacy of the Company’s drugcandidates that could slow or prevent products coming to market, theuncertainty of patent protection for the Company’s intellectual property ortrade secrets, and other factors referenced under “Risk Factors” in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

**Item 3 –Quantitative and Qualitative Disclosures about Market Risk**

 

As of June 30,2003, we did not own any derivative instruments, but we were exposed to marketrisks, primarily changes in U.S. interest rates.  As of June 30, 2003, we held total cash and investments of$66,283,987.  Maturities range from lessthan one month to approximately 7 months. Declines in interest rates over time will reduce our interest income fromour investments.  Based upon our balanceof cash, cash equivalents and marketable securities as of June 30, 2003, adecrease in interest rates of 1.0% would cause a corresponding decrease in ourannual interest income of approximately $663,000.

 

 

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**Item 4 – Controlsand Procedures**

 

As of June 30, 2003, 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.

 

During the three months ended June 30, 2003, there were no significantchanges in our internal controls or in other factors that could significantlyaffect internal controls.

 

 

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**PART II - OTHERINFORMATION**

 

Item 1.                                                             LegalProceedings

 

On April 19, 2002, the Company filed a Demand for Arbitration withthe American Arbitration Association in accordance with the terms of itsLicense Agreement dated February 19, 1999 (the “License Agreement”) withPharmacia Corporation (recently acquired by Pfizer), Pharmacia andUpjohn, Inc. and Pharmacia and Upjohn Company (collectively, “Pharmacia”),for the purpose of resolving a dispute with Pharmacia concerning delays in thedevelopment programs for LEP (Liposome Encapsulated Paclitaxel) and LED (LiposomeEncapsulated Doxorubicin) which were being conducted by Pharmacia. The Companycontends that Pharmacia failed in its duty under the License Agreement to usereasonable efforts to develop LEP and LED and that such failure constitutes abreach of the License Agreement. The Company further contends that Pharmaciabreached its duty to consult with NeoPharm on the progress of the drugdevelopment program and thereby impaired NeoPharm’s ability to monitor thedevelopment of these compounds. The Company is seeking all damages to which itis entitled. NeoPharm believes that these damages are substantial. OnMay 16, 2002, Pharmacia responded by denying the Company’s allegations,asserting various counterclaims and seeking restitution of monies paid, reimbursementof out-of-pocket expenses and substantial punitive damages. Subsequently,Pharmacia stated in a letter dated November 19, 2002, that it did notintend to move forward with the clinical development of NeoPharm’s NeoLipidTMLEP (LEP-ETU) because of its contention that NeoPharm had not providedPharmacia with sufficient product data and test samples, a claim which NeoPharmdenies. Pharmacia also stated that it would not continue to develop the earlierformulations of LEP and LED. Although Pharmacia indicated that it did notintend to continue with the clinical development of LEP and LED, Pharmacia didnot indicate that it had terminated the License Agreement. As a result, inNovember 2002, NeoPharm terminated the License Agreement in order to allowNeoPharm to continue with the further development of NeoLipidTM formulations ofLEP, as well as LED. Pharmacia disputes the propriety of the termination andhas included the termination as part of the arbitration hearing. InJanuary 2003, NeoPharm reached an agreement with Pharmacia that allowsNeoPharm to reference Pharmacia’s LEP Investigational New Drug application(IND) and start human clinical trials with LEP-ETU. The arbitration proceedingis currently ongoing and no prediction can be made as to the outcome of theclaims that the Company and Pharmacia have asserted against each other, or theamounts, if any, which either party may be awarded against the other, whichrecoveries or liabilities could be substantial. The arbitration hearing beganon May 28, 2003, was adjourned on June 27, 2003, and will reconvene onAugust 25, 2003. The Arbitral Panel has indicated that the taking of evidencewill conclude no later than October 7, 2003. A total of 15 additional days havebeen set aside to complete the hearing between August 25, 2003 and October 7,2003. NeoPharm has completed presenting its case to the panel.

 

The Company was also named in severalputative class action lawsuits (the “Class Action Suits”) each of which allegesvarious violations of the federal securities laws in connection with theCompany’s public statements during the period from September 25, 2000through April 19, 2002 as they relate to the Company’s LEP drug. Theoriginal lawsuits also named as individual defendants John N. Kapoor, Chairmanof the Company, and James M. Hussey, the Company’s President and CEO, andDr. Aquilur Rahman, a former director and executive officer of theCompany. The first of these Class Action Suits was filed on April 26, 2002and all of the Class Action Suits have been filed in the United States DistrictCourt for the Northern District of Illinois, Eastern Division. OnSeptember 16, 2002, a consolidated

 

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amended complaint was filed against NeoPharmin this matter. The amended complaint shortened the class period toOctober 31, 2001 through April 19, 2002, removed Dr. Rahman as adefendant, and added Dr. Imran Ahmad, the Company’s current ChiefScientific Officer and Senior Vice President of Research and Development, as adefendant. The Company intends to vigorously defend each and every claim in theclass action suits and, on November 4, 2002, moved to have the complaintdismissed. The Company’s motion to dismiss was granted in part and denied inpart in February 2003.  Dr. Kapoorwas dismissed from the lawsuit at that time. No trial date has been set.

 

Item 2.                                                           Changesin Securities and Use of Proceeds

None

 

Item 3.                                                           DefaultsUpon Senior Securities

None

 

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

 

On June 5, 2003 the Company held its Annual Meeting of Stockholders toelect six directors to serve until the 2004 Annual Meeting ofStockholders.  With respect to theelection for directors, the votes were as follows:

 
|              |   | **VOTES FOR** |   | **VOTES  AGAINST** |   | **VOTES  WITHHELD** |
|-------------------|--------|---------------|--------|--------------------|--------|---------------------|
|              |   |          |   |               |   |                |
| John N.  Kapoor   |   | 15,230,080    |   | 0                  |   | 158,533             |
| James M.  Hussey  |   | 15,228,100    |   | 0                  |   | 160,513             |
| Matthew P.  Rogan |   | 14,483,314    |   | 0                  |   | 905,299             |
| Kaveh T.  Safavi  |   | 15,274,923    |   | 0                  |   | 113,690             |
| Sander A.  Flaum  |   | 15,325,343    |   | 0                  |   | 63,270              |
| Erick E.  Hanson  |   | 15,305,438    |   | 0                  |   | 83,175              |

 

Item 5.                                                           OtherInformation

None

 

Item 6.                                                           Exhibitsand Reports on Form 8-K

 

(a)          Exhibits

 

Exhibit 31.1                      Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes–OxleyAct of 2002.

 

Exhibit 31.2                      Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes–OxleyAct of 2002.

 

Exhibit 32.1                      Certificationof the Chief Executive Officer pursuant to section 906 of the Sarbanes–OxleyAct of 2002.

 

Exhibit 32.2                      Certificationof the Chief Financial Officer pursuant to Section 906 of the Sarbanes–OxleyAct of 2002.

 

(b)         Reports on Form 8-K

 

On May 14, 2003, the Company filed a reporton Form 8-K incorporating a press release reporting the Company’s financialresults for the first quarter ended March 31, 2003.

 

On June 30, 2003, the Company filed a reporton Form 8-K incorporating a press release providing informationon the revised schedule for concluding the Registrant’s ongoing arbitrationhearing with Pharmacia and Upjohn Company (now Pfizer).

 

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**SIGNATURE PAGE**

 

**Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.**

 
|                  | NEOPHARM, INC. |
|-----------------------|----------------|
| Date: August 14, 2003 | By:            | /s/  Lawrence A. Kenyon |
|                  |           | Lawrence A. Kenyon, |
|                  |           | *Chief Financial  Officer  (Principal Accounting Officer and  Principal Financial Officer)* |

 

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