**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 June 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                   ** |

 

 

**Commissionfile 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) |

 

**150Field Drive**

**Suite195**

**LakeForest, Illinois   60045**

(Address of principal executive offices)  (Zip Code)

 

**(847)295-8678**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1)  has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý   No o

 

As of July 31, 2002 thenumber of shares outstanding of each of the issuer’s classes of common stock wasas follows:

 

| **Title of  each class**           |   | **Number of  shares outstanding** |
|------------------------------------|--------|-----------------------------------|
| Common Stock ($.0002145 par value) |   | 16,263,529                        |

 

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NEOPHARM, INC.

(A DELAWARE CORPORATION)

 
| PART I. FINANCIAL  INFORMATION |   |   |   |
|--------------------------------|--------|--------|--------|
|                           |   |   |   | Item 1. | Financial Statements |
|                           |   |   |   |   | Balance Sheets as  of June 30, 2002 and December 31, 2001 |
|                           |   |   |   |   | Statements  of Operations for the three and six months ended June 30, 2002 and June 30,  2001 |
|                           |   |   |   |   | Statements of Cash Flows for the six months ended  June 30, 2002 and June 30, 2001 |
|                           |   |   |   |   | Notes to Financial Statements |
|                           |   |   |   | Item 2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                           |   |   |   | Item 3. | Quantitative and  Qualitative Disclosures About Market Risk |
| 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                 |   |   |   |
|                                |        |        |        |  |  |  |  |  |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1****- Financial Statements**

 

**NEOPHARM,INC.**

**(ADelaware Corporation)**

**Balance Sheets**

 
|                                                                                                                                                                   |   | **June 30, 2002** |        | **December 31,****2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|--------------------------|--------|
|                                                                                                                                                                   |   | **(Unaudited)**   |        |                     |   |
| **ASSETS**                                                                                                                                                             |   |              |        |                     |   |
| Current assets:                                                                                                                                                        |   |              |        |                     |   |
| Cash and cash equivalents                                                                                                                                              |   | $                 | 95,951,911  |                     | $      | 106,525,864 |   |
| Short-term investment in marketable securities                                                                                                                         |   | 12,529,476        |        | 15,030,045               |   |
| Prepaid expenses                                                                                                                                                       |   | 1,521,499         |        | 469,862                  |   |
| Other receivables                                                                                                                                                      |   | 100,980           |        | 131,718                  |   |
| Total current assets                                                                                                                                                   |   |              | 110,103,866 |                     |   | 122,157,489 |   |
| Equipment and furniture:                                                                                                                                               |   |              |        |                     |   |
| Equipment                                                                                                                                                              |   | 2,690,957         |        | 2,260,949                |   |
| Furniture                                                                                                                                                              |   | 756,856           |        | 486,658                  |   |
| Leasehold improvements                                                                                                                                                 |   | 399,647           |        | 254,096                  |   |
| Less accumulated depreciation                                                                                                                                          |   | (1,214,762        | )           | (686,061                 | )      |
| Total equipment and furniture, net                                                                                                                                     |   | 2,632,698         |        | 2,315,642                |   |
| Long-term investment in marketable securities                                                                                                                          |   | 2,242,729         |        | 2,738,563                |   |
| Related party note receivable, net                                                                                                                                     |   | 2,083,789         |        | 1,983,381                |   |
| Total assets                                                                                                                                                           |   | $                 | 117,063,082 |                     | $      | 129,195,075 |   |
|                                                                                                                                                                   |   |              |        |                     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                          |   |              |        |                     |   |
| Current liabilities:                                                                                                                                                   |   |              |        |                     |   |
| Accrued clinical trial expense                                                                                                                                         |   | $                 | 2,340,033   |                     | $      | 632,365 |   |
| Accounts payable                                                                                                                                                       |   | 607,496           |        | 537,465                  |   |
| Accrued compensation                                                                                                                                                   |   | 877,138           |        | 221,862                  |   |
| Other accrued expenses                                                                                                                                                 |   | 528,419           |        | 459,833                  |   |
| Total current liabilities                                                                                                                                              |   | $                 | 4,353,086   |                     | $      | 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: 16,263,529 and 16,237,779 shares  issued and outstanding, respectively |   | 3,492             |        | 3,484                    |   |
| Additional paid-in capital                                                                                                                                             |   | 169,938,622       |        | 169,748,547              |   |
| Accumulated deficit                                                                                                                                                    |   | (57,232,118       | )           | (42,408,481              | )      |
| Total stockholders’ equity                                                                                                                                        |   | $                 | 112,709,996 |                     | $      | 127,343,550 |   |
| Total liabilities and stockholders’ equity                                                                                                                        |   | $                 | 117,063,082 |                     | $      | 129,195,075 |   |
|                                                                                                                                                                        |        |                   |             |                          |        |  |  |  |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

2

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**NEOPHARM,INC.**

**(ADelaware Corporation)**

**Statements of Operations**

**Threeand Six Months Ended June 30, 2002 and 2001**

(Unaudited)

 
|                                | **Three Months Ended** |       | **Six Months Ended** |   |
|-------------------------------------|------------------------|------------|----------------------|--------|
|                                | **June 30, 2002**      |       | **June 30, 2001**    |   | **June 30, 2002** |   | **June 30, 2001** |   |
| Revenues                            | $                      | —     |                 | $      | — |   | $ | — |   | $ | — |   |
| Expenses:                           |                   |       |                 |   |   |   |   |   |
| Research and development            | 7,568,786              |       | 2,982,161            |   | 12,642,395 |   | 4,565,557 |   |
| General and administrative          | 2,075,634              |       | 1,004,473            |   | 3,363,367 |   | 1,941,107 |   |
| Related party expenses              | 67,964                 |       | 57,099               |   | 104,054 |   | 97,509 |   |
| Total expenses                      | 9,712,384              |       | 4,043,733            |   | 16,109,816 |   | 6,604,173 |   |
| Loss from operations                | (9,712,384             | )          | (4,043,733           | )      | (16,109,816 | ) | (6,604,173 | ) |
| Other income                        | —                 |       | —               |   | — |   | 8,049 |   |
| Interest income                     | 692,710                |       | 1,537,191            |   | 1,286,179 |   | 3,505,755 |   |
| Net loss                            | $                      | (9,019,674 | )                    | $      | (2,506,542 | ) | $ | (14,823,637 | ) | $ | (3,090,369 | ) |
| Net loss per share                  |                   |       |                 |   |   |   |   |   |
| Basic and diluted                   | $                      | (0.55      | )                    | $      | (0.16 | ) | $ | (0.91 | ) | $ | (0.19 | ) |
| Weighted average shares outstanding |                   |       |                 |   |   |   |   |   |
| Basic and diluted                   | 16,263,529             |       | 16,127,780           |   | 16,256,370 |   | 16,125,682 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**NEOPHARM,INC.**

**(ADelaware Corporation)**

**Statementsof Cash Flows**

**Sixmonths Ended June 30, 2002 and 2001**

(Unaudited)

 
|                                                                         |   | **Six Months Ended** |        |
|------------------------------------------------------------------------------|--------|----------------------|-------------|
|                                                                         |   | **June 30, 2002**    |        | **June 30, 2001** |   |
| Cash flows used in operating activities:                                     |   |                 |        |   |   |
| Net loss                                                                     |   | $                    | (14,823,637 | ) | $ | (3,090,369 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities: |   |                 |        |   |   |
| Depreciation and amortization                                                |   | 528,701              |        | 160,699 |   |
| Compensation expense from non-employee stock options                         |   | 79,600               |        | 111,550 |   |
| Increase in other assets                                                     |   | (1,121,307           | )           | (681,108 | )  |
| Increase in current liabilities                                              |   | 2,501,562            |        | 476,800 |   |
| Net cash and cash equivalents used in operating  activities                  |   | (12,835,081          | )           | (3,022,428 | )  |
|                                                                         |   |                 |        |   |   |
| Cash flows provided by/(used in) investing activities:                       |   |                 |        |   |   |
| Proceeds from maturities of marketable securities                            |   | 21,719,019           |        | — |   |
| Purchase of marketable securities                                            |   | (18,722,616          | )           | (7,592,556 | ) |
| Purchase of equipment and furniture                                          |   | (845,758             | )           | (1,414,432 | ) |
| Net cash and cash equivalents provided by/(used in)  investing activities    |   | 2,150,645            |        | (9,006,988 | ) |
|                                                                         |   |                 |        |   |   |
| Cash flows from financing activities:                                        |   |                 |        |   |   |
| Proceeds from issuance of common stock                                       |   | 110,483              |        | 28,843 |   |
| Net cash and cash equivalents provided by financing  activities              |   | 110,483              |        | 28,843 |   |
|                                                                         |   |                 |        |   |   |
| Net decrease in cash and cash equivalents                                    |   | (10,573,953          | )           | (12,000,573 | ) |
| Cash and cash equivalents, beginning of period                               |   | 106,525,864          |        | 139,777,330 |   |
| Cash and cash equivalents, end of period                                     |   | $                    | 95,951,911  |   | $ | 127,776,757 |   |
|                                                                         |   |                 |        |   |   |
| Supplemental disclosure of cash paid for:                                    |   |                 |        |   |   |
| Interest                                                                     |   | $                    | —      |   | $ | — |   |
| Income taxes                                                                 |   | $                    | —      |   | $ | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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** **

**NEOPHARM, INC.**

**(A Delaware Corporation)**

**NOTES****TO FINANCIAL STATEMENTS**

**June 30, 2002**

 

**Note 1**  **Basis ofPresentation**

 

The financial informationherein is unaudited, other than the Balance Sheet at December 31, 2001, whichis derived from the audited financial statements.

 

The accompanyingunaudited financial statements of NeoPharm, Inc. (the “Company”) have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X. Accordingly, they do not contain all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. In theopinion of the Company, the accompanying unaudited interim financial statementscontain all adjustments (consisting of normal recurring adjustments) necessaryto present fairly the Company’s financial position as of June 30, 2002, theresults of operations for the three and six months ended June 30, 2002 and2001, and the cash flows for the six month periods ended June 30, 2002 and 2001.

 

While the Companybelieves that the disclosures presented are adequate to make the informationnot misleading, it is suggested that these financial statements be read inconjunction with the financial statements and notes included in the Company’s 2001Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

**Note 2**  **Loss PerShare**

 

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

 
|                                 | **For the three months ended:** |       | **For the six months ended:** |   |
|--------------------------------------|---------------------------------|------------|-------------------------------|--------|
|                                 | **June 30, 2002**               |       | **June 30, 2001**             |   | **June 30, 2002** |   | **June 30, 2001** |   |
| Numerator:                           |                            |       |                          |   |   |   |   |   |
| Net loss                             | $                               | (9,019,674 | )                             | $      | (2,506,542 | ) | $ | (14,823,637 | ) | $ | (3,090,369 | ) |
|                                 |                            |       |                          |   |   |   |   |   |
| Denominator:                         |                            |       |                          |   |   |   |   |   |
| Weighted average shares  outstanding | 16,263,529                      |       | 16,127,780                    |   | 16,256,370 |   | 16,125,682 |   |
|                                 |                            |       |                          |   |   |   |   |   |
|                                 |                            |       |                          |   |   |   |   |   |
| Loss per share - basic  and diluted  | $                               | (0.55      | )                             | $      | (0.16 | ) | $ | (0.91 | ) | $ | (0.19 | ) |
|                                 |                            |       |                          |   |   |   |   |   |
| Potential common share  equivalents: |                            |       |                          |   |   |   |   |   |
| Stock options                        | 583,867                         |       | 871,563                       |   | 678,572 |   | 896,052 |   |

 

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.

5

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**Note 3**  **Transactionswith 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 six months ended:** |              |
|----------------------------------|--------|------------------|---------------------------------|-------------------|-------------------------------|-------------------|
| **Related Party**                |   | **Expense Type** |                            | **June 30, 2002** |                          | **June 30, 2001** |   | **June 30, 2002** |   | **June 30, 2001** |   |
| Akorn, Inc.                      |   | Consulting       | $                               | 3,919             |                          | $                 | 25,493 |   | $ | 7,838 |   | $ | 33,330 |   |
| E.J. Financial Enterprises       |   | Consulting       | 31,250                          |              | 31,250                        |              | 62,500 |   | 62,500 |   |
| E.J.  Financial Enterprises      |   | Direct  Expenses | 241                             |              | 356                           |              | 1,162 |   | 1,679 |   |
| Unicorn  Pharma Consulting, Inc. |   | Consulting       | 32,554                          |              | 0                             |              | 32,554 |   | 0 |   |
| Total  related party expenses    |   |             | $                               | 67,964            |                          | $                 | 57,099 |   | $ | 104,054 |   | $ | 97,509 |   |
|                                  |        |                  |                                 |                   |                               |                   |  |  |  |  |  |  |  |  |  |  |  |

 

In December 2001, following approval by the Company’s Board ofDirectors, the Company loaned $3,250,000 to Akorn, Inc., an independentpublicly traded company, to assist Akorn in the completion of itslyophilization manufacturing facility in Decatur, Illinois.  The note receivable issued to Akorn is duein December 2006, and accrues interest at a rate equal to that received on theCompany’s investments in marketable securities, which is lower than theinterest rate paid by Akorn on its other outstanding debt.  In exchange, the Company has entered into amanufacturing processing agreement that grants the Company access to at least15% of the annual lyophilization manufacturing capacity at Akorn at adiscounted price, upon completion of the facility.  Dr. John N. Kapoor, Chairman of the Board and a principalshareholder of the Company, is also Chairman, CEO and a principal shareholderof Akorn.  The Company has recorded thenote receivable net of a discount reflecting the difference between the actualloan amount and the present value of the loan using an estimated marketinterest rate of 10%.  The discount isbeing amortized over the life of the loan.  During the second quarter of 2002, the Company recorded $68,586 ininterest income from this note receivable, comprised of $17,762 of accruedinterest on the note receivable and $50,824 of discount amortization.  For the first six months of 2002, theCompany recorded $133,490 in interest income from this note receivable,comprised of $33,081 of accrued interest on the note receivable and $100,409 ofdiscount 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 approximate the fair market value.  Short-term investment in marketablesecurities includes liquid investments purchased with an original maturity ofbetween three months and one year while long-term investment in marketablesecurities includes liquid investments purchased with an original maturity ofgreater than one year but less than two years. As provided by 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 June 30, 2002, the Company recorded its investmentsin marketable securities using cost plus accrued interest as this approximatedthe fair market value of the securities held. No investments were sold during the three and six month periods endedJune 30, 2002 or June 30, 2001.

 

**Note 5  Contingencies**

 

             On April 19, 2002, NeoPharm filed for arbitration toresolve a dispute with Pharmacia Corporation concerning the developmentprograms for LEP (Liposome Encapsulated Paclitaxel) and LED (LiposomeEncapsulated Doxorubicin), which are being conducted by Pharmacia.  Pharmacia subsequently responded and filed acounter claim alleging various breaches of the license agreement by NeoPharmand seeking arbitration of its claims against the Company.  In addition, subsequent to the Company'sannouncement of its arbitration demand with Pharmacia, the Company was named inseveral class action suits alleging various violations of the federalsecurities laws in connection with public statements made by the Companyconcerning LEP.  While the Company hasnot yet filed answers to these class action suits, it is the Company'sintention to vigorously defend each and every claim in the class actionsuits.  The Company anticipates furtherincreases in legal expenses during the remainder of 2002 as it pursues itsobjectives in the arbitration and the class action suits, but, at this time,the Company is unable to determine with any precision the amount or timing ofthese future legal expenses.  Inaddition, the Company is unable to predict the outcome or potential liability relatedto the arbitration or class action suits at this time.

 

**Item 2****- Management’s Discussion andAnalysis of Financial Condition 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 six anti-cancer compounds,four of which are in clinical trials. In addition, two other NeoPharm productshave been licensed to Pharmacia.  Wehave built our drug portfolio based on our two novel proprietary technologyplatforms: the NeoLipidTM electrostatic liposome drug delivery platform and atumor-targeting toxin platform. Our corporate strategy is to become a leader inthe research, development and commercialization of new and innovative anti-cancertreatments.

 

             During the second quarter of 2002, NeoPharm continued toadvance the four Phase I/II compounds under development towards Phase II/IIIclinical trials.  The drugs currently inPhase I/II clinical trials include: IL13-PE38 for the treatment of glioblastoma multiforme; LEM (LiposomeEncapsulated Mitoxantrone) for the treatment of prostate cancer; LErafAON(Liposome 

 

6

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Encapsulated crafAntisense Oligonucleotide) for the treatment of radiation and/or chemotherapyresistant tumors; and, SS1-PE38 for the treatment of mesothelioma and ovariancancer.  In addition, the Companysubmitted an IND for LE-SN38 (Liposome Encapsulated SN-38) in late June.  We anticipate the initiation of Phase I/IIclinical trials for LE-SN38 during the fourth quarter of 2002.  As progress is made in the clinicaldevelopment of our compounds, we anticipate increases in our research anddevelopment expenses.  NeoPharm hasindicated previously that we anticipate 2002 total research and developmentexpenses to increase by approximately 100% over 2001 total research anddevelopment expenses.  As of the date ofthis report, we continue to anticipate that total 2002 research and developmentexpenses will meet expectations.

 

             On April 19, 2002, NeoPharm filed for arbitration toresolve a dispute with Pharmacia Corporation concerning the developmentprograms for LEP (Liposome Encapsulated Paclitaxel) and LED (LiposomeEncapsulated Doxorubicin), which are being conducted by Pharmacia.  Pharmacia subsequently responded and filed acounterclaim alleging various breaches of the license agreement by NeoPharm andseeking arbitration of its claims against the Company.  In addition, subsequent to the Company’sannouncement of its arbitration demand with Pharmacia, the Company was named inseveral class action suits alleging various violations of the federalsecurities laws in connection with public statements made by the Companyconcerning LEP.  While the Company hasnot yet filed answers to these class action suits, it is the Company’sintention to vigorously defend each and every claim in the class actionsuits.  We anticipate further increasesin legal expenses during the remainder of 2002 as we pursue our objectives inthe arbitration and the class action suits, but, at this time, we are unable todetermine with any precision the amount or timing of these future legalexpenses.  While these anticipated legalexpenses may be significant, we do not anticipate any changes in the Company’spreviously announced projected net loss for 2002.  During the first half of 2002, the Company experienced asignificant increase in legal expenses of approximately $593,000 as comparedwith the first half of 2001.

 

**Results of Operations — Three Months EndedJune 30, 2002 vs. Three Months Ended June 30, 2001.**

 

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

 

             Research and development expense for the three-monthperiod ended June 30, 2002 was $7,568,786 compared to $2,982,161 for the sameperiod in 2001. During the second 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 research expenses of approximately $2,932,000 related to theclinical and pre-clinical development of our products, increased payroll andconsulting expense of approximately $1,365,000 related to increases in ourR&D staff, and an increase of approximately $290,000 in expenses incurredfor the operation of the research and development facility the Company openedin Waukegan, Illinois during February 2001.

 

             General and administrative expenses (including relatedparty expenses) for the three-month period ended June 30, 2002 were $2,143,598compared to $1,061,572 for the same period in 2001. The overall increase ingeneral and administrative expenses was the result of increased professionalfees of approximately $569,000 primarily due to increased legal fees, anincrease in miscellaneous general office expenses of approximately $154,000including rent, an increase of approximately $151,000 in patent and licensingexpenses for potential new products using our technology, an increase ofapproximately $148,000 for payroll and consulting expenses related to increasesin our administrative staff, and increased insurance expense of approximately$60,000 for the Company’s directors and officers liability and commercialinsurance premiums.

 

             The Company generated interest income on excess cashbalances of $692,710 and $1,537,191 for the three-month periods ended June 30,2002 and June 30, 2001, respectively. The decrease in interest income for the second quarter of 2002 wasprimarily due to a decrease in short-term interest rates earned on theCompany’s investment portfolio between the second quarter of 2001 and thesecond quarter of 2002, combined with a reduction in the total cash availablefor investing during the second quarter of 2002.

 

             Net loss for the three months ended June 30, 2002 was$9,019,674, or <$0.55> per share basic and diluted, compared to net lossof $2,506,542, or <$0.16> per share basic and diluted, for thethree-month period ended June 30, 2001.

 

**Results of Operations — Six MonthsEnded June 30, 2002 vs. Six Months Ended June 30, 2001.**

 

             The Company recorded no revenue for the six months endedJune 30, 2002 or for the six months ended June 30, 2001.

 

             Research and development expense for the six-monthperiod ended June 30, 2002 was $12,642,395 compared to $4,565,557 for the sameperiod in 2001. The overall increase in research and development costs was theresult of increased research expenses of approximately $4,701,000 related tothe clinical and pre-clinical development of our products, increased payrolland consulting expense of approximately $2,718,000 related to increases in ourR&D staff, and an increase of approximately $658,000 in expenses incurredfor the operation of the research and development facility the Company openedin Waukegan, Illinois during February 2001.

 

7

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             General and administrative expenses (including relatedparty expenses) for the six-month period ended June 30, 2002 were $3,467,421compared to $2,038,616 for the same period in 2001. The overall increase ingeneral and administrative expenses was the result of increased professionalfees of approximately $567,000 primarily due to increased legal fees, anincrease of approximately $400,000 for payroll and consulting expenses relatedto increases in our administrative staff, an increase in miscellaneous generaloffice expenses of approximately $209,000 including rent, an increase ofapproximately $159,000 in patent and licensing expenses for potential newproducts using our technology, and increased insurance expense of approximately$94,000 for the Company’s directors and officers liability and commercialinsurance premiums.

 

             The Company generated interest income on excess cashbalances of $1,286,179 and $3,505,755 for the six-month periods ended June 30,2002 and June 30, 2001, respectively. The decrease in interest income for the first half of 2002 was primarilydue to a decrease in short-term interest rates earned on the Company’sinvestment portfolio between the fourth quarter of 2000 and the second quarterof 2002, combined with a reduction in the total cash available for investingduring the first half of 2002.

 

             Net loss for the six months ended June 30, 2002 was$14,823,637, or <$0.91> per share basic and diluted, compared to net lossof $3,090,369, or <$0.19> per share basic and diluted, for the six-monthperiod ended June 30, 2001.

 

**Liquidity And Capital Resources**

 

             At June 30, 2002, we had $95,951,911 in cash and cashequivalents and net working capital of $105,750,780. 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 June 30, 2002 were $117,063,082 comparedto $129,195,075 at December 31, 2001. Our liabilities at June 30, 2002increased to $4,353,086 from $1,851,525 at December 31, 2001. This increase inliabilities was attributable to an increase in accrued clinical trial expensesof approximately $1,708,000 incurred in conducting our Phase I/II clinicaltrials due to increased patient enrollment and the initiation of additionalstudies designed to assist in the commercialization of our products, anincrease in accrued compensation of approximately $655,000 relating to accruedvacation time and sick leave as of June 30, 2002 and potential bonuses payableat the end of the year if certain employee performance milestones are achieved,and an increase in trade payables and other accrued expenses of approximately$138,000.

 

             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 on terms acceptable to us. Ifadequate financing is not available, we may be required to delay, scale back oreliminate certain of our research and development programs, relinquish rightsto certain of our technologies, cancer drugs or products, or license thirdparties to commercialize products or technologies that we would otherwise seekto develop ourselves.

 

**Forward Looking Statements**

 

             Any statements made by NeoPharm, Inc. (“we”, “us”,“our”, or the “Company”) in this quarterly report that are forward looking aremade pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  TheCompany cautions readers that important factors may affect the Company’s actualresults and could cause such results to differ materially from forward-lookingstatements made by or on behalf of the Company.  Such factors include, but are not limited to, changing marketconditions, the impact of competitive products and pricing, the timelydevelopment, approval by the Food and Drug Administration (“FDA”) and foreignhealth authorities, and market acceptance of the Company’s products indevelopment, the Company’s ability to further raise capital, the Company’sdependence on key personnel, and other factors referenced under “Risk Factors”in the Company’s Annual Report on Form 10-K for the fiscal year ended December31, 2001.

 

**PriorQuarter Financial Information**

 

             As a result of the Company having dismissed ArthurAndersen, LLP as its independent public accountants, the previously filedfinancial statements included in the Form 10-Q for the three month period endedMarch 31, 2002 were not reviewed by independent public accountants inaccordance with Rule 10-01(d) of Regulation S-X, and the filing  of the Company's Form 10-Q for that periodwas made in accordance with the Securities and Exchange Commission's TemporaryFinal Rule and Final Rule: Requirements for Arthur Andersen LLP Auditing Clientsdated March 18, 2002 (the "34 Act Order").  Effective July 1, 2002, the Company hasengaged KPMG LLP as its new independent public accountants. KPMG conducted areview of the previously filed financial statements for the three month periodended March 31, 2002 and has determined that no changes to those financialstatements are required.

 

 

**Item 3****— Quantitative and QualitativeDisclosures About Market Risk**

 

             As of June 30, 2002, we did not own any derivativeinstruments but we were exposed to market risks, primarily changes in U.S.interest rates.  As of June 30, 2002, wehad cash, cash equivalents and marketable securities in financial instrumentsof $110,724,116.  Maturities range fromless than one month to approximately 16 months.  Declines in interest rates over time will reduce our interestincome from our investments.  Based uponour balance of cash, cash equivalents and marketable securities as of June 30,2002, a decrease in interest rates of 1.0% would cause a corresponding decreasein our annual interest income of approximately $1.1 million.

 

 

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**PART II - OTHER INFORMATION**

 

Item 1.                    LegalProceedings

 

On April 19, 2002, the Company filed a Demand forArbitration with the American Arbitration Association in accordance with theterms of its License Agreement dated February 19, 1999 (the “LicenseAgreement”) with Pharmacia Corporation (“Pharmacia”), for the purpose ofresolving a dispute with Pharmacia concerning delays in the developmentprograms for LEP (Liposome Encapsulated Paclitaxal) and LED (LiposomeEncapsulated Doxorubicin) which are being conducted by Pharmacia.  The Company contends that Pharmacia failedin its duty under the License Agreement to use reasonable efforts to developLEP and LED and that such failure constitutes a breach of the LicenseAgreement.  The Company further contendsthat Pharmacia breached its duty to consult with NeoPharm on the progress ofthe drug development program and thereby impaired NeoPharm’s ability to monitorthe development of these compounds.  TheCompany is seeking all damages to which it is entitled, which include, but arenot limited to, loss of co-promotion and royalty revenues that would have beenreceived if LEP and LED had not been delayed, and milestone payments that wouldhave been received if the programs had been properly conducted byPharmacia.  NeoPharm believes that thesedamages are substantial.  NeoPharm isnot currently seeking a termination of the License Agreement as part of thearbitration.  On May 16, 2002 Pharmaciaresponded by filing its own response denying the Company's allegations,asserting various counterclaims and seeking restitution of monies paid,reimbursement of out-of-pocket expenses and substantial punitive damages.

 

The Company has also been named in several putativeclass action 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. Also named as individual defendants in each of the lawsuits are 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.  While theCompany has not yet filed answers to the Class Action Suits, it is theCompany’s intention to vigorously defend each and every claim contained inthese Class Action Suits.

 

Item 2.                    Changesin Securities and Use of Proceeds

 

As a result of approval by stockholders at the AnnualMeeting of Stockholders held on June 6, 2002, the Company increased the numberof authorized shares of $0.0002145 par value common stock from 25,000,000shares to 50,000,000 shares, and authorized and created a new class of $0.01par value preferred stock with such preferences, voting powers, qualificationsand special or relative rights or privileges as may be designated by the Boardof Directors, in the resolution authorizing the issuance of such preferredstock.

 

Item 3.                    DefaultsUpon Senior Securities

None

 

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

 

On June 6, 2002 the Company held its Annual Meeting ofStockholders to vote on the matters listed below.  All of the matters voted on at the Annual Meeting were approvedby the Company’s stockholders at the Annual Meeting.

 

1.           To elect six directors to serve untilthe 2003 Annual Meeting of Stockholders.

With respect to theelection for directors, the votes were as follows:
|             | **VOTES FOR** |   | **VOTES   AGAINST** |   | **VOTES   WITHHELD** |
|------------------|---------------|--------|---------------------|--------|----------------------|
|             |          |   |                |   |                 |
| John N. Kapoor   | 14,252,074    |   | 0                   |   | 200,795              |
| James M. Hussey  | 14,089,937    |   | 0                   |   | 362,932              |
| Matthew P. Rogan | 14,249,009    |   | 0                   |   | 203,860              |
| Kaveh T. Safavi  | 14,312,983    |   | 0                   |   | 139,886              |
| Sander A. Flaum  | 14,297,584    |   | 17,654              |   | 137,631              |
| Erick E. Hanson  | 14,296,484    |   | 17,654              |   | 138,731              |

 

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2.           To consider and act upon an amendmentto the Company’s Amended and Restated Certificate of Incorporation to increasethe number of shares of common stock that the Company has authority to issuefrom 25,000,000 shares to 50,000,000 shares.

                                        

| **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTENTIONS** |   | **NOT-VOTED** |
|---------------|--------|--------------------|--------|-----------------|--------|---------------|
|          |   |               |   |            |   |          |
| 14,137,345    |   | 301,070            |   | 14,454          |   | 0             |

 

3.           To consider and act upon an amendmentto the Company’s Amended and Restated Certificate of Incorporation to authorizethe issuance of 15,000,000 shares of preferred stock.

                                        

| **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTENTIONS** |   | **NOT-VOTED** |
|---------------|--------|--------------------|--------|-----------------|--------|---------------|
|          |   |               |   |            |   |          |
| 7,810,156     |   | 2,554,231          |   | 10,942          |   | 4,077,540     |

 

4.           To consider and act upon an amendmentto the Company’s 1998 Equity Incentive Plan to increase the number of shares ofcommon stock available for issuance under the Plan from 2,200,000 shares to4,000,000 shares.

                                        

| **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTENTIONS** |   | **NOT-VOTED** |
|---------------|--------|--------------------|--------|-----------------|--------|---------------|
|          |   |               |   |            |   |          |
| 8,935,197     |   | 1,430,248          |   | 9,884           |   | 4,077,540     |

 

 

 

Item 5.                    OtherInformation

 

                                On June 7, 2002, the Company filed anAmendment to its Amended and Restated Certificate of Incorporation with theoffice of the Secretary of State of the State of Delaware amending ARTICLEFOURTH to increase the number of authorized shares of common stock, par value$0.0002145, from 25,000,000 shares to 50,000,000 shares, and also authorizingthe Board of Directors to issue up to 15,000,000 shares of $0.01 par valuepreferred stock with such preferences, voting powers, qualifications andspecial or relative rights or privileges as may be designated by the Board ofDirectors.

 

Item 6.                    Exhibitsand Reports on Form 8-K

 

(a)    Exhibits

 

Exhibit 3.01       Amendment to the Amended and RestatedCertificate of Incorporation

 

Exhibit 99.1       Certificate of Company Chief ExecutiveOfficer and Chief Financial Officer pursuant to section 906 of the Sarbanes —Oxley Act of 2002.

 

(b)   Reports on Form 8-K

 

On April 22, 2002, the Company filed a report on Form8-K reporting that the Company had filed for arbitration to resolve a disputewith Pharmacia Corporation concerning unnecessary delays in the developmentprograms for LEP (Liposome Encapsulated Paclitaxel) and LED (LiposomeEncapsulated Doxorubicin).

 

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On May 9, 2002, the Company filed a report on Form 8-Kreporting that on May 3, 2002 the Company’s Board of Directors, based on therecommendation of its Audit Committee, determined not to renew the engagementof its independent public accountants, Arthur Andersen LLP, and initiated aninterview process to obtain new accountants to serve as the Company’sindependent public accountants for 2002.

 

On May 14, 2002, the Company filed an amended reporton Form 8-K/A to amend the report filed on Form 8-K on May 9, 2002 to clarifythat the Company dismissed Arthur Andersen LLP as its independent publicaccountants and state that the Company has not had any disagreements withArthur Andersen LLP for the interim period of December 31, 2001 through May 3,2002.

 

 

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**SIGNATURE****PAGE**

 

**Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.**

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

 

 

 

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