**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                |
|-----------------------------------------------|
|                                          |   |
|  ý                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                          |
| **For the Quarter Ended March 31, 2004** |
|                                          |
| **or**                                        |
|                                          |
|  o                                       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                          |
| **Commission file number 1-14430**            |

 

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**MAXIM PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                               |   | **87-0279983**                    |
|------------------------------------------------------------|--------|-----------------------------------|
| (State of incorporation)                                   |   | (IRS Employer Identification No.) |
|                                                       |   |                              |
| **8899 University Center Lane, Suite 400, San Diego, CA**  |   | **92122**                         |
| (Address of principal executive offices)                   |   | (zip code)                        |
|                                                       |   |                              |
| **(858) 453-4040**                                    |
| (Registrant’s telephone number, including  area code) |

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes ýNo o

 

Thenumber of outstanding shares of the registrant’s Common Stock, $.001 par value,as of May 3, 2004 was 28,315,668.

 

 

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**MAXIMPHARMACEUTICALS, INC. AND SUBSIDIARIES**

*(A Development Stage Company)*

 

**INDEX**

 
| **Part I-Financial Information** |
|----------------------------------|
| Item 1.                          | Financial Statements (unaudited) |   |
|                             | Condensed Consolidated Balance  Sheets-March 31, 2004 and September 30, 2003 | 1 |
|                             | Condensed Consolidated Statements of  Operations-Three and Six Months Ended March 31, 2004 and 2003 and from  Inception (October 23, 1989) through March 31, 2004 | 2 |
|                             | Condensed Consolidated Statements of Cash  Flows-Six Months Ended March 31, 2004 and 2003 and from Inception  (October 23, 1989) through March 31, 2004 | 3 |
|                             | Notes to Condensed Consolidated Financial  Statements | 4 |
| Item 2.                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 8 |
| Item 3.                          | Quantitative  and Qualitative Disclosures About Market Risk | 27 |
| Item 4.                          | Controls  and Procedures | 27 |
| **Part II-Other Information**    |   |
| Item 1.                          | Legal Proceedings | 28 |
| Item 4.                          | Submission of Matters to a Vote of Security  Holders | 29 |
| Item 6.                          | Exhibits and Reports on Form 8-K | 29 |
| **SIGNATURES**                   |   |

 

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**CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)**

**(inthousands, except share data)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 
|                                                                                                                                                                                    |   | **As of  March 31  2004** |       | **As of  September 30  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|------------------------------------|--------|
| **ASSETS**                                                                                                                                                                              |   |                           |       |                               |   |
| **Current Assets:**                                                                                                                                                                     |   |                           |       |                               |   |
| Cash and cash equivalents                                                                                                                                                               |   | **$**                          | **12,692** | ** **                         | $      | 32,861 |   |
| Investments in marketable securities,  available for sale                                                                                                                               |   | **57,445**                     | ** ** | 58,468                             |   |
| Accrued interest and other current assets                                                                                                                                               |   | **2,390**                      | ** ** | 2,210                              |   |
| Total current assets                                                                                                                                                                    |   | **72,527**                     | ** ** | 93,539                             |   |
|                                                                                                                                                                                    |   |                           |       |                               |   |
| Restricted cash and cash equivalents                                                                                                                                                    |   | **3,500**                      | ** ** | 3,500                              |   |
| Property and equipment, net                                                                                                                                                             |   | **3,870**                      | ** ** | 4,358                              |   |
| Patents and licenses, net                                                                                                                                                               |   | **4,025**                      | ** ** | 3,521                              |   |
| Note receivable from officer, net of  allowance of $700,000                                                                                                                             |   | **2,165**                      | ** ** | 2,287                              |   |
| Deposits and other assets                                                                                                                                                               |   | **269**                        | ** ** | 142                                |   |
| Total assets                                                                                                                                                                            |   | **$**                          | **86,356** | ** **                         | $      | 107,347 |   |
|                                                                                                                                                                                    |   |                           | ** ** |                               |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                          |   |                           | ** ** |                               |   |
| **Current  Liabilities:**                                                                                                                                                               |   |                           | ** ** |                               |   |
| Accounts payable                                                                                                                                                                        |   | **$**                          | **2,845**  | ** **                         | $      | 5,141 |   |
| Accrued expenses                                                                                                                                                                        |   | **3,905**                      | ** ** | 3,805                              |   |
| Notes payable and current portion of  long-term debt and obligations under capital leases                                                                                               |   | **890**                        | ** ** | 1,246                              |   |
| Provision for loan guarantee for officer                                                                                                                                                |   | **900**                        | ** ** | 900                                |   |
| Deferred revenue                                                                                                                                                                        |   | **726**                        | ** ** | 190                                |   |
| Total current liabilities                                                                                                                                                               |   | **9,266**                      | ** ** | 11,282                             |   |
|                                                                                                                                                                                    |   |                           | ** ** |                               |   |
| Long-term debt and obligations under  capital leases, excluding current portion                                                                                                         |   | **407**                        | ** ** | 828                                |   |
|                                                                                                                                                                                    |   |                           | ** ** |                               |   |
| Commitments and contingencies                                                                                                                                                           |   |                           | ** ** |                               |   |
|                                                                                                                                                                                    |   |                           | ** ** |                               |   |
| **Stockholders’  Equity:**                                                                                                                                                         |   |                           | ** ** |                               |   |
| Convertible preferred stock, $.001 par  value, 5,000,000 shares authorized; no shares issued and outstanding at  March 31, 2004 and September 30, 2003                        |   | **—**                     | ** ** | —                             |   |
| Common stock, $.001 par value, 60,000,000  shares authorized; 28,038,596 and 27,951,059 shares issued and outstanding at  March 31, 2004 and September 30, 2003, respectively |   | **28**                         | ** ** | 28                                 |   |
| Additional paid-in capital                                                                                                                                                              |   | **401,898**                    | ** ** | 401,251                            |   |
| Deficit accumulated during the development  stage                                                                                                                                       |   | **(325,314**                   | **)**      | (306,504                           | )      |
| Accumulated other comprehensive income                                                                                                                                                  |   | **71**                         | ** ** | 462                                |   |
| Total stockholders’ equity                                                                                                                                                         |   | **76,683**                     | ** ** | 95,237                             |   |
| Total liabilities and stockholders’ equity                                                                                                                                         |   | **$**                          | **86,356** | ** **                         | $      | 107,347 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

1

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**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

**(in thousands,except per share amounts)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 
|                                                                              |   |                                  |       |                                |   |           |       |       |        | **From Inception**          |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|--------|----------------|------------|------------|-------------|-----------------------------|--------|
|                                                                              |   |                                  |       |                                |   |           |       |       |        | **(October 23, 1989)** |   |
|                                                                              |   | **Three  Months Ended March 31** |       | **Six Months  Ended March 31** |   | **Through**    |       |
|                                                                              |   | **2004**                              |       | **2003**                            |   | **2004**       |       | **2003**   |        | **March 31,  2004**    |   |
|                                                                              |   |                                  |       |                                |   |           |       |       |        |                        |   |
| Collaboration and research revenue                                                |   | **$**                                 | **1,273**  | ** **                          | $      | 651            |       | **$**      | **2,692**   | ** **                  | $      | 1,041 |   | $ | 17,510 |   |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Operating expenses:                                                               |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Research and development                                                          |   | **8,363**                             | ** ** | 9,974                               |   | **17,694**     | ** ** | 18,229     |        | 233,474                     |   |
| Business development and marketing                                                |   | **647**                               | ** ** | 346                                 |   | **1,290**      | ** ** | 718        |        | 22,961                      |   |
| General and administrative                                                        |   | **1,589**                             | ** ** | 1,940                               |   | **3,355**      | ** ** | 3,847      |        | 43,702                      |   |
| Amortization of goodwill and other  acquisition-related intangible assets         |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | 2,955                       |   |
| Purchased in-process technology                                                   |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | 42,300                      |   |
| Provisions for note receivable and loan  guarantee to/for officers                |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | 1,600                       |   |
| Total operating expenses                                                          |   | **10,599**                            | ** ** | 12,260                              |   | **22,339**     | ** ** | 22,794     |        | 346,992                     |   |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Loss from operations                                                              |   | **(9,326**                            | **)**      | (11,609                             | )      | **(19,647**    | **)**      | (21,753    | )           | (329,482                    | )      |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Other income (expense):                                                           |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Investment income                                                                 |   | **407**                               | ** ** | 667                                 |   | **877**        | ** ** | 1,492      |        | 30,732                      |   |
| Gain on sale of assets                                                            |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | 4,435                       |   |
| Interest expense                                                                  |   | **(20**                               | **)**      | (34                                 | )      | **(43**        | **)**      | (67        | )           | (2,837                      | )      |
| Other income (expense)                                                            |   | **—**                            | ** ** | (5                                  | )      | **3**          | ** ** | 17         |        | 17                          |   |
| Total other income                                                                |   | **387**                               | ** ** | 628                                 |   | **837**        | ** ** | 1,442      |        | 32,347                      |   |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Loss before cumulative effect of accounting  change and preferred stock dividends |   | **(8,939**                            | **)**      | (10,981                             | )      | **(18,810**    | **)**      | (20,311    | )           | (297,135                    | )      |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Cumulative effect of accounting change                                            |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | (28,179                     | )      |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Net loss before preferred stock dividends                                         |   | **(8,939**                            | **)**      | (10,981                             | )      | **(18,810**    | **)**      | (20,311    | )           | (325,314                    | )      |
| Dividends on preferred stock                                                      |   | **—**                            | ** ** | —                              |   | **—**     | ** ** | —     |        | 5,496                       |   |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Net loss applicable to common stock                                               |   | **$**                                 | **(8,939** | **)**                               | $      | (10,981        | )          | **$**      | **(18,810** | **)**                       | $      | (20,311 | ) | $ | (330,810 | ) |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Basic and diluted net loss per share of  common stock                             |   | **$**                                 | **(0.32**  | **)**                               | $      | (0.47          | )          | **$**      | **(0.67**   | **)**                       | $      | (0.87 | ) |   |   |
|                                                                              |   |                                  | ** ** |                                |   |           | ** ** |       |        |                        |   |
| Weighted average shares outstanding                                               |   | **28,034,279**                        | ** ** | 23,328,501                          |   | **28,010,377** | ** ** | 23,320,973 |        |                        |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

2

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

**(Inthousands)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 
|                                                                                   |   |                               |        |        |       | **From  Inception**          |       |
|----------------------------------------------------------------------------------------|--------|------------------------------------|-------------|-------------|------------|------------------------------|------------|
|                                                                                   |   |                               |        |        |       | **(October 23,  1989)** |       |
|                                                                                   |   | **Six Months Ended March 31** |        | **Through** |       |
|                                                                                   |   | **2004**                           |        | **2003**    | ** ** | **March 31,  2004**     | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |   |                               |        |        |       |                         |       |
| Net loss                                                                               |   | **$**                              | **(18,810** | **)**       | $          | (20,311                      | )          | $ | (325,314 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:           |   |                               | ** **  |        |       |                         |       |
| Depreciation and amortization                                                          |   | **844**                            | ** **  | 1,183       |       | 13,393                       |       |
| Stock contributions to 401(k) plan                                                     |   | **—**                         | ** **  | 46          |       | 643                          |       |
| Cumulative effect of accounting change                                                 |   | **—**                         | ** **  | —      |       | 28,179                       |       |
| Stock-based compensation                                                               |   | **205**                            | ** **  | 25          |       | 1,593                        |       |
| Loss on disposal of property and equipment                                             |   | **20**                             | ** **  | 3           |       | 309                          |       |
| Provisions for note receivable and loan  guarantees to/for officers                    |   | **—**                         | ** **  | —      |       | 1,600                        |       |
| Purchased in-process technology                                                        |   | **—**                         | ** **  | —      |       | 44,946                       |       |
| Gain on sale of assets                                                                 |   | **—**                         | ** **  | —      |       | (2,146                       | )          |
| Amortization of premium on investments                                                 |   | **—**                         | ** **  | —      |       | 535                          |       |
| Cumulative effect of reorganization                                                    |   | **—**                         | ** **  | —      |       | 1,153                        |       |
| Gain on sale of subsidiary                                                             |   | **—**                         | ** **  | —      |       | (2,288                       | )          |
| Other                                                                                  |   | **—**                         | ** **  | —      |       | 160                          |       |
| Changes in operating assets and  liabilities:                                          |   |                               | ** **  |        |       |                         |       |
| Accrued interest and other current assets                                              |   | **(180**                           | **)**       | 686         |       | (370                         | )          |
| Deposits and other assets                                                              |   | **(127**                           | **)**       | 3           |       | (765                         | )          |
| Accounts payable                                                                       |   | **(2,296**                         | **)**       | 24          |       | 1,753                        |       |
| Accrued expenses                                                                       |   | **100**                            | ** **  | 962         |       | 2,608                        |       |
| Deferred revenue                                                                       |   | **536**                            | ** **  | (190        | )          | 726                          |       |
| Net cash used in operating activities                                                  |   | **(19,708**                        | **)**       | (17,569     | )          | (233,285                     | )          |
|                                                                                   |   |                               | ** **  |        |       |                         |       |
| **INVESTING  ACTIVITIES:**                                                             |   |                               | ** **  |        |       |                         |       |
| Purchases of marketable securities                                                     |   | **(48,628**                        | **)**       | (19,316     | )          | (487,089                     | )          |
| Sales and maturities of marketable  securities                                         |   | **49,260**                         | ** **  | 35,954      |       | 430,218                      |       |
| Purchases of property and equipment                                                    |   | **(261**                           | **)**       | (539        | )          | (11,153                      | )          |
| Additions to patents and licenses                                                      |   | **(619**                           | **)**       | (277        | )          | (6,984                       | )          |
| Net proceeds from sale of assets                                                       |   | **—**                         | ** **  | —      |       | 3,452                        |       |
| Cash acquired in acquisition of business                                               |   | **—**                         | ** **  | —      |       | 1,121                        |       |
| Net cash provided by (used in) investing  activities                                   |   | **(248**                           | **)**       | 15,822      |       | (70,435                      | )          |
|                                                                                   |   |                               | ** **  |        |       |                         |       |
| **FINANCING  ACTIVITIES:**                                                             |   |                               | ** **  |        |       |                         |       |
| Net proceeds from issuance of common stock  and exercise of stock options and warrants |   | **442**                            | ** **  | 1           |       | 278,157                      |       |
| Net proceeds from issuance of preferred  stock                                         |   | **—**                         | ** **  | —      |       | 41,298                       |       |
| Payment of preferred stock dividends                                                   |   | **—**                         | ** **  | —      |       | (302                         | )          |
| Proceeds from issuance of notes payable,  capital lease and long-term debt             |   | **—**                         | ** **  | —      |       | 9,318                        |       |
| Restricted cash                                                                        |   | **—**                         | ** **  | —      |       | (3,500                       | )          |
| Payments on notes payable, long-term debt,  and capital lease obligations              |   | **(777**                           | **)**       | (842        | )          | (9,346                       | )          |
| Proceeds from issuance of notes payable to  related parties                            |   | **—**                         | ** **  | —      |       | 4,982                        |       |
| Payments on notes payable to related  parties                                          |   | **—**                         | ** **  | —      |       | (1,330                       | )          |
| Loan to officer                                                                        |   | **122**                            | ** **  | 122         |       | (2,865                       | )          |
| Net cash provided by (used in) financing  activities                                   |   | **(213**                           | **)**       | (719        | )          | 316,412                      |       |
|                                                                                   |   |                               | ** **  |        |       |                         |       |
| Net increase (decrease) in cash and cash  equivalents                                  |   | **(20,169**                        | **)**       | (2,466      | )          | 12,692                       |       |
|                                                                                   |   |                               | ** **  |        |       |                         |       |
| Cash and cash equivalents at beginning of  period                                      |   | **32,861**                         | ** **  | 24,775      |       | —                       |       |
| Cash and cash equivalents at end of period                                             |   | **$**                              | **12,692**  | ** **  | $          | 22,309                       |       | $ | 12,692 |   |
|                                                                                   |   |                               | ** **  |        |       |                         |       |
| Noncash investing activities:                                                          |   |                               | ** **  |        |       |                         |       |
| Acquisition of property and equipment under  capital lease                             |   | **$**                              | **51**      | ** **  | $          | 50                           |       | $ | 321 |   |
| Increase (decrease) in fair value of  securities available for sale                    |   | **$**                              | **(391**    | **)**       | $          | (217                         | )          | $ | 75 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

3

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**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 

**1.****                                      PRINCIPLESOF INTERIM PERIOD REPORTING**

 

Maxim Pharmaceuticals, Inc. (the “Company”) has not earnedsignificant revenues from planned principal operations. Accordingly, theCompany’s activities have been accounted for as those of a “Development StageEnterprise” as set forth in Financial Accounting Standards Board StatementNo. 7.

 

The information at March 31, 2004 and for the three and six monthsended March 31, 2004 and 2003 and from inception (October 23, 1989)through March 31, 2004 is unaudited. In the opinion of the Company, thesecondensed consolidated financial statements contain all of the adjustments,consisting only of normal recurring adjustments and accruals, necessary topresent fairly the condensed consolidated financial position of the Company asof March 31, 2004 and September 30, 2003, and the condensedconsolidated results of operations for the three and six months endedMarch 31, 2004 and 2003 and from inception (October 23, 1989) throughMarch 31, 2004. The condensed consolidated results of operations for thethree and six months ended March 31, 2004 are not necessarily indicativeof the results to be expected in subsequent periods or for the year as a whole.For further information, refer to the consolidated financial statements andfootnotes thereto in our Annual Report on Form 10-K for the year endedSeptember 30, 2003.

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Stock Option Plans*-The Company accounts for its stock optionplans under the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees”,**andrelated Interpretations.  Compensationexpense associated with stock options to employees was $6,000 in the currentquarter and $52,000 year-to-date. Compensation expense to non-employees was $56,000 in the current quarterand $153,000 year-to-date.  There was nosimilar expense in the same periods in the prior year.

 

No other stock-based employee compensationcost is reflected in net loss, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net loss and

 

4

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loss per share if the Company had applied thefair value recognition provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”,**to stock-based employee compensation.

 
|                                                                                                            |   | **Three  Months Ended**  |   | **Six Months  Ended**    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                                                                            |   | **March 31,  2004** |   | **March 31,  2003** |   | **March 31,  2004** |   | **March 31,  2003** |   |
| Net loss,  as reported                                                                                          |   | $                        | (8,939 | )                        | $      | (10,981 | ) | $ | (18,810 | ) | $ | (20,311 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |   | (949                     | )      | (857                     | )      | (1,557 | ) | (1,839 | ) |
| Less:  Compensation expense associated with stock  options                                                 |   | 6                        |   | —                   |   | 52 |   | — |   |
| Pro forma  net loss                                                                                             |   | $                        | (9,882 | )                        | $      | (11,838 | ) | $ | (20,315 | ) | $ | (22,150 | ) |
|                                                                                                            |   |                     |   |                     |   |   |   |   |   |
| Net loss  per share:                                                                                            |   |                     |   |                     |   |   |   |   |   |
| Basic and  diluted-as reported                                                                                  |   | $                        | (0.32  | )                        | $      | (0.47 | ) | $ | (0.67 | ) | $ | (0.87 | ) |
| Basic and  diluted- pro forma                                                                                   |   | $                        | (0.35  | )                        | $      | (0.51 | ) | $ | (0.73 | ) | $ | (0.95 | ) |

 

The fair value of the stock options were estimated at the date of grantusing the “Black-Scholes” method for option pricing and the followingweighted-average assumptions were used for grants made during the three and sixmonths ended, March 31, 2004 and 2003, respectively:

 
|                          |   | **Three  Months Ended**  |   | **Six Months  Ended**    |   |
|-------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                          |   | **March 31,  2004** |   | **March 31,  2003** |   | **March 31,  2004** |   | **March 31,  2003** |   |
| Risk free  interest rate      |   | 2.00                     | %      | 1.94                     | %      | 2.33 | % | 2.25 | % |
| Dividend  Yield               |   | 0                        |   | 0                        |   | 0 |   | 0 |   |
| Volatility  Factor            |   | 75                       | %      | 75                       | %      | 75 | % | 75 | % |
| Expected  Life (in years)     |   | 3.02                     |   | 2.92                     |   | 3.85 |   | 3.67 |   |
| Resulting  average fair value |   | $                        | 4.63   |                     | $      | 1.55 |   | $ | 4.33 |   | $ | 1.48 |   |
|                               |        |                          |        |                          |        |  |  |  |  |  |  |  |  |

 

**3.****                                      TOTALOTHER COMPREHENSIVE LOSS**

 

Total other comprehensive loss for the three months endedMarch 31, 2004 and 2003 was $9,072,000 and $11,045,000, respectively.  Total other comprehensive loss for the sixmonths ended March 31, 2004 and 2003 was $19,201,000 and $20,528,000,respectively.  The difference betweentotal other comprehensive loss and net loss attributable to common stock wascomposed of unrealized gains and losses on available-for-sale securities.

 

**4.****                                      NETLOSS PER SHARE**

 

Net loss per share is calculated in accordance with SFAS No. 128“Earnings per Share”. Basic net loss per share of common stock is computed bydividing the net loss after deduction of dividends on preferred stock by theweighted average number of shares of common stock outstanding during theperiod. Diluted loss per share is calculated by including the additional commonshares issuable upon exercise of outstanding options and warrants in the basicweighted average share calculation unless the effect of their inclusion isantidilutive. For the quarters ended March 31, 2004 and 2003, outstandingoptions and warrants totaled 5,769,000 and 4,046,000,

 

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respectively. For the quarters ended March 31, 2004 and 2003,antidilutive options and warrants totaled 4,582,000 and 1,015,000,respectively. As these securities were antidilutive, diluted loss per shareequaled basic loss per share in each respective period.

 

**5.****                                      DEFERREDRENT**

 

In accordance with SFAS No.13, the Company records operating lease rentexpenses on a straight-line basis over the lease term, which causes the amountexpensed in our financial statements to vary from the actual amounts paidduring the period.  This variance isrecorded as deferred rent and included in accrued expenses.  As of March 31, 2004 and 2003, thedeferred rent balance was $640,000 and $250,000, respectively.

 

**6.****                                      RECLASSIFICATIONS**

 

Certain amounts in the prior period financial statements have beenreclassified to conform with current period classifications.

 

**7.****                                      RELATEDPARTY TRANSACTIONS**

 

In December 2000, the Company entered into a secured revolvingpromissory note with an officer of the Company. The purpose of the agreementwas to allow the repayment of margin loans associated with the exercise ofstock options, the payment of income taxes associated with such exercises andthe purchase of a residence.  The Boarddetermined that it was in the Company’s best interest to provide the loan tothe officer to avoid the necessity of selling personal holdings of theCompany’s securities during a period of depressed market prices.  The note bears interest at an annual rate of4.0% and is secured by the officer’s outstanding options and shares of commonstock. During the quarter ended September 30, 2002, the Company determinedthat the note to the officer had become impaired because the Company determinedthat the officer did not have the ability to repay the loan in full whendue.  Accordingly, the Company has notrecorded interest income of $218,000 on the note subsequent to June 30,2002 and has recorded an allowance on the note in the amount of $700,000.  In December 2003 and inDecember 2002, the officer paid the Company $122,000, which was a portionof the interest due on the note.  Theentire outstanding balance of principal and interest was due onDecember 8, 2002.  As of the datethe note came due, the officer did not have the liquid assets necessary torepay the loan.  The Company is reviewingits options and alternatives and intends to collect the outstanding principaland interest on the loan.  As ofMarch 31, 2004, the recorded outstanding principal and interest balance onthe note was $2,165,000, net of the $700,000 allowance.

 

At March 31, 2004, the Company was a guarantor on $1,800,000 inloans made by a bank to two officers and one former officer of the Company.Under the guarantor agreement executed in July 2001, the Company grantedthe bank a security interest in a $1,800,000 certificate of deposit ascollateral for the loans the bank made to the officers. The purpose of the thebank loans was to allow the payment of income taxes associated with theexercise of stock options.  The Boarddetermined that it was in the Company’s best interest to provide the guaranteesto avoid the necessity of the officers selling personal holdings of theCompany’s securities during a period of depressed market prices.  These loans are due in July 2004.  The Company does not hold any assets ascollateral for the guarantees; however, in a case of default the Company would

 

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pursue collection from the individuals.  During the fourth quarter of fiscal year 2002, the Companydetermined that it was probable that one of the officers would not have theability to repay his loan. Therefore, the Company recorded a provision for theguarantee and a liability in the amount of $900,000.  The Company intends to collect from the officer any amounts thatmay ultimately be paid by the Company to the bank as a result of the guaranteeon behalf of the officer.

 

**8.****                                      CONTINGENCIES**

 

On December 14, 2000, plaintiff Blake Martin, on behalf of himselfand purportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against the Company and two officers of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets, and seeking damages therefore. InDecember 2003, the United States Federal Court granted the Company’smotion to dismiss the lawsuit with prejudice and without leave to amend.  On December 30, 2003, plaintiff BlakeMartin exercised his right to appeal the decision of the United States DistrictCourt for the Southern District of California to the Ninth Circuit.  The complaint has been tendered to theCompany’s insurance carrier.

 

InOctober 2001 and May 2002, certain former shareholders of Cytovia filedcomplaints in California Superior Court in San Diego against the Company andtwo of its officers based on similar facts and circumstances, alleging fraudand negligent misrepresentation in connection with the Company’s acquisition ofCytovia.  A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003.  The three-member arbitration panel rejectedall of the plaintiffs’ claims, determined that Maxim has no liability for suchclaims and awarded recovery of the Company’s reasonable attorneys’ fees andcosts of approximately $922,000 as prevailing party in the proceeding.  In December 2003 the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In January 2004, the plaintiffs filed anotice of appeal.  No amounts have beenrecorded in the Company’s financial statements related to the recovery of theseexpenses.

 

TheCompany believes that the claims set forth in the pending complaints arewithout merit, and it intends to engage in a rigorous defense against suchclaims.  No assurances can be made that the Companywill be successful in its defense of the pending claims. If the Company is notsuccessful in its defense of such claims, the Company could be forced to makesignificant payments to its stockholders, the plaintiffs and defense lawyers,and such payments could have a material adverse effect on the Company’sbusiness, financial condition and results of operations if not covered by theCompany’s insurance carrier. Even if the Company’s defense against such claimsis successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect theCompany’s business.

 

As discussed in Footnote 7, Related Party Transactions, the Company isa guarantor on $1,800,000 in loans made by a bank to two officers and oneformer officer of the Company and has a $2,165,000 note receivable from anofficer, net of a $700,000 allowance against the note.

 

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**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (A DevelopmentStage Company)*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains certain forward-looking statementsthat involve risks and uncertainties. Such forward-looking statements includebut are not limited to statements regarding plans for the development andcommercialization of the Company’s drug candidates and future cashrequirements. Such statements are only predictions and the Company’s actualresults could differ materially from those anticipated or projected in suchforward-looking statements. Moreover, the Company assumes no responsibility forthe accuracy and completeness of the forward-looking statements.  The Company is under no duty to update anyof the forward-looking statements after the date hereof to conform suchstatements to actual results or to changes in its expectations.  Factors that could cause or contribute tosuch differences include, but are not limited to, those discussed in thesection entitled “Risk Factors” contained in this Quarterly Report. As aresult, you are cautioned not to rely on these forward-looking statements.*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with thecondensed consolidated financial statements, including the related notes,appearing in Item 1 of this Quarterly Report on Form 10-Q as well as theCompany’s Annual Report on Form 10-K for the year ended September 30,2003.*

 

#### **OVERVIEW**

#### ** **

Weare a global bio-pharmaceutical company with a diverse pipeline of drugcandidates for life-threatening cancers and chronic liver diseases.

 

Ourlead drug candidate CepleneTM (histamine dihydrochloride) is designed to preventor reverse damage associated with oxidative stress, thereby protecting criticalcells and tissues. Because Ceplene modulates basic immune functions, it has thepotential to be used in the treatment of a broad range of diseases in whichoxidative stress plays an important role. More than 2,000 patients haveparticipated in our 17 completed and ongoing clinical trials of Ceplene,conducted in 20 countries.  The clinicaltrials involve the following diseases:

 

•                  Life-threatening cancers, such as advancedmalignant melanoma (the most deadly form of skin cancer), acute myeloidleukemia and renal cell carcinoma (kidney cancer); and

 

•                  Hepatitis C, the most common blood-bornevirus in the United States.

 

Clinicaltrials completed to date have suggested that Ceplene can be safelyself-administered by most patients in their own homes.

 

Ceplene for the treatment of advanced malignant melanoma represents ourmost advanced program.  InNovember 2003, we filed a European Centralized Procedure MarketingAuthorization Application for Ceplene, in combination with interleukin-2(IL-2), a drug manufactured by Chiron Corporation, for the treatment ofpatients with advanced malignant melanoma. The Ceplene application was filed with the European Agency for theEvaluation of

 

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Medicinal Products (EMEA) as an electronic Common Technical Dossier(eCTD) in compliance with the most recent International Committee of Harmonization(ICH) guidelines.   Ireland and Swedenhave been assigned by the EMEA as the Rapporteur and Co-rapporteur,respectively, with responsibility to review the application on behalf of theEuropean Union (EU).

 

In April 2004 we announced that our treatment protocol to provideour investigational drug Ceplene, in combination with IL-2, for the treatmentof patients with advanced malignant melanoma, had been approved by the U.S.Food and Drug Administration (FDA). The treatment protocol allows us to provideexpanded access of Ceplene to patients in the United States while investigationof the drug continues in the Company’s confirming Phase 3 clinical trial. The FDA also agreed to allow reimbursementfor the study medication under the treatment protocol, which allows us torecover costs associated with providing qualified patients access to Ceplenetherapy.

 

Ourresearchers have also identified a series of novel cancer drug candidates thatare potent inducers of apoptosis, also known as programmed cell death. Thecompounds were identified through our proprietary high-throughput screeningtechnology that uses a unique live cell screening assay. We have screenedapproximately one million compounds and have identified drug candidates withunique mechanisms of action that target major cancers such as breast, lung,prostate, and colorectal.

 

Our development activities are supported by clinical collaborationswith Schering Plough, Myriad Genetics, and Chiron Corporation.

 

# **CRITICALACCOUNTING POLICIES**

# ** **

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses as well as relateddisclosure of contingent assets and liabilities. These estimates include usefullives for fixed assets, useful lives for intellectual property, estimated livesfor license agreements, revenue recognition, allowance for notes receivable,reserves related to loan guarantees, valuation of intellectual property, andestimates for clinical trial expenses incurred but not yet billed.  On an on-going basis, the Company evaluatesits estimates. The Company bases its estimates on historical experience andvarious other assumptions that are believed to be reasonable under thecircumstances. Under different assumptions or conditions these estimates mayvary significantly. In addition, actual results may differ materially fromthese estimates.

 

TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its condensedconsolidated financial statements.

 

*Revenue Recognition.* Revenue is generally recognized when all of the following criteria aremet: persuasive evidence that an arrangement exists; services have beenrendered and are non-refundable, the price is fixed and determinable andcollection is reasonably assured.  Allmultiple deliverable arrangements are reviewed by the Company for separabilityin accordance

 

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withEITF 00-21.  If the separabilitycriteria are met, non-refundable upfront technology access fees are accountedfor separately. Upfront technology access fees which are not consideredseparable from the related research fees are recognized as revenue over theapplicable research period as research activities are performed. Milestonepayments are recognized when earned and collectibility is assured provided thatthe milestone events are substantive and their achievability is not reasonablyassured at the inception of the agreement. Amounts received but unearned arerecorded as deferred revenue.  Certaincollaborative agreements provide the Company donated materials and serviceswhich are recorded when used at the fair market value of the material receivedor the service provided.  Grant fundingis recognized as revenue when earned.

 

*Clinical trial expenses.*  TheCompany accounts for certain study drug, clinical trial site and other clinicaltrial costs by estimating the services incurred but not reported for eachpatient enrolled in each trial. These costs and estimates vary based on thetype of clinical trial, the site of the clinical trial, the length of treatmentperiod for each patient and the length of time required to receive formaldocumentation of the actual expenses incurred. As actual costs become known,the Company may need to revise its estimated accrual, which could alsomaterially affect its results of operations.

 

*Valuation of Intellectual Property.*  TheCompany evaluates its patents and licenses for impairment on an annual basisand whenever indicators of impairment exist. During this process, the Companyreviews its portfolio of pending domestic and international patentapplications, domestic and international issued patents, and licenses theCompany has acquired from other parties. To determine if any impairment ispresent, the Company considers challenges or potential challenges to itsexisting patents, the likelihood of applications being issued, the scope of itsissued patents, the assessment of future cash flows to be generated from thepatents and its experience. In the event that it is determined that animpairment exists where the Company had previously determined that one did notexist, it may result in a material adjustment to the Company’s financialstatements.

 

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,2004 AND 2003

 

*Collaboration and Research Revenue. *For the quarter ended March 31, 2004,collaboration and research revenue was $1,273,000, an increase of $622,000 or96% compared to the same period in the prior year.  This increase was primarily attributable to $500,000 of researchand license revenue from the collaboration that we entered into inNovember 2003 with Myriad Genetics, Inc. (Myriad).  Additionally, we experienced an increase indonated drugs and services from Schering on our Phase 2 study (MP-8899-0406 orthe Phase 2 triple-drug trial in nonresponder HCV patient) as it became fullyenrolled in the prior year.  TheSchering Agreement provided $646,000 of revenue in the current quarter,compared to $399,000 of revenue in the same period in the prior year.  Other revenue recognized during the currentquarter amounted to $127,000 from license and research agreements with CeleraGenomics Corporation and a grant from the National Institute of Health.  In the prior year these agreements generated$252,000 of revenue.

 

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For the six months ended March 31, 2004, collaboration andresearch revenue was $2,692,000, an increase of 1,651,000 or 159% over the sameperiod in the prior year.  As notedabove, this increase was primarily attributable to $733,000 of research andlicense revenue from our collaboration with Myriad.  Additionally, we experienced an increase in donated drugs andservices from Schering in our Phase 2 study (MP-8899-0406) that resulted in $1,693,000of revenue in the current year versus $551,000 in revenue during the sameperiod in the prior year as a result of full enrollment in the trial in theprior year.  Other revenue recognizedduring the current year amounted to $266,000 from license and researchagreements with Celera Genomics Corporation and a grant from the NationalInstitute of Health.  In the prior yearthese agreements generated $490,000 of revenue.

 

*Research and Development Expenses. *Research and development expenses for thequarter ended March 31, 2004 totaled $8,363,000, a decrease of $1,611,000or 16% over the same period in the prior year. This decrease was primarily the result of decreased expenses from thecurrent stage of our Phase 2 study (MP-8899-0406) and Phase 3 study(MP-8899-0104), which is also known as the Phase 3 advanced malignant melanomatrial in patients with liver involvement.

 

Research and development expenses for the six months endedMarch 31, 2004 totaled $17,694,000, a decrease of $535,000 or 3% over thesame period in the prior year.  Thesecosts were relatively consistent with the prior year.  In the future we expect to continue incurring substantialadditional research and development expenses due to:

 

•                  preclinicaland clinical testing of our product candidates;

•                  expansionof or additional research and development programs; and

•                  regulatory-relatedexpenses.

 

*Business Development and Marketing Expenses. *Business development and marketingexpenses for the quarter ended March 31, 2004 were $647,000, an increaseof $301,000 or 87% over the same period of the prior year.  For the six months ended March 31,2004, business development and marketing expenses were $1,290,000, an increaseof $572,000 or 80% over the same period in the prior year.  These increases are due to an increase inpremarketing activities associated with the potential market launch ofCeplene.  Business development andmarketing expenses are expected to increase in the future to support marketingand administrative activities related to the potential commercialization ofCeplene as well as our other product candidates.

 

*General and Administrative Expenses. *For the quarter ended March 31, 2004,general and administrative expenses were $1,589,000, a decrease of $351,000 or18% from the same period in the prior year. For the six months ended March 31, 2004, general and administrativeexpenses were $3,355,000, a decrease of $492,000 or 13% from the same period inthe prior year.  These decreases are aresult of decreased legal expenses.

 

*Other Income.  I*nvestmentincome was $407,000 for the quarter ended March 31, 2004, a decrease of$260,000 or 39% from the same period in the prior year.  Investment income was $877,000 for the sixmonths ended March 31, 2004, a decrease of $615,000 or 41% from the sameperiod in the prior year.  This decreasewas a result of a decrease in our cash and short-term securities investmentbalances and in the rate of interest earned on investments.

 

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*Net Loss Applicable to Common Stock. *Net loss applicable to common stock for thequarter ended March 31, 2004 totaled $8,939,000, a decrease of $2,042,000or 19% from the same period in the prior year. This decrease was primarily aresult of decreases in research and development expenses and general and administrativeexpenses along with the increase in collaboration and research revenue,partially offset by the increase in business development and marketing expensesand the decrease in investment income, as described above.

 

Net loss applicable to common stock for the six months endedMarch 31, 2004 totaled $18,810,000, a decrease of $1,501,000 or 7% fromthe same period in the prior year.  Thisdecrease was primarily a result of the increase in collaboration and researchrevenue, as described above.

 

#### **LIQUIDITY AND CAPITAL RESOURCES**

#### ** **

The Company has financed its operations primarily through the sale ofits equity securities, including an initial public offering in 1996, aninternational follow-on public offering in 1997, private offerings of preferredstock in July and November 1999, a follow-on public offering inFebruary 2000, and a private placement of common stock inSeptember 2003, that provided total net proceeds of approximately $319million.

 

Until required for operations, the Company’s policy under establishedguidelines is to keep its cash reserves in bank deposits, corporate debtsecurities, United States government instruments and other readily marketabledebt instruments, all of which are investment-grade quality.  As of March 31, 2004, the Company hadcash, cash equivalents and investments (including restricted cash of $3.5million) totaling approximately $73.6 million compared with $94.8 million atSeptember 30, 2003.  As ofMarch 31, 2004, the Company had working capital of approximately $63.3million compared with $82.3 million at September 30, 2003.  The decrease in the Company’s cash, cashequivalents and short-term investments, and working capital was primarily dueto day-to-day operating expenses relating to research and developmentactivities.

 

In December 2000, the Company entered into a secured revolvingpromissory note with an officer of the Company.  The note bears interest at an annual rate of 4.0% and is securedby the officer’s outstanding options and shares of common stock. During the quarterended September 30, 2002, the Company determined that the note to theofficer had become impaired because the Company determined that the officer didnot have the ability to repay the loan in full when due.  Accordingly, the Company has not recordedinterest income of $218,000 on the note subsequent to June 30, 2002, andhas recorded an allowance on the note in the amount of $700,000.  In December 2003 and inDecember 2002, the officer paid the Company $122,000 which was a portionof the interest due on the note.  Theentire outstanding balance of principal and interest was due onDecember 8, 2002.  As of the datethe note came due, the officer did not have the liquid assets necessary torepay the loan.  The Company isreviewing its options and alternatives and intends to collect the outstandingprincipal and interest on the loan.

 

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The Company is a guarantor on $1,800,000 in loans made by a bank to twoofficers and one former officer of the Company. Under the guarantor agreementexecuted in July 2001, the Company granted the bank a security interest ina $1,800,000 certificate of deposit as collateral for the loans the bank madeto the officers.  These loans are due inJuly 2004.  The Company does nothold any assets as collateral for the guarantees; however, in a case of defaultthe Company would pursue collection from the individuals.  During the fourth quarter of fiscal year2002, the Company determined that it was probable that one of the officers wouldnot have the ability to repay his loan. Therefore, the Company recorded aprovision for the guarantee and a liability in the amount of $900,000.  The Company intends to collect from theofficer any amounts that may ultimately be paid by the Company to the bank as aresult of the guarantee on behalf of the officer.

 

The Company has term loans with a bank totaling $1,221,000 atMarch 31, 2004, the proceeds of which were used to finance capitalexpenditures.  The term loan agreementscontain customary affirmative and negative covenants, including financialcovenants requiring the maintenance of specified liquidity terms and tomaintenance of the Company’s principal depository and operating accounts withthe bank.  In addition, the Company hasthe choice to either maintain a minimum aggregate balance of $3,500,000 at theinstitution, which includes the $1,800,000 certificate of deposit held underthe loan guarantees, as noted above, or to pay the bank a quarterly fee of$2,500.  During the six months ended March 31,2004, the Company maintained the minimum aggregate balance noted above at thebank and was in compliance with all covenants.

 

The following table summarizes our contractual obligations as ofMarch 31, 2004:

 
|                        |   | **Payments  due by Period (in thousands)** |   |
|-----------------------------|--------|--------------------------------------------|--------|
|                        |   | **Total**                                  |   | **Less than  1  Year** |   | **1-3 Years** |   | **3-5 Years** |   | **More  than 5  Years** |   |
|                        |   |                                       |   |   |   |   |   |   |   |   |   |
| CONTRACTUAL OBLIGATIONS     |   |                                       |   |   |   |   |   |   |   |   |   |
| Debt                        |   | $                                          | 1,269  |   | $ | 873 |   | $ | 383 |   | $ | 13 |   | $ | — |   |
| Guarantee on Officer Loans  |   | 900                                        |   | 900 |   | — |   | — |   | — |   |
| Capital Lease Obligations   |   | 28                                         |   | 17 |   | 11 |   | — |   | — |   |
| Operating Lease Obligations |   | 11,340                                     |   | 2,034 |   | 3,785 |   | 3,604 |   | 1,917 |   |
|                             |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company, as a development stage enterprise, anticipates incurringsubstantial additional losses at least in the near future as it continues toexpend substantial amounts on its ongoing and planned clinical trials and itsexpanded efforts related to its other research and development efforts,including the apoptosis modulator program. In addition, the Company’s cash requirements may fluctuate in futureperiods as it conducts additional research and development activities,including clinical trials, and undertakes efforts associated with thecommercial launch of any product candidates that are approved for sale bygovernment regulatory bodies.  Among the

 

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activities that may result in an increase in cash requirements are thescope and timing of the Phase 3 and Phase 2 Ceplene cancer and hepatitis Cclinical trials currently underway, and earlier-stage clinical trials and otherresearch related to liver disease and the apoptosis modulator and topicalhistamine technologies. Other factors that may impact the Company’s cashrequirements include the results of clinical trials, the scope of otherresearch and development activities, the time required to obtain regulatoryapprovals, costs associated with defending certain lawsuits currently pendingagainst the Company, the costs of filing, prosecuting, defending and enforcingpatent claims and other intellectual property rights, and the ability toestablish marketing alliances and collaborative arrangements. As a result ofthese factors, it is difficult to accurately predict the timing and amount offuture cash requirements.

 

We believe that our available cash, cash equivalents and investments atMarch 31, 2004 will be sufficient to satisfy our funding needs for atleast the next 18 months.  To meet itscash requirements, the Company may pursue the issuance of additional equitysecurities and corporate collaborative agreements. In December 2003, theCompany filed a shelf registration statement, which will allow the Company toraise up to $75 million through the sale of various securities in one or moreofferings in the future.  Specificprices and terms will be determined at the time of any offering.  The issuance of additional equitysecurities, if any, could result in substantial dilution to the Company’sstockholders. There can be no assurance that additional funding will be availableon terms acceptable to the Company, if at all. The failure to fund theCompany’s capital requirements would have a material adverse effect on itsbusiness, financial condition and results of operations.

 

The Company is currently pursuing a pharmaceutical collaborationregarding the European marketing rights for Ceplene and is pursuing theout-licensing of certain of its apoptosis modulator technology.  For instance, in March 2004 the Companyannounced that it has entered into an agreement with Shire BioChem Inc.under which the Company reacquired the rights to the MX2105 series of vasculartargeting agent cancer drug candidates. The MX2105 series was originallylicensed in July 2000 to BioChem Pharma, a company that was subsequentlyacquired by Shire Pharmaceuticals.  InJuly 2003, Shire Pharmaceuticals announced that it was exiting the fieldof oncology research, creating the opportunity for the Company to reacquire therights to the MX2105 series of compounds. The Company is currently pursuing the out-licensing of these compounds.

 

In November 2003, the Company entered into an agreement withMyriad under which the Company licensed its MX90745 series of caspase-induceranti-cancer compounds to Myriad.  Theagreement requires that Myriad make licensing, research and milestone paymentsto the Company totaling up to $27 million, assuming the successfulcommercialization of the compound for the treatment of cancer, as well as pay aroyalty on product sales.  There can beno assurance that the Company will be able to enter into any additional agreementson acceptable terms, if at all.

 

The Company has never paid a cash dividend on its common stock and suchpayments are prohibited by the terms of the Company’s bank loan. The Companydoes not contemplate the payment of cash dividends on its common stock in theforeseeable future.

 

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**IMPACT OF INFLATION**

 

Theimpact of inflation on the operations of the Company for the three and sixmonths ended March 31, 2004 and 2003 was not material.

 

#### **RECENT ACCOUNTING PRONOUNCEMENTS**

 

There have been no recent accounting pronouncements that have affectedthe Company.

 

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**RISK FACTORS**

 

You should carefully consider the following risk factorsand the other information included herein as well as the information includedin our Annual Report on Form 10-K for the fiscal year ended September 30,2003, and other reports and filings made with the Securities and ExchangeCommission before investing in our common stock. If any of the following risksactually occur, our business, financial condition or results of operationscould be harmed. The trading price of our common stock could decline due to anyof these risks, and you may lose part or all of your investment.

 

**The development of our drug candidates issubject to uncertainties, many of which are beyond our control. If we fail tosuccessfully develop our drug candidates, our ability to generate revenues willbe substantially impaired.**

 

Potential products based on our Ceplene, apoptosis modulator andtopical histamine gel technologies will require, dependent upon the specificdrug candidate, extensive research and development, preclinical testing,clinical testing, regulatory approval and substantial additional investment beforewe can market them. We cannot assure you that any of our drug candidates will:

 

•                                          besuccessfully developed;

 

•                                          proveto be safe and effective in clinical trials;

 

•                                          meetapplicable United States or international regulatory standards;

 

•                                          becapable of being produced in commercial quantities at acceptable costs;

 

•                                          becommercially viable;

 

•                                          beeligible for third party reimbursement from governmental or private insurers;or

 

•                                          achievemarket acceptance.

 

We have not completed final testing for efficacy or safety in humansfor the diseases we propose to treat with Ceplene and our other drugcandidates. Failure to ultimately obtain approval for Ceplene and our otherdrug candidates, any delay in our expected testing and development schedules,or any elimination of a product development program in its entirety, willnegatively impact our ability to generate revenues in the future from the saleof our product candidates.

 

**We may not obtain regulatory clearance tomarket Ceplene or our other drug candidates on a timely basis, or at all.**

 

Ceplene and our other drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining Federal Drug Administration(FDA), European Agency for the Evaluation of Medicinal Products (EMEA), andother governmental and similar international regulatory approvals is costly,

 

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time consuming, uncertain and subject to unanticipated delays. Even ifwe believe that preclinical and clinical data are sufficient to supportregulatory approval for a drug candidate, the FDA, EMEA and similarinternational regulatory authorities may not ultimately approve the candidatefor commercial sale in any jurisdiction. The FDA, EMEA or similar internationalregulators may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are notsatisfied. The FDA, EMEA or similar international regulators may also requireadditional testing for safety and efficacy. For example, in 2000, we submitteda New Drug Application (NDA) to the FDA seeking approval to market Ceplenebased on the data from our first Phase 3 clinical study in advanced malignantmelanoma. In January 2001, the FDA determined that a second study wasrequired to support approval. In response to the FDA request, inJanuary 2002 we commenced another Phase 3 trial. Although we believe thatthis additional Phase 3 trial, in combination with the results of the firstPhase 3 trial, will support approval in the United States and other countries,we have no assurance that (i) the results from this additional Phase 3trial will confirm the results from the first Phase 3 trial, (ii) the FDA,EMEA or similar regulatory agencies will not require additional Phase 3 trialsor (iii) the FDA, EMEA or similar regulatory agencies will approve ourregulatory filings for drug approval.

 

In addition, manufacturing facilities operated by the third partymanufacturers with whom we contract to manufacture Ceplene and our other drugcandidates may not pass a FDA, EMEA or similar international regulatorypreapproval inspection. Moreover, if the FDA, EMEA or similar internationalregulatory agency grants regulatory approval of a product candidate, theapproval may be limited to specific indications or limited with respect to itsdistribution. Similar international regulatory authorities may apply similarlimitations or may refuse to grant any approval.

 

Any failure or delay in obtaining these approvals could prohibit ordelay us from marketing Ceplene and our other drug candidates. If Ceplene andour other drug candidates do not meet applicable regulatory requirements forapproval, we may not have the financial resources to continue research anddevelopment of these candidates, and we may not generate revenues from thecommercial sale of any of our products.

 

**Delays in the commencement, conduct orcompletion of our clinical trials would negatively impact our business.**

 

We may encounter problems with any of our completed, ongoing or plannedclinical studies. For example, we may encounter delays in commencing studies orenrolling volunteers, lower than anticipated retention rate of volunteers in atrial or serious side effects experienced by study participants relating to thedrug candidate. Factors that could affect patient enrollment include the sizeof the patient enrollment population for the targeted disease, eligibilitycriteria, proximity of eligible patients to clinical sites, clinical trialprotocols and the existence of competing protocols, including competitivefinancial incentives for patients and clinicians, and existing approved drugs.If we encounter any delay in the commencement, conduct or completion of ourclinical studies for Ceplene or our other drug candidates, we may experiencethe following consequences:

 

•                                          theanalysis of data from our clinical studies and the reporting of results may bedelayed;

 

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•                                          thesubmission of our applications for regulatory approval of Ceplene and otherdrug candidates with regulatory authorities in North America, Europe andelsewhere in the world may be delayed;

 

•                                          regulatoryapproval of our drug candidates may be delayed and may not occur on a timelybasis, delaying the generation of revenues from the commercial sale of any ofour marketed product candidates;

 

•                                          wemay not have the financial resources to continue and complete research anddevelopment of any of our product candidates; and

 

•                                          wemay not be able to enter into collaborative arrangements relating to anypotential product as a result of the delay in clinical development orregulatory filings.

 

**Because we are dependent on clinical researchcenters and other contractors for clinical testing and for certain research anddevelopment activities, the results of our clinical trials and such researchactivities are, to a certain extent, beyond our control.**

 

The nature of clinical trials and our business strategy requires us torely on clinical research centers and our other contractors to assist us withclinical testing and certain research and development activities. As a result,our success is dependent upon the success of these outside parties inperforming their responsibilities. Although we believe our contractors areeconomically motivated to perform on their contractual obligations, we cannotdirectly control the adequacy and timeliness of the resources and expertiseapplied to these activities by our contractors. If our contractors do notperform their activities in an adequate or timely manner, the development andcommercialization of our drug candidates could be delayed.

 

**We expect to rely on collaborative partnersfor research and development and commercialization of certain potentialproducts.**

 

We expect to rely on collaborative arrangements for research anddevelopment and commercialization of certain drug candidates discovered anddeveloped by us, such as our agreement with Schering Corporation related to ourMP-8899-0406 Phase 2 Ceplene clinical trial in nonresponder hepatitis Cpatients and our agreement with Myriad Genetics related to the MX90745 seriesof caspase-inducer anti-cancer compounds. We cannot be certain that we will beable to maintain these collaborations or enter into any future collaborativearrangements, that any of our collaborations will be successful or that we willreceive revenues from any of these collaborations. The success of these and anyfuture collaborations will depend, in significant part, on our partners’development and strategic considerations, including the relative advantages ofalternative products being developed or marketed by competitors. If ourpartners fail to conduct their activities in a timely manner, or at all,preclinical or clinical development of drug candidates under thosecollaborations could be delayed or terminated. The suspension or termination ofour collaborations, the failure of our collaborations to be successful or thedelay in the development or commercialization of drug candidates pursuant toour collaborations could harm our business.

 

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**Our planned business may expose us toproduct, clinical trial and other liability claims.**

 

Our design, testing and development of potential products involves aninherent risk of exposure to clinical trial and product liability claims andrelated adverse publicity. Insurance coverage is expensive and difficult toobtain, and we may be unable to obtain coverage in the future on acceptableterms, if at all. Although we currently maintain clinical trial insurance forour drug candidates in the amounts we believe to be commercially reasonable, wecannot be certain that the coverage limits of our insurance policies or thoseof our strategic partners will be adequate. If we are unable to obtainsufficient insurance at an acceptable cost or if a claim is brought against us,whether fully covered by insurance or not, our business, results of operationsand financial condition could be materially adversely affected.

 

**Our products may not be accepted, purchasedor used by doctors, patients or payors.**

 

Ceplene, and any of our other drug candidates in development, may notachieve market acceptance even if they are approved by the FDA, EMEA and similarinternational regulatory agencies. We cannot guarantee that physicians,patients, payors or the medical community in general will accept and utilizeany products that we develop. The degree of market acceptance of our potentialproducts will depend on a number of factors, including:

 

•                                          thescope of regulatory approvals;

 

•                                          theestablishment and demonstration of the clinical efficacy, safety and advantagesof our product candidates by clinical trial results, and the acceptance of suchresults by the medical community;

 

•                                          thepotential advantages of our products over existing treatment methods; and

 

•                                          reimbursementpolicies of government and other third-party payors.

 

**We have yet to market or sell any of ourproduct candidates.**

 

Although we currently intend to market Ceplene in the United States, ifit is approved by the FDA, through the recruitment of experienced marketing andsales personnel, we have never before marketed or sold any pharmaceuticalproduct. In order to market or co-market Ceplene or certain other drugcandidates, we will need to hire a significant number of people with relevantpharmaceutical experience to staff our sales force and marketing group, andpossibly also to make appropriate arrangements with collaborative partners. Ifwe cannot develop the required marketing and sales expertise both internallyand through our partnering arrangements, our ability to generate revenue fromproduct sales will likely suffer.

 

We intend to rely on collaborative partners to market and sell Ceplenein international markets, if approved for sale in such markets, and sucharrangements may be sought to market certain other drug candidates in allmarkets. We have not yet entered into any collaborative arrangement withrespect to marketing or selling Ceplene with the exception of agreementsrelating

 

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to Australia, New Zealand and Israel. We cannot guarantee that we willbe able to enter into any such arrangements on terms favorable to us, or atall. If we are able to enter into marketing and selling arrangements withcollaborative partners, we cannot assure you that such marketing collaboratorswill apply adequate resources and skills to their responsibilities, or thattheir marketing efforts will be successful. If we are unable to enter intofavorable collaborative arrangements with respect to marketing or sellingCeplene or our marketing collaborators efforts are not successful, our abilityto generate revenue from product sales will suffer.

 

**We will be dependent on third partymanufacturers of our product candidates. Our ability to sell our productcandidates may be harmed if adequate quantities of our product candidates arenot manufactured on a timely basis.**

 

We do not intend to acquire or establish our own dedicatedmanufacturing facilities for Ceplene and our other drug candidates in theforeseeable future. We have contracted and expect to continue to contract withestablished pharmaceutical manufacturers for the production of Ceplene. If weare unable to continue to contract with third-party manufacturers on acceptableterms or our manufacturers do not comply with applicable regulatoryrequirements, our ability to conduct clinical testing and to produce commercialquantities of Ceplene and other product candidates will be adversely affected.If we cannot adequately manufacture our product candidates, it could result indelays in submissions for regulatory approval and in commercial productlaunches, which in turn could materially impair our competitive position andthe possibility of achieving profitability. We cannot guarantee that we will beable to maintain our existing contract manufacturing relationships, or acquireor establish new, satisfactory third-party relationships to provide adequatemanufacturing capabilities in the future.

 

**We may not be able to successfully obtainreimbursement for Ceplene therapy offered under the treatment protocol approvedby the FDA and efforts to obtain reimbursement may divert management’sattention and resources, which could adversely affect our business**

 

In April 2004 we announced that our treatment protocol to provideour investigational drug Ceplene, in combination with IL-2, for the treatmentof patients with advanced malignant melanoma, had been approved by the FDA. Thetreatment protocol allows us to provide expanded access of Ceplene to patientsin the United States while investigation of the drug continues in ourconfirming Phase 3 clinical trial.  The FDA also agreed to allow reimbursement forstudy medication, which will allow us to recover costs associated withproviding qualified patients access to Ceplene therapy.  The cost of providing the study medicationis high and no assurances can be made that we will be successful in our effortsto obtain reimbursement for the study medication.  In addition, insurance companies typically do not reimburse forinvestigational medications.  If we arenot successful in obtaining reimbursement for the study medication ourfinancial position could suffer, and the efforts to obtain reimbursement maydivert management’s attention and resources, which could adversely affect ourbusiness.  In addition, we may usecontractors to assist us with obtaining reimbursement.  Accordingly, our success in obtainingreimbursement may be dependent upon the success of these outside parties inperforming their responsibilities.  Ifour contractors do not perform their activities in an adequate or timelymanner, we may not be successful at obtaining reimbursement.

 

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**We are not profitable and expect to continueto incur losses. If we do not become profitable, we may ultimately be forced todiscontinue our operations.**

 

We are a development-stage enterprise. We have experienced net lossesevery year since our inception. Our net losses applicable to common stock were$18.8 million and $20.3 million for the six months ended March 31,2004 and 2003. As of March 31, 2004, we had an accumulated deficit ofapproximately $325.3 million. We anticipate incurring substantialadditional losses over at least the next several years related to developingand testing our drug candidates and preparing for commercialization and plannedmarket launches of our products. If we do not become profitable, our stockprice will be negatively affected, and we may ultimately be forced todiscontinue our operations. We may never generate product revenues or becomeprofitable. We expect to have quarter-to-quarter fluctuations in revenues,expenses and losses, some of which could be significant.

 

**We will need to raise additional funds in thefuture. If we are unable to obtain the funds necessary to continue ouroperations, we will be required to delay, scale back or eliminate one or moreof our drug development programs.**

 

We have already spent substantial funds developing our potentialproducts and business. We expect to continue to have negative cash flow fromour operations for at least the next several years. We will have to raiseadditional funds to complete the development of our drug candidates and tobring them to market. Our future capital requirements will depend on numerousfactors, including:

 

•                                          theresults of our clinical trials;

 

•                                          thetiming and scope of any additional clinical trials undertaken;

 

•                                          thescope and results of our research and development programs;

 

•                                          thetime required to obtain regulatory approvals;

 

•                                          ourability to establish marketing alliances and collaborative agreements;

 

•                                          thecost of our internal marketing activities; and

 

•                                          thecost of filing, prosecuting and, if necessary, enforcing patent claims.

 

Additional financing may not be available on acceptable terms, if atall. If adequate funds are not available, we will be required to delay, scaleback or eliminate one or more of our drug development programs or obtain fundsthrough arrangements with collaborative partners or others that may require usto relinquish rights to certain of our technologies or product candidates thatwe would not otherwise relinquish.

 

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**We compete against many companies andresearch institutions that are developing products to treat the same diseasesas our drug candidates. To the extent these competitors are successful indeveloping and marketing such products, our future potential market share andrevenues could be reduced.**

 

There are many companies, both publicly and privately held, includingwell-known pharmaceutical companies and academic and other researchinstitutions, engaged in developing pharmaceutical products for the treatmentof life-threatening cancers and liver diseases. Products developed by any ofthese companies or institutions may demonstrate greater safety or efficacy thanour drug candidates or be more widely accepted by doctors, patients orthird-party payors. Many of our competitors and potential competitors havesubstantially greater capital resources, research and development capabilitiesand human resources than we do. Many of these competitors also havesignificantly greater experience than we do in undertaking preclinical testingand clinical trials of new pharmaceutical product candidates and obtaining FDA,EMEA and other regulatory approvals. If any of our drug candidates are approvedfor commercial sale, we will also be competing with companies that have greaterresources and experience in manufacturing, marketing and selling pharmaceuticalproducts. To the extent that any of our competitors succeed in developingproducts that are more effective, less costly or have better side effectprofiles than our products, then our future potential market share coulddecrease, which may have a negative impact on our business.

 

**If we fail to secure adequate protection ofour intellectual property or the right to use certain intellectual property ofothers, we may not be able to protect our product candidates and technologiesfrom competitors.**

 

Our success depends in large part on our ability to obtain, maintainand protect patents, trademarks and trade secrets and to operate withoutinfringing upon the proprietary rights of others. If we are unable to do so,our product candidates and technologies may not provide us with any competitiveadvantage.

 

The patent positions of biotechnology and pharmaceutical companies arehighly uncertain and involve complex legal and factual questions, and thebreadth of claims allowed in biotechnology and pharmaceutical patents cannot bepredicted. As a result, patents may not issue from any of our patentapplications. Patents currently held by us or issued to us in the future, or tolicensors from whom we have licensed technology rights, may be challenged,invalidated or circumvented so that our intellectual property rights may notprotect our technologies or provide commercial advantage to us. In addition, wealso rely on unpatented trade secrets and proprietary know-how, and we cannotbe sure that others will not obtain access to or independently develop suchtrade secrets and know-how. Enforcement of our intellectual property rightsagainst any infringers of our patents relating to Ceplene and our othertechnologies will be costly and time-consuming. Because of the nature of thosepatents, we could be required to bring lawsuits against many different entitiessuch as hospitals or clinics. This would have the effect of increasing thecosts of enforcing our rights.

 

The pharmaceutical industry has experienced extensive litigationregarding patent and other intellectual property rights. Although to date weare not aware of any intellectual property claims against us, in the future wecould be forced to incur substantial costs in defending ourselves in

 

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lawsuits that are brought against us claiming that we have infringed onthe patent rights of others or in asserting our patent rights in lawsuitsagainst other parties. We may also be required to participate in interferenceproceedings declared by the United States Patent and Trademark Office orinternational patent authorities for the purpose of determining the priority ofinventions in connection with our patent applications or other parties’ patentapplications. Adverse determinations in litigation or interference proceedingscould require us to seek licenses that may not be available on commerciallyreasonable terms or subject us to significant liabilities to third parties.

 

**The technology in our sector is developingrapidly, and our future success depends on our ability to keep abreast oftechnological change.**

 

We are engaged in the pharmaceutical field, which is characterized byextensive research efforts and rapid technological progress. New developmentsin oncology, cancer therapy, medicinal pharmacology, biochemistry and otherfields are expected to continue at a rapid pace. Research and discoveries byothers may render some or all of our proposed programs or product candidatesnoncompetitive or obsolete. Our business strategy is subject to the risksinherent in the development of new product candidates using new technologiesand approaches. Unforeseen problems may develop with these technologies orapplications, and we may not be able to successfully address technologicalchallenges we encounter in our research and development programs. This mayresult in our inability to develop commercially feasible products.

 

**Our future success depends on our ability toattract and retain key personnel.**

 

Our success will depend, to a great extent, upon the experience,abilities and continued services of our executive officers, and key personnelfor research, development and commercialization. If we lose the services of anyof these officers or key research and development personnel, our business couldbe harmed. Our success also will depend upon our ability to attract and retainother highly qualified research and development, managerial, manufacturing andsales personnel and our ability to develop and maintain relationships withqualified clinical researchers. Competition for these personnel andrelationships is intense and we compete with numerous pharmaceutical andbiotechnology companies as well as with universities and non-profit researchorganizations. We may not be able to continue to attract and retain qualifiedpersonnel or develop and maintain relationships with clinical researchers.

 

**The marketability of our product candidatesmay depend on reimbursement and reform measures in the health care industry.**

 

Our success may depend, in part, on the extent to which reimbursementfor the costs of therapeutic product candidates and related treatments will beavailable from third-party payors such as United States and similarinternational government health administration authorities, private healthinsurers, managed care programs and other organizations. Over the past decade,the cost of health care has risen significantly, and there have been numerousproposals by legislators, regulators and third-party health care payors to curbthese costs. Some of these proposals have involved limitations on the amount ofreimbursement for certain products and product candidates. We cannot guaranteethat similar United States federal or state or similar international healthcare legislation will not be adopted in the future or that any productcandidates sought to be

 

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commercialized by us will be considered cost-effective or that adequatethird-party insurance coverage will be available for us to establish andmaintain price levels sufficient for realization of an appropriate return onour investment in product development. Moreover, the existence or threat of costcontrol measures could have an adverse effect on the willingness of potentialcollaborators to pursue research and development programs related to ourproduct candidates.

 

**We may engage in strategic transactions,which could adversely affect our business.**

 

From time to time we consider strategic transactions and alternativeswith the goal of maximizing stockholder value. These potential transactions mayinclude a variety of different business arrangements, including spin-offs,acquisitions, strategic partnerships, joint ventures, restructurings,divestitures, business combinations and investments. We cannot assure you thatany such transactions will be consummated on favorable terms or at all, will infact enhance stockholder

 

value, or will not adversely affect our business or the trading priceof our stock. Any such transactions may require us to incur non-recurring orother charges and may pose significant integration challenges and/or managementand business disruptions, any of which could materially and adversely affectour business and financial results.

 

**We have been named as a defendant insecurities class action and other litigation that could result in substantialcosts and divert management’s attention and resources.**

 

On December 14, 2000 plaintiff Blake Martin, on behalf of himselfand purportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against us and two officers of our Company, alleging violations offederal securities laws related to declines in the Company’s stock price inconnection with various statements and alleged omissions to the public and tothe securities markets, and seeking damages therefore. In December 2003,the United States Federal Court granted our motion to dismiss the lawsuit withprejudice and without leave to amend. On December 30, 2003, plaintiffBlake Martin exercised his right to appeal the decision of the United StatesDistrict Court for the Southern District of California to the Ninth Circuit.The complaint has been tendered to our insurance carrier.

 

In October 2001 and May 2002, certain former shareholders ofCytovia, Inc. filed complaints in California Superior Court in San Diego,against us and two of our officers based on similar facts and circumstances,alleging fraud and negligent misrepresentation in connection with ouracquisition of Cytovia. A binding arbitration proceeding with the AmericanArbitration Association was held in May 2003. The three-member arbitrationpanel rejected all of the plaintiffs’ claims, determined that we have noliability for such claims and awarded recovery of our reasonable attorneys’fees and costs of approximately $922,000 as prevailing party in theproceedings. In December 2003, the decision was confirmed by the SuperiorCourt, which entered a judgment to this effect. In January 2004, theplaintiffs filed a notice of appeal.

 

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No assurances can be made that we will be successful in our defense ofthe pending claims. If we are not successful in our defense of such claims, wecould be forced to make significant payments to our stockholders, theplaintiffs and defense lawyers, and such payments could have a material adverseeffect on our business, financial condition and results of operations if notcovered by our insurance carrier. Even if our defense against such claims issuccessful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect ourbusiness.

 

**Our stock price may be highly volatile due to externalfactors.**

 

Ourcommon stock currently trades on the Nasdaq National Market and on the OMStockholm Exchange. Historically, our common stock has generally experiencedrelatively low daily trading volumes in relation to the aggregate number ofshares outstanding. The Company currently has a $75 million shelf registrationstatement on file with the Securities and Exchange Commission.  Sales of substantial amounts of our commonstock in the public market could adversely affect the prevailing market pricesof our common stock and our ability to raise equity capital in the future.

 

Factorsthat may have a significant impact on the market price or the liquidity of ourcommon stock also include:

 

•                                          actual or potential clinical trial resultsrelating to drug candidates under development by us or our competitors;

 

•                                          delays in our clinical testing anddevelopment schedules;

 

•                                          events or announcements relating to ourcollaborative relationships;

 

•                                          announcements of technological innovations ornew products or drug candidates by us or our competitors;

 

•                                          developments or disputes concerning patents orproprietary rights;

 

•                                          regulatory developments in both the UnitedStates and other countries;

 

•                                          economic and other external factors,disasters or crises, as well as period-to-period fluctuations in our financialresults;

 

•                                          market conditions for pharmaceutical andbiotechnology stocks, whether or not related to results or news regarding us orour competitors; and

 

•                                          publicity regarding actual or potentialmedical results relating to products or drug candidates under development by usor our competitors.

 

Externalfactors may also adversely affect the market price for our common stock. The

 

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priceand liquidity of our common stock may be significantly affected by the overalltrading activity and market factors on the Nasdaq National Market and the OMStockholm Exchange, and these factors may differ between the two markets. Inaddition, the securities markets have from time to time experienced significantprice and volume fluctuations that may be unrelated to the operatingperformance of particular companies. The market prices of the common stock ofmany publicly traded pharmaceutical or biotechnology companies have in the pastbeen, and can in the future be expected to be, especially volatile.

 

**Certain anti-takeover provisions in ourcharter, by-laws, shareholder rights plan and under Delaware law may deter athird party from acquiring us, even though such acquisition may be beneficialto our stockholders.**

 

Certain provisions of our charter and by-laws may make it moredifficult for a third party to acquire control of us, even though such acquisitionmay be beneficial to our stockholders. These provisions include, but are notlimited to:

 

•                                          astaggered or classified board;

 

•                                          theinability of stockholders to act by written consent; and

 

•                                          noright to remove directors other than for cause.

 

We have also adopted a shareholder rights plan or “poison pill.” Ourshareholder rights plan is designed to protect our shareholders in the event ofan unsolicited bid to acquire the Company. In general terms, the rights planimposes a significant penalty upon any person or group that acquires 15% ormore of our outstanding common stock without the approval of our board ofdirectors. Our shareholder rights plan could discourage a third party fromattempting to acquire us through an acquisition of our outstanding votingstock, even though such acquisition may be beneficial to our stockholders.

 

Our board of directors also has the authority to issue, at any time,without further stockholder approval, up to 5,000,000 shares of preferredstock, and to determine the price, rights, privileges and preferences of thoseshares. These preferred shares are available to be used in connection with ourshareholder rights plan. Any issuance of preferred stock could discourage athird party from acquiring a majority of our outstanding voting stock.

 

Furthermore, we are subject to the provisions of Section 203 ofthe Delaware General Corporations Law, an anti-takeover law, which may alsodissuade a potential acquiror, even though such acquisition may be beneficialto our stockholders.

 

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**Issuing preferred stock with rights senior tothose of our common stock could adversely affect holders of common stock.**

 

Our charter documents give our board of directors the authority toissue series of preferred stock without a vote or action by our stockholders.The board also has the authority to determine the terms of preferred stock,including price, preferences and voting rights. The rights granted to holdersof preferred stock may adversely affect the rights of holders of our commonstock. For example, a series of preferred stock may be granted the right toreceive a liquidation preference—a pre-set distribution in the event of aliquidation—that would reduce the amount available for distribution to holdersof common stock. In addition, the issuance of preferred stock could make itmore difficult for a third party to acquire a majority of our outstandingvoting stock. As a result, common stockholders could be prevented fromparticipating in transactions that would offer an optimal price for theirshares.

 

#### **ITEM 3**. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

#### ** **

The Company’s exposure to market risk is principally confined to itscash equivalents and investments that have maturities of less than three years.The Company maintains a non-trading investment portfolio of investment grade,liquid debt securities that limits the amount of credit exposure to any oneissue, issuer or type of instrument. The securities in its investment portfolioare not leveraged, are classified as available-for-sale and are subject tointerest rate risk. The Company currently does not hedge interest rateexposure. A hypothetical ten percent change in interest rates during thequarter ended March 31, 2004 would have resulted in approximately a$40,000 change in net loss.  The Companyhas not used derivative financial instruments in its investment portfolio.There have been no significant changes in the types or maturities ofinvestments held from September 30, 2003.

 

###### **ITEM 4**. CONTROLS AND PROCEDURES

###### ** **

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’sPresident and Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of theperiod covered by this report.  Basedupon that evaluation, the Company’s President and Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective in enabling the Company to record, process, summarizeand report information required to be included in the Company’s periodic filingswith the Securities Exchange Commission within the required time period.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to the date the Company carried out itsevaluation.

 

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**PART II****–OTHERINFORMATION**

 

*Item1.  Legal Proceedings*

* *

On December 14, 2000 plaintiff Blake Martin, on behalf of himselfand purportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against the Company and two officers of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets, and seeking damages therefore. InDecember 2003, the United States Federal Court granted the Company’smotion to dismiss the lawsuit with prejudice and without leave to amend.  On December 30, 2003, plaintiff BlakeMartin exercised his right to appeal the decision of the United States DistrictCourt for the Southern District of California to the Ninth Circuit.  The complaint has been tendered to the Company’sinsurance carrier.

 

InOctober 2001 and May 2002, certain former shareholders of Cytovia filedcomplaints in California Superior Court in San Diego against the Company andtwo of its officers based on similar facts and circumstances, alleging fraud andnegligent misrepresentation in connection with the Company’s acquisition ofCytovia.  A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003.  The three-member arbitration panel rejectedall of the plaintiffs’ claims, determined that the Company has no liability forsuch claims and awarded recovery of the Company’s reasonable attorneys’ feesand costs of approximately $922,000 as prevailing party in the proceeding.  In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In January 2004, the plaintiffs filed anotice of appeal.

 

TheCompany believes that the claims set forth in the pending complaints arewithout merit, and it intends to engage in a rigorous defense against suchclaims.  No assurances can be made that the Companywill be successful in its defense of the pending claims. If the Company is notsuccessful in its defense of such claims, the Company could be forced to makesignificant payments to its stockholders, the plaintiffs and defense lawyers,and such payments could have a material adverse effect on the Company’sbusiness, financial condition and results of operations if not covered by theCompany’s insurance carrier. Even if the Company’s defense against such claimsis successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect theCompany’s business.

 

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*Item 4.  Submission of Mattersto a Vote of Security Holders*

 

a)                  The Company’s Annual Meeting ofStockholders (the “Annual Meeting”) was held on February 19, 2004.

 

b)                 At the Annual Meeting, thestockholders considered and approved the following proposals:

 

(i)     Election of Directors to serve until the 2007Annual Meeting of Stockholders.  Thestockholders voted to elect Per-Olof Mårtensson as a Director with 24,269,524votes cast for the nominee.  A total of58,493 of the shares had abstained. The stockholders voted to elect Larry G.Stambaugh as a Director with 24,238,489 votes cast for the nominee.  A total of 89,528 of the shares hadabstained.  The stockholders voted toelect Wayne P. Yetter as a Director with 24,277,112 votes cast for thenominee.  A total of 50,905 of theshares had abstained.  There were novotes against, votes withheld or broker non-votes with respect to the electionof any of the nominees.

 

(ii)    Approval of the amendment to the 2001 IncentiveStock Option Plan (the “Plan”) to increase the aggregate number of shares ofthe Company’s common stock authorized for issuance pursuant to the Plan from atotal of 2,750,000 shares to 4,250,000 shares. The stockholders approved the amendment to the Plan.  The proposal received 4,148,828 votes infavor, 794,287 votes against and 21,310 abstentions.  There were no votes withheld and there were 19,363,592 brokernon-votes with respect to the proposal.

 

(iii)    Approval of the amendment to the Company’s Amendedand Restated Certificate of Incorporation to increase the authorized number ofshares of common stock from 40,000,000 to 60,000,000 shares.  The stockholders approved the amendment tothe Certificate of Incorporation.  Theproposal received 23,644,666 in favor, 696,138 against, and 17,084 abstentions.

 

(iv)   Ratification of Appointment of KPMG LLP asindependent auditors of the Company for its fiscal year endingSeptember 30, 2004.  Thestockholders ratified the selection of KPMG LLP as the independent publicauditors of the Company for the fiscal year ended September 30, 2004 with24,297,906 votes cast for ratification, 43,207 votes against ratification and15,775 abstentions.  There were no voteswithheld or broker non-votes with respect to the proposal.

 

*Item 6. Exhibits and Reports on Form 8-K*

 

*a)**            Exhibits*

 
| 3.1  |   | Certificate  of Amendment to Amended and Restated Certificate of Incorporation. (1)                                                                                                  |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Amended  and Restated Certificate of Incorporation of Registrant. (2)                                                                                                                |
| 10.1 |   | License  Agreement dated March 1, 2004 between the Registrant and Shire BioChem,  Inc.‡                                                                                    |
| 10.2 |   | Registrant’s  2001 Incentive Stock Option Plan, as amended. (3)                                                                                                                 |
| 31.1 |   | Certification  by Larry G. Stambaugh, Chief Executive Officer, Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 31.2 |   | Certification  by Anthony E. Altig, Chief Financial Officer, Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.   |
| 32   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                  |

 

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‡                                          Confidential treatment has been requestedwith respect to deleted portions of this agreement.

 

(1)                                  Previously filed asExhibit C with Registrant’s Definitive Proxy Statement filed with the SEC onJanuary 16, 2004, and incorporated herein by reference.

 

(2)                                  Previously filed withRegistrant’s Registration Statement on Form SB-2 (File No. 333-4854-LA) oramendments thereto, and incorporated herein by reference.

 

(3)                                  Previously filed withRegistrant’s Registration Statement on Form S-8 (File No. 333-113326) onMarch 5, 2004, and incorporated herein by reference.

 

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*b)**            Reports onForm 8-K*

 
| **Date of Report**    |   | **Description  of Exhibit** |   | **Financial  Statements Filed** |
|-----------------------|--------|-----------------------------|--------|---------------------------------|
| February 3, 2004 |   | Press Release: “Maxim  |   | No                              |
|                  |   | Pharmaceuticals Announces   |   |                            |
|                  |   | Fiscal 2004 First Quarter   |   |                            |
|                  |   | Financial Results”     |   |                            |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               | MAXIM  PHARMACEUTICALS, INC. |
|--------------------|------------------------------|
|               | By:                          | /s/ Anthony E. Altig |
|               |                         | Anthony E. Altig, |
|               |                         | *Vice President, Finance and Chief Financial Officer  (Principal Financial and Accounting Officer duly authorized to  sign on behalf of the registrant)* |
| Date:  May 7, 2004 |                         |   |

 

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