**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-Q**

 

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| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31,2005**

 

**Commission File No. 0-16614**

 

**NEORXCORPORATION**

(Exact name ofRegistrant as specified in its charter)

 
| **Washington**                                                               | ** ** | **91-1261311**                     |
|------------------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)             |       | (IRS Employer  Identification No.) |
| ** **                                                                   | ** ** | ** **                         |
| **300 Elliott Avenue West, Suite  500, Seattle, Washington 98119-4114**      |
| (Address of principal  executive offices)                                    |
| ** **                                                                   | ** ** | ** **                         |
| Registrant’s telephone  number, including area code: **(206) 281-7001** |

 

Indicate by check mark whether the Registrant:(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

| Yes | ý |   | No | o |
|-----|--------|--------|----|---|

 

 

Indicate by check mark whether the Registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act.

 

| Yes | ý |   | No | o |
|-----|--------|--------|----|---|

 

As of May 6, 2005, 34,228,953 shares of theRegistrant’s common stock, $.02 par value per share, were outstanding.

 

 

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**TABLE OFCONTENTS**

 

**QUARTERLYREPORT ON FORM 10-QFOR THE QUARTER ENDED MARCH 31, 2005**

 
| **PART I**    | **FINANCIAL INFORMATION**                                                                                             | ** ** |
|---------------|-----------------------------------------------------------------------------------------------------------------------|------------|
|          |                                                                                                                  |       |
| Item 1.       | Financial Statements                                                                                                  |       |
|          |                                                                                                                  |       |
|          | Condensed  Consolidated Balance Sheets as of March 31, 2005 (unaudited) and  December 31, 2004              |       |
|          |                                                                                                                  |       |
|          | Condensed  Consolidated Statements of Operations for the Three Months Ended  March 31, 2005 and 2004 (unaudited) |       |
|          |                                                                                                                  |       |
|          | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2005 and 2004 (unaudited) |       |
|          |                                                                                                                  |       |
|          | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                     |       |
|          |                                                                                                                  |       |
| Item  2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |       |
|          |                                                                                                                  |       |
| Item  3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                           |       |
|          |                                                                                                                  |       |
| Item 4.       | Controls and  Procedures                                                                                              |       |
|          |                                                                                                                  |       |
| **PART II**   | **OTHER INFORMATION**                                                                                                 | ** ** |
|          |                                                                                                                  |       |
| Item 6.       | Exhibits                                                                                                              |       |
|          |                                                                                                                  |       |
| Signatures    |                                                                                                                  |       |
|          |                                                                                                                  |       |
| Exhibit Index |                                                                                                                  |       |

 

2

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**PART I.  FINANCIAL INFORMATION**

** **

**Item 1.**  Financial Statements

 

**NEORX CORPORATION ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

** **
| ** **                                                                                                                                                                                     | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| **ASSETS**                                                                                                                                                                                     |       |                     |       |                        |       |
| ** **                                                                                                                                                                                     |       |                     |       |                        |       |
| **Current assets:**                                                                                                                                                                            |       |                     |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                     |       | $                        | 16,147     |                        | $          | 16,254 |   |
| Investment  securities                                                                                                                                                                         |       | —                   |       | 1,499                       |       |
| Prepaid  expenses and other current assets                                                                                                                                                     |       | 646                      |       | 639                         |       |
| Total  current assets                                                                                                                                                                          |       | 16,793                   |       | 18,392                      |       |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| Facilities  and equipment, net                                                                                                                                                                 |       | 6,986                    |       | 7,102                       |       |
| Other  assets                                                                                                                                                                                  |       | 67                       |       | 67                          |       |
| Licensed  products, net of accumulated amortization of $167 and $125                                                                                                                           |       | 1,833                    |       | 1,875                       |       |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| **Total assets**                                                                                                                                                                               |       | $                        | 25,679     |                        | $          | 27,436 |   |
| ** **                                                                                                                                                                                     |       |                     |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| **Current liabilities:**                                                                                                                                                                       |       |                     |       |                        |       |
| Accounts  payable                                                                                                                                                                              |       | $                        | 539        |                        | $          | 1,130 |   |
| Accrued  liabilities                                                                                                                                                                           |       | 1,560                    |       | 1,271                       |       |
| Current  portion of note payable                                                                                                                                                               |       | 269                      |       | 302                         |       |
| Total  current liabilities                                                                                                                                                                     |       | 2,368                    |       | 2,703                       |       |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| **Long-term liabilities:**                                                                                                                                                                     |       |                     |       |                        |       |
| Note  payable, net of current portion                                                                                                                                                          |       | 3,882                    |       | 3,905                       |       |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| **Shareholders’ equity:**                                                                                                                                                                 |       |                     |       |                        |       |
| Preferred stock, $.02 par value, 3,000,000  shares authorized:                                                                                                                                 |       |                     |       |                        |       |
| Convertible  preferred stock, Series 1, 205,340 shares issued and outstanding at March 31,  2005 and December 31, 2004 (entitled in liquidation to $5,300 and  $5,175, respectively) |       | 4                        |       | 4                           |       |
| Convertible  preferred stock, Series B, 1,575 shares issued and outstanding at March 31,  2005 and December 31, 2004 (entitled in liquidation to $15,750)                            |       | —                   |       | —                      |       |
| Common  stock, $.02 par value, 60,000,000 shares authorized, 34,228,953 and  30,908,753 shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively         |       | 685                      |       | 618                         |       |
| Additional  paid-in capital                                                                                                                                                                    |       | 258,244                  |       | 254,510                     |       |
| Accumulated  deficit, including other comprehensive loss of $0 and $1 at March 31,  2005 and December 31, 2004, respectively                                                         |       | (239,504                 | )          | (234,304                    | )          |
| Total  shareholders’ equity                                                                                                                                                               |       | 19,429                   |       | 20,828                      |       |
|                                                                                                                                                                                           |       |                     |       |                        |       |
| **Total liabilities and shareholders’ equity**                                                                                                                                            |       | $                        | 25,679     |                        | $          | 27,436 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

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**NEORX CORPORATION ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

(in thousands, except share data)

 
| ** **                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                           |       |                                  |       |   |   |
| **Revenues**                                   |       | $                                     | —     |   | $ | 500 |   |
| **Operating expenses:**                        |       |                                  |       |   |   |
| Research  and development                      |       | 3,345                                 |       | 3,782 |   |
| General  and administrative                    |       | 1,761                                 |       | 1,677 |   |
| Total  operating expenses                      |       | 5,106                                 |       | 5,459 |   |
| Loss  from operations                          |       | (5,106                                | )          | (4,959 | ) |
| **Other income (expense):**                    |       |                                  |       |   |   |
| Interest  income                               |       | 93                                    |       | 76 |   |
| Interest  expense                              |       | (63                                   | )          | (47 | ) |
| Total other income                             |       | 30                                    |       | 29 |   |
|                                           |       |                                  |       |   |   |
| Net  loss                                      |       | (5,076                                | )          | (4,930 | ) |
| Preferred  stock dividends                     |       | (125                                  | )          | (125 | ) |
| Net  loss applicable to common shares          |       | $                                     | (5,201     | ) | $ | (5,055 | ) |
|                                           |       |                                  |       |   |   |
| Loss  per share applicable to common shares:   |       |                                  |       |   |   |
| Basic  and diluted                             |       | $                                     | (0.16      | ) | $ | (0.17 | ) |
|                                           |       |                                  |       |   |   |
| Shares  used in calculation of loss per share: |       |                                  |       |   |   |
| Basic  and diluted                             |       | 31,794                                |       | 28,919 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

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**NEORX CORPORATION ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

(in thousands)

 
| ** **                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                         |       |                                  |       |   |   |
| **Cash flows from operating activities:**                                    |       |                                  |       |   |   |
| Net  loss                                                                    |       | $                                     | (5,076     | ) | $ | (4,930 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Depreciation  and amortization                                               |       | 200                                   |       | 170 |   |
| Stock  options and warrants issued for services                              |       | (12                                   | )          | 4 |   |
| Change  in operating assets and liabilities:                                 |       |                                  |       |   |   |
| Prepaid  expenses and other assets                                           |       | (7                                    | )          | 125 |   |
| Accounts  payable                                                            |       | (591                                  | )          | 263 |   |
| Accrued  liabilities                                                         |       | 164                                   |       | (318 | ) |
| Net  cash used in operating activities                                       |       | (5,322                                | )          | (4,686 | ) |
|                                                                         |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                    |       |                                  |       |   |   |
| Proceeds  from sales and maturities of investment securities                 |       | 1,500                                 |       | 3,976 |   |
| Purchases  of investment securities                                          |       | —                                |       | (18 | ) |
| Facilities  and equipment purchases                                          |       | (42                                   | )          | (68 | ) |
| Net  cash provided by investing activities                                   |       | 1,458                                 |       | 3,890 |   |
|                                                                         |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                    |       |                                  |       |   |   |
| Proceeds  from stock options and warrants exercised                          |       | —                                |       | 215 |   |
| Repayment  of note payable principal                                         |       | (56                                   | )          | (92 | ) |
| Net  proceeds from issuance of common stock and warrants                     |       | 3,813                                 |       | 9,042 |   |
| Net  cash provided by financing activities                                   |       | 3,757                                 |       | 9,165 |   |
|                                                                         |       |                                  |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                        |       | (107                                  | )          | 8,369 |   |
|                                                                         |       |                                  |       |   |   |
| **Cash and cash equivalents:**                                               |       |                                  |       |   |   |
| Beginning of period                                                          |       | 16,254                                |       | 15,166 |   |
| End of period                                                                |       | $                                     | 16,147     |   | $ | 23,535 |   |
|                                                                         |       |                                  |       |   |   |
| **Supplemental disclosure of cash flow  information:**                       |       |                                  |       |   |   |
| Accrual  of preferred dividend                                               |       | $                                     | 125        |   | $ | 125 |   |
| Cash  paid for interest                                                      |       | $                                     | 59         |   | $ | 47 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

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**NEORXCORPORATION AND SUBSIDIARY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

# **Note1.**  Basis ofPresentation

# ** **

The accompanyingunaudited condensed consolidated financial statements include the accounts ofNeoRx Corporation and subsidiary (the Company). All intercompany balances and transactions have been eliminated inconsolidation.

 

The Company hashistorically suffered recurring operating losses and negative cash flows fromoperations.  As of March 31, 2005,the Company had net working capital of $14.4 million and had an accumulateddeficit of $239.5 million with total shareholders’ equity of $19.4million.  These consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States, assuming that the Company willcontinue as a going concern.

 

While management believesthat current cash and cash equivalent balances, and any net cash provided byoperations, will provide adequate resources to fund operations at least until December 31, 2005,this may not be the case.  Management istherefore contemplating a number of alternatives to enable the Company tocontinue operating, including:

 

**•**      raisingadditional capital to fund continuing operations by private placements or othersales of equity or debt securities or through the establishment of otherfunding facilities;

 

**•**      enteringinto strategic collaborations, which may include joint ventures or partnershipsfor product development and commercialization, merger, sale of assets or othersimilar transactions; and

 

**•**      obtainingadditional capital resources to fund operations through cost cuttingmechanisms, including the delay, reduction or curtailment of the Company’s currentand planned product development programs.

 

On May 6, 2005, theCompany announced the immediate implementation of a strategic restructuringplan to reduce costs by discontinuing the Company’s STR development program. (See Note 7 below).

 

The Company’s inabilityto obtain additional cash as needed could have a material adverse effect on itsfinancial position, results of operations and its ability to continue inexistence. The accompanying condensed consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

Subjectto the foregoing, the accompanying condensed consolidated financial statementscontained herein have been prepared pursuant to the rules and regulations ofthe Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to those rules and regulations, although the Company believesthat the disclosures made are adequate to make the information presented notmisleading.  These financial statementsshould be read in conjunction with the Company’s annual report on Form 10-K forthe year ended December 31, 2004 filed with the SEC and available on theSEC’s website, www.sec.gov.

 

The accompanyingcondensed consolidated financial statements have been prepared withoutaudit.  In the opinion of management, thecondensed consolidated financial statements reflect all adjustments, consistingonly of normal recurring accruals necessary to present fairly the Company’sfinancial position as of March 31, 2005 and the results of operations andcash flows for the periods ended March 31, 2005 and 2004.

 

Theresults of operations for the periods ended March 31, 2005 and 2004 arenot necessarily indicative of the expected operating results for the full year.

 

*StockBased Compensation*:  The Company accounts for its stock optionplans for employees in accordance with the provisions of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations.  Compensationexpense related to employee stock options is recorded if, on

 

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the date of grant, the fair value ofthe underlying stock exceeds the exercise price.  The Company applies the disclosure-onlyrequirements of Statement of Financial Accounting Standard (SFAS) No. 123, “Accountingfor Stock-Based Compensation” and related interpretations, which allowsentities to continue to apply the provisions of APB Opinion No. 25 fortransactions with employees and to provide pro forma results of operationsdisclosures for employee stock option grants as if the fair-value based methodof accounting in SFAS No. 123 had been applied to these transactions.  Stock compensation costs related to fixedemployee awards with pro rata vesting are recognized on a straight-line basisover the period of benefit, generally the vesting period of the options.  For options and warrants issued to non-employees,the Company recognizes stock compensation costs utilizing the fair valuemethodology prescribed in SFAS No. 123 over the related period of benefit.

 

Had compensation cost for these stockoption plans for employees been determined using the fair value based method ofaccounting under SFAS No. 123, the Company’s net loss applicable to commonshares and loss per share would have been the pro forma amounts indicated below(in thousands, except per share data):

 
| ** **                                                                                         | ** ** | **Quarter ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net loss applicable to common shares:                                                              |       |                             |       |   |   |
|                                                                                               |       |                             |       |   |   |
| As reported                                                                                        |       | $                                | (5,201     | ) | $ | (5,055 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss                      |       | —                           |       | — |   |
| Deduct: Stock-based employee  compensation determined under fair value based method for all awards |       | (382                             | )          | (345 | ) |
| Pro forma                                                                                          |       | $                                | (5,583     | ) | $ | (5,400 | ) |
|                                                                                               |       |                             |       |   |   |
| Loss per common share, basic and  diluted:                                                         |       |                             |       |   |   |
|                                                                                               |       |                             |       |   |   |
| As reported                                                                                        |       | $                                | (0.16      | ) | $ | (0.17 | ) |
| Pro forma                                                                                          |       | $                                | (0.18      | ) | $ | (0.19 | ) |

 

Theper share weighted-average fair value of stock options granted during thequarters ended March 31, 2005 and 2004 was $1.20 and $3.94, respectively,on the grant date using the Black-Scholes option pricing model with thefollowing weighted average assumptions:
| ** **              | ** ** | **Quarter ended March  31,** | ** ** |
|-------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Expected dividend rate  |       | 0.0                          | %          | 0.0 | % |
| Risk-free interest rate |       | 3.96                         | %          | 2.40 | % |
| Expected volatility     |       | 122.0                        | %          | 123.4 | % |
| Expected life in years  |       | 3.85                         |       | 4.00 |   |

# ** **

# **Note2.**  Loss Per Common Share

# ** **

Basic and diluted loss per share are based on net lossapplicable to common shares, which is comprised of net loss and preferred stockdividends in all periods presented. Shares used to calculate basic loss pershare are based on the weighted average number of common shares outstandingduring the period.  Shares used to calculatediluted loss per share are based on the potential dilution that would occurupon the exercise or conversion of securities into common stock using thetreasury stock method.  The calculation of diluted loss per share exclude the effect ofthe following stock options and warrants to purchase additional shares ofcommon stock because the share increments would not be dilutive.

 

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| ** **             | ** ** | **Quarter ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                   |       |                              |       |   |   |
| Common  stock options  |       | 4,158,556                         |       | 3,767,322 |   |
| Common  stock warrants |       | 3,225,400                         |       | 2,387,500 |   |

 

Inaddition, 234,088 shares of common stock that would be issuable upon conversionof the Company’s Series 1 preferred stock are not included in the calculationof diluted loss per share for the periods ended March 31, 2005 and2004, respectively, and the 3,446,389 and 3,150,000 shares of common stock thatwould be issuable upon conversion of the Company’s Series B preferred stock arenot included in the calculation of diluted loss per share for the periods endedMarch 31, 2005 and 2004, respectively, because the effect of includingsuch shares would not be dilutive.

 

**Note 3.****  Comprehensive Loss**

 

The Company’scomprehensive loss for the quarters ended March 31, 2005 and 2004 was $5,075,000and $4,924,000, respectively.  Thecomprehensive loss for the quarters ended March 31, 2005 and 2004consisted of net loss of $5,076,000 and $4,930,000, respectively, and a netunrealized gain on investment securities of $1,000 and $6,000, respectively.

 

# **Note4.**  Common StockPrivate Placement

# ** **

The Company raisedapproximately $3,800,000 in net proceeds from the sale of 3,320,000 shares ofCommon Stock in a private placement transaction in March 2005 (the March 2005Financing).  In connection with this privateplacement, the Company issued five-year warrants to purchase an aggregate of1,328,000 shares of common stock at an exercise price of $2.00 per share.  The warrants are exercisable beginning on September 3,2005 and, thereafter, are exercisable at any time during their term.  The Company intends to use the net proceedsfrom the financing added to its existing funds to initiate a Phase II trial in picoplatin(NX 473) in small cell lung cancer and for general working capital, including restructuringcosts associated with the Company’s termination of its STR development program(see Note 7 below).  The 3,320,000 sharesof common stock issued in the March 2005 Financing,and the shares of common stock issuable upon exercise of the warrants relatedthereto, have been registered with the SEC.

 

# **Note5.**  Liquidity

# ** **

The Company will need toraise additional capital or enter into strategic partnerships for the clinicaldevelopment of its picoplatin platinum compound, and to fund its futureoperating cash needs.

 

The Company raisedapproximately $9,000,000 in net proceeds from the sale of Common Stock andwarrants in a private placement transaction in February 2004. The Companyraised approximately $3,800,000 in net proceeds from the sale of common stockand warrants in March 2005.

 

In connection with its2001 purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, the Company assumed $6,000,000 principal amount ofrestructured debt held by Texas State Bank, McAllen, TX.  The loan, which matures in April 2009,is secured by the assets acquired in the transaction.  The interest rate on the loan was 5.75% on March 31,2005.  The interest rate, which is equalto the bank prime rate and is adjusted on the same date that the bank primerate changes as reported in the Wall Street Journal, was 6.00% on May 6,2005.  The loan provides for a maximumannual interest rate of 18%.  Principaland interest are payable in monthly installments.  Principal and interest paid on the noteduring the quarters ended March 31, 2005 and 2004 totaled $115,000 and$139,000, respectively. In December 2003, the Company sold a non-essentialportion of the Denton facility, the proceeds of which ($827,000) were appliedto reduce the outstanding balance on the loan. As of March 31, 2005, theoutstanding balance of the loan was $4,151,000. The fixed monthly payments onthe note are

 

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recalculatedin April of each year based on the then current bank prime interest rateand outstanding note balance.  Becausethe loan is amortized over a fourteen-year period from its inception, aprincipal balance will remain at maturity in April 2009.  Based on an interest rate of 5.75%,******the estimated principal balancepayable at maturity would be $2,968,000.

 

Theterms of the Texas State Bank loan provide that an event of default may bedeemed to occur if the Company abandons, vacates or discontinues operations ona substantial portion of the Denton facility or there is a material adversechange in the Company’s operations. If this were to occur, Texas State Bankcould declare the entire outstanding amount of the loan ($4.2 million at March 31,2005) due and immediately payable. In such case, the Company’s cash resourcesand assets could be impaired depending on its ability to raise funds through asale of the Denton facility or other means.  Texas State Bank has confirmed that it willnot declare the loan in default based solely on the Company’s suspension,either temporarily or permanently, of manufacturing activities at the Dentonfacility.  Additionally, the Company doesnot believe that its strategic restructuring announced on May 6, 2005constitutes a material adverse change in the Company’s operations or wouldaffect the Company’s ability to continue to make payments under the loan, whichwould cause Texas State Bank to accelerate the loan, nor has Texas State Bankindicated that it views the restructuring as such.  The Company can provide no assurance,however, that Texas State Bank will not some time in the future seek to rely onthese or other provisions to declare the Company in default of the loan.  Based on a November 2002 appraisal ofthe Denton facility, the fair value of the facility and its assets exceeds theamount of the outstanding debt.

 

The Company’s actual capital requirements will dependupon numerous factors, including:

 

**•**      thescope and timing of the Company’s proposed picoplatin clinical program andother research and development efforts, including the Company’s ability toinitiate its Phase II trial of picoplatin in small cell lung cancer by mid-2005and the progress and costs of such trial;

 

**•**      the Company’s ability to obtain clinical supplies of picoplatindrug product in a timely and cost-effective manner;

 

**•**      actions taken by the US Food and Drug Administration (FDA)and other regulatory authorities;

 

**•**      thecosts of the strategic restructuring announced on May 6, 2005, including thecosts of discontinuing the STR development program, reducing the workforce andclosing and decommissioning the Denton, Texas manufacturing facility;

 

**•**      theCompany’s alternatives with respect to the STR assets, including any potentialdisposition or outlicensing alternatives and the timing, type and amount ofconsideration received and other terms of any such transactions;

 

**•**      the timing and amount of any milestone or other payments theCompany might receive from potential strategic partners;

 

**•**      the Company’s degree of success in commercializing picoplatinor any other cancer therapy product candidates;

 

**•**      the emergence of competing technologies and products, andother adverse market developments;

 

**•**      the acquisition or in-licensing of other products orintellectual property, if the Company chooses to undertake such activities; and

 

**•**       the costs of preparing, filing, prosecuting, maintaining andenforcing patent claims and other intellectual property rights.

 

There can be no assurancethat the Company will be able to obtain needed additional capital or enter intorelationships with corporate partners on a timely basis, on favorable terms, orat all.  Conditions in the capital

 

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marketsin general and the life science capital market specifically may affect theCompany’s potential financing sources and opportunities for strategicpartnering.  See Note 1 above.

 

**Note 6.****  Recent AccountingPronouncements**

 

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards (SFAS) No.123R, Share-Based Payment. SFAS 123Rreplaces SFAS 123, Stock-Based Compensation, issued in 1995. SFAS 123R requiresthat the fair value of the grant of employee stock options be reported as anexpense in theresults of operations. Historically, the Company has disclosed in its footnotes the pro formaexpense effect of the grants.  Stock compensation expense underthe prior rules would have increased reported diluted loss per share by $.02for the quarter ended March 31, 2005. Upon adoption of the revised standard, stock option awards will becharged to expense under the revised rules, which require that an expense berecognized equal to the fair value of the award.  The Company has not determined the effect ofthe new standard on its earnings; however, expense under the new standardcould be higher. The effect of adopting the new rules on reported dilutedearnings per share is dependent on the number of options granted in the future,the terms of those awards, and their fair values and, therefore, the effect ondiluted earnings per share could change. The adoption of the Statement isexpected to have a material effect on the financial statements.

 

In April 2005, the SEC approveda rule that delayed the effective date of SFAS No. 123R for publiccompanies. As a result, the Company expects to adopt the revised rules on January 1,2006.

 

**Note 7.****  Subsequent Event**

 

The Company recently hasbeen in discussions with the FDA to modify the eligibility criteria as apossible means of increasing slower than expected patient enrollment in its PhaseIII trial of STR in multiple myeloma. Based on these discussions, the Company concluded that continuation ofSTR development would not be economically feasible.  The FDA indicated that it wants torenegotiate the special protocol assessment for the Phase III trial.  The special protocol assessment is a writtenagreement between a company and the FDA that documents the design and plannedanalysis of a Phase III study.  The changesmentioned by the FDA would have extended the endpoints of the trial, increasingthe number of patients and the length of follow-up, all of which wouldsubstantially increase the time and cost of completion of the trial.  The uncertain regulatory situation combinedwith a changing treatment landscape have made negotiations with potential STRpartners difficult and make it unlikely that the Company will find a fundingpartner.

 

On May 6, 2005, theCompany issued a press release announcing the implementation of a strategicrestructuring plan to refocus the Company’s resources on the development ofpicoplatin (NX 473).  This restructuringincludes the discontinuation of the Company’s STR development program,including halting further patient enrollment in the Company’s Phase III trialof STR in multiple myeloma, ceasing operations at the Company’s Denton, Texasfacility, where STR is manufactured, and reducing the Company’s workforce by 21employees, leaving a post-restructuring workforce of 29 employees.  Under the plan, the Company will conserve itsfinancial resources to focus on launching its picoplatin clinical program,including initiating its planned Phase II trial of picoplatin in small celllung cancer in mid-2005.  The Companyestimates the cost of the restructuring to be approximately $2.0 million.  This cost estimate is preliminary and mayincrease as the Company further evaluates the nature, extent and timing ofrelated restructuring costs.  The Companyis evaluating its STR assets in light of the restructuring and is in theprocess of determining if an impairment exists that would result in futurecharges against operations.

 

The Company previouslyannounced that if it did not raise additional funds, either through the sale ofsecurities or a collaborative agreement with a strategic partner, it would needto take significant cost-cutting measures to continue its operations beyond theend of 2005.  The current strategicrestructuring plan is part of these cost-cutting measures.  The Company is continuing to evaluate otherareas where additional expenses can be reduced and is reviewing alternativeswith respect to the STR related assets. The Company plans to seek additionalfunding to support the development of picoplatin.

 

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**Item 2.****  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

ThisForm 10-Q contains forward-looking statements. These statements relate tofuture events or future financial performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expect,”“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “propose”or “continue,” the negative of these terms or other terminology.  These statements are only predictions. Actualevents or results may differ materially. In evaluating these statements, youshould specifically consider various factors described below in the section entitled“Additional factors that may affect results.” These factors may cause ouractual results to differ materially from any forward-looking statement.

 

Althoughwe believe the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. You should not place undue reliance on our forward-lookingstatements, which speak only as of the date of this report.  We undertake no obligation to update publiclyany forward-looking statements to reflect new information, events orcircumstances after the date of this report, or to reflect the occurrence ofunanticipated events.

 

NeoRxand STR are our trademarks or registered trademarks in the United States and/orforeign countries.

 

***CriticalAccounting Policies and Estimates***

 

Ourcritical accounting policies and estimates have not changed from those reportedin our Annual Report on Form 10-K for the year ended December 31,2004.  For a more complete description,please refer to our Annual Report on Form 10-K.

 

***RecentDevelopments***

 

We recently have been indiscussions with the FDA to modify the eligibility criteria as a possible meansof increasing slower than expected patient enrollment in our Phase III trial ofSTR in multiple myeloma.  Based on thesediscussions, we concluded that continuation of STR development would not beeconomically feasible.  The FDA indicatedthat it wants to renegotiate the special protocol assessment for the Phase IIItrial.  The special protocol assessmentis a written agreement between a company and the FDA that documents the designand planned analysis of a Phase III study. The changes mentioned by the FDA would have extended the endpoints ofthe trial, increasing the number of patients and the length of follow-up, allof which would substantially increase the time and cost of completion of thetrial.  The uncertain regulatorysituation combined with a changing treatment landscape have made negotiationswith potential STR partners difficult and make it unlikely that we will find afunding partner.

 

On May 6, 2005, we issueda press release announcing the implementation of a strategic restructuring torefocus our resources on the development of picoplatin (NX 473).  This restructuring includes thediscontinuation of our STR development program, including halting furtherpatient enrollment in our Phase III trial of STR in multiple myeloma, ceasingoperations at our Denton, Texas facility, where STR is manufactured, andreducing our workforce by 21 employees, leaving a post-restructuring workforceof 29 employees.  Under the plan, we willconserve our financial resources to focus on launching our picoplatin clinicalprogram, including initiating our planned Phase II trial of picoplatin in smallcell lung cancer in mid-2005.  Weestimate the cost of the restructuring to be approximately $2.0 million.  This cost estimate is preliminary and may increaseas we further evaluate the nature, extent and timing of related restructuringcosts.  We are evaluating our STR assetsin light of the restructuring and are in the process of determining if an impairment exists that would result in future chargesagainst operations.

 

We previously announcedthat if we did not raise additional funds, either through the sale ofsecurities or a collaborative agreement with a strategic partner, we would needto take significant cost-cutting measures to continue our operations beyond theend of 2005.  The current strategicrestructuring plan is part of these cost-cutting measures.  We are continuing to evaluate other areaswhere additional expenses can be reduced and are reviewing alternatives withrespect to the STR related assets. We plan to seek additional funding tosupport the development of picoplatin.

 

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###### ***Results of Operations***

###### *** ***

###### ***Quarter ended March 31, 2005 compared toquarter ended March 31, 2004***

###### *** ***

**There was no revenue for thefirst quarter of 2005, compared with $0.5 million for the first quarter of2004.  Revenue for first quarter of 2004consisted of revenue from a milestone payment from Boston ScientificCorporation.**

** **

Total operating expensesfor the first quarter of 2005 decreased 6% to $5.1 million, from $5.5 millionfor the first quarter of 2004.

 

Research and development(R&D) expenses decreased 12% to $3.3 million for the first quarter of 2005,from $3.8 million for the first quarter of 2004.  The decrease in R&D expenses for the firstquarter of 2005 resulted from lower costs associated with operating ourradiopharmaceutical manufacturing facility in Denton, Texas. R&D expensesfor the first quarter of 2004 were higher due to costs associated withpreparing for the opening of our STR Phase III trial, including expensesincurred for preparation and validation of the STR manufacturing activities.

 

General andadministrative (G&A) expenses increased 5% to $1.8 million for the firstquarter of 2005, compared with $1.7 million for the first quarter of 2004, due primarilyto increases in personnel related costs and increased accounting fees. These costs included such actions as the hiring of additional personnel insenior management, as well as compliance with the requirements of theSarbanes-Oxley Act.  In March 2004, we raised approximately $3.8 million in net proceeds through thesale in a private placement of 3,320,000 shares of common stock.  The purchasers in that offering also receivedfive-year warrants to purchase an aggregate of 1,328,000 shares of common stockat $2.00 per share.  As partial paymentof placement agent fees for that financing, we issued a warrant on the sameterms as those received by the purchasers in that transaction to purchase 199,200shares of common stock.

 

Cash and investmentsecurities as of March 31, 2005 were $16.1 million, compared with $17.8million at December 31, 2004.

 

***Major Research and DevelopmentProjects***

 

Our major research and development project during the fiscalquarters ended March 31, 2005 and 2004 was Skeletal Targeted Radiotherapy (STRTM), abone-targeting radiotherapeutic.  On May6, 2005, we announced the immediate implementation of a strategic restructuringprogram to refocus our resources on the development of picoplatin (NX 473), anext-generation platinum-based cancer therapy. The restructuring plan, which we expect to complete in the third quarterof 2005, includes the discontinuation of our STR development program, includinghalting further patient enrollment in our Phase III trial of STR in multiplemyeloma and ceasing operations at our Denton facility, where STR ismanufactured, and reducing our workforce to 29 employees.  Under the plan, we will conserve ourfinancial resources to focus on launching our picoplatin clinical program, includinginitiating our planned Phase II trial of picoplatin in small cell lung cancerby mid-2005.  We have incurred costs of approximately $57.2 millionin connection with the STR program since the program’s inception in 1998.

 

Total estimated costs tocomplete the STR clinical trial and potentially obtain marketing approval werein the range of $35-40 million, including cost of clinical drug supply.  These costs would have been substantiallyhigher if we were required to repeat, revise or expand the scope of our trials,or conduct additional clinical trials. The termination of the STR developmentprogram will relieve us of the annual costs associated with the program,including manufacturing, clinical trial and personnel costs.  During 2004, these costs were approximately $10.2million.  For 2005, these costs wereexpected to be approximately $4.5 million. We are currently reviewing alternatives with respect to our STR related assets.

 

STR is a clinical stageproduct candidate for which no marketing approvals have been obtained.  We have had no material cash inflows relatingto our STR development nor received any revenues from product sales ofSTR.  Due to our decision to curtail ourSTR development program, there is neither an anticipated completion date nor anexpected period during which material net cash inflows will commence.  Following our current strategic restructuring,we will not depend on the successful development and completion of our STRprogram and, therefore,

 

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there are no risks and uncertaintiesassociated with the STR program that will materially impact our operations andfinancial position.

 

Our developmentadministration overhead costs, consisting of rent, utilities, consulting fees,patent costs and other various overhead costs, are included in total researchand development expense for each period, but are not allocated among ourvarious projects.  Our total developmentcosts include the costs of various other research efforts directed toward theidentification of future product candidates. These other research projects, which include our picoplatindevelopment program, currently are pre-clinical and are not considered majorprojects.  Our total research anddevelopment costs are summarized below.

 
| ** **                            | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| **(000’s)**                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                  |       |                             |       |   |   |
| STR                                   |       | $                                | 1,866      |   | $ | 3,047 |   |
| Other  overhead and research costs    |       | 1,479                            |       | 735 |   |
|                                  |       |                             |       |   |   |
| Total  research and development costs |       | $                                | 3,345      |   | $ | 3,782 |   |

 

###### ***Liquidity and capital resources***

###### *** ***

We have financed ouroperations primarily through the sale of equity securities, technologylicensing, collaborative agreements and debt instruments.  We invest excess cash in investmentsecurities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $16.1 million at March 31, 2005 compared to $17.8million at December 31, 2004.  Weprimarily fund current operations with our existing cash and investments.  Cash used by operating activities for the three months ended March 31, 2005totaled $5.4 million.** **Revenues and other income sourcesfor the first quarter of 2005 were not sufficient to cover operating expenses.

 

We raised approximately $3.8******millionin net proceeds from the sale of common stock and warrants in a privateplacement transaction in March 2005. We intend to use the net proceeds from this financing added to ourexisting funds to initiate a Phase II trial in picoplatin in small cell lungcancer and for general working capital, including restructuring costsassociated with the termination of our STR development program. With theproceeds of this offering, and giving effect to the strategic restructuring, webelieve that our present cash, cash equivalents, investment securities andexpected interest income will be sufficient to fund our anticipated workingcapital and capital requirements at least through the fourth quarter of2005.  In the event that sufficientadditional funds are not obtained or strategic partners are not found in thefuture, we may be required to delay, reduce or curtail the scope of our picoplatindevelopment program, including any clinical trials, and other productdevelopment efforts and/or further reduce costs for facilities andadministration.

 

In April 2004, we acquired from AnorMED,Inc. the worldwide exclusive rights, excluding Japan, to develop, manufactureand commercialize picoplatin.  Under theterms of the agreement, we paid AnorMED a one-time upfront milestone payment of$1.0 million in our common stock and $1.0 million in cash.  The agreement also provides for additionalmilestone payments to AnorMED of up to $13 million, payable in cash or acombination of cash and our common stock. Upon regulatory approval, AnorMED would receive royalty payments of upto 15% on product sales.  Given that theearliest a Phase II study could commence, as stated below, is mid-2005, it isunlikely that these milestones would be triggered during 2005 or 2006.  Since we cannot predict the length of time tocomplete the first Phase II study, when we would commence a Phase III study orwhen we might submit a New Drug Application (NDA) for picoplatin, we are unableto predict when such milestones might be triggered after

 

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2006. We filed an Investigational New Drug Application (IND) for picoplatin inOctober 2004 for a Phase II study in small cell lung cancer and currentlyplan to initiate the trial in mid-2005. We also currently plan to initiate a study of picoplatin in patientswith colorectal cancer in late 2005 or early 2006.

 

Also in April 2004, we sold and transferredour Pretarget intellectual property to Aletheon Pharmaceuticals, Inc.  Under the agreement, we could receive up to$6.6 million in milestone payments if Aletheon achieves certain developmentgoals, plus royalties on potential future product sales.  We did not receive any upfront considerationfor the sale of the Pretarget property. We discontinued our clinical studies using the Pretarget technology in July 2002,and since that time, had been actively seeking, both through targeted inquiriesand a broad-based auction process, a buyer or licensee for the technology.  The sale of the Pretarget intellectualproperty relieves us of the annual costs associated with maintaining thePretarget patent estate.  During 2003, wespent approximately $350,000 for the prosecution and maintenance of thePretarget patents and trademarks.  For2004, these costs were approximately $70,000. Seattle-based Aletheon is a development stage biotherapeutics companyfounded by two former NeoRx employees. The timing and amount of milestone payments, if any, are uncertain.  The terms of the transaction were determinedthrough arms-length negotiation.  Neitherthe Company nor Bay City Capital LLC and its affiliates at any time has held,or in the future plans to acquire, a financial interest in Aletheon.

 

In February 2004, we raised approximately$9.0 million in net proceeds from the sale of common stock and warrants in aprivate placement transaction.

 

In connection with our2001 purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, we assumed $6.0 million principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assetsacquired in the transaction.  Theinterest rate on the loan was 5.75% on March 31, 2005.  The interest rate, which is equal to the bankprime rate and is adjusted on the same date that the bank prime rate changes asreported in the Wall Street Journal, was 6.00% on May 6, 2005.  The loan provides for a maximum annualinterest rate of 18%.  Principal andinterest are payable in monthly installments. Principal and interest paid on the note during the quarters ended March 31,2005 and 2004 totaled $115,000 and $139,000, respectively. In December 2003,we sold a non-essential portion of the Denton facility, the proceeds of which($827,000) were applied to reduce the outstanding balance on the loan. As of March 31,2005, the outstanding balance of the loan was $4.2 million. The fixed monthlypayments on the note are recalculated in April of each year based on thethen current bank prime interest rate and outstanding note balance.  Because the loan is amortized over afourteen-year period from its inception, a principal balance will remain atmaturity in April 2009.  Based on aninterest rate of 5.75%, the estimated principal balance payable at maturitywould be $2.97 million.

 

The terms of the TexasState Bank loan provide that an event of default may be deemed to occur if theCompany abandons, vacates or discontinues operations on a substantial portionof the Denton facility or there is a material adverse change in the Company’soperations.  If this were to occur, TexasState Bank could declare the entire outstanding amount of the loan ($4.2million at March 31, 2005) due and immediately payable. In such case, ourcash resources and assets could be impaired depending on our ability to raisefunds through a sale of the Denton facility or other means.  Texas State Bank has confirmed that it willnot declare the loan in default based solely on our suspension, eithertemporarily or permanently, of manufacturing activities at the Dentonfacility.  Additionally, we do no believethat our strategic restructuring announced on May 6, 2005 constitutes amaterial adverse change in our operations or would affect our ability tocontinue to make payments under the loan, which would cause Texas State Bank toaccelerate the loan, nor has Texas State Bank indicated that it views therestructuring as such.  We can provide noassurance, however, that Texas State Bank will not some time in the future seekto rely on these or other provisions to declare us in default of the loan.  Based on a November 2002 appraisal ofthe Denton facility, the fair value of the facility and its assets exceeds theamount of the outstanding debt.

 

In April 2003, wereceived $10 million from the sale to Boston Scientific Corporation (BSC) ofcertain non-core patents and patent applications and the grant to BSC of exclusivelicense rights to certain patents and patent applications.  BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc. and certain of itssubsidiaries, including Cordis Corporation and Guidant Corporation, alleginginfringement of such patents.** **In both lawsuits, the defendantsdenied infringement and asserted invalidity and unenforceability of thepatents.  BSC subsequently withdrew threeof the patents from the litigation. Although we are not currently a party to the lawsuits,our management and counsel have been deposed in connection with thelawsuits.  It is possible that BSC, if itis unsuccessful or has limited success with its claims against Johnson &Johnson, Inc. and its subsidiaries,

 

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mayseek damages from us, including recovery of all or a portion of the amounts itpaid to us in 2003.  We cannot assess thelikelihood of whether such claim will be brought against us or the extent ofrecovery, if any, on any such claim.

 

We have historicallysuffered recurring operating losses and negative cash flows fromoperations.  As of March 31, 2005, wehad net working capital of $14.4 million and had an accumulated deficit of$239.5 million with total shareholders’ equity of $19.4 million.  These consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States, assuming that we will continue as a going concern.

 

While management believesthat current cash and cash equivalent balances, and any net cash provided byoperations, will provide adequate resources to fund operations at least until December 31, 2005,this may not be the case.  Management istherefore contemplating a number of alternatives to enable us to continueoperating, including:

 

**•**      raisingadditional capital to fund continuing operations by private placements or othersales of equity or debt securities or through the establishment of otherfunding facilities;

 

**•**      enteringinto strategic collaborations, which may include joint ventures or partnershipsfor product development and commercialization, merger, sale of assets or othersimilar transactions; and

 

**•**      obtainingadditional capital resources to fund operations through cost cuttingmechanisms, including the delay, reduction or curtailment of our product developmentprograms.

 

On May 6, 2005, weannounced the immediate implementation of a strategic restructuring plan toreduce costs by discontinuing our STR development program and other STR relatedactivities.  The restructuring isdescribed in more detail in the section above entitled “RecentDevelopments.”

 

We have no assurance thatour strategic restructuring any other cost savings alternatives will besuccessful.  We may not be able to obtainthe required additional capital or enter into relationships with corporatepartners on a timely basis, on favorable terms, or at all.  Conditions in the capital markets in general, and the life science capital market specifically,may affect our potential financing sources and opportunities for strategicpartnering.  If we are unable to obtainsufficient cash when needed to fund our operations, we may be forced to seekprotection from creditors under the bankruptcy laws.

 

Our actual capitalrequirements will depend upon numerous factors, including:

 

**•**      thescope and timing of our proposed picoplatin clinical program and other researchand development efforts, including our ability to initiate our Phase II trialof picoplatin in small cell lung cancer in mid-2005 and the progress and costsof such trial;

 

**•**      our ability to obtain clinical supplies of picoplatin drugproduct in a timely and cost effective manner;

 

**•**      actions taken by the FDA and other regulatory authorities;

 

**•**      thecosts of the strategic restructuring announced on May 6, 2005, including thecosts of discontinuing our STR development program, reducing the workforce andclosing and decommissioning the Denton facility;

 

**•**      ouralternatives with respect to the STR assets, including any potential dispositionor out-licensing alternatives and the timing, type and amount of considerationreceived and other terms of any such transactions;

 

**•**      the timing and amount of any milestone or other payments wemight receive from potential strategic partners;

 

**•**      our degree of success in commercializing picoplatin or anyother cancer therapy product

 

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candidates;

 

**•**      the emergence of competing technologies and products, andother adverse market developments;

 

**•**      the acquisition or in-licensing of other products orintellectual property, if we choose to undertake such activities; and

 

**•**       the costs of preparing, filing, prosecuting, maintaining andenforcing patent claims and other intellectual property rights.

 

Our financial statements are prepared on a goingconcern basis; however, our inability to obtain additional cash as needed couldhave a material adverse effect on our financial position, results of operationsand our ability to continue in existence. Our condensed consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

***Additional factors that may affect results***

 

In addition to the otherinformation contained in this report, you should carefully read and considerthe following risk factors before purchasing our common stock. Each of these******risks could harm ourbusiness,******operatingresults and financial condition, as well as decrease the value of an investmentin our stock.  An investment in NeoRxsecurities involves a high degree of risk.

 

**RisksRelated to Our Business**

 

**We havea history of operating losses, we expect to continue to incur losses, and wemay never become profitable.**

 

We have not beenprofitable since our formation in 1984. As of March 31, 2005, we had anaccumulated deficit of $239.5 million. Our net loss for the quarter ended March 31,2005 was $5.1 million.  We had net lossesof $19.4 million for the year ended December 31, 2004, and $5.1 millionfor the year ended December 31, 2003. These losses resulted principallyfrom costs incurred in our research and development programs and from ourgeneral and administrative activities. To date, we have been engaged only inresearch and development activities and have not generated any significant revenuesfrom product sales. On May 6, 2005, we announced the discontinuation of our STR(bone-targeted radiotherapeutic) development program as part of a strategicplan to refocus our limited resources on the development of picoplatin (NX473), a platinum-based compound.  We donot anticipate that our proposed picoplatin product candidate, or any otherproposed products, will be commercially available for several years, if at all.We expect to incur additional operating losses in the future. These losses mayincrease significantly if we expand clinical development, manufacturing andcommercialization efforts.

 

Our ability to achievelong-term profitability is dependent upon obtaining regulatory approvals forour picoplatin product candidate and any other proposed products andsuccessfully commercializing our products alone or with third parties.

 

**Wewill need to raise additional capital, and our future access to capital isuncertain.**

** **

It is expensive to develop cancer therapy products and conduct clinicaltrials for these products.  Ourpicoplatin product is currently preclinical, and we currently have availablevery limited funds to initiate our proposed clinical program. The costs of ourclinical programs could vary substantially if we have to repeat, revise or expandthe scope of the trials, or conduct additional clinical trials.  We will be required to obtain additionalfunding or enter into strategic partnerships to continue development ofpicoplatin or any other proposed products, and to fund ongoing operations.

 

We raised approximately$3.8 million in net proceeds from the sale of common stock and warrants in aprivate placement transaction on March 7, 2005.  We intend to use the net proceeds from thisfinancing added to our existing funds to initiate a Phase II trial in picoplatinin small cell lung cancer and for general working capital, includingrestructuring costs associated with the termination of our STR developmentprogram.  Our total cash and marketablesecurities, which reflect the funds from this financing, was $16.1 million at March 31,2005.

 

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Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States, assuming that we willcontinue as a going concern. While management believes that current cash andcash equivalent balances, and any net cash provided by operations, will provideadequate resources to fund operations at least until December 31, 2005,this may not be the case.  Management istherefore exploring a number of alternatives to enable us to continue operating,including:

 

**•**      raisingadditional capital to fund continuing operations by private placements or othersales of equity or debt securities or through the establishment of otherfunding facilities;

 

**•**      enteringinto strategic collaborations, which may include joint ventures or partnershipsfor product development and commercialization, merger, sale of assets or othersimilar transactions; and

 

**•**      obtainingadditional capital resources to fund operations through cost cuttingmechanisms, including the delay, reduction or curtailment of our productdevelopment programs.

 

On May 6, 2005, weannounced the immediate implementation of a strategic restructuring plan toreduce costs by discontinuing our STR development program and other STR relatedactivities.  The restructuring isdescribed in more detail in the section above entitled “RecentDevelopments.”

 

There can be no assurancethat our strategic restructuring or any of the other cost-saving alternativeslisted above will be successful.  We maynot be able to obtain the required additional capital or enter intorelationships with corporate partners on a timely basis, on favorable terms, orat all.  Conditions in the capitalmarkets in general, and the life science capital market specifically, mayaffect our potential financing sources and opportunities for strategicpartnering. If we raise additional funds by issuing common stock or securitiesconvertible into or exercisable for common stock, further dilution toshareholders may result, and new investors could have rights superior tocurrent security holders.  If we areunable to obtain sufficient cash when needed to fund our operations, we may beforced to seek protection from creditors under the bankruptcy laws.

 

The amount of additionalfinancing we require will depend on a number of factors, including thefollowing:

 

**•**      thescope and timing of our proposed picoplatin clinical program and other researchand development efforts, including our ability to initiate our Phase II trialof picoplatin in small cell lung cancer in mid-2005 and the progress and costsof such trial;

 

**•**      ourability to obtain clinical supplies of picoplatin drug product in a timely andcost effective manner;

 

**•**      actionstaken by the FDA and other regulatory authorities;

 

**•**      thecosts of the strategic restructuring announced on May 6, 2005, including thecosts of discontinuing our STR development program, reducing the workforce andclosing and decommissioning the Denton facility;

 

**•**      ouralternatives with respect to the STR assets, including any potentialdisposition or outlicensing alternatives and the timing, amount and type ofconsideration received and other terms of any such transactions;

 

**•**      thetiming and amount of any milestone or other payments we might receive frompotential strategic partners;

 

**•**      ourdegree of success in commercializing picoplatin or any other cancer therapyproduct candidates;

 

**•**      theemergence of competing technologies and products, and other adverse marketdevelopments;

 

**•**      theacquisition or in-licensing of other products or intellectual property, if wechoose to undertake

 

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such activities; and

 

**•**       thecosts of preparing, filing, prosecuting, maintaining and enforcing patentclaims and other intellectual property rights.

 

**Our potential products mustundergo rigorous clinical testing and regulatory approvals, which could becostly, time consuming, and subject us to unanticipated delays or prevent usfrom marketing any products.**

 

The manufacture andmarketing of our proposed picoplatin product candidate and our research anddevelopment activities are subject to regulation for safety, efficacy andquality by the FDA in the United States and by comparable authorities in othercountries.

 

The process of obtainingFDA and other required regulatory approvals, including foreign approvals, isexpensive, often takes many years and can vary substantially depending on thetype, complexity and novelty of the products involved.

 

We have had only limitedexperience in filing and pursuing applications necessary to gain regulatoryapprovals. This may impede our ability to obtain timely approvals from the FDAor foreign regulatory agencies. We will not be able to commercialize ourproduct candidates until we obtain regulatory approval, and consequently anydelay in obtaining, or inability to obtain, regulatory approval could harm ourbusiness.

 

If we violate regulatoryrequirements at any stage, whether before or after marketing approval isobtained, we may be fined, forced to remove a product from the market orexperience other adverse consequences, including delay, which could materiallyharm our financial results. Additionally, we may not be able to obtain thelabeling claims necessary or desirable for product promotion. In addition, ifwe or other parties identify serious side effects after any of our products areon the market, or if manufacturing problems occur, regulatory approval may bewithdrawn and reformulation of our products, additional clinical trials,changes in labeling of our products, and/or additional marketing applicationsmay be required.

 

The requirementsgoverning the conduct of clinical trials and manufacturing and marketing of ourproposed products outside the United States vary widely from country tocountry. Foreign approvals may take longer to obtain than FDA approvals and caninvolve additional testing. Foreign regulatory approval processes include allof the risks associated with the FDA approval processes. Also, approval of aproduct by the FDA does not ensure approval of the same product by the healthauthorities of other countries.

 

**We may take longer to completeour clinical trials than we project, or we may be unable to complete them atall.**

 

In October 2004, wefiled an investigational new drug application (IND) with the FDA for a Phase IIclinical trial of picoplatin for the treatment of patients with small cell lungcancer (SCLC). We currently plan to initiate the Phase II clinical trial of picoplatinin mid-2005. The proposed trial would be a randomized trial comparing picoplatinto topotecan in patients with SCLC who are refractory or resistant to previousplatinum-based therapy.  Topotecan is ananti-tumor drug currently used off-label as a treatment for SCLC sensitivedisease after failure of first line chemotherapy.  The endpoints of the proposed picoplatintrial would include survival, time to progression, duration of response andresponse rate.

 

We also plan to undertakea Phase I/II trial of picoplatin in colorectal cancer. The proposed trial wouldevaluate increasing doses of picplatin in combination with the chemotherapyagents 5-fluorouracil and leucovorin in patients who have failed a 5-fluorouracil/leucovorinchemotherapy regimen. Endpoints would include safety, response rate (tumorshrinkage), duration of response and time to progression.  This proposed trial currently is targeted tobegin in late 2005 or early 2006.

 

The actual time forinitiation and completion of our picoplatin clinical trials depend uponnumerous factors, including:

 

**•**      ourability to obtain adequate additional funding or enter into strategicpartnerships;

 

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**•**      approvalsand other actions by the FDA and other regulatory agencies and the timingthereof;

 

**•**      ourability to open clinical sites;

 

**•**      ourability to enroll qualified patients into our studies;

 

**•**      ourability to obtain sufficient, reliable and affordable supplies of the picoplatindrug product;

 

**•**      theextent of competing trials at the clinical institutions where we conduct ourtrials; and

 

**•**      theextent of scheduling conflicts with participating clinicians and clinicalinstitutions.

 

We may not initiate our picoplatinclinical program and advance or complete our picoplatin clinical trials asprojected or achieve successful results.

 

We will rely on academicinstitutions and clinical research organizations to conduct, supervise ormonitor some or all aspects of clinical trials involving our proposed picoplatinproduct.  Further, we are seeking toenter into license agreements, partnerships or other collaborative arrangementsto support financing, development and commercialization of our picoplatin productcandidate. To the extent that we now or in the future participate in suchcollaborative arrangements, we will have less control over the timing, planningand other aspects of our clinical trials. If we fail to initiate, advance orcomplete, or experience delays in or are forced to curtail our planned clinicalprograms, our stock price and our ability to conduct our business could be materiallynegatively affected.

 

**If testing of a particularproduct does not yield successful results, we will be unable to commercializethat product.**

 

Our research anddevelopment programs are designed to test the safety and efficacy of ourproposed products in humans through extensive preclinical and clinical testing.We may experience numerous unforeseen events during, or as a result of, thetesting process that could delay or prevent commercialization of picoplatin orany other proposed products, including the following:

 

**•**      thesafety and efficacy results obtained in early human clinical trials may not beindicative of results obtained in later clinical trials;

 

**•**      theresults of preclinical studies may be inconclusive, or they may not beindicative of results that will be obtained in human clinical trials;

 

**•**      afterreviewing test results, we or any potential collaborators may abandon projectsthat we previously believed were promising;

 

**•**      ourpotential collaborators or regulators may suspend or terminate clinical trialsif the participating subjects or patients are being exposed to unacceptablehealth risks; and

 

**•**      theeffects of our potential products may not be the desired effects or may includeundesirable side effects or other characteristics that preclude regulatoryapproval or limit their commercial use if approved.

 

Clinical testing is veryexpensive, can take many years, and the outcome is uncertain. The data that wemay collect from our proposed picoplatin clinical trials may not be sufficientto support regulatory approval of our proposed picoplatin product. The clinicaltrials of picoplatin and any other proposed products may not be initiated orcompleted on schedule, and the FDA or foreign regulatory agencies may notultimately approve any of our product candidates for commercial sale. Ourfailure to adequately demonstrate the safety and efficacy of a cancer therapyproduct under development would delay or prevent regulatory approval of theproduct, which would prevent us from marketing the proposed product.

 

**Success in early clinical trialsmay not be indicative of results obtained in later trials.**

 

Results of earlypreclinical and clinical trials are based on a limited number of patients andmay, upon

 

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review, be revised ornegated by authorities or by later stage clinical results. Historically, theresults from preclinical testing and early clinical trials often have not beenpredictive of results obtained in later clinical trials. A number of new drugsand therapeutics have shown promising results in initial clinical trials, butsubsequently failed to establish sufficient safety and effectiveness data toobtain necessary regulatory approvals. Data obtained from preclinical andclinical activities are subject to varying interpretations, which may delay,limit or prevent regulatory approval.

 

**We are dependent on suppliers forthe timely delivery of materials and services and may experience futureinterruptions in supply.**

 

For our picoplatinproduct candidate to be successful, we need sufficient, reliable and affordablesupplies of the picoplatin drug product for clinical studies.  Sources of picoplatin drug product may belimited, and third-party suppliers of picoplatin drug product may be unable to manufacturedrug product in amounts and at prices necessary to successfully commercializeour picoplatin product.  Moreover,third-party manufacturers must continuously adhere to cGMP regulations enforcedby the FDA through its facilities inspection program. If the facilities ofthese manufacturers cannot pass a pre-approval plant inspection, the FDA willnot grant an NDA for our proposed products. In complying with cGMP and foreignregulatory requirements, any of our third-party manufacturers will be obligatedto expend time, money and effort in production, record-keeping and qualitycontrol to assure that our products meet applicable specifications and otherrequirements. If any of our third-party manufacturers fails to comply withthese requirements, we may be subject to regulatory action.

 

We have a limited supplyof picoplatin drug product that was manufactured by a prior licensee in September 2004and earlier.  The drug product has beendemonstrated to be stable for 12-18 months from the date of manufacture, whichtime period is not sufficient to complete both of our currently proposedclinical trials of picoplatin.  We have enteredinto an agreement with Hyaluron, Inc. to manufacture and supply additional picoplatindrug product on a purchase order, fixed fee basis.  The agreement will continue until April 15,2010, subject to earlier termination by either party in the event of an uncuredmaterial breach or the liquidation or bankruptcy of the other party.  We may terminate the agreement if we decideto no longer pursue manufacturing or distribution of picoplatin. There is noassurance that Hyaluron will be able to provide sufficient supplies of picoplatindrug product on a timely or cost-effective basis.  There are in general relatively fewmanufacturers and suppliers of picoplatin drug product. If Hyaluron or analternate manufacturer is unable or unwilling to manufacture and provide drug productat a cost and on other terms acceptable to us, we may suffer delays in, or beprevented from, initiating or completing our proposed clinical trials ofpicoplatin.

 

In connection with ourproduct development activities, we rely on third-party contractors to performfor us, or assist us with, certain specialized services, including drugmanufacture and supply, dispensing, distribution and shipping, and clinicaltrial management. Because these contractors provide specialized services, theiractivities and quality of performance may be outside our direct control. Ifthese contractors do not perform their obligations in a timely manner, or if weencounter difficulties with the quality of services we receive from thesecontractors, we may incur additional costs and delays in product developmentactivities, which could have a material negative effect on our business.

 

**Our current debt obligations mayrestrict our operating and financing flexibility and could, in an event ofdefault, impair our cash resources and assets.**

 

In connection with its2001 purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, we assumed $6.0 million principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assetsacquired in the transaction.  Theinterest rate on the loan was 5.75% on March 31, 2005.  The interest rate, which is equal to the bankprime rate and is adjusted on the same date that the bank prime rate changes asreported in the Wall Street Journal, was 6.00% on May 6, 2005.  The loan provides for a maximum annual interestrate of 18%.  Principal and interest arepayable in monthly installments. Principal and interest paid on the note during the quarters ended March 31,2005 and 2004 totaled $115,000 and $139,000, respectively. In December 2003,we sold a non-essential portion of its Denton facility, the proceeds of which($827,000) were applied to reduce the outstanding balance on the loan. As of March 31,2005, the outstanding balance of the loan was $4.2 million. The fixed monthlypayments on the note are recalculated in April of each year based on thethen current bank prime interest rate and outstanding note balance.  Because the loan is amortized over afourteen-year period from its inception, a principal balance will remain atmaturity in April 2009.  Based on aninterest rate of 5.75%, the estimated principal balance payable at maturity

 

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would be $2.97 million.

 

Theterms of the Texas State Bank loan provide that an event of default may bedeemed to occur if we abandon, vacate or discontinue operations on asubstantial portion of the Denton facility or there is a material adversechange in our operations. If this were to occur, Texas State Bank could declarethe entire amount of the loan ($4.2 million at March 31, 2005) due andimmediately payable.  In such case, our cashresources and assets could be impaired depending on our ability to raise fundsthrough a sale of the Denton facility or other means.  Texas State Bank has confirmed that itwill not declare the loan in default based solely on our suspension, eithertemporarily or permanently, of manufacturing activities at the Dentonfacility.  Additionally, we do no believethat our strategic restructuring announced on May 6, 2005 constitutes amaterial adverse change in our operations or would affect our ability tocontinue to make payments under the loan, which would cause Texas State Bank toaccelerate the loan, nor has Texas State Bank indicated that it views therestructuring as such.  We can provide noassurance, however, that Texas State Bank will not some time in the future seekto rely on these or other provisions to declare the company in default of theloan.  Based on a November 2002appraisal of the Denton facility, the fair value of the facility and its assetsexceeds the amount of the outstanding debt.

 

**If we cannot negotiate andmaintain collaborative arrangements with third parties, our research,development, manufacturing, sales and marketing activities may not be cost-effectiveor successful.**

 

Our success will dependin significant part on our ability to attract and maintain collaborativepartners and strategic relationships to support the development, sale,marketing, distribution and manufacture of picoplatin and any other futureproduct candidates and technologies in the US and Europe. At present, our onlymaterial collaborative agreement is the exclusive worldwide (except Japan)license granted to us by AnorMED, Inc. for the development and commercial saleof picoplatin.  Under that license, weare solely responsible for the development and commercialization of picoplatin.AnorMED retains the right, at our cost, to prosecute patent applications andmaintain all patents.  The partiesexecuted the license agreement in April 2004, at which time we paid AnorMEDa one-time upfront milestone payment of $1.0 million in NeoRx common stock and$1.0 million in cash.  The agreement alsoprovides for additional milestone payments to AnorMED of up to $13 million,payable in cash or a combination of cash and NeoRx common stock. Thesemilestones include our successful completion of a picoplatin Phase II study orinitiation of a picoplatin Phase III study, submission to the FDA of an NDA forpicoplatin, regulatory approval from the FDA of picoplatin and the attainmentof certain levels of annual net sales of picoplatin. Upon regulatory approval,AnorMED also would receive royalty payments of up to 15% on product sales.  We cannot be certain of the extent of oursuccess, if any, in commercializing picoplatin and attaining establishedmilestones.  Given that the earliest aPhase II study could commence, as stated below, is mid-2005, it is unlikelythat these milestones would be triggered during 2005 or 2006.  Since we cannot predict the length of time tocomplete the first Phase II study, when we would commence a Phase III study orwhen we might submit an NDA for picoplatin, we are unable to predict when suchmilestones might be triggered after 2006. The license agreement may be terminated by either party for breach if theother party files a petition in bankruptcy or insolvency or for reorganizationor is dissolved, liquidated or makes assignment for the benefit of creditors.We can terminate the license at any time upon prior written notice to AnorMED.If not earlier terminated, the license agreement will continue in effect, ineach country in the territory in which the licensed product is sold ormanufactured, until the earlier of (i) expiration of the last valid claim of apending or issued patent covering the licensed product in that country or (ii)a specified number of years after first commercial sale of the licensed productin that country.  We currently plan toinitiate a Phase II clinical trial of picoplatin in small cell lung cancer in mid-2005and a Phase I/II trial of picoplatin in colorectal cancer in late 2005 or early2006. If AnorMED were to breach its obligations under the license, or if thelicense expires or is terminated and we cannot renew, replace, extend orpreserve our rights under the license agreement, we would be unable to moveforward with our planned picoplatin clinical studies.

 

None of our currentemployees has any experience selling, marketing and distributing therapeuticproducts. To the extent we are successful in obtaining approval for the commercialsale of picoplatin or any other product candidate, we may need to secure one ormore corporate partners to conduct these activities. We may not be able toenter into partnering arrangements in a timely manner or on terms acceptable tous. To the extent that we enter into co-promotion or other licensingarrangements, our product revenues are likely to be lower than if we directlymarketed and sold our products, and any revenues we receive would depend uponthe efforts of third parties, which efforts may not be successful. If we arenot able to secure adequate partnering arrangements, we would have to hireadditional employees or consultants with expertise in sales, marketing anddistribution. Employees with relevant skills may not be available to us.Additionally, any increase in the number of employees would increase ourexpense level and could have a material adverse effect on our financialposition.

 

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**We face substantial competitionin the development of cancer therapies and may not be able to competesuccessfully, and our potential products may be rendered obsolete by rapidtechnological change.**

 

The competition fordevelopment of cancer therapies is substantial. There are numerous competitorsdeveloping products to treat the cancers for which we are seeking to developproducts.  Our initial focus for picoplatinwill be in small cell lung cancer, a disease for which there currently arelimited effective therapeutic options. Numerous companies, includingAstraZeneca PLC, Cell Therapeutics, Inc., Exelexis, Inc., ImClone SystemsIncorporated, ImmunoGen, Inc., Sanofi-Aventis Group, Inex PharmaceuticalsCorporation, Ipsen Limited, The Menarini Group, OSI Genetics, Inc. andPharmaMar USA, Inc., also are developing and testing therapeutics for smallcell lung cancer. These therapeutics include chemotherapy, inhibitors,monoclonal antibodies, antagonists and interferons. We cannot assure you thatwe will be able to effectively compete with these or future third party productdevelopment programs.  Many of ourexisting or potential competitors have, or have access to, substantiallygreater financial, research and development, marketing and production resourcesthan we do and may be better equipped than we are to develop, manufacture andmarket competing products.  Further, ourcompetitors may have, or may develop and introduce, new products that wouldrender our proposed picoplatin product less competitive, uneconomical orobsolete.

 

**If we are unable to protect ourproprietary rights, we may not be able to compete effectively, or operateprofitably.**

 

Our success is dependentin part on obtaining, maintaining and enforcing our patents and otherproprietary rights and our ability to avoid infringing the proprietary rightsof others. Patent law relating to the scope of claims in the biotechnologyfield in which we operate is still evolving and, consequently, patent positionsin our industry may not be as strong as in other, better-established fields.Accordingly, the United States Patent and Trademark Office (USPTO) may notissue patents from the patent applications owned by or licensed to us. Ifissued, the patents may not give us an advantage over competitors with similartechnologies.

 

The issuance of a patentis not conclusive as to its validity or enforceability and it is uncertain howmuch protection, if any, will be given to our patents if we attempt to enforcethem and they are challenged in court or in other proceedings, such asoppositions, which may be brought in foreign jurisdictions to challenge thevalidity of a patent. A third party may challenge the validity orenforceability of a patent after its issuance by the USPTO. It is possible thata competitor may successfully challenge our patents or that a challenge willresult in limiting their coverage. Moreover, the cost of litigation to upholdthe validity of patents and to prevent infringement can be substantial. If theoutcome of litigation is adverse to us, third parties may be able to use ourpatented invention without payment to us. Moreover, it is possible thatcompetitors may infringe our patents or successfully avoid them through designinnovation. We may need to file lawsuits to stop these activities. Theselawsuits can be expensive and would consume time and other resources, even ifwe were successful in stopping the violation of our patent rights. In addition,there is a risk that a court would decide that our patents are not valid andthat we do not have the right to stop the other party from using theinventions. There is also the risk that, even if the validity of our patentswas upheld, a court would refuse to stop the other party on the ground that itsactivities do not infringe our patents.

 

In addition, theprotection afforded by issued patents is limited in duration. With respect to picoplatin,we expect to rely primarily on US patent number 5,665,771 (expiring February 7,2016), which is licensed to us by AnorMED. We may be able to rely on the Hatch-Waxman Act to extend the term of aUS patent covering picoplatin after regulatory approval, if any, of suchproduct in the US.

 

Under our licenseagreement with AnorMED, AnorMED retains the right to prosecute patentapplications and maintain all licensed patents, with NeoRx reimbursing such expenses.Under the AnorMED agreement, we have the right to sue any third partyinfringers of the picoplatin patents in the licensed territory (worldwideexcept Japan). If we do not file suit, AnorMED, in its sole discretion, has theright to sue the infringer at its expense.

 

In addition to theintellectual property rights described above, we rely on unpatented technology,trade secrets and confidential information. Therefore, others may independentlydevelop substantially equivalent information and techniques or otherwise gainaccess to or disclose our technology. We may not be able to effectively protectour rights in unpatented technology, trade secrets and confidentialinformation. We require each of our employees, consultants and advisors toexecute a confidentiality agreement at the commencement of an

 

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employment or consultingrelationship with us.  However, theseagreements may not provide effective protection of our information or, in theevent of unauthorized use or disclosure, may not provide adequate remedies.

 

**The use of our technologies couldpotentially conflict with the rights of others.**

 

Our competitors or othersmay have or may acquire patent rights that they could enforce against us. Insuch case, we may be required to alter our products, pay licensing fees orcease activities. If our products conflict with patent rights of others, thirdparties could bring legal actions against us claiming damages and seeking toenjoin manufacturing and marketing of the affected products. If these legalactions are successful, in addition to any potential liability for damages, wecould be required to obtain a license in order to continue to manufacture ormarket the affected products. We may not prevail in any legal action and arequired license under the patent may not be available on acceptable terms.

 

**We may incur substantial costs asa result of litigation or other proceedings relating to patent and otherintellectual property rights.**

 

The cost to us of anylitigation or other proceedings relating to intellectual property rights, evenif resolved in our favor, could be substantial. Some of our competitors may bebetter able to sustain the costs of complex patent litigation because they havesubstantially greater resources. If there is litigation against us, we may notbe able to continue our operations. If third parties file patent applications,or are issued patents claiming technology also claimed by us in pendingapplications, we may be required to participate in interference proceedings inthe USPTO to determine priority of invention. We may be required to participatein interference proceedings involving our issued patents and pendingapplications. We may be required to cease using the technology or licenserights from prevailing third parties as a result of an unfavorable outcome inan interference proceeding. A prevailing party in that case may not offer us alicense on commercially acceptable terms.

 

In April 2003, wereceived $10 million from the sale to Boston Scientific Corporation (BSC) ofcertain non-core patents and patent applications and the grant to BSC ofexclusive license rights to certain patents and patent applications.  BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc. and certain of itssubsidiaries, including Cordis Corporation and Guidant Corporation, alleginginfringement of such patents.** **In both lawsuits, the defendantsdenied infringement and asserted invalidity and unenforceability of the patents.  BSC subsequently withdrew three of thepatents from the litigation.  Although weare not currently a party to the lawsuits, our management and counsel have beendeposed in connection with the lawsuits. It is possible that BSC, if it is unsuccessful or has limited successwith its claims against Johnson & Johnson, Inc. and its subsidiaries, mayseek damages from us, including recovery of all or a portion of the amounts itpaid to us in 2003.  We cannot assess thelikelihood of whether such claim will be brought against us or the extent ofrecovery, if any, on any such claim.

 

**Product liability claims inexcess of the amount of our insurance would adversely affect our financialcondition.**

 

The testing,manufacturing, marketing and sale of picoplatin and any other proposed cancertherapy products, including past clinical and manufacturing activities inconnection with our terminated STR radiotherapeutic, may subject us to productliability claims. We are insured against such risks up to a $10 millionannual aggregate limit in connection with clinical trials of our products underdevelopment and intend to obtain product liability coverage in the future.However, insurance coverage may not be available to us at an acceptable cost.We may not be able to obtain insurance coverage that will be adequate tosatisfy any liability that may arise. Regardless of merit or eventual outcome,product liability claims may result in decreased demand for a product, injuryto our reputation, withdrawal of clinical trial volunteers and loss ofrevenues. As a result, regardless of whether we are insured, a productliability claim or product recall may result in losses that could be material.

 

**Our use of radioactive and otherhazardous materials exposes us to the risk of material environmentalliabilities, and we may incur significant additional costs to comply withenvironmental laws in the future.**

 

Our research anddevelopment and manufacturing processes, as well as the manufacturing processesthat may be used by our collaborators, involve the controlled use of hazardousand radioactive materials. As a result, we are subject to foreign, federal,state and local laws, rules, regulations and policies governing the use,generation, manufacture, storage, air emission, effluent discharge, handlingand disposal of certain materials and wastes in

 

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connection with our useof these materials. Although we believe that our safety procedures for handlingand disposing of such materials comply with the standards prescribed by suchlaws and regulations, we may be required to incur significant costs to complywith environmental and health and safety regulations in the future. In theevent that we discontinue operations in facilities that have had past researchand manufacturing processes where hazardous or radioactive materials have beenin use, we may have significant decommissioning costs associated with thetermination of operation of these facilities. These potential decommissioningcosts also may reduce the market value of the facilities and may limit ourability to sell or otherwise dispose of these facilities in a timely andcost-effective manner.  We presently arein the process of terminating our STR manufacturing operations in Denton, Texas,and preparing that facility for possible sale. We currently estimate that the 2005 costs associated with the closure ofthe Denton facility, including decommissioning costs, will be approximately $0.7million.  These costs could increasesubstantially, depending on actions of regulators or if we discover previouslyunknown contamination in or around the facility.  In addition, the risk of accidentalcontamination or injury from hazardous or radioactive materials cannot becompletely eliminated. In the event of such an accident, we could be heldliable for any resulting damages, and any such liability could exceed ourresources. Our current insurance does not cover liability for the clean-up ofhazardous waste materials or other environmental risks.

 

**Even if we bring products tomarket, changes in healthcare reimbursement could adversely affect our abilityto effectively price our products or obtain adequate reimbursement for sales ofour products.**

 

Potential sales of ourproducts may be affected by the availability of reimbursement from governmentsor other third parties, such as insurance companies. It is difficult to predictthe reimbursement status of newly approved, novel medical products. Inaddition, third-party payors are increasingly challenging the prices chargedfor medical products and services. If we succeed in bringing one or moreproducts to market, we cannot be certain that these products will be consideredcost-effective and that reimbursement to the consumer will be available or willbe sufficient to allow us to competitively or profitably sell our products.

 

The levels of revenuesand profitability of biotechnology companies may be affected by the continuingefforts of government and third-party payors to contain or reduce the costs ofhealthcare through various means. For example, in certain foreign markets,pricing or profitability of prescription pharmaceuticals is subject togovernmental control. In the United States, there have been, and we expect thatthere will continue to be, a number of federal and state proposals to implementsimilar governmental controls. It is uncertain what legislative proposals willbe adopted or what actions federal, state or private payors for health caregoods and services may take in response to any health care reform proposals orlegislation. Even in the absence of statutory change, market forces arechanging the health care sector. We cannot predict the effect health carereforms may have on the development, testing, commercialization andmarketability of our proposed cancer therapy products. Further, to the extentthat such proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospectivecollaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.

 

**The loss of key employees couldadversely affect our operations.**

 

Neile Grayson, PhD,resigned as Vice President, Corporate Development, in January 2004.Although Dr. Grayson was an officer of the Company, we did not, at the time ofher resignation, consider her a key employee in terms of our productdevelopment activities. We did not experience any material disruptions ordelays as a consequence of the resignation of Dr. Grayson. Dr. Grayson’sposition was eliminated and her responsibilities reassigned to other members ofmanagement. Melinda G. Kile resigned as Vice President, Finance, effective April 16,2004.  On that date, Michael K. Jacksonwas promoted to Chief Accounting Officer and assumed responsibility for seniorfinancial duties on an interim basis.  Asprincipal financial officer, Ms. Kile was considered a key employee of theCompany; however, we did not experience any material disruptions or delays as aconsequence of Ms. Kile’s resignation. Susan D. Berland was appointed Chief Financial Officer of the Company,effective October 25, 2004.  Theposition of Chief Accounting Officer was eliminated as of December 31,2004, and Mr. Jackson resumed his prior responsibilities as CorporateController.

 

Gerald McMahon, Ph.D. wasappointed Chief Executive Officer of the Company, effective May 11, 2004, andwas named Chairman of the Board of Directors in June 2004.  Jack L. Bowman retired from the position asChief Executive Officer effective May 11, 2004, and he did not stand forreelection as a director at the 2004 annual shareholders meeting.  As Chief Executive Officer, Mr. Bowman wasconsidered a key employee of the Company. We did not experience any material disruption or delays as a consequenceof Mr. Bowman’s retirement.

 

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As of May 5, 2005, we hada total work force of 46 full-time employees and 4 part-time employees.  On May 6, 2005, we announced a workforcereduction of 21 employees in connection with our strategic restructuring, whichwill leave a post-restructuring workforce of 29. Our success depends, to asignificant extent, on the continued contributions of our principal managementand scientific personnel participating in our picoplatin development program.  We have limited or no redundancy of personnelin several key development areas, including finance, legal, clinicaloperations, regulatory affairs and quality control and assurance. The loss ofthe services of one or more of our employees could delay our picoplatin productdevelopment activities or other programs and research and development efforts.We do not maintain key-person life insurance on any of our officers, employeesor consultants.

 

Competition for qualifiedemployees among companies in the biotechnology and biopharmaceutical industryis intense. Our future success depends upon our ability to attract, retain andmotivate highly skilled employees and consultants. In order to commercializeour proposed products successfully, we will in the future be required tosubstantially expand our workforce, particularly in the areas of manufacturing,clinical trials management, regulatory affairs, business development and salesand marketing. These activities will require the addition of new personnel,including management, and the development of additional expertise by existingmanagement personnel. Our current financial situation may make it difficult toattract and retain key employees.

 

We have change in controlagreements and severance agreements with all of our executive officers andconsulting agreements with various of our scientific advisors. Our agreementswith our executive officers provide for “at will” employment, which means thateach executive may terminate his or her service with us at any time. Inaddition, our scientific advisors may terminate their services to us at anytime.

 

**Anyweakness identified in our internal controls as part of the evaluation beingundertaken by us and our independent registered public accounting firm pursuantto Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverseeffect on our business.**

 

Section 404 of theSarbanes-Oxley Act of 2002 requires public companies to evaluate and report ontheir systems of internal control over financial reporting. In addition, theindependent accountants must report on management’s evaluation. We havedocumented and tested our system of internal control over financial reportingin 2004 to provide the basis for our management’s evaluation included in ourForm 10-K for the year ended December 31, 2004.  Management’s assessment of the effectivenessof our internal control over financial reporting as of December 31, 2004has been audited by KPMG LLP, an independent registered public accounting firm,and KPMG’s report is included in our Form 10-K for the year ended December 31,2004.  Based on this evaluation, we haveconcluded that, as of December 31, 2004, we did not have any materialweaknesses in our internal control over financial reporting and our internalcontrol over financial reporting was effective.

 

Due to the ongoingevaluation and testing of our internal controls, there can be no assurance thatthere may not be significant deficiencies or material weaknesses that would berequired to be reported in the future. In addition, we expect the evaluationprocess and any required remediation, if applicable, to increase ouraccounting, legal and other costs and divert management resources from corebusiness operations.  We cannot becertain as to the results or actions related to our on-going evaluation andtesting of internal controls, or the impact of any of them on our operations orstock price.

 

**RisksRelated to Our Common Stock**

 

**Ourcommon stock listing was transferred from The Nasdaq National Market to TheNasdaq SmallCap Market; failure to maintain continued listing on Nasdaq couldaffect its market price and liquidity.**

 

Our common stock listingwas transferred from The Nasdaq National Market to The Nasdaq SmallCap Marketon March 20, 2003. We elected to seek a transfer to The Nasdaq SmallCapMarket because we had been unable to regain compliance with The Nasdaq NationalMarket minimum $1.00 bid price requirement for continued listing. Bytransferring to The SmallCap Market, we were afforded an extended grace periodin which to satisfy The SmallCap Market $1.00 minimum bid price requirement. OnMay 6, 2003, we received notice from Nasdaq confirming that we are incompliance with the $1.00 SmallCap minimum bid price requirement. As a resultof rule changes adopted by Nasdaq in March 2003, we will not be eligibleto relist our common stock on The Nasdaq

 

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National Market unlessand until our common stock maintains a minimum bid price of $5.00 per share for90 consecutive trading days and we otherwise comply with the initial listingrequirements for The Nasdaq National Market. Trading on the Nasdaq SmallCapMarket may have a negative impact on the value of our common stock, becausesecurities trading on the Nasdaq SmallCap Market typically are less liquid thanthose traded on The Nasdaq National Market.

 

Our common stock has beentrading below the Nasdaq SmallCap $1.00 minimum bid price requirement since theend of March 2005. If the minimum bid price remains less than $1.00 for 30consecutive business days, we will receive a deficiency notice from Nasdaq.Thereafter, we will be afforded an initial 180-day grace period, which initialgrace period may in certain circumstances be extended for an additional 180days, in which to regain compliance with the Nasdaq SmallCap minimum bidrequirement. If we are unable to regain compliance, our common stock may bedelisted from The Nasdaq SmallCap Market. In such case, we would likely seek quotation on the American StockExchange or a regional stock exchange, if available. Such listing could reducethe market liquidity for our common stock. If our common stock is not eligiblefor quotation on another market or exchange, trading of our common stock couldbe conducted in the over-the-counter market on an electronic bulletin boardestablished for unlisted securities such as the Pink Sheets or the OTC BulletinBoard. As a result, an investor would find it more difficult to dispose of, orobtain accurate quotations for the price of, our common stock.

 

If our common stock is delistedfrom The Nasdaq SmallCap Market, and if we fail to obtain quotation on anothermarket or exchange, and if the trading price remains below $5.00 per share, thentrading in our common stock might also become subject to the requirements ofcertain rules promulgated under the Securities Exchange Act of 1934, whichrequire additional disclosure by broker-dealers in connection with any tradeinvolving a stock defined as a “penny stock” (generally, any equity securitynot listed on a national securities exchange or quoted on Nasdaq that has amarket price of less than $5.00 per share, subject to certain exceptions). Manybrokerage firms are reluctant to recommend low-priced stocks to their clients.Moreover, various regulations and policies restrict the ability of shareholdersto borrow against or “margin” low-priced stocks, and declines in the stockprice below certain levels may trigger unexpected margin calls. Additionally,because brokers’ commissions on low-priced stocks generally represent a higherpercentage of the stock price than commissions on higher priced stocks, thecurrent price of the common stock can result in an individual shareholderpaying transaction costs that represent a higher percentage of total sharevalue than would be the case if our share price were higher. This factor mayalso limit the willingness of institutions to purchase our common stock.Finally, the additional burdens imposed upon broker-dealers by theserequirements could discourage broker-dealers from facilitating trades in ourcommon stock, which could severely limit the market liquidity of the stock andthe ability of investors to trade our common stock

 

**Ourstock price is volatile and, as a result, you could lose some or all of yourinvestment.**

 

There has been a historyof significant volatility in the market prices of securities of biotechnologycompanies, including our common stock. In 2004, the high and low closing saleprices were $5.78 and $1.43.  In 2003,the high and low closing sale prices were $6.47 and $0.37.  The high and low closing sale prices duringthe period from January 2, 2005 through May 6, 2005 were $2.34 and $0.57.  Our stock price following our announcement ofour strategic restructuring was $0.54 on May 9, 2005.  Our stock price has been and may continue tobe affected by this type of market volatility, as well as our own performance.Our business and the relative price of our common stock may be influenced by alarge variety of factors, including:

 

**•**      announcementsby us or our competitors concerning acquisitions, strategic alliances,technological innovations, new commercial products or changes in productdevelopment strategies;

 

**•**      theavailability of critical materials used in developing our proposed picoplatin product;

 

**•**      ourability to initiate our picoplatin clinical development program on a timely andcost-effective basis and the progress and results of our clinical trials andthose of our competitors;

 

**•**      developmentsconcerning patents, proprietary rights and potential infringement;

 

**•**      developmentsconcerning potential agreements with collaborators;

 

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**•**      theexpense and time associated with, and the extent of our ultimate success in,securing regulatory approvals;

 

**•**      ouravailable cash or other sources of funding; and

 

**•**      futuresales of significant amounts of our common stock by us or our shareholders.

 

In addition, potentialpublic concern about the safety of our proposed picoplatin product and anyother products we develop, comments by securities analysts, our ability tomaintain the listing of our common stock on the Nasdaq system, and conditionsin the capital markets in general and in the life science capital marketspecifically, may have a significant effect on the market price of our commonstock. The realization of any of the risks described in this report, as well asother factors, could have a material adverse impact on the market price of ourcommon stock and may result in a loss of some or all of your investment inNeoRx.

 

In the past, securitiesclass action litigation often has been brought against companies followingperiods of volatility in their stock prices. We may in the future be the targetof similar litigation. Securities litigation could result in substantial costsand divert our management’s time and resources, which could cause our businessto suffer.

 

**Certainprovisions in our articles of incorporation and Washington state law coulddiscourage a change of control.**

 

Our articles ofincorporation authorize our board of directors to issue up to 60,000,000 sharesof common stock and up to 3,000,000 shares of preferred stock.  With respect to preferred stock, our boardhas the authority to determine the price, rights, preference, privileges andrestrictions, including voting rights, of those shares without any further voteor action by our shareholders. We will be seeking shareholder approval at our2005 annual meeting to increase our authorized common stock to 150,000,000shares.

 

We have adopted ashareholder rights plan, which is intended to protect the rights ofshareholders by deterring coercive or unfair takeover tactics. The board ofdirectors declared a dividend to holders of our common stock of one preferredshare purchase right for each outstanding share of common stock. In addition,under certain circumstances, holders of our Series B Convertible PreferredStock are entitled to receive one preferred share purchase right for each shareof common stock into which their Series B preferred stock may beconverted. The rights are exercisable ten days following the offer to purchaseor acquisition of beneficial ownership of 20% of the outstanding common stockby a person or group of affiliated persons. Each right entitles the registeredholder, other than the acquiring person or group, to purchase from NeoRxone-hundredth of one share of Series A Junior Participating PreferredStock at the price of $40, subject to adjustment. The rights expire April 10,2006. In lieu of exercising the right by purchasing one one-hundredth of oneshare of Series A preferred stock, the holder of the right, other than theacquiring person or group, may purchase for $40 that number of shares of ourcommon stock having a market value of twice that price.

 

Washington law imposesrestrictions on certain transactions between a corporation and significantshareholders. Chapter 23B.19 of the Washington Business Corporation Actprohibits a target corporation, with some exceptions, from engaging inparticular significant business transactions with an acquiring person, which isdefined as a person or group of persons that beneficially owns 10% or more ofthe voting securities of the target corporation, for a period of five yearsafter the acquisition, unless the transaction or acquisition of shares isapproved by a majority of the members of the target corporation’s board ofdirectors prior to the acquisition. Prohibited transactions include, among other things:

 

**•**      amerger or consolidation with, disposition of assets to, or issuance orredemption of stock to or from the acquiring person;

 

**•**      terminationof 5% or more of the employees of the target corporation; or

 

**•**      receiptby the acquiring person of any disproportionate benefit as a shareholder.

 

A corporation may not optout of this statute. This provision may have the effect of delaying, deterringor preventing a change in control of NeoRx or limiting future investment inNeoRx by significant shareholders and

 

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their affiliates andassociates.

 

The provisions of ourarticles of incorporation, shareholder rights plan and Washington law discussedabove may have the effect of delaying, deterring or preventing a change ofcontrol of NeoRx, even if this change would be beneficial to our shareholders.These provisions also may discourage bids for our common stock at a premiumover market price and may adversely affect the market price of, and the votingand other rights of the holders of, our common stock. In addition, theseprovisions could make it more difficult to replace or remove our currentdirectors and management in the event our shareholders believe this would be inthe best interests of the corporation and our shareholders.

 

**Certainprovisions of our Series B Convertible Preferred Stock and certainoutstanding warrants may prevent or make it more difficult for us to raisefunds or take other actions.**

 

Certain provisions of thePreferred Stock and Warrant Purchase Agreement and Certificate of Designationfor our Series B Convertible Preferred Stock may require us to obtain theapproval of the holders of Series B preferred stock to amend, alter orrepeal any provision of the Certificate of Designation which may be deemed tomaterially adversely affect the rights of the holders of Series Bpreferred stock or to authorize, create or issue any class or series ofsecurities having liquidation or other rights superior to those of theSeries B preferred stock. The Series B preferred stock also containsprovisions requiring the adjustment of the conversion price if we issue (otherthan in connection with certain permitted transactions, such as strategiccollaborations and acquisitions approved by the board of directors ortransactions approved by a majority of the holders of the Series Bpreferred stock) shares of common stock at prices lower than the conversionprice. This means that if we need to raise equity financing at any time whenthe prevailing or discounted market price for our common stock is lower thanthe conversion price, the conversion price will be reduced and the dilution toshareholders increased. These provisions may make it more difficult for ourmanagement or shareholders to take certain corporate actions and could delay,discourage or prevent future financings. These provisions could also limit theprice that certain investors might be willing to pay for shares of our commonstock.

 

The outstanding shares ofSeries B preferred stock, at a conversion price of $5.00 per share, wereconvertible into 3,150,000 shares of common stock as of December 31, 2004.  Giving effect to the antidilution adjustmentoccurring as a result of our March 2005 common stock financing, theoutstanding shares of Series B preferred stock currently have a conversionprice of $4.578 per share and are convertible into 3,446,389 shares of commonstock.  In addition, warrantsaccompanying the Series B preferred stock, at an exercise price of $6.00 pershare, are exercisable into 630,000 shares of common stock. These shares ofcommon stock, when issued upon conversion of the Series B preferred stock andexercise of the warrants will be registered with the SEC and generallyavailable for immediate resale in the public market. The market price of ourcommon stock could fall as a result of such resales due to the increased numberof shares available for sale in the market.

 

# **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

# ** **

The Company is exposed tothe impact of interest rate changes and changes in the market values of itsinvestments.

 

**Interest Rate Risk**

 

The Company’s exposure tomarket rate risk for changes in interest rates relates primarily to the Company’sdebt securities included in its investment portfolio.  The Company does not have any derivativefinancial instruments.  The Companyinvests in debt instruments of the US Government and its agencies andhigh-quality corporate issuers. Investments in both fixed rate and floating rate interest earninginstruments carry a degree of interest rate risk.  Fixed rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, while floatingrate securities may produce less income than expected if interest rates decrease.  Due in part to these factors, the Company’sfuture investment income may fall short of expectations due to changes ininterest rates or the Company may suffer losses in principal if forced to sellsecurities that have declined in market value due to changes in interest rates.  At March 31, 2005, the Company owned no governmentdebt instruments and no corporate debt securities.

 

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The Company’s onlyoutstanding debt is its note payable to Texas State Bank.  The outstanding balance of the note was $4.2million on March 31, 2005.  Thenote, which matures in April 2009, bears interest equal to the bank primerate.  The interest rate on the note isadjusted on the same date that the bank prime rate changes.  The maximum permitted interest rate on theloan is 18% per annum. Because the interest rate on the note varies, theCompany’s interest expenses may increase as the bank prime interest rateincreases.  Extreme increases in the bankprime interest rate, up to the maximum interest rate permitted under the note,could materially affect the Company’s interest expense.

 

**Item 4.  Controls and Procedures**

** **

Under the supervision and with the participation of the Company’smanagement, including the Company’s Chairman and Chief Executive Officer andthe Chief Financial Officer, the Company has evaluated the effectiveness anddesign of its disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisreport, and, based on their evaluation, the Chairman and Chief ExecutiveOfficer and the Chief Financial Officer have concluded that these disclosurecontrols and procedures are effective in ensuring that the informationdisclosed by the Company in the reports that the Company files or submits underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the rules andforms.

 

There were no changes in the Company’s internal control overfinancial reporting that occurred during the quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s controlover financial reporting.

 

*Limitations on theEffectiveness of Controls*

 

Our management, including our Chairman and Chief Executive Officerand our Chief Financial Officer, does not expect that our disclosure controlsor our internal controls will prevent all error and all fraud.  A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of that control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrol must be considered relative to their costs. Because of the inherent limitationin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.  Theseinherent limitations include the reality that judgments in decision-making canbe faulty, and breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more persons, or bymanagement override of the control.  The designof any system of controls is also based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions; over time controls may become inadequate because of changes inconditions, of the degree of compliance with the policies and procedures maydeteriorate.  Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

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**PART II. OTHER INFORMATION**

 

**Item 6.  Exhibits**

 

(a) Exhibits – See Exhibit Index below.

 

30

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**SIGNATURES**

 

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.

 
|                                 | NEORX CORPORATION                             |                 |
|--------------------------------------|-----------------------------------------------|----------------------|
|                                 | (Registrant)                                  |                 |
|                                 |                                          |                 |
| Date:   May  10, 2005 | By:                                           | /s/ SUSAN D. BERLAND |   |
|                                 | Susan D. Berland                              |                 |
|                                 | Chief Financial Officer                       |                 |
|                                 | (Principal Financial  and Accounting Officer) |
|                                      |                                               |                      |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                              | ** ** | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1         |       | Amended and Restated Articles of  Incorporation                                                                                                                                                                                              |       | (B)        |
| 3.2         |       | Bylaws, as amended                                                                                                                                                                                                                           |       | (K)        |
| 10.1        |       | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                                                     |       | (F)        |
| 10.2        |       | Lease Agreement for 410 West Harrison  facility, dated March 1, 1996, between NeoRx Corporation and Diamond  Parking, Inc                                                                                                               |       | (H)        |
| 10.3        |       | Amendment No. 1, dated August 14,  2000, to Lease Agreement between NeoRx Corporation and Dina Corporation                                                                                                                              |       | (J)        |
| 10.4        |       | 1991 Stock Option Plan for Non-Employee  Directors, as amended (‡)                                                                                                                                                                      |       | (E)        |
| 10.5        |       | 1991 Restricted Stock Plan (‡)                                                                                                                                                                                                          |       | (D)        |
| 10.6        |       | Indemnification Agreement (‡)                                                                                                                                                                                                           |       | (H)        |
| 10.7        |       | License Agreement, dated June 30,  1999, between NeoRx and The Dow Chemical Company. Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment                                                 |       | (K)        |
| 10.8        |       | Stock Option Agreement, dated December 19,  2000, between NeoRx Corporation and Carl S. Goldfischer (‡)                                                                                                                            |       | (I)        |
| 10.9        |       | Stock Option Agreement, dated January 17,  2001, between NeoRx Corporation and Carl S. Goldfischer (‡)                                                                                                                             |       | (I)        |
| 10.10       |       | License Agreement dated as of April 2,  2004, between the Company and AnorMED, Inc. Certain portions of the agreement  have been omitted pursuant to a request for confidential treatment                                               |       | (Q)        |
| 10.11       |       | Sublicense Agreement, dated May 15,  1997, between NeoRx Corporation and Roche Molecular Biochemicals. Certain  portions of the agreement have been omitted pursuant to a grant of confidential  treatment.                                  |       | (L)        |
| 10.12       |       | Stock Option Grant Program for  Nonemployee Directors under the NeoRx Corporation 1994 Restated Stock Option  Plan (‡)                                                                                                                  |       | (M)        |
| 10.13       |       | Facilities Lease, dated February 15,  2002, between NeoRx Corporation and Selig Real Estate Holdings Six                                                                                                                                |       | (A)        |
| 10.14       |       | Lease Termination/Continuation Agreement  dated October 8, 2002, between NeoRx Corporation and Dina Corporation                                                                                                                         |       | (N)        |
| 10.15       |       | Key Executive Severance Agreement dated  as of May 13, 2003, between the Company and Karen Auditore-Hargreaves (‡)                                                                                                                      |       | (C)        |
| 10.16       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of May 13, 2003, between  the Company and Karen Auditore-Hargreaves (‡)                                                                  |       | (T)        |
| 10.17       |       | Change of Control Agreement dated as of  May 13, 2003, between the Company and Karen Auditore-Hargreaves (‡)                                                                                                                            |       | (C)        |
| 10.18       |       | Key Executive Severance Agreement dated  as of February 28, 2003, between the Company and Linda Findlay (‡)                                                                                                                        |       | (C)        |
| 10.19       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Linda Findlay (‡)                                                                    |       | (T)        |
| 10.20       |       | Change of Control Agreement dated as of February 28,  2003, between the Company and Linda Findlay (‡)                                                                                                                              |       | (C)        |
| 10.21       |       | Key Executive Severance Agreement dated  as of February 28, 2003, between the Company and Anna Wight (‡)                                                                                                                           |       | (C)        |
| 10.22       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                                                       |       | (T)        |
| 10.23       |       | Change of Control Agreement dated as of February 28,  2003, between the Company and Anna Wight (‡)                                                                                                                                 |       | (C)        |
| 10.24       |       | 2004 Incentive Compensation Plan (‡)                                                                                                                                                                                                    |       | (P)        |
| 10.25       |       | Supply Agreement dated as of March 1,  2004, between the Company and the University of Missouri Research Reactor  facility group. Certain portions of the agreement have been omitted pursuant  to a request for confidential treatment |       | (Q)        |
| 10.26       |       | Letter Agreement dated November 4,  2004, extending Supply Agreement with MURR                                                                                                                                                          |       | (G)        |
| 10.27       |       | Agreement of Sale and Purchase dated as  of April 2, 2004, between the Company and Aletheon Pharmaceuticals, Inc.  Certain portions of the agreement have been omitted pursuant to a request for  confidential treatment                |       | (Q)        |
| 10.28       |       | Employment Letter dated as of April 26,  2004, between the Company and Gerald McMahon (‡)                                                                                                                                          |       | (T)        |

 

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| 10.29 |   | Key Executive Severance Agreement dated  as of May 11, 2004, between the Company and Jerry McMahon (‡)                                                                 |   | (R)    |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.30 |   | Change of Control Agreement dated as of  May 11, 2004, between the Company and Jerry McMahon (‡)                                                                       |   | (R)    |
| 10.31 |   | Key Executive Severance Agreement dated  as of October 25, 2004, between the Company and Susan D. Berland (‡)                                                     |   | (S)    |
| 10.32 |   | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of October 25, 3004,  between the Company and Susan D. Berland (‡) |   | (T)    |
| 10.33 |   | Change of Control Agreement dated as of October 25,  2004, between the Company and Susan D. Berland (‡)((S)                                                       |   |   |
| 10.34 |   | Form of Non-Qualified Stock Option  Agreement under 2004 Incentive Compensation Plan (‡)                                                                               |   | (O)    |
| 10.35 |   | Form of Incentive Stock Option Agreement  under 2004 Incentive Compensation Plan (‡)                                                                              |   | (O)    |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chairman and Chief Executive Officer                                                                                             |   | (T)    |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                          |   | (T)    |
| 32.1  |   | Section 1350 Certification of  Chairman and Chief Executive Officer                                                                                                    |   | (T)    |
| 32.2  |   | Section 1350 Certification of Chief  Financial Officer                                                                                                                 |   | (T)    |

 

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| (‡) |   | Management  contract or compensatory plan.                                                                                                                                            |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                  |
| (A)      |   | Filed as an exhibit to the Company’s  Form 10-K for the fiscal year ended December 31, 2001, and incorporated  herein by reference.                                         |
|     |   |                                                                                                                                                                                  |
| (B)      |   | Filed as an exhibit to the Company’s  Current Report on Form 8-K filed March 18, 2005, and incorporated herein  by reference.                                               |
|     |   |                                                                                                                                                                                  |
| (C)      |   | Filed as an exhibit to the Company’s  Registration Statement on Form S-3/A (Registration No. 333-111344) filed on February 23,  2004, and incorporated herein by reference. |
|     |   |                                                                                                                                                                                  |
| (D)      |   | Filed as an exhibit to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 30, 1991,  and incorporated herein by reference.                       |
|     |   |                                                                                                                                                                                  |
| (E)      |   | Incorporated by reference to Exhibit A  to the Company’s definitive proxy statement on Schedule 14A filed April 10,  1996.                                             |
|     |   |                                                                                                                                                                                  |
| (F)      |   | Filed as an exhibit to the Company’s  Form 10-K for the fiscal year ended December 31, 1995, and incorporated  herein by reference.                                         |
|     |   |                                                                                                                                                                                  |
| (G)      |   | Filed as an exhibit to the Company’s  Current Report on Form 8-K filed February 3, 2005, and incorporated  herein by reference.                                             |
|     |   |                                                                                                                                                                                  |
| (H)      |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended March 31, 1996, and  incorporated herein by reference.                                       |
|     |   |                                                                                                                                                                                  |
| (I)      |   | Filed as an exhibit to the Company’s  Form 10-K for the fiscal year ended December 31, 2000 and incorporated  herein by reference.                                          |
|     |   |                                                                                                                                                                                  |
| (J)      |   | Filed as an exhibit to the Company’s  Form 10-K for the fiscal year ended December 31, 1998, and incorporated  herein by reference.                                         |
|     |   |                                                                                                                                                                                  |
| (K)      |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended September 30, 1999, and  incorporated herein by reference.                                   |
|     |   |                                                                                                                                                                                  |
| (L)      |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended March 31, 2001, and  incorporated herein by reference.                                       |
|     |   |                                                                                                                                                                                  |
| (M)      |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended June 30, 2002, and incorporated  herein by reference.                                        |

 

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| (N)    |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended September 30, 2002, and  incorporated herein by reference.                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
| (O)    |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended September 30, 2004, and  incorporated herein by reference.                     |
|   |   |                                                                                                                                                                    |
| (P)    |   | Filed as an exhibit to the Company’s  Registration Statement on Form S-8 (Registration No. 333-115729), filed May  21, 2004, and incorporated herein by reference. |
|   |   |                                                                                                                                                                    |
| (Q)    |   | Filed as an exhibit to the Company’s  Form 10-Q for the quarterly period ended March 31, 2004, and  incorporated herein by reference.                         |
|   |   |                                                                                                                                                                    |
| (R)    |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended June 30, 2004, and incorporated  herein by reference.                          |
|   |   |                                                                                                                                                                    |
| (S)    |   | Filed as an exhibit to the Company’s  Form 8-K filed October 19, 2004, and incorporated herein by reference.                                                  |
|   |   |                                                                                                                                                                    |
| (T)    |   | Filed herewith.                                                                                                                                                         |

 

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