**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-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 June 30, 2003**

 

**CommissionFile No. 0-16614**

 

**NEORXCORPORATION**

(Exact name of Registrant asspecified 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 98119-4077**      |
| (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 allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

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

 

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

 

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

 

As of August 14, 2003, 27,320,414 shares of the Registrant’s commonstock, $.02 par value per share, were outstanding.

 

 

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**TABLE OF CONTENTS**

 

**QUARTERLYREPORT ON FORM 10-Q****FOR THEQUARTER ENDED JUNE 30, 2003**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                   |
|-------------|-------------------------------------------------------------------------------------------------------------|
|        |                                                                                                        |
| Item 1.     | Financial  Statements (Unaudited):                                                                          |
|        |                                                                                                        |
|        | Condensed  Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                            |
|        |                                                                                                        |
|        | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2003 and 2002 |
|        |                                                                                                        |
|        | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003  and 2002           |
|        |                                                                                                        |
|        | Notes to Condensed Consolidated Financial  Statements                                                       |
|        |                                                                                                        |
| Item 2.     | Management’s  Discussion and Analysis of Results of Operations and Financial Condition                 |
|        |                                                                                                        |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                 |
|        |                                                                                                        |
| Item 4.     | Controls  and Procedures                                                                                    |
|        |                                                                                                        |
| **PART II** | **OTHER INFORMATION**                                                                                       |
|        |                                                                                                        |
| Item 4.     | Submission  of Matters to a Vote of Security Holders                                                        |
|        |                                                                                                        |
| Item 6.     | Exhibits  and Reports on Form 8-K                                                                           |
|        |                                                                                                        |
|        | Signatures                                                                                                  |
|        |                                                                                                        |
|        | Exhibit  Index                                                                                              |

 

2

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**PART I****.  FINANCIALINFORMATION**

 

**Item 1****.  FinancialStatements**

 

**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**(in thousands, except share data)(unaudited)

 
|                                                                                                                                                                                              |   | **June 30,  2003** |   | **December  31, 2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                                                                                                                                              |   |               |   |                   |   |
| **ASSETS**                                                                                                                                                                                        |   |               |   |                   |   |
| **Current assets:**                                                                                                                                                                               |   |               |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                         |   | $                  | 6,713  |                   | $      | 6,564 |   |
| Investment securities                                                                                                                                                                             |   | 11,879             |   | 9,572                  |   |
| Prepaid expenses and other current assets                                                                                                                                                         |   | 410                |   | 1,269                  |   |
| Total current assets                                                                                                                                                                              |   | 19,002             |   | 17,405                 |   |
|                                                                                                                                                                                              |   |               |   |                   |   |
| Facilities and equipment, net                                                                                                                                                                     |   | 8,297              |   | 8,509                  |   |
| Other assets, net                                                                                                                                                                                 |   | 67                 |   | 79                     |   |
|                                                                                                                                                                                              |   |               |   |                   |   |
| **Total assets**                                                                                                                                                                                  |   | $                  | 27,366 |                   | $      | 25,993 |   |
|                                                                                                                                                                                              |   |               |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                     |   |               |   |                   |   |
| **Current  liabilities:**                                                                                                                                                                         |   |               |   |                   |   |
| Accounts payable                                                                                                                                                                                  |   | $                  | 686    |                   | $      | 1,024 |   |
| Accrued liabilities                                                                                                                                                                               |   | 715                |   | 1,674                  |   |
| Current portion of note payable                                                                                                                                                                   |   | 345                |   | 512                    |   |
| Total current liabilities                                                                                                                                                                         |   | 1,746              |   | 3,210                  |   |
|                                                                                                                                                                                              |   |               |   |                   |   |
| **Long-term  liabilities:**                                                                                                                                                                       |   |               |   |                   |   |
| Note payable, net of current portion                                                                                                                                                              |   | 5,148              |   | 5,182                  |   |
| Asset retirement obligation                                                                                                                                                                       |   | 497                |   | —                 |   |
| Other                                                                                                                                                                                             |   | —             |   | 25                     |   |
| Total long-term liabilities                                                                                                                                                                       |   | 5,645              |   | 5,207                  |   |
|                                                                                                                                                                                              |   |               |   |                   |   |
| **Shareholders’  equity:**                                                                                                                                                                   |   |               |   |                   |   |
| Preferred  stock, $.02 par value, 3,000,000 shares authorized:                                                                                                                                    |   |               |   |                   |   |
| Convertible  preferred stock, Series 1, 205,340 shares issued and outstanding at June 30,  2003 and December 31, 2002 (entitled in liquidation to $5,175 at June 30,  2003 and December 31, 2002) |   | 4                  |   | 4                      |   |
| Common  stock, $.02 par value, 60,000,000 shares authorized, 27,150,542 and  26,765,082 shares issued and outstanding at June 30, 2003 and December 31,  2002, respectively                       |   | 543                |   | 535                    |   |
| Accumulated  other comprehensive income - unrealized loss on investment securities                                                                                                                |   | (42                | )      | (101                   | )      |
| Additional  paid-in capital                                                                                                                                                                       |   | 225,406            |   | 224,035                |   |
| Accumulated  deficit                                                                                                                                                                              |   | (205,936           | )      | (206,897               | )      |
| Total  shareholders’ equity                                                                                                                                                                  |   | 19,975             |   | 17,576                 |   |
| **Total liabilities  and shareholders’ equity**                                                                                                                                              |   | $                  | 27,366 |                   | $      | 25,993 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

3

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(in thousands,except per share data)(unaudited)

 
|                                                                          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                          |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| **Revenues**                                                                  |   | $                                | 10,190 |                           | $      | 1,219 |   | $ | 10,306 |   | $ | 1,529 |   |
| **Operating expenses:**                                                       |   |                             |   |                           |   |   |   |   |   |
| Research and development                                                      |   | 2,728                            |   | 6,993                          |   | 5,339 |   | 13,034 |   |
| General and administrative                                                    |   | 2,168                            |   | 1,863                          |   | 3,600 |   | 3,602 |   |
| Total operating expenses                                                      |   | 4,896                            |   | 8,856                          |   | 8,939 |   | 16,636 |   |
| Income (loss) from operations                                                 |   | 5,294                            |   | (7,637                         | )      | 1,367 |   | (15,107 | ) |
| **Other income (expense):**                                                   |   |                             |   |                           |   |   |   |   |   |
| Realized gain (loss) on sale of securities                                    |   | —                           |   | 12                             |   | — |   | 122 |   |
| Gain on disposal of equipment                                                 |   | 10                               |   | —                         |   | — |   | — |   |
| Interest income                                                               |   | 83                               |   | 312                            |   | 153 |   | 708 |   |
| Interest expense                                                              |   | (59                              | )      | (103                           | )      | (119 | ) | (206 | ) |
| Total other  income                                                           |   | 34                               |   | 221                            |   | 34 |   | 624 |   |
| Net income (loss) before cumulative effect  of change in accounting principle |   | 5,328                            |   | (7,416                         | )      | 1,401 |   | (14,483 | ) |
| Cumulative effect of change in accounting  principle                          |   | —                           |   | —                         |   | 190 |   | — |   |
| Net income (loss)                                                             |   | 5,328                            |   | (7,416                         | )      | 1,211 |   | (14,483 | ) |
| Preferred stock dividends                                                     |   | (125                             | )      | (125                           | )      | (250 | ) | (250 | ) |
| Net income (loss) applicable to common  shares                                |   | $                                | 5,203  |                           | $      | (7,541 | ) | $ | 961 |   | $ | (14,733 | ) |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| Earnings (loss) per share:                                                    |   |                             |   |                           |   |   |   |   |   |
| Basic:                                                                        |   |                             |   |                           |   |   |   |   |   |
| Before cumulative effect of change in  accounting principle                   |   | $                                | 0.19   |                           | $      | (0.28 | ) | $ | 0.04 |   | $ | (0.55 | ) |
| Cumulative effect of change in accounting  principle                          |   | —                           |   | —                         |   | — |   | — |   |
| Net income (loss)                                                             |   | $                                | 0.19   |                           | $      | (0.28 | ) | $ | 0.04 |   | $ | (0.55 | ) |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| Diluted:                                                                      |   |                             |   |                           |   |   |   |   |   |
| Before cumulative effect of change in  accounting principle                   |   | $                                | 0.18   |                           | $      | (0.28 | ) | $ | 0.04 |   | $ | (0.55 | ) |
| Cumulative effect of change in accounting  principle                          |   | —                           |   | —                         |   | (0.01 | ) | — |   |
| Net income (loss)                                                             |   | $                                | 0.18   |                           | $      | (0.28 | ) | $ | 0.03 |   | $ | (0.55 | ) |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| Weighted average common shares:                                               |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                         |   | 27,009                           |   | 26,602                         |   | 26,913 |   | 26,589 |   |
| Diluted                                                                       |   | 28,420                           |   | 26,602                         |   | 27,777 |   | 26,589 |   |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| Pro forma amounts had accounting principle  been applied retroactively:       |   |                             |   |                           |   |   |   |   |   |
| Net loss                                                                      |   |                             |   | $                              | (7,444 | ) |   |   | $ | (14,538 | ) |
| Preferred stock dividends                                                     |   |                             |   | (125                           | )      |   |   | (250 | ) |
| Loss applicable to common shares                                              |   |                             |   | $                              | (7,569 | ) |   |   | $ | (14,788 | ) |
|                                                                          |   |                             |   |                           |   |   |   |   |   |
| Loss per share:                                                               |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted                                                             |   |                             |   | $                              | (0.28  | ) |   |   | $ | (0.56 | ) |

 

See accompanying notes to the condensedconsolidated financial statements.

 

4

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**NEORXCORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**(in thousands)(unaudited)

 
|                                                                                                |   | **Six Months  ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                |   | **2003**                       |   | **2002** |   |
|                                                                                                |   |                           |   |   |   |
| **Cash flows from operating activities:**                                                           |   |                           |   |   |   |
| Net income (loss)                                                                                   |   | $                              | 1,211  |   | $ | (14,483 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                           |   |   |   |
| Depreciation and amortization                                                                       |   | 434                            |   | 836 |   |
| Gain on sale of securities                                                                          |   | —                         |   | (122 | ) |
| Loss on disposal of equipment                                                                       |   | 121                            |   | — |   |
| Cumulative effect of change in accounting  principle                                                |   | 190                            |   | — |   |
| Accretion of asset retirement obligation  liability                                                 |   | 33                             |   | — |   |
| Common stock issued for services                                                                    |   | 4                              |   | — |   |
| Stock options and warrants issued for  services                                                     |   | 272                            |   | 43 |   |
| Stock-based employee compensation                                                                   |   | 590                            |   | — |   |
| Change in operating assets and liabilities:                                                         |   |                           |   |   |   |
| Prepaid expenses and other assets                                                                   |   | 661                            |   | (82 | ) |
| Accounts payable                                                                                    |   | (338                           | )      | (271 | ) |
| Accrued liabilities                                                                                 |   | (901                           | )      | 33 |   |
| Net cash provided by  (used in) operating activities                                           |   | 2,277                          |   | (14,046 | ) |
|                                                                                                |   |                           |   |   |   |
| **Cash flows from investing activities:**                                                           |   |                           |   |   |   |
| Proceeds from sales and maturities of investment  securities                                        |   | 11,867                         |   | 14,608 |   |
| Purchases of investment securities                                                                  |   | (14,115                        | )      | (2,051 | ) |
| Facilities and equipment purchases                                                                  |   | (47                            | )      | (641 | ) |
| Proceeds from sales of equipment                                                                    |   | 188                            |   | — |   |
| Net cash (used in) provided by investing  activities                                                |   | (2,107                         | )      | 11,916 |   |
|                                                                                                |   |                           |   |   |   |
| **Cash flows from financing activities:**                                                           |   |                           |   |   |   |
| Proceeds from stock options and warrants  exercised                                                 |   | 480                            |   | 18 |   |
| Receipt of note receivable principal                                                                |   |                           |   | 91 |   |
| Repayment of note payable principal                                                                 |   | (201                           | )      | (70 | ) |
| Repayment of capital lease obligation                                                               |   | (50                            | )      | (50 | ) |
| Preferred stock dividends                                                                           |   | (250                           | )      | (250 | ) |
| Net cash used in provided by financing  activities                                                  |   | (21                            | )      | (261 | ) |
|                                                                                                |   |                           |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                               |   | 149                            |   | (2,391 | ) |
|                                                                                                |   |                           |   |   |   |
| **Cash and cash equivalents:**                                                                      |   |                           |   |   |   |
| Beginning of period                                                                                 |   | 6,564                          |   | 4,097 |   |
| End of period                                                                                       |   | $                              | 6,713  |   | $ | 1,706 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

5

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**NEORXCORPORATION AND SUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

# **Note 1.  Basis of Presentation**

 

The accompanying unaudited condensedconsolidated financial statements include the accounts of NeoRx Corporation andsubsidiary (the Company).  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

The interim financial statements containedherein have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. 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, 2002.

 

In the opinion of management, the interimfinancial statements reflect all adjustments, consisting only of normalrecurring accruals necessary to present fairly the Company’s financial positionas of June 30, 2003 and the results of its operations and cash flows for theperiods ended June 30, 2003 and 2002.

 

The results of operations for the periodsended June 30, 2003 and 2002 are not necessarily indicative of the expectedoperating results for the full year.

 

The Company accounts forits stock option plans for employees in accordance with the provisions ofAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations. As such compensation expense related to employee stock options is recorded if, on the date of grant, the fairvalue of the underlying stock exceeds the exercise price.  The Company applies the disclosure-onlyrequirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, whichallows entities 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 tonon-employees, the Company recognizes stock compensation costs utilizing the fairvalue methodology prescribed in SFAS No. 123 over the related period ofbenefit.

 

Had compensation cost forthese stock option plans for employees been determined using the fair valuebased method of accounting under SFAS 123, “Accounting for Stock-BasedCompensation,” the Company’s net loss applicable to common shares and net lossper share would have been the pro forma amounts indicated below (in thousands,except per share data):

 
|                                                                                                |   | **Quarter ended June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------------|--------|
|                                                                                                |   | **2003**                   |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net  income (loss) applicable to common shares:                                                     |   |                       |   |                           |   |   |   |   |   |
| As  reported                                                                                        |   | $                          | 5,203  |                           | $      | (7,541 | ) | $ | 961 |   | $ | (14,733 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss                       |   | 590                        |   | —                         |   | 590 |   | — |   |
| Deduct:  Stock-based employee compensation determined under fair value based method  for all awards |   | (1,255                     | )      | (949                           | )      | (1,737 | ) | (1,897 | ) |
| Pro  forma                                                                                          |   | $                          | 4,538  |                           | $      | (8,490 | ) | $ | (186 | ) | $ | (16,630 | ) |

 

6

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| Net earnings (loss) per common share, basic  and diluted: |   |   |   |   |   |   |   |   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| As reported:                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                     |   | $      | 0.19   |   | $      | (0.28  | )      | $      | 0.04   |   | $ | (0.55 | ) |
| Diluted                                                   |   | $      | 0.18   |   | $      | (0.28  | )      | $      | 0.03   |   | $ | (0.55 | ) |
| Pro  forma:                                               |   |   |   |   |   |   |   |   |   |
| Basic                                                     |   | $      | 0.17   |   | $      | (0.32  | )      | $      | (0.01  | )  | $ | (0.63 | ) |
| Diluted                                                   |   | $      | 0.16   |   | $      | (0.32  | )      | $      | (0.01  | )  | $ | (0.63 | ) |

 

The per share weighted-averagefair value of stock options granted during the quarters ended and six monthsended June 30, 2003 and 2002 was $2.25, $1.95, $0.87, and $2.03, respectively,on the grant date using the Black-Scholes option pricing model with thefollowing assumptions:

 
|                     |   | **Quarter ended June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------|--------|----------------------------|--------|--------------------------------|--------|
|                     |   | **2003**                   |   | **2002**                       |   | **2003** |   | **2002** |   |
| Expected  dividend rate  |   | 0.0                        | %      | 0.0                            | %      | 0.0 | % | 0.0 | % |
| Risk-free  interest rate |   | 2.06                       | %      | 3.83                           | %      | 2.29 | % | 3.83 | % |
| Expected  volatility     |   | 134.4                      | %      | 105.0                          | %      | 135.3 | % | 105.0 | % |
| Expected  life in years  |   | 4.00                       |   | 4.00                           |   | 4.00 |   | 4.00 |   |

 

**Note2.  Net Earnings or Loss Per CommonShare**

 

Basic and diluted earnings or loss per share are based on net income orloss applicable to common shares, which is comprised of net income or loss andpreferred stock dividends in all periods presented. Shares used to calculatebasic earnings or loss per share are based on the weighted average number ofcommon shares outstanding during the period. Shares used to calculate diluted earnings or loss per share are based onthe potential dilution that would occur upon the exercise or conversion ofsecurities into common stock using the treasury stock method.  Calculations of basic and diluted earningsor loss per share for the quarters and six months ended June 30, 2003 and 2002exclude the effect of warrants to purchase additional shares of common stockbecause the share increments would not be dilutive.

 

The computation of diluted net earnings or loss per share excludes thefollowing options and warrants to acquire shares of common stock for theperiods indicated because their effect would not be dilutive:

 
|                                      |   | **Quarter  ended June 30,** |   | **Six Months  ended June 30,** |   |
|-------------------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                                      |   | **2003**                    |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                      |   |                        |   |                           |   |   |   |   |   |
| Common stock options                      |   | 2,717,260                   |   | 4,636,129                      |   | 3,620,030 |   | 4,636,129 |   |
| Weighted average exercise price per share |   | $                           | 5.61   |                           | $      | 5.05 |   | $ | 4.65 |   | $ | 5.05 |   |
| Common stock warrants                     |   | 890,000                     |   | 1,051,000                      |   | 890,000 |   | 1,051,000 |   |
| Weighted average exercise price per share |   | $                           | 9.62   |                           | $      | 8.85 |   | $ | 9.62 |   | $ | 8.85 |   |

 

In addition,234,088 shares of common stock that would be issuable upon conversion of theCompany’s preferred stock are not included in the calculation of dilutedearnings (loss) per share for the periods ended June 30, 2003 and 2002 becausethe effect of including such shares would not be dilutive.

 

7

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**Note3.  Comprehensive Loss**

 

The Company’s comprehensive income (loss) for the quarters ended June30, 2003 and 2002 was $5,340,000 and $(7,530,000), respectively.  The comprehensive income (loss) for thequarters ended June 30, 2003 and 2002 consisted of net income (loss) of$5,328,000 and $(7,416,000), respectively, and a net unrealized gain (loss) oninvestment securities of $12,000 and $(114,000) for the quarters ended June 30,2003 and 2002, respectively.  Thecomprehensive income (loss) for the six months ended June 30, 2003 and 2002 was$1,270,000 and $(14,925,000), respectively. The comprehensive income (loss) for the six months ended June 30, 2003and 2002 consisted of net income (loss) of $1,211,000 and $(14,483,000),respectively, and a net unrealized gain (loss) on investment securities of$59,000 and $(442,000) for the six months ended June 30, 2003 and 2002,respectively.

 

**Note4.  Asset Retirement Obligation**

 

The Company recorded a $0.2 million cumulative effect of change inaccounting principle during the first six months of 2003 as a result of theCompany’s adoption of SFAS 143, *Accounting for Asset Retirement Obligations*.  Under SFAS 143, the Company recorded anasset and liability in the amount of $0.4 million related to estimated fairvalue of future decommissioning costs associated with the Dentonradiopharmaceutical manufacturing facility. This estimate will be depreciated over the seven year estimated usefullife of the asset and the asset retirement obligation will be accreted over thethirty years that represents the expected time that will elapse prior to thesettlement of the obligation.  The Companyadopted SFAS 143 on January 1, 2003.  Areconciliation of the asset retirement obligation follows (in 000’s):

 
| Asset retirement obligation calculated as  of date of Denton facility purchase (April 1, 2001) |   | $   | 364    |   |
|------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| Accretion-2001                                                                                 |   | 40  |   |
| Balance at December 31, 2001                                                                   |   | 404 |   |
| Accretion-2002                                                                                 |   | 60  |   |
| Balance at December 31, 2002                                                                   |   | 464 |   |
| Accretion-January 1, 2003 to June 30, 2003                                                     |   | 33  |   |
| Balance at June 30, 2003                                                                       |   | $   | 497    |   |

 

In addition,had the Company applied the provisions of SFAS 143 as of the date ofacquisition of the Denton facility, and using current January 1, 2003assumptions for interest rates and decommissioning costs, depreciation expensewould have increased by $51,000 and $39,000, respectively, for the years endedDecember 31, 2002 and 2001.

 

Had thischange been applied retroactively, operating expenses would have increased$28,000 and $55,000, respectively, for the quarter and six months ended June30, 2002.  Net loss and net loss pershare applicable to common shares, as reported, was $7,541,000, $14,733,000,$0.28 and $0.55, respectively, for the quarter and six months ended June 30,2002.  Had this change been appliedretroactively, net loss and net loss per share applicable to common shareswould have been $7,569,000, $14,788,000, $0.28, and $0.56, respectively, forthe quarter and six months ended June 30, 2002.

 

**Note5.  Boston Scientific CorporationIntellectual Property Sale**

 

On April 17, 2003, the Company entered into agreements with BostonScientific Corporation relating to the sale to Boston Scientific of certainnon-core NeoRx intellectual property and the grant to Boston Scientific ofcertain license rights.  Under the firstagreement, the Company assigned to Boston Scientific certain NeoRx intellectualproperty in exchange for a cash payment of $9 million.  The intellectual property assigned to BostonScientific included a portfolio of NeoRx patents and patent applications in thecardiovascular field.

 

Under a second agreement, NeoRx granted to Boston Scientific anexclusive license to use certain other NeoRx intellectual property, for whichNeoRx received a one-time cash payment of $1 million.  The exclusive

 

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license grants Boston Scientific the right to use, in certain medicaldevice fields, a separate portfolio of NeoRx patents and patent applicationsresulting from a collaboration with University of Cambridge investigators.

 

**Note6.  New Accounting Pronouncements**

 

In August2001, the FASB issued Statement No. 143, *Accounting for Asset Retirement Obligations,*which addresses financial accounting and reporting obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development, and (or) normal use ofthe asset.  Statement No. 143 requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The fair valueof the liability is added to the carrying amount of the associated asset andthis additional carrying amount is depreciated over the life of the asset.  If the obligation is settled for other thanthe carrying amount of the liability, the Company will recognize a gain or losson settlement. The Company adopted this Statement on January 1, 2003.  The cumulative effect of adopting thischange in accounting principle in the first quarter of 2003 is discussed in Note5.

 

In June 2002, the FASB issued Statement No. 146, *Accounting for Costs Associated withExit or Disposal Activities*, which addresses financial accountingand reporting for costs associated with exit or disposal activities.  Statement No. 146 nullifies EITF Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The principal difference between Statement No. 146 and IssueNo. 94-3 relates to the recognition of a liability for a cost associated withan exit or disposal activity.  StatementNo. 146 requires that a liability be recognized for those costs only when theliability is incurred, that is, when it meets the definition of a liability inthe FASB’s conceptual framework.  Incontrast, under Issue No. 94-3, a company recognized a liability for an exitcost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective forinitial measurement of liabilities related to exit or disposal activities.  The Statement is effective for exit ordisposal activities that are initiated after December 31, 2002.   The Company adopted this Statement onJanuary 1, 2003.  Management cannotdetermine the impact of adopting this Statement on its consolidated financialstatements, as its effects will be prospective.

 

In November 2002, the Financial Accounting Standards Board EmergingIssues Task Force issued its consensus concerning Revenue Arrangements withMultiple Deliverables (“EITF 00-21”). EITF 00-21 addresses how to determine whether a revenue arrangementinvolving multiple deliverables should be divided into separate units ofaccounting, and, if separation is appropriate, how the arrangementconsideration should be measured and allocated to the identified accountingunits.  The guidance in EITF 00-21 iseffective for revenue arrangements entered into in fiscal periods beginningafter June 15, 2003.  The Company does not anticipate that adoption ofEITF 00-21 will have a material impact on its consolidated financialstatements.

 

In May 2003,the FASB issued Statement No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*, which addressesfinancial accounting and reporting for certain financial instruments withcharacteristics of both liabilities and equity and requires that thoseinstruments be classified as liabilities in statements of financialposition.  Previously many of thosefinancial instruments were classified as equity.  The Statement is effective for financial instruments entered intoor modified after May 31, 2003 and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  The Company does not expect the adoption ofthe Statement to have a material impact on its operating results or financialposition.

 

**Note7.  Liquidity**

 

The Company will need to raise additionalcapital to fund its proposed Skeletal Targeted Radiotherapy (STRTM) pivotalclinical trial program and its future operating cash needs.  In April 2003 the Company received $10million from the sale to Boston Scientific Corporation of certain non-coreNeoRx intellectual property and the grant to Boston Scientific Corporation ofcertain license rights.  The Companyexpects that its present cash, cash equivalents, investment securities andexpected interest income will be sufficient to fund its anticipated workingcapital and capital requirements through the third quarter of 2004.

 

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During 2002, the Company discontinued allPretargetÒ  technology activities, reduced staffing by67% and terminated the lease for its facilities at 410 West Harrison Street inSeattle, effective in April 2003. PretargetÒ technology is a development platform fortargeted therapeutics that deliver intense doses of anti-cancer agents to tumorcells while largely sparing healthy tissues.

 

In connection with its 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, the Company assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  During 2002 and early 2003, the Companyreduced the staff at the Denton facility to four employees and has beenoperating the facility in standby mode. The Company currently is in the processof recruiting and hiring personnel and otherwise gearing up the manufacturingplant for production of clinical material for its planned STR pivotal program.  The Company also is seeking a buyer orpartner interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  Under the terms of the Texas State Bankloan, the Denton facility and the assets used in the facility cannot betransferred without the written approval of the bank.

 

The Company is addressing its need foradditional capital by pursuing opportunities for the licensing, sale ordivestiture of certain non-core intellectual property and other assets, includingits STR program and Pretarget® technology platform.  The Company also is addressing its need foradditional capital by seeking a buyer or partner for its manufacturing facilitywho is interested in continuing the facility’s radiopharmaceutical manufacturingoperations and producing the STR compound. The Company also may seek to raise capital through the sale of equityand/or debt securities or the establishment of other funding facilities.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction or curtailment ofits STR development activities and/or further reduction of costs for facilitiesand administration.

 

The Company’s actual capital requirementswill depend upon numerous factors, including:

 

•            therate of progress and costs of its clinical trial and research and developmentactivities, including costs of procuring clinical materials;

 

•            actionstaken by the US Food and Drug Administration (FDA) and other regulatoryauthorities;

 

•            thecosts of discontinuing projects and technologies or decommissioning existingfacilities, if the Company undertakes those activities;

 

•            thetiming and amount of milestone or other payments the Company might receive frompotential strategic partners;

 

•            thetiming and amount of payments the Company might receive from potentiallicenses;

 

•            theCompany’s degree of success in commercializing its STR product candidate orother cancer therapy product candidates;

 

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

 

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

 

There can be no assurance that the Companywill be able to obtain needed additional capital or enter into relationshipswith corporate partners on a timely basis, on favorable terms, or at all.  Conditions in the capital markets in generaland the life science capital market specifically may affect the Company’spotential financing sources and opportunities for strategic partnering.

 

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**Item 2****.     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

This Form 10-Qcontains forward-looking statements. These statements relate to future eventsor future financial performance. In some cases, you can identify forward-lookingstatements 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.Actual events or results may differ materially. In evaluating these statements,you should specifically consider various factors described below in the sectionentitled “Additional factors that may affect results.” These factors may causeour actual results to differ materially from any forward-looking statement.

 

Although we believe the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. You should not place undue reliance onour forward-looking statements, which speak only as of the date of this report.

 

***Critical AccountingPolicies and Estimates***

 

*Basis of Revenue Recognition:*To date, theCompany does not have any significant ongoing revenue sources.  On occasion, the Company derives significantrevenue from licensing its patented technologies and from governmentgrants.  Pursuant to the Securities andExchange Commission Staff Accounting Bulletin No. 101 and Emerging Issues TaskForce Consensus No. 00-21, revenues from collaborative agreements arerecognized as earned as the Company performs research activities under theterms of each agreement.  Billings inexcess of amounts earned are classified as deferred revenue.  Non-refundable upfront technology licensefees, where the Company is providing continuing services related to productdevelopment, are deferred.  Such feesare recognized as revenue over the product development periods based onestimated total development costs.

 

***Quarter and six months ended June 30, 2003compared to quarter and six months ended June 30, 2002***

 

Revenue forthe second quarter of 2003 was $10.2 million, compared to $1.2 million for thesecond quarter of 2002.  Revenue for thesix months ended June 30, 2003 was $10.3 million compared to $1.5 million forthe six months ended June 30, 2002. Revenue for the second quarter and the first six months of 2003consisted of $10.0 million from the sale to Boston Scientific Corporation ofcertain non-core NeoRx intellectual property, the grant to Boston ScientificCorporation of certain license rights, and revenue from a facilities leaseagreement.  Revenue for the secondquarter and first six months of 2002 consisted of a milestone payment of $1.0million from Angiotech Pharmaceuticals, Inc., along with revenue fromgovernment grants and a facilities lease agreement.

 

Total operating expenses for the second quarter of 2003 decreased 45%to $4.9 million from $8.9 million for the second quarter of 2002 and decreased46% to $8.9 million for the six months ended June 30, 2003 from $16.6 millionfor the same period in 2002.

 

Research and development expenses decreased61% to $2.7 million for the second quarter of 2003 from $7.0 million for thesecond quarter of 2002 and decreased 59% to $5.3 million for the six monthsended June 30, 2003 from $13.0 million for the same period in 2002.  The decrease in research and developmentexpenses for the second quarter of 2003 is the result of significantly reducedstaffing, curtailment of the Company’s PretargetÒprogram, and other cost reduction measures taken in 2002 and 2003.

 

General and administrative expenses increased16% to $2.2 million for the second quarter of 2003 from $1.9 million for thesecond quarter of 2002, and remained level at $3.6 million for the six monthsended June 30, 2003 compared to the same time period in 2002.  The increase in general and administrativecosts for second quarter ended June 30, 2003 was due primarily to a non-cash expenseof $0.6 million taken by the Company in connection with the amendment of stockoptions held by the former Chief Executive Officer, who resigned on June 30,2003.

 

Cash and investment securities as of June 30, 2003 were $18.6 millioncompared to $16.1 million at December 31, 2002.  NeoRx achieved an average cash expenditure rate for the secondquarter of 2003 of $1.3 million per month and believes that its cash will besufficient to fund its anticipated working capital and capital requirementsthrough the third quarter of 2004.

 

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***Liquidity and capital resources***

 

The Company has financed its operations primarily through the sale ofequity securities, technology licensing, collaborative agreements and debtinstruments.  We invest excess cash ininvestment securities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $18,592,000 at June 30, 2003 compared to $16,136,000 atDecember 31, 2002.  We primarily fundcurrent operations with our existing cash and investments.  Cash provided by operating activities for the six months endedJune 30, 2003 totaled $2,277,000. Revenues and other income sources for the first quarter of 2003 were notsufficient to cover operating expenses.

 

We currently maintain a line of credit with Pharmaceutical ProductDevelopment, Inc. (PPD) of up to $5.0 million to assist in funding the pivotalphase III trial of our STR product in development.   This line of credit is available to us only upon the successfulresumption and subject to conditions related to the specific design of the STRphase III trials, and the proceeds can only be applied to the expenses relatedto the phase III trials.  We have notdrawn funds on this line of credit to date, which carries an annual interestrate of 16%.

 

On November12, 2002, we entered into an agreement with IDEC Pharmaceuticals Corp. relatingto the sale to IDEC of certain non-core NeoRx intellectual property and thegrant to IDEC of certain license rights. We received $7.9 million in cash and may receive in the future royaltypayments with respect to certain products. The intellectual property addressedby the agreement included a portfolio of US and international patents andcertain associated technology and know-how relating to antibody-basedtherapeutics and ligand-linker technology. The intellectual property rights transferred to IDEC did not includerights to our STR or Pretarget programs. With respect to the patents involved in the sale, we retained a licensefor the development of certain NeoRx products.

 

On April 17,2003, we entered into agreements with Boston Scientific Corporation relating tothe sale to Boston Scientific of certain non-core NeoRx intellectual propertyand the grant to Boston Scientific of certain license rights.  Under the first agreement, the Companyassigned to Boston Scientific certain NeoRx intellectual property in exchangefor a cash payment of $9 million.  Theintellectual property assigned to Boston Scientific included a portfolio ofNeoRx patents and patent applications in the cardiovascular field. Under asecond agreement, NeoRx granted to Boston Scientific an exclusive license touse certain other NeoRx intellectual property, for which NeoRx received aone-time cash payment of $1 million. The exclusive license grants Boston Scientific the right to use, incertain medical device fields, a separate portfolio of NeoRx patents and patentapplications resulting from our collaboration with University of Cambridgeinvestigators.

 

We will need to raise additional capital tofund our proposed STR pivotal clinical trial program and our future operatingcash needs.  We expect that our presentcash, cash equivalents, investment securities and expected interest income willbe sufficient to fund our anticipated working capital and capital requirementsthrough the third quarter of 2004.

 

During 2002, we discontinued all Pretargettechnology activities, reduced staffing by 67% and terminated the facilitieslease at the 410 West Harrison Street location in Seattle, effective in April2003.  Pretarget® technology is adevelopment platform for targeted therapeutics that deliver intense doses ofanti-cancer agents to tumor cells while largely sparing healthy tissues.

 

In connection with our 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, we assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  During 2002 and early 2003, we reduced thestaff at the Denton facility to four employees and have been operating thefacility in standby mode.  We currentlyare in the process of recruiting and hiring personnel and otherwise gearing upthe manufacturing plant for production of clinical material for our planned STRpivotal program.  We are also seeking abuyer or partner interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  Under the terms of the Texas State Bankloan, the Denton facility and the assets used in the facility cannot betransferred without the written approval of the bank.

 

We are addressing our need for additionalcapital by pursuing opportunities for the licensing, sale or divestiture ofcertain intellectual property and other assets, including our STR program andPretarget® technology platform. We also are addressing our need for additional capital by seeking abuyer or partner for our manufacturing facility in Denton, TX who is interestedin continuing the facility’s radiopharmaceutical manufacturing operations

 

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and producing the STR compound. We also may seek to raise capital through the sale of equity and/or debtsecurities or the establishment of other funding facilities.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, we planto reduce expenses through the delay, reduction or curtailment of our STRdevelopment activities and/or further reduction of costs for facilities andadministration.

 

Our actual capital requirements will dependupon numerous factors, including:

 

•            therate of progress and costs of our clinical trial and research and developmentactivities, including costs of procuring clinical materials;

 

•            actionstaken by the FDA and other regulatory authorities;

 

•            thecosts of discontinuing projects and technologies or decommissioning existingfacilities, if we undertake those activities;

 

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

 

•            thetiming and amount of payments we might receive from potential licenses;

 

•            ourdegree of success in commercializing our STR product candidate or other cancertherapy product candidates;

 

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

 

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

 

There can be no assurance that we will beable to obtain needed additional capital or enter into relationships withcorporate partners on a timely basis, on favorable terms, or at all.  Conditions in the capital markets in generaland the life science capital market specifically may affect our potentialfinancing sources and opportunities for strategic partnering.  Our financial statements are prepared on agoing concern basis; however, if we are forced to liquidate our assets, we maynot recover the carrying amount of such assets.

 

***Related party transactions***

 

The Company’s ViceChairman of the Board of Directors, Dr. Frederick Craves, is a founder of BayCity Capital, LLC, also known as BCC, a merchant bank focused on the lifesciences industry.  NeoRx’s ChiefExecutive Officer and Chairman of the Board of Directors, Jack Bowman, is onthe business advisory board of BCC.  TheCompany and BCC entered into an agreement whereby BCC acts as the Company’sadvisor for the purpose of identifying opportunities to enter into strategicalliances and provide assistance relating to structuring and negotiating suchtransaction. The Company paid a retainer fee of $80,000 for each calendarquarter of 2002.  TheCompany renewed the agreement for one additional year from January 1, 2003 andpaid retainer fees of $26,667 and $25,000 for the quarters ended March 31, 2003and June 30, 2003, respectively, and will pay $25,000 per quarter thereafter,plus reasonable travel and other expenses.  The agreement alsoincludes a percentage of gross value of cash, securities, property or otherconsideration derived from a transaction, ranging from one to five percent,depending on the ultimate amount of consideration raised.  BCC agreed to exclude the Boston ScientificCorporation sale and assignment of intellectual property from this provision oftheir agreement with the Company, and, therefore, received no commission orother compensation related to the Boston Scientific transaction.

 

In connectionwith consulting services performed in 2003 and 2002, Dr. Paul G. Abrams, aformer Chief Executive Officer of the Company, received consulting fees ofapproximately $76,600 for each of the quarters ended June 30, 2003 and 2002,respectively.

 

The Company had a demand note receivable froman officer with a balance of approximately $90,700 that

 

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was recorded in other assets at March 31, 2002.  This note was paid in full on May 24,2002.  There were nodemand note receivables from related parties outstanding at June 30, 2003.

 

***Additional factorsthat may affect results***

 

In addition tothe other information contained in this report, the following factors couldaffect the Company’s actual results and could cause our actual results todiffer materially from those achieved in the past or expressed or implied byour forward-looking statements.

 

**Wehave a history of operating losses, we expect to continue to incur losses, andwe may never become profitable.**

 

We have not been profitable since our formation in 1984.  As of June 30, 2003, we had an accumulateddeficit of $205.9 million. These losses have resulted principally from costsincurred in our research and development programs and from our general andadministrative activities.  To date, wehave been engaged only in research and development activities and have notgenerated any significant revenues from product sales.  We do not anticipate that our proposed STRproduct will be commercially available for several years, if at all. We expectto incur additional operating losses in the future. These losses may increasesignificantly if we expand clinical development and commercialization efforts.

 

Our ability to achieve long-term profitability is dependent uponobtaining regulatory approvals for our STR product candidate or any otherproposed products and successfully commercializing our products alone or withthird parties.

 

**We will need to raiseadditional capital, and our future access to capital is uncertain.**

 

It is expensive to develop cancer therapy products and conduct clinicaltrials for these products.  Although wecurrently are focusing on our STR product candidate, we may in the futuresimultaneously conduct clinical trials and preclinical research for a number ofdifferent indications and cancer therapy products, which is costly. Our futurerevenues may not be sufficient to support the expense of our operations and theconduct of our clinical trials and preclinical research.  We will need to raise additional capital:

 

•             tofund operations;

 

•             tocontinue the research and development of our STR and any other productcandidates; and

 

•             tocommercialize our STR product candidate or any other proposed products.

 

We believe that our present cash, cashequivalents, investment securities and expected interest income will besufficient to fund our anticipated working capital and capital requirementsonly through the third quarter of 2004.

 

We are addressing our need for additionalcapital by pursuing opportunities for the licensing, sale or divestiture ofcertain non-core intellectual property and other assets, including our STRprogram and our Pretarget® technology platform.  In addition, we are seeking a buyer or partnerfor our manufacturing facility in Denton, TX, interested in continuing thefacility’s radiopharmaceutical manufacturing operations and producing the STRcompound.   We also may seek to raisecapital through the sale of equity and/or debt securities, or the establishmentof other funding facilities.

 

The amount of additional financing we needwill depend on a number of factors, including the following:

 

•             therate of progress and costs of our clinical trial and research and developmentactivities, including costs of procuring clinical materials;

 

•             actionstaken by the FDA and other regulatory authorities;

 

•             thecosts of discontinuing projects and technologies or decommissioning existingfacilities, if we undertake those activities;

 

•             thetiming and amount of milestone or other payments we might receive frompotential strategic

 

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                   partners;

 

•             thetiming and amount of payments we might receive from potential licenses;

 

•             ourdegree of success in commercializing our STR product candidate or other cancertherapy product candidates;

 

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

 

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

 

We may not be able to obtain additionalfinancing on a timely basis, on favorable terms, or at all.  If we are unable to raise additional fundswhen we need them, we may be required to delay, reduce or eliminate some or allof our development programs and some or all of our clinical trials.  We also may be forced to partner with thirdparties to develop or commercialize products or technologies that we otherwise wouldhave sought to develop independently. Such relationships may not be on terms as commercially favorable to usas might otherwise be the case.  If weraise additional funds by issuing equity securities, further dilution toshareholders may result, and new investors could have rights superior tocurrent security holders.

 

**Our current debt obligations may restrict ouroperating and financing flexibility and could, in an event of default, impairour cash resources and assets.**

 

In connection with our 2001 purchase of the radiopharmaceutical manufacturingplant and other assets located in Denton, TX, we assumed  $6,000,000 principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assets acquiredin the transaction.  During 2002 andearly 2003, we reduced the staff at the Denton facility to four employees andhave been operating the facility in standby mode.  We currently are in the process of recruiting and hiringpersonnel and otherwise gearing up the manufacturing plant for production ofclinical material for our planned STR pivotal program.  We are also seeking a buyer or partnerinterested in continuing the facility’s radiopharmaceutical manufacturingoperations and producing the STR compound. Under the terms of the Texas State Bank loan, the Denton facility andthe assets used in the facility cannot be transferred without the writtenapproval of the bank.

 

**Our potential products must undergo rigorousclinical testing and regulatory approvals, which could be costly, timeconsuming, and subject us to unanticipated delays or prevent us from marketingany products.**

 

The manufacture and marketing of our proposedSTR product and our research and development activities are subject toregulation for safety, efficacy and quality by the FDA in the United States andcomparable authorities in other countries.

 

The process of obtaining FDA and other required regulatory approvals,including foreign approvals, is expensive, often takes many years and can varysubstantially depending on the type, complexity and novelty of the productsinvolved.  Our STR product candidate isnovel; therefore, regulatory agencies lack direct experience with it. This maylengthen the regulatory review process, increase our development costs anddelay or prevent commercialization of our STR product candidate.

 

The FDA placed our earlier phase III study of our proposed STR productin multiple myeloma on clinical hold after some patients in our phase I/IItrials developed a serious delayed toxicity. The FDA requested that we collect additional radiation dosimetry datafrom a small number of multiple myeloma patients to validate thepatient-specific dosing method we had used in earlier studies of STR andproposed to use in our planned pivotal trial program. The study also used anadjusted radiation dose and a revised administration regimen. We completedpatient enrollment in this dosimetry study in late 2002.  We are conducting on-going follow-upevaluations that include assessments of STR safety and efficacy. In February2003, we submitted to the FDA data from our dosimetry study.  We also submitted to the FDA a proposal forfurther clinical development of our STR product candidate in patients withprimary refractory or relapsed multiple myeloma, using a revised dosingmethod.  In April 2003, the FDA liftedthe clinical hold on our STR product candidate.  In June 2003 we submitted to the FDA a proposed pivotal clinicalprogram to register our STR product candidate for marketing.  Subject to authorization from the FDA, ofwhich there can be no assurance, we plan to begin patient enrollment in thepivotal program in early 2004.

 

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No cancer product using our technologies hasbeen approved for marketing. Consequently, there is no precedent for thesuccessful commercialization of products based on our technologies.  In addition, we have had only limitedexperience in filing and pursuing applications necessary to gain regulatory approvals.  This may impede our ability to obtain timelyapprovals from the FDA or foreign regulatory agencies. We will not be able tocommercialize our STR product candidate until we obtain regulatory approval,and consequently any delay in obtaining, or inability to obtain, regulatoryapproval could harm our business.

 

If we violate regulatory requirements at anystage, whether before or after marketing approval is obtained, we may be fined,forced to remove a product from the market or experience other adverseconsequences, including delay, which could materially harm our financialresults.  Additionally, we may not beable to obtain the labeling claims necessary or desirable for productpromotion.  We also may be required toundertake post-marketing trials.  Inaddition, if we or other parties identify side effects after any of ourproducts are on the market, or if manufacturing problems occur, regulatoryapproval may be withdrawn and reformulation of our products, additionalclinical trials, changes in labeling of our products, and/or additional marketingapplications may be required.

 

The requirements governing the conduct ofclinical trials and manufacturing and marketing of our proposed STR productoutside the United States vary widely from country to country.  Foreign approvals may take longer to obtainthan FDA approvals and can involve additional testing.  Foreign regulatory approval processesinclude all of the risks associated with the FDA approval processes.  Also, approval of a product by the FDA doesnot ensure approval of the same product by the health authorities of othercountries.

 

**Wemay take longer to complete our clinical trials than we project, or we may beunable to complete them at all.**

 

Although for planning purposes we project the commencement,continuation and completion of our clinical trials, the time to initiation andcompletion of our STR clinical trial program depends upon numerous factors,including:

 

•                        ourability to obtain adequate additional funding;

 

•                        ourreceipt of approvals by the FDA and other regulatory agencies and the timingthereof;

 

•                        otheractions by regulators;

 

•                        therate of progress and costs of our clinical trial and research and developmentactivities;

 

•                        ourability to access sufficient, reliable and affordable supplies of the STRcompound for clinical studies, including third-party supplies of holmium-166,the radionuclide used in our STR product candidate, as well as other materialsused in the manufacture of the STR compound;

 

•                        thecosts of  ramping up and maintainingmanufacturing operations, should we determine this to be necessary;

 

•                        theextent of scheduling conflicts with participating clinicians and clinicalinstitutions; and

 

•                        ourability to identify and enroll patients who meet trial eligibility criteria.

 

We may not commence or complete our proposedclinical trial program for our STR product candidate as projected, may notconduct it successfully, or may not conduct it at all.

 

We currently rely on academic institutionsand clinical research organizations to conduct, supervise or monitor some orall aspects of clinical trials involving our proposed STR product.  Further, we are seeking to enter intolicense agreements, partnerships or other collaborative arrangements to supportfinancing and development of our STR product candidate.  To the extent that we now or in the futureparticipate in such collaborative arrangements, we will have less control overthe timing, planning and other aspects of our clinical trials.  If we fail to commence or complete, orexperience delays in or are forced to curtail our proposed clinical program,our stock price and our ability to conduct our business could be harmed.

 

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**Iftesting of a particular product does not yield successful results, we will beunable to commercialize that product.**

 

Our research and development programs aredesigned to test the safety and efficacy of our proposed products in humansthrough extensive preclinical and clinical testing.  We may experience numerous unforeseen events during, or as aresult of, the testing process that could delay or prevent commercialization ofour proposed STR product or any other proposed products, including thefollowing:

 

•                  safetyand efficacy results obtained in early human clinical trials may not be indicativeof 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 very expensive, can takemany years, and the outcome is uncertain. We cannot currently predict if, when, or under what conditions, we willundertake further clinical studies, including initiating a revised pivotalprogram, for our STR product candidate. The data collected from our clinical trials may not be sufficient tosupport regulatory approval of our proposed STR product or any other proposedproducts.  The clinical trials of ourproposed STR product and other proposed products may not be completed onschedule, and the FDA or foreign regulatory agencies may not ultimately approveany of our product candidates for commercial sale.  Our failure to adequately demonstrate the safety and efficacy ofa cancer therapy product under development would delay or prevent regulatoryapproval of the product, which could prevent us from achieving profitability.

 

**Weare dependent on suppliers for the timely delivery of materials and servicesand may experience in the future interruptions in supply.**

 

For our STR product to be successful, we needaccess to sufficient, reliable and affordable supplies of the STR compound forclinical studies.  This also requiresdeveloping and maintaining reliable and affordable third-party suppliers ofcommercial quantities of the radionuclide holmium-166, and the targeting agent,DOTMP, used in our STR product candidate. Sources of these materials may be limited, and we, or potentialthird-party suppliers of the STR compound, may be unable to obtain thesematerials in amounts and at prices necessary to successfully commercialize ourSTR product.  Timely delivery of theholmium-166 component material and of the finished STR compound iscritical.  For example, holmium-166loses its effectiveness for treating patients within a short period oftime.  As a result, the STR product mustbe shipped within 24 hours of its manufacture to the site where the patient isto be treated.  Failures or delays inthe manufacturing and shipping processes could compromise the quality and effectivenessof our product.

 

There are, in general, relatively few sourcesof the holmium-166 component of our STR product. Historically,  we have depended on a single source vendor,the University of Missouri Research Reactor facility group (MURR). In December2001, we entered into a contract, under which MURR was responsible for themanufacture of holmium-166, including process qualification, quality control,packaging and shipping, from its Columbia, MO reactor facility.  That supply contract expired in December2002.  We are in discussions with MURRto supply holmium-166 for our planned STR pivotal program.  While MURR generally has provided usmaterials with acceptable quality, quantity and cost in the past, it may beunable or unwilling to meet our future demands, or demands of potential third-partysuppliers of our STR compound.  If MURRor an alternate supplier is unable or unwilling to provide supplies ofholmium-166 at a cost and on other terms acceptable to us, the manufacture anddelivery of our STR product could be impaired, and we may suffer delays in, orbe prevented from, initiating or completing further clinical trials of our STRproduct candidate.

 

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**Ifwe fail to negotiate and maintain collaborative arrangements with thirdparties, our research, development, manufacturing, clinical testing, sales andmarketing activities may be delayed or reduced.**

 

We rely in part on third parties to performfor us or assist us with a variety of important functions, including researchand development, manufacturing and clinical trials management.  We also license technology from others toenhance or supplement our technologies. We may not be able to locate suppliers to manufacture our productcomponents or any proposed products at a cost or in quantities necessary tomake them commercially viable.  We mayrely on third-party contract manufacturers to produce large quantities ofcertain materials, potentially including the STR compound, for clinical trialsand product commercialization. Third-party manufacturers may not be able to meet our needs with respectto timing, quantity, quality or cost. If we are unable to contract for a sufficient supply of needed materialsor products on acceptable terms, or if we should encounter delays ordifficulties in our relationships with manufacturers, our clinical testing maybe delayed, thereby delaying the submission of products for regulatory approvalor market introduction and subsequent sales. Any such delay may reduce our revenues and potential profitability.

 

Moreover, any potential third-partymanufacturers must continually adhere to current Good Manufacturing Practices(cGMP) regulations enforced by the FDA through its facilities inspectionprogram.  If our facilities or thefacilities of these manufacturers cannot pass a pre-approval plant inspection,the FDA will not grant pre-market approval of our proposed products. Incomplying with cGMP and foreign regulatory requirements, we and any of ourthird-party manufacturers will be obligated to expend time, money and effort inproduction, record-keeping and quality control to assure that our products meetapplicable specifications and other requirements.  If we, or any of our third-party manufacturers, fail to complywith these requirements, we may be subject to regulatory action.

 

In April 2001, we purchased aradiopharmaceutical manufacturing facility and certain other assets located inDenton, TX. In addition to the manufacturing facility, we purchased existingequipment, documentation and certain processes. The facility achieved cGMPstatus and was issued appropriate radiation permits by the State of Texas. Thisradiopharmaceutical manufacturing facility assumed responsibility for allaspects of the manufacture of the STR compound, including process qualification,quality control, packaging and shipping, and production of the clinicalmaterial for the completed STR dosimetry study.  We believe that the Denton facility has the capabilities andcapacity to serve as the principal manufacturing site for the STR compound forour proposed pivotal program, and for potential commercial manufacture.  We are in the process of restarting STRmanufacturing operations at the facility to prepare for our proposed STRpivotal program.  We plan to operate theDenton facility ourselves while seeking to engage a buyer or partner interestedin continuing the facility’s radiopharmaceutical manufacturing operations andproducing the STR compound.  Acceptablemanufacturing alternatives may not be available to us on a timely or cost-effectivebasis.  Our decision whether to continueto utilize the Denton facility as our primary manufacturing site for the STRcompound in the future will depend on a number of factors, including:

 

•             actionstaken by the FDA and the timing thereof;

 

•             ourability to obtain adequate additional funding and the timing thereof;

 

•             ourability to access sufficient, reliable and affordable third-party supplies ofholmium-166;

 

•             thecosts of ramping up and maintaining manufacturing operations;

 

•             theavailability of qualified personnel;

 

•             theavailability and nature of strategic partnering opportunities; and

 

•             theavailability and cost of potential third-party suppliers of STR.

 

In connection with operation of the Denton facility to produce the STRcompound for our proposed pivotal program, we may be required to re-certify thefacility with the FDA. The ramp-up and re-certification processes at the Dentonfacility could take up to six months or more. If in the future we decide to transition the STR production process to athird-party supplier, such third-party supplier also could require significantstart-up time to qualify and implement the manufacturing process.  In either case, our ability to move forwardwith further STR clinical and commercial development could be adverselyaffected and we may incur significant additional costs in connection withmanufacturing operations.

 

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**We face substantial competition in thedevelopment of cancer therapies and may not be able to compete successfully,and our potential products may be rendered obsolete by rapid technologicalchange.**

 

The competition for development of cancer therapies is intense.  There are numerous competitors developingproducts to treat the diseases for which we are seeking to develop products. Weinitially are focusing clinical development of our STR product candidate on thetreatment of multiple myeloma.  Severalcompanies, including Celgene Corp. and Millennium Pharmaceuticals, Inc., alsoare developing and testing therapeutics for multiple myeloma.  In May 2003 Millennium obtained approval forits VelcadeTM therapeutic for treatment of multiple myeloma patients who havereceived at least two prior therapies and demonstrated disease progression onthe last therapy.  In addition, a numberof established pharmaceutical companies, including GlaxoSmithKline, Novartis AGand Bristol-Myers Squibb Co., are developing proprietary technologies or haveenhanced their capabilities by entering into arrangements with, or acquiring,companies with technologies applicable to the treatment of cancer.  Many of our existing or potentialcompetitors have, or have access to, substantially greater financial, researchand development, marketing and production resources than we do and may bebetter equipped than we are to develop, manufacture and market competingproducts.  Our competitors may have, ormay develop and introduce, new products that would render our technology andproposed STR product less competitive, uneconomical or obsolete.

 

We also expect to face increasing competitionfrom universities and other non-profit research organizations.  These institutions, which carry out asignificant amount of cancer research and development, are becomingincreasingly aware of the commercial value of their findings and more active inseeking patent and other proprietary rights, as well as licensing revenues.

 

**If we are unable to protect our proprietaryrights, we may not be able to compete effectively, or operate profitably.**

 

Our success is dependent in part onobtaining, maintaining and enforcing our patents and other proprietary rightsand our ability to avoid infringing the proprietary rights of others.  Patent law relating to the scope of claimsin the biotechnology field in which we operate is still evolving and,consequently, patent positions in our industry may not be as strong as inother, better-established fields. Accordingly, the United States Patent and Trademark Office (USPTO) maynot issue patents from the patent applications owned by or licensed to us.  If issued, the patents may not give us anadvantage over competitors with similar technologies.

 

We own approximately 100 issued United Statespatents and have licenses to additional patents.  However, the issuance of a patent is not conclusive as to itsvalidity or enforceability and it is uncertain how much protection, if any,will be given to our patents if we attempt to enforce them and they arechallenged in court or in other proceedings, such as oppositions, which may bebrought in foreign jurisdictions to challenge the validity of a patent.  A third party may challenge the validity orenforceability of a patent after its issuance by the USPTO.  It is possible that a competitor maysuccessfully challenge our patents or that a challenge will result in limitingtheir coverage.  Moreover, the cost oflitigation to uphold the validity of patents and to prevent infringement can besubstantial.  If the outcome oflitigation is adverse to us, third parties may be able to use our patentedinvention without payment to us. Moreover, it is possible that competitors may infringe our patents orsuccessfully avoid them through design innovation.  We may need to file lawsuits to stop these activities.  These lawsuits can be expensive and wouldconsume time and other resources, even if we were successful in stopping theviolation of our patent rights.  Inaddition, there is a risk that a court would decide that our patents are notvalid and that we do not have the right to stop the other party from using theinventions.  There is also the riskthat, even if the validity of our patents were upheld, a court would refuse tostop the other party on the ground that its activities do not infringe ourpatents.

 

In addition to the intellectual propertyrights described above, we rely on unpatented technology, trade secrets andconfidential information.  Therefore,others may independently develop substantially equivalent information andtechniques or otherwise gain access 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 employment orconsulting relationship with us. However, these agreements may not provide effective protection of ourinformation or, in the event of unauthorized use or disclosure, they may notprovide adequate remedies.

 

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**Theuse of our technologies could potentially conflict with the rights of others.**

 

Our competitors or others may have or acquirepatent rights that they could enforce against us.  In such case, we may be required to alter our products, paylicensing fees or cease activities.  Ifour products conflict with patent rights of others, third parties could bringlegal actions against us claiming damages and seeking to enjoin manufacturingand marketing of the affected products. If these legal actions are successful, in addition to any potentialliability for damages, we could be required to obtain a license in order tocontinue to manufacture or market the affected products.  We may not prevail in any legal action and arequired license under the patent may not be available on acceptable terms.

 

**Wemay incur substantial costs as a result of litigation or other proceedingsrelating to patent and other intellectual property rights.**

 

The cost to us of any litigation or otherproceedings relating to intellectual property rights, even if resolved in ourfavor, could be substantial.  Some ofour competitors may be better able to sustain the costs of complex patentlitigation because they have substantially greater resources.  If there is litigation against us, we maynot be able to continue our operations. If third parties file patent applications, or are issued patentsclaiming technology also claimed by us in pending applications, we may berequired to participate in interference proceedings in the USPTO to determinepriority of invention.  We may berequired to participate in interference proceedings involving our issuedpatents and pending applications.  Wemay be required to cease using the technology or license rights from prevailingthird parties as a result of an unfavorable outcome in an interferenceproceeding.  A prevailing party in thatcase may not offer us a license on commercially acceptable terms.

 

**Productliability claims in excess of the amount of our insurance would adverselyaffect our financial condition.**

 

The testing, manufacturing, marketing andsale of STR and any other proposed cancer therapy products may subject us toproduct liability claims.  We areinsured against such risks up to a $10 million annual aggregate limit in connectionwith clinical trials of our products under development and intend to obtainproduct liability coverage in the future. However, insurance coverage may not be available to us at an acceptablecost.  We may not be able to obtaininsurance coverage that will be adequate to satisfy any liability that mayarise.  Regardless of merit or eventualoutcome, product liability claims may result in decreased demand for a product,injury to our reputation, withdrawal of clinical trial volunteers and loss ofrevenues.  As a result, regardless ofwhether we are insured, a product liability claim or product recall may resultin losses that could be material.

 

**Ouruse of radioactive and other hazardous materials exposes us to the risk ofmaterial environmental liabilities, and we may incur significant additionalcosts to comply with environmental laws in the future.**

 

Our research and development and manufacturing processes, as well asthe manufacturing processes that may be used by our collaborators, involve thecontrolled use of hazardous and radioactive materials.  As a result, we are subject to foreign,federal, state and local laws, rules, regulations and policies governing theuse, generation, manufacture, storage, air emission, effluent discharge,handling and disposal of certain materials and wastes in connection with ouruse of these materials.  Although webelieve that our safety procedures for handling and disposing of such materialscomply with the standards prescribed by such laws and regulations, we may be requiredto incur significant costs to comply with environmental and health and safetyregulations in the future. In the event that we discontinue operations infacilities that have had past research and manufacturing processes wherehazardous or radioactive materials have been in use, we may have significantdecommissioning costs associated with the termination of operation of thesefacilities.  These potentialdecommissioning costs also may reduce the market value of the facilities andmay limit our ability to sell or otherwise dispose of these facilities in atimely and cost-effective manner. *** ***In addition, therisk of accidental contamination or injury from hazardous or radioactivematerials cannot be completely eliminated. In the event of such an accident, we could be held liable for anyresulting damages, and any such liability could exceed our resources.

 

**Evenif we bring products to market, changes in healthcare reimbursement couldadversely affect our ability to effectively price our products or obtainadequate reimbursement for sales of our products.**

 

The levels of revenues and profitability ofbiotechnology companies may be affected by the continuing efforts of governmentand third-party payors to contain or reduce the costs of healthcare through variousmeans.  For

 

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example, in certain foreign markets pricing or profitability ofprescription pharmaceuticals is subject to governmental control.  In the United States, there have been, andwe expect that there will continue to be, a number of federal and stateproposals to implement similar governmental controls.  It is uncertain what legislative proposals will be adopted orwhat actions federal, state or private payors for healthcare goods and servicesmay take in response to any healthcare reform proposals or legislation.  Even in the absence of statutory change,market forces are changing the healthcare sector.  We cannot predict the effect healthcare reforms may have on thedevelopment, testing, commercialization and marketability of our proposedcancer therapy products.  Further, tothe extent that such proposals or reforms have a material adverse effect on thebusiness, financial condition and profitability of other companies that areprospective collaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.  In addition, both in the United States andelsewhere, sales of prescription pharmaceuticals depend in part on the availabilityof reimbursement to the consumer from third-party payors, such as governmentaland private insurance plans. Third-party payors are increasingly challenging the prices charged formedical products and services.  If wesucceed in bringing one or more products to market, we cannot be certain thatthese products will be considered cost-effective and that reimbursement to theconsumer will be available or will be sufficient to allow us to sell ourproducts on a competitive or profitable basis.

 

**Theloss of key employees could adversely affect our operations.**

 

Since July 2002, we have implemented threereductions in force. Also in January 2003, we accepted the resignations ofRichard Ghalie, MD, Vice President, Medical and Regulatory Affairs, and Les Sabo,Vice President, Manufacturing.  Jack L.Bowman was named Executive Chairman and became Chairman of our Board ofDirectors on March 11, 2003.  DouglassB. Given, MD, PhD resigned as President, Chief Executive Officer and a Directorof the Company on June 30, 2003.  Onthat date, Mr. Bowman was named Chief Executive Officer and KarenAuditore-Hargreaves, PhD was promoted to Chief Operating Officer of theCompany.  As of June 30, 2003, we had atotal work force of 34 full-time employees and one part-time employee. Oursuccess depends, to a significant extent, on the continued contributions of ourprincipal management and scientific personnel. The loss of the services of one or more of the principal members of ourscientific and management staff could delay our STR product developmentactivities or other programs and research and development efforts.  We do not maintain key-person life insuranceon any of our officers, employees or consultants.

 

Competition for qualified employees amongcompanies in the biotechnology and biopharmaceutical industry is intense.  Our future success depends upon our abilityto attract, retain and motivate highly skilled employees.  In order to commercialize our proposedproducts successfully, we will in the future, be required to expandsubstantially our workforce, particularly in the areas of manufacturing,clinical trials management, regulatory affairs, business development and salesand marketing.  These activities willrequire the addition of new personnel, including management, and thedevelopment of additional expertise by existing management personnel.  Our current financial situation may make itmore difficult to attract and retain key employees.

 

**Our commonstock listing was transferred from The Nasdaq National Market to The NasdaqSmallCap Market; failure to maintain continued listing on Nasdaq could affectits market price and liquidity.**

 

Our common stock listing was transferred from The Nasdaq NationalMarket to The Nasdaq SmallCap Market on March 20, 2003.  We elected to seek a transfer to The NasdaqSmallCap Market because we had been unable to regain compliance with The NasdaqNational Market minimum $1.00 bid price requirement for continued listing. By transferring to The SmallCap Market, wewere afforded an extended grace period in which to satisfy the The SmallCapMarket $1.00 minimum bid price requirement. On May 6, 2003, we received notice from Nasdaq confirming that we arenow in compliance with the $1.00 SmallCap minimum bid price requirement.  As a result of rule changes adopted byNasdaq in March 2003, we will not be eligible to relist our common stock on TheNasdaq National Market unless and until our common stock maintains a minimumbid price of $5.00 per share and we otherwise comply with the initial listingrequirements for The Nasdaq National Market. Trading on the Nasdaq SmallCap Market may have a negative impact on thevalue of our common stock, because securities trading on the Nasdaq SmallCapMarket typically are less liquid than those traded on The Nasdaq NationalMarket.

 

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

 

There has been a history of significantvolatility in the market prices of securities of biotechnology companies,including our common stock, and it is likely that the market price of ourcommon stock will continue to

 

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be highly volatile.  Ourbusiness and the relative price of our common stock may be influenced by alarge variety of industry factors, including:

 

•                  announcementsby us or our competitors concerning acquisitions, strategic alliances,technological innovations and new commercial products;

 

•                  theavailability of critical materials used in developing and manufacturing ourproposed STR product;

 

•                  theprogress and results of clinical trials;

 

•                  developmentsconcerning patents, proprietary rights and potential infringement; and

 

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

 

In addition, potential public concern aboutthe safety of our proposed STR product and any other products we develop,comments by securities analysts, our ability to maintain the listing of ourcommon stock on the Nasdaq system and conditions in the capital markets ingeneral and in the life science capital market specifically, may have asignificant effect on the market price of our common stock.  The realization of any of the risksdescribed in this report, as well as other factors, could have a materialadverse impact on the market price of our common stock and may result in a lossof some or all of your investment.

 

In the past, securities class actionlitigation often has been brought against companies following periods ofvolatility in their stock prices.  Wemay in the future be the target of similar litigation.  Securities litigation could result insubstantial costs and divert our management’s time and resources, which couldcause our business to suffer.

 

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

 

Our articles of incorporation authorize ourBoard of Directors to issue up to 3,000,000 shares of preferred stock and todetermine the price, rights, preference, privileges and restrictions, includingvoting rights, of those shares without any further vote or action by ourshareholders.  The issuance of preferredstock could have the effect of delaying, deferring or preventing a change ofcontrol, even if this change would benefit our shareholders.  In addition, the issuance of preferred stockmay adversely affect the market price of our common stock and the voting andother rights of the holders of our common stock.

 

We have adopted a shareholders’ rights plan,which is intended to protect the rights of shareholders by deterring coerciveor unfair takeover tactics.  The Boardof Directors declared a dividend to holders of our common stock of onepreferred share purchase right for each outstanding share of common stock.  The right is exercisable ten days followingthe offer to purchase or acquisition of beneficial ownership of 20% of theoutstanding common stock by a person or group of affiliated persons.  Each right entitles the registered holder,other than the acquiring person or group, to purchase from NeoRx one-hundredthof one share of Series A Junior Participating Preferred Stock at the price of$40, subject to adjustment.  The rightsexpire April 10, 2006.  In lieu ofexercising the right by purchasing one one-hundredth of one share of Series APreferred Stock, the holder of the right, other than the acquiring person orgroup, may purchase for $40 that number of shares of our common stock having amarket value of twice that price.

 

Washington law imposes restrictions on certaintransactions between a corporation and significant shareholders.  Chapter 23B.19 of the Washington BusinessCorporation Act prohibits a target corporation, with some exceptions, fromengaging in particular significant business transactions with an acquiringperson, which is defined as a person or group of persons that beneficially owns10% or more of the voting securities of the target corporation, for a period offive years after the acquisition, unless the transaction or acquisition ofshares is approved by a majority of the members of the target corporation’sboard of directors 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;

 

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•    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 opt out of this statute.  This provision may have the effect ofdelaying, deterring or preventing a change in control of NeoRx or limitingfuture investment in NeoRx by significant shareholders and their affiliates andassociates.

 

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**Item 3****.  Quantitativeand Qualitative Disclosures about Market Risk**

 

The Company is exposed to the impact ofinterest rate changes and changes in the market values of its investments.

 

**InterestRate Risk**

 

The Company’s exposure to market rate riskfor changes in interest rates relates primarily to the Company’s debtsecurities included in its investment portfolio.  The Company does not have any derivative financial instruments.  The Company invests in debt instruments ofthe US Government and its agencies and high-quality corporate issuers.  Investments in both fixed rate and floatingrate interest earning instruments 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 ratesfall.  Due in part to these factors, theCompany’s future investment income may fall short of expectations due tochanges in interest rates or the Company may suffer losses in principal ifforced to sell securities that have declined in market value due to changes ininterest rates.  At June 30, 2003, theCompany owned $4.3 million in government debt instruments and owned corporatedebt securities in the amount of $9.0 million. The Company’s exposure to lossesas a result of interest rate changes is managed through investing primarily insecurities with relatively short maturities of up to three years and securitieswith variable interest rates.  TheCompany had no corporate debt securities that had maturity dates greater thanone year at June 30, 2003.

 

**Item 4****.  Controls and Procedures**

 

Under the supervision of and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Vice President, Finance, the Company has evaluated theeffectiveness and design and operation of its disclosure controls andprocedures as of the end of the quarter and, based on their evaluation, theChief Executive Officer and the Vice President, Finance, have concluded thatthese disclosure controls and procedures are effective in ensuring that allmaterial information required to be disclosed in the reports that the Companyfiles or submits under the Securities Exchange Act of 1934 have been made knownto them in a timely fashion.  There wereno changes in the Company’s internal controls over financial reporting thatoccurred during the quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PART II****.  OTHER INFORMATION**

 

**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

The Company’s annual meeting of shareholders washeld on May 9, 2003.  The followingnominees were elected as directors, each to hold office until his or hersuccessor is elected and qualified, by the vote set forth below:

 
| **Nominee**         |   | **For**    |   | **Withheld** |   |
|---------------------|--------|------------|--------|--------------|--------|
|                |   |       |   |         |   |
| Douglass B. Given   |   | 24,655,140 |   | 255,194      |   |
| Jack L. Bowman      |   | 24,069,663 |   | 840,671      |   |
| Frederick B. Craves |   | 24,531,481 |   | 378,853      |   |
| E. Rolland Dickson  |   | 24,678,755 |   | 231,579      |   |
| Carl S. Goldfischer |   | 24,071,378 |   | 838,956      |   |
| Alan A. Steigrod    |   | 24,647,712 |   | 262,622      |   |

 

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

 

 

(a) Exhibits -See Exhibit Index below.

 

(b) Reports onForm 8-K:

 

Form 8-K dated April 17, 2003, relating to the sale to BostonScientific Corporation of certain non-core NeoRx intellectual property andannouncing that the FDA lifted the clinical hold on the Company’s SkeletalTargeted Radiotherapy (STRTM) product candidate for multiple myeloma.

 

Form 8-K dated May 6, 2003, announcing the Company’s earnings for thequarter ended March 31, 2003.

 

Form 8-K dated June 1, 2003, announcing the presentation on theCompany’s Skeletal Targeted Radiotherapy (STRTM) product candidate at the 2003Annual Meeting of the American Society of Clinical Oncology by WilliamBensinger, MD.

 

Form 8-K dated June 30, 2003, announcing the appointment of Jack L.Bowman as Chief Executive Officer and Karen Auditore-Hargreaves, PhD as ChiefOperating Officer of the Company and the resignation of Douglass B. Given, MD,PhD as President, Chief Executive Officer and a Director of the Company.  The Company also announced its submission tothe FDA of a plan for its proposed STR pivotal clinical program.

 

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**SIGNATURES**

 

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

 

 
|   | NEORX CORPORATION |
|--------|-------------------|
|   | (Registrant)      |
|   |              |
|   |              |
|   | By:               | /s/ MELINDA G. KILE |   |
|   |              | Melinda G. Kile |
|   |              | Vice President, Finance and Chief Accounting Officer |

 

 

Date: August 14, 2003

 

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**EXHIBIT INDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                    |   |   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1(a)      |   | Restated Articles of Incorporation, dated April 29, 1996                                                                                                                                                           |   | (B)    |
| 3.1(b)      |   | Articles of Amendment, dated March 31, 1997, to Restated Articles of  Incorporation                                                                                                                                |   | (C)    |
| 3.1(c)      |   | Articles of Amendment, dated August 8, 1997, to Restated Articles of  Incorporation                                                                                                                                |   | (K)    |
| 3.2         |   | Bylaws, as amended, of the registrant                                                                                                                                                                              |   | (K)    |
| 10.1        |   | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                           |   | (F)    |
| 10.2        |   | Lease Agreement for 410 West Harrison facility, dated February 15,  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        |   | Agreement, dated as of December 15, 1995                                                                                                                                                                           |   | (F)    |
| 10.7        |   | Stock Option Agreement, dated July 30, 2001, between NeoRx  Corporation and Douglass B. Given (‡)                                                                                                             |   | (G)    |
| 10.8        |   | Indemnification Agreement (‡)                                                                                                                                                                                 |   | (H)    |
| 10.9        |   | Form of Key Executive Severance Agreement (‡)                                                                                                                                                                 |   | (I)    |
| 10.10       |   | Officer Change in Control Agreement (‡)                                                                                                                                                                       |   | (K)    |
| 10.11       |   | Key Executive Severance Agreement (‡)                                                                                                                                                                         |   | (K)    |
| 10.12       |   | License Agreement, dated June 30, 1999, between NeoRx and The Dow  Chemical Company                                                                                                                                |   | (L)    |
| 10.13       |   | Credit Facility Agreement, dated February 3, 2000, between NeoRx  Corporation and Pharmaceutical Product Development, Inc.                                                                                         |   | (M)    |
| 10.14       |   | Facilities Lease, dated July 24, 2000, between NeoRx Corporation and  F5 Networks                                                                                                                                  |   | (N)    |
| 10.15       |   | Stock Option Agreement, dated December 19, 2000, between NeoRx  Corporation and Carl S. Goldfischer (‡)                                                                                                       |   | (J)    |
| 10.16       |   | Stock Option Agreement, dated January 17, 2001, between NeoRx  Corporation and Carl S. Goldfischer   (‡)                                                                                                 |   | (J)    |
| 10.17       |   | Stock Option Agreement, dated November 16, 2000, between NeoRx  Corporation and Douglass B. Given (‡)                                                                                                         |   | (J)    |
| 10.18       |   | 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.  |   | (O)    |
| 10.19       |   | Stock Option Grant Program for Nonemployee Directors under the NeoRx  Corporation 1994 Restated Stock Option Plan (‡)                                                                                         |   | (P)    |
| 10.20       |   | First Amendment to Sublease Agreement, dated March 30, 2001, between  NeoRx Corporation and F5 Networks                                                                                                            |   | (O)    |
| 10.21       |   | Amendment No. 3 to Consulting Agreement, dated January 1, 2002,  between NeoRx Corporation and Bay City Capital BD, LLC                                                                                            |   | (A)    |
| 10.22       |   | Separation Agreement, dated September 13, 2001, between NeoRx  Corporation and Richard L. Anderson (‡)                                                                                                        |   | (A)    |
| 10.23       |   | Form of VP Change in Control Agreements (‡)                                                                                                                                                                   |   | (A)    |
| 10.24       |   | Clinical Manufacture and Supply Agreement, dated December 1, 2001,  between NeoRx Corporation and MURR.   Certain portions of the agreement have been omitted pursuant to a  grant of confidential treatment. |   | (A)    |
| 10.25       |   | Facilities Lease, dated February 15, 2002, between NeoRx Corporation  and Selig Real Estate Holdings Six                                                                                                           |   | (A)    |
| 10.26       |   | Form of VP Severance Agreements (‡)                                                                                                                                                                           |   | (A)    |
| 10.27       |   | Lease Termination/Continuation Agreement between NeoRx Corporation  and Dina Corporation                                                                                                                           |   | (R)    |
| 10.28       |   | Purchase Agreement dated as of November 12, 2002, between NeoRx  Corporation and IDEC Pharmaceutical Corporation                                                                                                   |   | (S)    |
| 10.29       |   | Change in Control Agreement, dated February 12, 2003, between NeoRx  Corporation and Douglass B. Given                                                                                                             |   | (T)    |
| 10.30       |   | Patent License Agreement dated April 17, 2003 between NeoRx  Corporation and SciMed Life Sciences, Inc.                                                                                                            |   | (Q)    |

 

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| 10.31 |   | Patent Assignment Agreement dated April 17, 2003 between NeoRx  Corporation and Boston Scientific Corporation |   | (Q) |
|-------|--------|---------------------------------------------------------------------------------------------------------------|--------|-----|
| 31.1  |   | Certification of Chief Executive Officer pursuant to Rule 13a-14a                                             |   | (U) |
| 31.2  |   | Certification of Principal Accounting Officer pursuant to Rule  13a-14a                                       |   | (U) |
| 32.1  |   | Certification of Chief Executive Officer pursuant to 18 USC Section  1350                                     |   | (U) |
| 32.2  |   | Certification of Principal Accounting Officer pursuant to 18 USC  Section 1350                                |   | (U) |

 

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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 Form 10-K for the fiscal year  ended December 31, 1996 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                   |
| (C)    |   | Filed as an exhibit to the Company’s Registration Statement on Form  S-3 (Registration No. 333-25161), filed April 14, 1997 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)    |   | Filed as an exhibit to the Company’s Registration Statement on Form  S-2 (Registration No. 33-71164) effective December 13, 1993 and incorporated  herein by reference.                                                                           |
|   |   |                                                                                                                                                                                                                                                   |
| (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 Registration Statement on Form  S-8 (Registration No. 333-71368), filed October 10, 2001 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-Q for the quarterly period  ended June 30, 1996 and incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                   |
| (J)    |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal year  ended December 31, 2000 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                   |
| (K)    |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal year  ended December 31, 1998 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                   |
| (L)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 1999 and incorporated herein by reference.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment. |
|   |   |                                                                                                                                                                                                                                                   |
| (M)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 2000 and incorporated herein by reference.  Certain portions of the agreement have been  omitted pursuant to a grant of confidential treatment.     |
|   |   |                                                                                                                                                                                                                                                   |
| (N)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 2000 and incorporated herein by reference.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment. |
|   |   |                                                                                                                                                                                                                                                   |
| (O)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 2001 and incorporated herein by reference.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                   |
| (P)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended June 30, 2002 and incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                   |
| (Q)    |   | Filed as an exhibit to the Company’s Form 8-K dated April 17, 2003  and incorporated herein by reference. Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment.                                     |

 

29

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| (R)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 2002 and incorporated herein by reference.                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                  |
| (S)    |   | Filed as an exhibit to  the Company’s Current Report on Form 8-K filed as of November 27, 2002 and  incorporated herein by reference.  Certain  portions of the agreement have been omitted pursuant to a grant of  confidential treatment. |
|   |   |                                                                                                                                                                                                                                                  |
| (T)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 2003 and incorporated herein by reference.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                  |
| (U)    |   | Filed herewith.                                                                                                                                                                                                                                       |

 

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