**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2006**

 

**Commission File No. 0-16614**

 

**NEORX CORPORATION**

(Exact name of Registrant as specified in itscharter)

 

| **Washington**                                                   | ** ** | **91-1261311**                    |
|------------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction  of incorporation or  organization) | ** ** | (IRS Employer Identification No.) |

** **

**300 Elliott Avenue West, Suite 500, Seattle,Washington 98119-4114**

(Address of principal executive offices)

 

Registrant’s telephone number, including areacode:**(206) 281-7001**

 

Indicateby check mark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| Large accelerated  filer   o |   | Accelerated filer   o |   | Non-accelerated filer   ý |
|---------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

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

 

Asof May 8, 2006 136,825,894 shares of the Registrant’s common stock, $.02 parvalue par share, were outstanding.

 

 

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**TABLE OF CONTENTS**

 

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED MARCH 31,2006**

 
| **PART I**    | **FINANCIAL INFORMATION**                                                                                         | ** ** |
|---------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                        | ** ** |
| Item 1.       | Financial  Statements:                                                                                            |       |
|          |                                                                                                              |       |
|          | Condensed  Consolidated Balance Sheets as of March 31, 2006   and December 31, 2005 (unaudited)                   |       |
|          |                                                                                                              |       |
|          | Condensed  Consolidated Statements of Operations for the Three   Months Ended March 31, 2006 and 2005 (unaudited) |       |
|          |                                                                                                              |       |
|          | Condensed Consolidated  Statements of Cash Flows for the Three   Months Ended March 31, 2006 and 2005 (unaudited) |       |
|          |                                                                                                              |       |
|          | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                 |       |
|          |                                                                                                              |       |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and   Results of Operations                     |       |
|          |                                                                                                              |       |
| Item 3.       | Quantitative and Qualitative  Disclosures About Market Risk                                                       |       |
|          |                                                                                                              |       |
| Item 4.       | Controls and Procedures                                                                                           |       |
|          |                                                                                                              |       |
| **PART II**   | **OTHER INFORMATION**                                                                                             | ** ** |
| ** **    | ** **                                                                                                        | ** ** |
| Item 1A.      | Risk  Factors                                                                                                     |       |
|          |                                                                                                              |       |
| Item 6.       | Exhibits                                                                                                          |       |
|          |                                                                                                              |       |
| Signatures    |                                                                                                              |       |
|          |                                                                                                              |       |
| Exhibit Index |                                                                                                              |       |

 

2

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**PART I. FINANCIALINFORMATION**

** **

**Item1. Financial Statements**

** **

**NEORX CORPORATION AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

(unaudited)

(inthousands, except share data)

 
| ** **                                                                                                                                                                           | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-----------------|------------|
| ** **                                                                                                                                                                           | ** ** | **2006**     | ** ** | **2005**        | ** ** |
| **ASSETS**                                                                                                                                                                           | ** ** | ** **   | ** ** | ** **      | ** ** |
| ** **                                                                                                                                                                           | ** ** | ** **   | ** ** | ** **      | ** ** |
| **Current  assets:**                                                                                                                                                                 | ** ** | ** **   | ** ** | ** **      | ** ** |
| Cash and cash  equivalents                                                                                                                                                           |       | $            | 3,203      |            | $          | 3,523 |   |
| Cash -  restricted                                                                                                                                                                   |       | —       |       | 1,000           |       |
| Prepaid expenses  and other current assets                                                                                                                                           |       | 440          |       | 455             |       |
| Assets held for  sale                                                                                                                                                                |       | 56           |       | 83              |       |
| Total current  assets                                                                                                                                                                |       | 3,699        |       | 5,061           |       |
| **Facilities  and equipment, at cost:**                                                                                                                                              | ** ** | ** **   | ** ** | ** **      | ** ** |
| Equipment and  furniture                                                                                                                                                             |       | 875          |       | 829             |       |
|                                                                                                                                                                                 |       | 875          |       | 829             |       |
| Less:  accumulated depreciation and amortization                                                                                                                                     |       | (581         | )          | (556            | )          |
| Facilities and  equipment, net                                                                                                                                                       |       | 294          |       | 273             |       |
|                                                                                                                                                                                 |       |         |       |            |       |
| Other assets                                                                                                                                                                         |       | 494          |       | 45              |       |
| Assets held for  sale                                                                                                                                                                |       | 3,027        |       | 3,027           |       |
| Licensed products,  net of accumulated amortization of $333 and $292                                                                                                                 |       | 1,667        |       | 1,708           |       |
| **Total  assets**                                                                                                                                                                    |       | $            | 9,181      |            | $          | 10,114 |   |
| ** **                                                                                                                                                                           | ** ** | ** **   | ** ** | ** **      | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                        | ** ** | ** **   | ** ** | ** **      | ** ** |
| ** **                                                                                                                                                                           | ** ** | ** **   | ** ** | ** **      | ** ** |
| **Current  liabilities:**                                                                                                                                                            | ** ** | ** **   | ** ** | ** **      | ** ** |
| Accounts payable                                                                                                                                                                     |       | $            | 1,322      |            | $          | 995 |   |
| Accrued liabilities                                                                                                                                                                  |       | 2,431        |       | 2,078           |       |
| Bank loan  payable                                                                                                                                                                   |       | 2,734        |       | 3,868           |       |
| Total current  liabilities                                                                                                                                                           |       | 6,487        |       | 6,941           |       |
|                                                                                                                                                                                 |       |         |       |            |       |
| **Long-term  liabilities:**                                                                                                                                                          | ** ** | ** **   | ** ** | ** **      | ** ** |
| Promissory notes  payable, net of debt discount of $1,730                                                                                                                            |       | 1,730        |       | —          |       |
|                                                                                                                                                                                 |       |         |       |            |       |
| **Shareholders’  equity:**                                                                                                                                                      | ** ** | ** **   | ** ** | ** **      | ** ** |
| Preferred stock,  $.02 par value, 3,000,000 shares authorized:                                                                                                                       |       |         |       |            |       |
| Convertible  preferred stock, Series 1, 205,340 shares issued and outstanding at March 31,  2006 and December 31, 2005 (entitled in liquidation to $5,300 and $5,175,  respectively) |       | 4            |       | 4               |       |
| Convertible  preferred stock, Series B, 1,575 shares issued and outstanding at March 31,  2006 and December 31, 2005 (entitled in liquidation to $15,750)                            |       | —       |       | —          |       |
| Common stock,  $.02 par value, 200,000,000 shares authorized, 34,332,293 and 34,322,293  shares issued and outstanding at March 31, 2006 and December 31, 2005,  respectively        |       | 686          |       | 686             |       |
| Additional  paid-in capital                                                                                                                                                          |       | 261,998      |       | 258,283         |       |
| Accumulated  deficit, including other comprehensive loss of $0 and $0 at March 31, 2006  and December 31, 2005, respectively                                                         |       | (261,724     | )          | (255,800        | )          |
| Total  shareholders’ equity                                                                                                                                                     |       | 964          |       | 3,173           |       |
| **Total  liabilities and shareholders’ equity**                                                                                                                                 |       | $            | 9,181      |            | $          | 10,114 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

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**NEORX CORPORATON AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(unaudited)

(Inthousands, except per share data)

 
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Revenues**                                  |       | $                                | —     |   | $ | — |   |
| ** **                                    |       |                             |       |   |   |
| **Operating expenses:**                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Research and development                      |       | 2,523                            |       | 3,345 |   |
| General and administrative                    |       | 1,513                            |       | 1,761 |   |
| Gain on sale of equipment                     |       | (37                              | )          | — |   |
|                                          |       |                             |       |   |   |
| Total operating  expenses                     |       | 3,999                            |       | 5,106 |   |
| Loss from operations                          |       | (3,999                           | )          | (5,106 | ) |
|                                          |       |                             |       |   |   |
| **Other income (expense):**                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest income                               |       | 38                               |       | 93 |   |
| Interest expense                              |       | (1,838                           | )          | (63 | ) |
|                                          |       |                             |       |   |   |
| Total other  (expense) income                 |       | (1,800                           | )          | 30 |   |
|                                          |       |                             |       |   |   |
| Net loss                                      |       | (5,799                           | )          | (5,076 | ) |
|                                          |       |                             |       |   |   |
| Preferred stock dividends                     |       | (125                             | )          | (125 | ) |
| Net loss applicable to common shares          |       | $                                | (5,924     | ) | $ | (5,201 | ) |
|                                          |       |                             |       |   |   |
| Loss per share applicable to common shares:   |       |                             |       |   |   |
| Basic and  diluted                            |       | $                                | (0.17      | ) | $ | (0.16 | ) |
| Shares used in calculation of loss per share: |       |                             |       |   |   |
| Basic and  diluted                            |       | 34,327                           |       | 31,794 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

4

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**NEORX CORPORATION AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(unaudited)

(Inthousands)

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                | (5,799     | ) | $ | (5,076 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                               |       | 67                               |       | 200 |   |
| Amortization of  discount on note payable                                    |       | 1,730                            |       | — |   |
| Gain on disposal  of equipment                                               |       | (37                              | )          | — |   |
| Stock-based  compensation                                                    |       | 248                              |       | (12 | ) |
| Change in  operating assets and liabilities:                                 |       |                             |       |   |   |
| Prepaid expenses  and other assets                                           |       | 15                               |       | (7 | ) |
| Accounts payable                                                             |       | 327                              |       | (591 | ) |
| Accrued  liabilities                                                         |       | 228                              |       | 164 |   |
| Net cash used in  operating activities                                       |       | (3,221                           | )          | (5,322 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash flows from investing activities:**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  sales and maturities of investment securities                 |       | —                           |       | 1,500 |   |
| Facilities and  equipment purchases                                          |       | (47                              | )          | (42 | ) |
| Proceeds from  sales of equipment                                            |       | 64                               |       | — |   |
| Net cash  provided by investing activities                                   |       | 17                               |       | 1,458 |   |
|                                                                         |       |                             |       |   |   |
| **Cash flows from financing activities:**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Repayment of  bank note payable principal                                    |       | (1,134                           | )          | (56 | ) |
| Proceeds from  bridge notes                                                  |       | 3,460                            |       | — |   |
| Decrease in  restricted cash                                                 |       | 1,000                            |       | — |   |
| Payment of  offering costs                                                   |       | (449                             | )          | — |   |
| Proceeds from  stock options and warrants exercised                          |       | 7                                |       | — |   |
| Net proceeds  from issuance of common stock and warrants                     |       | —                           |       | 3,813 |   |
| Net cash  provided by financing activities                                   |       | 2,884                            |       | 3,757 |   |
| Net decrease in cash and cash equivalents                                    |       | (320                             | )          | (107 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash and cash equivalents:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Beginning of  period                                                         |       | 3,523                            |       | 16,254 |   |
| End of period                                                                |       | $                                | 3,203      |   | $ | 16,147 |   |
|                                                                         |       |                             |       |   |   |
| **Supplemental disclosure of non-cash financing  activity:**                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Accrual of  preferred dividend                                               |       | $                                | 125        |   | $ | 125 |   |
| Warrants and  beneficial conversion feature                                  |       | $                                | 3,460      |   | $ | — |   |
| **Supplemental disclosure of cash paid during the  period for:**             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                      |       | $                                | 62         |   | $ | 59 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

# ** **

# **Note 1. Basis ofPresentation**

# ** **

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of NeoRx Corporation and subsidiary(the Company). All intercompany balances and transactions have been eliminatedin consolidation.

 

The Company hashistorically suffered recurring operating losses and negative cash flows fromoperations. As of March 31, 2006, the Company had a negative net workingcapital of $2,788,000 and had an accumulated deficit of $261,724,000 with totalshareholders’ equity of $964,000. On April 26, 2006, the Company received approximately$65,000,000 in gross proceeds from the issuance of shares of the Company’scommon stock and the concurrent issuance of warrants for the purchase ofadditional shares of common stock (See Note 7). With the proceeds of the equityfinancing, management believes that current cash and cash equivalent balancesand funds from the equity financing will provide adequate resources to fundoperations at least until the end of 2007. These consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States, assuming that the Company willcontinue as a going concern.

 

The accompanyingcondensed consolidated financial statements contained herein have been preparedpursuant to the rules and regulations of the Securities and Exchange Commission(SEC). Certain information and note disclosures normally included in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to those rules and regulations, although the Company believesthat the disclosures made are adequate to make the information presented notmisleading. These financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005 filedwith the SEC and available on the SEC’s website, www.sec.gov.

 

The accompanying condensed consolidated financialstatements are unaudited. In the opinion of management, the condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring accruals necessary to present fairly the Company’s financialposition as of March 31, 2006 and the results of operations and cash flows forthe periods ended March 31, 2006 and 2005.

 

The results of operationsfor the periods ended March 31, 2006 and 2005 are not necessarily indicative ofthe expected operating results for the full year.

 

*Estimatesand Uncertainties: *Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

# **Note 2. Stock-BasedEmployee Compensation**

# ** **

At March 31, 2006,the Company’s 2004 Incentive Compensation Plan (the 2004 Plan) was the only compensationplan under which options were available for grant. The Company’s 1991 StockOption Plan for Non-Employee Directors (the Directors Plan) was terminated onMarch 31, 2005, and no further options can be granted under that plan. TheCompany’s 1994 Stock Option Plan (the 1994 Plan) was terminated on February 17,2004 and no further options can be granted under that plan. The 2004 Plan, asamended and restated in 2005, authorizes the Company’s board or a committeeappointed by the board to grant options to purchase a maximum aggregate of5,000,000 shares of common stock. The 2004 Plan allows for the issuance ofincentive stock options and nonqualified stock options to employees, officers,directors, agents, consultants, advisors and independent contractors of the Company,subject to certain restrictions. All option grants expire ten years from thedate of grant, except for certain grants to consultants, which have expirationsbased upon terms of service. Option grants for employees with at least one yearof service become exercisable in monthly increments over a four-year periodfrom the grant date. Option grants for employees with less than one year ofservice and employees receiving

 

6

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promotions become exercisable at a rate of 25% after one year fromthe grant date and then in monthly increments at a rate of 1/48th per monthover the following three years. As of March 31, 2006, there were 2,533,163shares of common stock available for issuance under the 2004 Plan. Although no Companysecurities are available for issuance under the Directors Plan or the 1994 Plan,options granted prior to termination of those plans continue in effect inaccordance with their terms.

 

Effective January 1, 2006, the Company adopted Statementof Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payments,”which revises SFAS 123, “Accounting for Stock-Based Compensation.”  Prior to this, the Company accounted for its stockoption plans for employees in accordance with the provisions of AccountingPrinciples Board Opinion (APBO) No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. Compensation expense related toemployee stock options was recorded if, on the date of grant, the fair value ofthe underlying stock exceeded the exercise price. The Company applied thedisclosure-only requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation,” and related interpretations, which allowed entities to continueto apply the provisions of APBO No. 25 for transactions with employees and toprovide pro forma results of operations disclosures for employee stock optiongrants as if the fair-value based method of accounting in SFAS No. 123 had beenapplied to these transactions. Stock compensation costs related to fixedemployee awards with pro rata vesting were disclosed on a straight-line basisover the period of benefit, generally the vesting period of the options. Foroptions and warrants issued to non-employees, the Company recognized stockcompensation costs utilizing the fair value methodology prescribed in SFAS No.123 over the related period of benefit.

 

Under SFAS 123R, the Company is required to select avaluation technique or option-pricing model that meets the criteria as statedin the standard, which includes a binomial model and the Black-Scholes model.At the present time, the Company is continuing to use the Black-Scholes model.The adoption of SFAS 123R, applying the “modified prospective application” transitionmethod, as elected by the Company, requires the Company to value stock optionsprior to its adoption of SFAS 123 under the fair value method and expense theseamounts over the stock options remaining vesting period. Under this transitionmethod, compensation expense recognized during the three months endedMarch 31, 2006 included compensation expense for all share-based awardsgranted prior to, but not yet vested, as of December 31, 2005, based onthe grant date fair value estimated in accordance with the original provisionsof SFAS 123. In accordance with the modified prospective transition method, theCompany’s Consolidated Financial Statements for prior periods have not beenrestated to reflect the impact of SFAS 123R.

 

As a result of adopting SFAS 123(R) on January 1,2006, the Company’s loss from operations and net loss for the three monthsended March 31, 2006 is $245,000 higher than if it had continued toaccount for share-based compensation under the recognition and measurementprovisions of APBO No. 25, and related Interpretations, as permitted by SFAS123. Basic and diluted net income per share for the three months endedMarch 31, 2006 would have been $0.17 if the Company had not adopted SFAS123(R). SFAS 123R also requires the Company to estimate forfeitures incalculating the expense relating to stock-based compensation as opposed to onlyrecognizing these forfeitures and the corresponding reduction in expense asthey occur. When estimating forfeitures, the Company considered voluntarytermination behavior as well as analysis of historical option forfeitures. TheCompany adjusted for this cumulative effect and recognized a reduction instock-based compensation, which was recorded within Research and Developmentand General and Administrative expense on the Company’s condensed consolidated statementof operations. The adjustment was not recorded as a cumulative effectadjustment because the amount was not material to the condensed consolidated statementof operations.

 

Had compensation cost for these stock option plans for employees beendetermined prior to January 1, 2006 using the fair value based method ofaccounting under SFAS No. 123, the Company’s net loss applicable to commonshares and loss per share would have been the pro forma amounts indicated below(in thousands, except per share data):

 

7

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

 

Disclosures for the three months endedMarch 31, 2006 are not presented because stock-based payments wereaccounted for under SFAS 123(R)’s fair-value method during this period.

 

For the three months ended March 31, 2006 and 2005,the Company recognized employee stock compensation costs of $245,000 and $0,respectively. The remaining unrecognized compensation cost related to unvestedawards at March 31, 2006, was approximately $1,405,000 and the weighted-averageperiod of time over which this cost will be recognized is 2.1 years.

 

The Company did not grantany options during the quarter ended March 31, 2006. Accordingly stock-basedemployee compensation expense for the three months ended March 31, 2006includes only the effect of the fair value of non-vested options granted priorto January 1, 2006, adjusted for estimated forfeitures.

 

The per shareweighted-average fair value of stock options granted during the quarter endedMarch 31, 2005 was $1.20 on the grant date using the Black-Scholes optionpricing model with the following weighted average assumptions:

 

| ** **               | ** ** | **Quarter ended  March 31, 2005** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| Expected  dividend rate  |       | 0.0                                              | %          |
| Risk-free  interest rate |       | 3.96                                             | %          |
| Expected  volatility     |       | 122.0                                            | %          |
| Expected life in  years  |       | 4.00                                             |       |

 

The Company issues new shares of common stock uponexercise of stock options. The following table summarizes the Company’s stockoption activity for the three months ended March 31, 2006 (in thousands, exceptper share data):

 

8

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| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  beginning of quarter           |       | 4,324                      |       | $                                      | 2.69       |                                                |       |                                |       |   |
| Granted                                        |       | —                     |       | —                                 |       |                                                |       |                                |       |
| Exercised                                      |       | (10                        | )          | 0.68                                   |       |                                                |       |                                |       |
| Forefeited or  expired                         |       | (59                        | )          | 2.29                                   |       |                                                |       |                                |       |
| Outstanding at  end of quarter                 |       | 4,255                      |       | $                                      | 2.70       |                                                | 7.2        |                                | $          | 925 |   |
| Vested and  expected to vest at March 31, 2006 |       | 3,985                      |       | $                                      | 2.79       |                                                | 7.2        |                                | $          | 841 |   |
| Exercisable at  end of quarter                 |       | 2,407                      |       | $                                      | 3.72       |                                                | 5.9        |                                | $          | 298 |   |

 

Cash proceeds and intrinsic value related to totalstock options exercised during the three months ended March 31, 2006 and 2005are provided in the following table (dollars in thousands): 

 
| ** **                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Proceeds from  stock options exercised      |       | $                                          | 7          |   | $ | 44 |   |
| Intrinsic value  of stock options exercised |       | $                                          | 6          |   | $ | 50 |   |

 

# **Note 3. Loss Per CommonShare**

# ** **

Basic and dilutedloss per share are based on net loss applicable to common shares, which iscomprised of net loss and preferred stock dividends in all periods presented.Shares used to calculate basic loss per share are based on the weighted averagenumber of common shares outstanding during the period. Shares used to calculatediluted loss per share are based on the potential dilution that would occurupon the exercise or conversion of securities into common stock using thetreasury stock method. The calculation of diluted loss per share excludes theeffect of the following stock options and warrants to purchase additionalshares of common stock because the share increments would not be dilutive.

 
| ** **             | ** ** | **Quarter Ended  March 31,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Common stock  options  |       | 4,254,650                              |       | 4,158,556 |   |
| Common stock  warrants |       | 5,696,824                              |       | 3,225,400 |   |

 

In addition, 234,088 shares of common stock that wouldbe issuable upon conversion of the Company’s Series 1 preferred stock are notincluded in the calculation of diluted loss per share for the periods ended March31, 2006 and 2005, respectively, and the 3,446,389 shares of common stock thatwould be issuable upon conversion of the Company’s Series B preferredstock are not included in the calculation of diluted loss per share for theperiods ended March 31, 2006 and 2005, respectively, because the effect ofincluding such shares would not be dilutive. Finally, 5,006,776 shares ofcommon stock that would be issuable upon conversion of the bridge notes,including accrued interest thereon, are not included in the calculation ofdiluted loss per share for the period ended March 31, 2006 because the effectof including such shares would not be dilutive.

 

**Note 4. Comprehensive Loss**

 

The Company’s comprehensive loss for the quartersended March 31, 2006 and 2005 was $5,799,000 and $5,075,000, respectively. Thecomprehensive loss for the quarters ended March 31, 

 

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2006 and 2005 consisted of net loss of $5,799,000 and $5,076,000,respectively, and a net unrealized gain on investment securities of $0 and $1,000,respectively.

 

**Note 5. Bridge Financing**

 

On February 1, 2006, the Company received loanproceeds of $3,460,000 from private investors (the bridge financing) inconnection with the $61,500,000 equity financing as discussed in Note 7. Pursuantthe bridge financing, the Company issued convertible promissory notes in theprincipal amount of the loan and five-year warrants to purchase an aggregate of2,471,424 shares of common stock at an exercise price of $0.77 per share. Thefair value attributable to the warrants using the Black-Scholes option-pricingmodel was approximately $1,647,000 based upon assumptions of expected volatilityof 114%, a contractual term of five years, an expected dividend rate of zeroand a risk-free rate of interest of 4.5%. The Company recorded the warrants’fair value as a discount to the promissory notes payable. The convertibility ofthe promissory notes gave rise to a beneficial conversion feature, which theCompany recorded as additional discount on the promissory notes of approximately$1,813,000. The proceeds of the bridge loan were used for working capitalpending receipt of shareholder approvals and satisfaction of other conditionsto closing of the equity financing discussed Note 7. The convertible promissorynotes provided for an interest rate of 8% per annum and, at the closing of theequity financing the principal amount of the notes, together with $64,000 ofaccrued interest thereon, automatically converted, at a conversion rate of$0.70 per share, into an aggregate of 5,033,860 shares of common stock. Thenotes were secured by a first lien on certain of the Company’s assets pursuantto a security agreement between the Company and the investors dated as ofFebruary 1, 2006. The security agreement and the related security interestterminated at the closing of the equity financing.

 

# **Note 6. Liquidity**

# ** **

The Company will need to raise additional capital orenter into strategic partnerships for the clinical development of its picoplatinplatinum compound and other proposed product candidates.

 

The Company received approximately $61,912,000 in netproceeds from the sale of common stock and warrants in April 2006 (See Note 7).The Company issued $3,460,000 face amount of convertible promissory notes toinvestors in the bridge financing on February 1, 2006. The Company used thefunds received in the bridge financing for working capital pending receipt ofshareholder approvals and satisfaction of other conditions to closing thefinancing. Concurrently with the closing of the equity financing on April 26,2006, the outstanding principal amount of the promissory notes and all accrued andunpaid interest thereon automatically converted, at a conversion price of $0.70per share, into 5,033,860 shares of common stock.

 

The Company received approximately $9,000,000 in netproceeds from the sale of common stock and warrants in a private placementtransaction in February 2004. The Company received approximately $3,800,000 innet proceeds from the sale of common stock and warrants in March 2005.

 

On January 30, 2006, the Company entered into a letteragreement with Texas State Bank, pursuant to which the Company agreed to changethe maturity date of its promissory note with the Bank to June 5, 2006. TheTexas State Bank loan, which is secured by the Company’s radiopharmaceuticalplant and other STR assets located in Denton, Texas, had an interest rate of7.75% on March 31, 2006. The interest rate, which is equal to the bank primerate and is adjusted on the same date that the bank prime rate changes asreported in the Wall Street Journal, was 7.75% on May 8, 2006. The loanprovides for a maximum annual interest rate of 18%. Principal and interest arepayable in monthly installments. Principal and interest paid on the note duringthe quarters ended March 31, 2006 and 2005 totaled $1,196,000 and $115,000,respectively. As of March 31, 2006, the outstanding balance of the loan was$2,734,000. The fixed monthly payments on the note are recalculated in April ofeach year based on the then current bank prime interest rate and outstandingnote balance. Based on an interest rate of 7.75%, the estimated principalbalance payable at maturity would be $2,692,000.

 

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The terms of the Texas StateBank loan provide that an event of default may be deemed to occur if the Companyabandons, vacates or discontinues operations on a substantial portion of theDenton facility or there is a material adverse change in the Company’s financialcondition, results of operations, business or properties. If this were to occur, Texas State Bank coulddeclare the entire outstanding amount of the loan ($2,734,000 at March 31, 2006)due and immediately payable. In such case, the Company’s cash resources andassets could be impaired depending on its ability to raise funds through a saleof the Denton facility or other means. As a result of its May 2005restructuring, the Company has ceased manufacturing operations at the Dentonfacility and is actively working to sell the facility and other STR assets. TheCompany has listed the Denton facility for sale at a price of $3,300,000. Anysales of the Denton facility or other Denton assets are subject to approval ofthe Bank. As of March 31, 2006, the Company had received aggregate proceeds of$172,000 from the sale of equipment and other assets. These proceeds wereapplied to the outstanding principal balance of the loan. There can be noassurance that the Bank will approve the price or other terms of any offerreceived by the Company to buy the Denton facility or other STR assets, or thatthe sale proceeds, if any, received by the Company from such sales will be sufficientto satisfy the outstanding balance of the Bank loan.

 

In October 2005, the Company placed $1,000,000 cash ina restricted deposit account with the Bank as additional collateral to securethe payment of the loan. The Company agreed that if it did not obtain at least$15,000,000 in new financing on or before January 31, 2006, the Bank may applythe $1,000,000 cash deposit to the payment of the last maturing installments onthe loan. In return, the Bank agreed that the Company’s cessation of operationsat the Denton facility would not be declared an event of default under the loanas long as the Company continues to pay insurance and taxes on and otherwisemaintains the facility. Additionally, the Bank agreed, prior to January 31,2006, not to declare the loan in default on the basis that there has been amaterial adverse change in the Company’s financial condition, results ofoperations, business or properties. Pursuant to this agreement, the Bank, as ofJanuary 31, 2005, applied the $1,000,000 cash collateral and all interestaccrued thereon to the outstanding balance of the Bank note. By letteragreement dated January 30, 2006, the Bank agreed, in exchange for the Company’sagreement to accelerate the maturity date of the note, to continue the forbearanceunder the October 2005 agreement until June 5, 2006.

 

On August 4, 2005, the Company entered into a researchfunding and option agreement with The Scripps Research Institute (TSRI). Underthe agreement, the Company committed to provide TSRI an aggregate of $2,500,000over a 26-month period to fund research relating to synthesis and evaluation ofnovel small molecule, multi-targeted protein kinase inhibitors as therapeuticagents, including for the treatment of cancer. The Company has the option tonegotiate a worldwide exclusive license to use, enhance and develop anycompounds arising from the collaboration. The research funding is payable bythe Company to TSRI quarterly in accordance with a negotiated budget. On August8, 2005, the Company made an initial funding payment to TSRI of $137,500. OnApril 28, 2006, the Company paid TSRI $487,500. The Company is obligated to payTSRI $287,500 on July 1, 2006 and $237,500 on October 1, 2006. The agreementprovides for additional aggregate funding payments of $1,350,000 in 2007.

 

On May 10, 2006, the Company announced plans to relocate its corporateheadquarters to San Francisco by the beginning of the third quarter of 2006. TheCompany currently is in negotiations to lease facilities in San Francisco toaccommodate its new executive offices and plans for growth, includingpotentially substantial new hires. The Company intends to maintain clinicaldevelopment and support activities in Seattle and has no plans to relocate anyof its 19 employees currently in Seattle. The addition of the San Franciscosite will likely result in material new lease and operating costs connectedwith this facility, although the amount of these costs cannot currently bequantified.

 

With the proceeds of the bridge loan, the Company had cash and cashequivalents of $3,203,000 at March 31, 2006. With the proceeds of the equityfinancing, Company management believes that current cash and cash equivalentbalances will provide adequate resources to fund operations at least until theend of 2007. The Company’s actual capital requirements will depend uponnumerous factors, including:

 

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•  thescope and timing of the Company’s picoplatin clinical program and otherresearch and development efforts, including the progress and costs of the Company’scurrent Phase II trial of picoplatin in small cell lung cancer;

 

•  theCompany’s ability to obtain clinical supplies of picoplatin drug product in atimely and cost-effective manner;

 

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

 

•  thetiming and amounts of proceeds from the sale of the Denton facility and assets;

 

•  thetiming and amount of any milestone or other payments the Company might receivefrom potential strategic partners;

 

•  theCompany’s degree of success in commercializing picoplatin or any other cancertherapy product candidates;

 

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

 

•  theacquisition or in-licensing of other products or intellectual property;

 

•  thecosts, including lease and operating costs, incurred in connection with theCompany’s relocation of its corporate headquarters to San Francisco and thepotential expansion of its workforce;

 

•  thecosts of any research collaborations or strategic partnerships established; and

 

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

 

The Company had net operating loss carryforwards of approximately $138million as of December 31, 2005, which expire from 2006 through 2025. Theclosing of the equity financing resulted in a change of control, which maylimit the Company’s ability to utilize these net operating loss carryforwards. Ifsuch limitation occurs, the Company may incur higher tax expense, which alsowould affect its capital requirements.

 

There can be no assurance that the Company will beable to raise additional capital or enter into relationships with corporatepartners on a timely basis, on favorable terms, or at all. Conditions in thecapital markets in general and the life science capital market specifically mayaffect the Company’s potential financing sources and opportunities forstrategic partnering.

 

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**Note 7. Subsequent Events**

 

*Equity Financing*. On April 26,2006, the Company received approximately $61,500,000 in gross proceeds, not reflectingplacement fees, from the issuance of 92,948,146 shares of common stock to agroup of institutional and other sophisticated investors. In connection withthe equity financing, the outstanding principal balance and interest on theCompany’s convertible promissory notes issued to the investors in the bridgefinancing on February 1, 2006, automatically converted, at a conversion priceof $0.70 per share, into 5,033,860 shares of common stock. Investors in theequity financing also received five-year warrants to purchase an aggregate of27,857,128 shares of common stock at an exercise price of $0.77 per share,including warrants to purchase an aggregate of 2,471,424 common shares issuedon February 1, 2006, in connection with the bridge financing. At a specialmeeting of shareholders held on April 25, 2006, the Company’s shareholder’sapproved an amendment of the Company’s articles of incorporation to increasethe authorized common shares from 150,000,000 to 200,000,000. The Companyintends to use the net proceeds of the financing of approximately $61,912,000to support and expand its picoplatin development program and to pursue itsstrategic objective of building a diverse oncology pipeline. A portion of theproceeds will also be used to retire the Company’s outstanding indebtedness toTexas State Bank and for working capital.

 

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*Conversion of Series B Preferred Stock*.Concurrently with the closing of the equity financing, the holders of theCompany’s 1,575 shares of Series B convertible preferred stock outstandingconverted their Series B shares into an aggregate of 9,545,455 shares of commonstock, reflecting an adjusted conversion rate of 6,060.61 common shares perSeries B share.

 

*Change of Control and Related Party Interests.*Asa result of the completion of the financing and the conversion of the Series Bshares, the Company’s outstanding common stock at April 26, 2006, increasedfrom 34,332,293 shares to 136,825,894 shares. Entities affiliated with MPMCapital (MPM) acquired beneficial ownership of 52,039,196 common shares, or approximately35.0% of the Company’s common stock outstanding immediately following thefinancing. Entities affiliated with Bay City Capital Management IV LLC (BCC)acquired beneficial ownership of 27,878,143 common shares, or approximately19.5% of the common shares outstanding immediately following the financing. NicholasJ. Simon III, a representative of MPM, was appointed to the Company’s board ofdirectors on April 26, 2006, increasing the number of directors to nine. Mr.Simon was also appointed to the board compensation committee. Mr. Simon is ageneral partner of certain of the MPM entities that participated in thefinancing and possesses capital and carried interests in those entities. Two ofthe Company’s directors, Fred B. Craves and Carl S. Goldfischer, are managingdirectors of BCC and possess capital and carried interests in the BCC entitiesthat participated in the financing.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

***Important Information Regarding Forward- Looking Statements***

 

ThisForm 10-Q contains forward-looking statements. These statements relate tofuture events or future financial performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expect,”“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “propose”or “continue,” the negative of these terms or other terminology. Thesestatements are only predictions. Actual events or results may differmaterially. In evaluating these statements, you should specifically considervarious factors described below in the section entitled “Risk Factors.” Thesefactors may cause our actual results to differ materially from anyforward-looking statement.

 

Althoughwe believe the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. You should not place undue reliance on our forward-lookingstatements, which speak only as of the date of this report. We undertake noobligation to update publicly any forward-looking statements to reflect newinformation, events or circumstances after the date of this report, or to reflectthe occurrence of unanticipated events.

 

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

 

***Critical Accounting Policies and Estimates***

 

Our critical accountingpolicies and estimates have not changed from those reported in our AnnualReport on Form 10-K for the year ended December 31, 2005, except for ourshare-based compensation accounting policy, discussed below. For a morecomplete description, please refer to our Annual Report on Form 10-K.

 

*Share-basedCompensation* - Beginning January 1, 2006, the Companyaccounts for share-based compensation arrangements in accordance with theprovisions of Statement of Financial Accounting Standards No. 123R,“Share-Based Payments,” which requires the measurement and recognition ofcompensation expense for all share-based payment awards to employees anddirectors based on estimated fair values. The Company uses the Black-Scholesoption valuation model to estimate the fair value of its stock options at thedate of grant. The Black-Scholes option valuation model was developed for usein estimating the fair value of traded options which have no vestingrestrictions and are fully transferable. The Company’s employee stock options,however, have characteristics significantly different from those of tradedoptions. For example, employee stock options are generally subject to vestingrestrictions and are generally not transferable. In addition, option valuationmodels require the input of highly subjective assumptions including theexpected stock price volatility, the expected life of an option and the numberof awards ultimately expected to vest. Changes in subjective input assumptionscan materially affect the fair value estimates of an option. Furthermore, theestimated fair value of an option does not necessarily represent the value thatwill ultimately be realized by an employee. The Company uses historical data,and other related information as appropriate, to estimate the expected pricevolatility, the expected option life and the expected forfeiture rate. Therisk-free rate is based on the U.S. Treasury yield curve in effect at the timeof a grant. If actual results are not consistent with the Company’s assumptionsand judgments used in estimating the key assumptions, the Company may berequired to increase or decrease compensation expense, which could be materialto its results of operations.

 

###### ***Resultsof Operations***

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

###### ***Quarterended March 31, 2006 compared to quarter ended March 31, 2005***

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

**We had no revenue for either of the first quarters of 2006 and2005.**

** **

Total operating expenses for the first quarter of 2006decreased 22% to $4.0 million, from $5.1 million for the first quarter of 2005.

 

R&D expenses decreased 25% to $2.5 million for thefirst quarter of 2006, from $3.3 million for the first quarter of 2005. Amongthe primary components of the decrease were $1.9 million decrease in costsrelated to the STR program, offset by $1.3 million increase in picoplatindevelopment costs, and a $0.2 million decrease in patent maintenance costs.

 

General andadministrative expenses decreased 14% to $1.5 million for the first quarter of2006, from $1.8 million for the first quarter of 2005. The decrease in G&A costs for the first quarter of 2006 was dueprimarily to a decrease of $0.3 million for personnel related costs.

 

Total other expenseincreased to $1.8 million from $0 million due mostly to the amortization ofdiscount on convertible promissory notes of $1.7 million for the first quarterof 2006.

 

Cash and cash equivalents as of March 31, 2006 were $3.2million, compared with $3.5 million at December 31, 2005. On April 26, 2006, wecompleted an equity financing in which we raised approximately $61.9 million innet proceeds through the private sale to institutional and other sophisticatedinvestors of an aggregate of 92.9 million shares of common stock. Thepurchasers in that offering also received five-year warrants to purchase anaggregate of 27.9 million shares of common stock at an exercise price of $0.77per share. In connection with the equity financing, we issued $3.5 million faceamount of convertible promissory notes to investors on February 1, 2006 (thebridge financing). The notes provided for an interest rate of 8% per annum. We usedthe funds received in the bridge financing for working capital pending receiptof required shareholder approvals and other conditions to completion of the equityfinancing. The outstanding principal amount of the notes, together with $64,000of accrued interest, automatically converted, at a conversion price of $0.70per share, into 5.0 million shares of common stock at closing of the equityfinancing. We will require substantial

 

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additional funding to support our picoplatin and other proposedclinical development programs. In the event that we do not obtain sufficientadditional funds, we may be required to delay, reduce or curtain the scope ofour picoplatin and other product development activities.

 

***Major Research and Development Projects***

 

Our major research and development project ispicoplatin (NX 473), a new-generation platinum-based cancer therapy designed toovercome platinum resistance in the treatment of solid tumors. We initiated aPhase II clinical study of picoplatin in small cell lung cancer in June 2005and enrolled the first patient in July 2005. As of March 31, 2006, we haveincurred costs of approximately $6.5 million in connection with the entire picoplatinclinical program. In April 2006, we expanded our picoplatin Phase II clinicaltrial in small cell lung cancer to selected Eastern European countries byenrolling our first patients there. In May 2006, we treated our first patientin a Phase I/II study evaluating picoplatin in the front-line treatment ofpatients with advanced colorectal cancer. Total estimated costs to complete thepicoplatin Phase II trial in small cell lung cancer are in the range of $9 to $11million through 2007, including the cost of drug supply. Total estimated coststo complete the picoplatin Phase I/II trial in colorectal cancer are in therange of $4 to $6 million through 2007, including the cost of drug supply. Thecosts could be substantially higher if we have to repeat, revise or expand thescope of our trial. Material cash inflows relating to our picoplatindevelopment will not commence unless and until we complete required clinicaltrials and obtain FDA marketing approvals, and then only if picoplatin findsacceptance in the marketplace. To date, we have not received any revenues fromproduct sales of picoplatin.

 

The risks and uncertainties associated with completingthe development of picoplatin on schedule or at all, include the following, aswell as the other risk factors described in this report:

 

•      we may not have adequate funds to completethe development of picoplatin;

 

•      we may be unable to secure adequatesupplies of picoplatin drug product in order to complete our clinical trials;

 

•      picoplatin may not be shown to be safeand efficacious in clinical trials; and

 

•      we may be unable to obtain regulatoryapproval of the drug or may be unable to obtain such approval on a timelybasis.

 

If we fail to obtain marketing approval forpicoplatin, are unable to secure adequate clinical and commercial supplies ofpicoplatin drug product, or do not complete development and obtain US andforeign regulatory approvals on a timely basis, our operations, financialposition and liquidity could be severely impaired, including as follows:

 

•  we would not earn any sales revenue frompicoplatin, which would increase the likelihood that we would need to obtainadditional financing for our other development efforts; and

 

•  our reputation among investors might beharmed, which could make it more difficult for us to obtain equity capital onattractive terms or at all.

 

Because of the many risks and uncertainties relatingto completion of clinical trials, receipt of market approvals and acceptance inthe marketplace, we cannot predict the period in which material cash inflowsfrom our picoplatin program will commence, if ever.

 

*Summary of Research andDevelopment Costs***.**Ourdevelopment administration overhead costs, consisting of rent, utilities,consulting fees, patent costs and other various overhead costs, are included intotal research and development expense for each period, but are not allocatedamong our various projects. Finally, our total development costs include thecosts of various other research efforts directed toward the identification andevaluation of future product candidates. These other research

 

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projects are pre-clinical and not considered majorprojects. Our total research and development costs are summarized below**:**

 

**Summary of Research and DevelopmentCosts**

 

| ** **                            | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in thousands)**                    | ** ** |
|                                  |       |                                       |       |   |   |
| Picoplatin                            |       | $                                          | 1,802      |   | $ | 487 |   |
| Other overhead  and research costs    |       | 721                                        |       | 2,858 |   |
| Total research  and development costs |       | $                                          | 2,523      |   | $ | 3,345 |   |

 

###### ***Completionof Equity Financing***

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

On April 26, 2006, we closed our previously announcedequity financing pursuant to the securities purchase agreement dated as ofFebruary 1, 2006. The equity financing, from which we received gross proceedsof approximately $65 million, involved the private placement to accreditedinvestors of an aggregate of 92.9 million shares of common stock at a cashpurchase price of $0.70 per share, including shares of common stock received byinvestors upon automatic conversion of $3.5 million face amount of outstandingconvertible promissory notes (the bridge notes) issued as part of the bridgefinancing on February 1, 2006. Investors in the financing also receivedfive-year warrants to purchase an aggregate of 27.9 million shares of commonstock at an exercise price of $0.77 per share, including warrants to purchasean aggregate of 2.5 million shares issued on February 1, 2006 in connectionwith the bridge loan. The fair value attributable to the warrants using theBlack-Scholes option-pricing model was approximately $1,647,000 based uponassumptions of expected volatility of 114%, a contractual term of five years,an expected dividend rate of zero and a risk-free rate of interest of 4.5%. Werecorded the warrants’ fair value as a discount to the promissory notes payable.The convertibility of the promissory notes gave rise to a beneficial conversionfeature, which we recorded as additional discount on the promissory notes ofapproximately $1,813,000. At a special meeting of shareholders held on April25, 2006, our shareholders approved an amendment of our articles ofincorporation to increase the authorized common shares from 150,000,000 to200,000,000. The placement agent in the financing, in addition to a cash fee of$1.8 million, received a five-year warrant to purchase 835,714 shares of commonstock on the same terms as the investors. We intend to use the net proceeds ofthe financing of approximately $61.9 million to support and expand ourpicoplatin development program and to pursue our strategic objective ofbuilding a diverse oncology pipeline. A portion of the proceeds will also beused to retire our outstanding indebtedness to Texas State Bank and for workingcapital.

 

Concurrent with the closing of the equity financing,all holders of our outstanding shares of Series B convertible preferred stock(the Series B stock) converted their Series B shares into an aggregate of 9.5million share of common stock, reflecting an adjusted conversion rate of6060.6061 per share of Series B stock.

 

As a result of the completion of the financing and theconversion of our Series B stock, our outstanding common stock increased from34.3 million shares to approximately 136.8 million shares. Entities affiliatedwith MPM Capital (MPM) acquired beneficial ownership of approximately 52.0million shares of our common stock, or approximately 35.0% of the common sharesoutstanding immediately following the financing. Entities affiliated with BayCity Capital Management IV LLC (BCC) acquired beneficial ownership ofapproximately 27.9 million common shares, or approximately 19.5% of the commonshares outstanding immediately following the financing.

 

Nicholas J. Simon III, a representative of MPM, wasappointed to our board of directors on April 26, 2006, increasing the number ofdirectors to nine. Mr. Simon was also appointed to the board compensationcommittee. Mr. Simon is a general partner of certain of the MPM entities thatparticipated

 

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in the financing and possesses capital and carried interests in those entities.Two of our directors, Fred B. Craves and Carl S. Goldfischer, are managingdirectors of BCC and possess capital and carried interests in the BCC entitiesthat participated in the financing.

 

***Liquidity and Capital Resources***

 

We have historically suffered recurring operating lossesand negative cash flows from operations. As of March 31, 2006, we had netnegative working capital of $2.8 million and had an accumulated deficit of $261.7million with a shareholders’ equity of $1.0 million, which amount does not takeinto account the gross proceeds of the equity financing discussed above.

 

We have financed our operations primarily through thesale of equity securities, technology licensing, collaborative agreements anddebt instruments. We invest excess cash in investment securities that will beused to fund future operating costs. Cash and cash equivalents totaled $3.2million at March 31, 2006 compared to $3.5 million at December 31, 2005.We primarily fund current operations with our existing cash and investments. Cash used for operating activitiesfor the three months ended March 31, 2006 totaled $3.2 million. Revenues andother income sources for the first quarter of 2006 were not sufficient to coveroperating expenses during that quarter,

 

On February 1, 2006, wereceived a $3.5 million bridge loan from investors in the equity financing. Pursuantthe bridge loan, we issued convertible promissory notes for the principalamount of the loan and five-year warrants to purchase an aggregate of 2.5million shares of common stock at an exercise price of $0.77 per share. Theproceeds of the bridge loan were used for working capital pending receipt ofshareholder approvals and satisfaction of other conditions to closing theequity financing. The bridge notes had an interest rate of 8% per annum. At theclosing of the equity financing, the outstanding principal amount of the bridgenotes and all accrued and unpaid interest thereon automatically converted, at aconversion price of $0.70 per share, into 5.0 million shares of common stock. Thenotes were secured by a first lien on certain of our assets pursuant to asecurity agreement between us and the investors dated as of February 1, 2006. Thesecurity agreement and the related security interest terminated at the closingof the equity financing.

 

On January 30, 2006, we entered into a letteragreement with Texas State Bank, pursuant to which we agreed to change thematurity date of our promissory note with the Bank to June 5, 2006. The TexasState Bank loan, which is secured by our radiopharmaceutical plant and otherSTR assets located in Denton, Texas, had an interest rate of 7.75% on March 31,2006. The interest rate, which is equal to the bank prime rate and is adjustedon the same date that the bank prime rate changes as reported in the WallStreet Journal, was 7.75% on May 8, 2006. The loan provides for a maximumannual interest rate of 18%. Principal and interest are payable in monthlyinstallments. Principal and interest paid on the note during the quarters endedMarch 31, 2006 and 2005 totaled $1.2 million and $115,000, respectively. As ofMarch 31, 2006, the outstanding balance of the loan was $2.7 million. The fixedmonthly payments on the note are recalculated in April of each year based onthe then current bank prime interest rate and outstanding note balance. Basedon an interest rate of 7.75%, the estimated principal balance payable atmaturity would be $2.7 million.

 

The terms of the Texas State Bank loan provide that anevent of default may be deemed to occur if we abandon, vacate or discontinueoperations on a substantial portion of the Denton facility or there is amaterial adverse change in our financial condition, results of operations,business or properties. If this were to occur, Texas State Bank could declarethe entire amount of the loan ($2.7 million at May 8, 2006) due and immediatelypayable. In such case, our cash resources and assets could be impaireddepending on our ability to raise funds through a sale of the Denton facilityor other means. As a result of our May 2005 restructuring, we have ceasedmanufacturing operations at the Denton facility and are actively working tosell the facility and other STR assets. We have listed the Denton facility forsale at a price of $3.3 million. Any sales of the Denton facility or otherDenton assets are subject to approval of the Bank. As of March 31, 2006, we hadreceived aggregate proceeds of $172,000 from the sale of equipment and otherassets. These proceeds were applied to the outstanding principal balance of theloan. There can be no assurance that the Bank will approve the price or otherterms of any offer received by us to buy the Denton facility or other STRassets, or that the sale proceeds, if any, received by us from such sales willbe sufficient to satisfy the outstanding balance of the Bank loan.

 

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In October 2005, we placed $1.0 million in cash in arestricted deposit account with the Bank as additional collateral to secure thepayment of the loan. We further agreed that if we did not obtain at least $15.0million in new financing on or before January 31, 2006, the Bank may apply the$1.0 million cash deposit to the payment of the last maturing installments onthe loan. In return, the Bank agreed that our cessation of operations at theDenton facility would not be declared an event of default under the loan aslong as we continue to pay insurance and taxes on and otherwise maintain thefacility. Additionally, the Bank agreed, prior to January 31, 2006, not todeclare the loan in default on the basis that there has been a material adversechange in our financial condition, results of operations, business orproperties. Pursuant to this agreement, the Bank, as of January 31, 2005,applied the $1.0 million cash collateral and all interest accrued thereon tothe outstanding balance of the Bank note. By letter agreement dated January 30,2006, the Bank agreed, in exchange for our agreement to accelerate the maturitydate of the note, to continue the forbearance under the October 2005 agreementuntil June 5, 2006.

 

On August 4, 2005, we entered into a Research Fundingand Option Agreement with The Scripps Research Institute (TSRI). Under theagreement, we committed to provide TSRI an aggregate of $2.5 million over a26-month period to fund research relating to synthesis and evaluation of novelsmall molecule, multi-targeted protein kinase inhibitors as therapeutic agents,including for the treatment of cancer. We have the option to negotiate aworldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by us to TSRI quarterlyin accordance with a negotiated budget. We made an initial funding payment toTSRI of $137,500 on August 8, 2005. On April 28, 2006, we paid TSRI $487,500. Weare obligated to pay TSRI $287,500 on July 1, 2006 and $237,500 on October 1,2006. The agreement provides for additional aggregate funding payments of $1.4million in 2007.

 

With the proceeds from the bridge loan, we had cashand cash equivalents of $3.2 million at March 31, 2006. We received additionalcash proceeds of $61.5 million upon completion of the equity financing on April26, 2006. With these additional proceeds, we believe that our current cash andcash equivalent balances will provide adequate resources to fund operations atleast until the end of 2007.

 

Weacquired the worldwide exclusive rights, excluding Japan, to develop,manufacture and commercialize picoplatin from AnorMED, Inc. in April 2004. Underthe terms of the agreement, we paid AnorMED a one-time upfront milestonepayment of $1.0 million in common stock and $1.0 million in cash. The agreementalso provides for additional milestone payments to AnorMED of up to $13million, payable in cash or a combination of cash and common stock. Uponregulatory approval, AnorMED would receive royalty payments of up to 15% onproduct sales. We initiated our first picoplatin clinical trial, a Phase IIstudy of picoplatin in small cell lung cancer, in July 2005, and it is unlikelythat these milestones would be triggered during 2006. Because we cannot predictthe length of time to completion of our Phase II study, the time of initiationand completion of a Phase III study or the time of submission of a New DrugApplication for picoplatin, we are unable to predict when such milestones mightbe triggered after 2006.

 

Alsoin April 2004, we sold and transferred our Pretarget intellectual property toAletheon Pharmaceuticals, Inc. Under the agreement, we could receive up to $6.6million in milestone payments if Aletheon achieves certain development goals,plus royalties on potential future product sales. We did not receive anyupfront consideration for the sale of the Pretarget property. We discontinuedour clinical studies using the Pretarget technology in July 2002, and sought,both through targeted inquiries and a broad-based auction process, a buyer orlicensee for the technology. The sale of the Pretarget intellectual propertyrelieved us of the annual costs associated with maintaining the Pretargetpatent estate. During 2003, we spent approximately $350,000 for the prosecutionand maintenance of the Pretarget patents and trademarks. For 2004, these costswere approximately $70,000. Seattle-based Aletheon is a development stagebiotherapeutics company founded by two former NeoRx employees. The timing andamount of milestone payments, if any, are uncertain. The terms of thetransaction were determined through arms-length negotiation.

 

In April 2003, we received $10 million from the saleto Boston Scientific Corporation (BSC) of certain non-core patents and patentapplications and the grant to BSC of exclusive license rights to certainpatents and patent applications. BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc., its subsidiary, CordisCorporation, and Guidant Corporation, alleging infringement of such patents. Inboth lawsuits, the defendants denied infringement and asserted invalidity andunenforceability of the patents. BSC subsequently withdrew three of the patentsfrom the litigation,

 

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including the patents that were assigned to BSC. We understand that BSCis still asserting a licensed patent against the defendants, but has alsoagreed, in principle, to purchase Guidant. Although we are not currently aparty to the lawsuits, our management and counsel have been deposed inconnection with the lawsuits. It is possible that BSC, if it is unsuccessful orhas limited success with its claims, may seek damages from us, includingrecovery of all or a portion of the amounts it paid to us in 2003. We cannotassess the likelihood of whether such claim will be brought against us or theextent of recovery, if any, on any such claim.

 

On May 10, 2006, we announced plans to relocate our corporateheadquarters to San Francisco. We currently are in negotiations to leasefacilities in San Francisco to accommodate our new executive offices and plansfor growth, including potentially substantial new hires. We intend to maintainclinical development and support activities in Seattle and do not have plans torelocate any of our 19 employees currently in Seattle. The addition of the SanFrancisco site will likely result in material new lease and operating costsconnected with this facility, although the amount of these costs cannotcurrently be quantified.

 

We will require substantial additional funding todevelop and commercialize picoplatin and any other proposed products and tofund our operations.

 

Management is continuously exploring financing alternatives,including:

 

•  raisingadditional capital through the public or private sale of equity or debtsecurities or through the establishment of credit or other funding facilities;and

 

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

 

Our actual capital requirements will depend uponnumerous factors, including:

 

•  thescope and timing of our picoplatin clinical program and other research anddevelopment efforts, including the progress and costs of our Phase II trial ofpicoplatin in small cell lung cancer;

 

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

 

•  actionstaken by the FDA and other regulatory authorities;

 

•  thetiming and amounts of proceeds from any sale of the Denton facility and assets;

 

•  thetiming and amount of any milestone or other payments we might receive from orpay to potential strategic partners;

 

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

 

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

 

•  theacquisition or in-licensing of other products or intellectual property;

 

•  thecosts, including lease and operating costs, incurred in connection with therelocation of our corporate headquarters to San Francisco and the potentialexpansion of our workforce;

 

•  thecosts of any research collaborations or strategic partnerships established; and

 

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

 

We had net operating loss carryforwards of approximately $138 millionas of December 31, 2005, which expire from 2006 through 2025. The closing ofthe equity financing resulted in a change of control, which may limit ourability to utilize these net operating loss carryforwards. If such limitationoccurs, we may incur higher tax expense, which also would affect our capitalrequirements.

 

# **Item 3. Quantitative andQualitative Disclosures about Market Risk**

# ** **

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

 

**Interest Rate Risk**

 

The Company’s exposure to market rate risk for changesin interest rates relates primarily to the Company’s debt securities includedin its investment portfolio. The Company does not have any derivative financialinstruments. The Company invests in debt instruments of the US Government andits agencies and high-quality corporate issuers. Investments in both fixed rateand floating rate interest earning instruments carry a degree of interest raterisk. Fixed rate securities may have their fair market value adversely impacteddue to a rise in interest rates, while floating rate securities may produceless income than expected if interest rates decrease. Due in part to thesefactors, the Company’s future investment income may fall short of expectationsdue to changes in interest rates or the Company may suffer losses in principalif forced to sell securities that have declined in market value due to changesin interest rates. At March 31, 2006, the Company owned no government debtinstruments and no corporate debt securities.

 

The Company’s only outstanding debt is its notepayable to Texas State Bank. The outstanding balance of the note was $2.7million on March 31, 2006. The note, which matures June 5, 2006, bears interestequal to the bank prime rate. The interest rate on the note is adjusted on thesame date that the bank prime rate changes. The maximum permitted interest rateon the loan is 18% per annum. Because the interest rate on the note varies, theCompany’s interest expenses may increase as the bank prime interest rateincreases. Extreme increases in the bank prime interest rate, up to the maximuminterest rate permitted under the note, could materially affect the Company’sinterest expense.

 

**Item 4. Controls andProcedures**

** **

Underthe supervision and with the participation of the Company’s management,including the Company’s Chairman and Chief Executive Officer and the ChiefFinancial Officer, the Company has evaluated the effectiveness and design ofits disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e)) as of March 31, 2006,to ensure that the informationdisclosed by the Company in the reports that the Company files or submits underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the rules andforms. Based on this evaluation, the Chairman and Chief Executive Officer andthe Chief financial Officer have concluded that, as of March 31, 2006, thesedisclosure controls and procedures were not effective at the reasonableassurance level due to the material weakness described below.

 

Duringthe first quarter of 2006, management identified a material weakness regardingthe Company’s preparation and review of its condensed consolidated financialstatements for the three months ended March 31, 2006. Specifically, the Companydid not have effective controls in place to ensure that the warrants issuedwith respect to the February 1, 2006 convertible promissory notes were properlyaccounted for. This control deficiency resulted in a $1.7 million adjustment tothe Company’s condensed consolidated financial statements**forthe three months ended March 31, 2006, which was recorded prior to the filingof the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,2006. The Company has put new procedures in place in order to remediate thisweakness and strengthen the control procedures surrounding the review andaccounting treatment of non-routine debt and equity securities transactionsduring the quarterly closing process. These procedures include

 

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establishingadditional levels of review and oversight with respect to certain non-recurringand/or unusual transactions, including consulting outside accounting experts asappropriate

 

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

 

***Limitations on theEffectiveness of Controls***

 

TheCompany’s management, including its Chairman and Chief Executive Officer and itsChief Financial Officer, does not expect that the Company’s disclosure controlsor internal controls will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of that control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of control must be considered relative to theircosts. Because of the inherent limitation in all control systems, no evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within the Company have been detected. Theseinherent limitations include the reality that judgments in decision-making canbe faulty, and breakdowns can occur because of simple error or mistake. Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more persons, or by management override of the control. Thedesign of any system of controls is also based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions; over time controls may become inadequate because of changes inconditions, of the degree of compliance with the policies and procedures maydeteriorate. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

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**PART II. OTHERINFORMATION**

 

**Item1A. Risk Factors**

 

In addition to the other information contained in thisreport, the following factors could affect our actual results and could causeour actual results to differ materially from those achieved in the past orexpressed or implied by our forward looking statements.

 

***Risks Related to Our Business***

 

**We have a history of operating losses, we expectto continue to incur losses, and we may never become profitable.**

** **

We have not been profitable since our formation in1984. As of March 31, 2006, we had an accumulated deficit of $261.7 million.Our net loss for the quarter ended March 31, 2006 was $5.8 million. We had netlosses of $21.0 million for the year ended December 31, 2005 and $19.4 millionfor the year ended December 31, 2004. These losses resulted principally fromcosts incurred in our research and development programs and from our generaland administrative activities. To date, we have been engaged only in researchand development activities and have not generated any significant revenues fromproduct sales. In May 2005, we announced the discontinuation of our skeletaltargeted radiotherapy (STR) development program as part of a strategic plan torefocus our limited resources on the development of picoplatin (NX 473), aplatinum-based cancer therapy. We do not anticipate that our picoplatin productcandidate, or any other proposed products, will be commercially available forseveral years, if at all. We expect to incur additional operating losses in thefuture. These losses may increase significantly if we expand clinicaldevelopment, manufacturing and commercialization efforts.

 

Our ability to achieve long-term profitability isdependent upon obtaining regulatory approvals for our picoplatin productcandidate and any other proposed products and successfully commercializing ourproducts alone or with third parties.

 

**We will need to raise additional capital to developand commercialize our product candidates and fund operations**, and our future access to capital isuncertain.

** **

It is expensive todevelop cancer therapy products and conduct clinical trials for these products.We have not generated revenue from the commercialization of any product, and weexpect to continue to incur substantial net operating losses and negative cashflows from operations for the future. On April 26, 2006, we completed a $65million equity financing; however, we will require substantial additionalfunding to develop and commercialize picoplatin and any other proposed productsand to fund our future operations.

 

Management is continuously exploring financingalternatives, including:

 

•      raising additional capitalthrough the public or private sale of equity or debt securities or through theestablishment of credit or other funding facilities; and

 

•      entering into strategiccollaborations, which may include joint ventures or partnerships for productdevelopment and commercialization, merger, sale of assets or other similartransactions.

 

We may not be ableto obtain the required additional capital or enter into relationships withcorporate partners on a timely basis, on favorable terms, or at all. Conditionsin the capital markets in general, and the life science capital marketspecifically, may affect our potential financing sources and opportunities forstrategic partnering. If we raise additional funds by issuing common stock orsecurities convertible into or exercisable for common stock, our shareholdersmay experience substantial dilution, and new investors could have rightssuperior to current security holders. If we are unable to obtain sufficientadditional cash when needed, we may be forced to reduce expenses though thedelay, reduction or curtailment of our picoplatin and other development andcommercialization activities.

 

The amount of additional financing we will require inthe future will depend on a number of

 

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factors, including:

 

•      the scope and timing of ourpicoplatin clinical program and other research and development efforts,including the progress and costs of our Phase II trial of picoplatin in smallcell lung cancer;

 

•      our ability to obtainclinical supplies of picoplatin drug product in a timely and cost effectivemanner;

 

•      actions taken by the FDA andother regulatory authorities;

 

•      the timing and proceeds fromany sale of the Denton facility and assets;

 

•      the timing and amount of anymilestone or other payments we might receive from or pay to potential strategicpartners;

 

•      our degree of success incommercializing picoplatin or any other cancer therapy product candidates;

 

•      the emergence of competingtechnologies and products, and other adverse market developments;

 

•      the acquisition orin-licensing of other products or intellectual property;

 

•      the costs, including leaseand operating costs, incurred in connection with the relocation of our coporateheadquarters to San Francisco and the potential expansion of our workforce;

 

•      the costs of any researchcollaborations or strategic partnerships established; and

 

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

 

We had net operating loss carryforwards ofapproximately $138 million as of December 31, 2005, which expire from 2006through 2025. The closing of the equity financing resulted in a change ofcontrol, which may limit our ability to utilize these net operating losscarryforwards. If such limitation occurs, we may incur higher tax expense,which also would affect our capital requirements.

 

**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 picoplatinproduct candidate and our research and development activities are subject toregulation for safety, efficacy and quality by the FDA in the United States andby comparable authorities in other countries.

 

The process of obtaining FDA and other requiredregulatory approvals, including foreign approvals, is expensive, often takesmany years and can vary substantially depending on the type, complexity andnovelty of the products involved.

 

We have had only limited experience in filing andpursuing applications necessary to gain regulatory approvals. This may impedeour ability to obtain timely approvals from the FDA or foreign regulatoryagencies. We will not be able to commercialize our product candidates until weobtain regulatory approval, and consequently any delay in obtaining, orinability to obtain, regulatory approval could harm our business.

 

If we violate regulatory requirements at any stage,whether before or after marketing approval is obtained, we may be fined, forcedto remove a product from the market or experience other adverse

 

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consequences, including delay, which could materially harm ourfinancial results. Additionally, we may not be able to obtain the labelingclaims necessary or desirable for product promotion. In addition, if we orother parties identify serious side effects after any of our products are onthe market, or if manufacturing problems occur, regulatory approval may bewithdrawn and reformulation of our products, additional clinical trials,changes in labeling of our products, and/or additional marketing applicationsmay be required.

 

The requirements governing the conduct of clinicaltrials and manufacturing and marketing of our proposed products outside theUnited States vary widely from country to country. Foreign approvals may takelonger to obtain than FDA approvals and can involve additional testing. Foreignregulatory approval processes include all of the risks associated with the FDAapproval processes. Also, approval of a product by the FDA does not ensureapproval of the same product by the health authorities of other countries.

 

**We may take longer to complete our clinical trialsthan we project, or we may be unable to complete them at all.**

 

In June 2005, we initiated a Phase II clinical trialof picoplatin for the treatment of patients with small cell lung cancer inclinical sites in North America and enrolled our first patient in July 2005. InApril 2006, we announced the expansion of this Phase II trial into EasternEurope with the treatment of the first patients there. Our on-going Phase IIstudy is a randomized trial comparing picoplatin to topotecan in patients withsmall cell lung cancer who are refractory or resistant to previousplatinum-based therapy. Topotecan is an anti-tumor drug currently approved bythe FDA as a treatment for small cell lung cancer sensitive disease afterfailure of first line chemotherapy. The endpoints of the picoplatin trialinclude survival, response rate (tumor shrinkage), duration of response andtime to progression. We amended our Phase II clinical trial protocol in January2006 from a two-arm study of picoplatin versus topotecan to a single arm studyof picoplatin. We discontinued the topotecan arm of the study because patientsand investigators often were unwilling to accept the topotecan arm of thetwo-arm study. The rationale for the amendment was that the dose and scheduleof topotecan approved for use in patients with platinum-sensitive small celllung cancer have minimal, if any, efficacy in patients with resistant orrefractory small cell lung cancer and unacceptable toxicity, thus presenting asituation in which an ineffective but toxic treatment regimen was to be used asone arm of the randomized Phase II trial.

 

In May 2006, we treated our first patent in a PhaseI/II study evaluating picoplating in the front-line treatment of patients withadvanced colorectal cancer. This study is designed to determine the safety andefficacy of picoplatin when combined with fluorouracil and leucovorin to treatpatients newly diagnosed with metastatic disease. We anticipate completingenrollment of the 30-patient Phase I component of the study later this year.

 

We also plan to undertake a Phase I/II trial ofpicoplatin in patients with prostate cancer. This Phase I/II study, in which weexpect to initiate by the end of the second quarter of 2006, will evaluatepicpolatin in the treatment of patients with newly diagnosed metastatic hormonerefractory disease and is designed to determine the safety and efficacy ofpicoplatin when combined with docetaxel. Docetaxel (Taxotere®) is the currentstandard of care in the treatment of metastatic hormone refractory prostatecancer.

 

The actual time for initiation and completion of ourpicoplatin clinical trials depend upon numerous factors, including:

 

•      approvals and other actionsby the FDA and other regulatory agencies and the timing thereof;

 

•      our ability to open clinicalsites;

 

•      our ability to enrollqualified patients into our studies;

 

•      our ability to obtainsufficient, reliable and affordable supplies of the picoplatin drug product;

 

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•      our ability to obtainadequate additional funding or enter into strategic partnerships;

 

•      the extent of competingtrials at the clinical institutions where we conduct our trials; and

 

•      the extent of schedulingconflicts with participating clinicians and clinical institutions.

 

We may not initiate, advance or complete ourpicoplatin or any other proposed clinical studies as projected or achievesuccessful results.

 

We will rely on academic institutions and clinicalresearch organizations to conduct, supervise or monitor some or all aspects ofclinical trials involving picoplatin. Further, to the extent that we now or inthe future participate in collaborative arrangements in connection with thedevelopment and commercialization of our proposed products, we will have lesscontrol over the timing, planning and other aspects of our clinical trials. Ifwe fail to initiate, advance or complete, or experience delays in or are forcedto curtail our current or planned clinical trials, our stock price and ourability to conduct our business could be materially negatively affected.

 

**If testing of a particular product does not yieldsuccessful results, we will be unable to commercialize that product.**

 

Our research and development programs are designed totest the safety and efficacy of our proposed products in humans throughextensive preclinical and clinical testing. We may experience numerousunforeseen events during, or as a result of, the testing process that coulddelay or prevent commercialization of picoplatin or any other proposedproducts, including the following:

 

•      the safety and efficacyresults obtained in early human clinical trials may not be indicative ofresults obtained in later clinical trials;

 

•      the results of preclinicalstudies may be inconclusive, or they may not be indicative of results that willbe obtained in human clinical trials;

 

•      after reviewing testresults, we or any potential collaborators may abandon projects that wepreviously believed were promising;

 

•      our potential collaboratorsor regulators may suspend or terminate clinical trials if the participatingsubjects or patients are being exposed to unacceptable health risks; and

 

•      the effects of our potentialproducts may not be the desired effects or may include undesirable side effectsor other characteristics that preclude regulatory approval or limit theircommercial use if approved.

 

Clinical testing is very expensive, can take manyyears, and the outcome is uncertain. The data that we may collect from ourpicoplatin clinical trials may not be sufficient to support regulatory approvalof our proposed picoplatin product. The clinical trials of picoplatin and anyother proposed products may not be initiated or completed on schedule, and theFDA or foreign regulatory agencies may not ultimately approve any of ourproduct candidates for commercial sale. Our failure to adequately demonstrate thesafety and efficacy of a cancer therapy product under development would delayor prevent regulatory approval of the product, which would prevent us frommarketing the proposed product.

 

**Success in early clinical trials may not beindicative of results obtained in later trials.**

 

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

 

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**We are dependent on suppliers for the timelydelivery of materials and services and may experience future interruptions insupply.**

 

For our picoplatin product candidate to be successful,we need sufficient, reliable and affordable supplies of the picoplatin drugproduct. Sources of picoplatin drug product may be limited, and third-partysuppliers of picoplatin drug product may be unable to manufacture drug productin amounts and at prices necessary to successfully commercialize our picoplatinproduct. Moreover, third-party manufacturers must continuously adhere tocurrent Good Manufacturing Practice (cGMP) regulations enforced by the FDAthrough its facilities inspection program. If the facilities of thesemanufacturers cannot pass a pre-approval plant inspection, the FDA will notgrant a New Drug Application (NDA) for our proposed products. In complying withcGMP and foreign regulatory requirements, any of our third-party manufacturerswill be obligated to expend time, money and effort in production,record-keeping and quality control to assure that our products meet applicablespecifications and other requirements. If any of our third-party manufacturersfails to comply with these requirements, we may be subject to regulatoryaction.

 

We have a limited supply of picoplatin drug productthat was manufactured by a prior licensee in September 2004 and earlier. Thedrug product has been demonstrated to be stable for 18 to 24 months from thedate of manufacture, which time period is not sufficient to complete ourcurrent and proposed clinical trials of picoplatin***.***Wehave entered into an agreement with Hyaluron, Inc. to manufacture and supplyadditional picoplatin drug product on a purchase order, fixed fee basis, forour North American and Eastern European trials. The agreement will continueuntil April 15, 2010, subject to earlier termination by either party in theevent of an uncured material breach or the liquidation or bankruptcy of theother party. We may terminate the agreement if we decide to no longer pursuemanufacturing or distribution of picoplatin. There is no assurance thatHyaluron will be able to provide sufficient supplies of picoplatin drug producton a timely or cost-effective basis. There are in general relatively fewmanufacturers and suppliers of picoplatin drug product. If Hyaluron or analternate manufacturer is unable or unwilling to manufacture and provide drugproduct at a cost and on other terms acceptable to us, we may suffer delays in,or be prevented from, initiating or completing our clinical trials ofpicoplatin.

 

In connection with our product development activities,we rely on third-party contractors to perform for us, or assist us with,certain specialized services, including drug manufacture and supply,dispensing, distribution and shipping, and clinical trial management. Becausethese contractors provide specialized services, their activities and quality ofperformance may be outside our direct control. If these contractors do notperform their obligations in a timely manner, or if we encounter difficultieswith the quality of services we receive from these contractors, we may incursignificant additional costs and delays in product development activities,which could have a material negative effect on our business.

 

**If we cannot negotiate and maintain collaborativearrangements with third parties, our research, development, manufacturing,sales and marketing activities may not be cost-effective or successful.**

 

Our success will depend in significant part on ourability to attract and maintain collaborative partners and strategicrelationships to support the development, sale, marketing, distribution andmanufacture of picoplatin and any other future product candidates andtechnologies in the US and Europe. At present, our only material collaborativeagreement is the exclusive worldwide (except Japan) license granted to us byAnorMED, Inc. for the development and commercial sale of picoplatin. Under thatlicense, we are solely responsible for the development and commercialization ofpicoplatin. AnorMED retains the right, at our cost, to prosecute patentapplications and maintain all patents. The parties executed the licenseagreement in April 2004, at which time we paid AnorMED a one-time upfrontmilestone payment of $1.0 million in our common stock and $1.0 million in cash.The agreement also provides for additional milestone payments to AnorMED of upto $13.0 million, payable in cash or a combination of cash and our commonstock. These milestones include our successful completion of a picoplatin PhaseII study or initiation of a picoplatin Phase III study, submission to the FDAof a New Drug Application (NDA) for picoplatin, regulatory approval from theFDA of picoplatin and the attainment of certain levels of annual net sales ofpicoplatin. Upon regulatory approval, AnorMED also would receive royaltypayments of up to 15% on product sales. We cannot be certain of the extent ofour success, if any, in commercializing picoplatin and attaining establishedmilestones. We initiated our first picoplatin trial, a Phase II study ofpicoplatin in small cell lung cancer in June 2005, and it is unlikely thatthese

 

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milestones will be triggered during 2006. Because we cannot predict thelength of time to complete our Phase II study, the time or initiation andcompletion of a Phase III study or the time of submission of an NDA forpicoplatin, we are unable to predict when such milestones may be triggeredafter 2006. The license agreement may be terminated by either party for breachif the other party files a petition in bankruptcy or insolvency or forreorganization or is dissolved, liquidated or makes assignment for the benefitof creditors. We can terminate the license at any time upon prior writtennotice to AnorMED. If not earlier terminated, the license agreement willcontinue in effect, in each country in the territory in which the licensedproduct is sold or manufactured, until the earlier of (i) expiration of thelast valid claim of a pending or issued patent covering the licensed product inthat country or (ii) a specified number of years after first commercial sale ofthe licensed product in that country. If AnorMED were to breach its obligationsunder the license, or if the license expires or is terminated and we cannotrenew, replace, extend or preserve our rights under the license agreement, wewould be unable to move forward with our current and planned picoplatinclinical studies.

 

On August 4, 2005, we entered into a research fundingand option agreement with The Scripps Research Institute (TSRI). Thiscollaboration is still at an early stage. Under the agreement, we will provideTSRI an aggregate of $2.5 million over a 26-month period to fund researchrelating to synthesis and evaluation of novel small molecule, multi-targetedprotein kinase inhibitors as therapeutic agents, including for the treatment ofcancer. We have the option to negotiate a worldwide exclusive license to use,enhance and develop any compounds arising from the collaboration. The researchfunding is payable by us to TSRI quarterly in accordance with a negotiatedbudget. We made an initial funding payment to TSRI of $137,500, on August 8,2005. On April 28, 2006, we paid TSRI $487,500. We are obligated to pay TSRI$287,500 on July 1, 2006 and $237,500 on October 1, 2006. The agreementprovides for additional aggregate funding payments of $1.4 million in 2007. Wehave no assurance that the research funded under this arrangement will besuccessful or ultimately will give rise to any viable product candidates.Further, there can be no assurance that we will be able to negotiate, onacceptable terms, a license with respect to any of the compounds arising fromthe collaboration.

 

None of our current employees has experience selling,marketing and distributing therapeutic products. To the extent we aresuccessful in obtaining approval for the commercial sale of picoplatin or anyother product candidate; we may need to secure one or more corporate partnersto conduct these activities. We may not be able to enter into partneringarrangements in a timely manner or on terms acceptable to us. To the extentthat we enter into co-promotion or other licensing arrangements, our productrevenues are likely to be lower than if we directly marketed and sold ourproducts, and any revenues we receive would depend upon the efforts of thirdparties, which efforts may not be successful. If we are not able to secureadequate partnering arrangements, we would have to hire additional employees orconsultants with expertise in sales, marketing and distribution. Employees withrelevant skills may not be available to us. Additionally, any increase in thenumber of employees would increase our expense level and could have a materialadverse effect on our financial position.

 

**We face substantial competition in the developmentof cancer therapies and may not be able to compete successfully, and ourpotential products may be rendered obsolete by rapid technological change.**

 

The competition for development of cancer therapies issubstantial. There are numerous competitors developing products to treat thecancers for which we are seeking to develop products. Our initial focus forpicoplatin is small cell lung cancer, a disease for which there currently arelimited effective therapeutic options. Numerous companies, includingAstraZeneca PLC, Cell Therapeutics, Inc., Exelexis, Inc., ImClone SystemsIncorporated, ImmunoGen, Inc., Sanofi-Aventis Group, Inex PharmaceuticalsCorporation, Ipsen Limited, The Menarini Group, OSI Genetics, Inc. andPharmaMar USA, Inc., also are developing and testing therapeutics for smallcell lung cancer. These therapeutics include chemotherapy, inhibitors,monoclonal antibodies, antagonists and interferons. We cannot assure you thatwe will be able to effectively compete with these or future third party productdevelopment programs. Many of our existing or potential competitors have, orhave access to, substantially greater financial, research and development,marketing and production resources than we do and may be better equipped thanwe are to develop, manufacture and market competing products. Further, ourcompetitors may have, or may develop and introduce, new products that wouldrender our picoplatin or any other proposed product candidates lesscompetitive, uneconomical or obsolete.

 

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**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 on obtaining,maintaining and enforcing our patents and other proprietary rights and ourability to avoid infringing the proprietary rights of others. The United StatesPatent and Trademark Office, or the USPTO, may not issue patents from the patentapplications owned by or licensed to us. If issued, the patents may not give usan advantage over competitors with similar technologies.

 

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 thirdparty may challenge the validity or enforceability of a patent after itsissuance by the USPTO. It is possible that a competitor may successfullychallenge our patents or that a challenge will result in limiting theircoverage. Moreover, the cost of litigation to uphold the validity of patentsand to prevent infringement can be substantial. If the outcome of litigation isadverse to us, third parties may be able to use our patented invention withoutpayment to us. Moreover, it is possible that competitors may infringe ourpatents or successfully avoid them through design innovation. We may need tofile lawsuits to stop these activities. These lawsuits can be expensive andwould consume time and other resources, even if we were successful in stoppingthe violation of our patent rights. In addition, there is a risk that a courtwould decide that our patents are not valid and that we do not have the rightto stop the other party from using the inventions. There is also the risk that,even if the validity of our patents was upheld, a court would refuse to stopthe other party on the ground that its activities do not infringe our patents.

 

In addition, the protection afforded by issued patentsis limited in duration. With respect to picoplatin, in the United States we expectto rely primarily on US Patent Number 5,665,771 (expiring February 7, 2016),which is licensed to us by AnorMED, and additional licensed patents expiring in2016 covering picoplatin in the European Union. The FDA has also designatedpicoplatin as an orphan drug for the treatment of small cell lung cancer underthe provisions of the Orphan Drug Act, which entitles us to exclusive marketingrights for picoplatin in the United States for seven years following marketapproval. We may also be able to rely on the Hatch-Waxman Act to extend theterm of a US patent covering picoplatin after regulatory approval, if any, ofsuch product in the US.

 

Under our license agreement with AnorMED, AnorMEDretains the right to prosecute patent applications and maintain all licensedpatents, with NeoRx reimbursing such expenses. Under the AnorMED agreement, wehave the right to sue any third party infringers of the picoplatin patents inthe licensed territory (worldwide except Japan). If we do not file suit,AnorMED, in its sole discretion, has the right to sue the infringer at itsexpense.

 

In addition to the intellectual property rightsdescribed above, we rely on unpatented technology, trade secrets andconfidential information. Therefore, others may independently develop substantiallyequivalent information and techniques or otherwise gain access to or discloseour technology. We may not be able to effectively protect our rights inunpatented technology, trade secrets and confidential information. We requireeach of our employees, consultants and advisors to execute a confidentialityagreement at the commencement of an employment or consulting relationship withus. However, these agreements may not provide effective protection of ourinformation or, in the event of unauthorized use or disclosure, may not provideadequate remedies.

 

**The use of our technologies could potentiallyconflict with the rights of others.**

 

Our competitors or others may have or may acquirepatent rights that they could enforce against us. In such case, we may berequired to alter our products, pay licensing fees or cease activities. If ourproducts conflict with patent rights of others, third parties could bring legalactions against us claiming damages and seeking to enjoin manufacturing andmarketing of the affected products. If these legal actions are successful, inaddition to any potential liability for damages, we could be required to obtaina license in order to continue to manufacture or market the affected products.We may not prevail in any legal action and a required license under the patentmay not be available on acceptable terms.

 

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**We may incur substantial costs as a result oflitigation or other proceedings relating to patent and other intellectualproperty rights.**

 

The cost to us of any litigation or other proceedingsrelating to intellectual property rights, even if resolved in our favor, couldbe substantial. Some of our competitors may be better able to sustain the costsof complex patent litigation because they have substantially greater resources.If there is litigation against us, we may not be able to continue ouroperations. 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 be required to participate in interferenceproceedings involving our issued patents and pending applications. We may berequired to cease using the technology or license rights from prevailing thirdparties as a result of an unfavorable outcome in an interference proceeding. Aprevailing party in that case may not offer us a license on commerciallyacceptable terms.

 

In April 2003, we received $10 million from the saleto Boston Scientific Corporation (BSC) of certain non-core patents and patentapplications and the grant to BSC of exclusive license rights to certainpatents and patent applications. BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc., its subsidiary, CordisCorporation, and Guidant Corporation, alleging infringement of such patents. Inboth lawsuits, the defendants denied infringement and asserted invalidity andunenforceability of the patents. BSC subsequently withdrew three of the patentsfrom the litigation, including the patents that were assigned to BSC. Weunderstand that BSC is still asserting a licensed patent against thedefendants, but has also agreed, in principle, to purchase Guidant. Although weare not currently a party to the lawsuits, our management and counsel have beendeposed in connection with the lawsuits. It is possible that BSC, if it isunsuccessful or has limited success with its claims, may seek damages from us,including recovery of all or a portion of the amounts it paid to us in 2003. Wecannot assess the likelihood of whether such claim will be brought against usor the extent of recovery, if any, on any such claim.

 

**Product liability claims in excess of the amountof our insurance would adversely affect our financial condition.**

 

The testing, manufacturing, marketing and sale ofpicoplatin and any other proposed cancer therapy products, including pastclinical and manufacturing activities in connection with our terminated STRradiotherapeutic, may subject us to product liability claims. We are insuredagainst such risks up to a $10 million annual aggregate limit inconnection with clinical trials of our products under development and intend toobtain product liability coverage in the future. However, insurance coveragemay not be available to us at an acceptable cost. We may not be able to obtaininsurance coverage that will be adequate to satisfy any liability that mayarise. Regardless of merit or eventual outcome, product liability claims mayresult in decreased demand for a product, injury to our reputation, withdrawalof clinical trial volunteers and loss of revenues. As a result, regardless ofwhether we are insured, a product liability claim or product recall may resultin losses that could be material.

 

**Our use of radioactive and other hazardousmaterials exposes us to the risk of material environmental liabilities, and wemay incur significant additional costs to comply with environmental laws in thefuture.**

 

Our research and development and manufacturingprocesses, as well as the manufacturing processes that may be used by ourcollaborators, involve the controlled use of hazardous and radioactivematerials. As a result, we are subject to foreign, federal, state and locallaws, rules, regulations and policies governing the use, generation,manufacture, storage, air emission, effluent discharge, handling and disposalof certain materials and wastes in connection with our use of these materials.Although we believe that our safety procedures for handling and disposing ofsuch materials comply with the standards prescribed by such laws andregulations, we may be required to incur significant costs to comply withenvironmental and health and safety regulations in the future. In the eventthat we discontinue operations in facilities that have had past research andmanufacturing processes where hazardous or radioactive materials have been inuse, we may have significant decommissioning costs associated with thetermination of operation of these facilities. These potential decommissioningcosts also may reduce the market value of the facilities and may limit ourability to sell or otherwise dispose of these facilities in a timely andcost-effective manner. We have terminated our STR manufacturing operations inDenton,

 

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Texas and are actively marketing the facility for sale. In 2005, werecorded costs associated with the closure of the Denton facility of $0.9million. We estimate costs in 2006 related to these activities at $0.2 million.These costs could increase substantially, depending on actions of regulators orif we discover previously unknown contamination in or around the facility. Inaddition, the risk of accidental contamination or injury from hazardous orradioactive materials cannot be completely eliminated. In the event of such anaccident, we could be held liable for any resulting damages, and any suchliability could exceed our resources. Our current insurance does not coverliability for the clean-up of hazardous waste materials or other environmentalrisks.

 

**Even if we bring products to market, changes inhealthcare reimbursement could adversely affect our ability to effectivelyprice our products or obtain adequate reimbursement for sales of our products.**

 

Potential sales of our products may be affected by theavailability of reimbursement from governments or other third parties, such asinsurance companies. It is difficult to predict the reimbursement status ofnewly approved, novel medical products. In addition, third-party payors areincreasingly challenging the prices charged for medical products and services.If we succeed in bringing one or more products to market, we cannot be certainthat these products will be considered cost-effective and that reimbursement tothe consumer will be available or will be sufficient to allow us tocompetitively or profitably sell 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 throughvarious means. For example, in certain foreign markets, pricing orprofitability of prescription pharmaceuticals is subject to governmentalcontrol. In the United States, there have been, and we expect that there willcontinue to be, a number of federal and state proposals to implement similargovernmental controls. It is uncertain what legislative proposals will be adoptedor what actions federal, state or private payors for health care goods andservices may take in response to any health care reform proposals orlegislation. Even in the absence of statutory change, market forces arechanging the health care sector. We cannot predict the effect health carereforms may have on the development, testing, commercialization andmarketability of our proposed cancer therapy products. Further, to the extentthat such proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospectivecollaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.

 

**The loss of key employees could adversely affectour operations.**

 

As of March 31, 2006, we had a total work force of 20 full-timeemployees and 2 part-time employees. Our success depends, to a significantextent, on the continued contributions of our principal management and scientificpersonnel participating in our picoplatin development program. We have limitedor no redundancy of personnel in key development areas, including finance,legal, clinical operations, regulatory affairs and quality control andassurance. The loss of the services of one or more of our employees could delayour picoplatin product development activities or any other proposed programsand research and development efforts. We do not maintain key-person lifeinsurance on any of our officers, employees or consultants.

 

Competition for qualified employees among companies inthe biotechnology and biopharmaceutical industry is intense. Our future successdepends upon our ability to attract, retain and motivate highly skilledemployees and consultants. In order to commercialize our proposed productssuccessfully, we will in the future be required to substantially expand ourworkforce, particularly in the areas of manufacturing, clinical trialsmanagement, regulatory affairs, business development and sales and marketing.These activities will require the addition of new personnel, includingmanagement, and the development of additional expertise by existing managementpersonnel.

 

On May 10, 2006, we announced that we are changing our corporatename to Poniard Pharmaceuticals, Inc. effective June 16, 2006, and that we planto relocate our corporate headquarters to San Francisco by the beginning of thethird quarter of 2006. We currently are in negotiations to lease facilities inSan Francisco to accommodate our new executive offices and plans for growth,including potentially substantial new hires. We intend to maintain clinicaldevelopment and support activities in

 

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Seattle and do not have plans to relocate any of our 19 employees currentlyin Seattle.

 

We have change in control agreements and severanceagreements with all of our executive officers and consulting agreements withvarious of our scientific advisors. Our agreements with our executive officersprovide for “at will” employment, which means that each executive may terminatehis or her service with us at any time. In addition, our scientific advisorsmay terminate their services to us at any time.

 

**Risks Related to Our Common Stock**

 

**Our common stock may be delisted fromThe Nasdaq Capital Market if we are unable to maintain compliance with NasdaqCapital Market continued listing requirements.**

 

Our common stock listing was transferred from TheNasdaq National Market to The Nasdaq Capital Market (formerly the NasdaqSmallCap Market) on March 20, 2003. We elected to seek a transfer to TheNasdaq Capital Market because we had been unable to regain compliance with TheNasdaq National Market minimum $1.00 bid price requirement for continuedlisting. By transferring to The Nasdaq Capital Market, we were afforded anextended grace period in which to satisfy The Nasdaq Capital Market $1.00minimum bid price requirement. On May 6, 2003, we received notice fromNasdaq confirming that we were in compliance with the $1.00 minimum bid pricerequirement. We will not be eligible to relist our common stock on The NasdaqNational Market unless and until our common stock maintains a minimum bid priceof $5.00 per share for 90 consecutive trading days and we otherwise comply withthe initial listing requirements for The Nasdaq National Market. Trading on theNasdaq Capital Market may have a negative impact on the value of our commonstock, because securities trading on the Nasdaq Capital Market typically areless liquid than those traded on The Nasdaq National Market.

 

On January 10, 2006, we received a notice from Nasdaqindicating that we are not in compliance with Nasdaq Marketplace Rule4310(c)(8)(D) (the Minimum Bid Price Rule) because the closing bid price of ourcommon stock had been below $1.00 per share for 30 consecutive trading days. Inaccordance with Nasdaq Marketplace Rules, we were provided 180 calendar days,or until, July 10, 2006, to regain compliance with the Minimum Bid Price Rule. Toregain compliance, the closing bid price of our common stock had to remain at$1.00 per share or more for a minimum of ten consecutive trading days. OnFebruary 22, 2006, we received a notice from Nasdaq indicating that we hadregained compliance with the Minimum Bid Price Rule. The closing bid price ofour common stock may in the future fall below the Minimum Bid Price Rule or wemay in the future fail to meet other requirements for continued listing on theNasdaq Capital Market. If we are unable to cure any future events ofnoncompliance in a timely or effective manner, our common stock could bedelisted from the Nasdaq Capital Market

 

If our common stock were to be delisted from TheNasdaq Capital Market, we may seek quotation on a regional stock exchange, ifavailable. Such listing could reduce the market liquidity for our common stock.If our common stock is not eligible for quotation on another market orexchange, trading of our common stock could be conducted in theover-the-counter market on an electronic bulletin board established forunlisted securities such as the Pink Sheets or the OTC Bulletin Board. As aresult, an investor would find it more difficult to dispose of, or obtainaccurate quotations for the price of, our common stock.

 

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

 

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purchase our common stock. Finally, the additional burdens imposed uponbroker-dealers by these requirements could discourage broker-dealers fromfacilitating trades in our common stock, which could severely limit the marketliquidity of the stock and the ability of investors to trade our common stock.

 

**Our stock price is volatile and, as aresult, you could lose some or all of your investment.**

 

There has been a history of significant volatility inthe market prices of securities of biotechnology companies, including ourcommon stock. In 2005, the high and low closing sale prices of our common stockwere $2.34 and $0.47. In 2004, the high and low closing sale prices were $5.78and $1.43. The high and low closing sale prices during the period from January 3,2006 through May 8, 2006 were $1.57 and $0.72. Our stock price has been and maycontinue to be affected by this type of market volatility, as well as our ownperformance. Our business and the relative price of our common stock may beinfluenced by a large variety of factors, including:

 

•      announcements by us or ourcompetitors concerning acquisitions, strategic alliances, technologicalinnovations, new commercial products or changes in product development strategies;

 

•      the availability of criticalmaterials used in developing our proposed picoplatin product;

 

•      our ability to conduct ourpicoplatin clinical development program on a timely and cost-effective basisand the progress and results of our clinical trials and those of ourcompetitors;

 

•      developments concerningpatents, proprietary rights and potential infringement;

 

•       developmentsconcerning potential agreements with collaborators;

 

•      the expense and timeassociated with, and the extent of our ultimate success in, securing regulatoryapprovals;

 

•      our available cash or othersources of funding; and

 

•      future sales of significantamounts of our common stock by us or our shareholders.

 

In addition, potential public concern about the safetyof our proposed picoplatin product and any other products we develop, commentsby securities analysts, our ability to maintain the listing of our common stockon the Nasdaq system, and conditions in the capital markets in general and inthe life science capital market specifically, may have a significant effect onthe 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 our securities.

 

In the past, securities class action litigation oftenhas been brought against companies following periods of volatility in theirstock prices. We may in the future be the target of similar litigation.Securities litigation could result in substantial costs and divert ourmanagement’s time and resources, which could cause our business to suffer.

 

**Certain provisions in our articles ofincorporation and Washington state law could discourage a change of control.**

 

Our articles of incorporation authorize our board ofdirectors to issue up to 200 million shares of common stock and up to 3.0million shares of preferred stock. With respect to preferred stock, our boardhas the authority to determine the price, rights, preferences, privileges andrestrictions, including voting rights, of those shares without any further voteor action by our shareholders. Our shareholder rights plan adopted on April 10,1996 and the preferred stock purchase rights issued to each common shareholderthereunder expired, by their respective terms, on April 10, 2006.

 

Washington law imposes restrictions on certaintransactions between a corporation and

 

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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:

 

•      a merger or consolidationwith, disposition of assets to, or issuance or redemption of stock to or fromthe acquiring person;

 

•      termination of 5% or more ofthe employees of the target corporation; or

 

•      receipt by the acquiringperson of any disproportionate benefit as a shareholder.

 

A corporation may not opt out of this statute. Thisprovision may have the effect of delaying, deterring or preventing a change incontrol of NeoRx or limiting future investment in NeoRx by significantshareholders and their affiliates and associates.

 

The provisions of our articles of incorporation andWashington law discussed above may have the effect of delaying, deterring orpreventing a change of control of NeoRx, even if this change would bebeneficial to our shareholders. These provisions also may discourage bids forour common stock at a premium over market price and may adversely affect themarket price of, and the voting and other rights of the holders of, our commonstock. In addition, these provisions could make it more difficult to replace orremove our current directors and management in the event our shareholdersbelieve this would be in the best interests of the corporation and ourshareholders.

 

**As a result of the closing of theequity financing, the number of shares of our common stock outstandingincreased substantially and certain investors beneficially own significantblocks of our common stock; upon registration, such common shares will begenerally available for resale in the public market**

 

Upon the closing of the equity financing on April 26,2006, we issued to a small group of institutional and other accreditedinvestors an aggregate of 92.9 million shares of common stock, plus warrants topurchase an aggregate of 25.4 million additional shares of common stock. Theseinvestors also have received warrants to purchase an aggregate of 2.5 millionshares of common stock in connection with their participation in the bridgeloan. Concurrently with the closing, we issued an aggregate of 9.5 millionshares of common stock to the holders of our Series B preferred stock uponconversion of our outstanding Series B preferred shares. At the time ofclosing, the placement agent for the financing also received a five-year warrantto purchase, on the same terms as the investors, 835,714 common shares. Theissuance of such shares and warrants resulted in substantial dilution toshareholders who held our common stock prior to the financing.

 

The equity financing was led by MPM Capital (MPM). Entitiesaffiliated with MPM acquired beneficial ownership of approximately 52.0 millioncommon shares, or approximately 35.0% of our common stock outstandingimmediately following the financing. Entities affiliated with Bay City Capital ManagementIV LLC (BCC) acquired beneficial ownership of approximately 27.9 million commonshares, or approximately 19.5% of the common shares outstanding immediately followingthe financing. Two of our directors, Fred B. Craves and Carl S. Goldfischer,are managing directors of BCC and possess capital and carried interests in theBCC entities that participated in the financing. We have agreed, for as long asMPM owns at least 10% of the shares of common stock and warrants purchased inthe financing, to use our best efforts to cause one person designated by MPMand one person designated by mutual agreement of MPM and BCC to be nominatedand elected to our board of directors. Nicholas J. Simon III, a representativeof MPM, was appointed to our board of directors on April 26, 2006, increasingthe number of directors to nine. Mr. Simon is a general partner of certain ofthe MPM entities that participated in the financing and possesses capital andcarried interests in those entities. MPM and BCC have not yet recommended asecond director designee.

 

Under the securities purchase agreement, we haveagreed to file a registration statement with the SEC covering the resale of the92.9 million shares of common stock issued in the equity financing and the

 

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27.9 million shares of common stock issuable upon exercise of thewarrants issued in the bridge and the equity financings. Upon suchregistration, these shares will become generally available for immediate resalein the public market. In addition, the approximately 9.5 million shares ofcommon stock issued upon conversion of the Series B preferred stock currentlyare available for immediate resale pursuant to a registration statement or anexemption from registration under Rule 144(k) of the Securities Act. The marketprice of our common stock could fall as a result of such resales due to theincreased number of shares available for sale in the market.

 

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**Item6.****   ****Exhibits**

 

(a) Exhibits – See Exhibit Index below.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | NEORX CORPORATION                            |
|--------|----------------------------------------------|
|   | (Registrant)                                 |
|   |                                         |   |
| Date:  | May 15, 2006                                 | By: | /s/ SUSAN D. BERLAND |   |
|   | Susan D. Berland                             |
|   | Chief Financial Officer                      |
|   | (Principal Financial and Accounting Officer) |
|        |                                              |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                              | ** ** | ** ** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1         |       | Amended  and Restated Articles of Incorporation, as amended April 25, 2006                                                                                                                                   |       | (W)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 3.2         |       | Restated  Bylaws, as amended March 28, 2006                                                                                                                                                                  |       | (W)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.1        |       | Restated  1994 Stock Option Plan (‡)                                                                                                                                                                    |       | (F)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.2        |       | Lease  Agreement for 410 West Harrison facility, dated March 1, 1996, between NeoRx  Corporation and Diamond Parking, Inc                                                                                    |       | (H)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.3        |       | Amendment  No. 1, dated August 14, 2000, to Lease Agreement between NeoRx Corporation  and Dina Corporation                                                                                                  |       | (J)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.4        |       | 1991 Stock  Option Plan for Non-Employee Directors, as amended (‡)                                                                                                                                      |       | (E)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.5        |       | 1991  Restricted Stock Plan (‡)                                                                                                                                                                         |       | (D)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.6        |       | Indemnification  Agreement (‡)                                                                                                                                                                          |       | (H)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.7        |       | Stock Option  Grant Program for Nonemployee Directors under the NeoRx 2004 Incentive  Compensation Plan, as amended                                                                                          |       | (B)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.8        |       | Stock  Option Agreement, dated December 19, 2000, between NeoRx Corporation and Carl  S. Goldfischer (‡)                                                                                                |       | (I)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.9        |       | Stock  Option Agreement, dated January 17, 2001, between NeoRx Corporation and Carl  S. Goldfischer (‡)                                                                                                 |       | (I)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.10       |       | License  Agreement dated as of April 2, 2004, between the Company and AnorMED, Inc.  Certain portions of the agreement have been omitted pursuant to a request for  confidential treatment                   |       | (Q)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.11       |       | Stock  Option Grant Program for Nonemployee Directors under the NeoRx Corporation  1994 Restated Stock Option Plan (‡)                                                                                  |       | (M)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.12       |       | Facilities  Lease, dated February 15, 2002, between NeoRx Corporation and Selig Real  Estate Holdings Six                                                                                                    |       | (A)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.13       |       | Lease  Termination/Continuation Agreement dated October 8, 2002, between NeoRx  Corporation and Dina Corporation                                                                                             |       | (N)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.14       |       | Amended  and Restated 2004 Incentive Compensation Plan (‡)                                                                                                                                              |       | (G)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.15       |       | Manufacturing  and Supply Agreement dated as of May 4, 2004, between Hyaluron, Inc. and the  Company. Certain portions of the agreement have been omitted pursuant to a  request for confidential treatment. |       | (T)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.16       |       | Key  Executive Severance Agreement dated as of February 28, 2003, between the  Company and Anna Wight (‡)                                                                                               |       | (C)        |
|        |       |                                                                                                                                                                                                         |       |       |
| 10.17       |       | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of February 28, 2003, between the Company and  Anna Wight (‡)                                                 |       | (L)        |

 

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| 10.18  |   | Change of Control Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                                                                                                     |   | (C)    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.19  |   | Key Executive Severance Agreement dated as of June 23, 2005,  between the Company and David A. Karlin (‡)                                                                                                              |   | (P)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.20  |   | Change of Control Agreement dated as of June 23, 2005, between  the Company and David A. Karlin (‡)                                                                                                                    |   | (P)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.21  |   | Employment Letter dated as of April 26, 2004, between the  Company and Gerald McMahon (‡)                                                                                                                              |   | (L)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.22  |   | Key  Executive Severance Agreement dated as of May 11, 2004, between the Company  and Gerald McMahon (‡)                                                                                                               |   | (R)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.23  |   | Change of  Control Agreement dated as of May 11, 2004, between the Company and Gerald  McMahon (‡)                                                                                                                     |   | (R)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.24  |   | Key Executive  Severance Agreement dated as of October 25, 2004, between the Company and  Susan D. Berland (‡)                                                                                                         |   | (S)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.25  |   | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of October 25, 3004, between the Company and Susan  D. Berland (‡)                                                           |   | (L)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.26  |   | Change of  Control Agreement dated as of October 25, 2004, between the Company and Susan  D. Berland (‡)((S)                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.27  |   | Form of  Non-Qualified Stock Option Agreement under 2004 Incentive Compensation Plan  (‡)                                                                                                                              |   | (O)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.28  |   | Form of  Incentive Stock Option Agreement under 2004 Incentive Compensation  Plan (‡)                                                                                                                             |   | (O)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.29  |   | Consulting  Agreement between the Company and Alan B. Glassberg, M.D. (‡)                                                                                                                                              |   | (T)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.30  |   | Letter  Agreement dated October 14, 2005, between the Company and Texas State Bank                                                                                                                                          |   | (U)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.31  |   | Letter  Agreement dated January 30, 2006, between the Company and Texas State Bank                                                                                                                                          |   | (V)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.32  |   | Research  Funding and Option Agreement dated August 4, 2005, between the Company and  The Scripps Research Institute. Certain portions of the agreement have been  omitted pursuant to a request for confidential treatment |   | (U)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 10.33  |   | Form of  Directors’ Indemnification Agreements (‡)                                                                                                                                                                |   | (K)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 31.1   |   | Rule  13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer                                                                                                                                             |   | (W)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 31.2   |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                                                          |   | (W)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 32.1   |   | Section  1350 Certification of Chairman and Chief Executive Officer                                                                                                                                                         |   | (W)    |
|   |   |                                                                                                                                                                                                                        |   |   |
| 32.2   |   | Section  1350 Certification of Chief Financial Officer                                                                                                                                                                      |   | (W)    |

 

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| (‡) |   | Management contract or compensatory plan.                                                                                                                                         |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                              |
| (A)      |   | Filed as  an exhibit to the Company’s Form 10-K for the fiscal year ended December 31,  2001, and incorporated herein by reference.                                          |
|     |   |                                                                                                                                                                              |
| (B)      |   | Filed as  an exhibit to the Company’s Current Report on Form 8-K filed June 16, 2005,  and incorporated herein by reference.                                                 |
|     |   |                                                                                                                                                                              |
| (C)      |   | Filed as  an exhibit to the Company’s Registration Statement on Form S-3/A  (Registration No. 333-111344) filed on February 23, 2004, and incorporated  herein by reference. |
|     |   |                                                                                                                                                                              |
| (D)      |   | Filed as  an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 30, 1991, and incorporated herein by reference.                        |
|     |   |                                                                                                                                                                              |
| (E)      |   | Incorporated  by reference to Exhibit A to the Company’s definitive proxy statement on  Schedule 14A filed April 10, 1996.                                                   |
|     |   |                                                                                                                                                                              |
| (F)      |   | Filed as  an exhibit to the Company’s Form 10-K for the fiscal year ended December 31,  1995, and incorporated herein by reference.                                          |
|     |   |                                                                                                                                                                              |
| (G)      |   | Incorporated  by reference to Exhibit A to the Company’s definitive proxy statement on  Schedule 14A filed April 29, 2005.                                                   |
|     |   |                                                                                                                                                                              |
| (H)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 1996, and incorporated herein by reference.                                        |
|     |   |                                                                                                                                                                              |
| (I)      |   | Filed as  an exhibit to the Company’s Form 10-K for the fiscal year ended December 31,  2000, and incorporated herein by reference.                                          |
|     |   |                                                                                                                                                                              |
| (J)      |   | Filed as  an exhibit to the Company’s Form 10-K for the fiscal year ended December 31,  1998, and incorporated herein by reference.                                          |
|     |   |                                                                                                                                                                              |
| (K)      |   | Filed as  an exhibit to the Company’s Current Report on Form 8-K filed on April 28,  2006, and incorporated herein by reference.                                             |
|     |   |                                                                                                                                                                              |
| (L)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 2005, and incorporated herein by reference.                                        |
|     |   |                                                                                                                                                                              |
| (M)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30,  2002, and incorporated herein by reference.                                         |
|     |   |                                                                                                                                                                              |
| (N)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended  September 30, 2002, and incorporated herein by reference.                                    |
|     |   |                                                                                                                                                                              |
| (O)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended  September 30, 2004, and incorporated herein by reference.                                    |
|     |   |                                                                                                                                                                              |
| (P)      |   | Filed as  an exhibit to the Company’s Current Report on Form 8-K filed on June 29,  2005, and incorporated herein by reference.                                              |
|     |   |                                                                                                                                                                              |
| (Q)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 2004, and incorporated herein by reference.                                        |
|     |   |                                                                                                                                                                              |
| (R)      |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30,  2004,                                                                               |

 

40

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|   |   | and  incorporated herein by reference.                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| (S)    |   | Filed as  an exhibit to the Company’s Current Report on Form 8-K filed October 19,  2004, and incorporated herein by reference.          |
|   |   |                                                                                                                                          |
| (T)    |   | Filed as  an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30,  2005, and incorporated herein by reference.     |
|   |   |                                                                                                                                          |
| (U)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 2005, and incorporated herein by reference. |
|   |   |                                                                                                                                          |
| (V)    |   | Filed as an exhibit to the Company’s Form 8-K filed on February  3, 2006 and incorporated herein by reference.                           |
|   |   |                                                                                                                                          |
| (W)    |   | Filed herewith.                                                                                                                               |

 

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