**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

 

**For the quarterly period ended March 31, 2004**

 

**CommissionFile No. 0-16614**

 

**NEORXCORPORATION**

**(Exactname of Registrant as specified in its charter)**

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

** **

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

(Address of principal executiveoffices)

 

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

 

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

 

Yes         ý            No           o

 

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act.  

 

Yes         ý            No           o

 

As of May 4, 2004, 30,376,010 shares of the Registrant’s common stock,$.02 par value per share, were outstanding.

 

 

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**TABLEOF CONTENTS**

 

**QUARTERLYREPORT ON FORM 10-Q**

**FORTHE QUARTER ENDED MARCH 31, 2004**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                           |   |
|-------------|-----------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                |   |
| Item 1.     | Financial  Statements (Unaudited):                                                                  |   |
|        |                                                                                                |   |
|        | Condensed Consolidated Balance Sheets as of  March 31, 2004and December 31, 2003                    |   |
|        |                                                                                                |   |
|        | Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2004 and 2003 |   |
|        |                                                                                                |   |
|        | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2004 and 2003 |   |
|        |                                                                                                |   |
|        | Notes  to Condensed Consolidated Financial Statements                                               |   |
|        |                                                                                                |   |
| Item 2.     | Management’s  Discussion and Analysis of Results of Operations and Financial Condition         |   |
|        |                                                                                                |   |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                         |   |
|        |                                                                                                |   |
| Item 4.     | Controls  and Procedures                                                                            |   |
|        |                                                                                                |   |
| **PART II** | **OTHER INFORMATION**                                                                               |   |
|        |                                                                                                |   |
| Item 2.     | Unregistered Sales of Equity Securities and  Use of Proceeds                                        |   |
|        |                                                                                                |   |
| Item 6.     | Exhibits  and Reports on Form 8-K                                                                   |   |
|        |                                                                                                |   |
|        | Signatures                                                                                          |   |
|        |                                                                                                |   |
|        | Exhibit  Index                                                                                      |   |

 

2

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

 

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

 

**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(in thousands, except share data)

(unaudited)

 
|                                                                                                                                                                                                                          |   | **March 31,  2004** |   | **December  31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                    |   |                |   |                   |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Current assets:**                                                                                                                                                                                                           |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                     |   | $                   | 23,535 |                   | $      | 15,166 |   |
| Investment securities                                                                                                                                                                                                         |   | 8,383               |   | 12,335                 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                     |   | 527                 |   | 652                    |   |
| Total current assets                                                                                                                                                                                                          |   | 32,445              |   | 28,153                 |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| Facilities and equipment, net                                                                                                                                                                                                 |   | 7,369               |   | 7,471                  |   |
| Other assets, net                                                                                                                                                                                                             |   | 67                  |   | 67                     |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Total assets**                                                                                                                                                                                                              |   | $                   | 39,881 |                   | $      | 35,691 |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                 |   |                |   |                   |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Current liabilities:**                                                                                                                                                                                                      |   |                |   |                   |   |
| Accounts payable                                                                                                                                                                                                              |   | $                   | 672    |                   | $      | 409 |   |
| Accrued liabilities                                                                                                                                                                                                           |   | 1,102               |   | 1,295                  |   |
| Current portion of note payable                                                                                                                                                                                               |   | 389                 |   | 385                    |   |
| Total current liabilities                                                                                                                                                                                                     |   | 2,163               |   | 2,089                  |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Long-term liabilities:**                                                                                                                                                                                                    |   |                |   |                   |   |
| Note payable, net of current portion                                                                                                                                                                                          |   | 4,016               |   | 4,112                  |   |
|                                                                                                                                                                                                                          |   |                |   |                   |   |
| **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, 2004 and  December 31, 2003 (entitled in liquidation to $5,300 and $5,175,  respectively, at March 31, 2004 and December 31, 2003) |   | 4                   |   | 4                      |   |
| Convertible preferred stock,  Series B, 1,575 shares issued and outstanding at March 31, 2004 and December  31, 2003 (entitled in liquidation to $15,750)                                                                     |   | —              |   | —                 |   |
| Common stock, $.02 par value,  60,000,000 shares authorized, 30,054,175 and 28,002,945 shares  issued and outstanding at March 31,  2004 and December 31, 2003, respectively                                                  |   | 601                 |   | 560                    |   |
| Additional paid-in capital                                                                                                                                                                                                    |   | 252,585             |   | 243,365                |   |
| Accumulated deficit, including other  comprehensive loss of $1 and $7 at March 31, 2004 and December 31, 2003,  respectively                                                                                                  |   | (219,488            | )      | (214,439               | )      |
| Total shareholders’ equity                                                                                                                                                                                               |   | 33,702              |   | 29,490                 |   |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                           |   | $                   | 39,881 |                   | $      | 35,691 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

3

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(in thousands, except per share data)

(unaudited)

 
|                                                                                                                     |   | **Three  Months Ended March 31** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                     |   | **2004**                         |   | **2003** |   |
|                                                                                                                     |   |                             |   |   |   |
| **Revenues**                                                                                                             |   | $                                | 500    |   | $ | 116 |   |
| **Operating expenses:**                                                                                                  |   |                             |   |   |   |
| Research and development                                                                                                 |   | 3,782                            |   | 2,621 |   |
| General and administrative                                                                                               |   | 1,677                            |   | 1,432 |   |
| Total operating expenses                                                                                                 |   | 5,459                            |   | 4,053 |   |
| Loss from operations                                                                                                     |   | (4,959                           | )      | (3,937 | ) |
| **Other income (expense):**                                                                                              |   |                             |   |   |   |
| Realized gain (loss) on sale of securities                                                                               |   | —                           |   | 16 |   |
| Interest income                                                                                                          |   | 76                               |   | 54 |   |
| Interest expense                                                                                                         |   | (47                              | )      | (60 | ) |
| Total other income                                                                                                       |   | 29                               |   | 10 |   |
| Net loss before cumulative effect of change  in accounting principle                                                     |   | (4,930                           | )      | (3,927 | ) |
| Cumulative effect of change in accounting  principle                                                                     |   | —                           |   | (190 | ) |
| Net loss                                                                                                                 |   | (4,930                           | )      | (4,117 | ) |
| Preferred stock dividends                                                                                                |   | (125                             | )      | (125 | ) |
| Net loss applicable to common shares                                                                                     |   | $                                | (5,055 | ) | $ | (4,242 | ) |
|                                                                                                                     |   |                             |   |   |   |
| Loss per share:                                                                                                          |   |                             |   |   |   |
| Basic and diluted loss per share applicable  to common shares before cumulative effect of change in accounting principle |   | $                                | (0.17  | ) | $ | (0.15 | ) |
| Cumulative effect of change in accounting  principle                                                                     |   | —                           |   | (0.01 | ) |
| Basic and diluted loss applicable to common  shares                                                                      |   | $                                | (0.17  | ) | $ | (0.16 | ) |
|                                                                                                                     |   |                             |   |   |   |
| Weighted average common shares:                                                                                          |   |                             |   |   |   |
| Basic and diluted                                                                                                        |   | 28,919                           |   | 26,815 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

4

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
|                                                                         |   | **Three  Months ended March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | **2004**                          |   | **2003** |   |
|                                                                         |   |                              |   |   |   |
| **Cash flows from operating activities:**                                    |   |                              |   |   |   |
| Net loss                                                                     |   | $                                 | (4,930 | ) | $ | (4,117 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                |   | 170                               |   | 217 |   |
| Gain (loss) on sale of securities                                            |   | —                            |   | (16 | ) |
| Loss on disposal of equipment                                                |   | —                            |   | 10 |   |
| Cumulative effect of change in accounting  principle                         |   | —                            |   | 190 |   |
| Accretion of asset retirement obligation  liability                          |   | —                            |   | 16 |   |
| Common stock issued for services                                             |   | —                            |   | 4 |   |
| Stock options and warrants issued for  services                              |   | 4                                 |   | 57 |   |
| Change in operating assets and liabilities:                                  |   |                              |   |   |   |
| Prepaid expenses and other assets                                            |   | 125                               |   | 521 |   |
| Accounts payable                                                             |   | 263                               |   | (186 | ) |
| Accrued liabilities                                                          |   | (318                              | )      | (868 | ) |
| Net cash used in operating activities                                        |   | (4,686                            | )      | (4,172 | ) |
|                                                                         |   |                              |   |   |   |
| **Cash flows from investing activities:**                                    |   |                              |   |   |   |
| Proceeds from sales and maturities of  investment securities                 |   | 3,976                             |   | 10,691 |   |
| Purchases of investment securities                                           |   | (18                               | )      | (10,531 | ) |
| Facilities and equipment purchases                                           |   | (68                               | )      | — |   |
| Proceeds from sales of equipment                                             |   | —                            |   | 142 |   |
| Net cash provided by investing activities                                    |   | 3,890                             |   | 302 |   |
|                                                                         |   |                              |   |   |   |
| **Cash flows from financing activities:**                                    |   |                              |   |   |   |
| Proceeds from stock options and warrants  exercised                          |   | 215                               |   | — |   |
| Repayment of note payable principal                                          |   | (92                               | )      | (121 | ) |
| Proceeds from issuance of common stock and  warrants                         |   | 9,042                             |   | — |   |
| Net cash provided by (used in) financing  activities                         |   | 9,165                             |   | (121 | ) |
|                                                                         |   |                              |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | 8,369                             |   | (3,991 | ) |
|                                                                         |   |                              |   |   |   |
| **Cash and cash equivalents:**                                               |   |                              |   |   |   |
| Beginning of period                                                          |   | 15,166                            |   | 6,564 |   |
| End of period                                                                |   | $                                 | 23,535 |   | $ | 2,573 |   |
|                                                                         |   |                              |   |   |   |
| **Supplemental disclosure of non-cash  financing activity:**                 |   |                              |   |   |   |
| Issuance of common stock to settle accrued  bonuses                          |   | $                                 | — |   | $ | 33 |   |
| Cash paid for interest                                                       |   | $                                 | 47     |   | $ | 59 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

5

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**NEORX CORPORATION AND SUBSIDIARY**

 

**NOTESTO****CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

** **

**Note 1. Basis of Presentation**

 

The accompanying unaudited condensedconsolidated financial statements include the accounts of NeoRx Corporation andsubsidiary (the Company).  Allintercompany balances and transactions have been eliminated in consolidation.

 

The interim financial statements contained herein have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

In the opinion of management, the interimfinancial statements reflect all adjustments, consisting only of normalrecurring accruals necessary to present fairly the Company’s financial positionas of March 31, 2004 and the results of operations and cash flows for the threemonths ended March 31, 2004 and 2003.

 

The results of operations for the three months ended March 31, 2004 and2003 are not necessarily indicative of the expected operating results for thefull year.

 

Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

* *

*Stock Based Compensation*: The Company accounts for its stock option plans for employees inaccordance with the provisions of Accounting Principles Board (APB) Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations.  As such compensation expense related toemployee stock options is recorded if, on the date of grant, the fair value ofthe underlying stock exceeds the exercise price.  The Company applies the disclosure-only requirements of Statementof Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-BasedCompensation”, which allows entities to continue to apply the provisions of APBOpinion No. 25 for transactions with employees and to provide pro forma resultsof operations disclosures for employee stock option grants as if the fair-valuebased method of accounting in SFAS No. 123 had been applied to thesetransactions.  Stock compensation costsrelated to fixed employee awards with pro rata vesting are recognized on astraight-line basis over the period of benefit, generally the vesting period ofthe options.  For options and warrantsissued to non-employees, the Company recognizes stock compensation costsutilizing the fair value methodology prescribed in SFAS No. 123 over therelated period of benefit.

 

Had compensation cost for these stock optionplans for employees been determined using the fair value based method ofaccounting under SFAS No. 123,  theCompany’s net loss applicable to common shares and net loss per share wouldhave been the pro forma amounts indicated below (in thousands, except per sharedata):

 
|                                                                                               |   | **Quarter ended March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                               |   | **2004**                         |   | **2003** |   |
| Net loss applicable to  common shares:                                                             |   |                             |   |   |   |
|                                                                                               |   |                             |   |   |   |
| As reported                                                                                        |   | $                                | (5,055 | ) | $ | (4,242 | ) |
| 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 |   | (345                             | )      | (481 | ) |
| Pro forma                                                                                          |   | $                                | (5,400 | ) | $ | (4,723 | ) |
|                                                                                               |   |                             |   |   |   |
| Net loss per common  share, basic and diluted:                                                     |   |                             |   |   |   |
|                                                                                               |   |                             |   |   |   |
| As reported                                                                                        |   | $                                | (0.17  | ) | $ | (0.16 | ) |
| Pro forma                                                                                          |   | $                                | (0.19  | ) | $ | (0.18 | ) |

 

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The per shareweighted-average fair value of stock options granted during the quarters endedMarch 31, 2004 and 2003 was $3.94, and $0.43, respectively, on the grant dateusing the Black-Scholes option pricing model with the following weightedaverage assumptions:

 

|                    |   | **Quarter ended March 31,** |   |
|-------------------------|--------|----------------------------------|--------|
|                    |   | **2004**                         |   | **2003** |   |
| Expected dividend rate  |   | 0.0                              | %      | 0.0 | % |
| Risk-free interest rate |   | 2.40                             | %      | 2.36 | % |
| Expected volatility     |   | 123.4                            | %      | 134.4 | % |
| Expected life in years  |   | 4.00                             |   | 4.00 |   |

 

**Note 2. Net Loss Per Common Share**

 

Basic and diluted loss per share are based on net loss applicable tocommon shares, which is comprised of net loss and preferred stock dividends inall periods presented. Shares used to calculate basic loss per share are basedon the weighted average number of common shares outstanding during theperiod.  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.  Calculations ofbasic and diluted loss per share exclude the effect of the following stockoptions and warrants to purchase additional shares of common stock because theshare increments would not be dilutive.

 

|                                      |   | **Quarter  ended March 31,** |   |
|-------------------------------------------|--------|------------------------------|--------|
|                                      |   | **2004**                     |   | **2003** |   |
|                                      |   |                         |   |   |   |
| Common stock options                      |   | 3,767,322                    |   | 5,185,645 |   |
| Weighted average exercise price per share |   | $                            | 3.84   |   | $ | 3.50 |   |
| Common stock warrants                     |   | 2,387,500                    |   | 890,000 |   |
| Weighted average exercise price per share |   | $                            | 7.74   |   | $ | 9.62 |   |

 

In addition,234,088 shares of common stock that would be issuable upon conversion of theCompany’s Series I preferred stock are not included in the calculation ofdiluted loss per share for the three months ended March 31, 2004 and 2003,respectively, and the 3,150,000 shares of common stock that would be issuableupon conversion of the Company’s Series B preferred stock are not included inthe calculation of diluted loss per share for the three months ended March 31,2004 because the effect of including such shares would not be dilutive.

 

**Note 3. Comprehensive Loss**

 

The Company’scomprehensive loss for the quarters ended March 31, 2004 and 2003 was$4,922,000 and $4,070,000, respectively. The comprehensive loss for the quarters ended March 31, 2004 and 2003consisted of net loss of $4,930,000 and $4,117,000, respectively, and a netunrealized gain (loss) on investment securities of $6,000 and $47,000 for thequarters ended March 31, 2004 and 2003, respectively.

 

**Note 4. Asset Retirement Obligation**

 

The Companyrecorded a $0.2 million cumulative effect of change in accounting principleduring the first three months of 2003 as a result of the Company’s adoption ofSFAS No. 143, Accounting for Asset Retirement Obligations.  Under SFAS No. 143, the Company recorded anasset and liability in the amount of $0.4 million related to the estimated fairvalue of future decommissioning costs associated with the Denton radiopharmaceuticalmanufacturing facility. The real estate and equipment associated with themanufacturing facility for which the

 

7

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decommissioning costs wereestimated were sold in December 2003. The sale of these assets eliminated the future asset retirementobligation as recorded under SFAS 143 as of December 31, 2003.  Accretion of the asset retirement obligationtotaled $16,000 and depreciation expense for the asset retirement asset totaled$13,000 for the three months ended March 31, 2003.

 

**Note 5. Common Stock Private Placement**

 

In February 2004, the Company raised $9.0 million in net proceedsthrough the sale in a private placement (the “2004 Financing”) of 1,845,000shares of common stock.  The new commonshareholders also received five-year warrants to purchase an aggregate of922,500 shares of common stock at $7.00 per share.  The warrants are exercisablebeginning on February 23, 2004 and, thereafter, are exercisable at any timeduring their term.  The warrants containprovisions requiring the adjustment of the exercise price and number of sharesissuable if the Company sells (other than in connection with certain permittedtransactions, such as strategic collaborations and acquisitions approved by theboard of directors) shares of common stock at a price lower than thethen-current exercise price of the warrants. The warrants are redeemable at theelection of the Company at any time after March 24, 2006, if thevolume-weighted average price of the underlying Common Stock for each tradingday over a period of 20 consecutive trading days is equal to or greater than$10.50 per share, subject to adjustment. The 1,845,000 shares of common stock issued in the 2004Financing, and the shares of common stock issuable upon exercise of thewarrants related thereto, have been registered with the SEC.

 

**Note 6. Liquidity**

 

The Companywill need to raise additional capital to fund its Skeletal TargetedRadiotherapy (STRTM) phase III clinical trial, development of its newly acquiredplatinum-based compound, NX 473 (see Note 7), and future operating cashneeds.  In April 2003 the Companyreceived $10 million from the sale to Boston Scientific Corporation of certainnon-core NeoRx intellectual property and the grant to Boston ScientificCorporation of certain license rights. In December 2003 the Company raised approximately $14.6 million in netproceeds through the sale in a private placement of shares of a newly createdclass of Series B Convertible Preferred Stock (Series B Preferred Stock), whichare convertible, at a price of $5.00 per share, into 3,150,000 shares of commonstock, and warrants to purchase an aggregate of 630,000 common shares at $6.00per share.  The Company raisedapproximately $9.0 million in net proceeds from the sale of common stock andwarrants in a private placement transaction in February 2004.  The Company intends to use the net proceedsfrom these financings for general working capital and to support its STR phaseIII pivotal trial.  With the proceeds ofthese offerings, the Company believes that its present cash, cash equivalents,investment securities and expected interest income will be sufficient to fundits anticipated working capital and capital requirements with respect to itsSTR phase III program at least through the second quarter of 2005.  The Company will require additional fundsfor its NX 473 clinical program, which currently is expected to begin in thefirst half of 2005.  In the event thatsufficient additional funds are not obtained, the Company may be required todelay, reduce or curtail the scope of its NX 473 clinical program andother product development efforts.

 

During 2002, the Company discontinued all Pretarget® clinical andresearch activities, reduced staffing by 67% and terminated, effective in April2003, the lease for its facilities at 410 West Harrison Street in Seattle.  PretargetÒtechnology is a development platform for targeted immunotherapeutics thatdeliver intense doses of anti-cancer agents to tumor cells while largelysparing healthy tissues.  Since discontinuationof the Pretarget program, the Company actively had sought, both throughtargeted inquires and a broad-based auction process, a buyer or licensee forthe technology.  In April 2004 theCompany, in a negotiated arms-length transaction, sold the Pretarget patentportfolio to Aletheon Pharmaceuticals, Inc., a start-up company founded by twoformer Company employees.  The Companydid not receive cash at the time of sale to Aletheon. The Company could receiveup to $6.6 million in milestone payments if Aletheon achieves certaindevelopment goals, plus royalties on potential future product sales.  The sale of the Pretarget intellectualproperty relieves the Company from the annual costs of maintaining thePretarget patent estate.  During 2003the Company spent approximately $350,000 for the prosecution and maintenance ofthe Pretarget patents and trademarks. For 2004, these costs were expected to be in the range of $200,000 to$600,000.  See Note 7 below foradditional information about the Pretarget transaction.

 

In connection with its 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, the Company assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  The interest rate on the loan was 4.00% onMarch 31, 2004.  The interest rate,which is equal to the bank prime rate

 

8

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and which is adjusted on thesame date that the bank prime rate changes, was 4.00% at April 27, 2004.  The loan provides for a maximum annualinterest rate of 18%.  Principal and interestare payable in monthly installments. Principal and interest paid on the note during the quarters ended March31, 2004 and 2003 totaled $139,000 and $184,000, respectively. InDecember 2003, the Company sold a non-essential portion of its Dentonfacility, the proceeds of which ($827,000) were applied to reduce the outstandingbalance on the loan.  As of March 31,2004 the outstanding balance of the loan was $4,405,000. The fixed monthlypayments on the note are recalculated in April of each year based on the thencurrent bank prime interest rate and outstanding note balance.  Thebank prime interest rate of 4.00% was in effect on the payment recalculationdate in April 2004, resulting in an estimated total fixed payment obligation in2004, reflecting both principal and interest, of $486,000.

 

During2002 and early 2003, the Company reduced the staff at the Denton facility tofour employees and operated the facility in standby mode.   In the second half of 2003, the Companyre-staffed the facility in preparation for resumption of manufacturingactivities in the first quarter of 2004. The terms of the Texas State Bank loan provide that an event of defaultmay be deemed to occur if the Company abandons, vacates or discontinuesoperations on a substantial portion of the Denton facility or there is amaterial adverse change in the Company’s operations. The Company does notbelieve that operating the facility in standby mode during 2002 and early 2003violated these provisions, nor has Texas State Bank suggested that it viewssuch activities as a potential violation. The Company can provide no assurance,however, that Texas State Bank will not at some time in the future seek to relyon these or other provisions of the loan to declare the Company in default of the loan. If this wereto occur, Texas State Bank could declare the entire outstanding amount of theloan ($4,405,000 at March 31, 2004) due and immediately payable. In suchcase, the Company’s cash resources and assets could be impaired depending onits ability to raise funds through a sale of the Denton facility and other means.Based on a November 2002 appraisal of the Denton facility, the fair valueof the facility and its assets exceeds the amount of the outstanding debt.

 

The Company may seek to raise capital throughadditional sales of equity and/or debt securities or the establishment of otherfunding mechanisms. The Company isseeking to form a strategic partnership for STR development andcommercialization in Europe and possibly in the U.S.  The Company also may address its need foradditional capital by pursuing opportunities for the licensing, sale ordivestiture of certain non-core intellectual property and other assets.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction or curtailment ofits product development activities and/or further reduction of costs forfacilities and administration.

 

The Company’s actual capital requirements will depend upon numerousfactors, including:

 

•                  the rate ofprogress and costs of its clinical trial and research and developmentactivities, including costs and availability of clinical materials fromthird-party suppliers, and the Company’s ability to manufacture STR in a timelyand cost-effective manner;

 

•                  actions taken bythe US Food and Drug Administration (FDA) and other regulatory authorities;

 

•                  the scope andtiming of its NX 473 clinical program;

 

•                  the costs ofdiscontinuing projects and technologies or decommissioning existing facilities,if the Company undertakes those activities;

 

•                  the timing andamount of milestone or other payments the Company might receive from potentialstrategic partners or from potential licenses;

 

•                  the Company’sdegree of success in commercializing its STR product candidate and other cancertherapy product candidates;

 

•                  the emergence ofcompeting technologies and products, and other adverse market developments; and

 

•                  the costs ofpreparing, filing, prosecuting, maintaining and enforcing patent claims andother intellectual property rights.

 

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There can beno assurance that the Company will be able to obtain needed additional capitalor enter into relationships with corporate partners on a timely basis, onfavorable terms, or at all.  Conditionsin the capital markets in general and the life science capital marketspecifically may affect the Company’s potential financing sources andopportunities for strategic partnering.

 

**Note 7. Subsequent Events**

 

In April 2004,the Company acquired from AnorMED, Inc., the worldwide exclusive rights,excluding Japan, to develop, manufacture and commercialize NX 473, aplatinum-based anti-cancer agent.  Underthe terms of the agreement, the Company paid AnorMED a one-time upfrontmilestone payment of $1 million in NeoRx common stock and $1 million incash.  The agreement also provides foradditional milestone payments to AnorMED of up to $13 million, payable in cashor a combination of cash and NeoRx common stock.  Upon regulatory approval, AnorMED would receive royalty paymentsof up to 15% on product sales.  Underthe agreement, the Company acquired an exclusive license, under a portfolio ofissued patents and patent applications, to develop, manufacture andcommercialize NX 473.  The patentportfolio relates to composition of matter, formulations and methods of use ofNX 473 and related analogs and compounds, and includes issued patents andpatent applications in the United States and abroad.  The agreement also exclusively licenses to the Company certainknow-how pertaining to NX 473, including clinical and manufacturing data,regulatory submissions, and related information.  Also under the agreement, AnorMED will transfer to the Company aninventory of bulk NX 473 drug substance suitable for use in clinicalstudies.

 

Also in April2004, the Company sold to Aletheon Pharmaceuticals, Inc. the Company’sPretarget® intellectual property.  Underthe agreement, the Company could receive up to $6.6 million in milestonepayments if Aletheon achieves certain development goals, plus royalties onpotential future product sales.  The Company did notreceive cash at the time of sale to Aletheon. The Pretarget intellectual property that the Company transferred toAletheon under the agreement includes a portfolio of United States and foreignissued patents and patent applications, and trademark registrations andapplications.  The sale of the Pretargetintellectual property relieves the Company from the significant annual costs ofmaintaining the Pretarget patent estate. Seattle-based Aletheon is adevelopment stage biotherapeutics company founded by two former Companyemployees.  The timing and amount ofmilestone payments, if any, are uncertain. The terms of the transaction were determined through arms-lengthnegotiation.  Neither the Company norany affiliate of the Company, including Bay City Capital LLC and itsaffiliates, at any time has held, or in the future plans to acquire, a financialinterest in Aletheon.  As described inNote 6 above, the Company discontinued its Pretarget clinical studies in July2002.

 

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

 

This Form 10-Qcontains forward-looking statements. These statements relate to future eventsor future financial performance. In some cases, you can 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 otherterminology.  These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors describedbelow in the section entitled “Additional factors that may affect results.”These factors may cause our actual results to differ materially from anyforward-looking statement.

 

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

 

NeoRx and STRare our trademarks or registered trademarks in the United States and/or foreigncountries.  Pretarget® is a trademark ofAletheon Pharmaceuticals, Inc. in the United States and/or foreign countries.

 

***Critical AccountingPolicies and Estimates***

 

Our critical accounting policies andestimates have not changed from those reported in our Annual Report on Form10-K for the year ended December 31, 2003. For a more complete description, please refer to our Annual Report onForm 10-K.

 

***Quarter ended March31, 2004 compared to quarter ended March 31, 2003***

** **

Revenue for the first quarter of 2004 was $0.5 million, compared with$0.1 million for the first quarter of 2003. Revenue for the first quarter of 2004 consisted of revenue from amilestone payment from Boston Scientific Corporation.  Revenue for the first quarter 2003 consisted of revenue from afacilities lease agreement.

 

Totaloperating expenses for the first quarter of 2004 increased 35% to $5.5 millionfrom $4.1 million for the first quarter of 2003.

 

Research anddevelopment (R&D) expenses increased 44% to $3.8 million for the firstquarter of 2004 from $2.6 million for the first quarter of 2003.  The increase in R&D expenses for thefirst quarter of 2004 was due to costs associated with preparing for theopening of the STR phase III trial, including a $0.2 million increase inconsulting expenses and a $0.1 million increase in travel expenses.  Also, increased costs of $0.7 million wereincurred at our Denton, Texas facility for preparation and validation of STRmanufacturing activities.

 

General andadministrative expenses (G&A) increased 17% to $1.7 million for the firstquarter of 2004, compared with $1.4 million for the first quarter of 2003.  Increases in G&A costs for the firstquarter of 2004 were primarily due to a $0.2 million increase in personnelcosts.

 

Cash andinvestment securities as of March 31, 2004 were $31.9 million, compared with$27.5 million at December 31, 2003.  TheCompany currently believes that its existing cash and investment securitieswill be sufficient to fund its anticipated working capital and capitalrequirements with respect to its STR phase III program at least through thesecond quarter of 2005.  The Companywill require additional funds for its NX 473 clinical program, which currentlyis expected to begin in the first half of 2005.  In the event that sufficient additional funds are not obtained,the Company may be required to delay, reduce or curtail the scope of itsNX 473 clinical program and other product development efforts.

 

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***Major Research and Development Projects***

 

Our major research and development projectsduring the fiscal quarters ended March 31, 2004 and 2003 were Skeletal TargetedRadiotherapy(STRTM) and Pretarget® technology.

 

Skeletal TargetedRadiotherapy.  We are developing STR forthe treatment of multiple myeloma, a cancer originating in the bonemarrow.  STR is designed to deliverradiation specifically to sites of cancer in the bone and bone marrow.  STR consists of a bone-seeking moleculecalled DOTMP, which deposits the radioactive substance, holmium-166, in theskeleton.  We have incurred costsof approximately $48.3 million in connection with the STR program since theprogram’s inception in 1998.

 

In October 2003, we reached agreementwith the FDA on our STR phase III clinical trial design. This agreement, calleda Special Protocol Assessment, establishes the number of patients to be studiedand how and when the drug’s safety and effectiveness will be determined. At thesame time, the FDA confirmed that a single phase III trial is sufficient toobtain marketing approval for STR, provided that the drug is shown to be safeand effective in the trial.  Althoughthe FDA has agreed to accept complete response as a surrogate endpoint forefficacy in the phase III trial, we are required to follow the phase IIIpatients for survival as our phase IV commitment.

 

We opened thephase III trial of STR to patient enrollment in March 2004.  We ultimately plan to conduct the STR phaseIII trial at as many as 40 clinical sites in the US and Canada.  To accomplish this goal, we have prioritizedthe list of prospective sites into tiers according to their readiness,experience and projected rate of patient accrual, and intend to open them on arolling basis.  Presently, we haveopened four sites, and expect at least two more sites to open in late May2004.  Although we have not yet treatedour first patient, a number of potential patients currently are undergoingscreening and stem cell mobilization. Assuming successful completion of thephase III trial, we believe that we are on track to reach our goal of filing inmid-2007 a New Drug Application (NDA) for the treatment of multiple myeloma.

 

Totalestimated costs to complete the STR clinical trial and potentially obtainmarketing approval are in the range of $35-40 million.  These costs could be substantially higher ifwe have to repeat, revise or expand the scope of our trials, or conductadditional clinical trials not presently planned, to secure marketingapprovals.

 

Material cash inflows relating to our STR development will not commenceuntil after marketing approvals are obtained, if they are obtained, and thenonly if STR finds acceptance in the marketplace. To date, we have not receivedany revenues from product sales of STR.

 

The risks and uncertainties associated with completing the developmentof STR on schedule, or at all, include the following, as well as other riskfactors described in this report:

 

•                  STR may not beshown to be safe and efficacious in the phase III trial;

 

•                  We may be unableto obtain regulatory approval of the drug or may be unable to obtain suchapproval on a timely basis;

 

•                  We may be unableto continue to manufacture or otherwise secure adequate supplies of STR inorder to complete the phase III clinical trial and initiate commercial launchupon approval;

 

•                  We may be unableto recruit enough patients to complete the phase III trial in a timely manner;and

 

•                  We may not haveadequate funds to complete the development of STR.

 

If we fail to obtain marketing approval for STR, are unable to secureadequate clinical and commercial supplies of STR, or do not completedevelopment and obtain regulatory approval on a timely basis, our operations,financial position and liquidity could be severely impaired, including asfollows:

 

•                  We would notearn any sales revenue from STR, which would increase the likelihood that wewould need to obtain additional financing for our other development efforts;and

 

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•                  Our reputationamong investors might be harmed, which could make it more difficult for us toobtain equity capital on attractive terms or at all.

 

Because of the many risks and uncertainties relating to the completionof clinical trials, receipt of marketing approvals and acceptance in themarketplace, we cannot predict the period in which material cash inflows fromour STR program will commence, if ever.

Our development administration overhead costs, consisting of rent,utilities, consulting fees, patent costs and other various overhead costs, areincluded in total research and development expense for each period, but are notallocated among our various projects. Our total development costs include the costs of various other researchefforts directed toward the identification of future product candidates.  These other research projects arepre-clinical and not considered major projects.  Our total research and development costs are summarized below:

 

|                                 |   | **Quarter  Ended March 31** |   |
|--------------------------------------|--------|-----------------------------|--------|
|                                 |   | **2004**                    |   | **2003** |   |
|                                 |   |                        |   |   |   |
| STR                                  |   | $                           | 3,047  |   | $ | 1,705 |   |
| Other overhead and research costs    |   | 735                         |   | 916 |   |
|                                 |   |                        |   |   |   |
| Total research and development costs |   | $                           | 3,782  |   | $ | 2,621 |   |

 

***Liquidity and capital resources***

 

The Company has financed its operations primarily through the sale ofequity securities, technology licensing, collaborative agreements and debtinstruments.  We invest excess cash ininvestment securities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $31,918,000 at March 31, 2004 compared to $27,501,000 atDecember 31, 2003.  We primarily fundcurrent operations with our existing cash and investments.  Cash used by operating activities for the three months ended March31, 2004 totaled $4,686,000.  Revenuesand other income sources for the first quarter of 2004 were not sufficient tocover operating expenses.

 

In 2000, we established a line of credit with Pharmaceutical ProductDevelopment, Inc. (PPD) of up to $5.0 million to assist in funding the pivotalphase III trial of our STR product candidate. The line, which carried an annualinterest rate of 16%, expired in February 2004.  No funds were drawn against the line through the date oftermination.

 

On April 17,2003, we entered into agreements with Boston Scientific Corporation relating tothe sale to Boston Scientific of certain non-core intellectual property and thegrant to Boston Scientific of certain license rights.  Under the first agreement, we assigned to Boston Scientificcertain intellectual property in exchange for a cash payment of $9million.  The intellectual propertyassigned to Boston Scientific included a portfolio of NeoRx patents and patentapplications in the cardiovascular field. Under a second agreement, we grantedto Boston Scientific an exclusive license to use certain other NeoRxintellectual property, for which we received a one-time cash payment of $1million.  The exclusive license grantsBoston Scientific the right to use, in certain medical device fields, aseparate portfolio of NeoRx patents and patent applications resulting from ourcollaboration with University of Cambridge investigators.

 

In October2003 we announced that we had reached agreement with the FDA, under the SpecialProtocol Assessment (SPA) process, on the design of the phase III clinicaltrial for STR.  We also confirmed withthe FDA that a single phase III study is sufficient for registration of STR,provided that the drug is shown to be safe and effective in the trial.  The phase III trial planned under the SPAwill be a randomized, controlled study of STR in patients with primaryrefractory multiple myeloma.  The trialis expected to enroll approximately 240 evaluable patients.    The FDA accepted complete response at sixmonths post-transplant as a surrogate endpoint for efficacy in

 

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the phase III trial.   Acceptance of a surrogate endpoint placesSTR on the Accelerated Approval path. We are required to follow the phase III patients for survival as ourphase IV (post-marketing) commitment. Total estimated costs to complete the STR clinical trial and potentiallyobtain marketing approval are in the range of $35-40 million, including thecost of clinical drug supply.

 

In December 2003, we raised approximately $14.6 million in net proceedsthrough the sale in a private placement of shares of a newly created class ofSeries B Convertible Preferred Stock, which are convertible, at a price of$5.00 per share, into 3,150,000 shares of common stock, and warrants topurchase an aggregate of 630,000 common shares at $6.00 per share.  Additionally, we raised approximately $9.0million in net proceeds from the sale of common stock and warrants in a privateplacement transaction in February 2004. We intend to use the net proceeds from these financings for generalworking capital and to support our phase III pivotal trial.  With the proceeds of these offerings, webelieve that our present cash, cash equivalents, investment securities andexpected interest income will be sufficient to fund our anticipated workingcapital and capital requirements with respect to our STR phase III program atleast through the second quarter of 2005. We will require additional funds for our NX 473 clinical program, whichcurrently is expected to begin in the first half of 2005.  In the event that sufficient additionalfunds are not obtained, we may be required to delay, reduce or curtail thescope of our NX 473 clinical program and other product developmentefforts.

 

In connection with our 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, we assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  The interest rate on the loan was 4.00% onMarch 31, 2004.  The interest rate,which is equal to the bank prime rate, is adjusted on the same date that thebank prime rate changes.  The loanprovides for a maximum annual interest rate of 18%.  Principal and interest are payable in monthly installments.  Principal and interest paid on the noteduring the first quarter of 2004 totaled $139,000.  In December 2003, we sold a non-essential portion of ourDenton facility, the proceeds of which ($827,000) were applied to reduce theoutstanding balance on the loan. As of March 31, 2004, the outstandingbalance of the loan was $4,405,000. The fixed monthly payments on the note arerecalculated in April of each year based on the then current bank primeinterest rate and outstanding note balance. The bank prime interest rate of4.00% was in effect on the payment recalculation date in April 2004, resultingin an estimated total fixed payment obligation in 2004, reflecting bothprincipal and interest, of $486,000.

 

During2002 and early 2003, we reduced the staff at the Denton facility to fouremployees and operated the facility in standby mode.  In the second half of 2003, we re-staffed thefacility in preparation for resumption of manufacturing activities in the firstquarter of 2004.  The terms of the Texas State Bank loanprovide that an event of default may be deemed to occur if we abandon, vacateor discontinue operations on a substantial portion of the Denton facility orthere is a material adverse change in our operations.  We donot believe that operating the facility in standby mode during 2002 and early2003 violated these provisions, nor has Texas State Bank suggested that itviews such activities as a potential violation.  Wecan provide no assurance, however, that Texas State Bank will not some time inthe future seek to rely on these or other provisions of the loan to declare usin default of the loan.  If this were to occur, Texas State Bank coulddeclare the entire outstanding amount of the loan ($4,405,000 at March 31,2004) due and immediately payable. In such case, our cash resources and assetscould be impaired depending on our ability to raise funds through a sale of theDenton facility and other means.  Based on aNovember 2002 appraisal of the Denton facility, the fair value of thefacility and its assets exceeds the amount of the outstanding debt.

 

In April 2004,we acquired from AnorMED, Inc. the worldwide exclusive rights, excluding Japan,to develop, manufacture and commercialize NX 473, a platinum-based anti-canceragent.  Under the terms of theagreement, we paid AnorMED a one-time upfront milestone payment of $1 millionin our common stock and $1 million in cash. The agreement also provides for additional milestone payments to AnorMEDof up to $13 million, payable in cash or a combination of cash and our commonstock.  Upon regulatory approval,AnorMED would receive royalty payments of up to 15% on product sales.  In phase II trials conducted by the priorlicensee of the compound, NX 473 has been shown to be active in a variety ofcancers, including ovarian cancer and prostate cancer.  NX 473 also exhibits the potential to beavailable in both oral and intravenous formulations. We are currentlyevaluating our clinical strategy with respect to NX 473, but expect that ourclinical program will include additional phase II testing prior to beginningphase III testing.  The timing and scopeof those trials, as yet undetermined, will depend in part on our ability tosecure a contractor to fill and finish bulk drug substance and our ability toraise capital.  We are currently havingfill-and finish of the intravenous formulation of the drug performed by acontract manufacturer.  We expect thedrug to be available for clinical studies in the first quarter of 2005.

 

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Also in April2004, we sold and transferred to Aletheon Pharmaceuticals, Inc. our Pretarget®intellectual property.  Under theagreement, we could receive up to $6.6 million in milestone payments ifAletheon achieves certain development goals, plus royalties on potential futureproduct sales.  We did not receive anyupfront consideration for the sale of the Pretarget property.  We discontinued our clinical studies usingthe Pretarget technology in July 2002, and since that time, had been activelyseeking, both through targeted inquiries and a broad-based auction process, abuyer or licensee for the technology. The sale of the Pretarget intellectual property relieves us of theannual costs associated with maintaining the Pretarget patent estate.  During 2003, the Company spent approximately$350,000 for the prosecution and maintenance of the Pretarget patents andtrademarks.  For 2004, these costs wereexpected to be in the range of $200,000 to $600,000.  Seattle-based Aletheon is a development stage biotherapeuticscompany founded by two former NeoRx employees. The timing and amount of milestone payments, if any, are uncertain.  The terms of the transaction were determinedthrough arms-length negotiation. Neither the Company nor any affiliate of the Company, including Bay CityCapital LLC and its affiliates, at any time has held, or in the future plans toacquire, a financial interest in Aletheon.

 

We will need to raise additional capital to fund our STR phase IIIclinical trial, development of our newly-acquired platinum-based compound, NX473, and future operating cash needs. We may seek to raise capital through the sale of equity and/or debtsecurities or the development of other funding mechanisms. We are seeking to form a strategic partnership forSTR development and commercialization in Europe and possibly in the US.  We may also address our need for additionalcapital by pursuing opportunities for the licensing, sale or divestiture ofcertain non-core intellectual property and other assets  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, we planto reduce expenses through the delay, reduction or curtailment of our productdevelopment activities and/or further reduction of costs for facilities andadministration.

 

Our actual capital requirements will depend upon numerous factors,including:

 

•                  the rate ofprogress and costs of our clinical trial and research and developmentactivities, including costs and availability of clinical material fromthird-party suppliers, and our ability to manufacture STR in a timely andcost-effective manner;

 

•                  actions taken bythe FDA and other regulatory authorities;

 

•                  the scope andtiming of our NX 473 clinical program;

 

•                  the costs ofdiscontinuing projects and technologies or decommissioning existing facilities,if we undertake those activities;

 

•                  the timing andamount of milestone or other payments we might receive from potential strategicpartners or from potential licenses;

 

•                  our degree ofsuccess in commercializing STR and other cancer therapy product candidates;

 

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

 

•                  the costs of preparing, filing,prosecuting, maintaining and enforcing patent claims and other intellectualproperty rights.

 

There can be no assurance that we will be able to obtain neededadditional capital or enter into relationships with corporate partners on atimely basis, on favorable terms, or at all. Conditions in the capital markets in general, and the life sciencecapital market specifically, may affect our potential financing sources andopportunities for strategic partnering. Our financial statements are prepared on a going concern basis; however,if we are forced to liquidate our assets, we may not be able to recover the carryingamount of such assets.

 

***Related party transactions***

 

The Company’s ViceChairman of the Board of Directors, Dr. Frederick Craves, is a founder andcurrent chairman of the board of Bay City Capital, LLC, also known as BCC, amerchant bank focused on the life sciences industry.  Carl Goldfischer, a Company director, also is a managing directorof BCC.  NeoRx’s Chief Executive

 

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Officer (until retirement on May 11, 2004) and Chairman of the Board ofDirectors (until retirement on May 18, 2004), Jack Bowman, is on the businessadvisory board of BCC.  The Company andBCC entered into an agreement whereby BCC acted as the Company’s advisor forthe purpose of identifying opportunities to enter into strategic alliances andprovided assistance relating to structuring and negotiating such transaction.The Company paid a retainer fee of $26,667 for the first quarter of 2003 and$25,000 for each quarter thereafter to the end of 2003. Retainerfee expenses under this agreement totaled $101,667.  The agreement also included a percentage of gross value of cash,securities, property or other consideration derived from a transaction, rangingfrom one to five percent, depending on the ultimate amount of consideration raised.  BCC agreed to exclude the Boston ScientificCorporation sale and assignment of intellectual property from this provision oftheir agreement with the Company, and, therefore, received no commission orother compensation related to the Boston Scientific transaction.  This agreement expired December 31,2003, and the Company has elected not to renew it.  The Company believes that the fees associated with this contractare equivalent to market prices for similar service at independent investmentbanks.

 

In connection with consulting services performed in 2003, Dr. Paul G.Abrams, a former Chief Executive Officer of the Company, received consultingfees of approximately $76,600 for the quarter ended March 31, 2003.  This agreement terminated on July 31, 2003.

 

In connection with consulting services performed in 2003, Becky JBottino, former Senior Vice President of Technical Operations, receivedconsulting fees of approximately $35,000 for the quarter ended March 31,2003.  This agreement terminated on September15, 2003.

 

In connection with consulting services performed in 2003, Richard L.Anderson, former Senior Vice President, Chief Financial Officer and Secretary,received consulting fees of approximately $64,000 for the quarter ended March31, 2003.  This agreement terminated onOctober 7, 2003.

 

On June 26, 2003, the compensation committee approved, effective withthe resignation of Douglass B. Given as our President and Chief ExecutiveOfficer on June 30, 2003, the accelerated vesting of all outstanding stockoptions granted by the Company to Dr. Given. These options are exercisableuntil June 30, 2004.

 

***Additional factorsthat may affect results***

 

Inaddition to the other information contained in this report, you shouldcarefully read and consider the following risk factors before purchasing ourcommon stock. Each of theserisks could harm our business,******operating results and financialcondition, as well as decrease the value of an investment in our stock.  An investment in NeoRx securities involves ahigh degree of risk.

 

**Risks Related to Our Business**

 

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

 

Wehave not been profitable since our formation in 1984. As of March 31,2004, we had an accumulated deficit of $219.5 million. Our net loss forthe quarter ended March 31, 2004 was $4.9 million.  We had net losses of $5.1 million for the year ended December 31,2003, $23.1 million for the year ended December 31, 2002, and$23.8 million for the year ended December 31, 2001. These losses haveresulted principally from costs incurred in our research and developmentprograms and from our general and administrative activities. To date, we havebeen engaged only in research and development activities and have not generatedany significant revenues from product sales. We do not anticipate that ourproposed STRTM (Skeletal Targeted Radiotherapy) product will be commerciallyavailable for several years, if at all. We expect to incur additional operatinglosses in the future. These losses may increase significantly if we expandclinical development, manufacturing and commercialization efforts.

 

Ourability to achieve long-term profitability is dependent upon obtainingregulatory approvals for our STR product candidate and any other proposedproducts and successfully commercializing our products alone or with thirdparties.

 

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

 

Itis expensive to develop cancer therapy products and conduct clinical trials forthese products. Total estimated costs to complete the STR clinical trial andpotentially obtain marketing approval are in the range of $35-40 million,including the cost of clinical drug supply. Although we currently are focusingon our STR product candidate for multiple myeloma, we plan in the future tosimultaneously conduct clinical trials and preclinical research for a number ofdifferent indications and cancer therapy products, which is costly. Our futurerevenues may not be sufficient to support the expense of our operations and theconduct of our clinical trials and preclinical research. We will need to raiseadditional capital to:

 

•                  fund operations;

 

•                  continue research and development of STR andany other product candidates;

 

•                  commercialize STR or any other proposedproducts; and

 

•                  develop and implement a clinical program forour newly-acquired NX 473 platinum compound.

 

Webelieve that our available cash and investment securities will be sufficient tofund our anticipated working capital and capital requirements with respect toour STR phase III program at least through the second quarter of 2005.  We will require additional funds for our NX473 clinical program, which currently is expected to begin in the first half of2005.  In the event that sufficientadditional funds are not obtained, we may be required to delay, reduce orcurtail the scope of our NX 473 clinical program and other productdevelopment efforts.

 

Wemay seek to raise capital through the sale of equity and/or debt securities orthe development of other funding mechanisms. We are seeking to form astrategic partnership for STR development and commercialization in Europe andpossibly in the U.S. We also may address our need for additional capital bypursuing opportunities for the licensing, sale or divestiture of certainnon-core intellectual property and other assets. The amount of additionalfinancing we need will depend on a number of factors, including the following:

 

•                  the rate of progress and costs of our clinicaltrial and research and development activities, including costs and availabilityof clinical materials from third-party suppliers, and our ability tomanufacture STR in a timely and cost-effective manner;

 

•                  actions taken by the FDA and other regulatoryauthorities;

 

•                  the scope and timing our NX 473 clinicalprogram;

 

•                  the costs of discontinuing projects andtechnologies or decommissioning existing facilities, if we undertake thoseactivities;

 

•                  the timing and amount of milestone or otherpayments we might receive from potential strategic partners or from potentiallicenses;

 

•                  our degree of success in commercializing ourSTR product candidate and other cancer therapy product candidates;

 

•                  the emergence of competing technologies andproducts and other adverse market developments; and

 

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

 

Wemay not be able to obtain additional financing on a timely basis, on favorableterms, or at all. If we are unable to raise additional funds when we need them,we may be required to delay, reduce or eliminate some or all of our developmentprograms and some or all of our clinical trials. For example, inJuly 2002, in order to preserve limited resources, we curtailed ourPretarget product development program. The discontinued Pretarget activitiesincluded our Pretarget® Lymphoma and Pretarget® Carcinoma phase I/II clinicalstudies and manufacturing development activities associated with the Pretargetprograms. At the time of program termination, we had completed phase I safetystudies for Pretarget Lymphoma in patients with non-Hodgkin’s lymphoma and forPretarget Carcinoma in patients with gastrointestinal adenocarcinoma. We may inthe future be forced by cost

 

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considerations and limited access to fundingto, as occurred with the Pretarget program, discontinue development and testingof product candidates in which we have invested considerable time and money.Additionally, we may be forced to partner with third parties to develop orcommercialize products or technologies that we otherwise would have sought todevelop independently. Such relationships may not be on terms as commerciallyfavorable to us as might otherwise be the case. If we raise additional funds byissuing common stock or securities convertible into or exercisable for commonstock, further dilution to shareholders may result, and new investors couldhave rights superior to current security holders.

 

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

 

Themanufacture and marketing of our proposed STR product and our research anddevelopment activities are subject to regulation for safety, efficacy andquality by the FDA in the United States and comparable authorities in othercountries.

 

Theprocess of obtaining FDA and other required regulatory approvals, includingforeign approvals, is expensive, often takes many years and can varysubstantially depending on the type, complexity and novelty of the products involved.Our STR product candidate is novel; therefore, regulatory agencies lack directexperience with it. This may lengthen the regulatory review process, increaseour development costs and delay or prevent commercialization of our STR productcandidate.

 

InOctober 2000, the FDA placed all of our clinical trials of STR on clinicalhold because of a serious toxicity that developed in about 10% of patientstreated with STR on our STR phase I/II trials in multiple myeloma. Thistoxicity, which is called thrombotic thrombocytopenic purpura/hemolytic uremicsyndrome (TTP/HUS), emerged six to 13 months after treatment. As acondition to lifting the clinical hold, the FDA requested that we collectadditional data from a small number of multiple myeloma patients to validatethe patient-specific dosing method we used in earlier studies of STR and whichwe proposed to use in our planned pivotal trial program. In addition, the FDAasked us to quantify the exposure of certain organs, including the kidney, thebone and the bone marrow, to radiation from STR. Quantification of the exposureof internal organs to radiation is called dosimetry. The dosimetry study alsoused an adjusted radiation dosage and a revised administration regimen. Wesubmitted data from our dosimetry study to the FDA in February 2003, alongwith a proposal for further clinical development of STR in patients withprimary refractory myeloma (myeloma that has not been responsive toconventional first-line chemotherapy), using a revised dosing method. The FDAlifted the clinical hold in April 2003.

 

TTP/HUSis a syndrome that sometimes occurs in patients conditioned for bone marrowtransplant with total body irradiation. It is believed to be caused, at leastin part, by radiation injury to the kidneys. Of the seven patients whodeveloped TTP/HUS believed to be related to treatment with STR, two were aliveat last follow-up in 2003. Three patients died with disease progression, makingit difficult to determine the cause of death, and two patients died withoutdisease progression, suggesting that TTP/HUS may have been a cause of death.Our studies indicated that the occurrence of drug-related TTP/HUS in the phaseI/II trials was dependent on the dose of STR administered. The lowest dose atwhich drug-related TTP/HUS occurred was 938 mCi/m2. In the phase III trial, the dose of STR has been reduced to 750 mCi/m2. No cases of drug-related TTP/HUS have been seen among the ten patientstreated in the phase I/II studies at comparable doses of STR.

 

Nocancer product using our technologies has been approved for marketing.Consequently, there is no precedent for the successful commercialization ofproducts based on our technologies. In addition, we have had only limitedexperience in filing and pursuing applications necessary to gain regulatoryapprovals. This may impede our ability to obtain timely approvals from the FDAor foreign regulatory agencies. We will not be able to commercialize our STRproduct candidate until we obtain regulatory approval, and consequently anydelay in obtaining, or inability to obtain, regulatory approval could harm ourbusiness.

 

Ifwe violate regulatory requirements at any stage, whether before or aftermarketing approval is obtained, we may be fined, forced to remove a productfrom the market or experience other adverse consequences, including delay,which could materially harm our financial results. Additionally, we may not beable to obtain the labeling claims necessary or desirable for productpromotion. In addition, if we or other parties identify serious side effectsafter any of our products are on the market, or if manufacturing problemsoccur, regulatory approval may be withdrawn and reformulation of our products,additional clinical trials, changes in labeling of our products, and/oradditional marketing applications may be required.

 

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Therequirements governing the conduct of clinical trials and manufacturing andmarketing of our proposed STR product outside the United States vary widelyfrom country to country. Foreign approvals may take longer to obtain than FDAapprovals and can involve additional testing. Foreign regulatory approvalprocesses include all of the risks associated with the FDA approval processes.Also, approval of a product by the FDA does not ensure approval of the sameproduct by the health authorities of other countries.

 

**We may take longer to complete our clinical trials than weproject, or we may be unable to complete them at all.**

 

Weopened the phase III trial of STR to patient enrollment in March 2004.  We ultimately plan to conduct our STR phaseIII trial at as many as 40 clinical sites in the US and Canada.  To accomplish this goal, we have prioritizedthe list of prospective sites according to their readiness, experience andprojected rate of patient accrual, and intend to open them on a rolling basis.Presently, we have opened four sites and expect at least two more sites to openin late May 2004.  Although we have notyet treated our first patient, a number of potential patients currently areundergoing screening and stem cell mobilization.  We anticipate that the phase III trial will take several years tocomplete and we do not expect to submit a New Drug Application (NDA) beforemid-2007 for the potential approval of STR by the FDA. The actual time tocompletion of our STR phase III clinical trial, however, depends upon numerousfactors, including:

 

•                  our ability to obtain adequate additionalfunding;

 

•                  our receipt of approvals by the FDA and otherregulatory agencies and the timing thereof;

 

•                  other actions by regulators;

 

•                  the rate of progress and costs of our otherclinical trial and research and development activities;

 

•                  our ability to produce sufficient, reliableand affordable supplies of the STR compound for clinical studies, and to accessthird-party supplies of holmium-166, the radioactive substance used in our STRproduct candidate, as well as other materials used in the manufacture of theSTR compound;

 

•                  the costs of maintaining manufacturingoperations;

 

•                  the extent of scheduling conflicts withparticipating clinicians and clinical institutions; and

 

•                  our ability to identify and enroll patientswho meet trial eligibility criteria.

 

Wemay not advance or complete our planned phase III clinical trial for our STRproduct candidate as projected, may not conduct it successfully, or may notcomplete it at all.

 

Wecurrently rely on academic institutions and clinical research organizations toconduct, supervise or monitor some or all aspects of clinical trials involvingour proposed STR product. Further, we are seeking to enter into licenseagreements, partnerships or other collaborative arrangements to supportfinancing, development and commercialization of our STR product candidate inEurope and possibly in the U.S. To the extent that we now or in the futureparticipate in such collaborative arrangements, we will have less control overthe timing, planning and other aspects of our clinical trials. If we fail toadvance or complete, or experience delays in or are forced to curtail ourplanned clinical program, our stock price and our ability to conduct ourbusiness could be harmed.

 

**If testing of a particular productdoes not yield successful results, we will be unable to commercialize thatproduct.**

 

Ourresearch and development programs are designed to test the safety and efficacyof our proposed products in humans through extensive preclinical and clinicaltesting. We may experience numerous unforeseen events during, or as a resultof, the testing process that could delay or prevent commercialization of ourproposed STR product or any other proposed products, including the following:

 

•                  safety and efficacy results obtained in earlyhuman clinical trials may not be indicative of results obtained in laterclinical trials;

 

•                  the results of preclinical studies may beinconclusive, or they may not be indicative of results that will

 

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be obtained in human clinical trials;

 

•                  after reviewing test results, we or anypotential collaborators may abandon projects that we previously believed werepromising;

 

•                  our potential collaborators or regulators maysuspend or terminate clinical trials if the participating subjects or patientsare being exposed to unacceptable health risks; and

 

•                  the effects of our potential products may notbe the desired effects or may include undesirable side effects or othercharacteristics that preclude regulatory approval or limit their commercial useif approved.

 

Clinicaltesting is very expensive, can take many years, and the outcome is uncertain.The data that we may collect from our planned phase III clinical trial may notbe sufficient to support regulatory approval of our proposed STR product. Theclinical trials of our proposed STR product and other proposed products may notbe completed on schedule, and the FDA or foreign regulatory agencies may notultimately approve any of our product candidates for commercial sale. Ourfailure to adequately demonstrate the safety and efficacy of a cancer therapyproduct under development would delay or prevent regulatory approval of theproduct, which would prevent us from marketing the proposed product.

 

**Success in early clinical trials may not be indicative ofresults obtained in later trials.**

 

Results of early preclinical and clinical trials are based on a limitednumber of patients and may, upon review, be revised or negated by authoritiesor by later stage clinical results. Historically, the results from preclinicaltesting and early clinical trials often have not been predictive of resultsobtained in later clinical trials. A number of new drugs and therapeutics haveshown promising results in initial clinical trials, but subsequently failed toestablish sufficient safety and effectiveness data to obtain necessary regulatory approvals. Dataobtained from preclinical and clinical activities are subject to varyinginterpretations, which may delay, limit or prevent regulatory approval.

 

**We are dependent on suppliers for the timely delivery ofmaterials and services and may experience in the future interruptions insupply.**

 

Forour STR product to be successful, we need sufficient, reliable and affordablesupplies of the STR compound for clinical studies. This requires developing andmaintaining reliable and affordable third-party suppliers of commercialquantities of the radioactive substance holmium-166, and the targeting agentDOTMP, used in our STR product candidate. Sources of these materials may belimited, and we, or potential third-party suppliers of the STR compound, may beunable to obtain these materials in amounts and at prices necessary tosuccessfully commercialize our STR product. Timely delivery of the holmium-166component material and of the finished STR compound is critical. For example,holmium-166 loses its effectiveness for treating patients within a short periodof time. As a result, the STR product must be shipped within 24 hours ofits manufacture to the site where the patient is to be treated. Failures ordelays in the manufacturing and shipping processes could compromise the qualityand effectiveness of our product.

 

Thereare, in general, relatively few sources of the holmium-166 component of our STRproduct. Historically, we have depended on a single source vendor, the Universityof Missouri Research Reactor facility group (MURR) located in Columbia,Missouri. In March 2004, we entered into a contract, under which MURR isresponsible for the manufacture, including process qualification, qualitycontrol, packaging and shipping, of holmium-166 for our phase III trail.  Our contract with MURR is for an initialterm of one year, which we may extend for up to two additional years.  The contract may be terminated by eitherparty if the other party breaches the contract and such breach is not cured, ifMURR fails to fulfill our purchase orders on a timely basis, or if anyregulatory authority orders either party to stop manufacturing or usingholmium-166.  Under the contract, we paya fixed price per unit of holmium-166 ordered, subject to certain minimumpurchase requirements, and fixed amounts for handling and maintenance.  While MURR generally has provided usmaterials with acceptable quality, quantity and cost in the past, it may becomeunable or unwilling to meet our future demands, or demands of potentialthird-party suppliers of our STR compound. If MURR or an alternate supplier isunable or unwilling to provide supplies of holmium-166 at a cost and on otherterms acceptable to us, the manufacture and delivery of our STR productcandidate could be impaired, and we may suffer delays in, or be prevented from,initiating or completing further clinical trials of our STR product candidate.

 

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Weobtain DOTMP, the targeting agent for STR, from The Dow Chemical Company, fromwhich we license the STR technology. Because we license the STR technology fromDow, we historically have not felt it necessary to enter into a formal supplyagreement with Dow. We currently have a sufficient supply of DOTMP on hand tocomplete our phase III studies.

 

**Our current debt obligations may restrict our operating andfinancing flexibility and could, in an event of default, impair our cashresources and assets.**

 

In connection with our 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, we assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  The interest rate on the loan was 4.00% onMarch 31, 2004.  The interest rate,which is equal to the bank prime rate, is adjusted on the same date that the bankprime rate changes.  The loan providesfor a maximum annual interest rate of 18%. Principal and interest are payable in monthly installments.  Principal and interest paid on the noteduring the first quarter of 2004 totaled $139,000.  In December 2003, we sold a non-essential portion of ourDenton facility, the proceeds of which ($827,000) were applied to reduce theoutstanding balance on the loan. As of March 31, 2004, the outstandingbalance of the loan was $4,405,000. The fixed monthly payments on the note arerecalculated in April of each year based on the then current bank primeinterest rate and outstanding note balance. The bank prime interest rate of4.00% was in effect on the payment recalculation date in April 2004, resulting in an estimated totalfixed payment obligation in 2004, reflecting both principal and interest, of$486,000.

 

During2002 and early 2003, we reduced the staff at the Denton facility to fouremployees and operated the facility in standby mode. In the second half of2003, we re-staffed the facility in preparation for resumption of manufacturingactivities in the first quarter of 2004. The terms of the Texas State Bank loanprovide that an event of default may be deemed to occur if we abandon, vacateor discontinue operations on a substantial portion of the Denton facility orthere is a material adverse change in our operations. We do not believe thatoperating the facility in standby mode during 2002 and early 2003 violatedthese provisions, nor has Texas State Bank suggested that it views suchactivities as a potential violation. We can provide no assurance, however, thatTexas State Bank will not some time in the future seek to rely on these orother provisions of the loan to declare us in default of the loan. If this wereto occur, Texas State Bank could declare the entire outstanding amount of theloan ($4,405,000 at March 31, 2004) due and immediately payable. In such case,our cash resources and assets could be impaired depending on our ability toraise funds through a sale of the Denton facility and other means. Based on aNovember 2002 appraisal of the Denton facility, the fair value of thefacility and its assets exceeds the amount of the outstanding debt.

 

**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 insignificant part on our ability to attract and maintain collaborative partnersand relationships to support the development, sale, marketing, distribution andmanufacture of STR and any other future product candidates and technologies inthe US and Europe. At present, we have two material collaborativeagreements.  The first is the exclusiveworldwide (except in Australia) license granted to us by The Dow ChemicalCompany for the development and commercial sale of STR. Under that license, weare solely responsible for the development and commercialization of STR. Dowretains the obligation, at its cost, to prosecute patent applications andmaintain, extend and defend all patents. Dow is entitled to certain paymentsunder the license if and when we receive final approval for commercial sale ofSTR in various jurisdictions. After final approval, Dow will be entitled tocertain royalties and milestone payments based on our annual net sales of STRand related products. If we are successful in achieving all milestones underthe Dow agreement, our total milestone payments to Dow would be $8,500,000. Wecannot be certain of the extent of our success, if any, in commercializing STRand attaining established milestones. The license agreement may be terminatedby either party for breach. We can terminate the license at any time upon priorwritten notice to Dow. Dow may terminate the license if we cease to carry onour business as a result of liquidation, bankruptcy or insolvency. If notearlier terminated, the license agreement will continue in effect untilexpiration of all patents licensed under the agreement. We currently anticipatesuch expiration date to be February 3, 2015. Upon expiration of the Dowlicense agreement, we will retain from Dow a fully paid-up license to useunpatented technology related to STR. If Dow 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, ourSTR development efforts and our business could be significantly adverselyaffected.

 

Our second material collaborative agreement is the exclusive worldwide(except Japan) license granted to

 

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us by AnorMED, Inc. for thedevelopment and commercial sale of an anti-cancer platinum compound,NX 473.  Under that license, we aresolely responsible for the development and commercialization of NX 473.AnorMED retains the obligation, at its cost, to prosecute patent applicationsand maintain, extend and defend all patents. The parties executed the license agreement in April 2004, at which timewe paid AnorMED a one-time upfront milestone payment of $1 million in NeoRxcommon stock and $1 million in cash. The agreement also provides for additional milestone payments to AnorMEDof up to $13 million, payable in cash or a combination of cash and NeoRx commonstock. These milestones include our successful completion of an NX 473 phase IIstudy or initiation of an NX 473 phase III study, submission to the FDA ofan NDA for NX 473, regulatory approval from the FDA of NX 473 and theattainment of certain levels of annual net sales of NX 473.  Upon regulatory approval, AnorMED also wouldreceive royalty payments of up to 15% on product sales.  We cannot be certain of the extent of oursuccess, if any, in commercializing NX 473 and attaining establishedmilestones.  The license agreement maybe terminated by either party for breach, if the other party files a petitionin bankruptcy or insolvency or for reorganization, or is dissolved, liquidatedor makes assignment for the benefit of creditors. We can terminate the licenseat any time upon prior written notice to AnorMED. If not earlier terminated,the license agreement will continue in effect, in each country in the territoryin which the licensed product is sold or manufactured, until the earlier of (i)expiration of the last valid claim of a pending or issued patent covering thelicensed product in that country or (ii) a specified number of years afterfirst commercial sale of the licensed product in that country.  We currently are developing a strategy forinitiating our NX 473 clinical program. If AnorMED were to breach its obligations under the license, or if thelicense expires or is terminated and we cannot renew, replace, extend orpreserve our rights under the license agreement, we would be unable to moveforward with our plan to undertake NX 473 clinical studies.

 

Inconnection with our STR product development and manufacturing activities, werely on third-party contractors to perform for us, or assist us with, certainspecialized services, including process support and equipment validation at theDenton facility, drug dispensing and shipping, and clinical trial management.We are not materially dependent on our relationship with any of thesecontractors. However, because these contractors provide specialized services,their activities and quality of performance may be outside our direct control.If these contractors do not perform their obligations in a timely manner, or ifwe encounter difficulties with the quality of services we receive from thesecontractors, we may incur additional costs and delays in our STR phase IIItrial and any other product development activities, which could have a materialnegative effect on our business.

 

Onlyone of our current employees has any experience selling, marketing anddistributing therapeutic products. To the extent we are successful in obtainingapproval for the commercial sale of STR or any other product candidate, we mayneed to secure one or more corporate partners to conduct these activities. Wemay not be able to enter into partnering arrangements in a timely manner or onterms acceptable to us. To the extent that we enter into co-promotion or otherlicensing arrangements, our product revenues are likely to be lower than if wedirectly marketed and sold our products, and any revenues we receive woulddepend upon the efforts of third parties, which efforts may not be successful.If we are not able to secure adequate partnering arrangements, we would have tohire additional employees or consultants with expertise in sales, marketing anddistribution. Employees with relevant skills may not be available to us.Additionally, any increase in the number of employees would increase ourexpense level and could have a material adverse effect on our financialposition.

 

**Any delays in our STR manufacturing operations in Denton, TX,or failure to operate the facility in a cost-effective manner and in accordancewith regulatory requirements, could adversely affect our ability to proceedwith our STR phase III trials on a timely and cost-effective basis.**

 

InApril 2001, we purchased a manufacturing facility and certain other assetslocated in Denton, TX. In addition to the manufacturing facility, we purchasedexisting equipment, documentation and certain processes. The facility isoperated in accordance with current Good Manufacturing Practices (cGMP) and wasissued appropriate radiation permits by the Texas Department of Health. Thismanufacturing facility assumed responsibility for all aspects of themanufacture of the STR compound, including process qualification, qualitycontrol, packaging and shipping, and production of the clinical material forour completed STR dosimetry study. We believe that the Denton facility has thecapabilities and capacity to serve as the principal manufacturing site for theSTR compound for our phase III clinical trial and for potential commercialmanufacture.  We resumed ourmanufacturing activities at the Denton facility in February 2004. Our abilityto continue to utilize the Denton facility as our primary manufacturing sitefor the STR compound in the future will depend on a number of factors,including:

 

•                  actions taken by the FDA and the timingthereof;

 

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•                  our ability to obtain adequate additionalfunding and the timing thereof;

 

•                  our ability to access sufficient, reliable andaffordable third-party supplies of holmium-166;

 

•                  the costs of maintaining manufacturingoperations;

 

•                  our ability to retain qualified personnel; and

 

•                  the availability and cost of potentialthird-party suppliers of STR.

 

Ifin the future we decide to transition the STR production process to athird-party supplier, such third-party supplier could require significantstart-up time to qualify and implement the manufacturing process. In eithercase, our ability to move forward with further STR clinical and commercialdevelopment could be adversely affected and we may incur significant additionalcosts in connection with manufacturing operations. Further, there can be noassurance that manufacturing alternatives would be available on a timely orcost-effective basis.

 

We,or any potential third-party manufacturers, must continuously adhere to cGMPregulations enforced by the FDA through its facilities inspection program. Ifour facilities or the facilities of these manufacturers cannot pass apre-approval plant inspection, the FDA will not grant an NDA for our proposedproducts. In complying with cGMP and foreign regulatory requirements, we andany of our third-party manufacturers will be obligated to expend time, moneyand effort in production, record-keeping and quality control to assure that ourproducts meet applicable specifications and other requirements. If we, or anyof our third-party manufacturers, fail to comply with these requirements, wemay be subject to regulatory action.

 

**We face substantial competition in the development of cancertherapies and may not be able to compete successfully, and our potentialproducts may be rendered obsolete by rapid technological change.**

 

Thecompetition for development of cancer therapies is intense. There are numerouscompetitors developing products to treat the diseases for which we are seekingto develop products. We initially are focusing clinical development of our STRproduct candidate on the treatment of multiple myeloma. Several companies,including Celgene Corp. and Millennium Pharmaceuticals, Inc., also aredeveloping and testing therapeutics for multiple myeloma. In May 2003Millennium obtained FDA approval for its VelcadeTM therapeutic for treatment ofmultiple myeloma patients who have received at least two prior therapies anddemonstrated disease progression on the last therapy. In addition, a number ofestablished pharmaceutical companies, including GlaxoSmithKline, Novartis AGand Bristol-Myers Squibb Co., are developing proprietary technologies or haveenhanced their capabilities by entering into arrangements with, or acquiring,companies with technologies applicable to the treatment of cancer. Many of ourexisting or potential competitors have, or have access to, substantiallygreater financial, research and development, marketing and production resourcesthan we do and may be better equipped than we are to develop, manufacture andmarket competing products. Our competitors may have, or may develop andintroduce, new products that would render our technology and proposed STRproduct less competitive, uneconomical or obsolete.

 

Wealso expect to face increasing competition from universities and othernon-profit research organizations. These institutions, which carry out a significantamount of cancer research and development, are becoming increasingly aware ofthe commercial value of their findings and more active in seeking patent andother proprietary rights, as well as licensing revenues.

 

**If we are unable to protect our proprietary rights, we maynot be able to compete effectively, or operate profitably.**

 

Oursuccess is dependent in part on obtaining, maintaining and enforcing ourpatents and other proprietary rights and our ability to avoid infringing theproprietary rights of others. Patent law relating to the scope of claims in thebiotechnology field in which we operate is still evolving and, consequently,patent positions in our industry may not be as strong as in other,better-established fields. Accordingly, the United States Patent and TrademarkOffice (USPTO) may not issue patents from the patent applications owned by orlicensed to us. If issued, the patents may not give us an advantage overcompetitors with similar technologies.

 

Weown over 100 patents issued in the United States and in foreign jurisdictionsand have licenses to

 

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additional patents. However, the issuance of apatent is not conclusive as to its validity or enforceability and it isuncertain how much protection, if any, will be given to our patents if weattempt to enforce them and they are challenged in court or in otherproceedings, such as oppositions, which may be brought in foreign jurisdictionsto challenge the validity of a patent. A third party may challenge the validityor enforceability of a patent after its issuance by the USPTO. It is possiblethat a competitor may successfully challenge our patents or that a challengewill result in limiting their coverage. Moreover, the cost of litigation touphold the validity of patents and to prevent infringement can be substantial.If the outcome of litigation is adverse to us, third parties may be able to useour patented invention without payment to us. Moreover, it is possible thatcompetitors may infringe our patents or successfully avoid them through designinnovation. We may need to file lawsuits to stop these activities. Theselawsuits can be expensive and would consume time and other resources, even ifwe were successful in stopping the violation of our patent rights. In addition,there is a risk that a court would decide that our patents are not valid andthat we do not have the right to stop the other party from using theinventions. There is also the risk that, even if the validity of our patentswas upheld, a court would refuse to stop the other party on the ground that itsactivities do not infringe our patents.

 

Inaddition, the protection afforded by issued patents is limited in duration.With respect to our STR product in development in the United States, wecurrently rely primarily on US patent numbers USPN 4,882,142 (expiringDecember 19, 2008) and USPN 5,059,412 (expiring October 22, 2008),both of which are licensed to us by The Dow Chemical Company. We may be able torely on the Hatch-Waxman Act to extend the term of a US patent covering STRafter regulatory approval of STR in the United States. In addition, we havepatent applications pending in the United States that include claims directedto the treatment of bone-associated cancers (including multiple myeloma) usingthe STR product with other cancer treatments.

 

Underour license agreement with Dow, Dow retains the obligation, at its cost, toprosecute patent applications and maintain, extend and defend all licensedpatents. Dow has the first right to sue any third party infringers of the STRpatents. If Dow does not file suit, we have the right to sue the infringer atour own expense.

 

Inaddition to the intellectual property rights described above, we rely onunpatented technology, trade secrets and confidential information. Therefore,others may independently develop substantially equivalent information andtechniques or otherwise gain access to or disclose our technology. We may notbe able to effectively protect our rights in unpatented technology, tradesecrets and confidential information. We require each of our employees,consultants and advisors to execute a confidentiality agreement at thecommencement of an employment or consulting relationship with us. However,these agreements may not provide effective protection of our information or, inthe event of unauthorized use or disclosure, they may not provide adequateremedies.

 

**The use of our technologies could potentially conflict withthe rights of others.**

 

Ourcompetitors or others may have or may acquire patent rights that they couldenforce against us. In such case, we may be required to alter our products, paylicensing fees or cease activities. If our products conflict with patent rightsof others, third parties could bring legal actions against us claiming damagesand seeking to enjoin manufacturing and marketing of the affected products. Ifthese legal actions are successful, in addition to any potential liability fordamages, we could be required to obtain a license in order to continue tomanufacture or market the affected products. We may not prevail in any legalaction and a required license under the patent may not be available onacceptable terms.

 

**We may incur substantial costs as a result of litigation orother proceedings relating to patent and other intellectual property rights.**

 

Thecost to us of any litigation or other proceedings relating to intellectualproperty rights, even if resolved in our favor, could be substantial. Some ofour competitors may be better able to sustain the costs of complex patentlitigation because they have substantially greater resources. If there islitigation against us, we may not be able to continue our operations. If thirdparties file patent applications, or are issued patents claiming technologyalso claimed by us in pending applications, we may be required to participatein interference proceedings in the USPTO to determine priority of invention. Wemay be required to participate in interference proceedings involving our issuedpatents and pending applications. We may be required to cease using thetechnology or license rights from prevailing third parties as a result of anunfavorable outcome in an interference proceeding. A prevailing party in thatcase may not offer us a license on commercially acceptable terms.

 

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**Product liability claims in excess of the amount of ourinsurance would adversely affect our financial condition.**

 

Thetesting, manufacturing, marketing and sale of STR and any other proposed cancertherapy products 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 hazardous materials exposesus to the risk of material environmental liabilities, and we may incursignificant additional costs to comply with environmental laws in the future.**

 

Ourresearch and development and manufacturing processes, as well as themanufacturing processes that may be used by our collaborators, involve thecontrolled use of hazardous and radioactive materials. As a result, we aresubject to foreign, federal, state and local laws, rules, regulations andpolicies governing the use, generation, manufacture, storage, air emission,effluent discharge, handling and disposal of certain materials and wastes inconnection with our use of these materials. Although we believe that our safetyprocedures for handling and disposing of such materials comply with thestandards prescribed by such laws and regulations, we may be required to incursignificant costs to comply with environmental and health and safetyregulations in the future. In the event that we discontinue operations infacilities that have had past research and manufacturing processes wherehazardous or radioactive materials have been in use, we may have significantdecommissioning costs associated with the termination of operation of thesefacilities. These potential decommissioning costs also may reduce the marketvalue of the facilities and may limit our ability to sell or otherwise disposeof these facilities in a timely and cost-effective manner. In addition, therisk of accidental contamination or injury from hazardous or radioactivematerials cannot be completely eliminated. In the event of such an accident, wecould be held liable for any resulting damages, and any such liability could exceedour resources. Our current insurance does not cover liability for the clean-upof hazardous waste materials or other environmental risks.

 

**Even if we bring products to market, changes in healthcarereimbursement could adversely affect our ability to effectively price ourproducts or obtain adequate reimbursement for sales of our products.**

 

Thelevels of revenues and profitability of biotechnology companies may be affectedby the continuing efforts of government and third-party payors to contain orreduce the costs of healthcare through various means. For example, in certainforeign markets, pricing or profitability of prescription pharmaceuticals issubject to governmental control. In the United States, there have been, and weexpect that there will continue to be, a number of federal and state proposalsto implement similar governmental controls. It is uncertain what legislativeproposals will be adopted or what actions federal, state or private payors forhealthcare goods and services may take in response to any healthcare reformproposals or legislation. Even in the absence of statutory change, marketforces are changing the healthcare sector. We cannot predict the effecthealthcare reforms 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. Inaddition, both in the United States and elsewhere, sales of prescriptionpharmaceuticals depend in part on the availability of reimbursement to theconsumer from third-party payors, such as governmental and private insuranceplans. Third-party payors are increasingly challenging the prices charged formedical products and services. If we succeed in bringing one or more productsto market, we cannot be certain that these products will be consideredcost-effective and that reimbursement to the consumer will be available or willbe sufficient to allow us to sell our products on a competitive or profitablebasis.

 

**The loss of key employees could adversely affect ouroperations.**

 

SinceJuly 2002, we have implemented three reductions in force. Also inJanuary 2003, we accepted the resignations of Richard Ghalie, MD, VicePresident, Medical and Regulatory Affairs, and Les Sabo, Vice President, Manufacturing.Jack L. Bowman was named Executive Chairman and became Chairman of our Board ofDirectors on March 11, 2003. Douglass B. Given, MD, PhD, resigned asPresident, Chief Executive Officer and a Director of

 

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the Company on June 30, 2003. On thatdate, Mr. Bowman was named Chief Executive Officer and KarenAuditore-Hargreaves, PhD, was promoted to Chief Operating Officer of theCompany. Dr. Auditore-Hargreaves was elected President of the Company effectiveDecember 5, 2003. Neile Grayson, PhD, resigned as Vice President,Corporate Development, in January 2004. Although Mr. Sabo and Drs.Given and Grayson were officers of the Company, we did not, at the time oftheir resignations, consider them key employees in terms of our STR productdevelopment activities or other programs. Dr. Ghalie, as Vice President,Medical and Regulatory Affairs, was considered a key employee of the Company.We did not experience any material disruptions or delays as a consequence ofthe resignations of any or all of Mr. Sabo and Drs. Grayson, Given orGhalie. Dr. Given and Mr. Sabo have been replaced. Dr. Grayson’sposition has been eliminated and her responsibilities reassigned to othermembers of management. Dr. Ghalie’s position currently is vacant, and weare actively seeking a replacement. We elected to delay recruiting areplacement for Dr. Ghalie until the FDA-imposed clinical hold on STR waslifted. In the interim, medical and other professional employees of the Companyand outside consultants have performed, and will continue to perform, theadministrative and managerial responsibilities previously assigned toDr. Ghalie.  Melinda G. Kileresigned as Vice President, Finance, effective April 16, 2004.  On that date, Michael K. Jackson waspromoted to Chief Accounting Officer and assumed responsibility for seniorfinancial duties on an interim basis. As principal financial officer, Ms. Kile was considered a key employeeof the Company, and we intend to seek a replacement.  We did not experience any material disruptions or delays as aconsequence of Ms. Kile’s resignation.

 

On April 28, 2003, we announced that Jerry McMahon, Ph.D. has beenappointed Chief Executive Officer, effective May 11, 2004.  Mr. Bowman will retire from his position asChief Executive Officer and will not stand for re-election as a director at ourAnnual Meeting of Shareholders scheduled for May 18, 2004. In light of Mr.Bowman’s decision to retire, the number of director positions to be filled atthe Annual Meeting and the number of nominees recommended for election in ourproxy statement has been reduced from seven to six. Mr. Bowman will continue toserve as Chairman of the Board until the Annual Meeting.  We currently do not expect to experience anymaterial disruption or delays as a consequence of Mr. Bowman’s retirement.

 

                As of April 27, 2004, we had atotal work force of 41 full-time employees and one part-time employee. Oursuccess depends, to a significant extent, on the continued contributions of ourprincipal management, scientific, and manufacturing personnel. The loss of theservices of one or more of these individuals could delay our STR productdevelopment activities or other programs and research and development efforts.We do not maintain key-person life insurance on any of our officers, employeesor consultants.

 

Competitionfor qualified employees among companies in the biotechnology andbiopharmaceutical industry is intense. Our future success depends upon ourability to attract, retain and motivate highly skilled employees andconsultants. In order to commercialize our proposed products successfully, wewill in the future be required to expand substantially our workforce,particularly in the areas of manufacturing, clinical trials management,regulatory affairs, business development and sales and marketing. Theseactivities will require the addition of new personnel, including management,and the development of additional expertise by existing management personnel.Our current financial situation may make it more difficult to attract andretain key employees.

 

Wehave change in control agreements with all of our executive officers, severanceagreements with all of our executive officers except Mr. Bowman, andconsulting agreements with various of our scientific advisors. Our agreementswith our executive officers provide for “at will” employment, which means thateach executive may terminate his or her service with us at any time. Inaddition, our scientific advisors may terminate their services to us at anytime. As of the date of this report, no current key employee has announced hisor her intention to leave the company.

 

**Risks Related to Our Common Stock**

 

**Our common stock listing was transferred from The NasdaqNational Market to The Nasdaq SmallCap Market; failure to maintain continuedlisting on Nasdaq could affect its market price and liquidity.**

 

Ourcommon stock listing was transferred from The Nasdaq National Market to TheNasdaq SmallCap Market on March 20, 2003. We elected to seek a transfer toThe Nasdaq SmallCap Market because we had been unable to regain compliance withThe Nasdaq National Market minimum $1.00 bid price requirement for continuedlisting. By transferring to The SmallCap Market, we were afforded an extendedgrace period in which to satisfy The SmallCap Market $1.00 minimum bid pricerequirement. On May 6, 2003, we received notice from Nasdaq

 

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confirming that we are in compliance with the$1.00 SmallCap minimum bid price requirement. As a result of rule changesadopted by Nasdaq in March 2003, we will not be eligible to relist ourcommon stock on The Nasdaq National Market unless and until our common stockmaintains a minimum bid price of $5.00 per share for 90 consecutive tradingdays and we otherwise comply with the initial listing requirements for TheNasdaq National Market. Trading on The Nasdaq SmallCap Market may have anegative impact on the value of our common stock, because securities trading onThe Nasdaq SmallCap Market typically are less liquid than those traded on TheNasdaq National Market.

 

Ifour common stock is delisted from The Nasdaq SmallCap Market, we would likelyseek quotation on the American Stock Exchange or a regional stock exchange, ifavailable. Such listing could reduce the market liquidity for our common stock.If our common stock is not quoted on another market or exchange, trading of ourcommon stock could be conducted in the over-the-counter market on an electronicbulletin board established for unlisted securities such as the Pink Sheets orthe OTC Bulletin Board. As a result, an investor would find it more difficultto dispose of, or obtain accurate quotations for the price of, our commonstock.

 

Ifour common stock is delisted from The Nasdaq SmallCap Market, and if we fail toobtain quotation on another market or exchange, and if the trading priceremains below $5.00 per share, then trading in our common stock might alsobecome subject to the requirements of certain rules promulgated under theSecurities Exchange Act of 1934, which require additional disclosure bybroker-dealers in connection with any trade involving a stock defined as a“penny stock” (generally, any equity security not listed on a nationalsecurities exchange or quoted on Nasdaq that has a market price of less than$5.00 per share, subject to certain exceptions). Many brokerage firms arereluctant to recommend low-priced stocks to their clients. Moreover, variousregulations and policies restrict the ability of shareholders to borrow againstor “margin” low-priced stocks, and declines in the stock price below certainlevels may trigger unexpected margin calls. Additionally, because brokers’commissions on low-priced stocks generally represent a higher percentage of thestock price than commissions on higher priced stocks, the current price of thecommon stock can result in an individual shareholder paying transaction coststhat represent a higher percentage of total share value than would be the caseif our share price were higher. This factor may also limit the willingness ofinstitutions to purchase our common stock. Finally, the additional burdensimposed upon broker-dealers by these requirements could discouragebroker-dealers from facilitating trades in our common stock, which couldseverely limit the market liquidity of the stock and the ability of investorsto trade our common stock.

 

**Our stock price is volatile and, as a result, you could losesome or all of your investment.**

 

Therehas been a history of significant volatility in the market prices of securitiesof biotechnology companies, including our common stock. The high and lowclosing sale prices for our common stock were $6.05 and $0.28 in 2002. In 2003,the high and low closing sale prices were $6.47 and $0.37. The high and lowclosing sale prices during the period from January 2, 2004 through April27, 2004, were $5.78 and $3.25. Our stock price has been and may continue to beaffected by this type of market volatility, as well as our own performance. Ourbusiness and the relative price of our common stock may be influenced by alarge variety of factors, including:

 

•                  announcements by us or our competitorsconcerning acquisitions, strategic alliances, technological innovations and newcommercial products;

 

•                  the availability of critical materials used indeveloping and manufacturing our proposed STR product;

 

•                  the progress and results of clinical trials;

 

•                  developments concerning patents, proprietaryrights and potential infringement;

 

•                  the expense and time associated with, and theextent of our ultimate success in, securing regulatory approvals; and

 

•                  our available cash.

 

Inaddition, potential public concern about the safety of our proposed STR productand any other products we develop, comments by securities analysts, our abilityto maintain the listing of our common stock on the Nasdaq system, andconditions in the capital markets in general and in the life science capitalmarket specifically, may have a significant effect on the market price of ourcommon stock. The realization of any of the risks described in this report, aswell as other factors, could have a material adverse impact on the market priceof our common stock and

 

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may result in a loss of some or all of yourinvestment in NeoRx.

 

Inthe past, securities class action litigation often has been brought againstcompanies following periods of volatility in their stock prices. We may in thefuture be the target of similar litigation. Securities litigation could resultin substantial costs and divert our management’s time and resources, whichcould cause our business to suffer.

 

**Certain provisions in our articles of incorporation andWashington state law could discourage a change of control.**

 

Ourarticles of incorporation authorize our board of directors to issue up to3,000,000 shares of preferred stock and to determine the price, rights,preference, privileges and restrictions, including voting rights, of thoseshares without any further vote or action by our shareholders.

 

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

 

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

 

•                  a merger or consolidation with, disposition ofassets to, or issuance or redemption of stock to or from the acquiring person;

 

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

 

•                  receipt by the acquiring person of anydisproportionate benefit as a shareholder.

 

Acorporation may not opt out of this statute. This provision may have the effectof delaying, deterring or preventing a change in control of NeoRx or limitingfuture investment in NeoRx by significant shareholders and their affiliates andassociates.

 

Theprovisions of our articles of incorporation, shareholder rights plan 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.

 

**Certain provisions of our Series B Convertible PreferredStock and certain outstanding warrents may prevent or make it more difficultfor us to raise funds or take other actions.**

 

Certainprovisions of the Preferred Stock and Warrant Purchase Agreement andCertificate of Designation for our Series B Convertible Preferred Stockmay require us to obtain the approval of the holders of Series B

 

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preferred stock to amend, alter or repeal anyprovision of the Certificate of Designation which may be deemed to materiallyadversely affect the rights of the holders of Series B preferred stock orto authorize, create or issue any class or series of securities havingliquidation or other rights superior to those of the Series B preferredstock. The Series B preferred stock also contains provisions requiring theadjustment of the conversion price and the number of issuable common shares ifwe issue (other than in connection with certain permitted transactions, such asstrategic collaborations and acquisitions approved by the board of directors ortransactions approved by a majority of the holders of the Series Bpreferred stock) shares of common stock at prices lower than the then currentconversion price of the Series B preferred stock. Warrants issued to investorsin our February 2004 common stock financing (the “2004 Financing”) containsimilar antidilution provisions.  Thismeans that if we need to raise equity financing at any time when the prevailingor discounted market price for our common stock is lower than the conversion priceof the Series B preferred stock and/or the exercise price of the warrants, theconversion price and/or exercise price and number of shares issuable uponconversion or exercise will be adjusted and the dilution to shareholdersincreased. These provisions may make it more difficult for our management orshareholders to take certain corporate actions and could delay, discourage orprevent future financings. These provisions could also limit the price thatcertain investors might be willing to pay for shares of our common stock.

 

Theoutstanding shares of Series B preferred stock, at a conversion price of$5.00 per share, are currently convertible into 3,150,000 shares of commonstock. In addition, warrants accompanying the Series B preferred stock, atan exercise price of $6.00 per share, are exercisable for 630,000 shares ofcommon stock. These shares of common stock, when issued upon conversion of theSeries B preferred stock and exercise of the warrants, have beenregistered with the SEC and are generally available for immediate resale in thepublic market.  We issued in theFebruary 2004 Financing 1,845,000 shares of common stock and warrants, at anexercise price of $7.00 per share, exercisable into 922,500 shares of commonstock. The shares of common stock issued in the 2004 Financing, and the sharesof common stock issuable upon exercise of the warrants related thereto, havebeen registered with the SEC and are generally available for immediate resalein the public market.  The market price of our common stock couldfall as a result of such resales due to the increased number of sharesavailable for sale in the market.

 

**Item3****.  Quantitativeand Qualitative Disclosures about Market Risk**

 

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

 

**Interest Rate Risk**

 

The Company’s exposure to market rate risk for changes in interestrates relates primarily to the Company’s debt securities included in itsinvestment portfolio.  The Company doesnot have any derivative financial instruments. The Company invests in debt instruments of the US Government and itsagencies and high-quality corporate issuers. Investmentsin both fixed rate and floating rate interest earning instruments carry adegree of interest rate risk.  Fixedrate securities may have their fair market value adversely impacted due to arise in interest rates, while floating rate securities may produce less incomethan expected if interest rates decrease. Due in part to these factors, the Company’s future investment income mayfall short of expectations due to changes in interest rates or the Company maysuffer losses in principal if forced to sell securities that have declined inmarket value due to changes in interest rates. At March 31, 2004, the Company owned government debt instrumentstotaling $8.4 million and owned no corporate debt securities. The Company’sexposure to losses as a result of interest rate changes is managed throughinvesting primarily in securities with relatively short maturities of up tothree years and securities with variable interest rates.  The Company’s debt securities as of March31, 2004 had maturities of less then one year.

 

The Company’sonly outstanding debt is its note payable to Texas State Bank.  The outstanding balance of the note was$4,405,000 on March 31, 2004.  The note,which matures in April 2009, bears interest equal to the bank prime rate.  The interest rate on the note is adjusted onthe same date that the bank prime rate changes.  The maximum permitted interest rate on the loan is 18% per annum.Because the interest rate on the note varies annually, the Company’s interestexpenses may increase as the bank prime interest rate increases.  Extreme increases in the bank prime interestrate, up to the maximum interest rate permitted under the note, couldmaterially affect the Company’s interest expense.

 

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

 

Under thesupervision of and with the participation of the Company’s management,including the Company’s Chairman and Chief Executive Officer and CorporateController and Chief Accounting Officer, the Company has evaluated theeffectiveness and design and operation of its disclosure controls andprocedures as of the end of the quarter and, based on their evaluation, theChairman and Chief Executive Officer and the Corporate Controller and ChiefAccounting Officer, have concluded that these disclosure controls andprocedures are effective in ensuring that all material information required tobe disclosed in the reports that the Company files or submits under theSecurities Exchange Act of 1934 have been made known to them in a timelyfashion.  There were no changes in theCompany’s internal controls over financial reporting that occurred during thequarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

In February 2004, the Company sold to three institutional investors anaggregate of 1,845,000 shares of its common stock, at $5.25 per share, andfive-year warrants to purchase an aggregate of 922,500 shares, at an exerciseprice of $7.00 per share, in a private placement transaction exempt underSection 4(2) of the Securities Act of 1933. Details of this offering are set forth in the Current Report on Form 8-Kfiled with the SEC on February 24, 2004.

 

On February 23, 2004, the Company issued four warrants to affiliates ofReedland Capital Partners, a Division of Financial West Group, in considerationof Reedland’s services as placement agent in the above referenced privateplacement transaction.  The warrantsoblige the Company to issue an aggregate of 35,000 shares of common stock at anexercise price of $5.54. The exercise price is equal to the volume weightedaverage daily trading price per share of the Company’s common stock on The NASDAQSmallCap Market for the five consecutive trading days ending on February 20,2004, the day prior to the closing date of the private placementtransaction.  The warrants, which havethree-year terms, are fully vested and expire on February 23, 2007.  The warrants were, and the shares underlyingthe warrants will be, issued in reliance on the Section 4(2) private placementexemption from registration under the Securities Act of 1933.

 

The Company did not make any repurchases of its equity securities duringthe quarter ended March 31, 2004.

 

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

 

(a) Exhibits – See Exhibit Index below.

 

(b) Reports on Form 8-K:

 

On March 31, 2004, we filed a report on Form 8-K announcing the openingof Phase III clinical trial for STRTM (Skeletal Targeted Radiotherapy).

 

On March 24, 2004, we filed a report on Form 8-K announcing theexecution of an agreement with The University of Missouri-Columbia ResearchReactor Center.

 

On February 24, 2004, we filed a report on Form 8-K announcing $9.7million private placement financing.

 

On February 23, 2004, we filed a report on Form 8-K summarizingour executive compensation during the year ended December 31, 2003.

 

On February 23, 2004, we filed a report on Form 8-K announcing ourfinancial results for the quarter ended December 31, 2003.

 

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**SIGNATURES**

 

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

 
|                                | NEORX CORPORATION                                 |
|-------------------------------------|---------------------------------------------------|
|                                | (Registrant)                                      |
|                                |                                              |
| Date:   May 10, 2004 | By:                                               | /s/MICHAEL K. JACKSON |   |
|                                | Michael K. Jackson                                |
|                                | Corporate Controller and Chief Accounting Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                                         |   |   |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1         |   | Restated Articles of Incorporation, as amended                                                                                                                                                                                          |   | (B)    |
| 3.2         |   | Bylaws, as amended                                                                                                                                                                                                                      |   | (K)    |
| 10.1        |   | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                                                |   | (F)    |
| 10.2        |   | Lease Agreement for 410 West Harrison facility, dated March 1, 1996,  between NeoRx Corporation and Diamond Parking, Inc                                                                                                                |   | (H)    |
| 10.3        |   | Amendment No. 1, dated August 14, 2000, to Lease Agreement between  NeoRx Corporation and Dina Corporation                                                                                                                              |   | (J)    |
| 10.4        |   | 1991 Stock Option Plan for Non-Employee Directors, as amended (‡)                                                                                                                                                                  |   | (E)    |
| 10.5        |   | 1991 Restricted Stock Plan (‡)                                                                                                                                                                                                     |   | (D)    |
| 10.6        |   | Stock Option Agreement, dated July 30, 2001, between NeoRx  Corporation and Douglass B. Given (‡)                                                                                                                                  |   | (G)    |
| 10.7        |   | Indemnification Agreement (‡)                                                                                                                                                                                                      |   | (H)    |
| 10.8        |   | License Agreement, dated June 30, 1999, between NeoRx and The Dow  Chemical Company.  Certain portions of  the agreement have been omitted pursuant to a grant of confidential treatment                                           |   | (K)    |
| 10.9        |   | Stock Option Agreement, dated December 19, 2000, between NeoRx  Corporation and Carl S. Goldfischer (‡)                                                                                                                            |   | (I)    |
| 10.10       |   | Stock Option Agreement, dated January 17, 2001, between NeoRx  Corporation and Carl S. Goldfischer (‡)                                                                                                                             |   | (I)    |
| 10.11       |   | Stock Option Agreement, dated November 16, 2000, between NeoRx  Corporation and Douglass Given (‡)                                                                                                                                 |   | (I)    |
| 10.12       |   | Sublicense Agreement, dated May 15, 1997, between NeoRx Corporation  and Roche Molecular Biochemicals.   Certain portions of the agreement have been omitted pursuant to a  grant of confidential treatment.                       |   | (L)    |
| 10.13       |   | Stock Option Grant Program for Nonemployee Directors under the NeoRx  Corporation 1994 Restated Stock Option Plan (‡)                                                                                                              |   | (M)    |
| 10.14       |   | Facilities Lease, dated February 15, 2002, between NeoRx Corporation  and Selig Real Estate Holdings Six                                                                                                                                |   | (A)    |
| 10.15       |   | Lease Termination/Continuation Agreement dated October 8, 2002,  between NeoRx Corporation and Dina Corporation                                                                                                                         |   | (N)    |
| 10.16       |   | Key Executive Severance Agreement dated as of May 13, 2003, between  the Company and Karen Auditore-Hargreaves (‡)                                                                                                                 |   | (C)    |
| 10.17       |   | Change of Control Agreement dated as of May 13, 2003, between the  Company and Karen Auditore-Hargreaves (‡)                                                                                                                       |   | (C)    |
| 10.18       |   | Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Linda Findlay (‡)                                                                                                                        |   | (C)    |
| 10.19       |   | Change of Control Agreement dated as of February 28, 2003, between  the Company and Linda Findlay (‡)                                                                                                                              |   | (C)    |
| 10.20       |   | Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                                                                                                           |   | (C)    |
| 10.21       |   | Change of Control Agreement dated as of February 19, 2004, between  the Company and Jack L. Bowman (‡)                                                                                                                             |   | (C)    |
| 10.22       |   | Supply Agreement dated as of March 1, 2004, between the Company and the  University of Missouri Research  Reactor facility group. Certain portions of the agreement have been omitted  pursuant to a request for confidential treatment |   | (O)    |
| 10.23       |   | 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                                         |   | (O)    |
| 10.24       |   | Agreement of Sale and Purchase dated as of April 2, 2004, between the  Company and Aletheon Pharmaceuticals, Inc.   Certain  portions of the agreement have been omitted pursuant to a request for  confidential treatment         |   | (O)    |
| 23          |   | Consent of KPMG LLP                                                                                                                                                                                                                     |   | (O)    |
| 31.1        |   | Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief  Executive Officer                                                                                                                                                         |   | (O)    |
| 31.2        |   | Rule 13a-14(a)/15d-14(a) Certification of Corporate Controller and  Chief Accounting Officer                                                                                                                                            |   | (O)    |

 

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| 32.1 |   | Section 1350 Certification of Chairman and Chief Executive Officer               |   | (O) |
|------|--------|----------------------------------------------------------------------------------|--------|-----|
| 32.2 |   | Section 1350 Certification of Corporate Controller and Chief  Accounting Officer |   | (O) |

 

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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  Registration Statement on Form S-3 (No. 333-111344) filed on December 19,  2002, 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)      |   | Filed as an exhibit to the Company’s  Registration Statement on Form S-2 (Registration No. 33-71164) effective  December 13, 1993, and incorporated herein by reference.          |
|     |   |                                                                                                                                                                                   |
| (F)      |   | Filed as an exhibit to the Company’s Form  10-K for the fiscal year ended December 31, 1995, and incorporated herein by  reference.                                               |
|     |   |                                                                                                                                                                                   |
| (G)      |   | Filed as an exhibit to the Company’s  Registration Statement on Form S-8 (Registration No. 333-71368), filed  October 10, 2001, and incorporated herein by reference.             |
|     |   |                                                                                                                                                                                   |
| (H)      |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended March 31, 1996, and incorporated herein  by reference.                                             |
|     |   |                                                                                                                                                                                   |
| (I)      |   | Filed as an exhibit to the Company’s Form  10-K for the fiscal year ended December 31, 2000 and incorporated herein by  reference.                                                |
|     |   |                                                                                                                                                                                   |
| (J)      |   | Filed as an exhibit to the Company’s Form  10-K for the fiscal year ended December 31, 1998, and incorporated herein by  reference.                                               |
|     |   |                                                                                                                                                                                   |
| (K)      |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended September 30, 1999, and incorporated  herein by reference.                                    |
|     |   |                                                                                                                                                                                   |
| (L)      |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended March 31, 2001, and incorporated herein  by reference.                                             |
|     |   |                                                                                                                                                                                   |
| (M)      |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended June 30, 2002, and incorporated herein by  reference.                                              |
|     |   |                                                                                                                                                                                   |
| (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)      |   | Submitted herewith.                                                                                                                                                                    |
|     |   |                                                                                                                                                                                   |
| (P)      |   | Filed as an exhibit to the Company’s Form  10-Q for the quarterly period ended September 30, 2002, and incorporated  herein by reference.

                                  |

 

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