**UNITED STATES**

**SECURITIES 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 THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2003**

 

 

**CommissionFile No. 0-16614**

 

**NEORX CORPORATION**

(Exact name of Registrant as specified in itscharter)

 

| **Washington**                                                               |   | **91-1261311**                    |
|------------------------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of incorporation or  organization)              |   | (IRS Employer Identification No.) |
|                                                                         |   |                              |
| **410  West Harrison Street, Seattle, Washington 98119-4007**                |
| (Address of principal executive offices)                                     |
|                                                                         |
| Registrant’s telephone number, including area  code: **(206) 281-7001** |

 

 

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

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

 

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

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

 

 

Asof May 2, 2003, 26,978,768 shares of the Registrant’s common stock, $.02 parvalue per share, were outstanding.

 

 

 

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**TABLE OF CONTENTS**

 

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED MARCH 31, 2003**

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

 

2

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**PARTI**.  FINANCIALINFORMATION

** **

**Item1**.  FinancialStatements

** **

**NEORXCORPORATION AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(in thousands, except share data)

(unaudited)

** **
|                                                                                                                                                                                                                                                                          |   | **March 31,  2003** |   | **December  31, 2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                                                    |   |                |   |                   |   |
| **Current  assets:**                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                    |   | $                   | 2,573  |                   | $      | 6,564 |   |
| Investment  securities                                                                                                                                                                                                                                                        |   | 9,475               |   | 9,572                  |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                    |   | 695                 |   | 1,269                  |   |
| Total current  assets                                                                                                                                                                                                                                                         |   | 12,743              |   | 17,405                 |   |
|                                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Facilities and  equipment, net                                                                                                                                                                                                                                                |   | 8,467               |   | 8,509                  |   |
| Other assets,  net                                                                                                                                                                                                                                                            |   | 79                  |   | 79                     |   |
|                                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Total  assets**                                                                                                                                                                                                                                                             |   | $                   | 21,289 |                   | $      | 25,993 |   |
|                                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                                                                                |   |                |   |                   |   |
| **Current  liabilities:**                                                                                                                                                                                                                                                     |   |                |   |                   |   |
| Accounts payable                                                                                                                                                                                                                                                              |   | $                   | 838    |                   | $      | 1,024 |   |
| Accrued  liabilities                                                                                                                                                                                                                                                          |   | 898                 |   | 1,674                  |   |
| Current portion  of note payable                                                                                                                                                                                                                                              |   | 328                 |   | 512                    |   |
| Total current  liabilities                                                                                                                                                                                                                                                    |   | 2,064               |   | 3,210                  |   |
|                                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Long-term  liabilities:**                                                                                                                                                                                                                                                   |   |                |   |                   |   |
| Note payable,  net of current portion                                                                                                                                                                                                                                         |   | 5,245               |   | 5,182                  |   |
| Asset retirement  obligation                                                                                                                                                                                                                                                  |   | 480                 |   | —                 |   |
| Other                                                                                                                                                                                                                                                                         |   | 25                  |   | 25                     |   |
| Total long-term  liabilities                                                                                                                                                                                                                                                  |   | 5,750               |   | 5,207                  |   |
|                                                                                                                                                                                                                                                                          |   |                |   |                   |   |
| **Shareholders’  equity:**                                                                                                                                                                                                                                               |   |                |   |                   |   |
| Preferred stock,  $.02 par value, 3,000,000 shares authorized: Convertible preferred stock,  Series 1, 205,340 shares issued and outstanding at March 31, 2003 and  December 31, 2002 (entitled in liquidation to $5,300 and $5,175 at March 31,  2003 and December 31, 2002) |   | 4                   |   | 4                      |   |
| Common stock,  $.02 par value, 60,000,000 shares authorized, 26,845,032 and 26,765,082  shares issued and outstanding at March 31, 2003 and December 31, 2002,  respectively                                                                                                  |   | 537                 |   | 535                    |   |
| Accumulated  other comprehensive income — unrealized loss on investment securities                                                                                                                                                                                       |   | (54                 | )      | (101                   | )      |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |   | 224,127             |   | 224,035                |   |
| Accumulated  deficit                                                                                                                                                                                                                                                          |   | (211,139            | )      | (206,897               | )      |
| Total  shareholders’ equity                                                                                                                                                                                                                                              |   | 13,475              |   | 17,576                 |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                                                                                                          |   | $                   | 21,289 |                   | $      | 25,993 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

(unaudited)

 
|                                                                                                 |   | **Three  Months ended March 31,** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                 |   | **2003**                          |   | **2002** |   |
| **Revenues**                                                                                         |   | $                                 | 116    |   | $ | 310 |   |
| **Operating  expenses:**                                                                             |   |                              |   |   |   |
| Research and  development                                                                            |   | 2,611                             |   | 6,041 |   |
| General and  administrative                                                                          |   | 1,432                             |   | 1,739 |   |
| Total operating  expenses                                                                            |   | 4,043                             |   | 7,780 |   |
| Loss from  operations                                                                                |   | (3,927                            | )      | (7,470 | ) |
| **Other  income (expense):**                                                                         |   |                              |   |   |   |
| Realized gain on  sale of securities                                                                 |   | 16                                |   | 110 |   |
| Loss on disposal  of equipment                                                                       |   | (10                               | )      | — |   |
| Interest income                                                                                      |   | 54                                |   | 396 |   |
| Interest expense                                                                                     |   | (60                               | )      | (103 | ) |
| Total other  income (expense)                                                                        |   | —                            |   | 403 |   |
| Net loss before  cumulative effect of change in accounting principle                                 |   | (3,927                            | )      | (7,067 | ) |
| Cumulative  effect of change in accounting principle                                                 |   | (190                              | )      | — |   |
| Net loss                                                                                             |   | (4,117                            | )      | (7,067 | ) |
| Preferred stock  dividends                                                                           |   | (125                              | )      | (125 | ) |
| Net loss  applicable to common shares                                                                |   | $                                 | (4,242 | ) | $ | (7,192 | ) |
|                                                                                                 |   |                              |   |   |   |
| Loss per share:                                                                                      |   |                              |   |   |   |
| Basic and  diluted loss per common share before cumulative effect of change in  accounting principle |   | $                                 | (0.15  | ) | $ | (0.27 | ) |
| Cumulative  effect of change in accounting principle                                                 |   | (0.01                             | )      | — |   |
| Basic and  diluted loss per common share                                                             |   | $                                 | (0.16  | ) | $ | (0.27 | ) |
|                                                                                                 |   |                              |   |   |   |
| Weighted average  common shares outstanding — basic and diluted                                 |   | 26,815                            |   | 26,576 |   |
|                                                                                                 |   |                              |   |   |   |
| Pro forma  amounts had accounting principle been applied retroactively:                              |   |                              |   |   |   |
| Net loss                                                                                             |   | $                                 | (3,927 | ) | $ | (7,094 | ) |
| Preferred stock  dividends                                                                           |   | (125                              | )      | (125 | ) |
| Loss applicable  to common shares                                                                    |   | $                                 | (4,052 | ) | $ | (7,219 | ) |
|                                                                                                 |   |                              |   |   |   |
| Loss per share:                                                                                      |   |                              |   |   |   |
| Basic and  diluted                                                                                   |   | $                                 | (0.15  | ) | $ | (0.27 | ) |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

4

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(in thousands)

(unaudited)

 
|                                                                         |   | **Three  Months ended March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | **2003**                          |   | **2002** |   |
| **Cash  flows from operating activities:**                                   |   |                              |   |   |   |
| Net loss                                                                     |   | $                                 | (4,117 | ) | $ | (7,067 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                              |   |   |   |
| Depreciation and  amortization                                               |   | 217                               |   | 416 |   |
| Gain on sale of  securities                                                  |   | (16                               | )      | (110 | ) |
| 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                              |   | 57                                |   | 38 |   |
| Change in  operating assets and liabilities:                                 |   |                              |   |   |   |
| Prepaid expenses  and other assets                                           |   | 521                               |   | 72 |   |
| Accounts payable                                                             |   | (186                              | )      | 61 |   |
| Accrued  liabilities                                                         |   | (868                              | )      | (140 | ) |
| Net cash used in  operating activities                                       |   | (4,172                            | )      | (6,730 | ) |
|                                                                         |   |                              |   |   |   |
| **Cash  flows from investing activities:**                                   |   |                              |   |   |   |
| Proceeds from  sales and maturities of investment securities                 |   | 10,691                            |   | 5,542 |   |
| Purchases of  investment securities                                          |   | (10,531                           | )      | — |   |
| Facilities and  equipment purchases                                          |   | —                            |   | (287 | ) |
| Proceeds from  sales of equipment                                            |   | 142                               |   | — |   |
| Net cash  provided by investing activities                                   |   | 302                               |   | 5,255 |   |
|                                                                         |   |                              |   |   |   |
| **Cash  flows from financing activities:**                                   |   |                              |   |   |   |
| Proceeds from  stock options and warrants exercised                          |   | —                            |   | 14 |   |
| Repayment of  note payable principal                                         |   | (121                              | )      | — |   |
| Net cash (used  in) provided by financing activities                         |   | (121                              | )      | 14 |   |
|                                                                         |   |                              |   |   |   |
| Net decrease in cash and cash equivalents                                    |   | (3,991                            | )      | (1,461 | ) |
|                                                                         |   |                              |   |   |   |
| **Cash  and cash equivalents:**                                              |   |                              |   |   |   |
| Beginning of period                                                          |   | 6,564                             |   | 4,097 |   |
| End of period                                                                |   | $                                 | 2,573  |   | $ | 2,636 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

5

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**NEORX CORPORATION AND SUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

 

# **Note 1.  Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofNeoRx Corporation and subsidiary (the Company).  All significant intercompany balances and transactions have beeneliminated in consolidation.

 

The interim financialstatements contained herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to those rules and regulations, although theCompany believes that the disclosures made are adequate to make the informationpresented not misleading.  Thesefinancial statements should be read in conjunction with the Company’s annualreport on Form 10-K for the year ended December 31, 2002.

 

In the opinion ofmanagement, the interim financial statements reflect all adjustments, consistingonly of normal recurring accruals necessary to present fairly the Company’sfinancial position as of March 31, 2003 and the results of its operations andcash flows for the periods ended March 31, 2003 and 2002.

 

The results of operationsfor the quarters ended March 31, 2003 and 2002 are not necessarily indicativeof the expected operating results for the full year.

 

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 relatedinterpretations.  As such compensationexpense related to employee stock options is recorded if, on the date of grant,the fair value of the underlying stock exceeds the exercise price.  The Company applies the disclosure-onlyrequirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, whichallows entities to continue to apply the provisions of APB Opinion No. 25 fortransactions with employees and to provide pro forma results of operationsdisclosures for employee stock option grants as if the fair-value based methodof accounting in SFAS No. 123 had been applied to these transactions.  Stock compensation costs related to fixed employeeawards with pro rata vesting are recognized on a straight-line basis over theperiod of benefit, generally the vesting period of the options.  For options and warrants issued tonon-employees, the Company recognizes stock compensation costs utilizing thefair value methodology prescribed in SFAS No. 123 over the related period ofbenefit.

 

Had compensation cost for these stock option plans for employeesbeen determined using the fair value based method of accounting under SFAS 123,“Accounting for Stock-Based Compensation,” the Company’s net loss applicable tocommon shares and net loss per share would have been the pro forma amountsindicated below (in thousands, except per share data):

 
|                                                                                               |   | **Quarter ended March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                               |   | **2003**                    |   | **2002** |   |
| Net loss applicable to common shares:                                                              |   |                        |   |   |   |
| As reported                                                                                        |   | $                           | (4,242 | ) | $ | (7,192 | ) |
| 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 |   | (481                        | )      | (948 | ) |
| Pro forma                                                                                          |   | $                           | (4,723 | ) | $ | (8,140 | ) |
| Net loss per common share, basic and diluted:                                                      |   |                        |   |   |   |
| As reported                                                                                        |   | $                           | (0.16  | ) | $ | (0.27 | ) |
| Pro forma                                                                                          |   | $                           | (0.18  | ) | $ | (0.31 | ) |

 

The per share weighted-average fair value of stockoptions granted during the quarters ended March 31, 2003 and 2002 was $0.43 and$2.89, respectively, on the grant date using the Black-Scholes option pricingmodel with

 

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the following assumptions:

 

|                    |   | **Quarter ended March 31,** |   |
|-------------------------|--------|-----------------------------|--------|
|                    |   | **2003**                    |   | **2002** |   |
| Expected dividend rate  |   | 0.0                         | %      | 0.0 | % |
| Risk-free interest rate |   | 2.36                        | %      | 3.83 | % |
| Expected volatility     |   | 134.4                       | %      | 105.0 | % |
| Expected life in years  |   | 2.97                        |   | 2.97 |   |

 

 

 

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

 

Basic and diluted loss per share are based on net lossapplicable to common shares, which is comprised of net loss and preferred stockdividends in all periods presented. Shares used to calculate basic loss pershare are based on the weighted average number of common shares outstandingduring the period.  Shares used to calculatediluted loss per share are based on the potential dilution that would occurupon the exercise or conversion of securities into common stock using thetreasury stock method.  Calculations ofbasic and diluted loss per share for the quarters ended March 31, 2003 and 2002exclude the effect of options and warrants to purchase additional shares ofcommon stock because the share increments would not be dilutive.

 

The computation of diluted net loss per share excludesthe following options and warrants to acquire shares of common stock for the periodsindicated because their effect would not be dilutive:

 

|                                       |   | **March 31,  2003** |   | **March 31,  2002** |   |
|--------------------------------------------|--------|---------------------|--------|---------------------|--------|
| Common stock  options                      |   | 5,185,645           |   | 4,636,129           |   |
| Weighted average  exercise price per share |   | $                   | 3.50   |                | $      | 5.05 |   |
| Common stock  warrants                     |   | 890,000             |   | 1,051,000           |   |
| Weighted average  exercise price per share |   | $                   | 9.62   |                | $      | 8.85 |   |

 

In addition, 234,088 shares of common stock that wouldbe issuable upon conversion of the Company’s preferred stock are not includedin the calculation of diluted loss per share for the quarters ended March 31,2003 and 2002 because the effect of including such shares would not bedilutive.

 

 

# **Note3.  Comprehensive Loss**

 

The Company’s comprehensive loss for the quartersended March 31, 2003 and 2002 was $4,070,000 and $7,395,000, respectively.  The comprehensive loss for the quartersended March 31, 2003 and 2002 consisted of net loss of $4,117,000 and$7,067,000, respectively, and a net unrealized gain (loss) on investmentsecurities of $47,000 and $(328,000) for the quarters ended March 31, 2003 and2002, respectively.

 

# **Note4.  New Accounting Pronouncements**

 

In August 2001, the FASBissued Statement No. 143, *Accounting for Asset Retirement Obligations,*which addresses financial accounting and reporting obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development, and (or) normal use ofthe asset.  Statement No. 143 requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The fair valueof the liability is added to the carrying amount of the associated asset andthis additional carrying amount is depreciated over the life of the asset.  If the obligation is settled for other thanthe carrying amount of the liability, the Company will

 

7

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recognize a gainor loss on settlement. The Company adopted this Statement on January 1, 2003.  The cumulative effect of adopting this change in accountingprinciple in the first quarter of 2003 is discussed in Note 5.

 

In June 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichaddresses financial accounting and reporting for costs associated with exit ordisposal activities.  Statement No. 146nullifies EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The principal difference between StatementNo. 146 and Issue No. 94-3 relates to the recognition of a liability for a costassociated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for thosecosts only when the liability is incurred, that is, when it meets thedefinition of a liability in the FASB’s conceptual framework.  In contrast, under Issue No. 94-3, a companyrecognized a liability for an exit cost when it committed to an exit plan.  Statement No. 146 also establishes fair valueas the objective for initial measurement of liabilities related to exit or disposalactivities.  The Statement is effectivefor exit or disposal activities that are initiated after December 31,2002.   The Company adopted thisStatement on January 1, 2003. Management cannot determine the impact of adopting this statement on itsconsolidated financial statements, as its effects will be prospective.

 

In November 2002, the Financial Accounting StandardsBoard Emerging Issues Task Force issued its consensus concerning RevenueArrangements with Multiple Deliverables (“EITF 00-21”).  EITF 00-21 addresses how to determinewhether a revenue arrangement involving multiple deliverables should be dividedinto separate units of accounting, and, if separation is appropriate, how thearrangement consideration should be measured and allocated to the identifiedaccounting units.  The guidance in EITF00-21 is effective for revenue arrangements entered into in fiscal periodsbeginning after June 15, 2003.  The Company does not anticipate thatadoption of EITF 00-21 will have a material impact on its consolidatedfinancial statements.

 

 

 

# **Note5.  Asset Retirement Obligation**

 

The company recorded a $0.2 million cumulative effectof change in accounting principle in the first quarter of 2003 as a result ofthe Company’s adoption of SFAS 143, *Accounting for Asset Retirement Obligations*.  Under SFAS 143, the Company recorded anasset and liability in the amount of $0.4 million related to estimated fairvalue of future decommissioning costs associated with the Denton facility.  This estimate will be depreciated over theseven year estimated useful life of the asset and the asset retirementobligation will be accreted over the thirty years that represents the expectedtime that will elapse prior to the settlement of the obligation.  The Company adopted SFAS 143 on January 1,2003.  A reconciliation of the assetretirement obligation follows (in 000’s):

 

| Asset retirement  obligation calculated as of date of Denton facility purchase (April 1, 2001) |   | $   | 364    |   |
|------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| Accretion-2001                                                                                 |   | 40  |   |
| Balance at  December 31, 2001                                                                  |   | 404 |   |
| Accretion-2002                                                                                 |   | 60  |   |
| Balance at  December 31, 2002                                                                  |   | 464 |   |
| Accretion-January  1, 2003 to March 31, 2003                                                   |   | 16  |   |
| Balance at March  31, 2003                                                                     |   | $   | 480    |   |

 

In addition, hadthe Company applied the provisions of SFAS 143 as of the date of acquisition ofthe Denton facility, and using current January 1, 2003 assumptions for interestrates and decommissioning costs, depreciation expense would have increased by$51,000 and $39,000, respectively, for the years ended December 31, 2002 and2001.

 

Had this changebeen applied retroactively, operating expenses would have increased by$111,000, $79,000 and $27,000, respectively, for the years ended December 31,2002 and 2001 and the quarter ended March 31, 2002.  Net loss and net loss per share applicable to common shares asreported was $23,593,000, $24,303,000

 

8

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and $7,192,000 and $0.89, $0.92 and $0.27,respectively, for the years ended December 31, 2002 and 2001 and the quarterended March 31, 2002.  Had this changebeen applied retroactively, net loss and net loss per share applicable tocommon shares would have been $23,704,000, $24,382,000 and $7,219,000 and$0.89, $0.92 and $0.27, respectively, for the years ended December 31, 2002 and2001 and the quarter ended March 31, 2002.

 

# **Note6.  Liquidity**

The Company willneed to raise additional capital to fund its proposed STR pivotal clinicaltrial program and its future operating cash needs.  In April 2003 the Company received $10 million from twoagreements with Boston Scientific Corporation relating to the sale to BostonScientific of certain NeoRx intellectual property. ** ** The Company expects that its cash, cashequivalents, investment securities and interest income will be sufficient tofund its anticipated working capital and capital requirements through the thirdquarter of 2004.

During 2002, theCompany discontinued all PretargetÒ  technology activities, reduced staffing by 67% and terminated thefacilities lease at the 410 West Harrison Street location in Seattle, effectivein April 2003.  PretargetÒ is adevelopment platform for targeted therapeutics that deliver intense doses ofanti-cancer agents to tumor cells while largely sparing healthy tissues.

 

                Inconnection with its 2001 purchase of the radiopharmaceutical manufacturingplant and other assets of International Isotopes Inc. located in Denton, TX,the Company assumed  $6,000,000principal amount of restructured debt held by Texas State Bank, McAllen, TX.  The loan, which matures in April 2009, issecured by the assets acquired in the transaction.  During 2002 and early 2003, the Company reduced the staff at theDenton facility to four employees, and is operating the facility in standbymode pending a decision to resume clinical testing of STR and production of clinicalmaterials.  The Company is seeking abuyer or partner interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  Under the loan, the Denton facility and theassets used in the facility cannot be transferred without the written approvalof the Bank.  Moreover, the loan statesthat an event of default may be deemed to occur if the Company abandons,vacates or discontinues operations on a substantial portion of the Dentonfacility or there is a material adverse change in the Company’soperations.  The Company does notbelieve that operating the facility in its current standby mode violates theseprovisions, nor has Texas State Bank suggested that it views such operation asa potential violation.  The Company canprovide no assurance, however, that Texas State Bank will not at some time inthe future seek to rely on these or other provisions of the loan to declare the Company in default of theloan.  If this were to occur, TexasState Bank could declare the entire outstanding amount of the loan ($5,573,000at March 31, 2003) due and immediately payable by the Company. In such case,the Company’s cash resources and assets could be impaired depending on theCompany’s ability to raise funds through a sale of the Denton facility andother means.  Based on a recentappraisal of the Denton facility, the fair market value of the facility and itsassets exceeds the outstanding debt.

 

The Company is addressingits need for additional capital by pursuing opportunities for the licensing,sale or divestiture of certain intellectual property and other assets,including its Pretarget® technology platform.  In addition, the Company is seeking a buyeror partner for its manufacturing facility in Denton, TX interested incontinuing the facility’s radiopharmaceutical manufacturing operations andproducing the STR compound.  The Companyalso may seek to raise capital through the sale of equity and/or debtsecurities or the establishment of other funding facilities.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction or curtailment ofits STR development activities and/or further reduction of costs for facilitiesand administration.

 

The Company’sactual capital requirements will depend upon numerous factors, including:

 

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

 

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

 

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

 

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

 

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

 

•             theCompany’s degree of success in commercializing STR or other cancer therapyproduct candidates;

 

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

 

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

 

Therecan be no assurance that the Company will be able to obtain needed additionalcapital or enter into relationships with corporate partners on a timely basis,on favorable terms, or at all. Conditions in the capital markets in general and the life sciencecapital market specifically may affect the Company’s potential financingsources and opportunities for strategic partnering.

**Note 7.  Subsequent Events**

** **

**In April  2003, theCompany entered into agreements with Boston Scientific Corporation relating tothe sale to Boston Scientific of certain NeoRx intellectual property.  Under the first agreement the Companyassigned to Boston Scientific Corporation certain NeoRx intellectual propertyin exchange for a cash payment of $9 million. The intellectual property assigned to Boston Scientific includes aportfolio of NeoRx patents and patent applications in the cardiovascular field.**Under a second agreement, NeoRx granted to Boston Scientific anexclusive license to use certain other NeoRx intellectual property, for whichNeoRx received a one-time cash payment of $1 million.  The exclusive license grants Boston Scientific the right to use,in certain medical device fields, a separate portfolio of NeoRx patents andpatent applications resulting from collaboration with University of Cambridgeinvestigators.  The purchase price wasdetermined by arms length negotiations. The intellectual property rightsassigned to Boston Scientific do not include rights to NeoRx’s STR orPretarget® programs.

** **

Alsoin April 2003, the Company announced that the FDA has lifted the clinical holdon the Company’s STR product candidate for multiple myeloma.  The FDA’s decision follows NeoRx’ssubmission of data from a dosimetry study of STR, in which multiple myelomapatients were treated and detailed radiation dosimetry data were collected, aspreviously requested by the FDA.  NeoRxcontinues to follow these patients for safety and efficacy results.  Three-year survival data on the STR PhaseI/II patients will be available by the end of 2003. NeoRx also has submitted tothe FDA a proposal for further clinical development of STR, and expects tosubmit a full pivotal phase III study protocol before the end of  second quarter 2003 for the FDA’s review.

 

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**Item2.****    Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

This Form 10-Q contains forward-looking statements.These statements relate to future events or future financial performance. Insome cases, you can identify forward-looking statements by terminology such as“may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “propose” or “continue,” the negative ofthese terms or other terminology.  Thesestatements are only predictions. Actual events or results may differmaterially. In evaluating these statements, you should specifically considervarious factors described below in the section entitled “Additional factorsthat may affect results.” These factors may cause our actual results to differmaterially from any forward-looking statement.

Although we believe theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. You should not place undue reliance on our forward-lookingstatements, which speak only as of the date of this report.

 

***Critical Accounting Policies and Estimates***

 

*Basisof Revenue Recognition:*To date, the Company does not have any significant ongoing revenuesources.  On occasion, the Companyderives significant revenue from licensing its patented technologies andgovernment grants.  Pursuant to theSecurities and Exchange Commission Staff Accounting Bulletin No. 101, revenuesfrom collaborative agreements are recognized as earned as the Company performsresearch activities under the terms of each agreement.  Billings in excess of amounts earned areclassified as deferred revenue. Non-refundable upfront technology license fees, where the Company isproviding continuing services related to product development, aredeferred.  Such fees are recognized asrevenue over the product development periods based on estimated totaldevelopment costs.

 

 

###### ***Quarter ended March 31,2003 compared to quarter ended March 31, 2002***

 

**Revenue for the first quarter of 2003 was $0.1 million,compared to $0.3 million for the first quarter of 2002.  Revenue for the first quarter of 2003consisted of revenue from a facilities lease agreement.  Revenue for the first quarter of 2002consisted primarily of revenue from government grants and a facilities leaseagreement.**

** **

Total operating expenses for the first quarter of 2003decreased 48% to $4.0 million from $7.8 million for the first quarter of2002.  Research and development expensesdecreased 57% to $2.6 million for the first quarter of 2003 from $6.0 millionfor the first quarter of 2002.  Thedecrease in research and development expenses for the first quarter is theresult of significantly *reduced* staffing, the suspension of theCompany’s PretargetÒ programs and other cost reductionactions taken in 2002.  General andadministrative expenses declined 18% to $1.4 million for the first quarter of2003 compared to $1.7 million for the first quarter of 2002.  The decrease in general and administrativecosts for first quarter ended March 31, 2003 was due to reductions in staff anddecreased expenditures for recruiting and outside services.

 

The company recorded a $0.2 million cumulative effectof change in accounting principle in the first quarter of 2003 as a result ofthe Company’s adoption of SFAS 143, *Accounting for Asset Retirement Obligations*.  Under SFAS 143, the Company recorded an *asset*and liability in the amount of $0.4 million related to estimated fair value offuture decommissioning costs associated with the Denton facility.  This estimate will be depreciated over theseven year estimated useful life of the asset and the asset retirementobligation will be accreted over the thirty years that represents the expectedtime that will elapse prior to the settlement of the obligation.

 

Cash and investment securities as of March 31, 2003were $12.0 million compared to $16.1 million at December 31, 2002.  The average cash expenditure rate for thefirst quarter of 2003 was $1.4 million per month.  On April 21, 2003, NeoRx announced that it received a total of$10 million from intellectual property agreements with Boston ScientificCorporation. On April 23, 2003 NeoRx announced that the US Food and DrugAdministration (FDA) had lifted the clinical hold on the company’s SkeletalTargeted Radiotherapy (STR) product candidate for multiple myeloma.  Cash expenditures for 2003 are expected tobe approximately $12 million for the year. This number may increase depending on the timing and progress of activitiesrelated to our STR clinical trials during the current year.

 

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###### ***Liquidity and capitalresources***

 

We have financed our operations primarily through thesale of equity securities, technology licensing, collaborative agreements anddebt instruments.  We invest excess cashin investment securities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $12,048,000 at March 31, 2003 versus $16,136,000 at December31, 2002.  We primarily fund currentoperations with our existing cash and investments.  Cash used in operating activities for thefirst quarter of 2003 totaled $4,172,000. Revenues and other income sources for the first quarter of 2003 were notsufficient to cover operating expenses.

 

We currently maintain a line of credit withPharmaceutical Product Development, Inc. (PPD) of up to $5.0 million to assistin funding the pivotal phase III trial of our STR product in development.   This line of credit is available to us onlyupon the successful resumption and subject to conditions related to thespecific design of the STR phase III trials, and the proceeds can only beapplied to the expenses related to the phase III trials.  We have not drawn funds on this line ofcredit to date, which carries an annual interest rate of 16%.

** **

**On November 12, 2002, we entered into an agreement withIDEC Pharmaceuticals Corp. relating to the sale to IDEC of certain NeoRxintellectual property and the grant to IDEC of certain license rights.  We received $7.9 million in cash and mayreceive in the future royalty payments with respect to certain products. Theintellectual property addressed by this agreement includes a portfolio of USand international patents and certain associated technology and know-howrelating to antibody-based therapeutics and ligand-linker technology.  The intellectual property rights transferredto IDEC did not include rights to our STR or Pretarget programs.  With respect to the patents involved in thesale, we retained a license for the development of certain NeoRx products.**

 

On April 17, 2003, we entered into agreements withBoston Scientific Corporation relating to the sale to Boston ScientificCorporation of certain NeoRx intellectual property.  Under the first agreement, the Company assigned to BostonScientific  certain NeoRx intellectualproperty in exchange for a cash payment of $9 million.  The intellectual property assigned to BostonScientific includes a portfolio of NeoRx patents and patent applications in thecardiovascular field. Under a second agreement, NeoRx granted to BostonScientific an exclusive license to use certain other NeoRx intellectualproperty, for which NeoRx received a one-time cash payment of $1 million.  The exclusive license grants BostonScientific the right to use, in certain medical device fields, a separateportfolio of NeoRx patents and patent applications resulting from collaborationwith University of Cambridge investigators.

 

We will need to raiseadditional capital to fund our proposed STR pivotal clinical trial program andour future operating cash needs.  Weexpect that our cash, cash equivalents, investment securities and interestincome will be sufficient to fund our anticipated working capital and capitalrequirements through the third quarter of 2004.  During 2002, we discontinued all Pretarget technology activities,reduced staffing by 67% and terminated the facilities lease at the 410 WestHarrison Street location in Seattle, effective in April 2003.

 

                Inconnection with our 2001 purchase of the radiopharmaceutical manufacturing plantand other assets of International Isotopes Inc. located in Denton, TX, weassumed  $6,000,000 principal amount ofrestructured debt held by Texas State Bank, McAllen, TX.  The loan, which matures in April 2009, issecured by the assets acquired in the transaction.  During 2002 and early 2003, we reduced the staff at the Dentonfacility to four employees, and we are operating the facility in standby modepending a decision to resume clinical testing of STR and production of clinicalmaterials.  We are seeking a buyer orpartner interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  Under the loan, the Denton facility and theassets used in the facility cannot be transferred without the written approvalof the Bank.  Moreover, the loan statesthat an event of default may be deemed to occur if the Company abandons,vacates or discontinues operations on a substantial portion of the Dentonfacility or there is a material adverse change in the Company’soperations.  We do not believe thatoperating the facility in its current standby mode violates these provisions,nor has Texas State Bank suggested that it views such operation as a potentialviolation.  We can provide no assurance,however, that Texas State Bank will not some time in the future seek to rely onthese or other provisions of the loan to declare the Company in default of theloan.  If this were to occur, TexasState Bank could declare the entire outstanding amount

 

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of the Loan ($5,573,000 at March 31, 2003) due andimmediately payable by the Company. 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.  Basedon a recent appraisal of the Denton facility, the fair market value of thefacility and its assets exceeds the outstanding debt.

 

We are addressing ourneed for additional capital by pursuing opportunities for the licensing, saleor divestiture of certain intellectual property and other assets, including ourPretarget® technology platform. In addition, we are seeking a buyer or partner for our manufacturingfacility in Denton, TX interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  We also may seek to raise capital throughthe sale of equity and/or debt securities or the establishment of other fundingfacilities.  In the event thatsufficient additional funds are not obtained through asset sales, licensingarrangements, strategic partnering opportunities and/or sales of securities ona timely basis, we plan to reduce expenses through the delay, reduction orcurtailment of our STR development activities and/or further reduction of costsfor facilities and administration.

 

 Our actual capital requirements will dependupon numerous factors, including:

 

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

 

•             actionstaken by the FDA and other regulatory authorities;

 

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

 

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

 

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

 

•             ourdegree of success in commercializing STR or other cancer therapy productcandidates;

 

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

 

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

 

There can be no assurancethat we will be able to obtain needed additional capital or enter intorelationships with corporate partners on a timely basis, on favorable terms, orat all.  Conditions in the capitalmarkets in general and the life science capital market specifically may affectour potential financing sources and opportunities for strategicpartnering.  Our financial statementsare prepared on a going concern basis, however if we are forced to liquidateour assets, we may not recover the carrying amount of such assets.

 

#### ***Relatedparty transactions***

 

The Company’s ViceChairman of the Board of Directors, Dr. Craves, is a founder of Bay CityCapital, LLC, also known as BCC, a merchant bank focused on the life sciencesindustry.  NeoRx’s Executive Chairmanand Chairman of the Board of Directors, Jack Bowman, is on the businessadvisory board of BCC.  The Company andBCC entered into an agreement whereby BCC will act as the Company’s advisor forthe purpose of identifying opportunities to enter into strategic alliances andprovide assistance relating to structuring and negotiating such transaction.The Company paid a retainer fee of $80,000 for each calendar quarter of2002.  The Company renewed the agreement for one additionalyear from January 1, 2003 and paid a retainer fee of $26,667 for the quarterended

 

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March 31, 2003 and will pay $25,000 per quarter thereafter, plusreasonable travel and other expenses.  The agreement also includes a percentage ofgross value of cash, securities, property or other consideration derived from atransaction, ranging from one to five percent, depending on the ultimate amountof consideration raised.

 

                In connection withconsulting services performed in 2003 and 2002, Dr. Paul G. Abrams, the formerCEO of the Company, received consulting fees of approximately $76,600 for eachof the quarters ended March 31, 2003 and 2002, respectively.

 

                TheCompany had a demand note receivable from an officer with a balance ofapproximately $90,700 that was recorded in other assets at March 31, 2002.  This note was paid in full on May 24,2002.  There were no demand note receivables from relatedparties outstanding at March 31, 2003.

 

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

 

In addition to the other information contained in thisreport, the following factors could affect the Company’s actual results andcould cause our actual results to differ materially from those achieved in thepast or expressed or implied by our forward-looking statements.

 

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

 

We have not been profitable for any year since ourformation in 1984.  As of March 31,2003, we had an accumulated deficit of $211.1 million. These losses haveresulted principally from costs incurred in our research and developmentprograms and from our general and administrative activities.  To date, we have been engaged only inresearch and development activities and have not generated any significantrevenues from product sales.  Weanticipate that our proposed Skeletal Targeted Radiotherapy (STR) product willnot be commercially available for several years, if at all. We expect to incuradditional operating losses in the future. These losses may increasesignificantly if we expand development and clinical trial efforts.  Our ability to achieve long-termprofitability is dependent upon obtaining regulatory approvals for STR or anyother proposed products and successfully commercializing our products alone orwith third parties.  However, ouroperations may not be profitable even if we succeed in commercializing anyproduct.

 

**We will need to raise additional capital, and our futureaccess to capital is uncertain.**

 

It is expensive to develop cancer therapy products andconduct clinical trials for these products. Although we currently are focusing on our STR product candidate, we mayin the future simultaneously conduct clinical trials and preclinical researchfor a number of different indications and cancer therapy product candidates,which is costly. Our future revenues may not be sufficient to support theexpense of our operations and the conduct of our clinical trials andpreclinical research.  We will need toraise additional capital:

 

•                                          to fund operations;

 

•                                          to continue the research and developmentof our STR product candidate; and

 

•                                          to commercialize STR or any otherproposed products.

 

We expect that our cash,cash equivalents, investment securities and interest income will be sufficientto fund our anticipated working capital and capital requirements only throughthe  third quarter of 2004.

 

We are addressing ourneed for additional capital by pursuing opportunities for the licensing, saleor divestiture of certain intellectual property and other assets, including ourPretarget® technology platform.  In addition, we are seeking a buyer or partner for our manufacturingfacility in Denton, TX, interested in continuing the facility’sradiopharmaceutical manufacturing operations and producing the STRcompound.   We also may seek to raisecapital through the sale of equity and/or debt securities, or the establishmentof other funding facilities.  We

 

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cannot provide assurance, however, that any sale orlicense of assets, strategic collaborations, or sales of securities will beavailable to the Company on a timely basis or on acceptable terms, if at all.On March 20, 2003, the Company’s  CommonStock listing was transferred from The Nasdaq National Market to The NasdaqSmallCap Market.  This transfer mayadversely affect our ability to raise capital through the sale ofsecurities.  We may be required to enterinto relationships with third parties to develop or commercialize products ortechnologies that we otherwise would have sought to develop independently;moreover, such relationships may not be on terms as commercially favorable tous as might otherwise be the case.  Ifwe raise additional funds by issuing equity securities, further dilution toshareholders may result, and new investors could have rights superior tocurrent security holders.  The terms ofadditional funding also may limit our operating and financing flexibility.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, we planto reduce expenses through the delay, reduction or curtailment of our STRdevelopment activities and/or further reduction of costs for facilities andadministration.

 

The amount of additionalfinancing we need will depend on a number of factors, including the following:

 

•                                          the rate of progress and costs of ourclinical trial and research and development activities, including costs ofprocuring clinical materials;

 

•                                          actions taken by the FDA and otherregulatory authorities;

 

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

 

•                                          the timing and amount of milestone orother payments we might receive from potential strategic partners;

 

•                                          the timing and amount of payments wemight receive from potential licenses;

 

•                                          our degree of success in commercializingSTR or 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.

 

 

 

                In connection with our 2001purchase of the radiopharmaceutical manufacturing plant and other assets ofInternational Isotopes Inc. located in Denton, TX, we assumed  $6,000,000 principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assets acquiredin the transaction.  During 2002 andearly 2003, we reduced the staff at the Denton facility to four employees, andwe are operating the facility in standby mode pending a decision to resumeclinical testing of STR and production of clinical materials.  We are seeking a buyer or partner interestedin continuing the facility’s radiopharmaceutical manufacturing operations.  Under the terms of the loan, the Denton facilityand the assets used in the facility cannot be transferred without the writtenapproval of Texas State Bank.  Moreover,the loan states that an event of default may be deemed to occur if the Companyabandons, vacates or discontinues operations on a substantial portion of theDenton facility or there is a material adverse change in the Company’soperations.  We do not believe thatoperating the facility in its current standby mode violates these provisions,nor has Texas State Bank suggested that it views such operation as a potentialviolation.  We can provide no assurance,however, that Texas State Bank will not, some time in the future, seek to relyon these or other provisions of the loan to declare the Company in default ofthe loan.  If this were to occur, TexasState Bank could declare the entire outstanding amount of the loan ($5,573,000at March 31, 2003) due and immediately payable by the Company. 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

 

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means.  Basedon a recent appraisal of the Denton facility, the fair market value of thefacility and its assets exceeds the outstanding debt.

 

**Ourpotential products must undergo rigorous clinical testing and regulatoryapprovals, which could be costly, time consuming, and subject us tounanticipated delays or prevent us from marketing any products.**

 

The manufacture andmarketing of our proposed STR product and our research and developmentactivities are subject to regulation for safety, efficacy and quality by theFDA in the United States and comparable authorities in other countries.

 

The process of obtaining FDA and other required regulatory approvals,including foreign approvals, is expensive, often takes many years and can varysubstantially based upon the type, complexity and novelty of the productsinvolved.  We are developing STR fortreatment of multiple myeloma, a cancer of the bone marrow.  Our STR product candidate is novel;therefore, regulatory agencies lack direct experience with it. This maylengthen the regulatory review process, increase our development costs anddelay or prevent commercialization of our STR product candidate. An earlierphase III study of STR in multiple myeloma was placed on clinical hold by the FDAafter some patients in our STR phase I/II trials developed a serious delayedtoxicity.  The FDA requested that wecollect additional radiation dosimetry data from a small number of multiplemyeloma patients to validate the patient-specific dosing method we used inearlier studies of STR and had proposed to use in our planned pivotal trialprogram. The study also used an adjusted radiation dose and a revisedadministration regimen. We completed patient enrollment in this dosimetry studyof STR in late 2002. Follow-up evaluations are ongoing, and include assessmentsof STR safety and efficacy. In February 2003 we submitted to the FDA data fromour phase II dosimetry study of STR in patients with multiple myeloma.  We also submitted to the FDA a proposal for furtherclinical development of STR in patients with primary refractory or relapsedmultiple myeloma, using a revised dosing method.  In April 2003 the FDA lifted the clinical hold on our STR productcandidate for multiple myeloma. We expect to submit a full pivotal phase IIIstudy protocol before the end of  secondquarter 2003 for the FDA’s review.

 

In July 2002 we decided to curtail further Pretarget®product development activities.  Thediscontinued Pretarget activities include our Pretarget® Lymphoma andPretarget® Carcinoma phase I/II clinical programs and manufacturingdevelopment activities associated with the Pretarget programs.  We are seeking to sell or license ourPretarget patent portfolio.  We havecompleted phase I safety studies for Pretarget Lymphoma in patients withnon-Hodgkin’s lymphoma, and for Pretarget Carcinoma in patients withgastrointestinal adenocarcinoma. We have complied with the FDA’s requirementthat we complete a 90-day follow-up on all patients treated to date withPretarget Lymphoma.  We submitted thefollow-up data to the FDA for review and obtained clearance for continuedclinical development of this product.  We do not plan to enroll additional patients in either the PretargetLymphoma or Pretarget Carcinoma program, or otherwise further pursuedevelopment of these Pretarget product candidates internally.

 

No cancer product usingour technologies has been approved for marketing. Consequently, there is noprecedent for the successful commercialization of products based on ourtechnologies.  In addition, we have hadonly limited experience in filing and pursuing applications necessary to gainregulatory approvals.  This may impedeour ability to obtain timely approvals from the FDA or foreign regulatoryagencies, if at all. We will not be able to commercialize STR until we obtainregulatory approval, and consequently any delay in obtaining, or inability toobtain, regulatory approval could harm our business.

 

If we violate regulatoryrequirements at any stage, whether before or after marketing approval isobtained, we may be fined, forced to remove a product from the market orexperience other adverse consequences, including delay, which could materiallyharm our financial results.  Additionally,we may not be able to obtain the labeling claims necessary or desirable forproduct promotion.  We also may berequired to undertake post-marketing trials. In addition, if we or other parties identify side effects after any ofour products are on the market, or if manufacturing problems occur, regulatoryapproval may be withdrawn and reformulation of our products, additionalclinical trials, changes in labeling of our products, and/or additionalmarketing applications may be required.

 

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The requirementsgoverning the conduct of clinical trials and manufacturing and marketing of ourproposed STR product outside the United States vary widely from country tocountry.  Foreign approvals may takelonger to obtain than FDA approvals and can involve additional testing.  Foreign regulatory approval processesinclude all of the risks associated with the FDA approval processes.  Also, approval of a product by the FDA doesnot ensure approval of the same product by the health authorities of other countries.

 

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

 

Although for planning purposes we project thecommencement, continuation and completion of our clinical trials, the time toinitiation and completion of our STR clinical trial program depends uponnumerous factors, including:

 

•                  our ability to obtain adequate funding;

 

•                  our receipt of approvals by the FDA and other regulatory agencies andthe timing thereof;

 

•                  other actions by regulators;

 

•                  the rate of progress and costs of our clinical trial and research anddevelopment activities;

 

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

 

•                  the costs of  ramping up andmaintaining manufacturing operations, should we determine this to be necessary;

 

•                  the extent of scheduling conflicts with participating clinicians andclinical institutions; and

 

•                  our ability to identify and enroll patients who meet trial eligibilitycriteria.

 

We may not commence orcomplete our proposed clinical trial program for our STR product candidate asprojected, may not conduct it successfully, or may not conduct it at all.

 

We currently rely onacademic institutions and clinical research organizations to conduct, superviseor monitor some or all aspects of clinical trials involving our proposed STRproduct.  Further, we are seeking toenter into license agreements, partnerships or other collaborative arrangementsto support financing and development of STR. To the extent that we now or in the future participate in suchcollaborative arrangements, we will have less control over the timing, planningand other aspects of our clinical trials. In addition, if sufficient additional funds are not obtained by theCompany through sale and/or license of assets, strategic partneringopportunities and/or sales of securities on a timely basis, we may be requiredto reduce expenses by delaying, reducing or curtailing our STR developmentactivities.  If we fail to commence orcomplete, or experience delays in or are forced to curtail our proposed clinicalprogram, our stock price and our ability to conduct our business could beharmed.

 

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

 

Our research anddevelopment programs are designed to test the safety and efficacy of ourproposed products in humans through extensive preclinical and clinicaltesting.  We may experience numerousunforeseen events during, or as a result of, the testing process that coulddelay or prevent commercialization of STR or any other proposed products,including the following:

 

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•                                          safety and efficacy results obtained inearly human 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 be obtained inhuman clinical trials;

 

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

 

•                                          our potential collaborators or regulatorsmay suspend or terminate clinical trials if the participating subjects orpatients are being exposed to unacceptable health risks; and

 

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

 

Clinical testing is veryexpensive, can take many years, and the outcome is uncertain.  We cannot at this time predict if, when, orunder what conditions, we will undertake further clinical studies, includinginitiating a revised pivotal phase III program, for STR.  The data collected from our clinical trialsmay not be sufficient to support regulatory approval of our proposed STRproduct, or any other proposed products. The clinical trials of our proposed STR product and other proposedproducts may not be completed on schedule, and the FDA or foreign regulatoryagencies may not ultimately approve any of our product candidates forcommercial sale.  Our failure toadequately demonstrate the safety and efficacy of a cancer therapy productunder development would delay or prevent regulatory approval of the product,which could prevent us from achieving profitability.

 

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

 

For our STR product indevelopment to be successful, we need access to sufficient, reliable andaffordable supplies of the STR compound for clinical studies.  Moreover, STR requires sufficient, reliableand affordable quantities of holmium-166, the radionuclide used in our STRproduct candidate, and DOTMP, the small-molecule compound used in our STRproduct candidate to deliver holmium-166 to the bone.  Sources of these materials may be limited, and we, or potentialthird-party suppliers of the STR compound, may be unable to obtain thesematerials in amounts and at prices necessary to successfully commercialize ourproposed STR product.  Timely deliveryof the holmium-166 component material and of the STR compound is critical.  For example, holmium-166 loses itseffectiveness for treating patients within a short period of time.  As a result, the STR product must be shippedwithin 24 hours of its manufacture to the site where the patient is to betreated.  Failures or delays in themanufacturing and shipping processes could compromise the quality andeffectiveness of our product. There are, in general, relatively few sources ofholmium-166. To date, we have depended on a single source vendor, theUniversity of Missouri Research Reactor facility group (MURR), for theholmium-166 component of our STR product candidate. In December 2001 we enteredinto a contract with MURR to supply holmium-166, under which MURR wasresponsible for the manufacture of holmium-166, including processqualification, quality control, packaging and shipping, from its Columbia, MOreactor facility.  This supply contractexpired in December 2002. We, or potential third-party suppliers of our STRcompound, may pursue negotiation of a long-term supply contract for holmium-166for our proposed further clinical studies, including a revised pivotal phaseIII program. There can be no assurance that such a contract can be negotiatedon acceptable terms.  While MURRgenerally has provided us materials with acceptable quality, quantity and costin the past, it may be unable or unwilling to meet our future demands, ordemands of potential third-party suppliers of our STR compound. If MURR or analternate supplier is unable or unwilling to provide supplies of holmium-166 ata cost and on other terms acceptable to the Company, the manufacture anddelivery of our STR product could be impaired, and we may suffer delays in, orbe prevented from, initiating or completing further clinical trials of our STRproduct.

 

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

 

We rely in part on thirdparties to perform for us or assist us with a variety of important functions,including research and development, manufacturing and clinical trialsmanagement.  We also license technologyfrom others to enhance or supplement our technologies.  We may not be able to locate suppliers tomanufacture our product components or any proposed products at a cost or inquantities necessary to make them commercially viable.  We intend to rely on third-party contractmanufacturers to produce large quantities of certain materials, potentiallyincluding the STR compound, for clinical trials and productcommercialization.  Third-partymanufacturers may not be able to meet our needs with respect to timing,quantity, quality or cost.  If we areunable to contract for a sufficient supply of needed materials or products onacceptable terms, or if we should encounter delays or difficulties in ourrelationships with manufacturers, our clinical testing may be delayed, therebydelaying the submission of products for regulatory approval or marketintroduction and subsequent sales.  Anysuch delay may reduce our revenues and potential profitability.

 

Moreover, any potentialthird-party manufacturers and NeoRx must continually adhere to currentGood Manufacturing Practices (cGMP) regulations enforced by the FDA through itsfacilities inspection program.  If ourfacilities, or the facilities of these manufacturers, cannot pass apre-approval plant inspection, the FDA will not grant pre-market approval ofour proposed products. In complying with cGMP and foreign regulatoryrequirements, we and any of our potential third-party manufacturers will be obligatedto expend time, money and effort in production, record-keeping and qualitycontrol to assure that our products meet applicable specifications and otherrequirements.  If we, or any of ourpotential third-party manufacturers, fail to comply with these requirements, wemay be subject to regulatory action.

 

In April 2001, wepurchased a radiopharmaceutical manufacturing facility and certain other assetslocated in Denton, TX from InternationalIsotopes Inc.  In addition to themanufacturing facility, we purchased existing equipment, documentation, andcertain processes. The facility achieved cGMP status and was issued appropriateradiation permits by the State of Texas. This radiopharmaceuticalmanufacturing facility has assumed responsibility for all aspects of themanufacture of the STR compound, including process qualification, qualitycontrol, packaging and shipping, and production of the clinical material forthe completed STR dosimetry study. In October 2002, we reduced staffing at thefacility to a total of 21 employees. During the third quarter of 2002, we recognized a non-cash assetimpairment charge of $5.6 million on certain facilities, equipment andintangibles, resulting in part from our decision to reduce staff at the Dentonfacility and to eliminate contract manufacturing activities at thisfacility.  The loss on the Dentonfacility and related equipment was determined via outside appraisals.

 

In January 2003 weimplemented a further reduction in staff and laid off an additional 13 employeesat the Denton manufacturing facility. We are operating the Denton facility in standby mode pending a decisionto resume clinical testing of STR and production of clinical materials.  An additional impairment charge of $0.6million**relatingto intangible assets for licenses and processes at the Denton manufacturingfacility was recorded in the fourth quarter of 2002. The fourth quarterimpairment charge is associated with our decision to suspend production of STRand to operate the Denton facility instandby mode.

 

We believe that the Denton facility has thecapabilities and capacity to serve as the principal manufacturing site for theSTR compound for our proposed clinical studies, including a revised pivotalphase III program, and for potential commercial manufacture. We may operate thefacility ourselves, or alternatively, engage a buyer or partner interested incontinuing the facility’s radiopharmaceutical manufacturing operations andproducing the STR compound.  Ourdecision whether to continue to utilize the Denton facility as our primarymanufacturing site for STR in the future will depend on a number of factors,including:

 

•                  actions taken by the FDA and the timing thereof;

 

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

 

•                  our ability to access sufficient, reliable and affordable third-partysupplies of holmium-166;

 

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•                  the costs of ramping up and maintaining manufacturing operations;

 

•                  the availability of qualified personnel;

 

•                  the availability and nature of strategic partnering opportunities; and

 

•                  the availability and cost of potential third-party suppliers of STR.

 

There can be no assurance that acceptablemanufacturing alternatives will be available to us on a timely or cost-effectivebasis.  If we use the Denton facility toproduce the STR compound for our proposed future clinical studies, we may berequired to re-certify the facility with the FDA. The ramp-up andre-certification processes at the Denton facility could take up to six monthsor more.  If we transition the STRproduction process to a third-party supplier, such third-party supplier alsocould require significant start-up time to qualify and implement themanufacturing process.  In either case,our ability to move forward with further STR clinical studies could beadversely affected, and we may incur significant additional costs in connectionwith manufacturing operations.

 

We intend to enter intocollaborations for one or more of the research, development, manufacturing,marketing and other commercialization activities relating to our STR productcandidate. If we are unable to secure collaborators, or if we losecollaborators, our product development and potential for profitability maysuffer.  If any collaborator breaches orterminates an agreement with us, or fails to conduct its collaborativeactivities in a timely manner, the commercialization of our STR productcandidate could be slowed down or blocked completely.  Disputes may arise between NeoRx and collaborators on a varietyof matters, including financial or other obligations under our agreements.  These disputes may be both expensive andtime-consuming and may result in delays in the development andcommercialization of our proposed STR product.

 

**Our Common Stocklisting was transferred from The Nasdaq National Market to The Nasdaq SmallCapMarket; failure to maintain continued listing on Nasdaq could affect its marketprice and liquidity.**

** **

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

** **

**Moreover, there can be no assurance that we will be able tomaintain compliance with the SmallCap Market minimum $1.00 bid pricerequirement or successfully transfer to The Nasdaq National Market..  If we were to be delisted from The NasdaqSmallCap Market, our Common Stock would be listed on the over-the-counterbulletin board or another quotation system or exchange on which we wouldqualify.  Such delisting would have amaterial adverse effect on the trading price and liquidity of our stock, andshareholders’ ability to sell shares of our stock would be severelylimited.  Among other things, our CommonStock may then constitute “penny stock,” which would place an increasedregulatory burden upon brokers, making them less likely to make a market in ourstock.**

 

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**Weface substantial competition in the development of cancer therapies and may notbe able to compete successfully, and our potential products may be renderedobsolete by rapid technological change.**

 

The competition for development of cancer therapies isintense.  There are numerous competitorsdeveloping products to treat the diseases for which we are seeking to developproducts. We initially are focusing our STR product candidate on the treatmentof multiple myeloma. Several companies, including Celgene Corp. and MillenniumPharmaceuticals Inc., also are developing therapeutics for multiple myeloma.  In addition, a number of establishedpharmaceutical companies, including GlaxoSmithKline, Amersham PLC,Mallinckrodt, Inc. (Tyco Healthcare) and Bristol-Myers Squibb Co., aredeveloping proprietary technologies or have enhanced their capabilities byentering into arrangements with, or acquiring, companies with technologiesapplicable to the treatment of cancer. Many of our existing or potential competitors have, or have access to,substantially greater financial, research and development, marketing andproduction resources than we do and may be better equipped than we are todevelop, manufacture and market competing products.  Our competitors may have, or may develop and introduce, newproducts that would render our technology and proposed STR product less competitive,uneconomical or obsolete.

 

We also expect to faceincreasing competition from universities and other non-profit researchorganizations.  These institutions carryout a significant amount of cancer research and development.  These institutions are becoming increasinglyaware of the commercial value of their findings and more active in seekingpatent and other proprietary rights, as well as licensing revenues.

 

**Ifwe are unable to protect our proprietary rights, we may not be able to competeeffectively, or operate profitably.**

 

Our success is dependentin part on obtaining, maintaining and enforcing our patents and otherproprietary rights and our ability to avoid infringing the proprietary rightsof others.  Patent law relating to thescope of claims in the biotechnology field in which we operate is stillevolving and, consequently, patent positions in our industry may not be asstrong as in other, better-established fields. Accordingly, the United States Patent and Trademark Office (USPTO) maynot issue patents from the patent applications owned by or licensed to us.  If issued, the patents may not give us anadvantage over competitors with similar technologies.

 

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

 

In addition to theintellectual property rights described above, we rely on unpatented technology,trade secrets and confidential information. Therefore, others may independently develop substantially equivalentinformation and techniques or otherwise gain access to, or disclose ourtechnology.  We may not be able toeffectively protect our rights in unpatented technology, trade secrets andconfidential information. We require each of our employees, consultants andadvisors to execute a confidentiality agreement at the commencement of anemployment or consulting relationship with us. However, these agreements may not provide effective protection of ourinformation or, in the event of unauthorized use or disclosure, they may notprovide adequate remedies.

 

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

 

Our competitors or othersmay have or acquire patent rights that they could enforce against us.  If they do so, we may be required to alterour products, pay licensing fees or cease activities.  If our products conflict with patent rights of others, thirdparties could bring legal actions against us claiming damages and seeking toenjoin manufacturing and marketing of the affected products.  If these legal actions are successful, inaddition to any potential liability for damages, we could be required to obtaina license in order to continue to manufacture or market the affected products.  We may not prevail in any legal action and arequired license under the patent may not be available on acceptable terms orat all.

 

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

 

The cost to us of anylitigation or other proceedings relating to intellectual property rights, evenif resolved in our favor, could be substantial.  Some of our competitors may be better able to sustain the costsof complex patent litigation because they have substantially greaterresources.  If there is litigationagainst us, we may not be able to continue our operations.  If third parties file patent applications,or are issued patents claiming technology also claimed by us in pendingapplications, we may be required to participate in interference proceedings inthe USPTO to determine priority of invention. We may be required to participate in interference proceedings involvingour issued patents and pending applications. We may be required to cease using the technology or license rights fromprevailing third parties as a result of an unfavorable outcome in aninterference proceeding.  A prevailingparty in that case may not offer us a license on commercially acceptable termsor at all.

 

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

 

The testing,manufacturing, marketing and sale of STR and any other proposed cancer therapyproducts that we may have under development may subject us to product liabilityclaims.  We are insured against suchrisks up to a $10 million annual aggregate limit in connection with clinicaltrials of our products under development and intend to obtain product liabilitycoverage in the future.  However,insurance coverage may not be available to us at an acceptable cost, if atall.  We may not be able to obtaininsurance coverage that will be adequate to satisfy any liability that mayarise.  Regardless of merit or eventualoutcome, product liability claims may result in decreased demand for a product,injury to our reputation, withdrawal of clinical trial volunteers and loss ofrevenues.  As a result, regardless ofwhether we are insured, a product liability claim or product recall may resultin losses that could be material.

 

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

 

Our research anddevelopment and manufacturing processes, as well as the manufacturing processesthat may be used by our collaborators, involve the controlled use of hazardousand radioactive materials.  As a result,we are subject to foreign, federal, state and local laws, rules, regulationsand policies 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 safety procedures for handling anddisposing of such materials comply with the standards prescribed by such lawsand regulations, we may be required to incur significant costs to comply withenvironmental and health and safety regulations in the future. In the eventthat we discontinue operations in facilities that have had past research andmanufacturing processes where hazardous and radioactive materials have been inuse, we may have significant decommissioning costs associated with thetermination of operation of these facilities. These potential decommissioning costs also may reduce the market valueof the facilities and may limit our ability to sell or otherwise dispose ofthese facilities in a timely and cost-effective manner, if at all. *** ***In addition, the risk of accidental contaminationor injury from hazardous and radioactive materials cannot be completelyeliminated.  In the event of such anaccident, we could be held liable for any resulting damages, and any suchliability could exceed our resources.

 

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

 

The levels of revenuesand profitability of biotechnology companies may be affected by the continuingefforts of government and third-party payors to contain or reduce the costs ofhealthcare through various means.  Forexample, in certain foreign markets pricing or profitability of prescriptionpharmaceuticals is subject to governmental control.  In the United States, there have been, and we expect that therewill continue to be, a number of federal and state proposals to implementsimilar governmental controls.  It isuncertain what legislative proposals will be adopted or what actions federal,state or private payors for healthcare goods and services may take in responseto any healthcare reform proposals or legislation.  Even in the absence of statutory change, market forces arechanging the healthcare sector.  Wecannot predict the effect healthcare reforms may have on the development,testing, commercialization and marketability of our proposed cancer therapyproducts.  Further, to the extent thatsuch 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.  In addition, both in the United States andelsewhere, sales of prescription pharmaceuticals depend in part on theavailability of reimbursement to the consumer from third-party payors, such asgovernmental and private insurance plans. Third-party payors are increasingly challenging the prices charged formedical products and services.  If wesucceed in bringing one or more products to market, we cannot be certain thatthese products will be considered cost-effective and that reimbursement to theconsumer will be available or will be sufficient to allow us to sell ourproducts on a competitive or profitable basis.

 

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

 

                SinceJuly 2002, we have implemented three reductions in force. In July 2002, wereduced staff by 31 persons.  In October2002, we further reduced our work force, primarily at our Denton, TXmanufacturing facility, by an additional 13 persons. In January 2003, wereduced staff by an additional 21 persons. Also in January 2003, we accepted the resignations of Richard Ghalie,MD, Vice President, Medical and Regulatory Affairs, and Les Sabo, VicePresident, Manufacturing.  On March 11,2003 Jack L. Bowman was named Executive Chairman of the Company and Chairman ofits Board of Directors.  As of March 20,2003, we had a total work force of 35 full-time employees and one part-timeemployee. Our success depends, to a significant extent, on the continuedcontributions of our principal management and scientific personnel.  The loss of the services of one or more ofthe principal members of our scientific and management staff could delay ourSTR product development activities or other programs and research anddevelopment efforts.  We do not maintainkey-person life insurance on any of our officers, employees or consultants.

 

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

 

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

 

There has been a historyof significant volatility in the market prices of securities of biotechnologycompanies, including our Common Stock, and it is likely that the market priceof our Common Stock will continue to be highly volatile.  Our business and the relative price of ourCommon Stock may be influenced by a large variety of industry factors,including:

 

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

 

•                                          the availability of critical materialsused in developing and manufacturing our proposed STR product;

 

•                                          the progress and results of clinicaltrials;

 

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•                                          developments concerning patents,proprietary rights and potential infringement; and

 

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

 

In addition, publicconcern about the safety of STR and any other products we develop, comments bysecurities analysts, our ability to maintain the listing of our Common Stock onthe Nasdaq system and conditions in the capital markets in general and in thelife science capital market specifically, may have a significant effect on themarket price of our Common Stock.  Therealization of any of the risks described in this report, as well as otherfactors, could have a material adverse impact on the market price of our CommonStock and may result in a loss of some or all of your investment.

 

In the past, securitiesclass action litigation often has been brought against companies followingperiods of volatility in their stock prices. We may in the future be the target of similar litigation.  Securities litigation could result insubstantial costs and divert our management’s time and resources, which couldcause our business to suffer.

 

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

Our articles ofincorporation authorize our Board of Directors to issue up to 3,000,000 sharesof preferred stock and to determine the price, rights, preference, privilegesand restrictions, including voting rights, of those shares without any furthervote or action by our shareholders.  Theissuance of preferred stock could have the effect of delaying, deferring orpreventing a change of control, even if this change would benefit ourshareholders.  In addition, the issuanceof preferred stock may adversely affect the market price of our Common Stockand the voting and other rights of the holders of our Common Stock.

 

We have adopted ashareholders’ rights plan, which is intended to protect the rights ofshareholders by deterring coercive or unfair takeover tactics.  The Board of Directors declared a dividendto holders of our Common Stock of one preferred share purchase right for eachoutstanding share of Common Stock.  Theright is exercisable ten days following the offer to purchase or acquisition ofbeneficial ownership of 20% of the outstanding Common Stock by a person orgroup of affiliated persons.  Each rightentitles the registered holder, other than the acquiring person or group, topurchase from NeoRx one-hundredth of one share of Series A Junior ParticipatingPreferred Stock at the price of $40, subject to adjustment.  The rights expire April 10, 2006.  In lieu of exercising the right bypurchasing one one-hundredth of one share of Series A Preferred Stock, theholder of the right, other than the acquiring person or group, may purchase for$40 that number of shares of our Common Stock having a market value of twicethat price.

 

Washington law imposesrestrictions on certain transactions between a corporation and significantshareholders.  Chapter 23B.19 of theWashington Business Corporation Act prohibits a target corporation, with someexceptions, from engaging in particular significant business transactions withan acquiring person, which is defined as a person or group of persons thatbeneficially owns 10% or more of the voting securities of the targetcorporation, for a period of five years after the acquisition, unless thetransaction or acquisition of shares is approved by a majority of the membersof the target corporation’s board of directors prior to the acquisition.  Prohibited transactions include, among otherthings:

 

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

 

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

 

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

 

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

 

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# **Item 3.**  Quantitative and Qualitative Disclosuresabout Market Risk

 

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

 

**Interest Rate Risk**

 

                TheCompany’s exposure to market rate risk for changes in interest rates relatesprimarily to the Company’s debt securities included in its investmentportfolio.  The Company does not haveany derivative financial instruments.  TheCompany invests in debt instruments of the U.S. Government and its agencies andhigh-quality corporate issuers. Investments in both fixed rate and floating rate interest earninginstruments carry a degree of interest rate risk.  Fixed rate securities may have their fair market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall.  Due in part to these factors, the Company’sfuture investment income may fall short of expectations due to changes ininterest rates or the Company may suffer losses in principal if forced to sellsecurities that have declined in market value due to changes in interestrates.  At March 31, 2003, the Companyowned no government debt instruments and owned corporate debt securities in theamount of $11.1 million. The Company’s exposure to losses as a result ofinterest rate changes is managed through investing primarily in securities withrelatively short maturities of up to three years and securities with variableinterest rates.  The Company had nocorporate debt securities that had maturity dates greater than one year atMarch 31, 2003.

 

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

 

                Under thesupervision of and with the participation of the Company’s management,including the Company’s Executive Chairman, Chief Executive Officer and VicePresident, Finance, the Company has evaluated the effectiveness and design andoperation of its disclosure controls and procedures within 90 days of thefiling date of this quarterly report and, based on their evaluation, theExecutive Chairman, Chief Executive Officer and the Vice President, Financehave concluded that these disclosure controls and procedures areeffective.  There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of their evaluation.

 

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| **PART  II.****  OTHER  INFORMATION** |
|--------------------------------------------|
|                                       |   |
| **Item  6.**                               | **Exhibits and Reports on Form 8-K** |
|                                       |   |
|                                       |   |
|                                       |   |
|                                       | (a) Exhibits —  See Exhibit Index filed herewith. |
|                                       |   |
|                                       | (b) Reports on  Form 8-K: |
|                                       |   |
|                                       |   |
|                                       | Form 8-K dated  March 11, 2003, announcing that the Company has applied to transfer its  Common Stock to The Nasdaq SmallCap Market and announcing the appointment of  Jack L. Bowman as Executive Chairman of the Company. |
|                                       |   |
|                                       | Form 8-K dated  March 20, 2003, announcing transfer of Company Common Stock to The NASDAQ  SmallCap Market. |

 

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**SIGNATURES**

 

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

 

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

 

 

 

Date: May 15, 2003

 

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**CERTIFICATIONS**

I, Jack L. Bowman,certify that:

1.             I have reviewed this quarterly report on Form 10-Q ofNeoRx Corporation;

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand we have:

a)             designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)            evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c)             presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)             all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

b)            any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:       May 15, 2003

| /S/ JACK L. BOWMAN |
|--------------------|
| Jack L. Bowman     |
| Executive Chairman |

 

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**CERTIFICATIONS**

I, Douglass B. Given, MD,PhD, certify that:

1.             I have reviewed this quarterly report on Form 10-Q ofNeoRx Corporation;

2.             Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand we have:

a)             designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)            evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c)             presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)             all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

b)            any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:       May 15, 2003

| /S/ DOUGLASS B. GIVEN                  |
|----------------------------------------|
| Douglass B. Given, MD,  PhD            |
| President and Chief  Executive Officer |

 

30

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I,Melinda G. Kile, certify that:

1.             I have reviewed this quarterly report on Form 10-Q ofNeoRx Corporation;

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the period coveredby this quarterly report;

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand we have:

a)             designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)            evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c)             presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)             all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

b)            any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:       May 15, 2003

| /s/ MELINDA G. KILE                                   |
|-------------------------------------------------------|
| Melinda G. Kile                                       |
| Vice President, Finance  and Chief Accounting Officer |

 

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**EXHIBITINDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                    |   |   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1(a)      |   | Restated Articles of  Incorporation, dated April 29, 1996                                                                                                                                                          |   | (B)    |
| 3.1(b)      |   | Articles of Amendment,  dated March 31, 1997, to Restated Articles of Incorporation                                                                                                                                |   | (C)    |
| 3.1(c)      |   | Articles of Amendment,  dated August 8, 1997, to Restated Articles of Incorporation                                                                                                                                |   | (K)    |
| 3.2         |   | Bylaws, as amended, of  the registrant                                                                                                                                                                             |   | (K)    |
| 10.1        |   | Restated 1994 Stock  Option Plan (‡)                                                                                                                                                                          |   | (F)    |
| 10.2        |   | Lease Agreement for  410 West Harrison facility, dated February 15, 1996, between NeoRx  Corporation and Diamond Parking, Inc                                                                                      |   | (H)    |
| 10.3        |   | Amendment No. 1, dated  August 14, 2000, to Lease Agreement between NeoRx Corporation and Dina  Corporation                                                                                                        |   | (J)    |
| 10.4        |   | 1991 Stock Option Plan  for Non-Employee Directors, as amended (‡)                                                                                                                                            |   | (E)    |
| 10.5        |   | 1991 Restricted Stock  Plan (‡)                                                                                                                                                                               |   | (D)    |
| 10.6        |   | Agreement, dated as of  December 15, 1995                                                                                                                                                                          |   | (F)    |
| 10.7        |   | Stock Option  Agreement, dated July 30, 2001, between NeoRx Corporation and Douglass B.  Given (‡)                                                                                                            |   | (G)    |
| 10.8        |   | Indemnification  Agreement (‡)                                                                                                                                                                                |   | (H)    |
| 10.9        |   | Form of Key Executive  Severance Agreement (‡)                                                                                                                                                                |   | (I)    |
| 10.10       |   | Officer Change in  Control Agreement (‡)                                                                                                                                                                      |   | (K)    |
| 10.11       |   | Key Executive  Severance Agreement (‡)                                                                                                                                                                        |   | (K)    |
| 10.12       |   | License Agreement,  dated June 30, 1999, between NeoRx and The Dow Chemical Company                                                                                                                                |   | (L)    |
| 10.13       |   | Credit Facility  Agreement, dated February 3, 2000, between NeoRx Corporation and  Pharmaceutical Product Development, Inc.                                                                                        |   | (M)    |
| 10.14       |   | Facilities Lease,  dated July 24, 2000, between NeoRx Corporation and F5 Networks                                                                                                                                  |   | (N)    |
| 10.15       |   | Stock Option  Agreement, dated December 19, 2000, between NeoRx Corporation and Carl S.  Goldfischer (‡)                                                                                                      |   | (J)    |
| 10.16       |   | Stock Option  Agreement, dated January 17, 2001, between NeoRx Corporation and Carl S.  Goldfischer  (‡)                                                                                                 |   | (J)    |
| 10.17       |   | Stock Option  Agreement, dated November 16, 2000, between NeoRx Corporation and Douglass  Given (‡)                                                                                                           |   | (J)    |
| 10.18       |   | Sublicense Agreement,  dated May 15, 1997, between NeoRx Corporation and Roche Molecular Biochemicals.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment.   |   | (O)    |
| 10.19       |   | Stock Option Grant  Program for Nonemployee Directors under the NeoRx Corporation 1994 Restated  Stock Option Plan (‡)                                                                                        |   | (P)    |
| 10.20       |   | First Amendment to  Sublease Agreement, dated March 30, 2001, between NeoRx Corporation and F5  Networks                                                                                                           |   | (O)    |
| 10.21       |   | Amendment No. 3 to  Consulting Agreement, dated January 1, 2002, between NeoRx Corporation and  Bay City Capital BD, LLC                                                                                           |   | (A)    |
| 10.22       |   | Separation Agreement,  dated September 13, 2001, between NeoRx Corporation and Richard L. Anderson  (‡)                                                                                                       |   | (A)    |
| 10.23       |   | Form of VP Change in  Control Agreements (‡)                                                                                                                                                                  |   | (A)    |
| 10.24       |   | Clinical Manufacture  and Supply Agreement, dated December 1, 2001, between NeoRx Corporation and  MURR.  Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment. |   | (A)    |
| 10.25       |   | Facilities Lease,  dated February 15, 2002, between NeoRx Corporation and Selig Real Estate  Holdings Six                                                                                                          |   | (A)    |
| 10.26       |   | Form of VP Severance  Agreements (‡)                                                                                                                                                                          |   | (A)    |
| 10.27       |   | Lease  Termination/Continuation Agreement between NeoRx Corporation and Dina  Corporation                                                                                                                          |   | (R)    |
| 10.28       |   | Purchase Agreement  dated as of November 12, 2002, between NeoRx Corporation and IDEC  Pharmaceutical Corporation                                                                                                  |   | (S)    |
| 10.29       |   | Change in Control  Agreement, dated February 12, 2003, between NeoRx Corporation and Douglass B.  Given                                                                                                            |   | (T)    |
|        |   |                                                                                                                                                                                                               |   |   |
| 99.1        |   | Certification of  Quarterly Report by Executive Chairman and Chairman of the Board                                                                                                                                 |   | (Q)    |
| 99.2        |   | Certification of  Quarterly Report by President and Chief Executive Officer                                                                                                                                        |   | (Q)    |
| 99.3        |   | Certification of  Quarterly Report by Vice President, Finance                                                                                                                                                      |   | (Q)    |

 

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|        |
|--------|
| ‡ |   | Management contract or  compensatory plan. |

 
|   |   |                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (A)    |   | Filed as an exhibit to  the Company’s Form 10-K for the fiscal year ended December 31, 2001 and  incorporated herein by reference.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (B)    |   | Filed as an exhibit to  the Company’s Form 10-K for the fiscal year ended December 31, 1996 and  incorporated herein by reference.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (C)    |   | Filed as an exhibit to  the Company’s Registration Statement on Form S-3 (Registration No.  333-25161), filed April 14, 1997 and incorporated herein by reference.                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (D)    |   | Filed as an exhibit to  the Company’s Annual Report on Form 10-K for the fiscal year ended September  30, 1991 and incorporated herein by reference.                                                                                                |
|   |   |                                                                                                                                                                                                                                                     |
| (E)    |   | Filed as an exhibit to  the Company’s Registration Statement on Form S-2 (Registration No. 33-71164)  effective December 13, 1993 and incorporated herein by reference.                                                                             |
|   |   |                                                                                                                                                                                                                                                     |
| (F)    |   | Filed as an exhibit to  the Company’s Form 10-K for the fiscal year ended December 31, 1995 and  incorporated herein by reference.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (G)    |   | Filed as an exhibit to  the Company’s Registration Statement on Form S-8 (Registration No.  333-71368), filed October 10, 2001 and incorporated herein by reference.                                                                                |
|   |   |                                                                                                                                                                                                                                                     |
| (H)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended March 31, 1996 and  incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                     |
| (I)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended June 30, 1996 and  incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                     |
| (J)    |   | Filed as an exhibit to  the Company’s Form 10-K for the fiscal year ended December 31, 2000 and  incorporated herein by reference.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (K)    |   | Filed as an exhibit to  the Company’s Form 10-K for the fiscal year ended December 31, 1998 and  incorporated herein by reference.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| (L)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended September 30, 1999 and  incorporated herein by reference.   Certain portions of the agreement have been omitted pursuant to a  grant of confidential treatment. |
|   |   |                                                                                                                                                                                                                                                     |
| (M)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended March 31, 2000 and  incorporated herein by reference.   Certain portions of the agreement have been omitted pursuant to a  grant of confidential treatment.     |
|   |   |                                                                                                                                                                                                                                                     |
| (N)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended September 30, 2000 and  incorporated herein by reference.   Certain portions of the agreement have been omitted pursuant to a  grant of confidential treatment. |
|   |   |                                                                                                                                                                                                                                                     |
| (O)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended March 31, 2001 and  incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                     |
| (P)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended June 30, 2002 and  incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                     |
| (Q)    |   | Submitted herewith.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                     |
| (R)    |   | Filed as an exhibit to  the Company’s Form 10-Q for the quarterly period ended September 30, 2002 and  incorporated herein by reference.                                                                                                            |
|   |   |                                                                                                                                                                                                                                                     |
| (S)    |   | Filed as an exhibit to the Company’s Current Report on Form 8-K  filed as of November 27, 2002 and incorporated herein by reference.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment.      |
|   |   |                                                                                                                                                                                                                                                     |
| (T)    |   | Filed herewith.                                                                                                                                                                                                                                          |

 

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