**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**ý****                  ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2005**

 

**Commission File No. 0-16614**

 

**NEORXCORPORATION**

(Exact name ofRegistrant as specified in its charter)

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

 

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

(Address of principalexecutive offices)

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the Registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act).

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

 

As of November 4, 2005, 34,322,293 sharesof the Registrant’s common stock, $.02 par value per share, were outstanding.

 

 

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**TABLE OFCONTENTS**

 

**QUARTERLYREPORT ON FORM 10-QFOR THE QUARTER ENDED SEPTEMBER 30, 2005**

 
| **PART I**    | **FINANCIAL INFORMATION**                                                                                                          | ** ** |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** **                                                                                                                         | ** ** |
| Item 1.            | Financial Statements:                                                                                                              |       |
|               |                                                                                                                               |       |
|               | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004  (unaudited)                       |       |
|               |                                                                                                                               |       |
|               | Condensed Consolidated  Statements of Operations for the Three and Nine Months Ended September 30,  2005 and 2004 (unaudited) |       |
|               |                                                                                                                               |       |
|               | Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2005  and 2004 (unaudited)           |       |
|               |                                                                                                                               |       |
|               | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                  |       |
|               |                                                                                                                               |       |
| Item 2.            | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                        |       |
|               |                                                                                                                               |       |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                                                        |       |
|               |                                                                                                                               |       |
| Item 4.            | Controls and  Procedures                                                                                                           |       |
|               |                                                                                                                               |       |
| **PART II**   | **OTHER INFORMATION**                                                                                                              | ** ** |
| ** **         | ** **                                                                                                                         | ** ** |
| Item 5.            | Other Information                                                                                                                  |       |
|               |                                                                                                                               |       |
| Item 6.            | Exhibits                                                                                                                           |       |
|               |                                                                                                                               |       |
| Signatures         |                                                                                                                               |       |
|               |                                                                                                                               |       |
| Exhibit Index |                                                                                                                               |       |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**NEORXCORPORATION AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands, exceptshare data)

(unaudited)

 
| ** **                                                                                                                                                                                              | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                              |       |                        |       |                       |       |
| **Current assets:**                                                                                                                                                                                     |       |                        |       |                       |       |
| Cash  and cash equivalents                                                                                                                                                                              |       | $                           | 8,208      |                       | $          | 16,254 |   |
| Investment  securities                                                                                                                                                                                  |       | —                      |       | 1,499                      |       |
| Prepaid  expenses and other current assets                                                                                                                                                              |       | 765                         |       | 639                        |       |
| Total  current assets                                                                                                                                                                                   |       | 8,973                       |       | 18,392                     |       |
|                                                                                                                                                                                                    |       |                        |       |                       |       |
| Facilities  and equipment, net                                                                                                                                                                          |       | 299                         |       | 7,102                      |       |
| Other  assets                                                                                                                                                                                           |       | 45                          |       | 67                         |       |
| Assets  held for sale                                                                                                                                                                                   |       | 3,027                       |       | —                     |       |
| Licensed  products, net of accumulated amortization of $250 and $125                                                                                                                                    |       | 1,750                       |       | 1,875                      |       |
| **Total assets**                                                                                                                                                                                        |       | $                           | 14,094     |                       | $          | 27,436 |   |
| ** **                                                                                                                                                                                              |       |                        |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                          |       |                        |       |                       |       |
| **Current liabilities:**                                                                                                                                                                                |       |                        |       |                       |       |
| Accounts  payable                                                                                                                                                                                       |       | $                           | 292        |                       | $          | 1,130 |   |
| Accrued  liabilities                                                                                                                                                                                    |       | 2,479                       |       | 1,271                      |       |
| Current  portion of note payable                                                                                                                                                                        |       | 1,280                       |       | 302                        |       |
| Total  current liabilities                                                                                                                                                                              |       | 4,051                       |       | 2,703                      |       |
|                                                                                                                                                                                                    |       |                        |       |                       |       |
| **Long-term liabilities:**                                                                                                                                                                              |       |                        |       |                       |       |
| Note  payable, net of current portion                                                                                                                                                                   |       | 2,755                       |       | 3,905                      |       |
|                                                                                                                                                                                                    |       |                        |       |                       |       |
| **Shareholders’ equity:**                                                                                                                                                                          |       |                        |       |                       |       |
| Preferred  stock, $.02 par value, 3,000,000 shares authorized:                                                                                                                                          |       |                        |       |                       |       |
| Convertible  preferred stock, Series 1, 205,340 shares issued and outstanding at September 30,  2005 and December 31, 2004 (entitled in liquidation to $5,300 and  $5,175, respectively) |       | 4                           |       | 4                          |       |
| Convertible  preferred stock, Series B, 1,575 shares issued and outstanding at September 30,  2005 and December 31, 2004 (entitled in liquidation to $15,750)                            |       | —                      |       | —                     |       |
| Common  stock, $.02 par value, 150,000,000 shares authorized, 34,322,293 and  30,908,753 shares issued and outstanding at September 30, 2005 and December 31,  2004, respectively             |       | 687                         |       | 618                        |       |
| Additional  paid-in capital                                                                                                                                                                             |       | 258,282                     |       | 254,510                    |       |
| Accumulated  deficit, including other comprehensive loss of $0 and $1 at September 30,  2005 and December 31, 2004, respectively                                                              |       | (251,685                    | )          | (234,304                   | )          |
| Total  shareholders’ equity                                                                                                                                                                        |       | 7,288                       |       | 20,828                     |       |
| **Total liabilities and shareholders’ equity**                                                                                                                                                     |       | $                           | 14,094     |                       | $          | 27,436 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

3

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**NEORX CORPORATIONAND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(unaudited)

(in thousands, exceptshare data)

 
| ** **                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                      |       |                                     |       |   |   |   |   |
| **Revenues**                                   |       | $                                         | 2          |                                     | $          | 5 |   | $ | 4 |   | $ | 1,013 |   |
| **Operating expenses:**                        |       |                                      |       |                                     |       |   |   |   |   |
| Research and  development                      |       | 1,978                                     |       | 3,118                                    |       | 7,699 |   | 10,009 |   |
| General and  administrative                    |       | 1,160                                     |       | 1,492                                    |       | 4,582 |   | 5,173 |   |
| Realized net gain on  equipment disposals      |       | (184                                      | )          |                                     |       | (184 | ) | — |   |
| Asset impairment loss                          |       | —                                    |       | —                                   |       | 3,346 |   | — |   |
| Restructuring                                  |       | 140                                       |       | —                                   |       | 1,644 |   | — |   |
| Total  operating expenses                      |       | 3,094                                     |       | 4,610                                    |       | 17,087 |   | 15,182 |   |
| Loss from operations                           |       | (3,092                                    | )          | (4,605                                   | )          | (17,083 | ) | (14,169 | ) |
| **Other income (expense):**                    |       |                                      |       |                                     |       |   |   |   |   |
| Interest  income                               |       | 81                                        |       | 83                                       |       | 272 |   | 232 |   |
| Interest  expense                              |       | (67                                       | )          | (59                                      | )          | (196 | ) | (156 | ) |
| Total  other income                            |       | 14                                        |       | 24                                       |       | 76 |   | 76 |   |
| Net  loss                                      |       | (3,078                                    | )          | (4,581                                   | )          | (17,007 | ) | (14,093 | ) |
| Preferred stock  dividends                     |       | (125                                      | )          | (125                                     | )          | (375 | ) | (375 | ) |
| Net loss applicable to  common shares          |       | $                                         | (3,203     | )                                        | $          | (4,706 | ) | $ | (17,382 | ) | $ | (14,468 | ) |
|                                           |       |                                      |       |                                     |       |   |   |   |   |
| Loss per share  applicable to common shares:   |       |                                      |       |                                     |       |   |   |   |   |
| Basic  and diluted                             |       | $                                         | (0.09      | )                                        | $          | (0.15 | ) | $ | (0.52 | ) | $ | (0.48 | ) |
|                                           |       |                                      |       |                                     |       |   |   |   |   |
| Shares used in  calculation of loss per share: |       |                                      |       |                                     |       |   |   |   |   |
| Basic  and diluted                             |       | 34,279                                    |       | 30,419                                   |       | 33,443 |   | 29,901 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

4

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**NEORX CORPORATION AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

(inthousands)

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                         |       |                                     |       |   |   |
| **Cash flows from operating  activities:**                                   |       |                                     |       |   |   |
| Net  loss                                                                    |       | $                                        | (17,007    | ) | $ | (14,093 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                     |       |   |   |
| Depreciation  and amortization                                               |       | 390                                      |       | 592 |   |
| Net  gain on disposal of equipment                                           |       | (167                                     | )          | — |   |
| Asset  impairment loss                                                       |       | 3,346                                    |       | — |   |
| Restructuring                                                                |       | 905                                      |       | — |   |
| Stock  options and warrants issued for services                              |       | (21                                      | )          | (6 | ) |
| Stock-based  employee compensation                                           |       | 5                                        |       | 340 |   |
| Change  in operating assets and liabilities:                                 |       |                                     |       |   |   |
| Prepaid  expenses and other assets                                           |       | 100                                      |       | 216 |   |
| Accounts  payable                                                            |       | (838                                     | )          | (38 | ) |
| Accrued  liabilities                                                         |       | 178                                      |       | (133 | ) |
| Net  cash used in operating activities                                       |       | (13,109                                  | )          | (13,122 | ) |
|                                                                         |       |                                     |       |   |   |
| **Cash flows from investing  activities:**                                   |       |                                     |       |   |   |
| Proceeds  from sales and maturities of investment securities                 |       | 1,500                                    |       | 10,874 |   |
| Purchases  of investment securities                                          |       | —                                   |       | (32 | ) |
| Facilities  and equipment purchases                                          |       | (79                                      | )          | (301 | ) |
| Licensed  products                                                           |       | —                                   |       | (1,000 | ) |
| Proceeds  from sales of equipment                                            |       | 207                                      |       | — |   |
| Net  cash provided by investing activities                                   |       | 1,628                                    |       | 9,541 |   |
|                                                                         |       |                                     |       |   |   |
| **Cash flows from financing  activities:**                                   |       |                                     |       |   |   |
| Proceeds  from stock options and warrants exercised                          |       | —                                   |       | 448 |   |
| Repayment  of note payable principal                                         |       | (172                                     | )          | (226 | ) |
| Preferred  stock dividends                                                   |       | (250                                     | )          | (250 | ) |
| Net  proceeds from issuance of common stock and warrants                     |       | 3,857                                    |       | 9,042 |   |
| Net  cash provided by financing activities                                   |       | 3,435                                    |       | 9,014 |   |
|                                                                         |       |                                     |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                        |       | (8,046                                   | )          | 5,433 |   |
|                                                                         |       |                                     |       |   |   |
| **Cash and cash equivalents:**                                               |       |                                     |       |   |   |
| Beginning  of period                                                         |       | 16,254                                   |       | 15,166 |   |
| End  of period                                                               |       | $                                        | 8,208      |   | $ | 20,599 |   |
|                                                                         |       |                                     |       |   |   |
| **Supplemental disclosure of cash  flow information:**                       |       |                                     |       |   |   |
| Accrual  of preferred dividend                                               |       | $                                        | 375        |   | $ | 375 |   |
| Cash  paid for interest                                                      |       | $                                        | 195        |   | $ | 144 |   |
| Purchase  of Licensed Products with common stock                             |       | $                                        | —     |   | $ | 1,000 |   |
| Transfer  of assets out of Facilities and Equipment to Assets Held for Sale  |       | $                                        | 3,255      |   | $ | — |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

5

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**NEORX CORPORATION AND SUBSIDIARYNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

# **Note 1.  Basis of Presentation**

# ** **

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

 

TheCompany has historically suffered recurring operating losses and negative cashflows from operations.  As of September 30,2005, the Company had net working capital of $4.9 million and had anaccumulated deficit of $251.7 million with total shareholders’ equity of $7.3 million.  These consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States, assuming that the Company will continue as a going concern.

 

Management believes thatcurrent cash and cash equivalent balances, and any net cash provided byoperations, will provide adequate resources to fund operations at least until December 31, 2005.  The Company will need to raise additionalcapital to fund its 2006 and future operations. Management is actively exploring a number of alternatives to enable theCompany to continue operating, including:

 

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

 

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

 

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

 

On May 6, 2005, theCompany announced the implementation of a strategic restructuring plan torefocus the Company’s resources on the development of picoplatin (NX 473).  This restructuring included thediscontinuation of the Company’s skeletal targeted radiotherapy (STR)development program, including halting further patient enrollment in theCompany’s Phase III trial of STR in multiple myeloma, ceasing operations at theCompany’s Denton, Texas facility, where STR was manufactured, and reducing theCompany’s workforce by 21 employees, leaving a post-restructuring workforce of29 employees.  The Company expanded itsrestructuring activities under the plan in June 2005 to include the terminationof 4 additional employees.  Under theplan, the Company will conserve its financial resources to focus on its picoplatinclinical program, including its Phase II trial of picoplatin in small cell lungcancer, which was initiated in June 2005. The Company recorded a restructuring charge of $1,504,000 during theperiod ended June 30, 2005 and recorded an additional charge of $140,000during the quarter ended September 30, 2005 due to anticipated increasedwaste disposal costs at its Denton, Texas facility. The total restructuringcharge recorded by the Company was $1,644,000 for the nine months ended September 30,2005.  The Company made $739,000 ofrestructuring payments through September 30, 2005, leaving an accruedrestructuring charge of $905,000 as of September 30, 2005.

 

The Company evaluated itsSTR assets in light of the restructuring and determined that the related assetswere impaired.  A charge of $3,346,000 againstoperations was recognized in June 2005 to reflect the impairment.  The Company sold a portion of the STR-relatedassets for the quarter ended September 30, 2005, resulting in a reductionof $24,000 in the carrying amount of these assets held for sale.  While these asset sales resulted in therecognition of a gain on sale, no adjustment to the impairment charge wasdeemed appropriate.  Future adjustmentsto the charge may be taken as the remaining related assets are sold orotherwise disposed of.  The Company isactively seeking a buyer for the Denton facility and its STR related assets(See Note 5).  However, given theinherent uncertainty of the timing of a sale of the Denton facility, theCompany has classified this asset as long term.

 

The Company is continuingto evaluate other areas where expenses can be reduced. The Company will requireadditional funding to support the development of picoplatin.

 

6

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

 

Subjectto the foregoing, the accompanying condensed consolidated financial statementscontained herein have been prepared pursuant to the rules and regulationsof the Securities and Exchange Commission (SEC).  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 the Company believes that the disclosures made are adequate to makethe information presented not misleading. These financial statements should be read in conjunction with theCompany’s annual report on Form 10-K for the year ended December 31,2004 filed with the SEC and available on the SEC’s website, www.sec.gov.

 

The accompanyingcondensed consolidated financial statements are unaudited.  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring accruals necessary to present fairly the Company’s financialposition as of September 30, 2005 and the results of operations and cashflows for the periods endedSeptember 30, 2005 and 2004.

 

Theresults of operations for the periods ended September 30, 2005 and 2004are not necessarily indicative of the expected operating results for the fullyear.

 

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

 

*StockBased Compensation*:  The Company accounts for its stock optionplans for employees in accordance with the provisions of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. Compensation expense related to employee stock options is recorded if,on the date of grant, the fair value of the underlying stock exceeds theexercise price.  The Company applies thedisclosure-only requirements of Statement of Financial Accounting Standard(SFAS) No. 123, “Accounting for Stock-Based Compensation,” and relatedinterpretations, which allows entities to continue to apply the provisions ofAPB Opinion No. 25 for transactions with employees and to provide proforma results of operations disclosures for employee stock option grants as ifthe fair-value based method of accounting in SFAS No. 123 had been appliedto these transactions.  Stockcompensation costs related to fixed employee awards with pro rata vesting arerecognized on a straight-line basis over the period of benefit, generally thevesting period of the options.  Foroptions and warrants issued to non-employees, the Company recognizes stockcompensation costs utilizing the fair value methodology prescribed in SFAS No. 123over the related period of benefit.

 

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

 

7

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| ** **                                                                                          | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss applicable to  common shares:                                                              |       |                                  |       |                                      |       |   |   |   |   |
| As  reported                                                                                        |       | $                                     | (3,203     | )                                         | $          | (4,706 | ) | $ | (17,382 | ) | $ | (14,468 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss                       |       | —                                |       | —                                    |       | 6 |   | 340 |   |
| Deduct:  Stock-based employee compensation determined under fair value based method  for all awards |       | (286                                  | )          | (313                                      | )          | (906 | ) | (1,270 | ) |
| Pro  forma                                                                                          |       | $                                     | (3,489     | )                                         | $          | (5,019 | ) | $ | (18,282 | ) | $ | (15,398 | ) |
| Loss per common share,  basic and diluted:                                                          |       |                                  |       |                                      |       |   |   |   |   |
| As  reported                                                                                        |       | $                                     | (0.09      | )                                         | $          | (0.15 | ) | $ | (0.52 | ) | $ | (0.48 | ) |
| Pro  forma                                                                                          |       | $                                     | (0.10      | )                                         | $          | (0.16 | ) | $ | (0.55 | ) | $ | (0.51 | ) |

 

Theper share weighted-average fair value of stock options granted during the quarterand nine months ended September 30, 2005 and 2004 was $0.45, $1.67, $0.77,and $1.97, respectively, on the grant date using the Black-Scholes optionpricing model with the following weighted average assumptions:

 
| ** **              | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2005**                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected dividend rate  |       | 0.0                                   | %          | 0.0                                       | %          | 0.0 | % | 0.0 | % |
| Risk-free interest rate |       | 4.18                                  | %          | 3.14                                      | %          | 3.87 | % | 3.42 | % |
| Expected volatility     |       | 120.2                                 | %          | 122.3                                     | %          | 122.9 | % | 122.1 | % |
| Expected life in years  |       | 3.00                                  |       | 4.00                                      |       | 3.35 |   | 4.00 |   |

 

# **Note 2.  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 tocalculate diluted loss per share are based on the potential dilution that wouldoccur upon the exercise or conversion of securities into common stock using thetreasury stock method.  The calculationof diluted loss per share excludes the effect of the following stock optionsand warrants to purchase additional shares of common stock because the shareincrements would not be dilutive.

 
| ** **            | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **2005**                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Common stock options  |       | 4,351,474                             |       | 4,050,285                                 |       | 4,351,474 |   | 4,050,285 |   |
| Common stock warrants |       | 3,225,400                             |       | 1,587,500                                 |       | 3,225,400 |   | 1,587,500 |   |

 

In addition, 234,088shares of common stock that would be issuable upon conversion of the Company’s Series 1preferred stock are not included in the calculation of diluted loss per sharefor the periods ended September 30, 2005 and 2004, respectively, andthe 3,446,389 and 3,150,000 shares of common stock that would be 

 

8

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issuable upon conversionof the Company’s Series B preferred stock are not included in thecalculation of diluted loss per share for the periods ended September 30,2005 and 2004, respectively, because the effect of including such shares wouldnot be dilutive.

 

**Note 3.  Comprehensive Loss**

 

The Company’s comprehensiveloss for the quarters ended September 30, 2005 and 2004 was $3,078,000 and$4,576,000, respectively.  Thecomprehensive loss for the quarters ended September 30, 2005 and 2004consisted of net loss of $3,078,000 and $4,581,000, respectively, and a netunrealized gain on investment securities of $0 and $5,000, respectively.  The comprehensive loss for the nine monthsended September 30, 2005 and 2004 was $17,006,000 and $14,089,000,respectively.  The comprehensive loss forthe nine months ended September 30, 2005 and 2004 consisted of net loss of$17,007,000 and $14,093,000, respectively, and a net unrealized gain oninvestment securities of $1,000 and $4,000, respectively.

 

# **Note 4.  Common Stock Private Placement**

# ** **

The Company raisedapproximately $3,800,000 in net proceeds from the sale of 3,320,000 shares of commonstock in a private placement transaction in March 2005 (the March 2005Financing).  In connection with thisprivate placement, the Company issued five-year warrants to purchase an aggregateof 1,328,000 shares of common stock at an exercise price of $2.00 pershare.  The warrants became exercisablebeginning on September 3, 2005 and, thereafter, are exercisable at anytime during their term.  The Companyintends to use the net proceeds from the financing added to its existing fundsto support the current Phase II trial in picoplatin (NX 473) in small cell lungcancer and for general working capital, including restructuring costs associatedwith the Company’s termination of its STR development program (see Note 1 above).  The 3,320,000 shares of common stock issuedin the March 2005 Financing, and the shares of common stock issuable uponexercise of the warrants related thereto, have been registered with the SEC.

 

# **NOTE 5.  Asset Impairment Loss**

# ** **

In June 2005, theCompany recognized an asset impairment loss of $3,346,000 on certain facilitiesand equipment resulting from the Company’s decisions to terminate its STRprogram. The loss on the Denton manufacturing facility and related equipmentwas determined based on an appraisal study commissioned by the Company, as wellas management reviews with the assistance of outside commercial real estatebrokers.  The Company used a fair valueof $3,300,000 for the Denton facility in determining the impairment loss.  This valuation was the result of weightingthe range of values in the appraisal study, which varied from $3,100,000 to$5,000,000. The loss on the equipment at the Seattle facility was determined basedon estimates of potential sales values of used equipment.  These impairment charges established new costbases for the impaired assets, which are reported in Assets Held for Sale andother current assets on the accompanying Condensed Consolidated Balance Sheets.  The Company is actively seeking a buyer forthe Denton facility and its STR related assets. However, given the inherent uncertainty of the timing of a sale of theDenton facility, the Company classified this asset as long term.

 

The following tablesummarizes information related to the impairment charges:

 
| **Description**                                      | ** ** | **Impairment  Loss** | ** ** | **Impaired  Carrying  Value as of  June 30, 2005** | ** ** | **Disposals of  Assets** | ** ** | **Post  Impairment  Carrying Value  as of  September 30, 2005** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|---------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------------------------|------------|
|                                                 |       |                 |       |                                                    |       |                     |       |                                                                 |       |
| Equipment  – Seattle, WA                        |       | $                    | 155,000    |                                                    | $          | 45,000                   |       | $                                                                    | (24,000    | ) | $ | 21,000 |   |
| Equipment  – Manufacturing Facility, Denton, TX |       | 589,000              |       | 183,000                                                 |       | —                   |       | 183,000                                                              |       |
| Manufacturing  Facility – Denton, TX            |       | 2,602,000            |       | 3,027,000                                               |       | —                   |       | 3,027,000                                                            |       |
| Total                                                |       | $                    | 3,346,000  |                                                    | $          | 3,255,000                |       | $                                                                    | (24,000    | ) | $ | 3,231,000 |   |

 

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# **NOTE 6.  Restructuring**

# ** **

In May and June 2005, the Company restructured its operationsand reduced its work force by 50% in connection with the implementation of itsrestructuring plan to refocus its resources on the development of picoplatin(NX 473)  and discontinue its STRdevelopment program.  The employees terminatedas part of the reduction of staff were no longer with the Company at June 30,2005 and will not be providing future services to the Company.  The Company incurred termination benefits chargesof totaling $892,000 related to the reduction in staff in May and June 2005.  Of this amount, $441,000 remained unpaid asof September 30, 2005, which amount is payable within one year.  The Company incurred additional non-employeecharges totaling $612,000 related to the discontinuation of its STR clinicaltrials and the closure of its radiopharmaceutical manufacturing plant and STRresearch facilities, primarily consisting of contract termination anddecommissioning costs.  The Companyrecorded an additional charge of $140,000 for decommissioning costs during thequarter ended September 30, 2005 due to anticipated increased wastedisposal costs at its radiopharmaceutical manufacturing plant in Denton,Texas.  Of the total non-employee chargestotaling $752,000, $464,000 remained unpaid as of September 30, 2005,which amount is payable within one year.

 

The following tablesummarizes the change in the restructuring accrual from initial recognitionthrough September 30, 2005:

 
| **Description**                            | ** ** | **Initial  Restructuring  Charge** | ** ** | **Payment of  Restructuring  Obligations** | ** ** | **Adjustment of  Restructuing  Charge** | ** ** | **Accrued  Restructuring  Charge as of  September 30, 2005** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                       |       |                               |       |                                       |       |                                    |       |                                                              |       |
| Employee  termination benefits             |       | $                                  | 892,000    |                                       | $          | (451,000                                | )          | $                                                                 | —     |   | $ | 441,000 |   |
| Contract  termination costs                |       | 378,000                            |       | (347,000                                   | )          | —                                  |       | 31,000                                                            |       |
| Other  termination and consolidation costs |       | 234,000                            |       | 59,000                                     |       | 140,000                                 |       | 433,000                                                           |       |
| Sub-total                                  |       | 612,000                            |       | (288,000                                   | )          | 140,000                                 |       | 464,000                                                           |       |
| Total                                      |       | $                                  | 1,504,000  |                                       | $          | (739,000                                | )          | $                                                                 | 140,000    |   | $ | 905,000 |   |

 

# **Note 7.  Liquidity**

# ** **

The Company will need toraise additional capital or enter into strategic partnerships for the clinicaldevelopment of its picoplatin platinum compound and to fund its 2006 and futureoperating cash needs.

 

The Company raised approximately$9,000,000 in net proceeds from the sale of common stock and warrants in aprivate placement transaction in February 2004. The Company raisedapproximately $3,800,000 in net proceeds from the sale of common stock andwarrants in March 2005.

 

In connection with its2001 purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, the Company assumed $6,000,000 principal amount ofrestructured debt held by Texas State Bank, McAllen, TX (the Bank).  The loan, which matures in April 2009,is secured by the assets acquired in the transaction and certain cashcollateral.  The interest rate on theloan was 6.75% on September 30, 2005. The interest rate, which is equal to the bank prime rate and is adjustedon the same date that the bank prime rate changes as reported in the WallStreet Journal, was 7.00% on November 4, 2005.  The loan provides for a maximum annualinterest rate of 18%.  Principal andinterest are payable in monthly installments. Principal and interest paid on the note during the quarters ended September 30,2005 and 2004 totaled $126,000 and $115,000, respectively. In December 2003,the Company sold a non-essential portion of the Denton facility, the proceedsof which ($827,000) were applied to reduce the outstanding balance on the loan. As of September 30, 2005, theoutstanding balance of the loan was $4,035,000.  The fixed monthly payments on the note arerecalculated in April of each year based on the then current bank primeinterest rate and outstanding note balance. Because the loan is amortized over a fourteen-year period from itsinception, a principal balance will remain at maturity in April 2009.  Based on an 

 

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interest rate of 6.75%(effective September 20, 2005) and taking into account the early paymentof a minimum of $1,000,000 in additional principal under the arrangementdescribed below, the estimated principal balance payable at maturity would be $1,864,000.

 

Theterms of the Texas State Bank loan provide that an event of default may bedeemed to occur if the Company abandons, vacates or discontinues operations ona substantial portion of the Denton facility or there is a material adversechange in the Company’s financial condition, results of operations,business or properties.  If this were to occur, Texas State Bank coulddeclare the entire outstanding amount of the loan ($4,035,000 at September 30,2005) due and immediately payable. In such case, the Company’s cash resourcesand assets could be impaired depending on its ability to raise funds through asale of the Denton facility or other means.  As a result of the restructuring andthe decision to discontinue its STR development program, the Company has ceasedmanufacturing operations at the Denton, TX facility and is actively working to sellthe facility and other STR assets. The Company has listed the Denton facility forsale at a price of $3,300,000. (See Note 5 above.)  Any sales of the Denton facility or otherDenton assets are subject to approval of the Bank.  There can be no assurance that the Bank willapprove the price or other terms of any offer received by the Company to buythe Denton facility or other STR assets, or that the sale proceeds, if any,received by the Company from such sales will be sufficient to satisfy theoutstanding balance of the Bank loan.

 

In October 2005, theCompany placed $1,000,000 cash in a restricted deposit account with the Bank asadditional collateral to secure the payment of the loan.  The Company has agreed that if it is unableto obtain at least $15,000,000 in new financing on or before January 31,2006, the Bank may apply the $1,000,000 cash deposit to the payment of the lastmaturing installments on the loan.  Inreturn, the Bank has agreed that the Company’s cessation of operations at theDenton facility will not be declared an event of default under the loan as longas the Company continues to pay insurance and taxes on and otherwise maintains thefacility.  Additionally, the Bank hasagreed, prior to January 31, 2006, not to declare the loan in default onthe basis that there has been a material adverse change in the Company’sfinancial condition, results of operations, business or properties. If theCompany obtains $15,000,000 or more in new financing on or before January 31,2006, the Company has agreed to make a principal payment on the loan by January 31,2006 in an amount that reduces the unpaid principal owing on the loan to anamount equal to the lowest of $2,640,000; 80% of the fair market value of theDenton facility as reflected in the most recent appraisal; or 80% of the salesprice in the most recent listing agreement on the Denton facility.  In such case, the Bank has agreed that itwill not, after January 31, 2006, declare the loan in default on the basisthat there has been a material adverse change in the Company’s financialcondition, results of operations, business or properties as long as theprincipal balance on the loan does not exceed the lesser of 80% of the fairmarket value of the Denton facility as reflected in the most recent appraisalor 80% of the sales price in the most recent listing agreement on the Denton facility.  The Company can provide no assurance that itwill successfully secure new financing by January 31, 2006, or at all, orthat the Bank will not at some time in the future seek to rely on the foregoingor other provisions to declare the Company in default of the loan.

 

On August 4, 2005,the Company entered into a research funding and option agreement with TheScripps Research Institute (TSRI).  Underthe agreement, the Company has agreed to provide TSRI an aggregate of$2,500,000 over a 26-month period to fund research relating to synthesis andevaluation of novel small molecule, multi-targeted protein kinase inhibitors astherapeutic agents, including for the treatment of cancer.  The Company has the option to negotiate aworldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration.  The researchfunding is payable by the Company to TSRI quarterly in accordance with anegotiated budget.  On August 8,2005, the Company made an initial funding payment to TSRI of $137,500.  The agreement provides for additionalaggregate funding payments of $1,012,500 and $1,350,000 in 2006 and 2007,respectively.

 

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

 

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

 

•      theCompany’s ability to raise additional funding and the amounts raised, if any;

 

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

 

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

 

•      thecosts of the restructuring announced in May 2005, including the costs associatedwith discontinuing the STR development program, reducing the workforce andclosing and decommissioning the Denton, Texas manufacturing facility, as wellas the timing and amounts of proceeds from the sale of the Denton facility andassets;

 

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

 

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

 

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

 

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

 

•      theacquisition or in-licensing of other products or intellectual property, if theCompany chooses to undertake such activities;

 

•      thecosts of any research collaborations or strategic partnerships established, ifthe Company chooses to pursue such activities; and

 

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

 

There can be no assurancethat the Company will be able to raise additional capital or enter intorelationships with corporate partners on a timely basis, on favorable terms, orat all.  The report of the Company’sindependent registered public accountants issued in connection with the Company’sannual report on Form 10-K for the year ended December 31, 2004contains a statement expressing substantial doubt regarding the Company’sability to continue as a going concern. Conditions in the capital markets ingeneral and the life science capital market specifically may affect the Company’spotential financing sources and opportunities for strategic partnering. If theCompany is unable to obtain sufficient cash to fund its operations, the Companymay be forced to explore liquidation alternatives, including seeking protectionfrom creditors under the bankruptcy laws.

 

**Note 8.  Recent Accounting Pronouncements**

 

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards (SFAS) No.123R, Share-Based Payment. SFAS 123Rreplaces SFAS 123, Stock-Based Compensation, issued in 1995. SFAS 123R requiresthat the fair value of the grant of employee stock options be reported as anexpense in theresults of operations. Historically, the Company has disclosed in its footnotes the pro formaexpense effect of the grants.  Stock compensation expense underthe prior rules would have increased reported diluted loss per share by$.01 for the quarter ended September 30, 2005.  Upon adoption of the revised standard, stockoption awards will be charged to expense under the revised rules, which requirethat an expense be recognized equal to the fair value of the award.  The Company has not determined the effect ofthe new standard on its earnings; however, expense under the newstandard will be higher. The effect of adopting the new rules on reporteddiluted earnings per share is dependent on the number of options granted in thefuture, the terms of those awards, and their fair values and, therefore, theeffect on diluted earnings per share could change. The adoption of theStatement is expected to have a material effect on the financial statements.

 

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

 

**Note 9.  Subsequent Event**

 

As described in detail inNote 7 above, the Company and Texas State Bank entered into a letter agreement datedOctober 14, 2005, pursuant to which the Company has agreed to deliveradditional cash collateral to secure the payment of the Bank loan.

 

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

 

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

 

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

 

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

 

***CriticalAccounting Policies and Estimates***

 

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

 

# ***StrategicRestructuring***

# ** **

On May 6, 2005, weannounced the implementation of a strategic restructuring plan to refocus our resourceson the development of picoplatin (NX 473). This restructuring included the discontinuation of our Skeletal Targeted Radiotherapy (STRTM) development program,including halting further patient enrollment in our Phase III trial of STR inmultiple myeloma, ceasing operations at our Denton, Texas facility, where STR wasmanufactured, and reducing our workforce by 21 employees, leaving apost-restructuring workforce of 29 employees. Under the plan, we will conserve our financial resources to focus on ourpicoplatin clinical program, including our Phase II trial of picoplatin insmall cell lung cancer, which was initiated in June 2005.  We recorded a restructuring charge of approximately$1.5 million during the period ended June 30, 2005 and recorded anadditional charge of $140,000******during thequarter ended September 30, 2005 due to anticipated increased wastedisposal costs at its Denton, Texas facility. We have recorded a total restructuring charge of $1.6 million for thenine months ended September 30, 2005. We made $739,000 of restructuring payments through September 30,2005, leaving an accrued restructuring charge of $905,000 as of September 30,2005.

 

We evaluated our STRassets in light of the restructuring and determined that a likely impairmentexisted on those assets.  A charge of approximately$3.3 million was taken against operations in June 2005 to reflect suchimpairment.  The Company sold a portionof the STR-related assets through September 30, 2005, resulting in areduction of $24,000 in the carrying amount of these assets held for sale and anet gain of $184,000.  While these assetsales resulted in the recognition of a gain on sale, no adjustment to theimpairment charge was deemed appropriate. Future adjustments to the charge may be taken as the remaining related assetsare sold or otherwise disposed of.  Weare actively seeking a buyer for the Denton facility and our STR related assets.  However, given the inherent uncertainty ofthe timing of a sale of the Denton facility, we have classified this asset aslong term.

 

We are continuing toevaluate other areas where additional expenses can be reduced. We will requireadditional capital to support the development of picoplatin and to fund ourcash operating needs.

 

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

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

###### ***Quarter and nine months ended September 30,2005 compared to quarter and nine months ended September 30, 2004***

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

**Revenue for the third quarterof 2005 was $2,000, compared with $5,000 for the third quarter of 2004.  Revenue for the nine months ended September 30,2005 was $4,000, compared with $1.0 million for the nine**

 

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**months ended September 30, 2004.  Revenue for the quarter and nine months endedSeptember 30, 2005 consisted of royalties from out-licensed intellectualproperty.  Revenue for the quarter and ninemonths ended September 30, 2004 consisted primarily of milestonepayments from Boston Scientific Corporation.**

** **

Total operating expensesfor the third quarter of 2005 decreased 33% to $3.1 million, from $4.6 millionfor the third quarter of 2004, and increased 13% to $17.1 million for the nine monthsended September 30, 2005, from $15.2 million for the same period in2004.  Total operating expenses for the ninemonths ended September 30, 2005 include a non-cash asset impairment chargeof $3.3 million.  Additionally, arestructuring charge of $1.6 million, relating to termination benefits for the reductionin staff completed in May and June 2005 and for other costs associatedwith the termination of our STR program, is included in total operatingexpenses for the nine months ended September 30, 2005.  The decrease in Research and development(R&D) expenses and General and administrative (G&A) expenses was due tolower clinical and personnel costs resulting from the termination of our STRclinical program.

 

R&D expenses decreased37% to $2.0 million for the third quarter of 2005, from $3.1 million for the thirdquarter of 2004, and decreased 23% to $7.7 million for the nine months ended September 30,2005, from $10.0 million for the same period in 2004.  The decrease in R&D expenses for the thirdquarter of 2005 and nine months ended September 30, 2005 resulted from lowerclinical costs due to the termination of our STR clinical program, includingour STR Phase III trial in multiple myeloma.

 

G&A expenses decreased22% to $1.2 million for the third quarter of 2005, from $1.5 million for the thirdquarter of 2004, and decreased 11% to $4.6 million for the first nine months of2005, compared with $5.2 million for the same period in 2004.  Thereduction in G&A costs for 2005 is due primarily to reductions in personnel,consultant activity and accounting fees.

 

Cash and investmentsecurities as of September 30, 2005 were $8.2 million, compared with $17.8million at December 31, 2004.  In March 2005, we raised approximately $3.8million in net proceeds through the sale in a private placement of 3,320,000shares of common stock.  The purchasersin that offering also received five-year warrants to purchase an aggregate of1,328,000 shares of common stock at $2.00 per share.  We will require additional funds tosupport our picoplatin clinical program and fund our 2006 and future cashoperating needs.  In the event thatsufficient additional funds are not obtained, the Company may be required todelay, reduce or curtail the scope of its picoplatin clinical program and otherproduct development efforts and explore liquidation alternatives, includingseeking protection from creditors under the bankruptcy laws.

 

***Major Research and DevelopmentProjects***

 

Our major research and development project through May 6,2005 and during the fiscal quarter ended September 30, 2005 was STR, abone-targeting radiotherapeutic.  On May 6,2005, we announced the implementation of a strategic restructuring program to refocusour resources on the development of picoplatin (NX 473), a next-generationplatinum-based cancer therapy.  Thisrestructuring included the discontinuation of our STR development program, includinghalting further patient enrollment in our Phase III trial of STR in multiplemyeloma, ceasing operations at our Denton facility, where STR was manufactured,and reducing our workforce to 29 employees. Under the plan, we will conserve our financial resources to focus on ourpicoplatin clinical program, including our Phase II trial of picoplatin insmall cell lung cancer, which was initiated in June 2005.  We have incurred costs of approximately $58.2 millionin connection with the STR program since the program’s inception in 1998.

 

Total estimated costs tocomplete the STR clinical trial and potentially obtain marketing approval werein the range of $35-40 million, including cost of clinical drug supply.  These costs would have been substantiallyhigher if we were required to repeat, revise or expand the scope of our trials,or conduct additional clinical trials. The termination of the STR developmentprogram relieves us of the annual costs associated with the program, including manufacturing,clinical trial and personnel costs.  During2004, these costs were approximately $10.2 million.  For 2005, these costs were expected to be approximately$4.5 million.  We are actively seeking abuyer for the Denton facility and our STR related assets.  Given the inherent uncertainty of the timingof a sale of the Denton facility, we have classified this asset as long term.

 

STR was a clinical stageproduct candidate for which no marketing approvals have been obtained.  We had no material cash inflows relating toour STR development nor received any revenues from product sales of STR.  Due to our decision to curtail our STRdevelopment program, there is neither an anticipated completion date nor an 

 

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expected period duringwhich material net cash inflows will commence. As a consequence of the restructuring, we are not dependent on thesuccessful development and completion of our STR program and, therefore, thereare no risks and uncertainties associated with the STR program that willmaterially impact our operations and financial position.

 

Our current majorresearch and development project is picoplatin (NX 473), a next-generation platinum-basedcancer therapy designed to overcome platinum resistance in the treatment ofsolid tumors.  We initiated a Phase IIclinical study of picoplatin in small cell lung cancer in June 2005.  To date, we have incurred costs ofapproximately $3.0 million in connection with the picoplatin clinical program.  Total estimated costs to complete thepicoplatin Phase II trial in small cell lung cancer are in the range of $10 to$12 million for the period through 2007, including the cost of drugsupply.  The costs could be substantiallyhigher if we have to repeat, revise or expand the scope of our trial.  Material cash inflows relating to ourpicoplatin development will not commence unless and until we complete requiredclinical trials and obtain FDA marketing approvals, and then only if picoplatinfinds acceptance in the marketplace.  Todate, we have not received any revenues from product sales of picoplatin.

 

The risks anduncertainties associated with completing the development of picoplatin on schedule orat all, include the following, as well as the other risk factors described inthis report:

 

•      We may not have adequate funds to complete thedevelopment of picoplatin;

 

•      We may be unable to secure adequate supplies ofpicoplatin drug product in order to complete our clinical trials;

 

•      Picoplatin may not be shown to be safe and efficaciousin clinical trials; and

 

•      We may be unable to obtain regulatory approval of thedrug or may be unable to obtain such approval on a timely basis.

 

If we fail to obtainmarketing approval for picoplatin, are unable to secure adequate clinical andcommercial supplies of picoplatin drug product, or do not complete developmentand obtain regulatory approval on a timely basis, our operations, financialposition and liquidity could be severely impaired, including as follows:

 

•      We would not earn any sales revenue from picoplatin,which would increase the likelihood that we would need to obtain additionalfinancing for our other development efforts;

 

•      Our reputation among investors might be harmed, whichcould make it more difficult for us to obtain equity capital on attractiveterms or at all.

 

Because of the many risksand uncertainties relating to completion of clinical trials, receipt of marketapprovals and acceptance in the marketplace, we cannot predict the period inwhich material cash inflows from our picoplatin program will commence, if ever.

 

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

 

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| ** **                            | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| **(000’s)**                      | ** ** | **2005**                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Picoplatin                            |       | $                                     | 1,121      |                                      | $          | — |   | $ | 2,473 |   | $ | — |   |
| STR                                   |       | —                                |       | 2,479                                     |       | 3,004 |   | 7,850 |   |
| Other overhead and  research costs    |       | 857                                   |       | 639                                       |       | 2,222 |   | 2,159 |   |
|                                  |       |                                  |       |                                      |       |   |   |   |   |
| Total research and development  costs |       | $                                     | 1,978      |                                      | $          | 3,118 |   | $ | 7,699 |   | $ | 10,009 |   |

 

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

 

We have financed ouroperations primarily through the sale of equity securities, technologylicensing, collaborative agreements and debt instruments.  We invest excess cash in investmentsecurities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $8.2 million at September 30, 2005 compared to $17.8million at December 31, 2004.  Weprimarily fund current operations with our existing cash and investments.  Cash used for operating activities for the nine months ended September 30, 2005totaled $13.1 million.** **Revenues and other income sourcesfor the third quarter of 2005 were not sufficient to cover operating expenses.

 

We raised approximately $3.8******millionin net proceeds from the sale of common stock and warrants in a privateplacement transaction in March 2005. We intend to use the net proceeds from this financing added to ourexisting funds to support our Phase II trial in picoplatin in small cell lungcancer and for general working capital, including restructuring costsassociated with the termination of our STR development program. With theproceeds of this offering, and giving effect to the strategic restructuring, webelieve that our present cash, cash equivalents, investment securities andexpected interest income will be sufficient to fund our anticipated workingcapital and capital requirements at least through the fourth quarter of2005.  We will need to raise additionalcapital to fund our 2006 and future operations. In the event that sufficient additional funds are not obtained, we maybe required to delay, reduce or curtail the scope of our picoplatin clinicalprogram and other product development efforts and explore liquidationalternatives, including seeking protection from creditors under the bankruptcylaws.

 

We acquired the worldwide exclusive rights,excluding Japan, to develop, manufacture and commercialize picoplatin fromAnorMED, Inc. in April 2004. Under the terms of the agreement, we paid AnorMED a one-time upfrontmilestone payment of $1.0 million in common stock and $1.0 million incash.  The agreement also provides foradditional milestone payments to AnorMED of up to $13 million, payable in cashor a combination of cash and common stock. Upon regulatory approval, AnorMED would receive royalty payments of upto 15% on product sales.  We initiatedour first picoplatin clinical trial, a Phase II study of picoplatin in smallcell lung cancer, in June 2005, and it is therefore unlikely that thesemilestones would be triggered during 2005 or 2006.  Because we cannot predict the length of timeto completion of our Phase II study, the time of initiation and completion of aPhase III study or the time of submission of a New Drug Application (NDA) for picoplatin,we are unable to predict when such milestones might be triggered after 2006.

 

Also in April 2004, we sold and transferredour Pretarget intellectual property to Aletheon Pharmaceuticals, Inc.  Under the agreement, we could receive up to$6.6 million in milestone payments if Aletheon achieves certain developmentgoals, plus royalties on potential future product sales.  We did not receive any upfront considerationfor the sale of the Pretarget property. We discontinued our clinical studies using the Pretarget technology in July 2002,and sought, both through targeted inquiries and a broad-based auction process,a buyer or licensee for the technology. The sale of the Pretarget intellectual property relieves us of theannual costs associated with maintaining the Pretarget patent estate.  During 2003, we spent approximately $350,000for the prosecution and maintenance of the Pretarget patents and trademarks.  For 2004, these costs were approximately$70,000.  Seattle-based Aletheon is adevelopment stage biotherapeutics company founded by two former NeoRxemployees.  The timing and amount ofmilestone payments, if any, are uncertain. The terms of the transaction were determined through arms-lengthnegotiation.  Neither the Company nor BayCity Capital LLC and its affiliates at any time has held, or in the futureplans to acquire, a financial interest in Aletheon.

 

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

 

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In connection with our 2001purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, we assumed $6.0 million principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assetsacquired in the transaction.  Theinterest rate on the loan was 6.75% on September 30, 2005.  The interest rate, which is equal to the bankprime rate and is adjusted on the same date that the bank prime rate changes asreported in the Wall Street Journal, was 7.00% on November 4, 2005.  The loan provides for a maximum annualinterest rate of 18%.  Principal andinterest are payable in monthly installments. Principal and interest paid on the note during the quarters ended September 30,2005 and 2004 totaled $126,000 and $115,000, respectively. In December 2003,we sold a non-essential portion of the Denton facility, the proceeds of which($827,000) were applied to reduce the outstanding balance on the loan.  As of September 30, 2005, the outstandingbalance of the loan was $4.0 million.  Thefixed monthly payments on the note are recalculated in April of each yearbased on the then current bank prime interest rate and outstanding notebalance.  Because the loan is amortizedover a fourteen-year period from its inception, a principal balance will remainat maturity in April 2009.  Based onan interest rate of 6.75% (effective September 20, 2005) and taking intoaccount the early payment of a minimum of $1.0 million in principal under thearrangement described below, the estimated principal balance payable atmaturity would be $1.9 million.

 

Theterms of the Bank loan provide that an event of default may be deemed to occurif the Company abandons, vacates or discontinues operations on a substantialportion of the Denton facility or there is a material adverse change in theCompany’s financial condition, results of operations, business or properties.  If this were to occur, the Bank could declarethe entire outstanding amount of the loan ($4.0 million at September 30,2005) due and immediately payable. In such case, our cash resources and assetscould be impaired depending on our ability to raise funds through a sale of theDenton facility or other means.  Asa result of the restructuring and the decision to discontinue its STRdevelopment program, we have ceased manufacturing operations at the Dentonfacility and are actively working to sell the facility and other STR assets. Wehave listed the Denton facility for sale at a price of $3.3 million.  Any sales of the Denton facility or otherDenton assets are subject to approval of the Bank.  There can be no assurance that the Bank willapprove the price or other terms of any offer received by the Company to buythe Denton facility or other STR assets, or that the sale proceeds, if any,received by the Company from such sales will be sufficient to satisfy the outstandingbalance of the Bank loan.

 

In October 2005, we placed$1.0 million in cash in a restricted deposit account with the Bank asadditional collateral to secure the payment of the loan.  We have agreed that if we are unable toobtain at least $15.0 million in new financing on or before January 31,2006, the Bank may apply the $1.0 million cash deposit to the payment of thelast maturing installments on the loan. In return, the Bank has agreed that our cessation of operations at theDenton facility will not be declared an event of default under the loan as longas we continue to pay insurance and taxes on and otherwise maintain thefacility.  Additionally, the Bank hasagreed, prior to January 31, 2006, not to declare the loan in default onthe basis that there has been a material adverse change in the Company’sfinancial condition, results of operations, business or properties. If weobtain $15.0 million or more in new financing on or before January 31,2006, we have agreed to make a principal payment on the loan by January 31,2006 in an amount that reduces the unpaid principal owing on the loan to anamount equal to the lowest of $2,640,000; 80% of the fair market value of theDenton real facility as reflected in the most recent appraisal; or 80% of the salesprice in the most recent listing agreement for the Denton facility.  In such case, the Bank has agreed that itwill not, after January 31, 2006, declare the loan in default on the basisthat there has been a material adverse change in the Company’s financialcondition, results of operations, business or properties as long as theprincipal balance on the loan does not exceed the lesser of 80% of the fairmarket value of the Denton facility as reflected in the most recent appraisalor 80% of the sales price in the most recent listing agreement on the Dentonfacility.  We can provide no assurancethat we will successfully raise new financing by January 31, 2006, or atall, or that the Bank will not at some time in the future seek to rely on theforegoing or other provisions to declare the Company in default of the loan.

 

In April 2003, wereceived $10 million from the sale to Boston Scientific Corporation, or BSC, ofcertain non-core patents and patent applications and the grant to BSC ofexclusive license rights to certain patents and patent applications.  BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc. and certain of itssubsidiaries, including Cordis Corporation and Guidant Corporation, alleginginfringement of such patents.** **In both lawsuits, the defendantsdenied infringement and asserted invalidity and unenforceability of thepatents.  BSC subsequently withdrew threeof the patents from the litigation. Although we are not currently a party to the lawsuits, our managementand counsel have been deposed in connection with the lawsuits.  It is possible that BSC, if it isunsuccessful or has limited success with its claims against Johnson &Johnson, Inc. and its subsidiaries, may seek damages from us, includingrecovery of all or a portion of the amounts it paid to us in 2003.  We cannot assess the likelihood of whethersuch claim will be brought against us or the extent of recovery, if any, on anysuch claim.

 

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On August 4, 2005, we entered into aResearch Funding and Option Agreement with The Scripps Research Institute, orTSRI.  Under the agreement, we haveagreed to provide TSRI an aggregate of $2.5 million over a 26-month period tofund research relating to synthesis and evaluation of novel small molecule,multi-targeted protein kinase inhibitors as therapeutic agents, including forthe treatment of cancer.  We have theoption to negotiate a worldwide exclusive license to use, enhance and developany compounds arising from the collaboration. The research funding is payable by us to TSRI quarterly in accordancewith a negotiated budget.  We made aninitial funding payment to TSRI of $137,500 on August 8, 2005, and we areobligated to make additional aggregate funding payments of $1.0 million and$1.4 million in 2006 and 2007, respectively.

 

We have historically suffered recurringoperating losses and negative cash flows from operations.  As of September 30, 2005, we had networking capital of $4.9 million and had an accumulated deficit of $251.7million with total shareholders’ equity of $7.3 million.  Management believes that current cash andcash equivalent balances, and any net cash provided by operations, will provideadequate resources to fund operations at least until December 31, 2005.We will need to raise additional capital to fund our 2006 and futureoperations.  Management is activelyexploring a number of alternatives to enable us to continue operating,including:

 

•      raising additional capital to fund continuingoperations by private placements or other sales of equity or debt securities orthrough the establishment of other funding facilities;

 

•      entering into strategic collaborations, which mayinclude joint ventures or partnerships for product development andcommercialization, merger, sale of assets or other similar transactions; and

 

•      obtaining additional capital resources to fundoperations through cost cutting mechanisms, including the delay, reduction orcurtailment of our product development programs.

 

In May 2005, weimplemented a strategic restructuring plan to reduce costs by discontinuing ourSTR development program and other STR related activities.  The restructuring is described in more detailin the section above entitled “Strategic Restructuring.”

 

We have no assurance that our restructuringor any other cost savings alternatives will be successful.  We may not be able to obtain the requiredadditional capital or enter into relationships with corporate partners on atimely basis, on favorable terms, or at all. The report of our independent registered public accountants issued inconnection with our annual report on Form 10-K for the year ended December 31,2004 contains a statement expressing substantial doubt regarding our ability tocontinue as a going concern. Conditions in the capital markets in general, andthe life science capital market specifically, may affect our potentialfinancing sources and opportunities for strategic partnering.  If we are unable to obtain sufficient cash tofund our operations, we may be forced to explore liquidation alternatives,including seeking protection from creditors under the bankruptcy laws.

 

Our actual capital requirements will dependupon numerous factors, including:

 

•      the scope and timing of our picoplatin clinicalprogram and other research and development efforts, including the progress andcosts of our Phase II trial of picoplatin in small cell lung cancer, which wasinitiated in June 2005;

 

•      our ability to raise additional funding and theamounts raise, if any;

 

•      our ability to obtain clinical supplies ofpicoplatin drug product in a timely and cost effective manner;

 

•      actions taken by the FDA and other regulatoryauthorities;

 

•       the costs of the restructuring announced in May 2005,including the costs associated with discontinuing our STR development program,reducing our workforce and closing and decommissioning the Denton, Texasmanufacturing facility, as well as the timing and amounts of proceeds from anysale of the Denton facility and assets;

 

•      our alternatives with respect to the STR assets,including any potential disposition or out-licensing alternatives and thetiming, type and amount of consideration received and other terms of any such 

 

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transactions;

 

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

 

•      our degree of success in commercializingpicoplatin or any other cancer therapy product candidates;

 

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

 

•      the acquisition or in-licensing of other productsor intellectual property, if we choose to undertake such activities;

 

•      the costs of any research collaborations orstrategic partnerships established, if we chooses to pursue such activities and

 

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

 

At September 30, 2005, we had thefollowing long-term contractual commitments:

 

Payments Due by Period

(in thousands)

 
| ** **                      | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|----------------|------------|-----------|------------|
| Lease commitments               |       | 644                   |       | 1,137         |       | 326           |       | —         |       | 2,107     |       |
| Note payable (1)                |       | 1,503                 |       | 1,006         |       | 2,157         |       | —         |       | 4,666     | (2)        |
| Purchase  commitments - Scripps |       | 775                   |       | 1,588         |       | —        |       | —         |       | 2,363     |       |
| Total  commitments              |       | 2,922                 |       | 3,731         |       | 2,483         |       | —         |       | 9,136     |       |

 

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(1)          Amounts include interest payments.

(2)          Amount includes total principal payment of$4,035 as reflected on the Condensed Consolidated Balance Sheet as of September 30,2005.

 

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

 

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

 

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

 

**Risks Related to Our Business**

 

**Weneed to raise substantial additional capital to fund our continued businessoperations in 2006, and our future access to capital is uncertain.**

** **

It is expensive to develop cancer therapy products and conduct clinicaltrials for these products.  We currentlyhave available very limited funds to support our picoplatin program and otherbusiness operations.  We have notgenerated revenue from the commercialization of any product, and we expect tocontinue to incur substantial net operating losses and negative cash flows fromoperations for the future. We must obtain substantial 

 

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additional funding or enter into strategicpartnerships to continue development of picoplatin or any other proposedproducts, and to fund ongoing operations.

 

We raised approximately $3.8 million in netproceeds from the sale of common stock and warrants in a private placementtransaction on March 7, 2005.  Weintend to use the net proceeds from this financing added to our existing fundsto support our Phase II trial in picoplatin in small cell lung cancer and forgeneral working capital, including restructuring costs associated with thetermination of our STR development program. Our total cash and marketable securities, which include the funds fromthis financing, was $8.2 million at September 30, 2005.

 

Management believes that our current cash andcash equivalent balances, and any cash provided by operations, will provideadequate resources to fund operations at least until December 31, 2005. Wewill need to raise additional capital to fund our 2006 and futureoperations.  Management is activelyexploring a number of alternatives to enable us to continue operating,including:

 

•      raising additional capital to fund continuingoperations by private placements or other sales of equity or debt securities orthrough the establishment of other funding facilities;

 

•      entering into strategic collaborations, which mayinclude joint ventures or partnerships for product development andcommercialization, merger, sale of assets or other similar transactions; and

 

•      obtaining additional capital resources to fundoperations through cost cutting mechanisms, including the delay, reduction orcurtailment of our product development programs.

 

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

 

There can be no assurance that our strategicrestructuring or any of the other cost-saving alternatives listed above will besuccessful.  We may not be able to obtainthe required additional capital or enter into relationships with corporatepartners on a timely basis, on favorable terms, or at all.  The report of our independent registeredpublic accountants issued in connection with our annual report on Form 10-Kfor the year ended December 31, 2004 contains a statement expressingsubstantial doubt regarding our ability to continue as a going concern.Conditions in the capital markets in general, and the life science capitalmarket specifically, may affect our potential financing sources andopportunities for strategic partnering. If we raise additional funds by issuing common stock or securitiesconvertible into or exercisable for common stock, our shareholders may experiencesubstantial dilution,, and new investors could have rights superior to currentsecurity holders.  If we are unable toobtain sufficient cash when needed to fund our operations, we may be forced toexplore liquidation alternative, including seeking protection from creditorsunder the bankruptcy laws.

 

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

 

•      the scope and timing of our proposed picoplatinclinical program and other research and development efforts, including theprogress and costs of our Phase II trial of picoplatin in small cell lungcancer, which was initiated in June 2005;

 

•      our ability to raise additional capital and theamounts raised, if any;

 

•      our ability to obtain clinical supplies ofpicoplatin drug product in a timely and cost effective manner;

 

•      actions taken by the FDA and other regulatoryauthorities;

 

•      the costs of the strategic restructuringannounced in May 2005, including the costs of discontinuing our STRdevelopment program, reducing our workforce and closing and decommissioning theDenton, Texas manufacturing facility, as well as the timing and proceeds fromany sale of the Denton facility and assets;

 

•      our alternatives with respect to the STR assets,including any potential disposition or outlicensing 

 

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alternativesand the timing, amount and type of consideration received and other terms ofany such transactions;

 

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

 

•      our degree of success in commercializingpicoplatin or any other cancer therapy product candidates;

 

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

 

•      the acquisition or in-licensing of other productsor intellectual property, if we choose to undertake such activities;

 

•      the costs of any research collaborations orstrategic partnerships established, if we chooses to pursue such activities and

 

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

 

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

 

We have not been profitable since ourformation in 1984. As of September 30, 2005, we had an accumulated deficitof $251.7 million. Our net loss for the quarter ended September 30, 2005was $3.1 million.  We had net losses of$19.4 million for the year ended December 31, 2004, and $5.1 million forthe year ended December 31, 2003. These losses resulted principally fromcosts incurred in our research and development programs and from our generaland administrative activities. To date, we have been engaged only in researchand development activities and have not generated any significant revenues fromproduct sales. In May 2005, we announced the discontinuation of our STR(bone-targeted radiotherapeutic) development program as part of a strategicplan to refocus our limited resources on the development of picoplatin (NX473), a platinum-based compound.  We donot anticipate that our proposed picoplatin product candidate, or any otherproposed products, will be commercially available for several years, if at all.We expect to incur additional operating losses in the future. These losses mayincrease significantly if we expand clinical development, manufacturing andcommercialization efforts.

 

Our ability to achieve long-termprofitability is dependent upon obtaining regulatory approvals for ourpicoplatin product candidate and any other proposed products and successfullycommercializing our products alone or with third parties.

 

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

 

The manufacture and marketing of our proposedpicoplatin product candidate and our research and development activities aresubject to regulation for safety, efficacy and quality by the FDA in the UnitedStates and by comparable authorities in other countries.

 

The process of obtaining FDA and otherrequired regulatory approvals, including foreign approvals, is expensive, oftentakes many years and can vary substantially depending on the type, complexityand novelty of the products involved.

 

We have had only limited experience in filingand pursuing applications necessary to gain regulatory approvals. This mayimpede our ability to obtain timely approvals from the FDA or foreignregulatory agencies. We will not be able to commercialize our productcandidates until we obtain regulatory approval, and consequently any delay inobtaining, or inability to obtain, regulatory approval could harm our business.

 

If we violate regulatory requirements at anystage, whether before or after marketing approval is obtained, we may be fined,forced to remove a product from the market or experience other adverseconsequences, including delay, which could materially harm our financialresults. Additionally, we may not be able to obtain the labeling 

 

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claims necessary or desirable for product promotion. In addition, if weor other parties identify serious side effects after any of our products are onthe market, or if manufacturing problems occur, regulatory approval may bewithdrawn and reformulation of our products, additional clinical trials,changes in labeling of our products, and/or additional marketing applicationsmay be required.

 

The requirements governing the conduct ofclinical trials and manufacturing and marketing of our proposed productsoutside the United States vary widely from country to country. Foreignapprovals may take longer to obtain than FDA approvals and can involveadditional testing. Foreign regulatory approval processes include all of therisks associated with the FDA approval processes. Also, approval of a productby the FDA does not ensure approval of the same product by the healthauthorities of other countries.

 

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

 

In July 2005, we initiated a Phase IIclinical trial of picoplatin for the treatment of patients with small cell lungcancer.  This trial is a randomized trialcomparing picoplatin to topotecan in patients with small cell lung cancer whoare refractory or resistant to previous platinum-based therapy.  Topotecan is an anti-tumor drug currentlyapproved by the FDA as a treatment for small cell lung cancer sensitive diseaseafter failure of first line chemotherapy. The endpoints of the proposed picoplatin trial include survival,response rate (tumor shrinkage), duration of response and time to progression.

 

We also plan to undertake a Phase I/II trialof picoplatin in colorectal cancer. The proposed trial would evaluateincreasing doses of picoplatin in combination with the chemotherapy agents 5-fluorouraciland leucovorin in patients who have failed a 5-fluorouracil/leucovorinchemotherapy regimen. Endpoints would include safety, response rate (tumorshrinkage), duration of response and time to progression.  This proposed trial currently is targeted tobegin in early 2006.

 

The actual time for initiation and completionof our picoplatin clinical trials depend upon numerous factors, including:

 

•      our ability to obtain adequate additional fundingor enter into strategic partnerships;

 

•      approvals and other actions by the FDA and otherregulatory agencies and the timing thereof;

 

•      our ability to open clinical sites;

 

•      our ability to enroll qualified patients into ourstudies;

 

•      our ability to obtain sufficient, reliable andaffordable supplies of the picoplatin drug product;

 

•      the extent of competing trials at the clinicalinstitutions where we conduct our trials; and

 

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

 

We may not initiate, advance or complete ourpicoplatin clinical trials as projected or achieve successful results.

 

We will rely on academic institutions andclinical research organizations to conduct, supervise or monitor some or allaspects of clinical trials involving our proposed picoplatin product.  Further, we are seeking to enter into licenseagreements, partnerships or other collaborative arrangements to supportfinancing, development and commercialization of our picoplatin productcandidate. To the extent that we now or in the future participate in suchcollaborative arrangements, we will have less control over the timing, planningand other aspects of our clinical trials. If we fail to initiate, advance orcomplete, or experience delays in or are forced to curtail our current orplanned clinical trials, our stock price and our ability to conduct our businesscould be materially negatively affected.

 

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**If testing of a particular product does notyield successful results, we will be unable to commercialize that product.**

 

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

 

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

 

•      the results of preclinical studies may beinconclusive, or they may not be indicative of results that will be obtained inhuman clinical trials;

 

•      after reviewing test results, we or any potentialcollaborators may abandon projects that we previously believed were promising;

 

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

 

•      the effects of our potential products may not bethe desired effects or may include undesirable side effects or othercharacteristics that preclude regulatory approval or limit their commercial useif approved.

 

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

 

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

 

Results of early preclinical and clinicaltrials are based on a limited number of patients and may, upon review, berevised or negated by authorities or by later stage clinical results.Historically, the results from preclinical testing and early clinical trialsoften have not been predictive of results obtained in later clinical trials. Anumber of new drugs and therapeutics have shown promising results in initialclinical trials, but subsequently failed to establish sufficient safety andeffectiveness data to obtain necessary regulatory approvals. Data obtained frompreclinical and clinical activities are subject to varying interpretations,which may delay, limit or prevent regulatory approval.

 

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

 

For our picoplatin product candidate to besuccessful, we need sufficient, reliable and affordable supplies of thepicoplatin drug product.  Sources ofpicoplatin drug product may be limited, and third-party suppliers of picoplatindrug product may be unable to manufacture drug product in amounts and at pricesnecessary to successfully commercialize our picoplatin product.  Moreover, third-party manufacturers mustcontinuously adhere to cGMP regulations enforced by the FDA through its facilitiesinspection program. If the facilities of these manufacturers cannot pass apre-approval plant inspection, the FDA will not grant an NDA for our proposedproducts. In complying with cGMP and foreign regulatory requirements, any ofour third-party manufacturers will be obligated to expend time, money andeffort in production, record-keeping and quality control to assure that ourproducts meet applicable specifications and other requirements. If any of ourthird-party manufacturers fails to comply with these requirements, we may besubject to regulatory action.

 

We have a limited supplyof picoplatin drug product that was manufactured by a prior licensee in September 2004and earlier.  The drug product has beendemonstrated to be stable for 12-18 months from the date of manufacture, whichtime period is not sufficient to complete both of our current and proposedclinical trials of picoplatin.  We haveentered into an agreement with Hyaluron, Inc. to manufacture and supplyadditional picoplatin drug product on a purchase order, fixed fee basis.  The agreement will continue until April 15,2010, subject to earlier termination by either party in the event of an uncuredmaterial breach or the liquidation or bankruptcy of the other party.  We may terminate the agreement if we decideto no longer pursue manufacturing or distribution of 

 

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picoplatin. Thereis no assurance that Hyaluron will be able to provide sufficient supplies ofpicoplatin drug product on a timely or cost-effective basis.  There are in general relatively fewmanufacturers and suppliers of picoplatin drug product. If Hyaluron or analternate manufacturer is unable or unwilling to manufacture and provide drugproduct at a cost and on other terms acceptable to us, we may suffer delays in,or be prevented from, initiating or completing our clinical trials ofpicoplatin.

 

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

 

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

 

In connection with our2001 purchase of the radiopharmaceutical manufacturing plant and other assetslocated in Denton, TX, we assumed $6.0 million principal amount of restructureddebt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assetsacquired in the transaction and certain cash collateral.  The interest rate on the loan was 6.75% on September 30,2005.  The interest rate, which is equalto the bank prime rate and is adjusted on the same date that the bank primerate changes as reported in the Wall Street Journal, was 7.00% on November 4,2005.  The loan provides for a maximumannual interest rate of 18%.  Principaland interest are payable in monthly installments.  Principal and interest paid on the noteduring the quarters ended September 30, 2005 and 2004 totaled $126,000 and$115,000, respectively. In December 2003, we sold a non-essential portionof its Denton facility, the proceeds of which ($827,000) were applied to reducethe outstanding balance on the loan. As of September 30, 2005, theoutstanding balance of the loan was $4.0 million. The fixed monthly payments onthe note are recalculated in April of each year based on the then currentbank prime interest rate and outstanding note balance.  Because the loan is amortized over afourteen-year period from its inception, a principal balance will remain atmaturity in April 2009.  Based on aninterest rate of 6.75% (effective September 20, 2005) and taking intoaccount the early payment of a minimum of $1.0 million principal under thearrangement described below, the estimated principal balance payable atmaturity would be $1.9 million.

 

The terms of the Texas State Bank loan provide thatan event of default may be deemed to occur if we abandon, vacate or discontinueoperations on a substantial portion of the Denton facility or there is amaterial adverse change in our financial condition, results of operations,business or properties. If this were to occur, Texas State Bank could declarethe entire amount of the loan ($4.0 million at September 30, 2005) due andimmediately payable.  In such case, ourcash resources and assets could be impaired depending on our ability to raisefunds through a sale of the Denton facility or other means.  As a result of the restructuring andthe decision to discontinue its STR development program, we have ceasedmanufacturing operations at the Denton facility and are actively working tosell the facility and other STR assets. We have listed the Denton facility forsale at a price of $3.3 million.  Anysales of the Denton facility or other Denton assets are subject to approval ofthe Bank.  There can be no assurance thatthe Bank will approve the price or other terms of any offer received by us tobuy the Denton facility or other STR assets, or that the sale proceeds, if any,received by us from such sales will be sufficient to satisfy the outstandingbalance of the Bank loan.

 

In October 2005, we placed $1.0 millionin cash in a restricted deposit account with the Bank as additional collateralto secure the payment of the loan.  Wehave agreed that if we are unable to obtain at least $15.0 million in newfinancing on or before January 31, 2006, the Bank may apply the $1.0million cash deposit to the payment of the last maturing installments on theloan.  In return, the Bank has agreedthat our cessation of operations at the Denton facility will not be declared anevent of default under the loan as long as we continue to pay insurance andtaxes on and otherwise maintain the facility. Additionally, the Bank has agreed, prior to January 31, 2006, notto declare the loan in default on the basis that there has been a materialadverse change in the Company’s financial condition, results of operations,business or properties. If we obtain $15.0 million or more in new financing onor before January 31, 2006, we have agreed to make a principal payment onthe loan by January 31, 2006 in an amount that reduces the unpaidprincipal owing on the loan to an amount equal to the lowest of $2,640,000; 80%of the fair market value of the Denton real facility as reflected in the mostrecent appraisal; or 80% of the sales price in the 

 

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most recent listing agreement for the Denton facility.  In such case, the Bank has agreed that itwill not, after January 31, 2006, declare the loan in default on the basisthat there has been a material adverse change in the Company’s financialcondition, results of operations, business or properties as long as theprincipal balance on the loan does not exceed the lesser of 80% of the fairmarket value of the Denton facility as reflected in the most recent appraisalor 80% of the sales price in the most recent listing agreement on the Dentonfacility.  We can provide no assurancethat we will successfully raise new financing by January 31, 2006, or atall, or that the Bank will not at some time in the future seek to rely on theforegoing or other provisions to declare the Company in default of the loan.

 

**If we cannot negotiate and maintaincollaborative arrangements with third parties, our research, development,manufacturing, sales and marketing activities may not be cost-effective orsuccessful.**

 

Our success will depend in significant parton our ability to attract and maintain collaborative partners and strategicrelationships to support the development, sale, marketing, distribution andmanufacture of picoplatin and any other future product candidates andtechnologies in the US and Europe. At present, our only material collaborativeagreement is the exclusive worldwide (except Japan) license granted to us byAnorMED, Inc. for the development and commercial sale of picoplatin.  Under that license, we are solely responsiblefor the development and commercialization of picoplatin. AnorMED retains theright, at our cost, to prosecute patent applications and maintain allpatents.  The parties executed thelicense agreement in April 2004, at which time we paid AnorMED a one-timeupfront milestone payment of $1.0 million in NeoRx common stock and $1.0million in cash.  The agreement also providesfor additional milestone payments to AnorMED of up to $13 million, payable incash or a combination of cash and NeoRx common stock. These milestones includeour successful completion of a picoplatin Phase II study or initiation of apicoplatin Phase III study, submission to the FDA of an NDA for picoplatin,regulatory approval from the FDA of picoplatin and the attainment of certainlevels of annual net sales of picoplatin. Upon regulatory approval, AnorMEDalso would receive royalty payments of up to 15% on product sales.  We cannot be certain of the extent of oursuccess, if any, in commercializing picoplatin and attaining establishedmilestones. We initiated our first picoplatin clinical trial, a Phase II studyof picoplatin in small cell lung cancer, in June 2005 and it is thereforeunlikely that these milestones will be triggered during 2005 or 2006.  Because we cannot predict the length of timeto completion of our Phase II study, the time of initiation and completion of aPhase III study or the time of submission of an NDA for picoplatin, we areunable to predict when such milestones might be triggered after 2006.  The license agreement may be terminated byeither party for breach if the other party files a petition in bankruptcy orinsolvency or for reorganization or is dissolved, liquidated or makesassignment for the benefit of creditors. We can terminate the license at anytime upon prior written notice to AnorMED. If not earlier terminated, thelicense agreement will continue in effect, in each country in the territory inwhich the licensed product is sold or manufactured, until the earlier of (i) expirationof the last valid claim of a pending or issued patent covering the licensedproduct in that country or (ii) a specified number of years after firstcommercial sale of the licensed product in that country.  If AnorMED were to breach its obligationsunder the license, or if the license expires or is terminated and we cannotrenew, replace, extend or preserve our rights under the license agreement, wewould be unable to move forward with our current and planned picoplatinclinical studies.

 

On August 4, 2005, we entered into aresearch funding and option agreement with The Scripps Research Institute(TSRI).  This collaboration is still atvery early stage. Under the agreement, we will provide TSRI an aggregate of$2.5 million over a 26-month period to fund research relating to synthesis andevaluation of novel small molecule, multi-targeted protein kinase inhibitors astherapeutic agents, including for the treatment of cancer.  We have the option to negotiate a worldwideexclusive license to use, enhance and develop any compounds arising from thecollaboration.  The research funding ispayable by the Company to TSRI quarterly in accordance with a negotiatedbudget.  We made an initial fundingpayment to TSRI of $137,500, on August 8, 2005.  The agreement provides for additionalaggregate funding payments of $1,012,500 and $1,350,000 in 2006 and 2007,respectively.  We have no assurance thatthe research funded under this arrangement will be successful or ultimatelywill give rise to any viable product candidates. Further, there can be noassurance that we will be able to negotiate, on acceptable terms, a licensewith respect to some or all of the compounds arising from the collaboration.

 

None of our current employees has anyexperience selling, marketing and distributing therapeutic products. To theextent we are successful in obtaining approval for the commercial sale ofpicoplatin or any other product candidate, we may need to secure one or morecorporate partners to conduct these activities. We may not be able to enterinto partnering arrangements in a timely manner or on terms acceptable to us.To the extent that we enter into co-promotion or other licensing arrangements,our product revenues are likely to be lower than if we directly marketed andsold our products, and any revenues we receive would depend upon the efforts ofthird parties, which efforts may not be successful. If we are not able tosecure adequate partnering arrangements, we would have to hire additionalemployees or consultants with expertise in sales, marketing and distribution.Employees with relevant 

 

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skills may not be available to us. Additionally, any increase in thenumber of employees would increase our expense level and could have a materialadverse effect on our financial position.

 

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

 

The competition for development of cancertherapies is substantial. There are numerous competitors developing products totreat the cancers for which we are seeking to develop products.  Our initial focus for picoplatin is smallcell lung cancer, a disease for which there currently are limited effectivetherapeutic options. Numerous companies, including AstraZeneca PLC, CellTherapeutics, Inc., Exelexis, Inc., ImClone Systems Incorporated,ImmunoGen, Inc., Sanofi-Aventis Group, Inex Pharmaceuticals Corporation,Ipsen Limited, The Menarini Group, OSI Genetics, Inc. and PharmaMar USA, Inc.,also are developing and testing therapeutics for small cell lung cancer. Thesetherapeutics include chemotherapy, inhibitors, monoclonal antibodies,antagonists and interferons. We cannot assure you that we will be able toeffectively compete with these or future third party product developmentprograms. Many of our existing or potential competitors have, or have accessto, 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.  Further, our competitors may have, or maydevelop and introduce, new products that would render our picoplatin or anyother proposed product candidates less competitive, uneconomical or obsolete.

 

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

 

Our success is dependent in part onobtaining, maintaining and enforcing our patents and other proprietary rightsand our ability to avoid infringing the proprietary rights of others. Patent lawrelating to the scope of claims in the biotechnology field in which we operateis still evolving and, consequently, patent positions in our industry may notbe as strong as in other, better-established fields. Accordingly, the UnitedStates Patent and Trademark Office, or the USPTO, may not issue patents fromthe patent applications owned by or licensed to us. If issued, the patents maynot give us an advantage over competitors with similar technologies.

 

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

 

In addition, the protection afforded byissued patents is limited in duration. With respect to picoplatin, in theUnited States we expect to rely primarily on US Patent Number 5,665,771(expiring February 7, 2016), which is licensed to us by AnorMED.  We may be able to rely on the Hatch-WaxmanAct to extend the term of a US patent covering picoplatin after regulatoryapproval, if any, of such product in the US.

 

Under our license agreement with AnorMED,AnorMED retains the right to prosecute patent applications and maintain alllicensed patents, with NeoRx reimbursing such expenses. Under the AnorMEDagreement, we have the right to sue any third party infringers of thepicoplatin patents in the licensed territory (worldwide except Japan). If we donot file suit, AnorMED, in its sole discretion, has the right to sue theinfringer at its expense.

 

In addition to the intellectual propertyrights described above, we rely on unpatented technology, trade secrets andconfidential information. Therefore, others may independently developsubstantially equivalent information and techniques or otherwise gain access toor disclose our technology. We may not be able to effectively protect ourrights in unpatented technology, trade secrets and confidential information. Werequire each of our employees, consultants and advisors to execute a confidentialityagreement at the commencement of an 

 

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employment or consulting relationship with us.  However, these agreements may not provideeffective protection of our information or, in the event of unauthorized use ordisclosure, may not provide adequate remedies.

 

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

 

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

 

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

 

The cost to us of any litigation or otherproceedings relating to intellectual property rights, even if resolved in ourfavor, could be substantial. Some of our competitors may be better able tosustain the costs of complex patent litigation because they have substantiallygreater resources. If there is litigation against us, we may not be able tocontinue our operations. If third parties file patent applications, or areissued patents claiming technology also claimed by us in pending applications,we may be required to participate in interference proceedings in the USPTO todetermine priority of invention. We may be required to participate ininterference proceedings involving our 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 prevailing party in that case may not offer us alicense on commercially acceptable terms.

 

In April 2003, we received $10 millionfrom the sale to Boston Scientific Corporation, or BSC, of certain non-corepatents and patent applications and the grant to BSC of exclusive licenserights to certain patents and patent applications.  BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc. and certain of itssubsidiaries, including Cordis Corporation and Guidant Corporation, alleginginfringement of such patents.** **In both lawsuits, the defendantsdenied infringement and asserted invalidity and unenforceability of the patents.  BSC subsequently withdrew three of thepatents from the litigation.  Although weare not currently a party to the lawsuits, our management and counsel have beendeposed in connection with the lawsuits. It is possible that BSC, if it is unsuccessful or has limited successwith its claims against Johnson & Johnson, Inc. and itssubsidiaries, may seek damages from us, including recovery of all or a portionof the amounts it paid to us in 2003.  Wecannot assess the likelihood of whether such claim will be brought against usor the extent of recovery, if any, on any such claim.

 

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

 

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

 

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

 

Our research and development andmanufacturing processes, as well as the manufacturing processes that may beused by our collaborators, involve the controlled use of hazardous andradioactive materials. As a result, we are subject to foreign, federal, stateand local laws, rules, regulations and policies governing the use, generation,manufacture, storage, air emission, effluent discharge, handling and disposalof certain materials and wastes in connection with our use of these materials.Although we believe that our safety procedures for handling and 

 

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disposing of such materials comply with the standards prescribed bysuch laws and regulations, we may be required to incur significant costs tocomply with environmental and health and safety regulations in the future. Inthe event that we discontinue operations in facilities that have had pastresearch and manufacturing processes where hazardous or radioactive materialshave been in use, we may have significant decommissioning costs associated withthe termination of operation of these facilities. These potentialdecommissioning costs also may reduce the market value of the facilities andmay limit our ability to sell or otherwise dispose of these facilities in atimely and cost-effective manner.  Wehave terminated our STR manufacturing operations in Denton, Texas and areactively marketing the facility for sale. We currently estimate that the 2005 costs associated with the closure ofthe Denton facility, including decommissioning costs, will be approximately$0.9 million.  These costs could increasesubstantially, depending on actions of regulators or if we discover previouslyunknown contamination in or around the facility.  In addition, the risk of accidentalcontamination or injury from hazardous or radioactive materials cannot becompletely eliminated. In the event of such an accident, we could be heldliable for any resulting damages, and any such liability could exceed ourresources. Our current insurance does not cover liability for the clean-up ofhazardous waste materials or other environmental risks.

 

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

 

Potential sales of our products may beaffected by the availability of reimbursement from governments or other thirdparties, such as insurance companies. It is difficult to predict thereimbursement status of newly approved, novel medical products. In addition,third-party payors are increasingly challenging the prices charged for medicalproducts and services. If we succeed in bringing one or more products tomarket, we cannot be certain that these products will be consideredcost-effective and that reimbursement to the consumer will be available or willbe sufficient to allow us to competitively or profitably sell our products.

 

The levels of revenues and profitability ofbiotechnology companies may be affected by the continuing efforts of governmentand third-party payors to contain or reduce the costs of healthcare throughvarious means. For example, in certain foreign markets, pricing orprofitability of prescription pharmaceuticals is subject to governmentalcontrol. In the United States, there have been, and we expect that there willcontinue to be, a number of federal and state proposals to implement similargovernmental controls. It is uncertain what legislative proposals will beadopted or what actions federal, state or private payors for health care goodsand services may take in response to any health care reform proposals orlegislation. Even in the absence of statutory change, market forces arechanging the health care sector. We cannot predict the effect health carereforms may have on the development, testing, commercialization andmarketability of our proposed cancer therapy products. Further, to the extentthat such proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospectivecollaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.

 

**The loss of key employees could adverselyaffect our operations.**

 

Neile Grayson, PhD, resigned as VicePresident, Corporate Development, in January 2004. Although Dr. Graysonwas an officer of the Company, we did not, at the time of her resignation,consider her a key employee in terms of our product development activities. Wedid not experience any material disruptions or delays as a consequence of theresignation of Dr. Grayson. Dr. Grayson’s position was eliminated andher responsibilities reassigned to other members of management. Melinda G. Kileresigned as Vice President, Finance, effective April 16, 2004.  On that date, Michael K. Jackson was promotedto Chief Accounting Officer and assumed responsibility for senior financialduties on an interim basis.  As principalfinancial officer, Ms. Kile was considered a key employee of the Company;however, we did not experience any material disruptions or delays as aconsequence of Ms. Kile’s resignation. Susan D. Berland was appointed Chief Financial Officer of the Company,effective October 25, 2004.  Theposition of Chief Accounting Officer was eliminated as of December 31,2004, and Mr. Jackson resumed his prior responsibilities as CorporateController.

 

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

 

In June 2005, Dr. KarenAuditore-Hargreaves resigned as President and Chief Operating Officer of the 

 

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Company and Linda Findlay was, as part of our strategic restructuring,terminated as Vice President, Human Resources. Although Dr. Auditore-Hargreaves and Ms. Findlay were officersof the Company, we did not, at the time of their resignation and termination,consider them key employees in terms of our picoplatin productdevelopment.  The responsibilities of Dr. Auditore-Hargreavesand Ms. Findlay have been reassigned to other members of management.  We did not experience any materialdisruptions or delays as a consequence of the resignation and termination of Dr. Auditore-Hargreavesand Ms. Findlay.

 

As of November 4, 2005, we had a totalwork force of 22 full-time employees and 2 part-time employees.  Our success depends, to a significant extent,on the continued contributions of our principal management and scientificpersonnel participating in our picoplatin development program.  We have limited or no redundancy of personnelin key development areas, including finance, legal, clinical operations,regulatory affairs and quality control and assurance. The loss of the servicesof one or more of our employees could delay our picoplatin product developmentactivities or other programs and research and development efforts. We do notmaintain key-person life insurance on any of our officers, employees or consultants.

 

Competition for qualified employees amongcompanies in the biotechnology and biopharmaceutical industry is intense. Ourfuture success depends upon our ability to attract, retain and motivate highlyskilled employees and consultants. In order to commercialize our proposedproducts successfully, we will in the future be required to substantiallyexpand our workforce, particularly in the areas of manufacturing, clinicaltrials management, regulatory affairs, business development and sales and marketing.These activities will require the addition of new personnel, includingmanagement, and the development of additional expertise by existing managementpersonnel. Our current financial situation may make it difficult to attract andretain key employees.

 

We have change in control agreements andseverance agreements with all of our executive officers and consultingagreements with various of our scientific advisors. Our agreements with ourexecutive officers provide for “at will” employment, which means that eachexecutive may terminate his or her service with us at any time. In addition,our scientific advisors may terminate their services to us at any time.

 

**Any weakness identified in our internalcontrols as part of the evaluation being undertaken by us and our independentregistered public accounting firm pursuant to Section 404 of theSarbanes-Oxley Act of 2002 could have an adverse effect on our business.**

 

Section 404 of the Sarbanes-Oxley Act of2002 requires public companies to evaluate and report on their systems ofinternal control over financial reporting. In addition, the independentaccountants must report on management’s evaluation. We have documented andtested our system of internal control over financial reporting in 2004 toprovide the basis for our management’s evaluation included in our Form 10-Kfor the year ended December 31, 2004. Management’s assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2004 has been audited by KPMGLLP, an independent registered public accounting firm, and KPMG’s report isincluded in our Form 10-K for the year ended December 31, 2004.  Based on this evaluation, we have concludedthat, as of December 31, 2004, we did not have any material weaknesses inour internal control over financial reporting and our internal control overfinancial reporting was effective.

 

Due to the ongoing evaluation and testing ofour internal controls, there can be no assurance that there may not besignificant deficiencies or material weaknesses that would be required to bereported in the future. In addition, we expect the evaluation process and anyrequired remediation, if applicable, to increase our accounting, legal andother costs and divert management resources from core business operations.  We cannot be certain as to the results oractions related to our on-going evaluation and testing of internal controls, orthe impact of any of them on our operations or stock price.

 

**Risks Related to Our Common Stock**

 

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

 

Our common stock listing was transferred fromThe Nasdaq National Market to The Nasdaq Capital Market (formerly called TheNasdaq SmallCap Market) on March 20, 2003. We elected to seek a transferto The Nasdaq Capital Market because we had been unable to regain compliancewith The Nasdaq National Market minimum $1.00 bid price requirement forcontinued listing. By transferring to The Capital Market, we were afforded 

 

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an extended grace period in which to satisfy The Capital Market $1.00minimum bid price requirement. On May 6, 2003, we received notice fromNasdaq confirming that we were in compliance with the $1.00 minimum bid pricerequirement. We will not be eligible to relist our common stock on The NasdaqNational Market unless and until our common stock maintains a minimum bid priceof $5.00 per share for 90 consecutive trading days and we otherwise comply withthe initial listing requirements for The Nasdaq National Market. Trading on theNasdaq Capital Market may have a negative impact on the value of our commonstock, because securities trading on the Nasdaq Capital Market typically areless liquid than those traded on The Nasdaq National Market.

 

On May 12, 2005, we received a noticefrom Nasdaq indicating that the Company was not in compliance with NasdaqMarketplace Rule 4310(c)(8)(D) (the Minimum Bid Price Rule) becausethe closing bid price of our common stock had been below $1.00 per share for 30consecutive trading days.  On September 27,2005, we received a notice from Nasdaq indicating that the Company had regainedcompliance with the Minimum Bid Rule Price because the closing bid priceof our common stock had been at or above $1.00 per share for 10 consecutivetrading days.  The closing bid price ofour common stock may in the future fall below the Minimum Bid Price Rule orwe may in the future fail to meet other requirements for continued listing onthe Nasdaq Capital Market.  If we areunable to cure any future events of noncompliance in a timely or effectivemanner, our common stock could be delisted from the Nasdaq Capital Market.

 

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

 

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

 

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

 

There has been a history of significantvolatility in the market prices of securities of biotechnology companies,including our common stock. In 2004, the high and low closing sale prices were$5.78 and $1.43.  In 2003, the high andlow closing sale prices were $6.47 and $0.37. The high and low closing sale prices during the period from January 2,2005 through November 4, 2005 were $2.34 and $0.47, respectively.  Our stock price has been and may continue tobe affected by this type of market volatility, as well as our own performance.Our business and the relative price of our common stock may be influenced by alarge variety of factors, including:

 

•      announcements by us or our competitors concerningacquisitions, strategic alliances, technological innovations, new commercialproducts or changes in product development strategies;

 

•      the availability of critical materials used indeveloping our proposed picoplatin product;

 

•      our ability to conduct our picoplatin clinicaldevelopment program on a timely and cost-effective basis and the progress andresults of our clinical trials and those of our competitors;

 

•      developments concerning patents, proprietaryrights and potential infringement;

 

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•       developments concerning potential agreementswith collaborators;

 

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

 

•      our available cash or other sources of funding;and

 

•      future sales of significant amounts of our commonstock by us or our shareholders.

 

In addition, potential public concern aboutthe safety of our proposed picoplatin product and any other products wedevelop, comments by securities analysts, our ability to maintain the listingof our common stock on the Nasdaq system, and conditions in the capital marketsin general and in the life science capital market specifically, may have asignificant effect on the market price of our common stock. The realization ofany of the risks described in this report, as well as other factors, could havea material adverse impact on the market price of our common stock and mayresult in a loss of some or all of your investment in NeoRx.

 

In the past, securities class actionlitigation often has been brought against companies following periods ofvolatility in their stock prices. We may in the future be the target of similarlitigation. Securities litigation could result in substantial costs and divertour management’s time and resources, which could cause our business to suffer.

 

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

 

Our articles of incorporation authorize ourboard of directors to issue up to 150,000,000 shares of common stock and up to3,000,000 shares of preferred stock. With respect to preferred stock, our board has the authority todetermine the price, rights, preference, privileges and restrictions, includingvoting rights, of those shares without any further vote or action by ourshareholders.

 

We have adopted a shareholder rights plan,which is intended to protect the rights of shareholders by deterring coerciveor unfair takeover tactics. The board of directors declared a dividend toholders of our common stock of one preferred share purchase right for eachoutstanding share of common stock. In addition, under certain circumstances,holders of our Series B Convertible Preferred Stock are entitled toreceive one preferred share purchase right for each share of common stock intowhich their Series B preferred stock may be converted. The rights areexercisable 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 right entitles the registered holder, otherthan the acquiring person or group, to purchase from NeoRx one-hundredth of oneshare of Series A Junior Participating Preferred Stock at the price of$40, subject to adjustment. The rights expire April 10, 2006. In lieu ofexercising the right by purchasing one one-hundredth of one share of Series Apreferred stock, the holder of the right, other than the acquiring person orgroup, may purchase for $40 that number of shares of our common stock having amarket value of twice that price.

 

Washington law imposes restrictions oncertain transactions between a corporation and significant shareholders.Chapter 23B.19 of the Washington Business Corporation Act prohibits a targetcorporation, with some exceptions, from engaging in particular significantbusiness transactions with an acquiring person, which is defined as a person orgroup of persons that beneficially owns 10% or more of the voting securities ofthe target corporation, for a period of five years after the acquisition,unless the transaction or acquisition of shares is approved by a majority ofthe members of the target corporation’s board of directors prior to theacquisition.  Prohibited transactionsinclude, among other things:

 

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

 

•      termination of 5% or more of the employees of thetarget corporation; or

 

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

 

A corporation may not opt out of thisstatute. This provision may have the effect of delaying, deterring orpreventing a change in control of NeoRx or limiting future investment in NeoRxby significant shareholders and 

 

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their affiliates and associates.

 

The provisions of our articles ofincorporation, shareholder rights plan and Washington law discussed above mayhave the effect of delaying, deterring or preventing a change of control of NeoRx,even if this change would be beneficial to our shareholders. These provisionsalso may discourage bids for our common stock at a premium over market priceand may adversely affect the market price of, and the voting and other rightsof the holders of, our common stock. In addition, these provisions could makeit more difficult to replace or remove our current directors and management inthe event our shareholders believe this would be in the best interests of thecorporation and our shareholders.

 

**Certain provisions of our Series BConvertible Preferred Stock and certain outstanding warrants may prevent ormake it more difficult for us to raise funds or take other actions.**

 

Certain provisions of the Preferred Stock andWarrant Purchase Agreement and Certificate of Designation for our Series BConvertible Preferred Stock may require us to obtain the approval of theholders of Series B preferred stock to amend, alter or repeal anyprovision of the Certificate of Designation which may be deemed to materiallyadversely affect the rights of the holders of Series B preferred stock orto authorize, create or issue any class or series of securities havingliquidation or other rights superior to those of the Series B preferredstock. The Series B preferred stock also contains provisions requiring theadjustment of the conversion price if we issue (other than in connection withcertain permitted transactions, such as strategic collaborations andacquisitions approved by the board of directors or transactions approved by amajority of the holders of the Series B preferred stock) shares of commonstock at prices lower than the conversion price. This means that if we need toraise equity financing at any time when the prevailing or discounted marketprice for our common stock is lower than the conversion price, the conversionprice will be reduced and the dilution to shareholders increased. Theseprovisions may make it more difficult for our management or shareholders totake certain corporate actions and could delay, discourage or prevent futurefinancings. These provisions could also limit the price that certain investorsmight be willing to pay for shares of our common stock.

 

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

 

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

# ** **

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

 

**Interest Rate Risk**

 

The Company’s exposure to market rate riskfor changes in interest rates relates primarily to the Company’s debtsecurities included in its investment portfolio.  The Company does not have any derivativefinancial instruments.  The Companyinvests in debt instruments of the US Government and its agencies andhigh-quality corporate issuers. Investments in both fixed rate and floating rate interest earninginstruments carry a degree of interest rate risk.  Fixed rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, while floatingrate securities may produce less income than expected if interest ratesdecrease.  Due in part to these factors,the Company’s future investment income may fall short of expectations due tochanges in interest rates or the Company may suffer losses in principal ifforced to sell securities that have declined in market value due to changes ininterest rates.  At September 30, 2005,the Company owned no government debt instruments and no corporate debtsecurities.

 

The Company’s only outstanding debt is itsnote payable to Texas State Bank.  Theoutstanding balance of the note was $4.0 million on September 30,2005.  The note, which matures in April 2009,bears interest equal to the 

 

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bank prime rate.  The interestrate on the note is adjusted on the same date that the bank prime ratechanges.  The maximum permitted interestrate on the loan is 18% per annum. Because the interest rate on the notevaries, the Company’s interest expenses may increase as the bank prime interestrate increases.  Extreme increases in thebank prime interest rate, up to the maximum interest rate permitted under thenote, could materially affect the Company’s interest expense.

 

**Item4.  Controls and Procedures**

** **

Under the supervision and with the participation of the Company’smanagement, including the Company’s Chairman and Chief Executive Officer andthe Chief Financial Officer, the Company has evaluated the effectiveness anddesign of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report, and, based ontheir evaluation, the Chairman and Chief Executive Officer and the ChiefFinancial Officer have concluded that these disclosure controls and proceduresare effective in ensuring that the information disclosed by the Company in thereports that the Company files or submits under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the rules and forms.

 

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

 

***Limitations on the Effectivenessof Controls***

 

The Company’s management, including its Chairman and ChiefExecutive Officer and its Chief Financial Officer, does not expect that theCompany’s disclosure controls or internal controls will prevent all error andall fraud.  A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of that control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrol must be considered relative to their costs. Because of the inherentlimitation in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the reality that judgments indecision-making can be faulty, and breakdowns can occur because of simple erroror mistake.  Additionally, controls canbe circumvented by the individual acts of some persons, by collusion of two or morepersons, or by management override of the control.  The design of any system of controls is alsobased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time controls may becomeinadequate because of changes in conditions, of the degree of compliance withthe policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

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**PART II. OTHER INFORMATION**

 

**Item 5. OtherInformation**

 

(a) **Entry into a MaterialDefinitive Agreement.**

 

The Company and Texas State Bank have enteredinto a letter agreement dated as of October 14, 2005, pursuant to whichthe Company placed $1.0 million in cash in a restricted deposit account withthe Bank as additional collateral to secure the payment of the Company’soutstanding loan to Texas State Bank, the terms of which loan are describedabove in this Form 10-Q.  Under theletter agreement, the Company has agreed that if it is unable to obtain atleast $15.0 million in new financing on or before January 31, 2006, theBank may apply the $1.0 million cash deposit to the payment of the lastmaturing installment on the loan.  Inreturn, the Bank has agreed that the Company’s cessation of operations at theDenton facility will not be declared an event of default under the loan as longas the Company continues to pay insurance and taxes and otherwise maintains thefacility.  Additionally, the Bank hasagreed, prior to January 31, 2006, not to declare the loan in default onthe basis that there has been a material adverse change in the Company’sfinancial condition, results of operations, business or properties.  If the Company obtains $15.0 million or morein new financing on or before January 31, 2006, the Company has agreed tomake a principal payment on the loan by January 31, 2006 in an amount thatreduces the unpaid principal owing on the loan to an amount equal to the lowestof $2,640,000; 80% of the fair market value of the Denton real facility asreflected in the most recent appraisal; or 80% of the sales price in the mostrecent listing agreement for the Denton facility.  In such case, the Bank agrees that it willnot, after January 31, 2006, declare the loan in default on the basis thatthere has been a material adverse change in the Company’s financial condition,results of operations, business or properties as long as the principal balanceon the loan does not exceed the lesser of 80% of the fair market value of theDenton facility as reflected in the most recent appraisal or 80% of the salesprice in the most recent listing agreement on the Denton facility.

 

A copy of the letter agreement is attached tothis Form 10-Q as Exhibit 10.36, and is incorporated herein byreference.

 

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**Item 6.  Exhibits**

 

(a) Exhibits – See Exhibit Index below.

 

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**SIGNATURES**

 

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

 
|                                          | NEORX CORPORATION                             |
|-----------------------------------------------|-----------------------------------------------|
|                                          | (Registrant)                                  |
|                                          |                                          |
| Date:   November 9,  2005 | By:                                           | /s/ SUSAN D. BERLAND |   |
|                                          | Susan D. Berland                              |
|                                          | Chief Financial Officer                       |
|                                          | (Principal Financial and Accounting  Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                        | ** ** | ** ** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1         |       | Amended and Restated Articles of  Incorporation, as amended June 15, 2005                                                                                                                                         |       | (B)        |
| 3.2         |       | Bylaws, as amended                                                                                                                                                                                                     |       | (K)        |
| 10.1        |       | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                               |       | (F)        |
| 10.2        |       | Lease Agreement for 410 West Harrison  facility, dated March 1, 1996, between NeoRx Corporation and Diamond  Parking, Inc                                                                                         |       | (H)        |
| 10.3        |       | Amendment No. 1, dated August 14,  2000, to Lease Agreement between NeoRx Corporation and Dina Corporation                                                                                                   |       | (J)        |
| 10.4        |       | 1991 Stock Option Plan for Non-Employee  Directors, as amended (‡)                                                                                                                                                |       | (E)        |
| 10.5        |       | 1991 Restricted Stock Plan (‡)                                                                                                                                                                                    |       | (D)        |
| 10.6        |       | Indemnification Agreement (‡)                                                                                                                                                                                     |       | (H)        |
| 10.7        |       | Stock Option Grant Program for  Nonemployee Directors under the NeoRx 2004 Incentive Compensation Plan, as  amended                                                                                                    |       | (B)        |
| 10.8        |       | Stock Option Agreement, dated December 19,  2000, between NeoRx Corporation and Carl S. Goldfischer (‡)                                                                                                      |       | (I)        |
| 10.9        |       | Stock Option Agreement, dated January 17,  2001, between NeoRx Corporation and Carl S. Goldfischer (‡)                                                                                                       |       | (I)        |
| 10.10       |       | License Agreement dated as of April 2,  2004, between the Company and AnorMED, Inc. Certain portions of the  agreement have been omitted pursuant to a request for confidential treatment                    |       | (Q)        |
| 10.11       |       | Stock Option Grant Program for  Nonemployee Directors under the NeoRx Corporation 1994 Restated Stock Option  Plan (‡)                                                                                            |       | (M)        |
| 10.12       |       | Facilities Lease, dated February 15,  2002, between NeoRx Corporation and Selig Real Estate Holdings Six                                                                                                          |       | (A)        |
| 10.13       |       | Lease Termination/Continuation Agreement  dated October 8, 2002, between NeoRx Corporation and Dina Corporation                                                                                                   |       | (N)        |
| 10.14       |       | Key Executive Severance Agreement dated  as of May 13, 2003, between the Company and Karen Auditore-Hargreaves  (‡)                                                                                          |       | (C)        |
| 10.15       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of May 13, 2003,  between the Company and Karen Auditore-Hargreaves (‡)                                  |       | (L)        |
| 10.16       |       | Change of Control Agreement dated as of May 13,  2003, between the Company and Karen Auditore-Hargreaves (‡)                                                                                                 |       | (C)        |
| 10.17       |       | Key Executive Severance Agreement dated  as of February 28, 2003, between the Company and Linda  Findlay (‡)                                                                                                 |       | (C)        |
| 10.18       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Linda Findlay (‡)                                         |       | (L)        |
| 10.19       |       | Change of Control Agreement dated as of February 28,  2003, between the Company and Linda Findlay (‡)                                                                                                        |       | (C)        |
| 10.20       |       | Key Executive Severance Agreement dated  as of February 28, 2003, between the Company and Anna  Wight (‡)                                                                                                    |       | (C)        |
| 10.21       |       | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                            |       | (L)        |
| 10.22       |       | Change of Control Agreement dated as of February 28,  2003, between the Company and Anna Wight (‡)                                                                                                           |       | (C)        |
| 10.23       |       | Key Executive Severance Agreement dated  as of June 23, 2005, between the Company and David A. Karlin (‡)                                                                                                    |       | (P)        |
| 10.24       |       | Change of Control Agreement dated as of June 23,  2005, between the Company and David A. Karlin (‡)                                                                                                          |       | (P)        |
| 10.25       |       | Amended and Restated 2004 Incentive  Compensation Plan (‡)                                                                                                                                                        |       | (G)        |
| 10.26       |       | Manufacturing and Supply Agreement dated  as of May 4, 2004, between Hyaluron, Inc. and the Company. Certain  portions of the agreement have been omitted pursuant to a request for  confidential treatment. |       | (T)        |
| 10.27       |       | Employment Letter dated as of April 26,  2004, between the Company and Gerald McMahon (‡)                                                                                                                    |       | (L)        |

 

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| 10.28 |   | Key Executive Severance Agreement dated  as of May 11, 2004, between the Company and Gerald McMahon (‡)                                                                                                                |   | (R) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|
| 10.29 |   | Change of Control Agreement dated as of May 11,  2004, between the Company and Gerald McMahon (‡)                                                                                                                      |   | (R) |
| 10.30 |   | Key Executive Severance Agreement dated  as of October 25, 2004, between the Company and Susan D. Berland (‡)                                                                                                          |   | (S) |
| 10.31 |   | Amendment No. 1 dated as of March 30,  2005 to Key Executive Severance Agreement dated as of October 25, 3004,  between the Company and Susan D. Berland (‡)                                                 |   | (L) |
| 10.32 |   | Change of Control Agreement dated as of October 25,  2004, between the Company and Susan D. Berland (‡)                                                                                                                |   | (S) |
| 10.33 |   | Form of Non-Qualified Stock Option  Agreement under 2004 Incentive Compensation Plan (‡)                                                                                                                               |   | (O) |
| 10.34 |   | Form of Incentive Stock Option  Agreement under 2004 Incentive Compensation Plan (‡)                                                                                                                              |   | (O) |
| 10.35 |   | Consulting Agreement between the Company  and Alan B. Glassberg, M.D. (‡)                                                                                                                                                   |   | (T) |
| 10.36 |   | Letter Agreement dated October 14,  2005, between the Company and Texas State Bank                                                                                                                                          |   | (U) |
| 10.37 |   | Research Funding and Option Agreement  dated August 4, 2005, between the Company and The Scripps Research  Institute. Certain portions of the agreement have been omitted pursuant to a  request for confidential treatment |   | (U) |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chairman and Chief Executive Officer                                                                                                                                        |   | (U) |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                                                                     |   | (U) |
| 32.1  |   | Section 1350 Certification of  Chairman and Chief Executive Officer                                                                                                                                                         |   | (U) |
| 32.2  |   | Section 1350 Certification of Chief  Financial Officer                                                                                                                                                                      |   | (U) |

 

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

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

 

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| (K)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended September 30, 1999, and incorporated  herein by reference.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                           |
| (L)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended March 31, 2005, and incorporated herein  by reference.           |
|   |                                                                                                                                                           |
| (M)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended June 30, 2002, and incorporated herein by  reference.            |
|   |                                                                                                                                                           |
| (N)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended September 30, 2002, and incorporated  herein by reference.       |
|   |                                                                                                                                                           |
| (O)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended September 30, 2004, and incorporated  herein by reference.       |
|   |                                                                                                                                                           |
| (P)    | Filed as an exhibit to the Company’s  Current Report on Form 8-K filed on June 29, 2005, and incorporated  herein by reference.                 |
|   |                                                                                                                                                           |
| (Q)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended March 31, 2004, and incorporated herein  by reference.           |
|   |                                                                                                                                                           |
| (R)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended June 30, 2004, and incorporated herein by  reference.            |
|   |                                                                                                                                                           |
| (S)    | Filed as an exhibit to the Company’s  Current Report on Form 8-K filed October 19, 2004, and incorporated  herein by reference.                 |
|   |                                                                                                                                                           |
| (T)    | Filed as an exhibit to the Company’s Form 10-Q  for the quarterly period ended June 30, 2005, and incorporated herein by  reference.            |
|   |                                                                                                                                                           |
| (U)    | Filed herewith.                                                                                                                                                |

 

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