**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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

 

**For the quarterly period ended September 30, 2002**

 

**Commission File No. 0-16614**

 

**NEORX CORPORATION**

(Exactname of Registrant as specified in its charter)

 

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

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes      ý      No     o

 

As of November 14, 2002, 26,765,082 shares of theRegistrant’s common stock, $.02 par value per share, were outstanding.

 

 

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**TABLE OF CONTENTS**

 

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED SEPTEMBER 30, 2002**

 

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                         |
|-------------|-------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                              |
| Item 1.     | Financial Statements  (Unaudited):                                                                                |
|        |                                                                                                              |
|        | Condensed  Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                             |
|        |                                                                                                              |
|        | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2002 and 2001 |
|        |                                                                                                              |
|        | Condensed  Consolidated Statements Of Cash Flows for the Nine Months Ended September 30,  2002 and 2001           |
|        |                                                                                                              |
|        | Notes  to Condensed Consolidated Financial Statements                                                             |
|        |                                                                                                              |
| Item  2.    | Management’s  Discussion and Analysis of Results of Operations and Financial Condition                       |
|        |                                                                                                              |
| Item  3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                       |
|        |                                                                                                              |
| Item  4.    | Controls  and Procedures                                                                                          |
|        |                                                                                                              |
| **PART II** | **OTHER INFORMATION**                                                                                             |
|        |                                                                                                              |
| Item  5.    | Other  Information                                                                                                |
|        |                                                                                                              |
| Item  6.    | Exhibits                                                                                                          |
|        |                                                                                                              |
|        | Signature                                                                                                         |
|        |                                                                                                              |
|        | Certifications                                                                                                    |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**NEORXCORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(in thousands, except share data)

(unaudited)

 
|                                                                                                                                                                                                       |   | **September  30, 2002** |   | **December  31, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| **ASSETS**                                                                                                                                                                                                 |   |                    |   |                   |   |
| **Current assets:**                                                                                                                                                                                        |   |                    |   |                   |   |
| Cash and cash  equivalents                                                                                                                                                                                 |   | $                       | 1,110  |                   | $      | 4,097 |   |
| Investment  securities                                                                                                                                                                                     |   | 11,268                  |   | 29,484                 |   |
| Notes receivable                                                                                                                                                                                           |   | 68                      |   | 177                    |   |
| Prepaid expenses  and other current assets                                                                                                                                                                 |   | 1,199                   |   | 907                    |   |
| Total current  assets                                                                                                                                                                                      |   | 13,645                  |   | 34,665                 |   |
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| Facilities and  equipment, net                                                                                                                                                                             |   | 9,083                   |   | 15,222                 |   |
| Other assets,  net                                                                                                                                                                                         |   | 736                     |   | 1,141                  |   |
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| **Total  assets**                                                                                                                                                                                          |   | $                       | 23,464 |                   | $      | 51,028 |   |
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                             |   |                    |   |                   |   |
| **Current  liabilities:**                                                                                                                                                                                  |   |                    |   |                   |   |
| Accounts payable                                                                                                                                                                                           |   | $                       | 844    |                   | $      | 1,537 |   |
| Accrued  liabilities                                                                                                                                                                                       |   | 1,834                   |   | 1,701                  |   |
| Current portion  of note payable                                                                                                                                                                           |   | 478                     |   | 304                    |   |
| Total current  liabilities                                                                                                                                                                                 |   | 3,156                   |   | 3,542                  |   |
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| **Long-term  liabilities:**                                                                                                                                                                                |   |                    |   |                   |   |
| Note payable,  net of current portion                                                                                                                                                                      |   | 5,347                   |   | 5,696                  |   |
| Other                                                                                                                                                                                                      |   | 25                      |   | 75                     |   |
| Total long-term  liabilities                                                                                                                                                                               |   | 5,372                   |   | 5,771                  |   |
|                                                                                                                                                                                                       |   |                    |   |                   |   |
| **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, 2002 and December 31, 2001 (entitled in  liquidation to $5,175 at September 30, 2002 and December 31, 2001) |   | 4                       |   | 4                      |   |
| Common stock, $.02 par value, 60,000,000 shares authorized, 26,765,082  and 26,571,098 shares issued and outstanding at September 30, 2002 and  December 31, 2001, respectively                            |   | 535                     |   | 532                    |   |
| Additional  paid-in capital                                                                                                                                                                                |   | 224,031                 |   | 223,905                |   |
| Accumulated  other comprehensive income – unrealized gain on investment securities                                                                                                                    |   | 32                      |   | 578                    |   |
| Accumulated  deficit                                                                                                                                                                                       |   | (209,666                | )      | (183,304               | )      |
| Total  shareholders’ equity                                                                                                                                                                           |   | 14,936                  |   | 41,715                 |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                                       |   | $                       | 23,464 |                   | $      | 51,028 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(in thousands, except per share data)

(unaudited)

 
|                                                            |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                            |   | **2002**                               |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                                            |   |                                   |    |                                  |   |   |   |   |   |
| **Revenues**                                                    |   | $                                      | 507     |                                  | $      | 263 |   | $ | 2,036 |   | $ | 1,437 |   |
| **Operating expenses:**                                         |   |                                   |    |                                  |   |   |   |   |   |
| Research and  development                                       |   | 4,369                                  |    | 5,663                                 |   | 17,403 |   | 14,334 |   |
| General and  administrative                                     |   | 1,535                                  |    | 2,755                                 |   | 5,137 |   | 6,014 |   |
| Asset impairment  loss                                          |   | 5,658                                  |    | —                                |   | 5,658 |   | — |   |
| Restructuring                                                   |   | 529                                    |    | —                                |   | 529 |   | — |   |
| Total operating  expenses                                       |   | 12,091                                 |    | 8,418                                 |   | 28,727 |   | 20,348 |   |
| Loss from  operations                                           |   | (11,584                                | )       | (8,155                                | )      | (26,691 | ) | (18,911 | ) |
| **Other income (expense):**                                     |   |                                   |    |                                  |   |   |   |   |   |
| Realized gain on  sale of securities                            |   | 20                                     |    | 154                                   |   | 142 |   | 253 |   |
| Loss on disposal  of equipment                                  |   | (69                                    | )       | —                                |   | (69 | ) | — |   |
| Interest income                                                 |   | 204                                    |    | 656                                   |   | 912 |   | 2,314 |   |
| Interest expense                                                |   | (75                                    | )       | (133                                  | )      | (281 | ) | (285 | ) |
| Total other  income                                             |   | 80                                     |    | 677                                   |   | 704 |   | 2,282 |   |
| Net loss                                                        |   | (11,504                                | )       | (7,478                                | )      | (25,987 | ) | (16,629 | ) |
| Preferred stock  dividends                                      |   | (125                                   | )       | (125                                  | )      | (375 | ) | (375 | ) |
| Net loss  applicable to common shares                           |   | $                                      | (11,629 | )                                     | $      | (7,603 | ) | $ | (26,362 | ) | $ | (17,004 | ) |
| Net loss per  common share - basic and diluted                  |   | $                                      | (0.44   | )                                     | $      | (0.29 | ) | $ | (0.99 | ) | $ | (0.65 | ) |
| Weighted average  common shares outstanding - basic and diluted |   | 26,634                                 |    | 26,433                                |   | 26,604 |   | 26,358 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
|                                                                         |   | **Nine  Months Ended September 30,** |    |
|------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                         |   | **2002**                             |    | **2001** |   |
|                                                                         |   |                                 |    |   |   |
| **Cash flows from operating  activities:**                                   |   |                                 |    |   |   |
| Net loss                                                                     |   | $                                    | (25,987 | ) | $ | (16,629 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                 |    |   |   |
| Depreciation and  amortization                                               |   | 1,337                                |    | 929 |   |
| Gain on sale of  securities                                                  |   | (142                                 | )       | (253 | ) |
| Loss on disposal  of equipment                                               |   | 69                                   |    | — |   |
| Asset impairment  loss                                                       |   | 5,658                                |    | — |   |
| Restructuring                                                                |   | 529                                  |    | — |   |
| Common stock  issued for services                                            |   | 68                                   |    | 148 |   |
| Stock options  and warrants issued for services                              |   | 42                                   |    | 921 |   |
| Change in  operating assets and liabilities:                                 |   |                                 |    |   |   |
| Decrease in  notes receivable                                                |   | 109                                  |    | 2,555 |   |
| (Increase)  decrease in prepaid expenses and other assets                    |   | (129                                 | )       | 497 |   |
| Decrease in  accounts payable                                                |   | (693                                 | )       | (607 | ) |
| Increase in  accrued liabilities                                             |   | (521                                 | )       | 820 |   |
| Net cash used in  operating activities                                       |   | (19,660                              | )       | (11,619 | ) |
|                                                                         |   |                                 |    |   |   |
| **Cash flows from investing  activities:**                                   |   |                                 |    |   |   |
| Proceeds from  sales and maturities of investment securities                 |   | 25,661                               |    | 40,933 |   |
| Purchases of  investment securities                                          |   | (7,849                               | )       | (25,335 | ) |
| Facilities and  equipment purchases                                          |   | (683                                 | )       | (7,350 | ) |
| Net cash  provided by investing activities                                   |   | 17,129                               |    | 8,248 |   |
|                                                                         |   |                                 |    |   |   |
| **Cash flows from financing  activities:**                                   |   |                                 |    |   |   |
| Proceeds from  stock options and warrants exercised                          |   | 19                                   |    | 329 |   |
| Repayment of  note payable principal                                         |   | (175                                 | )       | — |   |
| Repayment of  capital lease obligation                                       |   | (50                                  | )       | — |   |
| Preferred stock  dividends                                                   |   | (250                                 | )       | (250 | ) |
| Net cash (used  in) provided by financing activities                         |   | (456                                 | )       | 79 |   |
|                                                                         |   |                                 |    |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (2,987                               | )       | (3,292 | ) |
|                                                                         |   |                                 |    |   |   |
| **Cash and cash equivalents:**                                               |   |                                 |    |   |   |
| Beginning of  period                                                         |   | 4,097                                |    | 8,389 |   |
| End of period                                                                |   | $                                    | 1,110   |   | $ | 5,097 |   |
|                                                                         |   |                                 |    |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:**  |   |                                 |    |   |   |
|                                                                         |   |                                 |    |   |   |
| Assets acquired  through assumption of liabilities                           |   | $                                    | —  |   | $ | 6,175 |   |
| Issuance of  stock warrants                                                  |   | —                               |    | 1,288 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

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**NEORXCORPORATION AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Note 1.  Basis of Presentation**

 

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

 

The interim financial statements contained herein havebeen prepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the Company’s annual report on Form 10-K for the year endedDecember 31, 2001.

 

In the opinion of management, the interim financialstatements reflect all adjustments, consisting only of normal recurringaccruals necessary to present fairly the Company’s financial position as ofSeptember 30, 2002 and the results of its operations and cash flows for theperiods ended September 30, 2002 and 2001.

 

The results of operations for the quarters endedSeptember 30, 2002 and 2001 are not necessarily indicative of the expectedoperating results for the full year.

 

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

 

Basic and diluted loss per share are based on net lossapplicable to common shares, which is comprised of net loss and preferred stockdividends in all periods presented. Shares used to calculate basic loss pershare are based on the weighted average number of common shares outstandingduring the period.  Shares used 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.  Calculations ofbasic and diluted loss per share for the quarters ended September 30, 2002 and2001 exclude the effect of options and warrants to purchase additional sharesof common stock because the share increments would be antidilutive.

 

The computation of diluted net loss per share excludesthe following options and warrants to acquire shares of common stock for theperiods indicated because their effect would be antidilutive:

 

|                                       |   | **September  30,  2002** |   | **September  30,  2001** |   |
|--------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                       |   |                     |   |                     |   |
| Common stock  options                      |   | 4,714,779                |   | 4,414,789                |   |
| Weighted average  exercise price per share |   | $                        | 4.63   |                     | $      | 5.10 |   |
| Common stock  warrants                     |   | 890,000                  |   | 1,070,000                |   |
| Weighted average  exercise price per share |   | $                        | 9.62   |                     | $      | 8.72 |   |

 

In addition, 234,088 shares of common stock that wouldbe issuable upon conversion of the Company’s preferred stock are not includedin the calculation of diluted loss per share for the quarters ended September30, 2002 and 2001 because the effect of including such shares would be antidilutive.

 

**Note 3.  Comprehensive Loss**

 

The Company’s comprehensive loss for the quartersended September 30, 2002 and 2001 was $11,608,000 and $7,464,000,respectively.  The comprehensive lossfor the quarters ended September 30, 2002 and 2001 consisted of net loss of$11,504,000 and $7,478,000, respectively, and a net unrealized gain (loss) oninvestment securities of $(104,000) and $14,000 for the quarters endedSeptember 30, 2002 and 2001, respectively. The Company’s comprehensive loss for the nine months ended September 30,2002 and 2001 was $26,533,000 and $16,283,000, respectively.  The comprehensive loss for the nine monthsended September 30, 2002 and 2001 consisted of net loss of $25,987,000 and$16,629,000, respectively, and a net unrealized gain (loss) on investmentsecurities of $(546,000) and $346,000 for the nine month periods endedSeptember 30, 2002 and 2001, respectively.

 

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**Note4.  New Accounting Pronouncements**

 

In July 2001, the FASB issued Statement No. 141, *BusinessCombinations,* and Statement No. 142, *Goodwill and Other Intangible Assets.*  Statement 141 requires that all businesscombinations be accounted for under a single method – the purchase method. Useof the pooling-of-interests method is no longer permitted.  Statement 141 requires that the purchasemethod be used for business combinations initiated after June 30, 2001.  Statement 142 requires that goodwill nolonger be amortized to earnings, but instead be reviewed for impairment.  The amortization of goodwill ceases uponadoption of the Statement, which was adopted by the Company on January 1,2002.  The adoption of Statements No.141 and 142 did not have any impact on the Company’s consolidated financialstatements.

 

In August 2001, the FASB issued Statement No. 143, *Accountingfor Asset Retirement Obligations,* which addresses financialaccounting and reporting obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  The standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, and (or) normal use of the asset.  Statement No. 143 requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred if a reasonable estimate of fair value can bemade.  The fair value of the liabilityis added to the carrying amount of the associated asset and this additionalcarrying amount is depreciated over the life of the asset.  If the obligation is settled for other thanthe carrying amount of the liability, the Company will recognize a gain or losson settlement. The Company will adopt this Statement on January 1, 2003.  Management has not yet determined the impactof adopting this statement on its consolidated financial statements.

 

In October 2001, the FASB issued Statement No. 144, *Accountingfor Impairment or Disposal of Long-Lived Assets,* which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  While Statement No. 144supersedes FASB Statement No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of,* it retains many of thefundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reportingprovisions of APB Opinion No. 30, *Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,* for the disposal ofa segment of a business.  However, itretains the requirement in Opinion No. 30 to report separately discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, abandonment, or in distribution to owners) or isclassified as held for sale.  TheCompany adopted the provisions of Statement No. 144 on January 1, 2002.  The adoption of this statement impacted theCompany’s consolidated financial statements as disclosed in Note 5.

 

In July 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichaddresses financial accounting and reporting for costs associated with exit ordisposal activities.  Statement No. 146nullifies EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The principal difference between StatementNo. 146 and Issue No. 94-3 relates to the recognition of a liability for a costassociated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for thosecosts only when the liability is incurred, that is, when it meets thedefinition of a liability in the FASB’s conceptual framework.  In contrast, under Issue No. 94-3, a companyrecognized a liability for an exit cost when it committed to an exit plan.  Statement No. 146 also establishes fairvalue as the objective for initial measurement of liabilities related to exitor disposal activities.  The Statementis effective for exit or disposal activities that are initiated after December31, 2002 although earlier application is encouraged.  The Company will adopt this Statement on January 1, 2003.  Management has not yet determined the impactof adopting this statement on its consolidated financial statements.

 

**Note 5.  Asset Impairment Loss**

 

In September 2002, the Company recognized a non-cashasset impairment loss on certain facilities and equipment resulting from theCompany’s decisions to reduce staff at its Denton, Texas radiopharmaceuticalmanufacturing facility, decrease the development of contract manufacturingactivities in Denton, and curtail Pretarget® activities at itsSeattle, Washington research and development facility. The loss on the Denton,Texas

 

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manufacturing facility and related equipment was determined via outsideappraisals.  The loss on the equipmentat the Seattle facility was determined via estimates of potential sales valuesof used equipment.  In addition, theestimated useful life of other intangibles associated with the Denton facilitywas reduced to two years.  The followingtable summarizes information related to the impairment charges:

 
| **Description**                                         |   | **Impairment  Loss** |      | **Post  Impairment  Carrying Value** |   |
|---------------------------------------------------------|--------|----------------------|-----------|--------------------------------------|--------|
|                                                    |   |                 |      |                                 |   |
| Equipment –  Seattle, Washington                   |   | $                    | 306,000   |                                 | $      | 4,837,000 |   |
| Equipment –  Manufacturing Facility, Denton, Texas |   | 2,393,000            |      | 1,122,000                            |   |
| Manufacturing  Facility, Denton, Texas                  |   | 2,895,000            |      | 5,680,000                            |   |
| Intangibles –  Denton, Texas                       |   | 64,000               |      | —                               |   |
| Total                                                   |   | $                    | 5,658,000 |                                 | $      | 11,639,000 |   |

 

**Note 6.  Restructuring**

 

In July 2002, the Company restructured its operationsand reduced its work force by 31 employees. The employees were no longer with the Company at September 30, 2002 andwill not be providing future services to the Company.  The Company incurred a severance charge of approximately $529,000as a result of the restructuring.  Theaccrued severance payable at September 30, 2002 was approximately $241,000, ofwhich approximately $155,000 will be paid in 2002 and $86,000 will be paid in2003.

 

**Note7.  Liquidity**

 

The Company has incurred losses annually sinceinception and has limited working capital. On November 12, 2002, the Company entered into an agreement with IDECPharmaceuticals Corporation (IDEC) relating to the sale to IDEC of certainNeoRx intellectual property and the grant to IDEC of certain license and optionrights.  The Company received $7.9million in cash and may receive in the future royalty payments with respect tocertain products.  Taking into accountthe cash funds received in the IDEC transaction, the Company believes itsexisting working capital will only be sufficient to fund operations into thefourth quarter of 2003. In July 2002, the Company decided to focus its effortson its STR product candidate and discontinue its Pretarget®technology activities.  Also in July2002, the Company reduced its staff by 31 persons, or approximately 30%.  The cost associated with the reduction inforce was approximately $529,000 and will be incurred primarily over afour-month time period beginning in August 2002.  In October 2002, the Company further reduced its staff, primarilyin its Denton manufacturing facility, by an additional 13 persons, orapproximately 15% of the Company’s total work force.  The cost associated with the reduction in force was approximately$122,000 and will be incurred primarily over a four-month time period beginningin October 2002.  In an effort tofurther reduce cash expenditures and unused office space, in October 2002 theCompany terminated its lease at the 410 West Harrison Street location inSeattle, Washington, effective April 2003. The lease originally was effective through May 2006.  The cost of terminating the lease was threemonths base rent, or approximately $110,000, which was paid in October 2002.The administrative offices were consolidated into the 300 Elliott Avenue Westlocation in Seattle, Washington.

 

The Company’s decisions to curtail Pretarget®activities and reduce staff were in response to the anticipated clinicaldevelopment timeline of the Pretarget® product candidates and thecurrent economic environment.  Thediscontinued Pretarget® activities include development of thePretarget® Lymphoma and Pretarget® Carcinoma productcandidates beyond the phase I trials, for which patient enrollment hasconcluded, and manufacturing development activities associated with thePretarget® project. The Company will seek to sell or outlicense thePretarget® patent portfolio and other assets in an effort to raiseadditional funds. The Company also is addressing its need for additionalcapital by exploring opportunities for the licensing or divestiture of certainintellectual property and other assets, by seeking partnering or outlicensingopportunities for its STR product development program, and through the sale ofsecurities.  In the event thatsufficient additional funds are not obtained through asset sales, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction, or curtailmentof STR development activities and/or the further reduction of costs forfacilities and administration.

 

The Company’s actual capital requirements will dependon numerous factors, including the conditions in the

 

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capital markets in general and in the life sciences capital marketsspecifically, which may affect potential financing sources for the developmentof the Company’s business; the rate of progress and results of research anddevelopment activities and clinical trials; actions by the U.S. Food and DrugAdministration (FDA) and other regulatory authorities; the levels of resourcesthat the Company devotes to establishing and maintaining marketing andmanufacturing capabilities; the emergence of competing technologies and otheradverse market developments; the costs of preparing, filing, prosecuting,maintaining and enforcing patent claims and other intellectual property rights;and the timing and amount of revenues and expense reimbursements resulting fromrelationships with third parties or collaborative agreements.  There can be no assurance that the Companywill be able to obtain such additional capital or enter into relationships withcorporate partners on a timely basis, on favorable terms, or at all.  These financial statements are prepared on agoing concern basis, however if the Company were forced to liquidate itsassets, it may not recover the carrying amount of such assets.

** **

**Note8.  Subsequent Events**

 

On November 12, 2002, theCompany entered into an agreement with IDEC Pharmaceuticals Corporationrelating to the sale to IDEC of certain NeoRx intellectual property and thegrant to IDEC of certain license and option rights.  NeoRx received $7.9 million in cash and may receive in the futureroyalty payments with respect to certain products.  The purchase price was determined by arms length negotiations.

 

The intellectual propertyaddressed by this agreement includes a portfolio of NeoRx US and internationalpatents and certain associated technology and know-how relating toantibody-based therapeutics and ligand-linker technology.  The intellectual property rights beingtransferred to IDEC do not include rights to NeoRx’s STR or Pretarget®programs.  With respect to the patentsinvolved in the sale, NeoRx retains a license for the development of certainNeoRx products.

 

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**NEORXCORPORATION AND SUBSIDIARY**

**Item 2****.  Management’s Discussion andAnalysis of Results of Operations and Financial Condition**

 

This Form 10-Q containsforward-looking statements. These statements relate to future events or futurefinancial performance. In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “should,” “expect,” “plan,”“intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”“propose” or “continue,” the negative of these terms or other terminology.  These statements are only predictions.Actual events or results may differ materially. In evaluating these statements,you should specifically consider various factors described below in the sectionentitled “Additional factors that may affect results.” These factors may causeour actual results to differ materially from any forward-looking statement.

 

Although we believe the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements. You should not place unduereliance on our forward-looking statements, which speak only as of the date ofthis report.

 

***Critical Accounting Policies and Estimates***

 

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

 

*Impairmentof Long-Lived Assets:*In September 2002, the Companyrecognized a non-cash asset impairment loss on certain facilities and equipmentresulting from the Company’s decisions to reduce staff at its Denton, Texasradiopharmaceutical manufacturing facility, decrease the development ofcontract manufacturing activities in Denton, and curtail Pretarget®activities at its Seattle, Washington research and development facility. Theloss on the Denton, Texas manufacturing facility and related equipment wasdetermined via outside appraisals.  Theloss on the equipment at the Seattle facility was determined via estimates ofpotential sales values of used equipment. In addition, the estimated useful life of other intangibles associatedwith the Denton facility was reduced to two years.

 

***Quarter and ninemonths ended September 30, 2002 compared to quarter and nine months endedSeptember 30, 2001***

 

Revenue for the quarter ended September 30, 2002 was$507,000 compared to $263,000 for the quarter ended September 30, 2001.  Revenue for the quarters ended September 30,2002 and 2001 consisted primarily of revenue from government grants and afacilities lease agreement.  Revenue forthe nine months ended September 30, 2002 was $2,036,000 compared to $1,437,000for the nine months ended September 30, 2001. Revenue for the nine months ended September 30, 2002 consisted of amilestone payment of $1,000,000 from Angiotech Pharmaceuticals, Inc., alongwith revenue from government grants and a facilities lease agreement. Revenuefor the nine months ended September 30, 2001 consisted primarily of revenuefrom government grants and a facilities lease agreement.  The Company recognizes revenue fromgovernment grants as earned.  TheCompany does not have any significant revenue sources.  On occasion, the Company derives revenuefrom licensing its patented technologies and from government grants. Pursuantto SAB 101, the timing and amount of license revenue recognized during an accountingperiod is determined by the nature of the contractual provisions included inthe license arrangement.

 

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Total operating expenses for the quarter endedSeptember 30, 2002 increased 44% to $12,091,000 from $8,418,000 in the quarterended September 30, 2001, and increased 41% to $28,727,000 for the nine monthsended September 30, 2002 from $20,348,000 for the nine months ended September30, 2001.  Total operating expenses forthe third quarter of 2002 included a non-cash asset impairment charge of$5,658,000.  Additionally, severance of$529,000 was incurred relating to the curtailment of the Company’s Pretarget®Lymphoma and Pretarget® Carcinoma clinical product developmentprograms and the resulting reduction in force implemented in July 2002.  Research and development expenses for thequarter ended September 30, 2002 decreased 23% to $4,369,000 from $5,663,000for the same time period in 2001, and increased 21% to $17,403,000 for the ninemonths ended September 30, 2002 from $14,334,000 for the nine months endedSeptember 30, 2001.  The decrease inresearch and development expenses for the third quarter of 2002 ended September30, 2002 was predominantly due to the curtailment of the Company’s Pretarget®Lymphoma and Pretarget® Carcinoma clinical product developmentprograms and the resulting reduction in force implemented in July 2002.  The increase in research and developmentexpenses for the nine months ended September 30, 2002 was predominantly due tothe addition of the Company’s radiopharmaceutical manufacturing facility inDenton, Texas and costs associated with Pretarget® projectactivities.

 

In July 2002, the Company began enrolling and dosingmultiple myeloma patients in a dosimetry study for STR.  This study was requested by the FDA tovalidate the method proposed for calculating radiation dose in a plannedpivotal clinical trial program. Enrollment of multiple myeloma patients in our STR dosimetry study is inprogress, with three clinical sites actively treating patients. The Company isin discussions with the FDA on the design of its STR pivotal program and iscurrently reassessing how and on what timeline to proceed.

 

We expect research and development expenses todecrease by approximately 15% to 20% during the fourth quarter of 2002, due tothe curtailment of Pretarget® project activities and  reductions in staff.  The discontinued Pretarget®activities include our Pretarget® Lymphoma and Pretarget®Carcinoma phase I trials, for which patient enrollment has concluded, andmanufacturing development activities associated with the Pretarget®project. We will seek to sell or license our Pretarget® patentportfolio, pursue partnering and outlicensing opportunities in connection withour STR technology, and sell or license other assets in an effort to raiseadditional funds.  In an effort tofurther reduce cash expenditures and unused office space, in October 2002, theCompany terminated its lease at the 410 West Harrison Street location inSeattle, Washington, effective April 2003. The lease originally was effective through May 2006.  The cost of terminating the lease was threemonths base rent, or approximately $110,000, which was paid in October 2002.The administrative offices were consolidated into the 300 Elliott Avenue Westlocation in Seattle, Washington.

 

General and administrative expenses for the quarterended September 30, 2002 decreased 44% to $1,535,000 versus $2,755,000 for thequarter ended September 30, 2001, and decreased 15% to $5,137,000 for the ninemonths ended September 30, 2002 compared to $6,014,000 for the nine monthsended September 30, 2001.  The decreasein general and administrative costs during the third quarter and nine monthsended September 30, 2002 was due to the accrual of one-time severance costs forthe former CEO in the third quarter of 2001 and the overall effort to reduceexpenses to conserve cash.  In thesecond and third quarter of 2002, the Company implemented two reductions in itswork force, resulting in an overall reduction of its staff size by 45%.  Costs for general and administrative arealso expected to decrease in the fourth quarter of 2002 as a result of thereductions in force taken by the Company.

 

Other income for the third quarter of 2002 was $80,000compared to $677,000 for the third quarter of 2001.  Other income for the nine months ended September 30, 2002 was$704,000 compared to $2,282,000 for the same time period in 2001.  Other income included interest income forthe third quarter of 2002 of $204,000 compared to $656,000 for the thirdquarter of 2001.  Other income includedinterest income for the nine months ended September 30, 2002 of $912,000compared to $2,314,000 for the same time period in 2001.  Other income is expected to decline due todeclining balances of cash and cash equivalents.

 

***Liquidity andcapital resources***

 

The Company has financed its operations primarilythrough the sale of equity securities, collaborative agreements and debtinstruments.  The Company invests excesscash in investment securities that will be used to fund future operatingcosts.  Cash, cash equivalents andinvestment securities totaled $12,378,000 at September 30, 2002 versus$33,581,000 at December 31, 2001.  TheCompany primarily funds current operations with its existing cash andinvestments.  On occasion, the Companyderives revenue from licensing its patent technologies and from

 

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government grants.

 

The Company currently maintains a line of credit withPharmaceutical Product Development, Inc. (PPD) of up to $5.0 million to assistin funding the pivotal phase III trial of its STR product in development.   This line of credit is available to theCompany only upon the successful resumption of phase III trials and theproceeds can only be applied to the expenses related to the phase IIItrials.  The Company has not drawn fundson this line of credit to date, which carries an annual interest rate of 16%.

 

In January 2002, the Company sold the remainder of itsinvestment in Angiotech Pharmaceuticals, Inc. for $1.4 million and recognized again on the sale of approximately $109,000.

 

On November 12, 2002, theCompany entered into an agreement with IDEC Pharmaceuticals Corporationrelating to the sale to IDEC of certain NeoRx intellectual property and thegrant to IDEC of certain license and option rights.  NeoRx received $7.9 million in cash and may receive in the futureroyalty payments with respect to certain products. The intellectual propertyaddressed by this agreement includes a portfolio of NeoRx US and internationalpatents and certain associated technology and know-how relating toantibody-based therapeutics and ligand-linker technology.  The intellectual property rights beingtransferred to IDEC do not include rights to NeoRx’s STR or Pretarget®programs.  With respect to the patentsinvolved in the sale, NeoRx retains a license for the development of certainNeoRx products.

 

The Company will need to raise additional capital tofund its planned STR pivotal clinical trial program, and its current operatingcash needs.  The Company expects thatits cash, including the consideration received in the transaction with IDEC,cash equivalents, investment securities and interest income will be sufficientto fund its anticipated working capital and capital requirements into thefourth quarter of 2003. In July 2002, the Company decided to discontinue all ofits Pretarget® technology activities.  The discontinued Pretarget® activities include itsPretarget® Lymphoma and Pretarget® Carcinoma phase Itrials, for which patient enrollment has concluded, and manufacturingdevelopment activities associated with the Pretarget® project. Alsoin July 2002, the Company reduced its staff size by 31 persons, or 30%.  The cost associated with the reduction inforce is approximately $529,000 and will be incurred primarily over afour-month time period beginning in August 2002. In October 2002, the Companyfurther reduced its staff, primarily in its Denton manufacturing facility, byan additional 13 persons, or approximately 15% of the Company’s total workforce.  The cost associated with thisreduction in force was approximately $122,000 and will be incurred primarilyover a four-month time period beginning in October 2002.  In an effort to further reduce cashexpenditures and unused office space, in October 2002 the Company terminatedits lease at the 410 West Harrison Street location in Seattle, Washingtoneffective April 2003.  The leaseoriginally was effective through May 2006. The cost of terminating the lease was three months base rent, orapproximately $110,000, which was paid in October 2002.

 

The Company’s decision to curtail Pretarget®activities and reduce staff was in response to the anticipated clinicaldevelopment timeline of the Pretarget® candidates and the currenteconomic environment.   The Company willseek to sell or outlicense the Pretarget® patent portfolio and otherassets in an effort to raise additional funds. The Company also is addressingits need for additional capital by pursuing opportunities for the licensing ordivestiture of certain intellectual property and other assets, by seekingpartnering or outlicensing opportunities for its STR technology, and throughthe sale of  securities.  In the event that sufficient additionalfunds are not obtained through asset sales, strategic partnering opportunitiesand/or sales of securities on a timely basis, the Company plans to reduceexpenses through the delay, reduction or curtailment of STR developmentactivities and/or further reduction of costs for facilities andadministration.  The Company’s actualcapital requirements will depend on numerous factors, including conditions inthe capital markets in general and in the life sciences capital marketsspecifically, which may affect potential financing sources for the developmentof the Company’s business; the progress and results of research and developmentactivities and clinical trials; actions by the FDA and other regulatoryauthorities; the levels of resources that the Company devotes to establishing andmaintaining marketing and manufacturing capabilities; the emergence ofcompetitive technologies and other adverse market developments and the timingand amount of revenues and expense reimbursements resulting from relationshipswith third parties or collaborative agreements.  There can be no assurance that the Company will be able to obtainsuch additional capital or enter into relationships with corporate partners ona timely basis, on favorable terms, or at all. These financial statements are prepared on a going concern basis,however if the Company were forced to liquidate its assets, it may not recoverthe carrying amount of such assets.

 

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***Related partytransactions***

 

The Company’s Chairman of the Board of Directors, Dr.Fred Craves, had a consulting agreement with the Company that provided that heshall be retained as a general advisor and consultant to the Company’smanagement on all matters pertaining to the Company’s business.  In exchange for such services, he wascompensated $30,000 for each calendar quarter of services, plus reasonabletravel and other expenses.  Compensationpayments under this agreement totaled $30,000 for the third quarter endedSeptember 30, 2001, and $90,000 for the nine months then ended.  In addition, payments for travel and otherexpenses totaled approximately $10,000 for the quarter ended September 30,2001, and $39,600 for the nine months then ended. In 2002, the Company did notrenew this agreement with Dr. Craves.

 

Dr. Craves is a founder and Managing Director of BayCity Capital BD LLC, also known as BCC, a merchant bank focused on the lifesciences industry.  As of September 30,2002, BCCF, an affiliate of BCC, owned 8.89% of the Company’s commonstock.  Dr. Carl Goldfischer, a memberof the NeoRx Board of Directors, is a Managing Director of BCC; Jack L. Bowman,a member of the NeoRx Board of Directors, is on the business advisory board ofBCC; and Dr. Douglass B. Given, President and CEO and a Director of NeoRx, is anExecutive in Residence at BCC.

 

The Company and BCC entered into an agreement wherebyBCC will act as the Company’s advisor for the purpose of identifyingopportunities to enter into strategic alliances. The Company paid a retainerfee of $50,000 in cash for each calendar quarter through the end of 2001. TheCompany renewed the agreement for 2002 and pays a retainer fee of $80,000 perquarter, plus reasonable travel and other expenses. The agreement also includesa percentage of consideration, ranging from one to five percent, depending onthe ultimate amount of capital raised. Retainer fee payments under this agreement totaled $80,000 and $50,000for the quarters ended September 30, 2002 and 2001, respectively, and $240,000and $200,000 for the nine months ended September 30, 2002 and 2001,respectively, which included the balance payable of $100,000 at December 31,2000.  In addition, payments for traveland other expenses totaled approximately $14,100 for the quarter endedSeptember 30, 2002 and approximately $45,700 for the nine months endedSeptember 30, 2002.  The Company alsopaid BCC approximately $612,000 during the second quarter of 2001 forcommissions related to the Company’s purchase of the radiopharmaceuticalmanufacturing facility located in Denton, Texas.

 

In connection with an agreement to provide financialconsulting services in 2001, Dr. Goldfischer received fees in the third quarterended September 30, 2001 of $30,000 and $75,000 during the nine months thenended, along with stock option grants of 10,000 shares in December 2000 and150,000 shares in January 2001. Services related to these stock options were fully provided by December31, 2001, after which this agreement was terminated.  As of January 29, 2002, vesting was accelerated for those optionsgranted under the agreement that had not already vested. The Company recordedan expense in the amount of $526,000 during 2001 for the fair value of theoption grants on the date the services were completed.

 

In connection with consulting services performed in2002 and 2001, Dr. Paul G. Abrams, the former CEO of the Company, receivedconsulting fees in the amount of $229,905 and $127,725, respectively.  Prior to his appointment as CEO in July2001, Dr. Given provided consulting services to the Company.  The total consulting fees paid to Dr. Givenin 2001 were $225,000.

 

The Company had a demand note receivable from anofficer with a balance of approximately $49,675 as of June 30, 2001 that wasrecorded in other assets. This note was paid in full on July 31, 2001.  The Company had another demand notereceivable from an officer with a balance of approximately $90,990 during thefirst half of 2002.  This note was paidin full on May 24, 2002.  There were nodemand note receivables to related parties outstanding at September 30, 2002.

 

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

 

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

 

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

 

We have not been profitable for any year since ourformation in 1984.  As ofSeptember 30, 2002, we had an accumulated deficit of $210 million. Theselosses have resulted principally from costs incurred in our research anddevelopment programs and from our general and administrative activities.  To date, we have been engaged only inresearch and development activities and have not generated any significantrevenues from product sales.  We do notanticipate that our proposed STR product will be commercially available forseveral years. We expect to incur additional operating losses in the future.These losses may increase significantly if we expand development and clinicaltrial efforts.  Our ability to achievelong-term profitability is dependent upon obtaining regulatory approvals forour STR and any other proposed products and successfully commercializing ourproducts alone or with third parties. However, our operations may not be profitable even if we succeed in commercializingany product.

 

**We willneed to raise additional capital, and our future access to capital isuncertain.**

 

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

 

•                                          tofund operations;

 

•                                          tocontinue the research and development of our STR product candidate; and

 

•                                          tocommercialize our STR and any other proposed products.

 

We expect that our cash,cash equivalents, investment securities and interest income will only besufficient to fund our anticipated working capital and capital requirementsinto the fourth quarter of 2003.

 

We will seek to sell oroutlicense our Pretarget® patent portfolio and other assets in aneffort to raise additional funds. We also are addressing our need foradditional capital by pursuing opportunities for the licensing or divestitureof certain intellectual property and other assets, by seeking partnering oroutlicensing opportunities for our STR technology and through the sale ofsecurities.

 

In the event thatsufficient additional funds are not obtained through asset sales, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction or curtailment ofSTR development activities and/or further reduction of costs for facilities andadministration.

 

The amount of additionalfinancing we need within this time frame depends on a number of factors,including the following:

 

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

 

•                                          actionstaken by the FDA and other regulatory authorities;

 

•                                          thecosts of developing and maintaining manufacturing operations;

 

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

 

•                                          thetiming and amount of milestone payments we might receive from potentialstrategic partners;

 

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

 

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

 

•                                          theemergence of competing technologies and other adverse market developments;

 

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

 

We may not be able toobtain additional financing on favorable terms or at all.  If we are unable to raise additional fundswhen we need them, we may be required further to delay, reduce or eliminatesome or all of our STR development activities and clinical trials.  We also may be required to enter intorelationships with third parties to develop or commercialize products ortechnologies that we otherwise would have sought to develop independently.  If we raise additional funds by issuingequity securities, further dilution to shareholders may result, and newinvestors could have rights superior to current security holders.

 

The financial statementsincluded in this report are prepared on a going concern basis, however if wewere forced to liquidate our assets, we may not recover the carrying amount ofsuch assets.

 

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

 

The manufacture andmarketing of our proposed products and our research and development activitiesare subject to regulation for safety, efficacy and quality by the FDA in theUnited States and comparable authorities in other countries.

 

The process of obtainingFDA and other required regulatory approvals, including foreign approvals, isexpensive, often takes many years and can vary substantially based upon thetype, complexity and novelty of the products involved.  Our STR product candidate is novel;therefore, regulatory agencies lack direct experience with it. This maylengthen the regulatory review process, increase our development costs anddelay or prevent commercialization of our STR product candidate. An earlierphase III study of STR was placed on clinical hold by the FDA after somepatients in our STR phase I/II multiple myeloma trials developed a seriousdelayed toxicity.  The FDA requestedthat we collect additional radiation dosimetry data from a small number ofpatients to validate the method proposed for calculating radiation dose in ourplanned pivotal trial program.  Underthe ongoing dosimetry study, which will enroll approximately 12 patients,tracer doses of the STR therapeutic initially are administered to determineskeletal uptake and eligibility for treatment. Eligible patients then receive a treatment dose of the STR therapeutic,followed by high-dose chemotherapy and peripheral blood stem celltransplantation to restore bone marrow function.  Patients are carefully monitored throughout the study.  Follow-up evaluations will include assessmentsof STR safety and efficacy.  Enrollmentof multiple myeloma patients in our STR dosimetry study for STR is in progress,with three clinical sites actively treating patients.   We have discussed with the FDA a revised plan for a pivotalclinical trial program for STR in patients with multiple myeloma, and havesubmitted to the FDA a draft protocol for the proposed pivotal program. Basedon the results of the dosimetry study and subject to authorization by the FDA,we plan to resume STR clinical trials under a revised pivotal phase IIIprogram.  The time to initiation of theproposed pivotal program, if undertaken at all, will depend upon numerousfactors, including our ability to obtain adequate funding, actions taken by theFDA and other regulatory agencies, and the timing thereof; the rate of progressand costs of our clinical trial and research and development activities; ourability to maintain sufficient, reliable and affordable third-party supplies ofmaterials used in the manufacture of STR, including holmium-166, theradionuclide used in our STR product candidate; the costs of developing andmaintaining manufacturing operations; scheduling conflicts with participatingclinicians and clinical institutions; and potential difficulties in identifyingand enrolling patients who meet trial eligibility criteria.

 

In July 2002, we decidedto curtail further Pretarget® product development activities.  The discontinued Pretarget®activities include our Pretarget® Lymphoma and Pretarget®Carcinoma phase I trials and manufacturing development activities associatedwith the Pretarget® programs. We will seek to sell or license our Pretarget® patentportfolio.  We have completed patientenrollment in phase I safety studies for Pretarget® Lymphoma inpatients with non-Hodgkin’s lymphoma, and for Pretarget® Carcinomain patients with gastrointestinal adenocarcinoma. The FDA

 

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has required that we complete a 90-day follow-up onall patients treated to date with Pretarget® Lymphoma and review thedata with the FDA. We plan to complete the necessary patient follow-up andreview, but do not plan to enroll additional patients in either the Pretarget®Lymphoma or Pretarget® Carcinoma program, or otherwise further pursue developmentof these Pretarget® product candidates internally.

 

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

 

If we violate regulatoryrequirements at any stage, whether before or after marketing approval isobtained, we may be fined, forced to remove a product from the market orexperience other adverse consequences, including delay, which could materiallyharm our financial results. Additionally, we may not be able to obtain the labeling claims necessaryor desirable for product promotion.  Wealso may be required to undertake post-marketing trials.  In addition, if we or other parties identifyside effects after any of our products are on the market, or if manufacturingproblems occur, regulatory approval may be withdrawn and reformulation of ourproducts, additional clinical trials, changes in labeling of our products, andadditional marketing applications may be required.

 

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

 

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

 

Although for planningpurposes we project the commencement, continuation and completion of ourclinical trials, a number of factors, including availability of funds, actionsby the FDA, scheduling conflicts with participating clinicians and clinicalinstitutions and difficulties in identifying and enrolling patients who meettrial eligibility criteria, may cause significant delays.  We may not commence or complete our proposedpivotal clinical trial program for our STR product candidate as projected, maynot conduct it successfully, or may not conduct it at all.

 

We currently rely onacademic institutions and clinical research organizations to conduct, superviseor monitor some or all aspects of clinical trials involving our STR and anyother proposed products.  Further, weplan to explore partnering or outlicensing opportunities for our STRtechnology.  To the extent that we nowor in the future participate in such collaborative arrangements, we will haveless control over the timing, planning and other aspects of our clinicaltrials.  In addition, if sufficientadditional funds are not obtained by the Company through asset sales, strategicpartnering opportunities and/or sales of securities on a timely basis, the Companymay be required to reduce expenses by delaying, reducing or curtailing its STRdevelopment activities.  If we fail tocommence or complete, or experience delays in or are forced to curtail ourplanned clinical trials, our stock price and our ability to conduct ourbusiness could be harmed.

 

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

 

Our research anddevelopment programs are designed to test the safety and efficacy of our proposedproducts in humans through extensive preclinical and clinical testing.  We may experience numerous unforeseen eventsduring, or as a result of, the testing process that could delay or preventcommercialization of our STR and any other proposed products, including thefollowing:

 

•                                          safetyand efficacy results attained in early human clinical trials may not beindicative of results that are obtained in later clinical trials;

 

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•                                          theresults of preclinical studies may be inconclusive, or they may not beindicative of results that will be obtained in human clinical trials;

 

•                                          afterreviewing test results, we or any potential collaborators may abandon projectsthat we previously believed were promising;

 

•                                          ourpotential collaborators or regulators may suspend or terminate clinical trialsif the participating subjects or patients are being exposed to unacceptablehealth risks; and

 

•                                          theeffects of our potential products may not be the desired effects or may includeundesirable side effects or other characteristics that preclude regulatoryapproval or limit their commercial use if approved.

 

Clinical testing is veryexpensive, can take many years, and the outcome is uncertain.  We cannot at this time predict if, when orunder what conditions we will initiate our revised pivotal phase III programfor STR.  The data collected from ourclinical trials may not be sufficient to support regulatory approval of ourproposed STR multiple myeloma product, or any other proposed products.  The clinical trials of our proposed STRmultiple myeloma product and other proposed products may not be completed onschedule, and the FDA or foreign regulatory agencies may not ultimately approveany of our product candidates for commercial sale.  Our failure to adequately demonstrate the safety and efficacy ofa cancer therapy product under development would delay or prevent regulatoryapproval of the product, which could prevent us from achieving profitability.

 

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

 

To be successful, we needto develop and maintain reliable and affordable third-party suppliers of****commercialquantities of holmium-166, the radionuclide used in our STR product candidate,and DOTMP, the small-molecule compound used in our STR product candidate todeliver holmium-166 to the bone. Sources of these materials may be limited, and we may be unable toobtain these materials in amounts and at prices necessary to successfullycommercialize our proposed STR product. Timely delivery of materials is critical to our success.  For example, holmium-166 loses itseffectiveness for treating patients within a short period of time.  As a result, the STR product must be shippedwithin 24 hours of its manufacture to the site where the patient is to betreated.  Failures or delays in themanufacturing and shipping processes could compromise the quality andeffectiveness of our product.  We currentlydepend on a single source vendor, University of Missouri Research Reactorfacility group (MURR), for the holmium-166 component of our STR productcandidate.  There are, in general,relatively few alternative sources of holmium-166. While the current vendorgenerally has provided us these materials with acceptable quality, quantity andcost in the past, it may be unable or unwilling to meet our future demands. Ifwe have to switch to a replacement vendor, the manufacture and delivery of ourSTR product could be interrupted for an extended period.

 

In December 2001 weentered into a contract with MURR to supply holmium-166. MURR is responsiblefor the manufacture of holmium-166, including process qualification, qualitycontrol, packaging and shipping, from its Columbia, Missouri reactorfacility.  This supply contract followsa previous arrangement in which MURR provided NeoRx supplies of holmium-166 forthe STR product in development.  Ourbusiness and operations could be materially adversely affected if MURR does notcontinue to perform satisfactorily under this agreement.  We may pursue negotiation of a long-termsupply contract for holmium-166, for the proposed pivotal program.  If MURR is unable or unwilling to providesupplies of holmium-166 in a satisfactory manner, we may suffer delays in, orbe prevented from, initiating or completing pivotal phase III clinical trialsof our STR product.

 

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

 

We rely in part on thirdparties to perform for us or assist us with a variety of important functions,including research and development, manufacturing and clinical trialsmanagement.  We also license technologyfrom others to enhance or supplement our technologies.  We may not be able to locate suppliers tomanufacture our product components or products at a cost or in quantitiesnecessary to make them commercially viable. We intend to rely on third-party contract manufacturers to produce largequantities of certain materials needed for clinical trials and

 

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product commercialization.  Third-party manufacturers may not be able to meet our needs withrespect to timing, quantity or quality. If we are unable to contract for a sufficient supply of needed materialson acceptable terms, or if we should encounter delays or difficulties in ourrelationships with manufacturers, our clinical testing may be delayed, therebydelaying the submission of products for regulatory approval or marketintroduction and subsequent sales.  Anysuch delay may lower our revenues and potential profitability.

 

Moreover, any potentialthird–party manufacturers and NeoRx must continually adhere to currentGood Manufacturing Practices (cGMP) regulations enforced by the FDA through itsfacilities inspection program.  If ourfacilities, or the facilities of these manufacturers, cannot pass a pre-approvalplant inspection, the FDA will not grant pre-market approval of our cancertherapy product candidates. In complying with cGMP and foreign regulatoryrequirements, we and any of our third-party manufacturers will be obligated toexpend time, money and effort in production, record-keeping and quality controlto assure that our products meet applicable specifications and otherrequirements.  If any of our third-partymanufacturers or we fail to comply with these requirements, we may be subjectto regulatory action.

 

In April 2001, wepurchased a radiopharmaceutical manufacturing and distribution facility andcertain other assets located in Denton, Texas fromInternational Isotopes Inc.  In additionto the manufacturing facility, we purchased existing equipment, documentation,and certain processes. The facility has achieved cGMP status and has beenissued appropriate radiation permits by the State of Texas.

 

Our radiopharmaceuticalmanufacturing facility in Denton is the principal manufacturing site for theproposed STR product for our multiple myeloma clinical trials.  This facility is responsible for all aspectsof the manufacture of STR, including process qualification, quality control,packaging and shipping.  The agreementwith our previous supplier of STR for the phase I/II clinical trials, ABCLaboratories, Inc. (ABC), expired on June 30, 2002.  The Denton facility continues to manufacture the STR therapy usedin the Company’s STR dosimetry study. We believe that the Denton facility, despite the recent reduction inforce, would be sufficient to meet our needs to continue the production of STRfor our dosimetry trial.

 

If we are unable tomaintain the necessary cGMP status and permits for our Dentonradiopharmaceutical facility, or if we should encounter delays or difficultiesin any aspect of the manufacture of STR, our clinical testing may be delayed,thereby delaying the submission of the products for regulatory approval or themarket introduction and subsequent sales of the product.  Any such delay may lower our revenues andpotential profitability.

 

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

 

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

 

The competition fordevelopment of cancer therapies is intense. There are numerous competitors developing products to treat the diseasesfor which we are seeking to develop products. We are initially focusing our STR product candidate on the treatment ofmultiple myeloma.  Celgene Corp.’sthalidomide product is in development for treatment of multiple myeloma.  Other therapeutics with anti-angiogenicproperties and other modes of action also are in clinical development fortreatment of multiple myeloma. In addition, a number of establishedpharmaceutical companies, including GlaxoSmithKline, Amersham PLC,Mallinckrodt, Inc. (Tyco Healthcare) and Bristol-Myers Squibb Co., aredeveloping proprietary technologies or have enhanced their capabilities byentering into arrangements with, or acquiring, companies with technologiesapplicable to the treatment of cancer. Many of our existing or potential competitors have, or have access to,substantially greater financial, research and development, marketing andproduction resources than we do and may be better equipped than we are todevelop,

 

18

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manufacture and market competing products.  Our competitors may have, or may develop andintroduce, new products that would render our technology and proposed STRproduct less competitive, uneconomical or obsolete.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The cost to us of anylitigation or other proceedings relating to intellectual property rights, evenif resolved in our favor, could be substantial.  Some of our competitors may be better able to sustain the costsof complex patent

 

19

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

 

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

 

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

 

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

 

Our research anddevelopment and clinical manufacturing processes, as well as the manufacturingprocesses that may be used by our collaborators, involve the controlled use ofhazardous and radioactive materials.  Asa result, we are subject to foreign, federal, state and local laws, rules,regulations and policies governing the use, generation, manufacture, storage,air emission, effluent discharge, handling and disposal of certain materialsand wastes in connection with our use of these materials.  Although we believe that our safetyprocedures for handling and disposing of such materials comply with thestandards prescribed by such laws and regulations, we may be required to incursignificant costs to comply with environmental and health and safetyregulations in the future.  In addition,the risk of accidental contamination or injury from hazardous and radioactivematerials cannot be completely eliminated. In the event of such an accident, we could be held liable for anyresulting damages, and any such liability could exceed our resources.

 

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

 

The levels of revenuesand profitability of biotechnology companies may be affected by the continuingefforts of government and third-party payors to contain or reduce the costs ofhealthcare through various means.  Forexample, in certain foreign markets pricing or profitability of prescriptionpharmaceuticals is subject to governmental control.  In the United States, there have been, and we expect that therewill continue to be, a number of federal and state proposals to implementsimilar governmental controls.  It isuncertain what legislative proposals will be adopted or what actions federal,state or private payors for healthcare goods and services may take in responseto any healthcare reform proposals or legislation.  Even in the absence of statutory change, market forces arechanging the healthcare sector.  Wecannot predict the effect healthcare reforms may have on the development,testing, commercialization and marketability of our cancer therapyproducts.  Further, to the extent thatsuch proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospective collaboratorsfor certain of our potential products, our ability to commercialize ourproducts under development may be adversely affected.  In addition, both in the United States and elsewhere, sales ofprescription pharmaceuticals depend in part on the availability ofreimbursement to the consumer from third-party payors, such as governmental andprivate insurance plans.  Third-partypayors are increasingly challenging the prices charged for medical products andservices.  If we succeed in bringing oneor more products to market, we cannot be certain that these products will beconsidered cost-effective and that reimbursement to the consumer will beavailable or will be sufficient to allow us to sell our products on acompetitive or profitable basis.

 

20

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

 

In July 2002, weimplemented a 30% reduction in force. In October 2002, we further reduced our work force, primarily at ourDenton manufacturing facility, by an additional 13 persons, or approximately15% of the Company’s total work force. We currently have fewer than 75 employees.  Our success depends, to a significant extent, on the continuedcontributions of our principal management and scientific personnel.  The loss of the services of one or more ofthe principal members of our scientific and management staff could delay ourSTR product development activities or other programs and research anddevelopment efforts.  We do not maintainkey person life insurance on any of our officers, employees or consultants.

 

Competition for qualifiedemployees among companies in the biotechnology and biopharmaceutical industryis intense.  Our future success dependsupon our ability to attract, retain and motivate highly skilled employees.  In order to commercialize our proposedproducts successfully, we may in the future be required to expand substantiallyour work force, particularly in the areas of manufacturing, clinical trialsmanagement, regulatory affairs, business development and sales andmarketing.  These activities willrequire the addition of new personnel, including management, and thedevelopment of additional expertise by existing management personnel.

 

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

 

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

 

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

 

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

 

•                                          theprogress and results of clinical trials;

 

•                                          developmentsconcerning patents, proprietary rights and potential infringement; and

 

•                                          theexpense and time associated with and the extent of our ultimate success insecuring regulatory approvals.

 

In addition, publicconcern about the safety of STR and any other products we develop, comments bysecurities analysts, and conditions in the capital markets in general and inthe life sciences capital markets specifically may have a significant effect onthe market price of our common stock. The realization of any of the risks described in this report, as well asother factors, could have a material adverse impact on the market price of ourcommon stock and may result in a loss of some or all of your investment.

 

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

 

**Wecannot assure you that our common stock will continue to be listed on theNasdaq National Market, and delisting could further depress our stock price andmake it more difficult for us to raise capital.**

 

Ourcommon stock is currently listed on the Nasdaq National Market.  To maintain such listing, we must continueto satisfy ongoing listing requirements, including consistently maintaining aminimum bid price for the common stock of $1.00 per share or more. Our commonstock has traded below the $1.00 minimum bid requirement since July 31, 2002.  If our common stock trades below the $1.00minimum bid requirement for a period of 30 consecutive business days or more,or if we otherwise fail to meet Nasdaq’s ongoing listing criteria, Nasdaq couldinitiate delisting procedures at any time. On September 6, 2002, we received a letter from the Nasdaq Stock Marketadvising that we have until December 5, 2002 to regain compliance with NasdaqNational Market listing criteria.

 

21

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Our management iscurrently considering various alternatives to address this situation. If Nasdaqmoves to delist our common stock, we could spend material financial andmanagement resources in an attempt to avoid delisting, which could cause ourbusiness to suffer. If we were to lose our Nasdaq National Market status, wewould likely seek listing of our common stock in the over-the-counter market,which is viewed by many investors as a less liquid marketplace.  Among other things, our common stock maythen constitute “penny stock,” which would place increased regulatory burdenupon brokers, making them less likely to make a market in our stock.  Loss of our Nasdaq National Market statuscould also make it more difficult for us to raise capital or completeacquisitions and would also complicate compliance with state “blue sky” laws.

 

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

 

Ourarticles of incorporation authorize our board of directors to issue up to3,000,000 shares of preferred stock and to determine the price, rights,preference, privileges and restrictions, including voting rights, of thoseshares without any further vote or action by our shareholders.  The issuance of preferred stock could havethe effect of delaying, deferring or preventing a change of control, even ifthis change would benefit our shareholders. In addition, the issuance of preferred stock may adversely affect themarket price of our common stock and the voting and other rights of the holdersof our common stock.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**InterestRate Risk**

 

The Company’s exposure to market rate risk for changesin interest rates relates primarily to the Company’s debt securities includedin its investment portfolio.  TheCompany does not have any derivative financial instruments.  The Company invests in debt instruments ofthe U.S. Government and its agencies and high-quality corporate issuers.  Investments in both fixed rate and floatingrate interest earning instruments carry a degree of interest rate risk.  Fixed rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, while floatingrate securities may produce less income than expected if interest ratesfall.  Due in part to these factors, theCompany’s future investment income may fall short of expectations due tochanges in interest rates or the Company may suffer losses in principal ifforced to sell securities that have declined in market value due to changes ininterest rates.  At September 30, 2002,the Company owned no government debt instruments and owned corporate debtsecurities in the amount of $11.3 million. The Company’s exposure to losses asa result of interest rate changes is managed through investing primarily insecurities with relatively short maturities of up to three years and securitieswith variable interest rates.  TheCompany had approximately $4.2 million of corporate debt securities that hadmaturity dates greater than one year at September 30, 2002, all of which werevariable interest rate securities.

 

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

 

Under the supervision of and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andVice President, Finance and Chief Accounting Officer, the Company has evaluatedthe effectiveness and design and operation of its disclosure controls andprocedures within 90 days of the filing date of this quarterly report and,based on their evaluation, the Chief Executive Officer and the Vice President,Finance and Chief Accounting Officer have concluded that these disclosurecontrols and procedures are effective. There were no significant changes in the Company’s internal controls orin other factors that could significantly affect those controls subsequent tothe date of their evaluation.

 

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**PART II****.**

 

**Item 5****.  Other Information**

 

Measures to reduce expenses during the third quarterof 2002 included the elimination of two senior management positions after thedepartures of Richard L. Anderson, formerly Senior Vice President and ChiefFinancial Officer, and Becky J. Bottino, formerly Senior Vice President ofOperations.  The Company’s financialresponsibilities will be managed by Melinda G. Kile, Vice President, Financeand Chief Accounting Officer.  Responsibilitiesfor manufacturing will continue to be managed by Les Sabo, Vice President ofManufacturing.

 

**Item 6****.  Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

(a)(1) Financial Statements – See Index to FinancialStatements.

 

(a)(2) Financial Statement Schedules – Not Applicable.

 

(a)(3) Exhibits – See Exhibit Index filed herewith.

 

(b) Reports on Form 8-K:

 

Form 8-K dated July 24, 2002, relating to an update ofthe STR dosimetry study and the discontinuance of the Pretarget®program and reduction in force.

 

Form 8-K dated September 6, 2002, relating to theCompany’s receipt of a letter from NASDAQ regarding noncompliance of stocklisting requirements.

 

24

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

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

 

 

Date: November 14, 2002

 

25

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**CERTIFICATIONS**

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

 

1.             Ihave reviewed this quarterly report on Form 10-Q of NeoRx Corporation;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officer and I have indicated in this quarterly reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:       November 14, 2002

 

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

 

26

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I, Melinda G. Kile, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of NeoRx Corporation;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

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

 

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

 

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

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

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

 

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

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:       November 14, 2002

 

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

 

27

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**EXHIBIT INDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                   |   | **Incorporation  by  Reference to** |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
| 3.1(a)      |   | Restated Articles of Incorporation, dated April 29,  1996                                                                                                                                                         |   | *                                   |
| 3.1(b)      |   | Articles of Amendment, dated March 31, 1997, to  Restated Articles of Incorporation                                                                                                                               |   | **                                  |
| 3.1(c)      |   | Articles of Amendment, dated August 8, 1997, to  Restated Articles of Incorporation                                                                                                                               |   | XXXXX                               |
| 3.2         |   | Bylaws, as amended, of the registrant                                                                                                                                                                             |   | XXXXX                               |
| 10.1        |   | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                          |   | •                              |
| 10.2        |   | Lease Agreement for 410 West Harrison facility,  dated February 15, 1996, between NeoRx Corporation and Diamond Parking, Inc                                                                                      |   | #                                   |
| 10.3        |   | Amendment No. 1, dated August 14, 2000, to Lease  Agreement between NeoRx Corporation and Dina Corporation                                                                                                        |   | X                                   |
| 10.4        |   | 1991 Stock Option Plan for Non-Employee Directors,  as amended (‡)                                                                                                                                           |   | =                                   |
| 10.5        |   | 1991 Restricted Stock Plan (‡)                                                                                                                                                                               |   | ******                              |
| 10.6        |   | Agreement, dated as of December 15, 1995                                                                                                                                                                          |   | =====                               |
| 10.7        |   | Stock Option Agreement, dated July 30, 2001, between  NeoRx Corporation and Douglass B. Given (‡)                                                                                                            |   | •                              |
| 10.8        |   | Indemnification Agreement (‡)                                                                                                                                                                                |   | #                                   |
| 10.9        |   | Form of Key Executive Severance Agreement (‡)                                                                                                                                                                |   | ##                                  |
| 10.10       |   | Officer Change in Control Agreement (‡)                                                                                                                                                                      |   | XXXXX                               |
| 10.11       |   | Key Executive Severance Agreement (‡)                                                                                                                                                                        |   | XXXXX                               |
| 10.12       |   | License Agreement, dated June 30, 1999, between  NeoRx and The Dow Chemical Company                                                                                                                               |   | _                                   |
| 10.13       |   | Credit Facility Agreement, dated February 3, 2000,  between NeoRx Corporation and Pharmaceutical Product Development, Inc.                                                                                        |   | __                                  |
| 10.14       |   | Facilities Lease, dated July 24, 2000, between NeoRx  Corporation and F5 Networks                                                                                                                                 |   | ___                                 |
| 10.15       |   | Stock Option Agreement, dated December 19, 2000,  between NeoRx Corporation and Carl S. Goldfischer (‡)                                                                                                      |   | X                                   |
| 10.16       |   | Stock Option Agreement, dated January 17, 2001,  between NeoRx Corporation and Carl S. Goldfischer  (‡)                                                                                                 |   | X                                   |
| 10.17       |   | Stock Option Agreement, dated November 16, 2000,  between NeoRx Corporation and Douglass Given (‡)                                                                                                           |   | X                                   |
| 10.18       |   | Sublicense Agreement, dated May 15, 1997, between  NeoRx Corporation and Roche Molecular Biochemicals.  Certain portions of the agreement have been omitted pursuant to  a grant of confidential treatment.  |   | ^                                   |
| 10.19       |   | Stock Option Grant Program for Nonemployee Directors  under the NeoRx Corporation 1994 Restated Stock Option Plan (‡)                                                                                        |   | ^^                                  |
| 10.20       |   | First Amendment to Sublease Agreement, dated March  30, 2001, between NeoRx Corporation and F5 Networks                                                                                                           |   | ^                                   |
| 10.21       |   | Amendment No. 3 to Consulting Agreement, dated  January 1, 2002, between NeoRx Corporation and Bay City Capital BD, LLC                                                                                           |   | &&                          |
| 10.22       |   | Separation Agreement, dated September 13, 2001,  between NeoRx Corporation and Richard L. Anderson (‡)                                                                                                       |   | &&                          |
| 10.23       |   | Form of VP Change in Control Agreements (‡)                                                                                                                                                                  |   | &&                          |
| 10.24       |   | Clinical Manufacture and Supply Agreement, dated  December 1, 2001, between NeoRx Corporation and MURR.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment. |   | &&                          |
| 10.25       |   | Facilities Lease, dated February 15, 2002, between  NeoRx Corporation and Selig Real Estate Holdings Six                                                                                                          |   | &&                          |
| 10.26       |   | Form of VP Severance Agreements (‡)                                                                                                                                                                          |   | &&                          |
| 10.27       |   | Lease Termination/Continuation Agreement between  NeoRx Corporation and Dina Corporation                                                                                                                          |   | ^^^                                 |
| 21          |   | Subsidiaries of NeoRx Corporation                                                                                                                                                                                 |   | &&                          |
| 99.1        |   | Certification of Periodic Report by Chief Executive  Officer                                                                                                                                                      |   | ^^^                                 |
| 99.2        |   | Certification of Periodic Report by Vice President,  Finance and Chief Accounting Officer                                                                                                                         |   | ^^^                                 |

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| && |   | Filed as an exhibit to the Company’s Form 10-K for  the fiscal year ended December 31, 2001 and incorporated herein by reference.                                                                                                                  |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *          |   | Filed as an exhibit to the Company’s Form 10-K for  the fiscal year ended December 31, 1996 and incorporated herein by reference.                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                    |
| **         |   | Filed as an exhibit to the Company’s Registration  Statement on Form S-3 (Registration No. 333-25161), filed April 14, 1997 and  incorporated herein by reference.                                                                                 |
|       |   |                                                                                                                                                                                                                                                    |
| ******     |   | 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.                                                                                               |
|       |   |                                                                                                                                                                                                                                                    |
| =          |   | Filed as an exhibit to the Company’s Registration  Statement on Form S-2 (Registration No. 33-71164) effective December 13, 1993  and incorporated herein by reference.                                                                            |
|       |   |                                                                                                                                                                                                                                                    |
| =====      |   | Filed as an exhibit to the Company’s Form 10-K for  the fiscal year ended December 31, 1995 and incorporated herein by reference.                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                    |
| •     |   | Filed as an exhibit to the Company’s Registration  Statement on Form S-8 (Registration No. 333-71368), filed October 10, 2001  and incorporated herein by reference.                                                                               |
|       |   |                                                                                                                                                                                                                                                    |
| #          |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended March 31, 1996 and incorporated herein by  reference.                                                                                                               |
|       |   |                                                                                                                                                                                                                                                    |
| ##         |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended June 30, 1996 and incorporated herein by  reference.                                                                                                                |
|       |   |                                                                                                                                                                                                                                                    |
| X          |   | Filed as an exhibit to the Company’s Form 10-K for  the fiscal year ended December 31, 2000 and incorporated herein by reference.                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                    |
| XXXXX      |   | Filed as an exhibit to the Company’s Form 10-K for  the fiscal year ended December 31, 1998 and incorporated herein by reference.                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                    |
| _          |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended September 30, 1999 and incorporated herein by  reference.  Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment. |
|       |   |                                                                                                                                                                                                                                                    |
| __         |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended March 31, 2000 and incorporated herein by  reference.  Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment.     |
|       |   |                                                                                                                                                                                                                                                    |
| ___        |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended September 30, 2000 and incorporated herein by  reference.  Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment. |
|       |   |                                                                                                                                                                                                                                                    |
| ‡     |   | Management contract or compensatory plan.                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                    |
| ^          |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended March 31, 2001 and incorporated herein by  reference.                                                                                                               |
|       |   |                                                                                                                                                                                                                                                    |
| ^ ^        |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended June 30, 2002 and incorporated herein by  reference.                                                                                                                |
|       |   |                                                                                                                                                                                                                                                    |
| ^ ^ ^      |   | Submitted herewith.                                                                                                                                                                                                                                     |

 

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