**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**Forthe quarterly period ended September 30, 2003**

 

**CommissionFile No. 0-16614**

 

**NEORXCORPORATION**

(Exact name ofRegistrant as specified in its charter)

 

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

 

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

(Address of principalexecutive offices)

 

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

 

 

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

 

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

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act.  

 

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

 

Asof November 7, 2003, 27,943,132 shares of the Registrant’s common stock, $.02par value per share, were outstanding.

 

 

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**TABLEOF CONTENTS**

 

**QUARTERLYREPORT ON FORM 10-QFOR THE QUARTER ENDED SEPTEMBER 30, 2003**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                        |
|-------------|------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                             |
| Item 1.     | Financial Statements (Unaudited):                                                                                |
|        |                                                                                                             |
|        | Condensed Consolidated Balance Sheets as of  September 30, 2003 and December 31, 2002                            |
|        |                                                                                                             |
|        | Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2003 and 2002 |
|        |                                                                                                             |
|        | Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended September 30, 2003 and 2002           |
|        |                                                                                                             |
|        | Notes to Condensed Consolidated Financial  Statements                                                            |
|        |                                                                                                             |
| Item 2.     | Management’s Discussion and Analysis of Results  of Operations and Financial Condition                      |
|        |                                                                                                             |
| Item  3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                      |
|        |                                                                                                             |
| Item 4.     | Controls and  Procedures                                                                                         |
|        |                                                                                                             |
| **PART II** | **OTHER INFORMATION**                                                                                            |
|        |                                                                                                             |
| Item 6.     | Exhibits and Reports on Form 8-K                                                                                 |
|        |                                                                                                             |
|        | Signatures                                                                                                       |
|        |                                                                                                             |
|        | Exhibit  Index                                                                                                   |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**NEORX CORPORATION AND SUBSIDIARY**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands, except share data)

(unaudited)

 
|                                                                                                                                                                                                                                   |   | **September  30, 2003** |   | **December  31, 2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| **ASSETS**                                                                                                                                                                                                                             |   |                    |   |                   |   |
| **Current assets:**                                                                                                                                                                                                                    |   |                    |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                              |   | $                       | 2,390  |                   | $      | 6,564 |   |
| Investment securities                                                                                                                                                                                                                  |   | 13,350                  |   | 9,572                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                                              |   | 955                     |   | 1,269                  |   |
| Total current assets                                                                                                                                                                                                                   |   | 16,695                  |   | 17,405                 |   |
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| Facilities and equipment, net                                                                                                                                                                                                          |   | 8,117                   |   | 8,509                  |   |
| Other assets, net                                                                                                                                                                                                                      |   | 67                      |   | 79                     |   |
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| **Total assets**                                                                                                                                                                                                                       |   | $                       | 24,879 |                   | $      | 25,993 |   |
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                          |   |                    |   |                   |   |
| **Current  liabilities:**                                                                                                                                                                                                              |   |                    |   |                   |   |
| Accounts payable                                                                                                                                                                                                                       |   | $                       | 653    |                   | $      | 1,024 |   |
| Accrued liabilities                                                                                                                                                                                                                    |   | 832                     |   | 1,674                  |   |
| Current portion of note payable                                                                                                                                                                                                        |   | 348                     |   | 512                    |   |
| Total current liabilities                                                                                                                                                                                                              |   | 1,833                   |   | 3,210                  |   |
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| **Long-term  liabilities:**                                                                                                                                                                                                            |   |                    |   |                   |   |
| Note payable, net of current portion                                                                                                                                                                                                   |   | 5,062                   |   | 5,182                  |   |
| Asset retirement obligation                                                                                                                                                                                                            |   | 514                     |   | —                 |   |
| Other                                                                                                                                                                                                                                  |   | —                  |   | 25                     |   |
| Total long-term liabilities                                                                                                                                                                                                            |   | 5,576                   |   | 5,207                  |   |
|                                                                                                                                                                                                                                   |   |                    |   |                   |   |
| **Shareholders’  equity:**                                                                                                                                                                                                        |   |                    |   |                   |   |
| Preferred  stock, $.02 par value, 3,000,000 shares authorized:                                                                                                                                                                         |   |                    |   |                   |   |
| Convertible  preferred stock, Series 1, 205,340 shares issued and outstanding at September  30, 2003 and December 31, 2002 (entitled in liquidation to $5,300 and $5,175,  respectively, at September  30, 2003 and December 31, 2002) |   | 4                       |   | 4                      |   |
| Common  stock, $.02 par value, 60,000,000 shares authorized, 27,696,623 and 26,765,082  shares issued and outstanding at September  30, 2003 and December 31, 2002, respectively                                                       |   | 554                     |   | 535                    |   |
| Accumulated other comprehensive income – unrealized  loss on investment securities                                                                                                                                                |   | (19                     | )      | (101                   | )      |
| Additional paid-in capital                                                                                                                                                                                                             |   | 226,115                 |   | 224,035                |   |
| Accumulated deficit                                                                                                                                                                                                                    |   | (209,184                | )      | (206,897               | )      |
|    Total shareholders’ equity                                                                                                                                                                                                |   | 17,470                  |   | 17,576                 |   |
| **Total liabilities  and shareholders’ equity**                                                                                                                                                                                   |   | $                       | 24,879 |                   | $      | 25,993 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

3

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**NEORXCORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

(unaudited)

 
|                                                                                                                     |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |    |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|---------|
|                                                                                                                     |   | **2003**                               |   | **2002**                              |    | **2003** |   | **2002** |   |
|                                                                                                                     |   |                                   |   |                                  |    |   |   |   |   |
| **Revenues**                                                                                                             |   | $                                      | 225    |                                  | $       | 507 |   | $ | 10,531 |   | $ | 2,036 |   |
| **Operating expenses:**                                                                                                  |   |                                   |   |                                  |    |   |   |   |   |
| Research and development                                                                                                 |   | 2,037                                  |   | 4,438                                 |    | 7,376 |   | 17,472 |   |
| General and administrative                                                                                               |   | 1,142                                  |   | 1,535                                 |    | 4,742 |   | 5,137 |   |
| Asset impairment loss                                                                                                    |   | —                                 |   | 5,658                                 |    | — |   | 5,658 |   |
| Restructuring                                                                                                            |   | —                                 |   | 529                                   |    | — |   | 529 |   |
| Total operating expenses                                                                                                 |   | 3,179                                  |   | 12,160                                |    | 12,118 |   | 28,796 |   |
| Loss from operations                                                                                                     |   | (2,954                                 | )      | (11,653                               | )       | (1,587 | ) | (26,760 | ) |
| **Other income (expense):**                                                                                              |   |                                   |   |                                  |    |   |   |   |   |
| Realized gain (loss) on sale of securities                                                                               |   | (142                                   | )      | 20                                    |    | (142 | ) | 142 |   |
| Interest income                                                                                                          |   | 30                                     |   | 204                                   |    | 184 |   | 912 |   |
| Interest expense                                                                                                         |   | (57                                    | )      | (75                                   | )       | (177 | ) | (281 | ) |
| Total other  income (expense)                                                                                            |   | (169                                   | )      | 149                                   |    | (135 | ) | 773 |   |
| Net loss before cumulative effect of change  in accounting principle                                                     |   | (3,123                                 | )      | (11,504                               | )       | (1,722 | ) | (25,987 | ) |
| Cumulative effect of change in accounting  principle                                                                     |   | —                                 |   | —                                |    | (190 | ) | — |   |
| Net loss                                                                                                                 |   | (3,123                                 | )      | (11,504                               | )       | (1,912 | ) | (25,987 | ) |
| Preferred stock dividends                                                                                                |   | (125                                   | )      | (125                                  | )       | (375 | ) | (375 | ) |
| Net loss applicable to common shares                                                                                     |   | $                                      | (3,248 | )                                     | $       | (11,629 | ) | $ | (2,287 | ) | $ | (26,362 | ) |
|                                                                                                                     |   |                                   |   |                                  |    |   |   |   |   |
| Loss per share:                                                                                                          |   |                                   |   |                                  |    |   |   |   |   |
| Basic and diluted loss per share applicable  to common shares before cumulative effect of change in accounting principle |   | $                                      | (0.12  | )                                     | $       | (0.44 | ) | $ | (0.07 | ) | $ | (0.99 | ) |
| Cumulative effect of change in accounting  principle                                                                     |   | —                                 |   | —                                |    | (0.01 | ) | — |   |
| Basic and diluted loss applicable to common  shares                                                                      |   | $                                      | (0.12  | )                                     | $       | (0.44 | ) | $ | (0.08 | ) | $ | (0.99 | ) |
|                                                                                                                     |   |                                   |   |                                  |    |   |   |   |   |
| Weighted average common shares:                                                                                          |   |                                   |   |                                  |    |   |   |   |   |
| Basic and diluted                                                                                                        |   | 27,355                                 |   | 26,634                                |    | 27,062 |   | 26,604 |   |
|                                                                                                                     |   |                                   |   |                                  |    |   |   |   |   |
| Pro forma amounts had accounting principle  been applied retroactively:                                                  |   |                                   |   |                                  |    |   |   |   |   |
| Net loss                                                                                                                 |   |                                   |   | $                                     | (11,532 | ) |   |   | $ | (26,070 | ) |
| Preferred stock dividends                                                                                                |   |                                   |   | (125                                  | )       |   |   | (375 | ) |
| Loss applicable to common shares                                                                                         |   |                                   |   | $                                     | (11,657 | ) |   |   | $ | (26,445 | ) |
|                                                                                                                     |   |                                   |   |                                  |    |   |   |   |   |
| Loss per share:                                                                                                          |   |                                   |   |                                  |    |   |   |   |   |
| Basic and diluted                                                                                                        |   |                                   |   | $                                     | (0.44   | ) |   |   | $ | (0.99 | ) |

 

See accompanying notes to the condensedconsolidated financial statements.

 

4

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**NEORXCORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
|                                                                         |   | **Nine Months ended September  30,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2003**                             |   | **2002** |   |
|                                                                         |   |                                 |   |   |   |
| **Cash flows from operating activities:**                                    |   |                                 |   |   |   |
| Net loss                                                                     |   | $                                    | (1,912 | ) | $ | (25,987 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                 |   |   |   |
| Depreciation and amortization                                                |   | 607                                  |   | 1,337 |   |
| Gain (loss) on sale of securities                                            |   | 142                                  |   | (142 | ) |
| Loss on disposal of equipment                                                |   | 240                                  |   | 69 |   |
| Asset impairment loss                                                        |   | —                               |   | 5,658 |   |
| Restructuring                                                                |   | —                               |   | 529 |   |
| Cumulative effect of change in accounting  principle                         |   | 190                                  |   | — |   |
| Accretion of asset retirement obligation  liability                          |   | 50                                   |   | — |   |
| Common stock issued for services                                             |   | 4                                    |   | 68 |   |
| Stock options and warrants issued for  services                              |   | 276                                  |   | 42 |   |
| Stock-based employee compensation                                            |   | 590                                  |   | — |   |
| Change in operating assets and liabilities:                                  |   |                                 |   |   |   |
| Prepaid expenses and other assets                                            |   | (60                                  | )      | (111 | ) |
| Accounts payable                                                             |   | (371                                 | )      | (693 | ) |
| Accrued liabilities                                                          |   | (909                                 | )      | (521 | ) |
| Net cash used in operating activities                                        |   | (1,153                               | )      | (19,751 | ) |
|                                                                         |   |                                 |   |   |   |
| **Cash flows from investing activities:**                                    |   |                                 |   |   |   |
| Proceeds from sales and maturities of  investment securities                 |   | 19,211                               |   | 25,661 |   |
| Purchases of investment securities                                           |   | (23,049                              | )      | (7,849 | ) |
| Facilities and equipment purchases                                           |   | (51                                  | )      | (683 | ) |
| Proceeds from sales of equipment                                             |   | 188                                  |   | — |   |
| Net cash (used in) provided by investing  activities                         |   | (3,701                               | )      | 17,129 |   |
|                                                                         |   |                                 |   |   |   |
| **Cash flows from financing activities:**                                    |   |                                 |   |   |   |
| Proceeds from stock options and warrants exercised                           |   | 1,196                                |   | 19 |   |
| Receipt of note receivable principal                                         |   | 68                                   |   | 91 |   |
| Repayment of note payable principal                                          |   | (284                                 | )      | (175 | ) |
| Repayment of capital lease obligation                                        |   | (50                                  | )      | (50 | ) |
| Preferred stock dividends                                                    |   | (250                                 | )      | (250 | ) |
| Net cash provided by (used in) financing activities                          |   | 680                                  |   | (365 | ) |
|                                                                         |   |                                 |   |   |   |
| Net decrease in cash and cash equivalents                                    |   | (4,174                               | )      | (2,987 | ) |
|                                                                         |   |                                 |   |   |   |
| **Cash and cash equivalents:**                                               |   |                                 |   |   |   |
| Beginning of  period                                                         |   | 6,564                                |   | 4,097 |   |
| End of  period                                                               |   | $                                    | 2,390  |   | $ | 1,110 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

5

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**NEORXCORPORATION AND SUBSIDIARY**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

# ** **

 

# **Note 1.  Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of NeoRx Corporation and subsidiary (the Company).  All intercompany balances and transactionshave been eliminated in consolidation.

 

The interim financial statements contained herein have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to those rules and regulations,although the Company believes that the disclosures made are adequate to makethe information presented not misleading. These financial statements should be read in conjunction with theCompany’s annual report on Form 10-K for the year ended December 31, 2002.

 

In the opinion of management, the interim financial statements reflectall adjustments, consisting only of normal recurring accruals necessary topresent fairly the Company’s financial position as of September 30, 2003 andthe results of operations and cash flows for the periods ended September 30,2003 and 2002.

 

The results of operations for the periods ended September 30, 2003 and2002 are not necessarily indicative of the expected operating results for thefull year.

 

The Company accounts for its stock option plans for employees inaccordance with the provisions of Accounting Principles Board (APB) Opinion No.25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  As such compensationexpense related to employee stock options is recorded if, on the date of grant,the fair value of the underlying stock exceeds the exercise price.  The Company applies the disclosure-onlyrequirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, whichallows entities to continue to apply the provisions of APB Opinion No. 25 fortransactions with employees and to provide pro forma results of operationsdisclosures for employee stock option grants as if the fair-value based methodof accounting in SFAS No. 123 had been applied to these transactions.  Stock compensation costs related to fixedemployee awards with pro rata vesting are recognized on a straight-line basisover the period of benefit, generally the vesting period of the options.  For options and warrants issued to non-employees,the Company recognizes stock compensation costs utilizing the fair valuemethodology prescribed in SFAS No. 123 over the related period of benefit.

 

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

 
|                                                                                               |   | **Quarter ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                                                                                               |   | **2003**                              |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Net loss applicable to common shares:                                                              |   |                                  |   |                                      |   |   |   |   |   |
| As reported                                                                                        |   | $                                     | (3,248 | )                                         | $      | (11,629 | ) | $ | (2,287 | ) | $ | (26,362 | ) |
| Add: Stock-based employee compensation expense included in  reported net loss                      |   | —                                |   | 67                                        |   | 590 |   | 67 |   |
| Deduct: Stock-based employee compensation determined under fair  value based method for all awards |   | (494                                  | )      | (578                                      | )      | (2,231 | ) | (2,475 | ) |
| Pro forma                                                                                          |   | $                                     | (3,742 | )                                         | $      | (12,140 | ) | $ | (3,928 | ) | $ | (28,770 | ) |
| Net loss per common share, basic and diluted:                                                      |   |                                  |   |                                      |   |   |   |   |   |
| As reported:                                                                                       |   |                                  |   |                                      |   |   |   |   |   |
| Basic and diluted                                                                                  |   | $                                     | (0.12  | )                                         | $      | (0.44 | ) | $ | (0.08 | ) | $ | (0.99 | ) |
| Pro forma:                                                                                         |   |                                  |   |                                      |   |   |   |   |   |
| Basic and diluted                                                                                  |   | $                                     | (0.14  | )                                         | $      | (0.46 | ) | $ | (0.15 | ) | $ | (1.08 | ) |

 

6

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The per shareweighted-average fair value of stock options granted during the quarters endedand nine months ended September 30, 2003 and 2002 was $2.42, $1.95, $0.97, and$2.03, respectively, on the grant date using the Black-Scholes option pricingmodel with the following weighted average assumptions:

 
|                    |   | **Quarter ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                    |   | **2003**                              |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Expected dividend rate  |   | 0.0                                   | %      | 0.0                                       | %      | 0.0 | % | 0.0 | % |
| Risk-free interest rate |   | 2.40                                  | %      | 3.83                                      | %      | 2.30 | % | 3.83 | % |
| Expected volatility     |   | 140.0                                 | %      | 105.0                                     | %      | 135.6 | % | 105.0 | % |
| Expected life in years  |   | 4.00                                  |   | 4.00                                      |   | 4.00 |   | 4.00 |   |

 

 

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

 

Basic and diluted loss per share are based on net loss applicable tocommon shares, which is comprised of net loss and preferred stock dividends inall periods presented. Shares used to calculate basic loss per share are basedon the weighted average number of common shares outstanding during theperiod.  Shares used to calculatediluted loss per share are based on the potential dilution that would occurupon the exercise or conversion of securities into common stock using thetreasury stock method.  Calculations ofbasic and diluted loss per share for the quarters and nine months ended September 30, 2003 and 2002exclude the effect of stock options warrants to purchase additional shares ofcommon stock because the share increments would not be dilutive.

 

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

 
|                                       |   | **Quarter ended  September 30,** |   | **Nine Months ended  September 30,** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------------|--------|
|                                       |   | **2003**                         |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                       |   |                             |   |                                 |   |   |   |   |   |
| Common stock options                       |   | 4,431,894                        |   | 4,714,779                            |   | 4,431,894 |   | 4,714,779 |   |
| Weighted average  exercise price per share |   | $                                | 3.59   |                                 | $      | 4.63 |   | $ | 3.59 |   | $ | 4.63 |   |
| Common stock warrants                      |   | 875,000                          |   | 1,051,000                            |   | 875,000 |   | 1,051,000 |   |
| Weighted average  exercise price per share |   | $                                | 9.72   |                                 | $      | 8.85 |   | $ | 9.72 |   | $ | 8.85 |   |

 

In addition, 234,088shares of common stock that would be issuable upon conversion of the Company’spreferred stock are not included in the calculation of diluted loss per sharefor the periods ended September 30, 2003 and 2002 because the effect ofincluding such shares would not be dilutive.

 

7

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# **Note 3.  Comprehensive Loss**

 

The Company’s comprehensive loss for the quarters ended September 30,2003 and 2002 was $3,100,000 and $11,608,000, respectively.  The comprehensive loss for the quartersended September 30, 2003 and 2002 consisted of net loss of $3,123,000 and$11,504,000, respectively, and a net unrealized gain (loss) on investmentsecurities of $23,000 and $(104,000) for the quarters ended September 30, 2003and 2002, respectively.  Thecomprehensive loss for the nine months ended September 30, 2003 and 2002 was$1,830,000 and $26,533,000, respectively. The comprehensive loss for the nine months ended September 30, 2003 and2002 consisted of net loss of $1,912,000 and $25,987,000, respectively, and anet unrealized gain (loss) on investment securities of $82,000 and $(546,000)for the nine months ended September 30, 2003 and 2002, respectively.

 

# **Note 4.  Asset Retirement Obligation**

 

The Company recorded a $0.2 million cumulative effect of change inaccounting principle during the first nine months of 2003 as a result of theCompany’s adoption of SFAS 143, *Accounting for Asset Retirement Obligations*.  Under SFAS 143, the Company recorded anasset and liability in the amount of $0.4 million related to estimated fairvalue of future decommissioning costs associated with the Dentonradiopharmaceutical manufacturing facility. This estimate will be depreciated over the seven year estimated usefullife of the asset and the asset retirement obligation will be accreted over thethirty years that represents the expected time that will elapse prior to thesettlement of the obligation.  TheCompany adopted SFAS 143 on January 1, 2003. A reconciliation of the asset retirement obligation follows (in 000’s):

 
| Asset retirement obligation calculated as  of date of Denton facility purchase (April 1, 2001) |   | $   | 364    |   |
|------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| Accretion-2001                                                                                 |   | 40  |   |
| Balance at December 31, 2001                                                                   |   | 404 |   |
| Accretion-2002                                                                                 |   | 60  |   |
| Balance at December 31, 2002                                                                   |   | 464 |   |
| Accretion-January 1, 2003 to September 30,  2003                                               |   | 50  |   |
| Balance at September 30, 2003                                                                  |   | $   | 514    |   |

 

 

In addition, hadthe Company applied the provisions of SFAS 143 as of the date of acquisition ofthe Denton facility, and using current January 1, 2003 assumptions for interestrates and decommissioning costs, depreciation expense would have increased by$39,000, $52,000 and $39,000, respectively, for the nine months ended September30, 2002 and the years ended December 31, 2002 and 2001.

 

# **Note 5.  Boston Scientific Corporation IntellectualProperty Sale**

 

On April 17, 2003, the Company entered into agreements with BostonScientific Corporation relating to the sale to Boston Scientific of certainnon-core NeoRx intellectual property and the grant to Boston Scientific ofcertain license rights.  Under the firstagreement, the Company assigned to Boston Scientific certain NeoRx intellectualproperty in exchange for a cash payment of $9 million.  The intellectual property assigned to BostonScientific included a portfolio of NeoRx patents and patent applications in thecardiovascular field.

 

Under a second agreement, NeoRx granted to Boston Scientific anexclusive license to use certain other NeoRx intellectual property, for whichNeoRx received a one-time cash payment of $1 million.  The exclusive license grants Boston Scientific the right to use,in certain medical device fields, a separate portfolio of NeoRx patents andpatent applications resulting from a collaboration with University of Cambridgeinvestigators.

 

# **Note 6.  New Accounting Pronouncements**

 

In August 2001,the FASB issued Statement No. 143, *Accounting for Asset Retirement Obligations,*which addresses financial accounting and reporting obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development, and (or) normal use ofthe asset.

 

8

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Statement No. 143 requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.  The fair value of the liability is added tothe carrying amount of the associated asset and this additional carrying amountis depreciated over the life of the asset. If the obligation is settled for other than the carrying amount of the liability,the Company will recognize a gain or loss on settlement. The Company adoptedthis Statement on January 1, 2003.  Thecumulative effect of adopting this change in accounting principle in the firstquarter of 2003 is discussed in Note 4.

 

In June 2002, the FASB issued Statement No. 146, *Accounting for Costs Associated withExit or Disposal Activities*, which addresses financial accountingand reporting for costs associated with exit or disposal activities.  Statement No. 146 nullifies EITF Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The principal difference between Statement No. 146 and IssueNo. 94-3 relates to the recognition of a liability for a cost associated withan exit or disposal activity.  StatementNo. 146 requires that a liability be recognized for those costs only when theliability is incurred, that is, when it meets the definition of a liability inthe FASB’s conceptual framework.  Incontrast, under Issue No. 94-3, a company recognized a liability for an exitcost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective forinitial measurement of liabilities related to exit or disposal activities.  The Statement is effective for exit ordisposal activities that are initiated after December 31, 2002.   The Company adopted this Statement onJanuary 1, 2003.  Management cannotdetermine the impact of adopting this Statement on its consolidated financialstatements, as its effects will be prospective.

 

In November 2002, the Financial Accounting Standards Board EmergingIssues Task Force issued its consensus concerning Revenue Arrangements withMultiple Deliverables (“EITF 00-21”). EITF 00-21 addresses how to determine whether a revenue arrangementinvolving multiple deliverables should be divided into separate units ofaccounting, and, if separation is appropriate, how the arrangementconsideration should be measured and allocated to the identified accountingunits.  The guidance in EITF 00-21 iseffective for revenue arrangements entered into in fiscal periods beginningafter June 15, 2003.  The adoption of EITF 00-21 did not have a materialimpact on the Company’s consolidated financial statements.

 

                InMay 2003, the FASB issued Statement No. 150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*,which addresses financial accounting and reporting for certain financialinstruments with characteristics of both liabilities and equity and requiresthat those instruments be classified as liabilities in statements of financialposition.  Previously many of thosefinancial instruments were classified as equity.  The Statement is effective for financial instruments entered intoor modified after May 31, 2003 and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  The adoption of the Statement did not have amaterial impact on the Company’s operating results or financial position.

 

# **Note 7.  Liquidity**

 

The Company will need to raise additional capital to fund its plannedSkeletal Targeted Radiotherapy (STRTM) phase III clinical trial and its futureoperating cash needs.  In April 2003 theCompany received $10 million from the sale to Boston Scientific Corporation ofcertain non-core NeoRx intellectual property and the grant to Boston ScientificCorporation of certain license rights. The Company expects that its present cash, cash equivalents, investmentsecurities and expected interest income will be sufficient to fund itsanticipated working capital and capital requirements through the third quarterof 2004.

 

During 2002, the Company discontinued all Pretarget® technologyactivities, reduced staffing by 67% and terminated the lease for its facilitiesat 410 West Harrison Street in Seattle, effective in April 2003.  PretargetÒtechnology is a development platform for targeted immunotherapeutics thatdeliver intense doses of anti-cancer agents to tumor cells while largelysparing healthy tissues.

 

In connection with its 2001 purchase of the radiopharmaceuticalmanufacturing plant and other assets located in Denton, TX, the Company assumed$6,000,000 principal amount of restructured debt held by Texas State Bank,McAllen, TX.  The loan, which matures inApril 2009, is secured by the assets acquired in the transaction.  During 2002 and early 2003, the Companyreduced the staff at the Denton facility to four employees and operated thefacility in standby mode. The Company currently is in the process of recruitingand hiring personnel and otherwise ramping up the manufacturing plant forproduction of clinical material for its planned STR phase III

 

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clinical trial.

 

The Company may seek to raise capital throughthe sale of equity and/or debt securities or the establishment of other fundingfacilities. The Company isseeking to form a strategic partnership for STR development andcommercialization.  The Companyis also addressing its need for additional capital by pursuing opportunitiesfor the licensing, sale or divestiture of certain non-core intellectualproperty and other assets, including its Pretarget® technologyplatform.  In addition, the Company isalso looking for an investor or partner for its manufacturing facility who isinterested in continuing the facility’s radiopharmaceutical manufacturingoperations and producing the STR compound. Under the terms of the Texas State Bank loan, the Denton facility andthe assets used in the facility cannot be transferred without the writtenapproval of the bank.  In the event thatsufficient additional funds are not obtained through asset sales, licensingarrangements, strategic partnering opportunities and/or sales of securities ona timely basis, the Company plans to reduce expenses through the delay,reduction or curtailment of its STR development activities and/or furtherreduction of costs for facilities and administration.

 

The Company’s actual capital requirementswill depend upon numerous factors, including:

 

•              the rate of progressand costs of its clinical trial and research and development activities,including costs and availability of clinical materials from third-partysuppliers, and the Company’s ability to manufacture STR in a timely andcost-effective manner;

 

•             actions taken by theUS Food and Drug Administration (FDA) and other regulatory authorities;

 

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

 

•             the timing and amountof milestone or other payments the Company might receive from potentialstrategic partners;

 

•             the timing and amountof payments the Company might receive from potential licenses;

 

•             the Company’s degreeof success in commercializing its STR product candidate or other cancer therapyproduct candidates;

 

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

 

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

 

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

 

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**Item2.     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

ThisForm 10-Q contains forward-looking statements. These statements relate tofuture events or future financial performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”“potential,” “propose” or “continue,” the negative of these terms or otherterminology.  These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors describedbelow in the section entitled “Additional factors that may affect results.”These factors may cause our actual results to differ materially from anyforward-looking statement.

 

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

 

***Critical AccountingPolicies and Estimates***

 

*Basis of Revenue Recognition:*To date, theCompany does not have any significant ongoing revenue sources.  On occasion, the Company derives significantrevenue from licensing its patented technologies and from governmentgrants.  Pursuant to the Securities andExchange Commission Staff Accounting Bulletin No. 101 (SAB 101) and EmergingIssues Task Force Consensus No. 00-21, revenues from collaborative agreementsare recognized as earned as the Company performs research activities under theterms of each agreement.  Billings inexcess of amounts earned are classified as deferred revenue.  To the extent that a transaction containsmultiple deliverables, the Company determines whether the multiple deliverablesare separable, and, if separable, the revenue to be allocated to eachdeliverable based on fair value. If fair value is undeterminable forundelivered elements of the arrangement, revenue is deferred over the contractperiod. The revenue allocated to each deliverable is recognized following therequirements of SAB 101.

 

###### ***Quarterand nine months ended September 30, 2003 compared to quarter and nine monthsended September 30, 2002***

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

Revenue for thethird quarter of 2003 was $0.2 million, compared to $0.5 million for the thirdquarter of 2002.  Revenue for the ninemonths ended September 30, 2003 was $10.5 million, compared to $2.0 million forthe nine months ended September 30, 2002. Revenue for the third quarter of 2003 consisted of revenue from afacilities lease agreement, while revenue for the first nine months of 2003consisted of $10.0 million from the assignment and license to Boston ScientificCorporation of certain intellectual property and revenue from a facilitieslease agreement.  Revenue for the thirdquarter of 2002 consisted of revenue from government grants and a facilitieslease agreement.  Revenue for the ninemonths ended September 30, 2002 consisted of a milestone payment of $1.0 millionfrom Angiotech Pharmaceuticals, Inc., revenue from government grants, and afacilities lease agreement.

 

Total operating expenses for the thirdquarter of 2003 decreased 74% to $3.2 million from $12.2 million for the thirdquarter of 2002 and decreased 58% to $12.1 million for the nine months endedSeptember 30, 2003 from $28.8 million for the same period in 2002.  A significant portion of thedecrease in operating expenses is due to the inclusion of a non-cash assetimpairment charge of $5,658,000 in the third quarter of 2002.  Also included is a charge of $529,000 forseverance 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 decreased54% to $2.0 million for the third quarter of 2003 from $4.4 million for thethird quarter of 2002 and decreased 58% to $7.4 million for the nine monthsended September 30, 2003 from $17.5 million for the same time period in2002.  The decrease in research anddevelopment expenses in 2003 is the result of significantly reduced staffing,curtailment of the Company’s PretargetÒ programsand other cost reduction measures taken in 2002 and 2003.

 

General andadministrative expenses decreased 26% to $1.1 million for the third quarter of2003 from $1.5 million for the third quarter of 2002, and decreased 8% to $4.7million for the nine months ended September 30, 2003 from $5.1 million for thesame time period in 2002.  The decreasein general and administrative costs for the third quarter ended September 30,2003 was due primarily to reductions in facilities expense, salaries and other

 

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corporate overhead expenses.

 

Other expensefor the quarter was 0.2 million and $0.1 million for the nine months endedSeptember 30, 2003.  The expense for thethree months and nine months ended September 30, 2003 results from a loss oninvestment securities and interest paid on the bank note secured by theCompany’s Denton, Texas manufacturing facility offset by interest income earnedon liquid investments.  In 2002 otherincome for the same time period consisted primarily of interest income andinterest paid on the bank note secured by the Company’s Denton, Texas facility.

 

During the ninemonth period ended September 30, 2003, the Company recorded a $0.2 millioncumulative effect of change in accounting principle as a result of theCompany’s adoption of SFAS 143, Accounting for Asset Retirement Obligations,effective January 1, 2003.

 

Cash and investmentsecurities as of September 30, 2003, were $15.7 million compared to $16.1million at December 31, 2002. NeoRx achieved an average cash expenditure rate for the third quarter of2003 of $1.0 million per month.

 

###### ***Liquidityand capital resources***

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

The Company has financed its operations primarily through the sale ofequity securities, technology licensing, collaborative agreements and debtinstruments.  We invest excess cash in investmentsecurities that will be used to fund future operating costs.  Cash, cash equivalents and investmentsecurities totaled $15,740,000 at September 30, 2003 compared to $16,136,000 atDecember 31, 2002.  We primarily fundcurrent operations with our existing cash and investments.  Cash used by operating activities for the nine months endedSeptember 30, 2003 totaled $1,153,000. Revenues and other income sources for the third quarter of 2003 and ninemonths ended September 30, 2003 were not sufficient to cover operatingexpenses.

 

We currently maintain a line of credit with Pharmaceutical ProductDevelopment, Inc. (PPD) of up to $5.0 million to assist in funding the pivotalphase III trial of our STR product in development.   This line of credit is available to us for the STR phase IIItrials subject to conditions related to the specific design thereof and to theextent that we use PPD as our Clinical Research Organization (CRO) for thephase III trial.  We may choose not touse PPD as our CRO or we may choose to use PPD, but not to utilize this line ofcredit, which carries an annual interest rate of 16%.

 

**On November 12, 2002, weentered into an agreement with IDEC Pharmaceuticals Corporation relating to thesale to IDEC of certain non-core NeoRx intellectual property and the grant toIDEC of certain license rights.  Wereceived $7.9 million in cash and may receive in the future royalty paymentswith respect to certain products. The intellectual property addressed by theagreement included a portfolio of US and international patents and certainassociated technology and know-how relating to antibody-based therapeutics andligand-linker technology.  Theintellectual property rights transferred to IDEC did not include rights to ourSTR or Pretarget programs.  With respectto the patents involved in the sale, we retained a license for the developmentof certain NeoRx products.**

** **

On April 17, 2003, weentered into agreements with Boston Scientific Corporation relating to the saleto Boston Scientific of certain non-core NeoRx intellectual property and thegrant to Boston Scientific of certain license rights.  Under the first agreement, the Company assigned to BostonScientific certain NeoRx intellectual property in exchange for a cash paymentof $9 million.  The intellectualproperty assigned to Boston Scientific included a portfolio of NeoRx patentsand patent applications in the cardiovascular field. Under a second agreement,NeoRx granted to Boston Scientific an exclusive license to use certain otherNeoRx intellectual property, for which NeoRx received a one-time cash paymentof $1 million.  The exclusive licensegrants Boston Scientific the right to use, in certain medical device fields, aseparate portfolio of NeoRx patents and patent applications resulting from ourcollaboration with University of Cambridge investigators.

 

In October 2003 weannounced that we had reached agreement with the FDA, under the SpecialProtocol Assessment (SPA) process, on the design of the phase III clinicaltrial for STR.  We also confirmed withthe FDA that a single phase III study is sufficient for registration of STR,followed by a confirmatory phase IV commitment.

 

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The phase IIItrial planned under the SPA will be a randomized, controlled study of STR inpatients with primary refractory multiple myeloma.  The trial is expected to enroll approximately 240 evaluablepatients, half on the experimental arm and half on the control arm.  Patients on the experimental arm will receiveSTR plus the chemotherapy drug melphalan, followed by autologous stem celltransplantation.  Patients on thecontrol arm will receive melphalan only, followed by transplantation.  The FDA accepted complete response at sixmonths post-transplant as a surrogate endpoint for the study.  Acceptance of a surrogate endpoint placesSTR on the Accelerated Approval path. We anticipate that the STR phase III clinical trial will cost approximately$20 million, which does not include the cost of manufacturing the STR compoundat our Denton facility.

 

We will need to raise additional capital to fund our planned STR phaseIII clinical trial and our future operating cash needs.  We expect that our present cash, cashequivalents, investment securities and expected interest income will besufficient to fund our anticipated working capital and capital requirementsthrough the third quarter of 2004.

 

We may seek to raise capital through the saleof equity and/or debt securities or the establishment of other funding facilities.We are seeking toform a strategic partnership for STR development and commercialization.  We may also address our need for additionalcapital by pursuing opportunities for the licensing, sale or divestiture ofcertain non-core intellectual property and other assets, including ourPretarget® technology platform. In addition, we are also looking for an investor or partner for ourmanufacturing facility who is interested in continuing the facility’sradiopharmaceutical manufacturing operations and producing the STRcompound.  Under the terms of the TexasState Bank loan, the Denton facility and the assets used in the facility cannotbe transferred without the written approval of the bank.  In the event that sufficient additionalfunds are not obtained through asset sales, licensing arrangements, strategicpartnering opportunities and/or sales of securities on a timely basis, theCompany plans to reduce expenses through the delay, reduction or curtailment ofits STR development activities and/or further reduction of costs for facilitiesand administration.

 

#### ***Related party transactions***

 

The Company’s ViceChairman of the Board of Directors, Dr. Frederick Craves, is a founder of BayCity Capital, LLC, also known as BCC, a merchant bank focused on the life sciencesindustry.  NeoRx’s Chief ExecutiveOfficer and Chairman of the Board of Directors, Jack Bowman, is on the businessadvisory board of BCC.  The Company andBCC entered into an agreement whereby BCC acts as the Company’s advisor for thepurpose of identifying opportunities to enter into strategic alliances andprovide assistance relating to structuring and negotiating such transaction.The Company paid a retainer fee of $80,000 for each calendar quarter of2002.  The Company renewedthe agreement for one additional year from January 1, 2003.  The Company pays retainer fees of $25,000per quarter, except for the quarter ended March 31, 2003, for which it paid$26,667, plus reasonable travel and other expenses.  The agreement also includes a percentage of gross value of cash,securities, property or other consideration derived from a transaction, rangingfrom one to five percent, depending on the ultimate amount of considerationraised.  BCC agreed to exclude the BostonScientific Corporation sale and assignment of intellectual property from thisprovision of their agreement with the Company, and, therefore, received nocommission or other compensation related to the Boston Scientific transaction.

 

In connection with consulting services performed in 2003 and 2002, Dr.Paul G. Abrams, a former Chief Executive Officer of the Company, receivedconsulting fees of approximately $25,500 and $76,600 for the quarters endedSeptember 30, 2003 and 2002, respectively. This agreement terminated on July 31, 2003.

 

The Company had a demandnote receivable from an officer with a balance of approximately $90,700 thatwas recorded in other assets at March 31, 2002.  This note was paid in full on May 24, 2002.  There were no demand notereceivables from related parties outstanding at September 30, 2003.

 

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

 

In addition to the otherinformation contained in this report, the following factors could affect theCompany’s actual results and could cause our actual results to differmaterially from those achieved in the past or expressed or implied by ourforward-looking statements.

 

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

 

We have not been profitable since our formation in1984.  As of September 30, 2003, we hadan accumulated deficit of $209.2 million. These losses have resultedprincipally from costs incurred in our research and development programs andfrom our general and administrative activities.  To date, we have been engaged only in research and developmentactivities and have not generated any significant revenues from productsales.  We do not anticipate that ourproposed STR product will be commercially available for several years, if atall. We expect to incur additional operating losses in the future. These lossesmay increase significantly if we expand clinical development andcommercialization efforts.

 

Our ability to achieve long-term profitability isdependent upon obtaining regulatory approvals for our STR product candidate orany other proposed products and successfully commercializing our products aloneor with third parties.

 

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

 

It is expensive todevelop cancer therapy products and conduct clinical trials for theseproducts.  We anticipate that theplanned STR phase III clinical trial will cost approximately $20 million, whichdoes not include the cost of manufacturing the STR compound at our Dentonfacility.  Although we currently arefocusing on our STR product candidate, we may in the future simultaneouslyconduct clinical trials and pre-clinical research for a number of differentindications and cancer therapy products, which is costly. Our future revenuesmay not be sufficient to support the expense of our operations and the conductof our clinical trials and pre-clinical research.  We will need to raise additional capital:

 

•            to fund operations;

 

•            to continue the researchand development of our STR and any other product candidates; and

 

•             to commercialize ourSTR product candidate or any other proposed products.

 

We believe that our present cash, cashequivalents, investment securities and expected interest income will besufficient to fund our anticipated working capital and capital requirementsonly through the third quarter of 2004.

 

We may seek to raise capital through the saleof equity and/or debt securities or the establishment of other fundingfacilities. We areseeking to form a strategic partnership for STR development andcommercialization.  We may alsoaddress our need for additional capital by pursuing opportunities for thelicensing, sale or divestiture of certain non-core intellectual property andother assets, including our Pretarget® technology platform.  In addition, we are also looking for aninvestor or partner for our manufacturing facility who is interested incontinuing the facility’s radiopharmaceutical manufacturing operations andproducing the STR compound.

 

The amount ofadditional financing we need will depend on a number of factors, including thefollowing:

 

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

 

•                  actions taken bythe FDA and other regulatory authorities;

 

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

 

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

 

•                  the timing andamount of payments we might receive from potential licenses;

 

•                  our degree ofsuccess in commercializing our STR product candidate or other cancer therapyproduct candidates;

 

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

 

•                  the costs ofpreparing, filing, prosecuting, maintaining and enforcing patent claims andother

 

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intellectual property rights.

 

We may not be able to obtain additionalfinancing on a timely basis, on favorable terms, or at all.  If we are unable to raise additional fundswhen we need them, we may be required to delay, reduce or eliminate some or allof our development programs and some or all of our clinical trials.  We also may be forced to partner with thirdparties to develop or commercialize products or technologies that we otherwisewould have sought to develop independently. Such relationships may not be on terms as commercially favorable to usas might otherwise be the case.  If weraise additional funds by issuing equity securities, further dilution toshareholders may result, and new investors could have rights superior tocurrent security holders.

 

**Our current debtobligations may restrict our operating and financing flexibility and could, inan event of default, impair our cash resources and assets.**

** **

In connection with our 2001 purchase of theradiopharmaceutical manufacturing plant and other assets located in Denton, TX,we assumed  $6,000,000 principal amountof restructured debt held by Texas State Bank, McAllen, TX.  The assets acquired in the transactionsecure the loan, which matures in April 2009. During 2002 and early 2003, we reduced the staff at the Denton facilityto four employees and operated the facility in standby mode.  We currently are in the process ofrecruiting and hiring personnel and otherwise ramping up the manufacturingplant for production of clinical material for our planned STR phase IIIclinical trial.  We are also seeking aninvestor or partner interested in continuing the facility’s radiopharmaceuticalmanufacturing operations and producing the STR compound.  Under the terms of the Texas State Bankloan, the Denton facility and the assets used in the facility cannot betransferred without the written approval of the bank.

 

**Our potential productsmust undergo rigorous clinical testing and regulatory approvals, which could becostly, time consuming, and subject us to unanticipated delays or prevent usfrom marketing any products.**

** **

The manufacture and marketing of our proposedSTR product and our research and development activities are subject toregulation for safety, efficacy and quality by the FDA in the United States andcomparable authorities in other countries.

 

The process of obtaining FDA and other requiredregulatory approvals, including foreign approvals, is expensive, often takesmany years and can vary substantially depending on the type, complexity andnovelty of the products involved.  OurSTR product candidate is novel; therefore, regulatory agencies lack direct experiencewith it. This may lengthen the regulatory review process, increase ourdevelopment costs and delay or prevent commercialization of our STR productcandidate.

 

In October 2003 we announced that we had reachedagreement with the FDA, under the Special Protocol Assessment (SPA) process, onthe design of the phase III clinical trial for STR.  We also confirmed with the FDA that a single phase III study issufficient for registration of STR, followed by a confirmatory phase IVcommitment.  The phase III trial plannedunder the SPA will be a randomized, controlled study of STR in patients withprimary refractory multiple myeloma. The trial is expected to enroll approximately 240 evaluable patients,half on the experimental arm and half on the control arm.  Patients on the experimental arm willreceive STR plus the chemotherapy drug melphalan, followed by autologous stemcell transplantation.  Patients on thecontrol arm will receive melphalan only, followed by transplantation.  The FDA accepted complete response at sixmonths post-transplant as a surrogate endpoint for the study.  Acceptance of a surrogate endpoint placesSTR on the Accelerated Approval path.

 

No cancer product using our technologies hasbeen approved for marketing. Consequently, there is no precedent for thesuccessful commercialization of products based on our technologies.  In addition, we have had only limitedexperience in filing and pursuing applications necessary to gain regulatoryapprovals.  This may impede our abilityto obtain timely approvals from the FDA or foreign regulatory agencies. We willnot be able to commercialize our STR product candidate until we obtainregulatory approval, and consequently any delay in obtaining, or inability toobtain, regulatory approval could harm our business.

 

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

 

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claims necessary or desirable for product promotion.  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,and/or additional 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.**

 

We expect to open the planned phase III trial forpatient enrollment in the first quarter of 2004.  We anticipate that the phase III trial will take several years tocomplete and we do not expect to submit a New Drug Application before 2007 forthe potential approval of STR by the FDA. The actual time to initiation and completion of our STR phase IIIclinical trial, however, depends upon numerous factors, including:

 

•                        ourability to obtain adequate additional funding;

 

•                        ourreceipt of approvals by the FDA and other regulatory agencies and the timingthereof;

 

•                        otheractions by regulators;

 

•                        the rateof progress and costs of our clinical trial and research and developmentactivities;

 

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

 

•                        the costsof ramping up and maintaining manufacturing operations, should we determinethis to be necessary;

 

•                        the extentof scheduling conflicts with participating clinicians and clinical institutions;and

 

•                        ourability to identify and enroll patients who meet trial eligibility criteria.

 

We may not commence or complete our plannedphase III clinical trial for our STR product candidate as projected, may notconduct it successfully, or may not conduct it at all.

 

Wecurrently rely on academic institutions and clinical research organizations toconduct, supervise or monitor some or all aspects of clinical trials involvingour proposed STR product.  Further, weare seeking to enter into license agreements, partnerships or othercollaborative arrangements to support financing and development of our STRproduct candidate.  To the extent thatwe now or in the future participate in such collaborative arrangements, we willhave less control over the timing, planning and other aspects of our clinicaltrials.    If we fail to commence orcomplete, or experience delays in or are forced to curtail our planned clinicalprogram, our stock price and our ability to conduct our business could beharmed.

 

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

 

Our research and development programs aredesigned to test the safety and efficacy of our proposed products in humansthrough extensive preclinical and clinical testing.  We may experience numerous unforeseen events during, or as aresult of, the testing process that could delay or prevent commercialization ofour proposed STR product or any other proposed products, including thefollowing:

 

•                  safety andefficacy results obtained in early human clinical trials may not be indicativeof results obtained in later clinical trials;

 

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•                  the results ofpreclinical studies may be inconclusive, or they may not be indicative ofresults that will be obtained in human clinical trials;

 

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

 

•                  our potentialcollaborators or regulators may suspend or terminate clinical trials if theparticipating subjects or patients are being exposed to unacceptable healthrisks; and

 

•                  the effects ofour 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 very expensive, can takemany years, and the outcome is uncertain. The data that we may collect from ourplanned phase III clinical trial may not be sufficient to support regulatoryapproval of our proposed STR product or any other proposed products.  The clinical trials of our proposed STRproduct and other proposed products may not be completed on schedule, and theFDA or foreign regulatory agencies may not ultimately approve any of ourproduct candidates for commercial sale. Our failure to adequately demonstrate the safety and efficacy of acancer therapy product under development would delay or prevent regulatoryapproval of the product, which would prevent us from marketing the proposedproduct.

 

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

 

Forour STR product to be successful, we need sufficient, reliable and affordablesupplies of the STR compound for clinical studies.  This requires developing and maintaining reliable and affordablethird-party suppliers of commercial quantities of the radionuclide holmium-166,and the targeting agent DOTMP, used in our STR product candidate.  Sources of these materials may be limited,and we, or potential third-party suppliers of the STR compound, may be unableto obtain these materials in amounts and at prices necessary to successfullycommercialize our STR product.  Timelydelivery of the holmium-166 component material and of the finished STR compoundis critical.  For example, holmium-166loses its effectiveness for treating patients within a short period oftime.  As a result, the STR product mustbe shipped within 24 hours of its manufacture to the site where the patient isto be treated.  Failures or delays inthe manufacturing and shipping processes could compromise the quality andeffectiveness of our product.

 

There are, in general, relatively few sourcesof the holmium-166 component of our STR product. Historically, we have dependedon a single source vendor, the University of Missouri Research Reactor facilitygroup (MURR). In December 2001, we entered into a contract, under which MURRwas responsible for the manufacture of holmium-166, including processqualification, quality control, packaging and shipping, from its Columbia, MOreactor facility.  That supply contractexpired in December 2002.  In August2003 we placed a purchase order with MURR for purchases of holmium-166 fromNovember 2003 through April 2004.  Underthe purchase order we will pay certain initial fixed amounts and a per unitfixed price during its term.  We are indiscussions with MURR to supply holmium-166 for our planned STR phase IIIclinical trial.  While MURR generallyhas provided us materials with acceptable quality, quantity and cost in thepast, it may be unable or unwilling to meet our future demands, or demands ofpotential third-party suppliers of our STR compound.  If MURR or an alternate supplier is unable or unwilling toprovide supplies of holmium-166 at a cost and on other terms acceptable to us,the manufacture and delivery of our STR product candidate could be impaired,and we may suffer delays in, or be prevented from, initiating or completingfurther clinical trials of our STR product candidate.

 

**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 third parties to performfor us or assist us with a variety of important functions, including researchand development, manufacturing of product components, and clinical trialsmanagement.  We also license technologyfrom others to enhance or supplement our technologies.  We may not be able to locate suppliers tomanufacture our product components or any proposed products at a cost or inquantities necessary to make them commercially viable.  We may rely on third-party contractmanufacturers to produce large quantities of certain materials, potentiallyincluding the STR compound, for clinical trials and product commercialization.Third-party

 

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manufacturers may not be able to meet our needs with respect to timing,quantity, quality or cost.  If we areunable to contract for a sufficient supply of needed materials or products onacceptable terms, or if we should encounter delays or difficulties in ourrelationships with manufacturers, our clinical testing may be delayed, therebydelaying the submission of products for regulatory approval or marketintroduction and subsequent sales.  Anysuch delay may reduce our revenues and potential profitability.

 

Moreover,any potential third-party manufacturers must continually adhere tocurrent Good Manufacturing Practices (cGMP) regulations enforced by the FDAthrough its facilities inspection program. If our facilities or the facilities of these manufacturers cannot pass apre-approval plant inspection, the FDA will not grant a New Drug Application(NDA) for our proposed products. 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 we, or any of ourthird-party manufacturers, fail to comply with these requirements, we may besubject to regulatory action.

 

**Anydelay or failure to restart STR manufacturing operations in Denton, Texas, orto operate the facility in a cost-effective manner and in accordance withregulatory requirements, could adversely affect our ability to proceed with ourSTR phase III trials on a timely and cost-effective basis.**

 

In April 2001, we purchased aradiopharmaceutical manufacturing facility and certain other assets located inDenton, TX.  In addition to themanufacturing facility, we purchased existing equipment, documentation andcertain processes. The facility achieved cGMP status and was issued appropriateradiation permits by the State of Texas. This radiopharmaceutical manufacturingfacility assumed responsibility for all aspects of the manufacture of the STRcompound, including process qualification, quality control, packaging andshipping, and production of the clinical material for the completed STRdosimetry study.  We believe that theDenton facility has the capabilities and capacity to serve as the principalmanufacturing site for the STR compound for our planned phase III clinicaltrial and for potential commercial manufacture.  We are in the process of restarting and requalifying STRmanufacturing operations at the facility to prepare for our planned STR phaseIII clinical trial, with the goal of having the facility operational for theproduction of clinical supplies of STR before we open the phase III clinicaltrial for patient enrollment, which we expect will occur in the first quarterof 2004.  We plan to operate the Dentonfacility ourselves while seeking to engage an investor or partner interested incontinuing the facility’s radiopharmaceutical manufacturing operations andproducing the STR compound.

 

Our decision whether to continue to utilizethe Denton facility as our primary manufacturing site for the STR compound inthe future will depend on a number of factors, including:

 

•             actions taken by theFDA and the timing thereof;

 

•             our ability to obtainadequate additional funding and the timing thereof;

 

•             our ability to accesssufficient, reliable and affordable third-party supplies of holmium-166;

 

•             the costs of rampingup and maintaining manufacturing operations;

 

•             the availability ofqualified personnel;

 

•             the availability andnature of strategic partnering opportunities; and

 

•             the availability andcost of potential third-party suppliers of STR.

 

If in the future we decide to transition the STR production process toa third-party supplier, such third-party supplier also could require significantstart-up time to qualify and implement the manufacturing process.  In either case, our ability to move forwardwith further STR clinical and commercial development could be adverselyaffected and we may incur significant additional costs in connection withmanufacturing operations.  Further,there can be no assurance that manufacturing alternatives would be available ona timely or cost-effective basis.

 

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

** **

The competition for development of cancer therapies isintense.  There are numerous competitorsdeveloping products to treat the diseases for which we are seeking to developproducts. We initially are focusing clinical development of our STR productcandidate on the treatment of multiple myeloma.  Several companies, including Celgene Corp. and Millennium Pharmaceuticals,Inc., also are developing and testing therapeutics for multiple myeloma.  In May 2003 Millennium obtained FDA approvalfor its VelcadeTM therapeutic for treatment of multiple myeloma patients whohave received at least two prior therapies and demonstrated disease progressionon the last therapy.  In addition, anumber of established pharmaceutical companies, including GlaxoSmithKline,Novartis AG and Bristol-Myers Squibb Co., are developing proprietary technologiesor have enhanced their capabilities by entering into arrangements with, oracquiring, companies with technologies applicable to the treatment ofcancer.  Many of our existing orpotential competitors have, or have access to, substantially greater financial,research and development, marketing and production resources than we do and maybe better equipped than we are to develop, manufacture and market competingproducts.  Our competitors may have, ormay develop and introduce, new products that would render our technology andproposed STR product less competitive, uneconomical or obsolete.

 

We also expect to face increasing competition from universities andother non-profit research organizations. These institutions, which carry out a significant amount of cancerresearch and development, are becoming increasingly aware of the commercialvalue of their findings and more active in seeking patent and other proprietaryrights, as well as licensing revenues.

 

**If we are unable to protect our proprietary rights, wemay not be able to compete effectively, or operate profitably.**

** **

Our success is dependent in part on obtaining, maintaining andenforcing our patents and other proprietary rights and our ability to avoidinfringing the proprietary rights of others. Patent law relating to the scope of claims in the biotechnology field inwhich we operate is still evolving and, consequently, patent positions in ourindustry may not be as strong as in other, better-established fields.  Accordingly, the United States Patent andTrademark Office (USPTO) may not issue patents from the patent applicationsowned by or licensed to us.  If issued,the patents may not give us an advantage over competitors with similartechnologies.

 

We own approximately 100 issued United States patents and have licensesto additional patents.  However, theissuance of a patent is not conclusive as to its validity or enforceability andit is uncertain how much protection, if any, will be given to our patents if weattempt to enforce them and they are challenged in court or in otherproceedings, such as oppositions, which may be brought in foreign jurisdictionsto challenge the validity of a patent. A third party may challenge the validity or enforceability of a patentafter its issuance by the USPTO.  It ispossible that a competitor may successfully challenge our patents or that achallenge will result in limiting their coverage.  Moreover, the cost of litigation to uphold the validity ofpatents and to prevent infringement can be substantial.  If the outcome of litigation is adverse tous, third parties may be able to use our patented invention without payment tous.  Moreover, it is possible thatcompetitors may infringe our patents or successfully avoid them through designinnovation.  We may need to filelawsuits to stop these activities. These lawsuits can be expensive and would consume time and otherresources, even if we were successful in stopping the violation of our patentrights.  In addition, there is a riskthat a court would decide that our patents are not valid and that we do nothave the right to stop the other party from using the inventions.  There is also the risk that, even if thevalidity of our patents were upheld, a court would refuse to stop the otherparty on the ground that its activities do not infringe our patents.

 

In addition to theintellectual property rights described above, we rely on unpatented technology,trade secrets and confidential information. Therefore, others may independently develop substantially equivalent informationand techniques or otherwise gain access to or disclose our technology.  We may not be able to effectively protectour rights in unpatented technology, trade secrets and confidentialinformation. We require each of our employees, consultants and advisors toexecute a confidentiality agreement at the commencement of an employment orconsulting 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.

 

**The use of ourtechnologies could potentially conflict with the rights of others.**

 

Our competitors or others may have or acquire patent rights that theycould enforce against us.  In such case,we may be required to alter our products, pay licensing fees or ceaseactivities.  If our products conflictwith

 

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patent rights of others, third parties could bring legal actionsagainst us claiming damages and seeking to enjoin manufacturing and marketingof the affected products.  If theselegal actions are successful, in addition to any potential liability fordamages, we could be required to obtain a license in order to continue tomanufacture or market the affected products. We may not prevail in any legal action and a required license under thepatent may not be available on acceptable terms.

 

**We may incursubstantial costs as a result of litigation or other proceedings relating topatent and other intellectual property rights.**

 

The cost to us of any litigation or other proceedings relating tointellectual property rights, even if resolved in our favor, could besubstantial.  Some of our competitorsmay be better able to sustain the costs of complex patent litigation becausethey have substantially greater resources. If there is litigation against us, we may not be able to continue ouroperations.  If third parties filepatent applications, or are issued patents claiming technology also claimed byus in pending applications, we may be required to participate in interferenceproceedings in the USPTO to determine priority of invention.  We may be required to participate ininterference proceedings involving our issued patents and pending applications.  We may be required to cease using thetechnology or license rights from prevailing third parties as a result of anunfavorable outcome in an interference proceeding.  A prevailing party in that case may not offer us a license oncommercially acceptable terms.

 

**Product liabilityclaims in excess of the amount of our insurance would adversely affect ourfinancial condition.**

 

The testing, manufacturing, marketing and sale of STR and any otherproposed cancer therapy products may subject us to product liabilityclaims.  We are insured against suchrisks up to a $10 million annual aggregate limit in connection with clinicaltrials of our products under development and intend to obtain product liabilitycoverage in the future.  However,insurance coverage may not be available to us at an acceptable cost.  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.

 

**Our use ofradioactive and other hazardous materials exposes us to the risk of materialenvironmental liabilities, and we may incur significant additional costs tocomply with environmental laws in the future.**

 

Our research and development and manufacturing processes, as well asthe manufacturing processes that may be used by our collaborators, involve thecontrolled use of hazardous and radioactive materials.  As a result, we are subject to foreign,federal, state and local laws, rules, regulations and policies governing theuse, generation, manufacture, storage, air emission, effluent discharge,handling and disposal of certain materials and wastes in connection with ouruse of these materials.  Although webelieve that our safety procedures for handling and disposing of such materialscomply with the standards prescribed by such laws and regulations, we may berequired to incur significant costs to comply with environmental and health andsafety regulations in the future. In the event that we discontinue operationsin facilities that have had past research and manufacturing processes wherehazardous or radioactive materials have been in use, we may have significantdecommissioning costs associated with the termination of operation of thesefacilities.  These potentialdecommissioning costs also may reduce the market value of the facilities andmay limit our ability to sell or otherwise dispose of these facilities in atimely and cost-effective manner. *** ***In addition, therisk of accidental contamination or injury from hazardous or 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.

 

**Even if we bringproducts to market, changes in healthcare reimbursement could adversely affectour ability to effectively price our products or obtain adequate reimbursementfor sales of our products.**

 

The levels of revenues and profitability of biotechnology companies maybe affected by the continuing efforts of government and third-party payors tocontain or reduce the costs of healthcare through various means.  For example, in certain foreign marketspricing or profitability of prescription pharmaceuticals is subject togovernmental control.  In the UnitedStates, there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar governmental controls.  It is uncertain what legislative proposalswill be adopted or what actions federal, state or private payors for healthcaregoods and services may take in

 

20

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response to any healthcare reform proposals or legislation.  Even in the absence of statutory change,market forces are changing the healthcare sector.  We cannot predict the effect healthcare reforms may have on thedevelopment, testing, commercialization and marketability of our proposedcancer therapy products.  Further, tothe extent that such proposals or reforms have a material adverse effect on thebusiness, financial condition and profitability of other companies that areprospective collaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.  In addition, both in the United States andelsewhere, sales of prescription pharmaceuticals depend in part on theavailability of reimbursement to the consumer from third-party payors, such asgovernmental and private insurance plans. Third-party payors are increasingly challenging the prices charged formedical products and services.  If wesucceed in bringing one or more products to market, we cannot be certain thatthese products will be considered cost-effective and that reimbursement to theconsumer will be available or will be sufficient to allow us to sell ourproducts on a competitive or profitable basis.

 

**The loss of keyemployees could adversely affect our operations.**

 

Since July 2002, we have implemented three reductions in force. Also inJanuary 2003, we accepted the resignations of Richard Ghalie, MD, VicePresident, Medical and Regulatory Affairs, and Les Sabo, Vice President,Manufacturing.  Jack L. Bowman was namedExecutive Chairman and became Chairman of our Board of Directors on March 11,2003.  Douglass B. Given, MD, PhDresigned as President, Chief Executive Officer and a Director of the Company onJune 30, 2003.  On that date, Mr. Bowmanwas named Chief Executive Officer and Karen Auditore-Hargreaves, PhD waspromoted to Chief Operating Officer of the Company.  As of September 30, 2003, we had a total work force of 36full-time employees and one part-time employee. Our success depends, to asignificant extent, on the continued contributions of our principal managementand scientific personnel.  The loss ofthe services of one or more of the principal members of our scientific andmanagement staff could delay our STR product development activities or otherprograms and research and development efforts. We do not maintain key-person life insurance on any of our officers, employeesor consultants.

 

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

 

**Our common stock listing was transferred fromThe Nasdaq National Market to The Nasdaq SmallCap Market; failure to maintaincontinued listing on Nasdaq could affect its market price and liquidity.**

** **

Our common stock listing was transferred from TheNasdaq National Market to The Nasdaq SmallCap Market on March 20, 2003.  We elected to seek a transfer to The NasdaqSmallCap Market because we had been unable to regain compliance with The NasdaqNational Market minimum $1.00 bid price requirement for continued listing. Bytransferring to The SmallCap Market, we were afforded an extended grace periodin which to satisfy the The SmallCap Market $1.00 minimum bid pricerequirement.  On May 6, 2003, wereceived notice from Nasdaq confirming that we are now in compliance with the$1.00 SmallCap minimum bid price requirement. As a result of rule changes adopted by Nasdaq in March 2003, we will notbe eligible to relist our common stock on The Nasdaq National Market unless anduntil our common stock maintains a minimum bid price of $5.00 per share and weotherwise comply with the initial listing requirements for The Nasdaq NationalMarket.  Trading on the Nasdaq SmallCapMarket may have a negative impact on the value of our common stock, becausesecurities trading on the Nasdaq SmallCap Market typically are less liquid thanthose traded on The Nasdaq National Market.

 

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

 

There has been a history of significant volatility in the market pricesof securities of biotechnology companies, including our common stock, and it islikely that the market price of our common stock will continue to be highlyvolatile.  Our business and the relativeprice of our common stock may be influenced by a large variety of industry factors,including:

 

21

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

 

•                  the availabilityof critical materials used in developing and manufacturing our proposed STRproduct;

 

•                  the progress andresults of clinical trials;

 

•                  developmentsconcerning patents, proprietary rights and potential infringement; and

 

•                  the expense andtime associated with, and the extent of our ultimate success in, securingregulatory approvals.

 

In addition,potential public concern about the safety of our proposed STR product and anyother products we develop, comments by securities analysts, our ability tomaintain the listing of our common stock on the Nasdaq system and conditions inthe capital markets in general and in the life science capital marketspecifically, may have a significant effect on the market price of our commonstock.  The realization of any of therisks described in this report, as well as other factors, could have a materialadverse impact on the market price of our common stock and may result in a lossof some or all of your investment.

 

In the past,securities class action litigation often has been brought against companiesfollowing periods of volatility in their stock prices.  We may in the future be the target ofsimilar litigation.  Securitieslitigation could result in substantial costs and divert our management’s timeand resources, which could cause our business to suffer.

 

**Certain provisions inour articles of incorporation and Washington state law could discourage achange of control.**

 

Our articles of incorporation authorize our Board of Directors to issueup to 3,000,000 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 a shareholders’ rights plan, which is intended toprotect the rights of shareholders by deterring coercive or unfair takeovertactics.  The Board of Directorsdeclared a dividend to holders of our common stock of one preferred sharepurchase right for each outstanding share of common stock.  The right is exercisable ten days followingthe offer to purchase or acquisition of beneficial ownership of 20% of theoutstanding common stock by a person or group of affiliated persons.  Each right entitles the registered holder,other than the acquiring person or group, to purchase from NeoRx one-hundredthof one share of Series A Junior Participating Preferred Stock at the price of$40, subject to adjustment.  The rightsexpire April 10, 2006.  In lieu ofexercising the right by purchasing one one-hundredth of one share of Series APreferred Stock, the holder of the right, other than the acquiring person orgroup, may purchase for $40 that number of shares of our common stock having amarket value of twice that price.

 

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

 

•              a merger orconsolidation with, disposition of assets to, or issuance or redemption ofstock to or from the acquiring person;

 

•              termination of 5% ormore of the employees of the target corporation; or

 

•              receipt by theacquiring person of any disproportionate benefit as a shareholder.

 

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

 

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

 

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

 

**Interest Rate Risk**

 

TheCompany’s exposure to market rate risk for changes in interest rates relatesprimarily to the Company’s debt securities included in its investmentportfolio.  The Company does not haveany derivative financial instruments. The Company invests in debt instruments of the US Government and itsagencies and high-quality corporate issuers. Investments in both fixed rate and floating rate interest earninginstruments carry a degree of interest rate risk.  Fixed rate securities may have their fair market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall.  Due in part to these factors, the Company’sfuture investment income may fall short of expectations due to changes ininterest rates or the Company may suffer losses in principal if forced to sellsecurities that have declined in market value due to changes in interestrates.  At September 30, 2003, theCompany owned $8.9 million in government debt instruments and owned corporatedebt securities in the amount of $4.5 million. The Company’s exposure to lossesas a 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 no corporate debt securities that had maturity dates greater thanone year at September 30, 2003.

 

**Item4.  Controls and Procedures**

 

Under the supervision of and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Vice President,Finance, the Company has evaluated the effectiveness and design and operationof its disclosure controls and procedures as of the end of the quarter and,based on their evaluation, the Chief Executive Officer and the Vice President,Finance, have concluded that these disclosure controls and procedures areeffective in ensuring that all material information required to be disclosed inthe reports that the Company files or submits under the Securities Exchange Actof 1934 have been made known to them in a timely fashion.  There were no changes in the Company’sinternal controls over financial reporting that occurred during the quarterthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

 

**Item6.  Exhibits and Reports on Form 8-K**

 

 

(a) Exhibits – SeeExhibit Index below.

 

(b) Reports onForm 8-K:

 

Form 8-K dated July 28, 2003, announcing the Company’searnings for the quarter ended June 30, 2003.

 

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**SIGNATURES**

 

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

 
|                    | NEORX CORPORATION |
|-------------------------|-------------------|
|                    | (Registrant)      |
|                    |              |
|                    |              |
|                    | By:               | /s/ MELINDA G. KILE |   |
|                    |              | Melinda G. Kile |
|                    |              | Vice President, Finance and Chief Accounting Officer |
|                    |              |   |
|                    |              |   |
| Date: November 13, 2003 |              |   |

 

26

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**EXHIBIT INDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                   |   |   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1(a)      |   | Restated  Articles of Incorporation, dated April 29, 1996                                                                                                                                                         |   | (B)    |
| 3.1(b)      |   | Articles  of Amendment, dated March 31, 1997, to Restated Articles of Incorporation                                                                                                                               |   | (C)    |
| 3.1(c)      |   | Articles  of Amendment, dated August 8, 1997, to Restated Articles of Incorporation                                                                                                                               |   | (K)    |
| 3.2         |   | Bylaws,  as amended, of the registrant                                                                                                                                                                            |   | (K)    |
| 10.1        |   | Restated  1994 Stock Option Plan (‡)                                                                                                                                                                         |   | (F)    |
| 10.2        |   | Lease  Agreement for 410 West Harrison facility, dated February 15, 1996, between  NeoRx Corporation and Diamond Parking, Inc                                                                                     |   | (H)    |
| 10.3        |   | Amendment  No. 1, dated August 14, 2000, to Lease Agreement between NeoRx Corporation  and Dina Corporation                                                                                                       |   | (J)    |
| 10.4        |   | 1991  Stock Option Plan for Non-Employee Directors, as amended (‡)                                                                                                                                           |   | (E)    |
| 10.5        |   | 1991  Restricted Stock Plan (‡)                                                                                                                                                                              |   | (D)    |
| 10.6        |   | Agreement,  dated as of December 15, 1995                                                                                                                                                                         |   | (F)    |
|        |   |                                                                                                                                                                                                              |   |   |
| 10.8        |   | Indemnification  Agreement (‡)                                                                                                                                                                               |   | (H)    |
| 10.9        |   | Form  of Key Executive Severance Agreement (‡)                                                                                                                                                               |   | (I)    |
| 10.10       |   | Officer  Change in Control Agreement (‡)                                                                                                                                                                     |   | (K)    |
| 10.11       |   | Key  Executive Severance Agreement (‡)                                                                                                                                                                       |   | (K)    |
| 10.12       |   | License  Agreement, dated June 30, 1999, between NeoRx and The Dow Chemical Company                                                                                                                               |   | (L)    |
| 10.13       |   | Credit  Facility Agreement, dated February 3, 2000, between NeoRx Corporation and  Pharmaceutical Product Development, Inc.                                                                                       |   | (M)    |
|        |   |                                                                                                                                                                                                              |   |   |
| 10.15       |   | Stock  Option Agreement, dated December 19, 2000, between NeoRx Corporation and Carl  S. Goldfischer (‡)                                                                                                     |   | (J)    |
| 10.16       |   | Stock  Option Agreement, dated January 17, 2001, between NeoRx Corporation and Carl  S. Goldfischer  (‡)                                                                                                |   | (J)    |
| 10.17       |   | Stock  Option Agreement, dated November 16, 2000, between NeoRx Corporation and  Douglass B. Given (‡)                                                                                                       |   | (J)    |
| 10.18       |   | Sublicense  Agreement, dated May 15, 1997, between NeoRx Corporation and Roche Molecular  Biochemicals.  Certain portions of the  agreement have been omitted pursuant to a grant of confidential treatment. |   | (O)    |
| 10.19       |   | Stock  Option Grant Program for Nonemployee Directors under the NeoRx Corporation  1994 Restated Stock Option Plan (‡)                                                                                       |   | (P)    |
|        |   |                                                                                                                                                                                                              |   |   |
| 10.21       |   | Amendment  No. 3 to Consulting Agreement, dated January 1, 2002, between NeoRx  Corporation and Bay City Capital BD, LLC                                                                                          |   | (A)    |
| 10.22       |   | Separation  Agreement, dated September 13, 2001, between NeoRx Corporation and Richard L.  Anderson (‡)                                                                                                      |   | (A)    |
| 10.23       |   | Form  of VP Change in Control Agreements (‡)                                                                                                                                                                 |   | (A)    |
|        |   |                                                                                                                                                                                                              |   |   |
| 10.25       |   | Facilities  Lease, dated February 15, 2002, between NeoRx Corporation and Selig Real  Estate Holdings Nine                                                                                                        |   | (A)    |
| 10.26       |   | Form  of VP Severance Agreements (‡)                                                                                                                                                                         |   | (A)    |
| 10.27       |   | Lease  Termination/Continuation Agreement between NeoRx Corporation and Dina  Corporation                                                                                                                         |   | (R)    |
| 10.28       |   | Purchase  Agreement dated as of November 12, 2002, between NeoRx Corporation and IDEC  Pharmaceutical Corporation                                                                                                 |   | (S)    |
|        |   |                                                                                                                                                                                                              |   |   |
| 10.30       |   | Patent  Assignment dated April 17, 2003 between NeoRx Corporation and SciMed Life  Sciences, Inc.                                                                                                                 |   | (Q)    |
| 10.31       |   | Patent  License Agreement dated April 17, 2003 between NeoRx Corporation and Boston  Scientific Corporation                                                                                                       |   | (Q)    |
| 31.1        |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14a                                                                                                                                                |   | (U)    |
| 31.2        |   | Certification  of Principal Accounting Officer pursuant to Rule 13a-14a                                                                                                                                           |   | (U)    |
| 32.1        |   | Certification  of Chief Executive Officer pursuant to 18 USC Section 1350                                                                                                                                         |   | (U)    |

 

27

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| 32.2 |   | Certification  of Principal Accounting Officer pursuant to 18 USC Section 1350 |   | (U) |
|------|--------|--------------------------------------------------------------------------------|--------|-----|

 

28

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| ‡ |   | Management  contract or compensatory plan.                                                                                                                                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                    |
| (A)    |   | Filed  as an exhibit to the Company’s Form 10-K for the fiscal year ended December  31, 2001 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                    |
| (B)    |   | Filed  as an exhibit to the Company’s Form 10-K for the fiscal year ended December  31, 1996 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                    |
| (C)    |   | Filed  as an exhibit to the Company’s Registration Statement on Form S-3  (Registration No. 333-25161), filed April 14, 1997 and incorporated herein by  reference.                                                                                |
|   |   |                                                                                                                                                                                                                                                    |
| (D)    |   | Filed  as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 30, 1991 and incorporated herein by reference.                                                                                               |
|   |   |                                                                                                                                                                                                                                                    |
| (E)    |   | Filed  as an exhibit to the Company’s Registration Statement on Form S-2  (Registration No. 33-71164) effective December 13, 1993 and incorporated  herein by reference.                                                                           |
|   |   |                                                                                                                                                                                                                                                    |
| (F)    |   | Filed  as an exhibit to the Company’s Form 10-K for the fiscal year ended December  31, 1995 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                    |
| (H)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 1996 and incorporated herein by reference.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                    |
| (I)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended June  30, 1996 and incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                    |
| (J)    |   | Filed  as an exhibit to the Company’s Form 10-K for the fiscal year ended December  31, 2000 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                    |
| (K)    |   | Filed  as an exhibit to the Company’s Form 10-K for the fiscal year ended December  31, 1998 and incorporated herein by reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                    |
| (L)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended  September 30, 1999 and incorporated herein by reference.  Certain portions of the agreement have  been omitted pursuant to a grant of confidential treatment. |
|   |   |                                                                                                                                                                                                                                                    |
| (M)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 2000 and incorporated herein by reference.  Certain portions of the agreement have been omitted pursuant to  a grant of confidential treatment.     |
|   |   |                                                                                                                                                                                                                                                    |
| (O)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended March  31, 2001 and incorporated herein by reference.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                    |
| (P)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended June  30, 2002 and incorporated herein by reference.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                    |
| (Q)    |   | Filed  as an exhibit to the Company’s Form 8-K dated April 17, 2003 and incorporated  herein by reference. Certain portions of the agreement have been omitted  pursuant to a grant of confidential treatment.                                     |
|   |   |                                                                                                                                                                                                                                                    |
| (R)    |   | Filed  as an exhibit to the Company’s Form 10-Q for the quarterly period ended  September 30, 2002 and incorporated herein by reference.                                                                                                           |
|   |   |                                                                                                                                                                                                                                                    |
| (S)    |   | Filed as an exhibit to the Company’s  Current Report on Form 8-K filed as of November 27, 2002 and incorporated  herein by reference.  Certain  portions of the agreement have been omitted pursuant to a grant of  confidential treatment.   |

 

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| (U) |   | Filed  herewith. |
|-----|--------|------------------|

 

30

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