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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


________________

Form 10-K

|           |  |                                              
|---------- |  | ---------------------------------------------
|(Mark One)
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
|           |  | OF THE SECURITIES EXCHANGE ACT OF 1934       

For the fiscal year ended December 31, 2003


OR


|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|---- |  | -------------------------------------------------
|     |  | OF THE SECURITIES EXCHANGE ACT OF 1934           

For the transition period from. . . . . . to. . . . . .


Commission file number 0-22147

ILEX ONCOLOGY, INC.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 74-2699185
(I.R.S. Employer
Identification No.)

|                                                                                    |  |                 
|----------------------------------------------------------------------------------- |  | ----------------
|4545 Horizon Hill Blvd.
San Antonio, Texas
(Address of principal executive offices) |  | 78229
(Zip Code)

Registrants telephone number, including area code: (210) 949-8200

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ].

Indicate by check mark if the issuer is an accelerated filer (as defined
in Exchange Act rule 12b-2). Yes [X] No [  ].

The aggregate market value of the common stock held by non-affiliates of
the Registrant as of June 30, 2003 was approximately $612,625,521 based on the
closing price of $19.38 for such date reported on the Nasdaq National Stock
Market.

The number of shares outstanding of the Registrants common stock as of
February 19, 2004 is 39,061,379.





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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART II.ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SCHEDULESITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSignaturesFirst Amendment to Rights Agreement1995 Stock Option Plan2000 Employee Stock Compensation PlanConsulting Services AgreementComputation of Earnings Per ShareCode of Ethics for Senior Financial OfficersConsent of Ernst & Young LLPCertification of President and CEO - Section 302Certification of Senior VP and CFO - Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K This Annual Report on Form 10-K contains certain forward-looking statements as
such term is defined in the Private Securities Litigation Reform Act of 1995
and information relating to us and our subsidiaries that are based on the
beliefs of our management as well as assumptions made by and information
currently available to our management. When used in this report, the words
anticipate, believe, estimate, expect and intend and words or phrases of
similar import, as they relate to us or our subsidiaries or our management, are
intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, risks associated with preclinical and clinical
developments in the biopharmaceutical industry in general and in our compounds
under development in particular; the potential failure of our compounds under
development to prove safe and effective for treatment of disease; uncertainties
inherent in the early stage of our compounds under development; failure to
successfully implement or complete clinical trials; failure to receive market
clearance from regulatory agencies for our compounds under development;
managements ability to implement strategic initiatives; our ability to
predict our future expenses and capital needs; the development of competing
products; our ability to combine our disparate research capabilities and
translate them into clinical drug development programs; uncertainties related
to our dependence on and relationships with third parties and partners; general
economic and market conditions; risks inherent in the biopharmaceutical
industry; stock price volatility; variability of license, royalty and other
revenue; risks related to the outcome of litigation and claims made against us;
risks related to the market acceptance of CAMPATH® or other drugs that might
be approved; possible adverse effects from changes in governmental regulations
including reimbursement or price controls; uncertainties related to protection
of our intellectual property; rapid technological change that could render our
technologies obsolete; acquisitions, divestitures, mergers, restructurings or
strategic initiatives that change our structure, including the proposed merger
with Genzyme Corporation, which is subject to regulatory approval; business
combinations among our competitors and major customers could affect our
competitive position; one-time events and those risks described herein, in the
Companys Form S-3 filed July 30, 2003, as amended (Commission file
#333-106735) and in other filings made by us with the SEC. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. We do not intend to update these forward-looking
statements. In this Annual Report on Form 10-K, ILEX, the Company, we, our or
us refer to ILEX Oncology, Inc. and its wholly owned partnership and
subsidiaries, and common stock or our stock refers to ILEXs common stock,
par value $0.01 per share. 
 PART I. 
 ITEM 1. BUSINESS Summary We are a product-driven biopharmaceutical company focused on developing
and commercializing a portfolio of novel therapeutic treatments primarily in
oncology. We have leveraged our core competencies in clinical drug development
to identify, develop and commercialize our proprietary product candidates. Our
lead product is marketed in the United States as CAMPATH® and in Europe and
other countries as MABCAMPATH® for the treatment of patients with B-cell
chronic lymphocytic leukemia (CLL) who have been treated with alkylating agents
and who have failed fludarabine therapy. CLL is a type of blood cancer
characterized by progressive accumulation of B-lymphocytes, a type of immune
system cell formed in the bone marrow. In addition to CAMPATH, we have
product candidates in clinical trials, principally addressing oncology, as well
as several active preclinical and drug discovery programs. Our pipeline
comprises product candidates at various stages of clinical development,
including monoclonal antibodies, agents that have toxic effects on certain
cells (cytotoxic agents) or inhibit cellular growth (cytostatic agents) with
novel mechanisms of action, agents that inhibit the formation of new blood
vessels (angiogenesis inhibitors) and agents which block cellular messaging
associated with cancer growth and metastasis (signal transduction inhibitors). We have incurred losses since inception and had an accumulated deficit
through December 31, 2003 of $345.5 million. Our losses have resulted primarily
from research and product development activities, including licensing of
products and product and corporate acquisitions for which we incur in-process
research and development charges and administrative expenses. We plan to
continue to invest in key research and development activities. We expect to
continue to incur operating losses throughout 2004. Our revenue for the
foreseeable future will be limited to our product profit and royalty revenue,
product development revenue, interest income and other miscellaneous income. On February 26, 2004, we entered into a definitive merger agreement with
Genzyme Corporation (Genzyme). Under the terms of the Merger Agreement, each
outstanding share of ILEX common stock, $0.01 par value per share, will be
converted into the right to receive a fraction of a share (the Exchange
Ratio) of Genzyme common stock. The Exchange Ratio will be calculated by
dividing $26.00 by the average per share closing price of Genzyme common stock
(the Genzyme Share Price) as reported by 1




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K the NASDAQ National Market over the twenty trading days ending on the
fifth trading day prior to the closing date of the Mergers, except that if the
Genzyme Share Price is greater than $59.88, the Exchange Ratio will be 0.4342,
and if the Genzyme Share Price is less than $46.58, the Exchange Ratio will be
0.5582. In addition, each outstanding option to purchase ILEX common stock will
be converted into an option to purchase the number of shares of Genzyme common
stock equal to the number of shares of ILEX common stock subject to such option
multiplied by the Exchange Ratio, and the associated exercise price will be
adjusted accordingly. Until the closing date, which is anticipated to occur in
mid-2004, we will continue to operate independently of Genzyme. The closing of
the transaction is contingent upon approval of our stockholders and approval by
certain regulatory authorities including the U.S. Federal Trade Commission. In February 2001, we announced our intent to focus our in-house drug
development capabilities on our own proprietary products, including those being
jointly developed with partners. At that time, we began a transition out of
the fee-for-service contract research organization (CRO) business. We expect
this transition to be completed by the end of the third quarter of 2004. We
will continue to recognize limited revenues from current client projects, but
we do not intend to take on any new fee-for-service contracts. OUR STRATEGY Our strategic vision is to be a product-driven biopharmaceutical company,
focused primarily on oncology. We plan to achieve this vision through our
aggressive pursuit of development and commercialization of the product
candidates in our pipeline. The key elements of our strategy to accomplish this
objective are to:  
    
    Establish CAMPATH as an effective treatment in oncology, autoimmune
diseases and organ transplantation. By broadening the approved label
indications, we can greatly increase our target markets for CAMPATH.
Together with Schering AG, we are supporting more than 100
post-marketing studies to evaluate CAMPATH.
    
    Explore areas of unmet medical need where our products can offer an
advantage. If our development plans are successful, we hope to
accelerate our timelines and enter the market as soon as possible.
Concurrently, we will develop our products in broader indications.
    
    Continue to build our commercialization strength. As products in our
pipeline reach later stages of development, we want to be aptly prepared
to maximize their potential. We have twelve medical science liaison
(MSL) positions to help us better interact with the marketplace. Over
the long term, we hope to create a sales force if our products are
approved.
    
    Build a diversified pipeline of product candidates. We are developing
a focused pipeline of product candidates that are in various stages of
clinical and preclinical development and that are based on different
technology platforms. We believe this strategy increases the likelihood
that we will successfully develop commercially viable pharmaceutical
products. Our approach is intended to reduce our exposure to the impact
of any single product failure and increase our flexibility to eliminate
programs we deem less promising.
    
    License or otherwise acquire complementary products or technologies and
potentially out-license our products in areas that are not within our
main areas of focus. 2




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K   OUR PRODUCT CANDIDATE PIPELINE As noted above, our product candidate pipeline includes oncology compounds
at various stages of development, with significant therapeutic targets and
unique mechanisms of action. The following chart identifies the clinical
progress of these product candidates as of December 31, 2003: MARKETING RIGHTSPRODUCTCANDIDATE
    
    TARGET
    
    INDICATIONS
    
    STATUS
    
    UNITED STATES
    
    OTHERCAMPATH ®
    
    CD52
    
    Chronic lymphocytic
leukemia
    
    Marketed
    
    Berlex
    
    Schering AG(1)CD52
    
    Multiple sclerosis
    
    Phase II
    
    Berlex
    
    Schering AG(1)CD52
    
    Non-Hodgkins
Lymphoma
    
    Phase I/II
    
    Berlex
    
    Schering AG(1)Clofarabine
    
    DNA, Mitochondria
    
    Hematologic
malignancies
    
    Phase II
    
    ILEX(2)
    
    Bioenvision(2)DNA, Mitochondria
    
    Solid tumors
    
    Phase I
    
    ILEX(2)
    
    Bioenvision(2)ILX-651
    
    Tubulin
    
    Solid tumors
    
    Phase II
    
    ILEX
    
    ILEXAPOMINE®
    
    HMGcoA
reductase
    
    Osteoporosis
    
    Phase II
    
    ILEX
    
    ILEXNM-3
    
    Endothelium
    
    Solid tumors
    
    Phase I
    
    ILEX
    
    ILEXSignal Transduction
Inhibitors
    
    MUC1
    
    Solid tumors
    
    Preclinical
    
    ILEX
    
    ILEXAngiogenesis inhibitors
    
    Multiple Growth Factors
    
    Solid tumors
    
    Preclinical
    
    ILEX
    
    ILEX
   (1)
    
    At inception of the development and distribution agreement, Schering AG
held worldwide rights except in Japan and the Asian Pacific Basin, which
were retained by ILEX Pharmaceuticals, L.P., formerly known as Millennium &
ILEX Partners, L.P. (the Partnership). In 2003, Schering AG acquired the
rights in Japan and the Asian Pacific Basin, now giving them worldwide
rights to marketing and distribution. Sales in the U.S. are made by
Berlex Laboratories, Inc., Schering AGs subsidiary.(2)
    
    ILEX holds marketing rights in the U.S. and Canada and Bioenvision Inc.
holds marketing rights in the rest of the world. CAMPATH CAMPATH is a humanized monoclonal antibody that binds to a specific
target, CD52, on cell surfaces leading the bodys immune system to destroy
malignant, or cancerous, cells. CAMPATH was launched in May 2001 in the United
States and in August 2001 in Europe. In 2003, its second full year on the
market, CAMPATH generated global net sales of approximately $71.7 million. Our
revenues from CAMPATH consist of our share of the profits resulting from net
sales of CAMPATH in the U.S. and royalty revenue from net sales in the rest of
the world. CAMPATH is still in the early stages of commercialization. It is
approved for use in patients with B-Cell chronic lymphocytic leukemia who have
been treated with alkylating agents and who have failed fludarabine therapy,
and we are now conducting trials in non-Hodgkins lymphoma (NHL) and multiple
sclerosis (MS) as well. In addition, CAMPATH is being evaluated at leading
solid organ transplant centers in the U.S. for use in that arena. Overall,
CAMPATH is being evaluated by clinical investigators around the world in more
than 100 studies in oncology and non-oncology; we will continue to support
selected investigator initiatives in areas of interest beyond our current
indication. Clofarabine Clofarabine is a next-generation, purine nucleoside antimetabolite that is
currently under investigation in pediatric and adult leukemias and solid
tumors. Nucleoside analogs are antimetabolites that affect deoxyribonucleic
acid (DNA) synthesis. Clofarabine is in the same chemical class as fludarabine,
cladribine and gemcitabine, all approved oncology drugs which are halogenated
nucleoside analogs. Early clinical studies of clofarabine in patients with
relapsed or refractory acute myelogenous leukemia (AML) and acute lymphocytic
leukemia (ALL) showed promising results. Based on these early studies, we
initiated Phase II trials in 2002 in both children and adults with refractory
acute leukemia. We have initiated a rolling New Drug Application (NDA) with
the U.S. Food and Drug Administration (FDA) for pediatric leukemias based on
Phase II data and we have been granted fast-track designation by the agency.
A rolling NDA provides the FDA with an opportunity to begin reviewing the
application at an earlier time, on a piecemeal basis as each NDA section is
submitted. Designation as a fast-track 3




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K drug indicates that the product is intended to treat a serious or
life-threatening condition and demonstrates the potential to address an unmet
medical need. In mid-2002, we initiated a Phase I trial in adults with
advanced solid tumors based on favorable preclinical results. In October 2002,
we launched a Phase I trial of clofarabine in combination with the chemotherapy
drug ara-C (cytarabine) in adults with a spectrum of hematologic malignancies.
We also initiated a Phase I trial in late 2003 using an oral formulation of
clofarabine for adults with advanced solid tumors. Additional studies are
under review and are expected to be started in 2004. ILX-651 ILX-651 is a next-generation synthetic pentapeptide analog of the natural
substance dolastatin-15 that targets tubulin and has been chemically modified
to provide improved pharmacological properties over earlier members of its
class. In preclinical models, ILX-651 has shown significant anti-tumor activity
against a wide range of solid tumors, including those cell lines that are
resistant to other tubulin interactive agents, such as the commonly prescribed
taxanes. We initiated Phase II trials in late 2003 in recurrent or metastatic
melanoma and in locally advanced or metastatic non-small cell lung cancer. We
plan to fully enroll these trials during 2004. We also plan to initiate two
more Phase II trials of ILX-651 in solid tumors. APOMINE APOMINE is the first candidate from our unique class of non-hormonal
agents known as phosphonate esters. It is administered orally and has been
shown, in preclinal models, to inhibit osteoclasts, cells associated with the
absorption and removal of bone, like the currently marketed bisphosphonic acids
such as Fosamax® and Actonel®. Unlike the currently marketed drugs,
APOMINE also appears to activate osteoblasts with potential bone-building
effects. We initiated a double-blinded, placebo-controlled Phase II
proof-of-principle trial in 2002 to evaluate the effects of APOMINE in
post-menopausal women with osteoporosis. This trial was expanded and extended
in 2003. Results of the extended trial are expected to be available before the
end of 2005. We have determined that we will no longer internally pursue our
development of APOMINE in cancer. NM-3 NM-3 is an orally administered inhibitor of proliferating endothelial
cells. Preclinical studies have determined that NM-3 inhibits growth in a
variety of tumor models, primarily when combined with radiation or
chemotherapy. We are currently conducting Phase I trials with this
compound. Eflornithine The investigational agent eflornithine (DFMO), which we were studying in
collaboration with the National Cancer Institute (NCI) in a Phase III
placebo-controlled trial of patients with superficial bladder cancer, did not
prevent the recurrence of cancer more than the placebo and we have discontinued
the trial. Drug Discovery and Preclinical Programs In addition to our product candidates in clinical trials, we have a number
of preclinical programs, including signal transduction and angiogenesis
inhibitors. OUR TARGET MARKET We are currently focused primarily on the oncology market. Cancer
encompasses a large number of discrete diseases that afflict many different
parts of the human body. The diversity of cancer types and their overall
prevalence create a large need for new and improved treatments. It is estimated
that one in three Americans will be diagnosed with cancer, making it the second
leading cause of death in the United States. We have chosen to focus initially
on the oncology market because there is a great need for more effective
treatments. It is often the case that a drugs mechanistic effects or mode of
action may have therapeutic relevance in other human diseases and we will
continue to evaluate these opportunities as appropriate. Two such
opportunities in CAMPATH are MS and solid organ transplantation. INTELLECTUAL PROPERTY, PATENTS AND TRADEMARKS Patents and other proprietary rights are vital to our business. Our policy
is to seek appropriate patent protection both in the
United States and abroad for our proprietary technologies. In addition to
seeking our own patents, we enter into license 4




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K agreements with various
pharmaceutical companies and research, educational and governmental
institutions to obtain patent rights from them to develop and potentially sell
products which use the compounds and technologies protected by those patents. CAMPATH is protected by patents directed to the composition of matter and
methods of use issued in the U.S., European major market countries, Australia,
Canada, New Zealand, Japan and South Africa, which expire between 2009 and
2015. The European composition of matter patent was issued in February 1989 and
the U.S. patent in December 1998. APOMINE is covered by an issued composition
of matter patent. In addition, numerous patent applications have been filed on
our portfolio of angiogenesis inhibitors including one issued patent in the
U.S. Additionally, as a result of an agreement with BASF Pharma (BASF), ILEX
has acquired a worldwide license for ILX-651 including composition of matter
patent coverage, filed in 43 countries, including the U.S. The U.S. patent
expires at the end of 2015. Clofarabine is protected by core patent rights
held by Southern Research Institute and licensed to Bioenvision Inc.
(Bioenvision), including pharmaceutical composition and cancer treatment patent
claims coverage expiring between 2008 and 2014 in the U.S. We have a broad patent estate. This patent estate includes patents and
patent applications directed to compositions, pharmaceutical formulations and
methods-of-use within our research and development pipeline. In addition to 40
United States patents and approximately 290 foreign patents we have licensed
from others, we own approximately 15 issued patents in the United States and
over 60 issued foreign patents. We also have approximately 30 pending patent
applications in the United States and approximately 60 foreign applications and
we have licensed from others the rights to approximately 20 United States
pending patent applications and over 250 foreign pending patent applications.
Patent coverage for our MUC1 program includes 3 issued United States patents,
expiring between 2013 and 2016, and 9 issued foreign patents, all of which we
have in-licensed on an exclusive basis. Also, the MUC1 patent portfolio
includes 11 pending United States patent applications and 7 foreign patent
applications to which we hold exclusive rights through both in-licensing and
co-ownership. In December 2001, Genentech, Inc. (Genentech) announced that it was
granted a patent relating to fundamental methods and compositions for the
production of monoclonal antibodies using anti-recombinant DNA technology. The
proceeding entitled Genentech to priority over the patent held by the Celltech
Group PLC, who had first received the patent in 1989. Based on this decision
which was favorable to Genentech, we finalized a non-exclusive patent license
from Genentech in March of 2003 covering production of monoclonal antibodies,
such as CAMPATH, directed at the CD52 cell surface target. We paid Genentech a
license grant fee of $2.0 million in the second quarter of 2003 and it is
currently being amortized over approximately 13 years. We will also pay
milestones and royalties based upon net U.S. sales levels of CAMPATH. As of
December 31, 2003, we have achieved and accrued all sales milestones. Our compounds acquired pursuant to in-licensing arrangements are normally
protected by patents obtained or applied for by our licensors. This includes
U.S. patents, U.S. patent applications and foreign patents and patent
applications. We have not conducted in-depth validity and infringement studies
on the patents and patent applications that we have in-licensed from major
biotechnology and pharmaceutical companies, and it is possible that these
patents or patent applications will be challenged or will not provide
protection for our compounds. The patent positions of biotechnology and pharmaceutical companies are
generally uncertain and involve complex legal and factual issues. No assurance
can be given that any patent issued to or licensed by us will provide
protection that has commercial significance. We cannot assure you that:  
    
    our patents will afford protection against competitors with similar compounds or technologies;
    
    our patent applications will be issued;
    
    others will not obtain patents claiming aspects similar to those covered by our patents or applications;
    
    the patents of others will not have an adverse effect on our ability to do business; or
    
    the patents issued to or licensed by us will not be infringed, challenged, invalidated or circumvented. Moreover, we believe that obtaining foreign patents may, in some cases, be
more difficult than obtaining domestic patents because of differences in patent
laws. We also recognize that our patent position may generally be stronger in
the U.S. than abroad. Conversely, the protection provided by foreign patents
may be weaker than that provided by domestic patents. CAMPATH®

and MABCAMPATH® are our trademarks. We have filed for
trademark protection on various other product candidates in the development
pipeline, including worldwide filings for APOMINE. Additionally, we anticipate
we will have additional filings on new product candidates entering development
as they progress through the development process. 5




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We generally protect this information with
confidentiality agreements that provide that all confidential information
developed or made known to others during the course of their employment,
consulting or business relationship with us shall be kept confidential except
in specified circumstances. Agreements with employees provide that all
inventions conceived by the individual while employed by us are our exclusive
property. We cannot guarantee, however, that these agreements will be honored,
that we will have adequate remedies for breach if they are not honored or that
our trade secrets will not otherwise become known or be independently
discovered by competitors. RECENT DEVELOPMENTS On February 26, 2004, we entered into a definitive merger agreement with
Genzyme Corporation (Genzyme). Under the terms of the Merger Agreement, each
outstanding share of ILEX common stock, $0.01 par value per share, will be
converted into the right to receive a fraction of a share (the Exchange
Ratio) of Genzyme common stock. The Exchange Ratio will be calculated by
dividing $26.00 by the average per share closing price of Genzyme common stock
(the Genzyme Share Price) as reported by the NASDAQ National Market over the
twenty trading days ending on the fifth trading day prior to the closing date
of the Mergers, except that if the Genzyme Share Price is greater than $59.88,
the Exchange Ratio will be 0.4342, and if the Genzyme Share Price is less than
$46.58, the Exchange Ratio will be 0.5582. In addition, each outstanding option
to purchase ILEX common stock will be converted into an option to purchase the
number of shares of Genzyme common stock equal to the number of shares of ILEX
common stock subject to such option multiplied by the Exchange Ratio, and the
associated exercise price will be adjusted accordingly. Until the closing date,
which is anticipated to occur in mid-2004, we will continue to operate
independently of Genzyme. The closing of the transaction is contingent upon
approval of our stockholders and approval by certain regulatory authorities
including the U.S. Federal Trade Commission. In January 2004, we announced that we signed an amendment to our
co-development agreement with Bioenvision whereby we obtained the exclusive
U.S. and Canadian sublicense for clofarabine in oncology for $3.5 million.
Under the terms of the agreement, an additional $4.0 million, due in two
payments, is triggered upon completing the submission of the NDA. The
amendment was effective in December 2003. We were studying the investigational agent eflornithine (DFMO), in
collaboration with the National Cancer Institute (NCI) in a Phase III
placebo-controlled trial of patients with superficial bladder cancer. In
January 2004, we announced that DFMO did not prevent the recurrence of cancer
more than the placebo and we have discontinued the trial. On August 4, 2003, we completed an underwritten public offering of our
common stock, pursuant to which we sold 5.5 million shares. In addition, the
Cancer Therapy and Research Center Endowment, an ILEX shareholder, offered and
sold 500,000 shares of our common stock. Proceeds, net of costs to us, from
this offering were approximately $87.4 million. The net proceeds from this
offering have been and will continue to be used to fund clinical trials of our
lead product candidates; for clinical and preclinical studies for our other
product candidates; for potential licenses and acquisitions of other businesses
or complementary products and technologies; and for working capital, capital
expenditures and other general corporate purposes. In May 2003, we signed an agreement with QuatRx Pharmaceuticals Co.
(QuatRx), granting QuatRx an exclusive, worldwide license to certain
lipid-focused research platforms. In connection therewith, we received a payment of $2.5 million, which was recognized as revenue in September
2003, as the associated technology transfer was completed during such period.
We may also receive payments upon the completion of certain milestones and
royalties based on net sales of a product developed from these research
platforms. In April 2003, our subsidiary, ILEX Oncology Services, Inc. (ILEX
Services) settled a dispute with a former CRO customer. As a result of this
settlement, ILEX Services paid the former CRO customer $20.0 million in June
2003. We recorded a settlement charge in the first quarter of 2003 of $16.5
million, which is net of insurance reimbursement of $3.5 million, related to
the settlement of this dispute. In March 2003, we finalized a non-exclusive patent license from Genentech
covering the production of CAMPATH. The license grant fee of $2.0 million was
paid in the second quarter of 2003 and is currently being amortized over
approximately 13 years. We will also pay milestones and royalties based upon
net U.S. sales levels of CAMPATH. As of December 31, 2003, we have achieved
and accrued all sales milestones. In March 2003, we finalized an amendment to the CAMPATH therapeutic
license agreement with BTG International Ltd. (BTG), whereby we gained access
to rights to develop and commercialize all remaining human therapeutic uses of
CAMPATH. In January 2003, Schering AG obtained exclusive rights to develop, sell
and distribute CAMPATH in Japan and the Asian 6




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Pacific Basin. We received a
payment which is being recognized as revenue over the life of the patent. The
Partnership will also receive payments upon completion of certain milestones
and a royalty based on net sales of CAMPATH in Japan and the Asian Pacific
Basin. STRATEGIC ALLIANCES We may eventually develop and commercialize our own products by forming
our own sales, marketing and distribution capabilities. However, in some
instances we may form partnerships or collaborations with larger pharmaceutical
companies, particularly for development of non-oncology uses and for
commercialization outside the U.S. In a typical partnership arrangement, a
corporate partner may bear the substantial cost of clinical development,
scale-up production, FDA and European Agency for the Evaluation of Medicinal
Products (EMEA) approval and marketing. We do not currently have our own sales force and we have contracted with
Schering AG under the CAMPATH distribution and development agreement for its
sales and distribution capabilities. We have twelve MSLs to enhance our direct
interface with oncology physicians and opinion leaders. However, all CAMPATH
sales responsibilities remain with Schering AG. In August 1999, the
Partnership and Schering AG entered into a distribution and development
agreement that grants Schering AG exclusive worldwide marketing and
distribution rights to CAMPATH, except in Japan and the Asian Pacific Basin
where the Partnership had retained rights. However, in January 2003, Schering
AG obtained the marketing and distribution rights to CAMPATH in Japan and the
Asian Pacific Basin from the Partnership. POTENTIAL FUTURE ALLIANCES AND COLLABORATIONS In the ordinary course of our business, we investigate, evaluate and
discuss with others the potential creation of strategic collaborations, and the
acquisition of businesses, technologies and compounds that complement our
business. Although we currently have no definitive understandings or
agreements with respect to any such strategic collaboration or acquisition, we
are continually engaged in discussions with parties which may either singly or
in the aggregate materially impact our business, financial condition and
results of operations. No assurance can be given, however, that any such
strategic collaboration or acquisition will be made or, if made, that it will
prove to be successful. LICENSING AGREEMENTS As a part of our business strategy, we actively seek to expand our product
portfolio. Historically, these acquisitions have been in the form of exclusive
licensing arrangements. Our in-license agreements and out-license agreements (the Licenses)
generally require us to undertake and pursue with diligence and best efforts
the development of the compounds and technologies licensed and to report on a
regular basis on our development, progress and plans. Each of the Licenses
requires payments of royalties on sales of products covered by the License.
Under most of the Licenses, the licensor has the first right to sue for
infringement of, and defend invalidity charges against, the licensed patents.
All of the Licenses provide that the licensor or sublicensor may terminate all
or a portion of the license or sublicense in the event of our default in our
obligations, including the obligations to diligently pursue and apply best
efforts to the development of the licensed compound or technology, and, in some
instances, in the event of our insolvency or bankruptcy. In addition, certain Licenses will automatically terminate if we do not
achieve certain development milestones by specified dates or, in lieu thereof,
make payments extending such dates. If we default under any of these license
agreements, we may lose our right to market and sell any products based on the
licensed technology. Losing our marketing and sales rights could materially
harm our business and financial condition. We believe that we have complied in
all material respects with the terms of all of our Licenses to date. We intend
to continue our licensing program and to engage in compound acquisitions with a
primary focus on clinical stage oncology compounds. There can be no assurance
that any such licenses or acquisitions will be on terms similar to the Licenses
or favorable to us. All of our in-licensing agreements follow standard practice in the
industry with differential royalty rates for patent versus non-patent countries
and a royalty off-set if additional licenses are required from other third
parties with conflicting or complementary intellectual property rights. In
patent countries, the royalty is usually payable for the life of the patent
rights while in non-patent countries, the royalty is typically payable for a
fixed period of time after the first commercial sale. PEOPLE As of January 30, 2004 we had 216 employees worldwide, the majority of
whom were located at our corporate 7




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K headquarters in San Antonio, Texas. COMPETITION Product Development The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are developing cancer drugs similar to ours. There are
products on the market that will compete directly with the products that we are
seeking to develop. In addition, colleges, universities, governmental agencies
and other public and private research institutions will continue to conduct
research and are becoming more active in seeking patent protection and
licensing arrangements to collect license fees, milestone payments and
royalties in exchange for license rights to technologies that they have
developed, some of which may directly compete with our technologies. These
companies and institutions also compete with us in recruiting qualified
scientific personnel. Many of our competitors have substantially greater
financial, research and development, human and other resources than we do.
Furthermore, large pharmaceutical companies have significantly more experience
than we do in preclinical testing, human clinical trials and regulatory
approval procedures. Our competitors may:  
    
    develop safer and more effective products than ours;
    
    obtain patent protection or intellectual property rights that limit our ability to commercialize products; or
    
    commercialize products earlier than we can. We expect technology developments in our industry to continue to occur at
a rapid pace. Commercial developments by our competitors may render some or all
of our potential products obsolete or non-competitive, which would materially
harm our business and financial condition. GOVERNMENT REGULATION The design, research, development, testing, manufacturing, labeling,
promotion, marketing, advertising and distribution of drug products are
extensively regulated by the FDA in the U.S. and similar regulatory bodies in
other countries. The regulatory process is similar for a Biologics License
Application (BLA) and an NDA. The steps ordinarily required before a new drug
may be marketed in the U.S., which are similar to steps required in most other
countries, include:  
    
    preclinical laboratory tests, preclinical studies in animals, formulation studies and the submission to the FDA of an
Investigational New Drug (IND) application;
    
    adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication;
    
    the submission of a BLA or NDA to the FDA; and
    
    FDA review and approval of the BLA/NDA. Preclinical tests include laboratory evaluation of product chemistry, Good
Laboratory Practices, toxicology studies, formulation development, animal
preclinical efficacy studies and manufacturing of current Good Manufacturing
Practices (cGMP) grade clinical trial material. The results of preclinical
testing are submitted to the FDA as part of an IND application. A 30-day
waiting period after the filing of each IND application is required prior to
the commencement of clinical testing in humans. At any time during this 30-day
period or at any time thereafter, the FDA may halt proposed or ongoing clinical
trials until the FDA authorizes trials under specified terms. The IND
application process may be extremely costly and substantially delay development
of our products. Moreover, positive results of preclinical tests will not
necessarily indicate positive results in subsequent clinical trials. Clinical trials to support BLAs or NDAs are typically conducted in three
sequential phases, although the phases may overlap. During Phase I the drug is
tested to assess metabolism, pharmacokinetics and pharmacological actions and
safety, including side effects associated with increasing doses. Phase II
usually involves studies in a limited patient population to:  
    
    assess the clinical activity of the drug in specific, targeted indications;
    
    assess dosage tolerance and optimal dosage; and
    
    continue to identify possible adverse effects and safety risks. If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase
III trials are undertaken to further demonstrate clinical efficacy and to
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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K at geographically
dispersed clinical trial sites. After successful completion of the required clinical trials, a BLA or NDA
is generally submitted. The FDA may request additional information before
accepting a BLA/NDA for filing, in which case the application must be
resubmitted with the additional information. Once the submission has been
accepted for filing, the FDA reviews the application and responds to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification. The FDA may refer the BLA or NDA
to an appropriate advisory committee for review, evaluation and recommendation
as to whether the application should be approved, but the FDA is not bound by
the recommendation of an advisory committee. If FDA evaluations of the BLA or NDA and the manufacturing facilities are
favorable, the FDA may issue an approval letter or an approvable letter. An
approvable letter will usually contain a number of conditions that must be met
in order to secure final approval of the BLA or NDA and authorization of
commercial marketing of the drug for certain indications. The FDA may also
refuse to approve the BLA/NDA or issue a not approvable letter, outlining the
deficiencies in the submission and often requiring additional testing or
information. The manufacturers of approved products and their manufacturing facilities
are subject to continual review and periodic inspections. Because we currently
intend to contract with third parties for commercial scale manufacturing of our
products, our ability to control compliance with FDA manufacturing requirements
will be limited to the requirements imposed by contracts. Approved drugs and manufacturing facilities are subject to ongoing
compliance requirements. Identification of certain side effects or the
occurrence of manufacturing problems after any of our drugs are on the market
could cause issuance of warning letters, subsequent withdrawal of approval,
reformulation of the drug, and additional preclinical studies or clinical
trials. Outside the U.S., our ability to market our products will also be
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The foreign regulatory approval process includes all of
the complexities associated with FDA approval described above. The requirements
governing the conduct of clinical trials and marketing authorization vary
widely from country to country. At present, foreign marketing authorizations
are applied for at a national level, although within the European Union, or the
EU, procedures are available to companies wishing to market a product in more
than one member state. Under the regulatory system in the EU, marketing authorizations may be
submitted at a centralized, a decentralized or a national level. The
centralized procedure is mandatory for the approval of biotechnology products
and high technology products and available at the applicants option for other
products. The centralized procedure provides for the grant of a single
marketing authorization that is valid in all EU member states. The
decentralized procedure is available for all medicinal products that are not
subject to the centralized procedure. The decentralized procedure provides for
mutual recognition of national approval decisions, changes existing procedures
for national approvals and establishes procedures for coordinated EU actions on
products, suspensions and withdrawals. Under this procedure, the holder of a
national marketing authorization for which mutual recognition is sought may
submit an application to one or more EU member states, certify that the dossier
is identical to that on which the first approval was based or explain any
differences and certify that identical dossiers are being submitted to all
member states for which recognition is sought. Within 90 days of receiving the
application and assessment report, each EU member state must decide whether to
recognize approval. The procedure encourages member states to work with
applicants and other regulatory authorities to resolve disputes concerning
mutual recognition. Lack of objection of a given country within 90 days
automatically results in approval from the member state. We will choose the appropriate route of European regulatory filing to
accomplish our regulatory objectives most efficiently. However, the chosen
regulatory strategy may not secure regulatory approvals or approvals of the
chosen product indications. The clinical development path for oncology agents
is uncertain and may require long-term clinical studies. PRODUCT LIABILITY AND INSURANCE Our business involves the risk of product liability claims and possible
claims for indemnification under our clinical trial agreements. We have not
experienced any product liability or indemnity claims to date. We maintain
product liability insurance as commercially reasonable and available and our
product liability insurance related to CAMPATH is consistent with a contractual
agreement that we have with Millennium as a result of our purchase of its
interest in the Partnership. There can be no assurance that product liability
claims, if any are asserted, will not exceed such insurance coverage limits,
which could have a materially adverse effect on our business, financial
condition or results of operations, or that such insurance will continue to be
available on commercially reasonable terms, if at all. 9




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K ACCESS TO COMPANY INFORMATION ILEX electronically files the annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports with the Securities and Exchange Commission (SEC). The public may read
and copy any of the reports that are filed with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding issuers that file electronically, including ILEX. ILEX makes available, free of charge, through its website, and by
responding to requests addressed to our investor relations office, the annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports. These reports are available as soon
as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. ILEXs website address is
http://www.ilexonc.com. The information contained on our website, or on other
websites linked to our website, is not part of this document. ADDITIONAL BUSINESS RISKS In February 2004, we announced a definitive agreement to enter into a merger
agreement with Genzyme Corporation; if we fail to complete the merger, our
stock price and future business operations could be harmed. If the merger is not completed for any reason, the price of our common
stock may decline insofar as the current price of our common stock reflects a
positive market assumption that the merger will be completed. In addition, if
the merger is not completed, we may be subject to a number of material risks,
including: payment of a $32.5 million termination fee under certain
circumstances; and payment of a maximum of $2.5 million in costs related to the
merger, such as financial advisory, legal and accounting fees. If the merger agreement is terminated, we may be unable to find a partner
willing to engage in a similar transaction on terms as favorable as those set
forth in the merger agreement, or at all. This could limit our ability to
pursue our strategic goals. In addition, while the merger agreement is in
effect, we are prohibited from soliciting, initiating or taking any other
action with respect to competing transactions, such as a merger, sale of assets
or other business combination, with any party other than unsolicited, written,
bona fide proposals or offers under specified terms and conditions. If the merger is terminated and our board of directors determines to seek
another partner or business combination, there can be no assurance that we will
be able to find a partner willing to pay an equivalent or more attractive price
than the price offered in the merger. We have a limited operating history and we expect to continue to generate
losses for the foreseeable future. We began operations in October 1994 and have only a limited operating
history upon which you can evaluate our business. We have incurred losses every
year since we began operations. As of December 31, 2003, our accumulated
deficit was approximately $345.5 million, including net losses of approximately
$62.1 million, $46.2 million and $121.0 million for the years ended December
31, 2003, 2002 and 2001, respectively. We expect to continue to incur losses in
2004. It is possible that we will never achieve profitable operations. We may be unable to obtain additional capital if needed to accelerate our
product candidate development or for licensing or acquisition opportunities. We believe that our existing capital will fund our activities for at least
the next two years. We may use these existing resources more quickly if we
decide to accelerate the development of our pipeline or because of changes in
our research and development programs, potential licenses or acquisitions,
commercialization plans or other factors affecting our operating revenues,
expenses or capital expenditures. We may not be able to obtain any future
funds that we require, either in the public or private markets or otherwise, on
acceptable terms, or at all. If adequate funds are not available, we may have to delay, scale back or
eliminate one or more of our development programs, or obtain funds by entering
into more arrangements with collaborative partners or others that may require
us to relinquish rights to certain of our products or technologies that we
would not otherwise relinquish. 10




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K CAMPATH is still a relatively new oncology treatment and is in a competitive
marketplace. Although CAMPATH is the only product that has been approved by the FDA and
the European Commission for treating CLL in patients who have failed
fludarabine therapy, there are other products that compete with CAMPATH. In
addition, like many other chemotherapy agents, CAMPATHs potential side effects
may inhibit physicians from prescribing it, thereby limiting its market
penetration. Patients with CLL are generally treated with alkylating agents
first, and, if that treatment fails, then with fludarabine. Some of our
competitors may have greater financial resources. Because we have limited manufacturing capabilities, we are dependent on
third-party manufacturers to manufacture products for us. We may be required
to incur significant costs and devote significant efforts to establish our own
manufacturing capabilities. We have limited manufacturing experience and no commercial scale
manufacturing capabilities. In order to continue to develop products, apply
for regulatory approvals and ultimately commercialize additional products, we
need to subcontract or otherwise arrange for the necessary manufacturing. There are a limited number of manufacturers that operate under the FDAs
cGMP capable of manufacturing for us. As a result, we have experienced some
difficulty finding manufacturers with adequate capacity for our anticipated
future needs. If we are unable to arrange for third party manufacturing on
commercially reasonable terms, we may not be able to complete development of
our product candidates or market them on a timely basis, if at all. Reliance on third party manufacturers entails risks to which we would not
be subject if we manufactured products ourselves, including reliance on the
third party for regulatory compliance and quality assurance, the possibility of
breach of the manufacturing agreement by the third party and the possibility of
termination or non-renewal of the agreement by the third party, based on its
business priorities, at a time that is costly or inconvenient for us. If our
third party manufacturers fail to maintain regulatory compliance, our product
supply will be interrupted resulting in lost or delayed revenues and delayed
clinical trials. We may not have business interruption insurance to cover this
interruption. Drug manufacturing facilities are subject to continual review and periodic
inspection and manufacturing modifications. Domestic manufacturing facilities
are subject to biennial inspections by the FDA, and foreign facilities are
inspected by the FDA less frequently. Both domestic and foreign facilities must
comply with the FDAs cGMP, and other regulations. In complying with these
regulations, manufacturers must spend funds, time and effort in the areas of
production, record keeping, personnel and quality control to ensure full
compliance. The FDA stringently applies regulatory standards for manufacturing.
Failure to comply with any of these post-approval requirements can result in,
among other things, warning letters, product seizures, recalls, fines,
injunctions, suspensions or revocations of marketing licenses, operating
restrictions and criminal prosecutions. This could interrupt our supply for our
marketed products and for our clinical trials. We have limited marketing capabilities and we are currently dependent upon
third parties to sell and market CAMPATH. We will be required to incur
significant expense to develop our own marketing capabilities. We depend on Schering AG and its U.S. affiliate, Berlex Laboratories,
Inc., to market and sell CAMPATH. Our reliance on Schering AG subjects us to
various risks. The terms of our contract with Schering AG may not be favorable
to us in the future. The amount and timing of resources dedicated by Schering
AG to marketing CAMPATH is not within our control, and Schering AG may not
commit enough resources to marketing CAMPATH. Schering AG could develop,
independently or with a third party, a drug that competes with CAMPATH.
Schering AG may not perform its obligations as expected and our revenues will
be decreased or delayed if Schering AG breaches or terminates its agreement
with us. We periodically report global net sales of CAMPATH, which represents
sales of CAMPATH by Schering AG and Berlex, to wholesalers and others. We
obtain this information from Schering AG and Berlex, and we rely on them for
the accuracy of this information. If this information is not accurate, we
could over-report or under-report market demand for CAMPATH. If we choose to
sell products ourselves we will need to develop a marketing and sales force
with sufficient technical expertise and distribution capability, which will
require substantial expenditures and management resources. Our competitors may develop products superior to those we are developing. The technological areas in which we work evolve at a rapid pace. Our
future success depends upon our ability to compete in the research, development
and commercialization of products and technologies in oncology, our area of
focus. Many of our competitors have substantially greater research and
development capabilities and experience and greater manufacturing, marketing,
financial and managerial resources than we do. These competitors may
develop products that are superior to those we are 11




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K developing and render our
products or technologies non-competitive or obsolete. In addition, we may not
be able to keep pace with technological change. Significant competitive factors determining whether we will be able to
compete successfully include:  
    
    efficacy and safety of our product candidates;
    
    timing and scope of regulatory approvals;
    
    product availability;
    
    marketing and sales capabilities;
    
    reimbursement coverage from insurance companies and others;
    
    degree of clinical benefits of our product candidates relative to their costs;
    
    method of administering a product;
    
    price; and
    
    patent protection. The Medicare
Prescription Drug Improvement and Modernization Act of 2003
materially changes the Medicare reimbursement guidelines for intravenous and
oral oncology products, which may impact our sales and revenue The Medicare Prescription Drug Improvement and Modernization Act of 2003,
which was signed into law on December 8, 2003, lowered the reimbursement to
oncologists for all intravenous oncology products sold after January 1, 2004,
including CAMPATH. New drug entries during the transition in 2004, such as
clofarabine (if approved) are expected to be eligible for reimbursement as a percentage of
average wholesale prices. In 2005, a new reimbursement methodology for all
intravenous oncology drugs will be in place based on the average selling prices
of each drug. It is possible that these changes in Medicare reimbursement
will have a negative impact on our revenues. There are potential limitations on third-party reimbursement and other
pricing-related matters that could reduce sales of our products and may delay
or impair our ability to generate significant revenues. The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to reduce the cost of health care through various means. In
the U.S., we expect that there will continue to be, a number of legislative
proposals aimed at changing the nations healthcare system. In certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. There may be additional legislative proposals regarding
price decreases for prescription drugs that could impact the price that could
be charged for our drugs, thus affecting our revenues. Any additional
legislative proposals could impair our ability to raise capital, and our
business could be adversely affected if additional legislative proposals are
adopted. In particular, individual pricing negotiations are often required in
many countries of the European Union, irrespective of separate government
approval to market a drug. There is a risk that reimbursement will not be available in the future for
our products or will not be adequate. Third-party payors are increasingly
challenging the price of medical products and services. If government entities
and third-party payors do not provide adequate reimbursement levels, then our
revenues will be adversely affected and could cause our stock price to decline. 12




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K We do business internationally and are subject to additional political,
economic and regulatory uncertainties. We may not be able to operate successfully in any foreign market. We
currently conduct drug discovery research in our laboratory in Geneva,
Switzerland. We also conduct drug development operations near London, England.
CAMPATH has been approved for marketing in the UK and 32 other non-U.S.
countries (under the name MABCAMPATH). We believe that, because the
pharmaceutical industry is global in nature, international activities will
continue to be a significant part of our future business activities and that a
substantial portion of our revenues will be derived from outside the United
States. Foreign regulatory agencies often establish standards different from
those in the United States, and an inability to obtain foreign regulatory
approvals on a timely basis could have an adverse effect on our business. Our
international operations may be limited or disrupted by:  
    
    imposition of government controls;
    
    political or economic instability;
    
    trade restrictions;
    
    changes in tariffs;
    
    restrictions on repatriating profits;
    
    taxation; and
    
    difficulties in staffing and managing international operations. Also, our business may be adversely affected by fluctuations in currency
exchange rates. We may be unsuccessful in our efforts to expand the number and scope of
authorized uses of CAMPATH, which would hamper sales growth and make it more
difficult for us to attain profitability. CAMPATH is approved for sale in the United States and Europe (under the
name MABCAMPATH) for use by patients with refractory CLL. Under current FDA
regulations, we are prohibited from promoting the use of CAMPATH outside of
this approved indication. The patient population for refractory CLL is relatively small. We are
conducting clinical trials to examine whether or not CAMPATH can be used to
treat indications other than refractory CLL, such as NHL and MS, and whether
CAMPATH can be used for refractory CLL prior to alkylating agents and
fludarabine. Additional trials in these indications are necessary before we can
apply to expand the authorized uses of CAMPATH. We do not know whether these
trials will demonstrate safety and efficacy, or if they do, whether we will
succeed in receiving regulatory approval to market CAMPATH for additional
indications. If the results of these trials are negative, or if adverse
experiences are reported in these trials or otherwise in connection with the
use of CAMPATH by patients, this could adversely affect existing regulatory
approvals, undermine physician and patient comfort with the product, reduce
sales of the product and diminish the acceptance of CAMPATH in the potential
hematological and autoimmune markets. Even if the results of these trials are
positive, the impact on sales of CAMPATH may be minimal unless they are
accepted by the medical community and we are able to obtain regulatory approval
to expand the authorized use of CAMPATH. FDA regulations restrict our ability
to communicate the results of additional clinical trials to patients, and to a
lesser extent, physicians, without first obtaining approval from the FDA to
expand the authorized uses for this product. If we are not able to demonstrate the safety and efficacy of our product
candidates in clinical trials or if our clinical trials are delayed, we will
not be able to obtain regulatory approval to market these drugs, or regulatory
approval to market these drugs will be delayed. 13




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Clinical testing is a long, expensive and uncertain process. With the
exception of CAMPATH, no regulatory agency has approved any of our product
candidates and the data we collect from our clinical trials may not be
sufficient to support approval. Our clinical trials may not be completed on
schedule and the FDA may never approve our product candidates for commercial
sale. Furthermore, even if initially positive preclinical studies or clinical
trial results are achieved, it is possible that we will obtain different
results in the later clinical trials or the FDA will interpret pivotal trial
results unfavorably. Drugs in late stages of clinical development may fail to
show the desired safety and efficacy traits despite having progressed through
initial clinical testing. For example, positive results in early Phase I or
Phase II trials may not be repeated in larger Phase II or Phase III trials. All of our product candidates are subject to the risks of failure inherent in
drug development. Many of our research and development programs are at an early stage. In
addition to the risks described above, there is a possibility that none of our
product candidates will or can:  
    
    meet applicable regulatory standards;
    
    be manufactured or produced economically and on a large scale;
    
    be a commercially viable drug; or
    
    be successfully marketed, particularly if a third party introduces an equivalent or superior product. Delays in patient enrollment for clinical trials could increase costs and delay
regulatory approvals. The rate of completion of our clinical trials will depend on the rate of
patient enrollment. Substantial competition to enroll patients in clinical
trials has delayed some of our clinical trials in the past. In addition, recent
improvements in existing drug therapy, particularly for some cancers, may make
it more difficult for us to enroll patients in our clinical trials as the
patient population may choose to enroll in clinical trials sponsored by other
companies or choose alternative therapies. Delays in patient
enrollment, regardless of the cause, can
result in increased development costs and delays in regulatory approvals. If we fail to comply with extensive regulations enforced by the FDA and its
foreign counterparts, the commercialization of our product candidates would be
prevented or delayed. Our products are subject to extensive government regulations related to
development, clinical trials, manufacturing and commercialization. The process
of obtaining FDA and foreign regulatory marketing approvals is costly,
time consuming, uncertain and subject to unanticipated delays. In addition,
after receiving marketing approval in Europe, we then must mutually agree on a
pricing structure with each countrys regulatory authority prior to launching
sales in that particular country. We are unable to predict how long this
process will take. Failure to comply with the regulatory requirements of the FDA and other
applicable foreign and U.S. regulatory requirements may subject a company to
administrative or judicially imposed sanctions. These include:  
    
    warning letters;
    
    civil penalties;
    
    criminal penalties;
    
    injunctions;
    
    product seizure or detention;
    
    product recalls;
    
    total or partial suspension of production; and
    
    FDA refusal to approve NDAs or BLAs or supplements to approved NDAs or BLAs. 14




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K   The FDA will refuse to approve an application if it believes that
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy. Foreign regulatory authorities may
also refuse to accept an application or grant any marketing approval. The FDA and European Commission approvals for CAMPATH require us to
conduct a post-approval clinical trial comparing the safety and efficacy of
CAMPATH to that of chlorambucil, an alkylating agent that is a frontline
treatment for CLL. Alkylating agents work by disrupting the DNA structure and
are believed to be effective in treating CLL. The post-approval clinical trial
and report must be completed by 2006, according to the approvals given in 2001.
If we discover adverse safety or efficacy data, our marketing approvals may be
revoked. If any of our license agreements for intellectual property underlying a product
candidate are terminated, we may lose our rights to develop or market that
product. We have licensed or have rights to license intellectual property,
including patents, patent applications, technical information and know-how,
from pharmaceutical companies, research institutions and others, including the
intellectual property underlying CAMPATH and our three other oncological
products in clinical trials: clofarabine, ILX-651 and NM-3. Each licensor or potential licensor has the power to terminate its
agreement with us if we fail to meet our obligations under that license or
development agreement. We may not be able to meet specified milestone or
deadline dates or other obligations under these license agreements. Generally,
we have to diligently develop and commercialize the compounds we have licensed
or are co-developing and make milestone payments. If we default or a dispute arises under any of these license agreements
regarding performance, we may lose our right to market and sell any products
based on the licensed technology. If we were to lose our marketing and sales
rights to a compound, we would not be able to replace the resources we used in
developing the compound, and we will have to spend additional time and capital
resources in finding a replacement product candidate. We may not be able to obtain or maintain effective patents to protect our
technologies from use by other companies, and patents of other companies could
prevent us from developing or marketing our other product candidates. Our success will depend to a significant degree on our ability to:  
    
    obtain, maintain and enforce patents;
    
    license rights to patents from third parties;
    
    protect trade secrets; and
    
    operate without infringing on the proprietary rights of others. It is possible that we will not develop technologies, drugs or processes
that result in obtaining a patent. It is also possible that our patent position
will not provide sufficient protection against competitors, or that patents
issued to or licensed by us will be infringed or will be challenged,
invalidated or circumvented. Competitors may develop products, which compete

against our products but fall outside the scope of our patents. In addition,
competitors may have filed patent applications, may have been issued patents or
may obtain additional patents and proprietary rights relating to technologies,
drugs and processes that compete with our technologies, drugs and processes. If we infringe on the intellectual property rights of others, we will have
to either obtain a license for the use of these intellectual property rights
or terminate our use of these rights. We may not be able to obtain licenses to
use the technology on commercially reasonable terms, or at all. We also rely on trade secret protection for our unpatented proprietary
technology. Trade secrets are difficult to protect. Other parties could
independently develop substantially equivalent proprietary information and
techniques or gain access to our trade secrets. We have attempted to prevent the disclosure and use of our know-how and
trade secrets by entering into confidentiality agreements with our employees,
consultants and third parties. However, there are risks that: 15




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K  
    
    these parties will not honor our confidentiality agreements;
    
    others will independently develop equivalent or superior technologies;
    
    disputes will arise concerning the ownership of intellectual property
or the applicability of confidentiality obligations; or
    
    disclosure of our trade secrets will occur regardless of these
contractual protections. We often work with consultants and research collaborators at universities
and other research organizations. If any of these consultants or research
collaborators use intellectual property owned by others as part of their work
with us, disputes may arise between us and these other parties as to which one
of us has the rights to intellectual property related to or resulting from the
work done. Costly litigation might be necessary to protect our orphan drug
designations or patent positions, or to determine the scope and validity of
third-party proprietary rights. It is possible that we will not have the
required resources to pursue such litigation or to protect our patent rights.
An adverse outcome in litigation with respect to infringement by us of patents
of others could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease using
a product or technology. Any of these results could materially harm our
business and financial condition. Market volatility may affect our stock price and the value of an investment in
our stock may be subject to sudden decreases. The trading prices for securities of biotechnology companies, including
our stock, have been and are likely to continue to be volatile. Our stock
price depends upon a number of factors, including our historical and
anticipated operating results, our and our competitors preclinical and
clinical trial results, market perception of the prospects for biotechnology
companies as an industry sector and general market and economic conditions,
some of which are beyond our control. Factors such as fluctuations in our
financial and operating results, changes in government regulations affecting
product approvals, reimbursements or other aspects of our or our competitors
businesses, announcements of technological innovations or new commercial
products by us or our competitors, developments concerning key personnel and
our intellectual property rights, significant collaborations or strategic
alliances and publicity regarding actual or potential performance of products
under development by us or our competitors could also cause our stock price to
fluctuate substantially. In addition, the United States securities markets,
including the NASDAQ National Market on which our stock is listed, have from
time to time experienced extreme price and volume fluctuations that are
unrelated to the operating performance of particular companies. These broad
market fluctuations may lower our stock price. Moreover, during periods of
stock market price volatility, share prices of many biotechnology companies
have often fluctuated in a manner not necessarily related to the companies
operating performance. Accordingly, our stock price may be subject to greater
volatility than the stock prices of other companies during periods of stock
market price volatility. We may be subject to costly and damaging liability claims. Although we take what we believe to be appropriate precautions, our
business exposes us to many liability risks and contract disputes, which are
inherent in the development, testing, manufacturing and sale of pharmaceutical
products. We could face exposure to product liability claims or
indemnification claims if the use of CAMPATH or any of our product candidates
is alleged to have harmed someone. We could also face exposure to breach of
contract claims under license development or other agreements arising in the
normal course of business or claims based upon errors or omissions in
connection with our ongoing or completed CRO activities. We currently have product liability insurance related to CAMPATH;
product liability insurance related to other
investigational drug candidates; errors
and omissions coverage for ongoing CRO work and tail coverage (supplemental extended reporting period)
for CRO services. We also have purchased insurance to cover certain interruptions regarding
the manufacturing of CAMPATH. Adequate insurance coverage may not be available
in the future at acceptable prices or at all. It is possible that claims
against us or damages incurred by us as a result of a business interruption
could exceed our coverage limits. The successful assertion of an uninsured or
underinsured claim against us could cause us to incur a significant expense,
could adversely affect our product development activities and could divert
managements attention from running the business. In addition, regardless of
merit or eventual outcome, product liability claims may result in decreased
demand for the applicable product or our products in general and in injury to
our general reputation. Thus, whether or not we are adequately insured, a
product liability or other claim or product recall may result in losses that
could be material. 16




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K We have adopted a shareholder rights plan, which could discourage or prevent
stockholders from selling their shares at a premium. Our rights plan provides, among other things, that if a person or group
attempts to acquire 20% or more of our common stock on terms not approved by
our Board of Directors, stockholders will be entitled to purchase additional
shares of our stock at 50% of the then-current market price. These purchase
rights would cause substantial dilution to a person or group that acquires or
attempts to acquire 20% or more of our common stock in this manner and, as a
result, could delay or prevent a change in control or other transaction that
could provide our stockholders with a premium over the then-prevailing market
price of their shares or which might otherwise be in their best interests. If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages. Our research and development activities involve the controlled use of
small research quantities of potentially harmful biological materials as well
as hazardous materials, chemicals and various radioactive compounds. We cannot
completely eliminate the risk of accidental contamination or injury from the
use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and
such liability could exceed our resources. We are subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
these materials and specified waste products. The cost of compliance with, or
any potential violation of, these laws and regulations could be significant. If we fail to recruit and retain personnel, our product development programs
may be delayed. Our future growth and success depend on our ability to recruit, retain,
manage and motivate our employees. The loss of key scientific, technical and
managerial personnel may delay or otherwise harm our product development
programs. Any harm to our research and development programs would harm our
business and prospects. Because of the specialized scientific and managerial
nature of our business, we rely heavily on our ability to attract and retain
qualified scientific, technical and managerial personnel. The competition for
qualified personnel in the biopharmaceutical field is intense. Due to this
intense competition, we may be unable to continue to attract and retain
qualified personnel necessary for the development of our business. 
 ITEM 2. PROPERTIES In July 2000, we entered into a lease that expires in October 2008 for
our corporate headquarters consisting of approximately 86,000 square feet of
office space in San Antonio, Texas. We lease approximately 19,000 square feet of office and laboratory space,
which includes a 7,200 square-foot manufacturing facility located in San
Antonio that has been designed to produce multi-kilogram lot sizes of
anticancer compounds under cGMP. The design of this facility, prepared by ILEX
staff, has been reviewed by the Regional Compliance Office of the FDA and found
to be suitable for production of bulk drugs. Currently, the facility is being
used for clinical trial and manufacturing support activities but none of our
products are manufactured in the facility. The facility is owned by a
non-profit corporation controlled by the CTRC Research Foundation Building
Corporation and the Texas Research Park Foundation. The lease provides for the
payment by us of fixed monthly rent plus a percentage of gross sales generated
from the facility. These two organizations obtained a $1.5 million grant to
build the facility from the Economic Development Administration (EDA). We have
a 15-year lease to the facility with three five-year-extension options. The
lease expires in December 2010. In the event that there is an early
termination of the lease or a non-conforming use, there is a risk that we may
be required to repay a portion of the EDA grant. Our
subsidiary, ILEX Products, Inc., formerly Convergence Pharmaceuticals, Inc.,
leases approximately 11,000 square feet of office and research space in Boston,
Massachusetts. The lease expires in July 2004. Additionally, we have
approximately 2,600 square feet of leased office space in Guildford, England
utilized by our subsidiary, ILEX Services Limited, which expires in June 2004.
Our subsidiary ILEX Oncology Research Sarl formerly Symphar, S.A., leases
approximately 18,000 square feet of office and research space in Geneva,
Switzerland expiring between 2006 and 2007. 
 ITEM 3. LEGAL PROCEEDINGS We are involved in various routine legal proceedings incidental to our
business. We believe it is unlikely that the final outcome of the legal
proceedings to which we are a party will have a material adverse effect on our
financial position or results of operations. However, due to the inherent
uncertainty of the litigation process, there can be no assurance that the
resolution of any particular legal proceeding will not have a material adverse
effect on our results of operations for the period in which such
resolution occurred. 17




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K In September 2003, certain former shareholders of Convergence
Pharmaceuticals, Inc. (Convergence) delivered to us a demand for arbitration
under the Plan of Merger and Acquisition Agreement executed in connection with
our acquisition of Convergence in July 1999. The demand for arbitration
alleges that we breached an obligation of good faith and fair dealing by
intentionally delaying Phase II trials of NM-3 in order to avoid making a
milestone payment of 500,000 shares of our common stock that would have become
due pursuant to the Plan of Merger and Acquisition Agreement if Phase II trials
were initiated by December 31, 2002. The demand for arbitration was filed by
former shareholders of Convergence whose pro rata share of the 500,000 share
milestone payment is 210,000 shares. The parties are in the discovery phase of
the arbitration proceedings. We believe that the claims made against us are
without merit and intend to defend the action vigorously. However, the
arbitration process is inherently uncertain and unpredictable, and accordingly
there can be no assurance as to the ultimate outcome of the arbitration. If we
are required to deliver shares subject to the current demand or otherwise pay
damages in lieu thereof, then we may be required to deliver up to an additional
290,000 shares or pay damages to the other former Convergence shareholders in
connection with potential additional disputes with other former Convergence
shareholders. 18




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders during the fourth
quarter of the year ended December 31, 2003. 
 PART II. 
 ITEM 5.
    
    MARKET FOR THE COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
 As of February 19, 2004, we had approximately 6,600 beneficial holders of
common stock, including approximately 160 record holders. Our common stock is
traded on the NASDAQ National Market under the symbol ILXO. The following
table sets forth, for the calendar periods indicated, the range of high and low
sales prices for our common stock, as reported by the Nasdaq National Market: 2003
    
    2002High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    9.44
    
    
    $
    5.90
    
    
    $
    28.00
    
    
    $
    14.30Second Quarter
    
    
    21.66
    
    
    
    8.93
    
    
    
    17.98
    
    
    
    12.83Third Quarter
    
    
    21.38
    
    
    
    14.05
    
    
    
    13.70
    
    
    
    4.40Fourth Quarter
    
    
    22.37
    
    
    
    16.28
    
    
    
    11.20
    
    
    
    3.80
 These price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. Our common stock began trading February 20, 1997. The closing
price of our common stock on February 19, 2004 was $22.11. We have never paid dividends on our common stock and anticipate that we
will not pay such dividends in the foreseeable future. Recent Sales of Unregistered Securities In February 2001, we acquired Symphar, a research firm located in Geneva,
Switzerland. We acquired Symphar for $28.9 million, which included cash of
$15.0 million and 521,121 shares of our common stock. The value of the common
stock issued in connection with this merger was calculated using a fair value
of $26.6875 per share. These shares were exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2)
of the Securities Act of 1933, as a
transaction by an issuer not involving any public offering. Equity Compensation Plan Information Number of securitiesremaining available forissuance under equityNumber of securities to be
    
    
    
    compensation plansissued upon exercise of
    
    Weighted-average exercise
    
    (excluding securities reflectedoutstanding options
    
    price of outstanding options
    
    in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    3,866,486
    
    
    $
    18.37
    
    
    
    1,066,175Equity compensation
plans not approved
by security holders
    
    
    146,384
    
    
    
    17.93
    
    
    
    17,768Total
    
    
    4,012,870
    
    
    $
    17.94
    
    
    
    1,083,943
 19




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Equity Compensation Plans Approved by Security Holders. During
1995, shareholders approved a stock option plan (the 1995 Plan). Under the
1995 Plan, stock options may be granted to our key employees and consultants as
approved by a committee of our board of directors. Originally, we had reserved
1,141,807 shares of common stock for issuance in accordance with the Plan. In
May 1998, our stockholders approved an increase in the number of authorized
shares of common stock reserved for issuance under the Plan to 1.8 million. In May 2000, shareholders approved a proposal to ratify the adoption of
the 2000 Employee Stock Compensation Plan (the 2000 Plan). The 2000 Plan
authorizes a committee of the Board of Directors to issue options intended to
qualify as incentive stock options (ISOs) as defined in Section 422 of the
Internal Revenue Code of 1986 (the Code), stock options that are not intended
to conform to the requirements of Section 422 of the Code (Non-ISOs), and
restricted stock awards. Originally, we had reserved 3.0 million shares of
commons stock for issuance under the 2000 Plan. In 2002, we increased the
authorized number of shares of common stock reserved for issuance under the
2000 Plan to 3.25 million, and in January 2003, the authorized number of shares
was increased to 4.25 million. During 2001, we adopted the 2001 UK Stock
Option Plan (the UK Plan), which is a part of the 2000 Plan. Shares granted
under the UK Plan are granted from the total shares available for grant under
the 2000 Plan. In
June 2000, shareholders approved the Employee Stock Purchase Plan (the Stock
Purchase Plan). Under the Stock Purchase Plan, eligible employees may purchase
our common stock at 85% of the fair market value at specific, predetermined
dates. The aggregate number of shares to be issued under the Stock Purchase
Plan is 250,000. Equity Compensation Plans Not Approved by Security Holders. In October 1996, we adopted a nonemployee directors stock option plan
(the Directors Plan). The total number of options that could be granted under
the Directors Plan was 171,271. In May 1998, our stockholders approved an
increase in the number of authorized shares of common stock reserved for
issuance under the Directors Plan to 225,000. Under the Directors Plan, each
nonemployee director is granted an option for up to 17,500 shares of common
stock upon appointment to the board and is eligible to receive up to 6,000
stock options annually, which will be fully vested at the time of grant and
based upon the participation of the director. 20




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 ITEM 6. SELECTED FINANCIAL DATA The information below was derived from the audited consolidated financial
statements included in this report and in reports we have previously filed with
the SEC. This information should be read together with those consolidated
financial statements and the notes to the consolidated financial statements.
These historical results are not necessarily indicative of the results to be
expected in the future. Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands, except per share data)Summary of Operating Statement Data:Revenue:Product profit and royalty
    
    $
    23,315
    
    
    $
    10,843
    
    
    $
    
    
    
    $
    
    
    
    $
    Product development
    
    
    6,307
    
    
    
    9,786
    
    
    
    3,994
    
    
    
    3,381
    
    
    
    4,646Outlicensing revenue
    
    
    2,773
    
    
    
    634
    
    
    
    
    
    
    
    
    
    
    
    Contract research services
    
    
    1,762
    
    
    
    9,400
    
    
    
    25,178
    
    
    
    29,407
    
    
    
    17,615Other
    
    
    632
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    34,789
    
    
    
    30,901
    
    
    
    29,172
    
    
    
    32,788
    
    
    
    22,261Operating expenses:Research and development costs
    
    
    49,026
    
    
    
    46,928
    
    
    
    33,798
    
    
    
    24,419
    
    
    
    16,219Licensing costs
    
    
    8,444
    
    
    
    5,657
    
    
    
    10,281
    
    
    
    6,116
    
    
    
    10Selling, general and administrative
    
    
    13,998
    
    
    
    11,326
    
    
    
    11,052
    
    
    
    5,061
    
    
    
    1,837Direct costs of research services
    
    
    1,341
    
    
    
    5,897
    
    
    
    19,535
    
    
    
    25,123
    
    
    
    17,385Depreciation and amortization
    
    
    7,542
    
    
    
    7,390
    
    
    
    2,415
    
    
    
    2,507
    
    
    
    2,226Settlement charge
    
    
    16,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment charge
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,882In-process research and development
    
    
    
    
    
    
    
    
    
    
    86,112
    
    
    
    14,562
    
    
    
    11,124Total operating expenses
    
    
    97,064
    
    
    
    77,198
    
    
    
    163,193
    
    
    
    77,788
    
    
    
    62,683Operating loss
    
    
    (62,275
    )
    
    
    (46,297
    )
    
    
    (134,021
    )
    
    
    (45,000
    )
    
    
    (40,422
    )Other income (expense):Interest income and other, net
    
    
    4,322
    
    
    
    7,084
    
    
    
    9,995
    
    
    
    11,747
    
    
    
    1,700Imputed interest expense
    
    
    (4,137
    )
    
    
    (6,654
    )
    
    
    
    
    
    
    
    
    
    
    Equity in income (losses) of joint venture
    
    
    
    
    
    
    
    
    
    
    3,094
    
    
    
    (5,370
    )
    
    
    (7,134
    )Minority interest in consolidated subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262
    )
    
    
    (82
    )Loss before income taxes
    
    
    (62,090
    )
    
    
    (45,867
    )
    
    
    (120,932
    )
    
    
    (38,885
    )
    
    
    (45,938
    )Provision for foreign income taxes
    
    
    (24
    )
    
    
    (289
    )
    
    
    (22
    )
    
    
    (97
    )
    
    
    (117
    )Net loss
    
    $
    (62,114
    )
    
    $
    (46,156
    )
    
    $
    (120,954
    )
    
    $
    (38,982
    )
    
    $
    (46,055
    )Basic and diluted net loss per share(1)
    
    $
    (1.76
    )
    
    $
    (1.42
    )
    
    $
    (4.48
    )
    
    $
    (1.61
    )
    
    $
    (3.04
    )Weighted average number of shares of common
stock and common stock equivalents
outstanding(1)
    
    
    35,258
    
    
    
    32,476
    
    
    
    27,011
    
    
    
    24,285
    
    
    
    15,144Balance Sheet Data:Cash, cash equivalents and investments
in marketable securities(2)
    
    $
    197,661
    
    
    $
    191,000
    
    
    $
    278,246
    
    
    $
    202,772
    
    
    $
    89,126Working capital
    
    
    95,413
    
    
    
    109,007
    
    
    
    104,966
    
    
    
    152,922
    
    
    
    77,226Total assets
    
    
    275,095
    
    
    
    270,906
    
    
    
    368,907
    
    
    
    216,356
    
    
    
    100,706Noncurrent portion of note payable
    
    
    
    
    
    
    36,155
    
    
    
    70,041
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (345,544
    )
    
    
    (283,430
    )
    
    
    (237,274
    )
    
    
    (116,320
    )
    
    
    (77,338
    )Total stockholders equity
    
    
    215,814
    
    
    
    177,242
    
    
    
    221,028
    
    
    
    196,005
    
    
    
    84,579
   (1)
    
    See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.(2)
    
    Includes cash, cash equivalents, short and long term investments, and all
restricted investments. 21




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is included to describe our financial position
and results of operations for each of the previous three years in the period
ended December 31, 2003. The Consolidated Financial Statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion. GENERAL On February 26, 2004, we entered into a definitive merger agreement with
Genzyme. Under the terms of the Merger Agreement, each
outstanding share of ILEX common stock, $0.01 par value per share, will be
converted into the right to receive a fraction of a share (the Exchange

Ratio) of Genzyme common stock. The Exchange Ratio will be calculated by
dividing $26.00 by the average per share closing price of Genzyme common stock
(the Genzyme Share Price) as reported by the NASDAQ National Market over the
twenty trading days ending on the fifth trading day prior to the closing date
of the Mergers, except that if the Genzyme Share Price is greater than $59.88,
the Exchange Ratio will be 0.4342, and if the Genzyme Share Price is less than
$46.58, the Exchange Ratio will be 0.5582. In addition, each outstanding option
to purchase ILEX common stock will be converted into an option to purchase the
number of shares of Genzyme common stock equal to the number of shares of ILEX
common stock subject to such option multiplied by the Exchange Ratio, and the
associated exercise price will be adjusted accordingly. Until the closing date,
which is anticipated to occur in mid-2004, we will continue to operate
independently of Genzyme. The closing of the transaction is contingent upon
approval by certain regulatory authorities including the U.S. Federal Trade
Commission and our shareholders. We are a product-driven biopharmaceutical company focused on developing
and commercializing a portfolio of novel therapeutic treatments primarily in
oncology. We have leveraged our core competencies in clinical drug development
to identify, develop and commercialize our proprietary product candidates. Our
lead product is marketed in the United States as CAMPATH® and in Europe and
other countries as MABCAMPATH® for the treatment of patients with B-cell
chronic lymphocytic leukemia (CLL) who have been treated with alkylating agents
and who have failed fludarabine therapy. CLL is a type of blood cancer
characterized by progressive accumulation of B-lymphocytes, a type of immune
system cell formed in the bone marrow. In addition to CAMPATH, we have
product candidates in clinical trials, principally addressing oncology, as well
as several active preclinical and drug discovery programs. Our pipeline
comprises product candidates at various stages of clinical development,
including monoclonal antibodies, agents that have toxic effects on certain
cells (cytotoxic agents) or inhibit cellular growth (cytostatic agents) with
novel mechanisms of action, agents that inhibit the formation of new blood
vessels (angiogenesis inhibitors) and agents which block cellular messaging
associated with cancer growth and metastasis (signal transduction inhibitors). We have incurred losses since inception and had an accumulated deficit
through December 31, 2003 of $345.5 million. Our losses have resulted primarily
from research and product development activities, including licensing of
products and product and corporate acquisitions for which we incur in-process
research and development charges and administrative expenses. We plan to
continue to invest in key research and development activities. We expect to
continue to incur operating losses throughout 2004. Our revenue for the
foreseeable future will be limited to our product profit and royalty revenue,
product development revenue, interest income and other miscellaneous income. Currently the revenues recorded in product profit and royalty revenue
consist of our profit share from net U.S. sales of
CAMPATH and royalty revenue from the rest of the world sales. Participation
from our CAMPATH distributor, Schering AG, for services performed and costs
incurred in connection with the development of CAMPATH are
recorded as product development revenues. The
development of CAMPATH is ongoing for B-cell chronic lymphocytic leukemia
(CLL), multiple sclerosis (MS), non-Hodgkins lymphoma (NHL) and solid organ
transplantation. Prior to January 1, 2002, we accounted for CAMPATH activities as follows:  
    
    our operating revenue included product development revenue we received
from the ILEX Pharmaceuticals, L.P., formerly known as Millennium &
ILEX Partners, L.P. (the Partnership);
    
    our research and development expenses included all of the development
costs for CAMPATH, which were largely offset by the revenue we
received from the Partnership;
    
    our portion of the profits resulting from CAMPATH sales and the other
revenues and expenses of the Partnership was recorded in equity in
income (loss) of joint venture. 22




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K   In December 2003 and in connection with our co-development agreement, we
paid Bioenvision $3.5 million for the exclusive U.S. and Canadian sublicense
for clofarabine in oncology. Under the terms of the agreement, an additional
$4.0 million, due in two payments, is triggered upon completing the submission
of the New Drug Application (NDA). On August 4, 2003, we completed an underwritten public offering of our
common stock, pursuant to which we sold 5.5 million shares. In addition, the
Cancer Therapy and Research Center Endowment, an ILEX shareholder, offered and
sold 500,000 shares of our common stock. Proceeds, net of costs to us, from
this offering were approximately $87.4 million. The net proceeds from this
offering have been and will continue to be used to fund clinical trials of our
lead product candidates; for clinical and preclinical studies for our other
product candidates; for potential licenses and acquisitions of other businesses
or complementary products and technologies; and for working capital, capital
expenditures and other general corporate purposes. On October 29, 2001, we announced that we had entered into a definitive
Purchase and Sale agreement (Purchase Agreement) to purchase Millennium
Pharmaceuticals, Inc.s (Millenniums) 50% equity interest in the Partnership.
The acquisition closed on December 31, 2001. We estimated the purchase price
at $127.6 million based on the net present value of the required future cash
payments discounted at 6.5%, our estimated incremental borrowing rate on the
date of purchase. The terms of the agreement required an initial cash payment
of $20.0 million and an additional $120.0 million in scheduled payments over
the following three years. As of December 31, 2003, $40.0 million remains due
to Millennium. At our option, $10.0 million of this remainder may be paid in
our common stock. We anticipate $20.0 million of the maturities will be paid
in the second or third quarter of 2004 with the remaining $20.0 million to be
paid on December 31, 2004. In addition, Millennium will be entitled to
royalties based upon net U.S. CAMPATH sales above specified levels beginning in
2005. In February 2001, we acquired Symphar, now known as ILEX Oncology Research
Sarl, and its research platform in medicinal chemistry and nuclear receptor
biology, which has led to drug candidates in several therapeutic fields,
including cardiovascular and bone disease. The Symphar acquisition, combined
with our preclinical signal transduction and angiogenesis inhibition programs
in Boston, gives us the capability to translate early-stage research leads into
clinical drug development programs. Under the terms of the agreement, we
acquired Symphar for $28.9 million, including $15.0 million in cash and 521,121
shares of our common stock. CRITICAL ACCOUNTING POLICIES We believe that our most critical accounting issues include our policy for
the recognition of revenue from outlicensing agreements, the valuation and
impairment review of the intangible assets acquired in connection with the
purchase of Millenniums interest in the Partnership and the process of
determining the amount of in-process research and development obtained in an
acquisition. Outlicensing revenue is earned and recognized based on the performance
requirements of the respective outlicensing agreements. Non-refundable license
fees for which no further performance obligations exist, and no continuing
involvement by us is required, are recognized on the earlier of when the
payments are received or when collection is assured. Revenue from
non-refundable license fees where we continue involvement through development
collaboration or have an obligation to supply product is recognized ratably
over the applicable development period or patent life. Revenue associated with performance milestones is recognized based upon
the achievement of the milestones, as defined in the respective agreements.
Revenue under research and development cost reimbursement contracts is
recognized as the related costs are incurred. Advance payments received in
excess of amounts earned are classified as deferred revenue until earned. The amount recorded as completed technology and the amount recorded as
trademark within our other intangible assets were determined based on an
independent appraisal of the estimated timing and amount of revenue to be
generated from sales of CAMPATH. Additionally, we perform a test at
least annually to determine that the amounts recorded as intangible
assets are recoverable. Amounts recorded as in-process research and
development are based upon assumptions and estimates regarding the amount and
timing of projected revenues and costs as well as the appropriate discount
rates and expected trends in technology. No assurance can be given, however,
that the underlying assumptions used to estimate revenue, development costs or
profitability or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects involve the projected timing of completion and revenues attributable
to each project. 23




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K The following
discussion addresses our consolidated results of operations
for 2003, 2002 and 2001, our liquidity and capital resources and contractual
obligations. It should be read in conjunction with our Financial Statements,
the Notes thereto and other financial information beginning on page F-1 of this
report. RESULTS OF OPERATIONS - DECEMBER 31, 2003 AND 2002 Operating Revenues Product Profit and Royalty Revenue.Product profit and royalty revenue,
which is our share of CAMPATH net profits on U.S. sales and a royalty on the
rest of the world sales, totaled $23.3 million in 2003 compared to $10.8
million in 2002. The increase of $12.5 million in product profit and royalty
revenue is due to an increase in global net sales of CAMPATH. Global net sales
of CAMPATH, recorded by Schering AG and Berlex, were $71.7 million in 2003
compared to $44.1 million in 2002. Product Development Revenue.Product development revenue represents
Schering AGs contribution to research and development expenses. Revenue from
product development decreased to $6.3 million through December 31, 2003 from
$9.8 million through December 31, 2002, a decrease of $3.5 million or 36%.
Product development revenue decreased primarily because the advance balance
from Schering AG was depleted in the first quarter of 2003. Outlicensing Revenue.Outlicensing revenue increased to $2.8 million in
2003 from $0.6 million in 2002, an increase of $2.2 million. In 2003, our
outlicensing revenue consisted primarily of a $2.5 million payment received
from QuatRx, which was recognized as revenue in the third quarter. The
revenues generated related to the granting of an exclusive worldwide license to
certain lipid-focused research platforms. Contract Research Services Revenue. Revenue from our fee-for-service CRO
business decreased to $1.8 million in 2003 from $9.4 million in 2002. The
decrease of $7.6 million, or 81%, in our CRO revenues is consistent with our
plan to transition out of the fee-for-service CRO business. Operating Expenses Research and Development Costs. Research and development costs increased
to $49.0 million in 2003, from $46.9 million in 2002. This increase of $2.1
million, or 4%, was due to increased development spending on our product
pipeline, specifically CAMPATH and ILX-651, which was partially offset by a
decrease in other research and development program spending and reductions in
salary and facility-related operating expenses. Licensing Costs.Licensing costs increased to $8.4 million in 2003 from
$5.7 million in 2002, an increase of $2.7 million or 47%. In 2003, licensing
costs consisted primarily of expense accruals for the achievement of milestones
associated with the license grant from Genentech as well as $3.5 million paid
to Bioenvision for the exclusive U.S. and Canadian sublicense for clofarabine
in oncology. In 2002, licensing costs consisted primarily of a license fee
expense of $4.0 million related to an exclusive, worldwide license from Knoll
AG (Abbott Laboratories) for ILX-651. We may be required to make future
payments in accordance with these agreements if certain drug development and
time-based milestones are met. Selling, General and Administrative Costs. Selling,general and
administrative costs increased to $14.0 million in 2003, from approximately
$11.3 million in 2002. This increase of $2.7 million, or 24%, is primarily due
to increased compensation charges, commercialization costs and legal fees
associated with the settlement charge. Direct Costs of Research Services. Direct costs of research services
expense decreased to $1.3 million in 2003, from $5.9 million in 2002. This
decrease of $4.6 million, or 78%, is consistent with our aforementioned
transition out of the fee-for-service CRO business. Depreciation and Amortization.Depreciation and amortization increased to
$7.5 million in 2003 from $7.4 million in 2002, an increase of $0.1 million or
1%. This increase was primarily the result of an increase in intangible assets
in 2003. Settlement charge. We incurred a net settlement charge of $16.5 million
in the first quarter of 2003. This charge is the result of the settlement of a
dispute with a former CRO client. Impairment charge. We recorded an impairment charge of $213,000 in 2003.
We determined that the goodwill resulting from the purchase of Symphar S.A. in
2001 had been impaired due to research focus and personnel changes at our
location in 24




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Geneva, Switzerland. Interest Income and Other, Net Interest income and other decreased to $4.3 million in 2003, from $7.1
million in 2002, a decrease of $2.8 million, or 39%. Included in interest
income and other in 2002 is a gain on the sale of a marketable security of
$435,000. The remaining decrease is primarily attributable to a reduction in
interest rate returns. Interest Expense Interest expense decreased to $4.1 million in 2003 from $6.7 million in
2002, a decrease of $2.6 million, or 39%. Interest expense relates to the
imputed interest on the note to Millennium for our purchase of its interest in
the Partnership. The decrease in interest expense from 2002 is the result of
the decrease in the outstanding balance on which interest expense is
calculated. Net Loss Net loss increased $15.9 million in 2003, or 34%, to $62.1 million, from
$46.2 million in 2002. Net loss per share increased $0.34 per share to $1.76
per share in 2003, from $1.42 per share in 2002. Excluding the net settlement
charge related to our CRO business of $16.5 million, our non-GAAP net loss was
$45.6 million or $1.29 per share for the year ended
December 31, 2003. Our
management believes that the aforementioned non-GAAP measure of net loss and
net loss per share is useful for investors as it excludes the significant,
unusual settlement charge. Management also believes that excluding the
settlement charge from our GAAP net loss provides users of our financial
statements an important insight into our net results and the related trends,
which are affecting our core business. Non-GAAP net loss and net loss per
share should not be considered in isolation and are not intended to represent
an alternative measure of operating or net results or any other measure of
performance determined in accordance with GAAP. The following table shows the
reconciliation of our GAAP net loss and net loss per share to our non-GAAP net
loss and net loss per share for the year ended December 31, 2003: Net Loss
    
    Net Loss per shareGAAP net loss and loss per share
    
    $
    (62,114
    )
    
    $
    (1.76
    )Settlement charge
    
    
    16,500
    
    
    
    0.47Non-GAAP net loss and loss per share
    
    $
    (45,614
    )
    
    $
    (1.29
    )
 RESULTS OF OPERATIONS - DECEMBER 31, 2002 AND 2001 Operating Revenues Product Profit and Royalty Revenue.Product profit and royalty revenue
totaled $10.8 million in 2002. Prior to January 1, 2002, our share of CAMPATH
net profits on U.S. sales and royalties on the rest of the world sales was
included in equity in income of joint venture. Product Development Revenue. Product development revenue increased to
$9.8 million in 2002 from $4.0 million in 2001, an increase of $5.8 million.
This increase reflects the recognition of our revenues from our development and
distribution partner, which prior to January 1, 2002 were included in equity in
income (losses) of joint venture. Contract Research Services Revenue. Revenue from our CRO business
decreased to $9.4 million in 2002, from $25.2 million in 2001. The decrease of
$15.8 million, or 63%, in our CRO revenues is consistent with our plan to
transition out of the fee-for-service CRO business. 25




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Operating Expenses Research and Development Costs. Research and development costs increased
to $46.9 million in 2002, from $33.8 million in 2001. This increase of $13.1
million, or 39%, was due to increased development spending on our product
candidates, particularly for clofarabine and CAMPATH. Licensing Costs.Licensing costs decreased to $5.7 million in 2002 from
$10.3 million in 2001 or a decrease of $4.6 million or 45%. In 2002, licensing
costs consisted primarily of a license fee expense of $4.0 million related to
an exclusive, worldwide license from Knoll AG (Abbott Laboratories) for
ILX-651. In 2001, licensing costs consisted of a $6.0 million expense accrual,
also related to the exclusive worldwide license of ILX-651. Additionally in
2001, a payment of $1.1 million was made to Bioenvision upon our execution of a
co-development agreement for clofarabine. Selling, General and Administrative Costs. Selling,general and
administrative costs increased to $11.3 million in 2002, from approximately
$11.1 million in 2001. This increase of $0.2 million, or 2%, was due in part to
our transition out of the fee-for-service CRO business, and the corresponding
transition of our internal resources to focus on new business opportunities,
build strategic relationships and develop our proprietary product candidates.
The costs associated with these management and business development activities
were previously included in direct costs of research services and are now
reflected in general and administrative costs. Direct Cost of Research Services. Direct costs of research services
expense decreased to $5.9 million in 2002, from $19.5 million in 2001. This
decrease of $13.6 million, or 70%, is consistent with our aforementioned
transition out of the fee-for-service CRO business. Depreciation and Amortization.Depreciation and amortization increased to
$7.4 million in 2002 from $2.4 million in 2001, an increase of $5.0 million.
This increase was primarily the result of the amortization of the completed
technology asset and trademark, which we obtained through the acquisition of
Millenniums interest in the Partnership on December 31, 2001. In-process Research and Development.In-process research and development
was $86.1 million in 2001, due to the acquisitions of Symphar in February 2001
and Millenniums interest in the Partnership in December 2001. The in-process
research and development charge associated with the Symphar acquisition was
$26.1 million, and the charge related to the acquisition of the 50% interest in
the Partnership was $60.0 million. Interest Income and Other, Net Interest income and other decreased to $7.1 million in 2002, from
approximately $10.0 million in 2001, a decrease of
$2.9 million, or 29%.
Included in interest income and other in 2001 is the accrual of a non-cash loss
on the impairment of a held-to-maturity marketable security of $435,000. In
2002, this investment was sold and we recorded a $435,000 gain. The decrease
of $2.9 million is primarily attributable to a decline in interest rate returns
throughout 2002, which offset the gain on the sale of our held-to-maturity
marketable security. Interest Expense Interest expense of $6.7 million relates to the imputed interest on the
note to Millennium for our purchase of their interest in the Partnership. This
transaction closed on December 31, 2001, and as such, a comparable amount does
not exist for 2001. Equity in Income of Joint Venture Equity in income of joint venture was income of $3.1 million in 2001.
This amount included our profit share of CAMPATH sales, which are now shown as
product profit and royalty revenue. We purchased Millenniums interest in the
Partnership on December 31, 2001 and, as a result, activity related to the
Partnership was included in the consolidated statement of operations of ILEX
Oncology Inc. as of January 1, 2002. Net Loss Net loss decreased $74.8 million in 2002, or 62%, to $46.2 million, from
$121.0 million in 2001. Net loss per share decreased $3.06 per share to $1.42
per share in 2002, from $4.48 per share in 2001. Excluding in-process research
and development expense, non-GAAP net loss increased $11.4 million, or 33%, to
$46.2 million, from $34.8 million in 2001, and non- 26




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K GAAP net loss per share
increased $0.13 per share to $1.42 per share, from $1.29 per share in 2001. Our
management believes that the aforementioned non-GAAP measure of net loss and
net loss per share is useful for investors as it excludes the significant,
in-process research and development charge. Management also believes that
excluding the in-process research and development charge from our GAAP net loss
provides users of our financial statements an important insight into our net
results and the related trends, which are affecting our core business.
Non-GAAP net loss and net loss per share should not be considered in isolation
and are not intended to represent an alternative measure of operating or net
results or any other measure of performance determined in accordance with GAAP.
The following table shows the reconciliation of our GAAP net loss and net loss
per share to our non-
GAAP net loss and net loss per share for the year ended December 31, 2001: Net Loss
    
    Net Loss per shareGAAP net loss and loss per share
    
    $
    (120,954
    )
    
    $
    (4.48
    )In-process research and development
    
    
    86,112
    
    
    
    3.19Non-GAAP net loss and loss per share
    
    $
    (34,842
    )
    
    $
    (1.29
    )
 LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through the sale of
our capital stock, through development and licensing fee revenues provided by
our collaborative partners under our collaborative agreements and through
fee-for-service or participatory revenues pursuant to contracts with our CRO
clients. At December 31, 2003, we had cash, cash equivalents, restricted
investments and investments in marketable securities of $197.7 million and
working capital of $95.4 million. On August 4, 2003, we completed an underwritten public offering of our
common stock, pursuant to which we sold 5.5 million shares. In addition, the
Cancer Therapy and Research Center Endowment, an ILEX shareholder, offered and
sold 500,000 shares of our common stock. Proceeds, net of costs to us, from
this offering were approximately $87.4 million. The net proceeds from this
offering have been and will continue to be used to fund clinical trials of our
lead product candidates; for clinical and preclinical studies for our other
product candidates; for potential licenses and acquisitions of other businesses
or complementary products and technologies; and for working capital, capital
expenditures and other general corporate purposes. We expect our current funds will be adequate to cover all of our
obligations for at least the next two years. Until our business can generate
sufficient levels of cash from product sales, we expect to continue to finance
our operations through existing cash, revenue from collaborative relationships,
and proceeds from the sale of equity securities. We plan to continue our policy of investing available funds in government
securities, government agencies, government-sponsored enterprises and
investment-grade, interest-bearing securities, none of which mature in more
than eighteen months. We do not invest in derivative financial instruments, as
defined by Statement of Financial Accounting Standards No. 133 and 138. Our future expenditures and capital requirements will depend on numerous
factors, including but not limited to: the progress of our research and
development programs; the progress of our pre-clinical and clinical testing;
the magnitude and scope of these activities; the time and costs involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights; competing
technological and market developments; changes in or termination of existing
collaborative arrangements; the ability to establish, maintain and avoid
termination of collaborative arrangements and the purchase of capital equipment
and acquisitions of compounds, technologies or businesses. As of December 31,
2003, we did not have any material commitments for capital expenditures. CONTRACTUAL OBLIGATIONS As previously discussed, we have a number of products in our pipeline. In
connection with these research and development efforts, we have entered into
agreements with certain development partners. The terms of these agreements
require 27




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K us to make payments in either cash or stock if certain drug development
or time-based milestones are met. Most of the cash payments are payable in
U.S. dollars, while some are payable in euros. The future minimum payments
required to keep these licenses are set forth in the table below as minimum
license obligations. These include annual amounts due to a licensor and patent
and legal fees required to maintain our licenses. In addition, some of these
agreements require us to make payments based on certain sales milestones which
are not included in the table below. Total potential future commitments for
the next five years, exclusive of payments related to sales milestones, under
these agreements are estimated to be approximately $48.9 million based upon the
assumption that all development milestones are achieved for our product
pipeline. On October 29, 2001, we announced that we had entered into a definitive
Purchase and Sale agreement (Purchase Agreement) to purchase Millenniums 50%
equity interest in the Partnership. The acquisition closed on December 31,
2001. We estimated the purchase price at $127.6 million based on the net
present value of the required future cash payments discounted at 6.5%, our
estimated incremental borrowing rate on the date of purchase. The terms of the
agreement required an initial cash payment of $20.0 million and an additional
$120.0 million in scheduled payments over the following three years. As of
December 31, 2003, $40.0 million remains due to Millennium. At our option,
$10.0 million of this remainder may be paid in our common
stock. We anticipate $20.0 million of the maturities will be paid in the
second or third quarter of 2004 with the remaining $20.0 million to be paid on
December 31, 2004. In addition, Millennium will be entitled to royalties based
upon net U.S. CAMPATH sales above specified levels beginning in 2005. Our sole supplier of CAMPATH is Boehringer Ingelheim Pharma KG (BI) in
Germany. The agreement with BI is payable in euros and contains a minimum
purchase quantity in kilograms, which equals approximately $4.5 million per
year through 2006, or a total of approximately $13.5 million, to avoid a
contractual surcharge. The minimum purchase quantity of $4.5 million per year
is calculated based on the current exchange rate. We believe that the minimum
purchase quantity will be satisfied. We have several noncancelable operating leases for office space, equipment
and the cGMP facility. One of our operating leases is with CTRC Research
Foundation, a related party. Total future commitments under these leases are
$11.6 million. Our contractual obligations are due as set forth in the following table: Payments due by period ($ in thousands)Contractual Obligations
    
    Total
    
    Less than 1 year
    
    1 - 3 years
    
    3 -5 years
    
    More than 5 yearsMinimum License
Obligations
    
    $
    1,750
    
    
    $
    450
    
    
    $
    500
    
    
    $
    400
    
    
    $
    400Debt Obligations
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    13,500
    
    
    
    4,500
    
    
    
    9,000
    
    
    
    
    
    
    
    Operating Leases
    
    
    11,644
    
    
    
    2,568
    
    
    
    4,565
    
    
    
    3,510
    
    
    
    1,001Total
    
    $
    66,894
    
    
    $
    47,518
    
    
    $
    14,065
    
    
    $
    3,910
    
    
    $
    1,401
 ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
and in December 2003 issued a revised interpretation (FIN 46R). FIN 46 and FIN
46R address the accounting for, and disclosure of, investments in variable
interest entities and require that the assets, liabilities and results of the
activity of variable interest entities be consolidated into the financial
statements of the company that has a controlling financial interest. It also
provides a framework for determining whether a variable interest entity should
be consolidated based on voting interest or significant financial support. We
have evaluated FIN 46 and FIN 46R and determined that we do not have any
variable interest entities requiring consolidation. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows due to adverse changes in
financial market prices, including interest rate risk, foreign currency
exchange rate risk, commodity price risk, and other relevant market rate or
price risks. We are exposed to some market risk through interest rates, related to our
investment of our current cash, cash equivalents, restricted investments and
marketable securities of approximately $197.7 million at December 31, 2003.
These funds are generally invested in highly liquid money market accounts,
government-sponsored enterprises and corporate bonds. As such instruments 28




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K mature and the funds are reinvested, we are exposed to changes in market
interest rates. This risk is not considered material and we manage such risk by
continuing to evaluate the best investment rates available for current and
noncurrent high quality investments. If market interest rates were to increase
or decrease immediately and uniformly by 50 basis points, we would not expect
there to be a material effect on our results of operations or on our balance
sheet. We have not used derivative financial instruments in its investment
portfolio. Our European operations are denominated in local currency. We have
unhedged transaction exposures in these currencies that are not considered
material. We have not entered into any forward foreign exchange contracts for
speculative, trading or other purposes. 
 ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES The report of our Independent Auditors, Consolidated Financial Statements
and Notes to Consolidated Financial Statements appears herein commencing on
page F-1. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE A change in independent auditors from Arthur Andersen LLP to Ernst & Young
LLP was reported in a Current Report on Form 8-K/A dated March 27, 2002. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2003 to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. 29




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 PART III. 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information with respect to each director and executive
officer of the Company as of January 1, 2004. The executive officers are
elected by the Board of Directors and serve at the discretion of the Board of
Directors. Name
    
    Age
    
    PositionJeffrey H. Buchalter (2)
    
    
    46
    
    
    President and Chief Executive Officer and DirectorMark P. Mellin
    
    
    43
    
    
    Senior Vice President, Chief Financial OfficerTerry L. Murdock
    
    
    43
    
    
    Senior Vice President, Clinical OperationsTimothy M. Ruane
    
    
    39
    
    
    Senior Vice President, Business ManagementRonald G. Tefteller
    
    
    56
    
    
    Vice President, General CounselCraig A. Tooman
    
    
    38
    
    
    Senior Vice President, Strategic Planning
and Corporate CommunicationsSteven D. Weitman, M.D
    
    
    47
    
    
    Senior Vice President, Chief Medical OfficerJoy
A. Amundson (1)(2)(4)(5)
    
    
    49
    
    
    Chairman of the BoardJoseph
S. Bailes, M.D (4)(5)
    
    
    47
    
    
    DirectorJason
S. Fisherman, M.D. (1)(5)
    
    
    47
    
    
    DirectorRichard L. Love
    
    
    60
    
    
    DirectorVictor
P. Micati (1)(3)(5)
    
    
    64
    
    
    DirectorDaniel D. Von Hoff, M.D
    
    
    56
    
    
    DirectorMark
E. Watson, Jr. (3)(5)
    
    
    68
    
    
    DirectorGary
V. Woods (2)(3)(4)(5)
    
    
    60
    
    
    Director
   (1)
    
    Member of the Compensation Committee(2)
    
    Member of the Executive Committee(3)
    
    Member of the Audit Committee(4)
    
    Member of the Nominating and Governance Committee(5)
    
    Independent, as determined by the Board of
Directors, under the NASDAQ listing standards and the applicable
rules of the Securities and Exchange Commission Jeffrey H. Buchalterwas named President of ILEX Oncology, Inc. in
September 2001 and Chief Executive Officer on January 1, 2002. Mr.
Buchalter has served as a Director of ILEX since February 2001. From 1997 to
2001, Mr. Buchalter was Group Vice President for the Worldwide Oncology
Franchise at Pharmacia Corporation. From 1993 to 1997, Mr. Buchalter was a
Group Director with American Home Products, Wyeth Ayerst Laboratories. He was
presented the Joseph F. Buckley Memorial Award from the American Cancer Society
for commitment to cancer control and involvement in the pharmaceutical oncology
field. Additionally, Mr. Buchalter was invited by former President George Bush
to serve as a collaborating partner in the National Dialogue on Cancer. Mr.
Buchalter received his B.S. from Seton Hall University and his M.B.A. from
Temple University. Mark P. Mellinjoined ILEX in September 2002 as Senior Vice President and
Chief Financial Officer. Before joining ILEX, he was the managing partner for
the San Antonio office of Arthur Andersen LLP. During his tenure at Arthur
Andersen, Mr. Mellin oversaw the operations of the 150-person audit, tax and
consulting practice of the San Antonio office. Additionally, Mr. Mellin served
as an auditor and financial advisor to numerous public and private companies,
including biotechnology companies, throughout his 20 years with Arthur
Andersen. He earned a B.B.A. in Accounting from the University of Texas and is
a Certified Public Accountant. Terry L. Murdockjoined ILEX in September 2001 as Vice President, Clinical
Operations, responsible for the overall clinical management function, including
project management, monitoring and training and was promoted to Senior Vice
President, Clinical Operations in December 2003. From 1995 until he joined
ILEX, Mr. Murdock served as Vice President, Research with US Oncology Inc. in
Houston. Mr. Murdock previously worked with the University of Texas
Southwestern Medical Center, Advacare Inc. and AM/MetWest Clinical
Laboratories, all of Dallas, and with the Hospital Corporation of America in
Fort Worth. Mr. Murdock received his B.S. in Microbiology and his M.S. in
Biology from the University of Texas - Arlington. Timothy M. Ruanejoined ILEX in February 2002 as Senior Vice President,
Business Management. Before joining ILEX, he served as Senior Director, Global
Oncology Commercial Development for Pharmacia Corporations Oncology Division
and prior to his appointment as Senior Director he served as Director, Oncology
North America and Latin America from March 2000 to January 2002. Mr. Ruane
served as Managing Director of Saatchi & Saatchi Healthcares Advanced
Therapeutics Group from September 1998 to March 2000. From July 1993 to
September 1998 he served as Director of Marketing - Leukine® and Flt3 30




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K ligand and previously as Director of New Business Development for
Immunex Corporation. Mr. Ruane earned his B.S. from Wake Forest University and
his M.B.A. from the University of Washington. Ronald G. Teftellerhas served as Vice President and General Counsel since
January 2000 and as Senior Director of Corporate Development and General
Counsel since joining ILEX in April 1999. From 1991 to 1999, Mr. Tefteller
served as Legal Counsel and consultant to Methodist Healthcare Ministries,
Inc., the Methodist Healthcare System of San Antonio, Ltd. and associated
physician organizations. Previously, he spent 10 years at Sage Energy Company
as Vice President. He received a B.S. from Texas A&M University in 1970 and a
J.D. from The University of Texas School of Law in 1975 after service in the
United States Air Force. He also completed the Harvard Graduate School of
Business Program for Management Development in 1989. Craig A. Toomanjoined ILEX in March 2002 as Vice President of Investor
Relations and was promoted to Senior Vice President, Strategic Planning and
Corporate Communications in September 2002. Mr. Tooman has more than 15 years
of pharmaceutical experience, having worked in diverse positions including
investor relations, strategic planning, finance, marketing and sales. He has
also held positions in Europe and Japan. Prior to joining ILEX, Mr. Tooman
served as the Vice President of Investor Relations for Pharmacia Corporation
from 2000 to 2001. Under his leadership, the Pharmacia Investor Relations unit
won four of the largest awards of distinction in Investor/Public Relations.
Prior to the merger of Pharmacia & Upjohn and Monsanto, he served as Assistant
Vice President of Investor Relations for Pharmacia & Upjohn from 1999 to 2000
and as Worldwide Director of Investor Relations from 1998 to 1999. Prior to
that time, Mr. Tooman served as Director of Investor Relations, Europe and as
Director of Corporate Strategy for Pharmacia & Upjohn Management Co. from 1996
to 1997. Mr. Tooman earned his B.A. from Kalamazoo College and his M.B.A. from
the University of Chicago. Steven
D. Weitman, M.D., Ph.D., a pediatric oncologist, joined ILEX in May
2001 as Vice President, Global Cancer Research, responsible for overseeing the
companys drug discovery and translational research programs and was promoted
to Senior Vice President and Chief Medical Officer in December 2003. In early
2003, Dr. Weitmans role broadened to include the clinical development of
ILEXs pipeline products, as well as regulatory affairs and drug safety. Before
joining ILEX, Dr. Weitman directed the translational research and pediatric
oncology programs at the Cancer Therapy and Research Centers Institute for
Drug Development in San Antonio. He also served as an associate professor in
the Department of Pediatrics at the University of Texas Health Science Center
at San Antonio. Dr. Weitman received his B.S. in Microbiology from the
University of Wisconsin. Dr. Weitman earned his M.S and Ph.D. in Pharmacology
and his M.D. from the Medical College of Wisconsin. Joy A. Amundsonhas served as a Director of ILEX since May 2002. Ms.
Amundson is currently a principal with Amundson Partners, a healthcare
consulting firm. She served as Senior Vice President at Abbott Laboratories, a
$16 billion global diversified healthcare company, from 1995 to 2001.
Concurrently, she served as President of Ross Products, a division of Abbott,
from 1998 to 2001 and as President of Chemical and Agricultural Products,
another Abbott division, from 1995 to 1998. Prior to being named Senior Vice
President, Ms. Amundson served in various management positions at Abbott
including Corporate Vice President of Abbott HealthSystems and Vice President
and General Manager of Hospital Products. Prior to joining Abbott in 1982, Ms.
Amundson was in brand management with Procter & Gamble. She received a B.A. in
journalism/advertising from the University of Wisconsin and a Masters in
Management from the Kellogg School of Management at Northwestern University.
She serves as a director of The Dial Corporation, INAMED, Corp.,
ORIDION Systems, Ltd. and Advocate Lutheran General Hospital. Joseph S. Bailes, M.D.,has served as a Director of ILEX since August
1997. He has been Executive Vice President, Clinical Affairs for US Oncology,
Inc. since it was formed in June 1999 through the merger of American Oncology
Resources, Inc. and Physician Reliance Network, Inc. (PRN) until
January 1,
2004. He currently serves as a policy advisor to US Oncology. Dr. Bailes
served as Executive Vice President and National Medical Director of PRN since
it was formed in 1993. Since 1986 he has been employed as an oncologist by
Texas Oncology, P.A. A board certified oncologist, Dr. Bailes received his
medical degree from The University of Texas Southwestern Medical School in
Dallas. He is a past President of the American Society of Clinical Oncology.
Dr. Bailes serves as an advisory director of Texas Regional Bancshares. Jason S. Fisherman, M.D.,has been a Director of ILEX since September
1995. Dr. Fisherman is currently a Vice President at Advent International, one
of the worlds largest private equity investment firms. Prior to joining
Advent, Dr. Fisherman served as Senior Director of Medical Research for Enzon,
Inc. from 1991 to 1994. Between 1989 and 1992, he managed clinical development
of a number of anticancer drugs at the National Cancer Institute. Dr. Fisherman
is currently a director of Exelixis, Inc., and several
private health care companies. Dr. Fisherman received his B.A. in Molecular
Biophysics and Biochemistry from Yale, his M.D. from the University of
Pennsylvania, and his M.B.A. from Wharton. He is board-certified in internal
medicine and medical oncology. Richard L. Loveserved as President, Chief Executive Officer and a
Director of ILEX Oncology, Inc. since our formation 31




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K in December 1993. In September 2001, Mr. Love resigned his position as
President of ILEX Oncology, Inc. and, on December 31, 2001, Mr. Love resigned
his position as Chief Executive Officer of ILEX Oncology, Inc. Mr. Love
remains on the Board of Directors. Mr. Love is currently the Director and
Chief Operating Officer of Translational Genomics Research Institute (TGEN). He
has served on the Board of Directors of Parexel International since September
2002 and has served on the Board of Directors of Signase, Inc. since 2000. He
has more than 33 years of industry experience with more than 20 years in the
biosciences industry. Prior to forming ILEX, Mr. Love was Chief Operating
Officer of CTRC Research from April 1991 to September 1994. From 1983 through
1991, Mr. Love served as CEO of Triton Biosciences Inc., a subsidiary of Shell
Oil Company, and led the sale of Triton to Berlex Laboratories, Inc., a
subsidiary of Schering AG. Mr. Love earned his B.S. and M.S. in Chemical
Engineering from Virginia Polytechnic Institute. Victor P. Micatihas been a Director of ILEX since May 2003. Mr. Micati
is currently a consultant to the pharmaceutical industry, a role he has served
since retiring from Pfizer in 2000. Mr. Micati joined Pfizer in 1965 and has
held a wide variety of marketing and product development positions. In 1971,
he was appointed Vice President of Marketing, Pfizer Laboratories. In 1972, he
became Vice President of Pharmaceutical Development in Pfizer Internationals
headquarters operations; 1980, he moved to the Brussels-based European
Management Center to become Executive Vice President of Pfizer Europe. Mr.
Micati returned to Pfizer headquarters in 1984 and was appointed Senior Vice
President, Pharmaceuticals and a member of the Pfizer International Board of
Directors. He was appointed President of European Operations in 1990 and
became a corporate officer and Vice President of Pfizer in 1992. With the
globalization of pharmaceutical operations in January 1997, Mr. Micati was
appointed to the ten-member Corporate Management Committee. He assumed
responsibility for the Consumer Healthcare Group in September 1997. Mr.
Micatis last responsibility at Pfizer was as Executive Vice President of the
Pfizer Pharmaceutical Group of Pfizer, Inc. In this role, he was responsible
for Pfizers European pharmaceutical operations as well as the global consumer
healthcare business. Mr. Micati graduated from Middlebury College with a B.A.
in chemistry in 1962 and earned an M.B.A. in marketing from Columbia University
in 1965. Daniel D. Von Hoff, M.D.,has served as a Director of ILEX since we began
operations in October 1994. Dr. Von Hoff was named Director of the Arizona
Cancer Center in August 1999 and Professor of Medicine at the University of
Arizona Health Sciences Center in Tucson. Dr. Von Hoff currently serves as
the Director of the Arizona Cancer Centers Cancer Therapeutics
Program and as Director, Translational Drug Development Division for TGEN. Prior to that, he
served as the Director of the Institute for Drug Development since 1989, Chief
Executive Officer of CTRC Research since 1995, and a Clinical Professor of
Medicine at the University of Texas Health Science Center in San Antonio
(UTHSCSA) since 1995. He is a past President of the American Association for
Cancer Research and is the Co-Director of Research for US Oncology, Inc. He is
widely regarded as one of the worlds most experienced developers of new
anticancer agents. Dr. Von Hoff has served on the FDAs Oncology Drug Advisory
Committee (ODAC) and was a member of the Board of Directors of the American
Society of Clinical Oncology. He is the recipient of numerous awards and honors
including the K. Bagshawe Honorary Lecture for the British Association for
Cancer Research, the EORTC Michel Clavel Lectureship and the Therapeutic
Frontiers Lecture Award from the American College of Clinical Pharmacy. He is a
Fellow of the American Association for the Advancement of Science and is a
recipient of both the Outstanding Professor Award and the Presidential Teaching
Award from UTHSCSA. Dr. Von Hoff received his B.S. from Carroll College and
his M.D. from Columbia College of Physicians and Surgeons. Mark E. Watson, Jr.has served as Director of ILEX since May 2003. Mr.
Watson owns and operates the Diamond K Ranch in Sisterdale, Texas. In 1983, he
founded Titan Holdings, Inc., which became a member of the New York Stock
Exchange in 1994 and was acquired by The St. Paul Insurance Group in 1998. Mr.
Watson is a Commissioner with the Texas Parks and Wildlife Commission. He is
the Vice-Chairman of the National Center for American Western Art and he serves
on the Board of Directors of CTRC, the Texas State Aquarium and the Blood
and Tissue Center. He is a Board of Trustee Emeritus of the University of the
Incarnate Word and serves on the Board of the College of Arts and Letters at
the University of Notre Dame. Gary V. Woodshas served as a Director of ILEX since our formation in
December 1993 and has served as Chairman of the Board of Directors from 1994 to
2003. Since 1979, Mr. Woods has been employed as President of McCombs
Enterprises, Inc., an organization that invests in automobile dealerships, oil
and gas ventures, real estate and broadcasting. He currently serves on the
Board of Directors of several private organizations, including CTRC, where he
serves as Chairman of the Board of Directors. Mr. Woods serves as a director
of Argonaut Group, Inc. and previously served as a director of Titan Holdings,
Inc. and the Greater San Antonio Chamber of Commerce. He also served as
President of the San Antonio Spurs of the National Basketball Association from
1988 to 1993. Mr. Woods has been the President of the Minnesota Vikings of the
National Football League since August 1998. Mr. Woods received his B.B.A. from
Southwest Texas State University and his M.B.A. from Southern Methodist
University and is a Certified Public Accountant. 32




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires that the Companys directors,
executive officers and persons who own more than 10% of a registered class of
the Companys equity securities file with the Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Directors, executive officers and greater than 10%
stockholders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Companys knowledge, based solely on a review of the copies of the
Section 16(a) reports furnished to the Company and written representations that
no other reports were required, during the fiscal year ended December 31, 2003,
all reports required by Section 16(a) of the Exchange Act during December 31,
2003 were filed on a timely basis. Code of Ethics We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Treasurer, Senior Director of
Accounting, Directors of Finance, Associate Director of Treasury/Risk Management and
other employees performing similar functions. Director Independence The
majority of our directors are independent under the NASDAQ listing
standards and the applicable rules of the Securities and Exchange
Commission. The Audit Committee, the Compensation Committee and the
Nominating and Governance Committee are each composed entirely of
directors who are independent under the NASDAQ listing Standards and
the applicable rules of the Securities and Exchange Commission. Identification of Audit Committee and Audit Committee Financial Expert We have a separately-designated Audit Committee comprised of Mr. Micati,
Mr. Watson and Mr. Woods. We have determined that
Mr. Woods is a financial expert within the meaning of the current rules of
the Securities and Exchange Commission. 33




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes all compensation earned for services rendered to
the Company in all capacities during the years ended December 31, 2003, 2002
and 2001 by the Companys Chief Executive Officer and the Companys four other
most highly compensated executive officers during 2003 (together, the Named
Officers). SUMMARY COMPENSATION
TABLE Long-TermCompensationAwardsAnnual Compensation
    
    Other Annual
    
    Restricted
    
    SecuritiesFiscal
    
    
    
    Compensation
    
    Stock
    
    Underlying
    
    All OtherName & Principal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    ($)
    
    Awards ($)
    
    Options (#)
    
    Compensation ($)Jeffrey H. Buchalter (1)
    
    
    2003
    
    
    $
    425,000
    
    
    $
    677,000
    (2)
    
    $
    51,765
    (3)
    
    $
    704,000
    (2)
    
    
    250,000
    
    
    $
    27,719
    (4)President and Chief
    
    
    2002
    
    
    
    400,000
    
    
    
    290,000
    (21)
    
    
    209,981
    (5)(21)
    
    
    
    
    
    
    191,670
    
    
    
    17,288
    (6)(21)Executive
    
    
    2001
    
    
    
    87,500
    
    
    
    101,250
    (7)(21)
    
    
    
    
    
    
    
    
    
    
    230,830
    
    
    
    2,250
    (8)OfficerMark P. Mellin(9)
    
    
    2003
    
    
    $
    226,250
    
    
    $
    153,850
    
    
    $
    
    
    
    $
    
    
    
    
    75,000
    
    
    $
    12,750
    (10)Senior Vice President,
    
    
    2002
    
    
    
    65,256
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    2,500
    (11)Chief Financial Officer
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ronald G. Tefteller (12)
    
    
    2003
    
    
    $
    186,300
    
    
    $
    121,100
    
    
    $
    
    
    
    $
    
    
    
    
    45,000
    
    
    $
    7,844
    (13)Vice President, General
    
    
    2002
    
    
    
    180,000
    
    
    
    40,000
    (21)
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    12,300
    (14)(21)Counsel
    
    
    2001
    
    
    
    160,000
    
    
    
    65,000
    (21)
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    4,800
    (15)(21)Craig A. Tooman(16)
    
    
    2003
    
    
    $
    230,000
    
    
    $
    172,500
    
    
    $
    
    
    
    $
    
    
    
    
    50,000
    
    
    $
    14,400
    (17)Senior Vice President,
    
    
    2002
    
    
    
    179,385
    
    
    
    164,767
    (7)(21)
    
    
    
    
    
    
    
    
    
    
    110,000
    
    
    
    9,075
    (18)(21)Strategic Planning and
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate CommunicationsSteven D. Weitman, M.D.,
    
    

    2003
    
    
    $
    216,010
    
    
    $
    162,010
    
    
    $
    
    
    
    $
    
    
    
    
    50,000
    
    
    $
    14,089
    (20)Ph.D.(19)
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice President,
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Medical Officer
  1)
    
    Mr. Buchalter became president in September 2001 and Chief Executive
Officer on January 1, 2002.2)
    
    In March 2003, Mr. Buchalter was granted 150,000 shares of restricted
stock. In accordance with the restricted stock agreement, 50,000 shares
vested immediately and the remaining shares vest at a rate of 33% per year
over the following three years. The fair market value of the restricted
stock grant on the grant date was approximately $1.1 million. The fair
market value of the unvested stock on the grant date was $704,000. The
fair market value of the vested stock on the grant date was $352,000 which
is included in the bonus column in addition to Mr. Buchalters $325,000
bonus. The fair market values are based on the closing price of ILEX
stock on the grant date. The value of the unvested portion of the
restricted stock award on December 31, 2003 was $2.125 million, based on
the closing price of the Companys stock on that date. Dividends, if
declared, will be paid on the 150,000 shares regardless of whether they
have all vested.3)
    
    $36,871 represents relocation expenses paid by the Company.4)
    
    $6,000 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Buchalter and $21,719 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Buchalter.5)
    
    $209,981 represents relocation and temporary housing expenses paid by the
Company.6)
    
    $5,500 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Buchalter and $11,788 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Buchalter.7)
    
    Includes sign-on bonus.8)
    
    Represents the Companys contribution to the 401(k) plan on behalf of Mr.
Buchalter.9)
    
    Mr. Mellin joined the Company on September 3, 2002.10)
    
    $6,000 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Mellin and $6,750 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Mellin. 34




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K    11)
    
    $1,500 represents the Companys contribution to the 401(k) plan on
behalf of Mr. Mellin and $1,000 represents the Companys contribution to
the deferred compensation plan on behalf of Mr. Mellin.12)
    
    Mr. Tefteller joined the Company on April 12, 1999.13)
    
    $5,581 represents the Companys contribution to the 401(k) plan on
behalf of Mr. Tefteller and $2,263 represents the Companys contribution
to the deferred compensation plan on behalf of Mr. Tefteller.14)
    
    $5,400 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Tefteller and $6,900 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Tefteller.15)
    
    Represents the Companys contribution to the 401(k) Plan on behalf of Mr.
Tefteller.16)
    
    Mr. Tooman joined the Company on March 11, 2002.17)
    
    $6,000 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Tooman and $8,400 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Tooman.18)
    
    $4,950 represents the Companys contribution to the 401(k) plan on behalf
of Mr. Tooman and $4,125 represents the Companys contribution to the
deferred compensation plan on behalf of Mr. Tooman.19)
    
    Dr. Weitman joined the Company on May 1, 2001 and became an executive
officer in December 2003.20)
    
    $6,000 represents the Companys contribution to the 401(k) plan on behalf
of Dr. Weitman and $8,089 represents the Companys contribution to the
deferred compensation plan on behalf of Dr. Weitman.21)
    
    This amount has been revised. Stock Option Grants in Fiscal 2003 The following tables set forth information concerning individual grants of
stock options, exercises of stock options, and aggregate stock options held for
each of the Named Officers listed in the Summary Compensation Table above for
the year ended December 31, 2003: Potential RealizableValue at AssumedAnnual Rates ofNumber of
    
    Percent of
    
    
    
    
    
    
    
    
    
    Stock PriceSecurities
    
    Total Options
    
    
    
    
    
    
    
    
    
    Appreciation forUnderlying
    
    Granted to
    
    Exercise
    
    
    
    
    
    Option Term(1)Options
    
    Employees in
    
    Price
    
    ExpirationName
    
    Granted (#)
    
    2003
    
    Per Share
    
    Date
    
    5%
    
    10%Jeffrey H. Buchalter
    
    
    150,000
    
    
    
    12.86
    %
    
    $
    7.04
    
    
    
    3/13/2013
    
    
    $
    664,113
    
    
    $
    1,682,992100,000
    
    
    
    8.58
    %
    
    
    19.69
    
    
    
    12/11/2013
    
    
    
    1,238,294
    
    
    
    3,138,079Mark P. Mellin
    
    
    25,000
    
    
    
    2.14
    %
    
    $
    10.79
    
    
    
    4/24/2013
    
    
    $
    169,644
    
    
    $
    429,91250,000
    
    
    
    4.29
    %
    
    
    19.65
    
    
    
    12/8/2013
    
    
    
    617,889
    
    
    
    1,565,852Ronald G. Tefteller
    
    
    45,000
    
    
    
    3.86
    %
    
    $
    19.65
    
    
    
    12/8/2013
    
    
    $
    556,100
    
    
    $
    1,409,267Craig A. Tooman
    
    
    50,000
    
    
    
    4.29
    %
    
    $
    19.65
    
    
    
    12/8/2013
    
    
    $
    617,889
    
    
    $
    1,565,852Steven D. Weitman,
M.D., Ph.D.
    
    
    50,000
    
    
    
    4.29
    %
    
    $
    19.65
    
    
    
    12/8/2013
    
    
    $
    617,889
    
    
    $
    1,565,852
  1)
    
    The potential realizable value is calculated based on the term of
the option and is calculated by assuming that the fair market value of
Common Stock on the date of the grant as determined by the Board
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the
Common Stock received therefrom is sold on the last day of the term of
the option for the appreciated price. The 5% and 10% rates of
appreciation are derived from the rules of the Securities and Exchange
Commission and do not reflect the Companys estimate of future stock
price appreciation. The actual value realized may be greater than or
less than the potential realizable values set forth in the table. 35




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K   Aggregate Option Exercises in 2003 and Fiscal Year-End Option Values Shares
    
    
    
    
    
    Number of Securities
    
    Value of Unexercised In-Shares
    
    
    
    
    
    Underlying Unexercised
    
    The-Money Options atAcquired
    
    
    
    
    
    Options at FY-End (#)
    
    FY-End(1) ($)Upon Option
    
    Value Realized(2)Name
    
    Exercise(#)
    
    ($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJeffrey H. Buchalter
    
    
    
    
    
    $
    
    
    
    
    179,978
    
    
    
    492,522
    
    
    $
    537,750
    
    
    $
    3,900,750Mark P. Mellin
    
    
    3,000
    
    
    
    45,150
    
    
    
    15,750
    
    
    
    131,250
    
    
    
    243,653
    
    
    
    1,211,688Ronald G. Tefteller
    
    
    8,000
    
    
    
    99,798
    
    
    
    52,627
    
    
    
    94,753
    
    
    
    210,796
    
    
    
    502,200Craig A. Tooman
    
    
    
    
    
    
    
    
    
    
    27,500
    
    
    
    132,500
    
    
    
    
    
    
    
    982,600Steven D. Weitman,
M.D. Ph.D.
    
    
    6,250
    
    
    
    85,263
    
    
    
    23,500
    
    
    
    92,250
    
    
    
    21,875
    
    
    
    370,750
  (1)
    
    The dollar values have been calculated by determining the difference
between the fair market value of the securities underlying the options at
December 31, 2003 ($21.25) and exercise prices of the options.(2)
    
    The value realized is determined as the difference between the fair
market value of the securities on the exercise date and the exercise price
of the options. Employment Agreements and Change-of-Control Arrangements In the event of a change of control, the current Chief Executive Officer
will receive three times his yearly base salary in effect immediately prior to
the date of such change of control. Additionally, in the event of a change of
control, any other officer of the Company who does not receive a comparable
offer of employment with the Company or its successor of at least one year
duration following the change of control or who is terminated without cause
within one year following the change of control shall be entitled to the amount
opposite such officer as set forth below: Senior Vice President
    
    Two times the yearly base salary in effect immediately prior to the date of such change of controlVice President
    
    The yearly base salary in effect immediately prior to the date of such change of control
 A change of control for purposes of the policy described above is a
sale, transfer or disposition of substantially all of the assets of the
Company, a merger or consolidation of the Company with or into another entity
or any other corporate reorganization, if more than 50% of the combined voting
power of the continuing or surviving entitys securities outstanding
immediately after such merger, consolidation or reorganization is owned by
persons who were not stockholders of the Company immediately prior to the
merger, consolidation or other reorganization. Additionally,
in the event of a change of control, all outstanding options and
restricted stock awards vest immediately. If the employment of the President or any
Senior Vice President is terminated without cause, such officer shall be
entitled to receive a lump sum equal to such officers then current yearly base
salary; provided however, such payments are not in addition to any amounts
payable to such officer upon a change of control. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee of the Companys Board of
Directors are Ms. Amundson and Messrs. Micati and Fisherman. The Compensation Committee makes
recommendations to the Board of Directors regarding executive compensation
matters, including decisions relating to salary and bonus and grants of stock
options. 36




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of January 1, 2004 certain information
with respect to the Companys Common Stock beneficially owned by each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Companys Common Stock, each director, each executive officer named in the
Summary Compensation Table and by all its directors and executive officers as a

group. Shares
    
    Percentage ofBeneficially
    
    Outstanding SharesName and Address of Beneficial Owner
    
    Owned(1)(2)
    
    Beneficially Owned(3)Wellington Management Company LLP (4)
75 State Street
Boston, Massachusetts 02109
    
    
    2,545,330
    
    
    
    6.40
    %Sectoral Asset Management, Inc. (5)
1000 Sherbrooke Street West
Suite 2120 Montreal, Canada H3A 3G4
    
    
    2,017,109
    
    
    
    5.07
    %Jeffrey H. Buchalter (6)
    
    
    376,124
    
    
    
    *Daniel D. Von Hoff, M.D. (7)
    
    
    306,265
    
    
    
    *Richard L. Love (8)(9)
    
    
    233,376
    
    
    
    *Gary V. Woods (10)
    
    
    90,043
    
    
    
    *Ronald G. Tefteller (11)
    
    
    55,986
    
    
    
    *Mark E. Watson, Jr. (12)
    
    
    49,078
    
    
    
    *Jason S. Fisherman, M.D. (13)(14)
    
    
    46,099
    
    
    
    *Joseph S. Bailes, M.D. (15)
    
    
    42,628
    
    
    
    *Craig A. Tooman (16)
    
    
    27,700
    
    
    
    *Steven D. Weitman, M.D., Ph.D. (17)
    
    
    25,189
    
    
    
    *Joy A. Amundson (18)
    
    
    20,848
    
    
    
    *Mark P. Mellin (19)
    
    
    18,750
    
    
    
    *Victor P. Micati (20)
    
    
    7,878
    
    
    
    *All executive officers and directors as a group
(15 persons)(13)
    
    
    1,366,765
    
    
    
    3.44
    %
 * Less than 1%.  (1)
    
    Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares of Common Stock beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options and warrants held by that person that are currently exercisable or
exercisable within 60 days of January 1, 2004 are deemed outstanding.
Except as otherwise noted, the street address of the named beneficial
owner is 4545 Horizon Hill Blvd., San Antonio, Texas 78229.(2)
    
    To the Companys knowledge, unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.(3)
    
    Based on a total of 39,800,480 shares of Common stock, which includes
39,046,917 shares of Common Stock issued and outstanding on January 1,
2004, 725,977 shares of common stock issuable upon exercise of options and
27,586 shares of common stock issuable upon exercise of options, which
will vest within 60 days of January 1, 2004.(4)
    
    Represents shares held by Wellington Management Company, which exercises
sole voting and investment power as investment adviser with respect to the
shares. Based solely on information contained in Schedule 13G filed with
the Securities and Exchange Commission.(5)
    
    Represents shares held by Sectoral Asset Management, Inc., which
exercises sole voting and investment power as investment adviser with
respect to the shares. Based solely on information contained in Schedule
13G filed with the Securities and Exchange Commission.(6)
    
    Includes 179,978 shares of Common Stock issuable upon exercise of options
and 100,000 shares pursuant to a restricted stock grant, which are not yet
vested.(7)
    
    Includes 49,546 shares of Common Stock issuable upon exercise of options.(8)
    
    Includes 800 shares of Common Stock held by each of Mr. Loves three
children and Mr. Loves spouse, 600 shares of Common Stock held by Mr.
Loves brother and 200 shares held by Mr. Loves mother.(9)
    
    Includes 13,596 shares of Common Stock issuable upon exercise of options.(10)
    
    Includes 45,128 shares of Common Stock issuable upon exercise of options.
Mr. Woods has agreed to donate economic gain from these options to CTRC.(11)
    
    Includes 53,880 shares of Common Stock issuable upon exercise of options.(12)
    
    Includes 8,878 shares of Common Stock issuable upon exercise of options. 37




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K    (13)
    
    Does not include 371,565 shares of Common Stock beneficially owned by
entities under the control of Advent International Corporation (Advent).
Dr. Fisherman is a Vice President of Advent and may be deemed to be the
beneficial owner of such shares. Dr. Fisherman disclaims beneficial
ownership of such shares.(14)
    
    Includes 45,724 shares of Common Stock issuable upon exercise of options.(15)
    
    Includes 42,128 shares of Common Stock issuable upon exercise of options.(16)
    
    Includes 27,500 shares of Common Stock issuable upon exercise of options.(17)
    
    Includes 23,500 shares of Common Stock issuable upon exercise of options.(18)
    
    Represents 20,848 shares of Common Stock issuable upon exercise of
options.(19)
    
    Includes 15,750 shares of Common Stock issuable upon exercise of options.(20)
    
    Includes 4,459 shares of Common Stock issuable upon exercise of options. Compensation of Directors Each
nonemployee director receives a fee of $2,000 for each board meeting
and committee meeting attended, if such committee meeting is held on
a different day than a Board of Directors meeting. In addition,
each nonemployee director receives a year end
option grant of 1,000 shares of Common Stock, which vests
immediately, for each regularly scheduled board meeting attended. The
chairman of the board of directors receives a retainer fee of $20,000
and the chairman of the audit committee receives a retainer fee of
$15,000. All other nonemployee directors that do not have a
consulting relationship with us receive retainer fees of $10,000.
Each nonemployee director who is eligible to receive a retainer fee
has the option to receive the retainer fee in stock options instead
of a cash payment. Additionally, upon initial election to the Board,
each nonemployee director receives an option grant of 17,500 shares
of Common Stock, which vests in monthly increments over a four-year
period. We also reimburse directors for their travel expenses to and
from the meetings. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ILEX was formed in December 1993 for the purpose of conducting certain
advanced drug development programs and pursuing commercial opportunities of
CTRC. Mr. Woods is Chairman of the Board of Directors of CTRC and Mr. Watson
is a director of CTRC. The Company and CTRC have an agreement not to commence
any legal action against, in the case of CTRC, the Board of Directors of the
Company, other than Directors of the Company who are also employees or officers
of or consultants to ILEX, or, in the case of ILEX, the Board of Trustees of
CTRC, for any claim that would have been covered by any directors and
officers liability insurance policies maintained by CTRC or ILEX, as
applicable, subject to certain exceptions. This agreement terminated upon
consummation of the initial public offering of the Companys Common Stock on
February 20, 1997, but remains in effect with respect to any activity occurring
prior to the termination of the agreement. The Company has a lease agreement with CTRC Research Foundation Building
Corporation, a joint venture between CTRC Research Foundation and the Texas
Research Park Foundation, for office space, a lab and a manufacturing facility.
Additionally CTRC Research Foundation performs certain research services for
the Company. For the year ended December 31, 2003, the Company paid CTRC
Research Foundation approximately $354,000 for these services. For the year
ended December 31, 2003, the Company paid CTRC Research Foundation Building
Corporation approximately $240,000 related to the aforementioned lease
agreement. The lease agreement provides that rent will be paid at a fixed
monthly rate plus a percentage of gross sales from the facility, as defined in
the lease. The Company was not required to begin making fixed monthly payments
until 1998 nor is it required to begin making the payments, which are based on
a percentage of gross sales from the facility, until certain gross levels are
achieved. At December 31, 2003, the Company had payables to CTRC Research of
$152,000 related to the aforementioned services and lease agreements. Dr. Bailes had been Executive Vice President, Clinical Affairs for US
Oncology, Inc. since it was formed in June 1999 through January 1, 2004. Dr.
Bailes currently serves as a policy advisor to U.S. Oncology. In
May 2001, we entered into an agreement with the Arizona Board of
Regents for the University of Arizona for pancreatic cancer research.
As of December 31, 2002, all amounts related to this research
agreement had been expensed. Additional amounts paid to the
University of Arizona relate to payments to investigators. A member
of our Board of Directors is currently the Director of the Arizona
Health Science Centers Cancer Therapeutics Program and
Professor of Medicine at the University of Arizona Health Science
Center in Tucson. In July 1997, we entered into a consulting agreement with Dr. Von Hoff,
which expired on December 31, 2002. A new agreement was entered into in January
2003, which expires on December 31, 2004. Under the terms of the agreement,
we will pay Dr. Von Hoff an annual fee of $275,000 for services provided in
accordance with the agreement and reimbursement of out-of-pocket expenses
incurred in connection with the services provided. The related party subcontractors provide us with consulting services and
preclinical and clinical testing related to certain of our contracts. During
the year ended December 31, 2003, we incurred the following approximate
expenses for subcontracting and consulting costs to the named related parties: CTRC Research Foundation
    
    $
    350,000CTRC Research Foundation Building Corporation
    
    
    240,000Director of the Company
    
    
    280,000US Oncology
    
    
    758,000University of Arizona
    
    
    87,000
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees. Ernst
& Young billed aggregate fees of $322,876 for professional
services rendered for (i) the audit of the Companys financial statements for
the year ended December 31, 2003, (ii) the review of the financial
statements included in the Companys quarterly reports on Form 10-Q filed with
the Securities and Exchange Commission, (iii) accounting
consultations on matters that arose during the audit or interim
reviews and (iv) our secondary offering. Ernst & Young billed aggregate 38




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K fees
of $282,889 for professional services rendered for (i) the audit of the
Companys financial statements for the year ended
December 31, 2002, (ii)
the review of the financial statements included in the Companys quarterly
reports on Form 10-Q filed with the Securities and Exchange
Commission and (iii) accounting consultations on matters that arose
during the audit or interim reviews. Audit-related Fees.
Ernst & Young billed fees of $4,423 during the year ended December 31, 2003
for services rendered related to the audit of our financial statements.
There were no fees billed during the year ended December 31, 2002 for services rendered related to the audit of our financial statements. Tax Fees. Ernst &
Young billed fees of $105,922 for tax planning and tax advice and $88,910 for tax compliance during the year ended December 31, 2003.
Ernst & Young billed fees of $203,673 for tax planning and tax
advice and $35,430 for tax compliance during the year ended December 31, 2002. All Other Fees. Ernst & Young billed fees of $1,500 during the year ended December 31, 2003 for products and services rendered other than those listed in the above categories.
Ernst & Young billed fees of $1,307 during the year ended December 31, 2002 for products and services rendered other than those listed in the above categories. Audit Committee Pre-Approval Policy Our Audit Committee has adopted a policy requiring pre-approval by the
committee of all services (audit and non-audit) to be provided to us by our
independent auditor. In accordance with that policy, the Audit Committee has
given its approval for the provision of audit services by Ernst & Young LLP for
fiscal 2004 and has also given its approval for the provision by Ernst & Young
LLP of particular categories or types of audit-related and tax services in
fiscal 2004, in each case subject to a specific budget. In cases where the
Audit Committees pre-approval is not covered by one of those approvals, a
designated member of the Audit Committee has the delegated authority to
pre-approve the provision of services, and such pre-approvals are then
communicated to the full Audit Committee. 39




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K 
 PART IV. 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)
    
    
    1.
    
    
    Financial StatementsIndex to Financial Statements appears on Page F-1.
  (b)
    
    Reports on Form 8-K Report dated October 22, 2003, reporting Item 12 Results of Operations
and Financial Condition. The report included a press release announcing our
financial results for the third quarter of 2003.  (c)
    
    Exhibits ExhibitNumber
    
    Identification of Exhibit2.1
    
    Purchase and Sale Agreement dated October 29, 2001 by and among ILEX Oncology, Inc., ILEX Acquisitions, Inc.,
Millennium Pharmaceuticals, Inc, and mHoldings Trust (Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q filed November 15, 2001)3.1
    
    Amended and Restated Certificate of Incorporation of the Company filed May 31, 2000 (Incorporated herein by
reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q filed August 8, 2000)3.2
    
    Bylaws of the Company, as amended (Incorporated herein by reference to Exhibit 3.2 of the Companys
Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)4.1
    
    Specimen of certificate representing Common Stock, $.01 par value, of the Company (Incorporated herein by
reference to Exhibit 4.1 of the Companys Registration Statement No. 333-17769 on Form S-1 filed December 12,
1996, as amended)4.2
    
    Rights Agreement dated April 10, 2001, by and between ILEX Oncology, Inc. and American Stock Transfer & Trust
Co. which includes as Exhibit A the Form of Certificate of Designations of Series I Preferred Stock, as
Exhibit B the Form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Common Stock
(Incorporated herein by reference to Exhibit 4.1 to the Companys Form 8-K filed April 11, 2001)4.3*
    
    First Amendment to Rights Agreement dated February 26, 2004, by and between ILEX Oncology, Inc. and American
Stock Transfer & Trust Co.10.1
    
    Services Agreement dated November 18, 1994 between CTRC Research Foundation and the Company (Incorporated
herein by reference to Exhibit 10.6 of the Companys Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)10.2
    
    Covenant Not To Sue dated September 1995 between CTRC Research Foundation and the Company (Incorporated herein
by reference to Exhibit 10.7 of the Companys Registration Statement No. 333-17769 on Form S-1 filed December
12, 1996, as amended)
 40




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K ExhibitNumber
    
    Identification of Exhibit10.3
    
    Commercial Industrial Sublease Agreement between TRTF/CTRCRF Building Corporation and the Company
(Incorporated herein by reference to Exhibit 10.11 of the Companys Registration Statement No. 333-17769 on
Form S-1 filed December 12, 1996, as amended)10.4*
    
    1995 Stock Option Plan for the Company, as amended through February 25, 200410.5
    
    Second Amended and Restated 1996 Non-Employee Director Stock Option Plan for the Company (Incorporated herein
by reference to Exhibit 10.7 of the Companys Annual Report on Form 10-K filed April 2, 2001)10.6
    
    Form of Non-Employee Director Stock Option Agreement for the Company (Incorporated herein by reference to
Exhibit 10.49 to the Companys Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)10.7*
    
    2000 Employee Stock Compensation Plan for the Company, as amended through February 25, 200410.8
    
    2000 Employee Stock Purchase Plan for the Company, as amended (Incorporated herein by reference to Exhibit
10.10 of the Companys Annual Report on Form 10-K filed April 2, 2001)10.9
    
    Form of Pledge Agreement between Cancer Therapy and Research Center Endowment and each of Gary V. Woods and
Ruskin C. Norman, M.D. (Incorporated herein by reference to Exhibit 10.55 to the Companys Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)10.10
    
    Office Building Lease Agreement dated April 8, 1998, between the Company and N.W.A. Limited Partnership
(Incorporated herein by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed August
14, 1998)10.11
    
    Distribution and Development Agreement between Millennium & ILEX Partners, L.P. (now ILEX Pharmaceuticals,
L.P.) and Schering AG dated August 24, 1999 (incorporated herein by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K/A filed September 21, 1999)10.12
    
    Letter agreement dated September 9, 1999, between the Company and Al J. Jecminek (Incorporated herein by
reference to Exhibit 10.41 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999)10.13
    
    Office Lease Agreement dated July 14, 2000, between Orion Fountainhead Two Partners, Ltd., and ILEX Oncology,
Inc. (Incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q filed
November 14, 2000)10.14
    
    Supply Agreement dated as of June 4, 1999 between Millennium & ILEX Partners, L.P. (formerly L&I Partners,
L.P.) and Boehringer Ingelheim Pharma KG. (Incorporated herein by reference to Exhibit 10.25 to the Millennium
Pharmaceuticals, Inc. 10-K for the fiscal year ending December 31, 1999)10.15
    
    License Agreement, dated May 2, 1997, between Millennium & ILEX Partners, L.P. (formerly L&I Partners, L.P.)
and Millennium Pharmaceuticals, Inc (as successor to LeukoSite, Inc.) (Incorporated by reference to Exhibit
10.17(b) to LeukoSite, Inc.s Registration Statement on Form S-1 (No. 333-30213) filed June 27, 1997)10.16
    
    2001 UK Employee Stock Compensation Plan (Incorporated herein by reference to Exhibit 10.27 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2001)10.17
    
    Employment agreement dated January 1, 2002, between the Company and Jeffrey H. Buchalter (Incorporated herein
by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q filed August 13, 2002)
 41




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K ExhibitNumber
    
    Identification of Exhibit10.18*
    
    Consulting Services Agreement dated January 1, 2003, between the Company and Daniel D. Von Hoff, M.D.11.1*
    
    Computation of Earnings Per Share14.1*
    
    ILEX Oncology Inc. Code of Ethics for Senior Financial Officers21.1
    
    Subsidiaries of the Company
 Place of
    
    Names Under WhichName
    
    Incorporation
    
    Doing BusinessILEX Oncology Services, Inc.
    
    Delaware
    
    ILEX Oncology Services, Inc.ILEX Products, Inc.
    
    Delaware
    
    ILEX Products, Inc.ILEX Services Limited
    
    United Kingdom
    
    ILEX Services LimitedILEX Oncology Research Sarl
    
    Geneva, Switzerland
    
    ILEX Oncology Research SarlILEX Acquisitions, Inc.
    
    Delaware
    
    ILEX Acquisitions, Inc.ILEX Pharmaceuticals, L.P.
    
    Delaware
    
    ILEX Pharmaceuticals, L.P.ILEX
Pharmaceuticals, LTD.
    
    United Kingdom
    
    ILEX Pharmaceuticals, LTD.ILEX Pharmaceuticals, L.L.C.
    
    Delaware
    
    ILEX Pharmaceuticals, L.L.C.
 23.1*
    
    Consent of Ernst & Young LLP23.2
    
    Information regarding consent of
Arthur Andersen LLP (Incorporated herein by reference to the Companys
Annual Report on Form 10-K for the year ended December 31, 2002 filed
March 14, 2003)31.1*
    
    Certification of President and Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Senior Vice President and Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2*
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
  *
    
    Filed herewith.
    
    Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission. 42




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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K   
 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. Date: March 12, 2004By:
    
    /s/ JEFFREY H. BUCHALTERJeffrey H. BuchalterPresident and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ MARK P. MELLINMark P. MellinSenior Vice President and Chief Financial Officer(Chief Financial and Accounting Officer)
 Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated. Date: March 12, 2004 Signature
    
    Title/s/ JOY A. AMUNDSON

Joy A. Amundson
    
    Director, Chairman of the Board/s/ JOSEPH S. BAILES, M.D.

Joseph S. Bailes, M.D.
    
    Director/s/ JEFFREY H. BUCHALTER

Jeffrey H. Buchalter
    
    Director/s/ JASON S. FISHERMAN, M.D.

Jason S. Fisherman, M.D.
    
    Director/s/ RICHARD L. LOVE

Richard L. Love
    
    Director/s/ VICTOR P. MICATI

Victor P. Micati
    
    Director/s/ DANIEL D. VON HOFF, M.D.

Daniel D. Von Hoff, M.D.
    
    Director/s/ MARK E. WATSON, JR.

Mark E. Watson, Jr.
    
    Director/s/ GARY V. WOODS

Gary V. Woods
    
    Director
 43




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Auditors
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Operations - For the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated Statements of Stockholders Equity and Comprehensive Income - For the Years
Ended December 31, 2003, 2002 and 2001
    
    
    F-7Consolidated Statements of Cash Flows - For the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Report of Independent Auditors To the Board of Directors and Stockholders of ILEX Oncology, Inc. and
Subsidiaries: We have
audited the accompanying consolidated balance sheets of ILEX Oncology Inc. and
subsidiaries as of December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders equity and comprehensive income, and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of ILEX Oncology Inc. and subsidiaries as of
December 31, 2001, and for the year then ended were audited by other auditors
who have ceased operations and whose report dated February 25, 2002 expressed
an unqualified opinion on those statements before the reclassification
adjustments and conforming disclosures described in Note 2. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ILEX Oncology,
Inc. and subsidiaries at December 31, 2003 and 2002 and the
consolidated results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. As discussed
above, the consolidated financial statements of ILEX Oncology Inc.
and subsidiaries as of December 31, 2001, and for the year then ended were
audited by other auditors who have ceased operations. As described in Note 2,
these financial statements have been revised. We audited the reclassification
adjustments and conforming disclosures described in Note 2 that were applied to
revise the 2001 financial statements. In our opinion, such reclassification
adjustments and conforming disclosures are appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of the Company other than with
respect to such reclassification adjustments and conforming disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole. /s/ Ernst & Young LLPSan Antonio, TexasJanuary 23,
2004,except for Note 19, as to which the date is
February 26, 2004
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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ILEX Oncology, Inc.: We have audited the accompanying consolidated balance sheets of ILEX Oncology,
Inc. (a Delaware corporation), and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ILEX Oncology, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. /s/ ARTHUR ANDERSEN LLPSan Antonio, TexasFebruary 25, 2002
 THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH ILEX ONCOLOGY, INC.S FILING ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER
DISCUSSION. F-3




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##### Table of Contents



ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K CONSOLIDATED BALANCE SHEETS
(in thousands) December 312003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,154
    
    
    $
    29,679Investments in marketable securities
    
    
    75,791
    
    
    
    123,591Restricted investments
    
    
    816
    
    
    
    976Accounts receivable, net of allowance for doubtful accounts of $5
and $30 in 2003 and 2002, respectively
    
    
    166
    
    
    
    871Accounts
receivable - Schering AG
    
    
    8,363
    
    
    
    4,701Other receivables
    
    
    2,152
    
    
    
    3,654Prepaid expenses and other
    
    
    2,433
    
    
    
    2,273Total current assets
    
    
    152,875
    
    
    
    165,745Investments in marketable securities
    
    
    56,209
    
    
    
    34,737Restricted investments
    
    
    1,691
    
    
    
    2,017Completed technology asset, net of accumulated amortization of
$9,257 and $4,629 in 2003 and 2002, respectively
    
    
    55,543
    
    
    
    60,171Other intangible assets, net of accumulated amortization of $517 and
$200 in 2003 and 2002, respectively
    
    
    4,283
    
    
    
    2,600Goodwill
    
    
    
    
    
    
    213Other assets
    
    
    689
    
    
    
    283Property and equipment, at cost, net of accumulated depreciation of
$10,302 and $7,950 in 2003 and 2002, respectively
    
    
    3,805
    
    
    
    5,140Total assets
    
    $
    275,095
    
    
    $
    270,906
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts) December 312003
    
    2002LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable-Related parties
    
    $
    
    
    
    $
    136Other
    
    
    11,477
    
    
    
    8,214Accrued liabilities-Related parties
    
    
    564
    
    
    
    455Other
    
    
    6,646
    
    
    
    6,378Deferred revenue
    
    
    385
    
    
    
    879Advances from Schering AG
    
    
    
    
    
    
    2,577Note payable
    
    
    38,390
    
    
    
    38,099Total current liabilities
    
    
    57,462
    
    
    
    56,738Deferred revenue
    
    
    1,077
    
    
    
    Note payable
    
    
    
    
    
    
    36,155Other non-current liabilities
    
    
    742
    
    
    
    771Total liabilities
    
    
    59,281
    
    
    
    93,664Commitments and contingencies (see Note 16)Stockholders equity:Convertible preferred stock, $0.01 par value; 20,000,000
shares authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 100,000,000 shares
authorized; 39,046,917 and 32,546,890 shares issued and
outstanding in 2003 and 2002, respectively
    
    
    390
    
    
    
    326Additional paid-in capital
    
    
    560,632
    
    
    
    460,014Deferred compensation
    
    
    (359
    )
    
    
    Accumulated deficit
    
    
    (345,544
    )
    
    
    (283,430
    )Accumulated other comprehensive income
    
    
    695
    
    
    
    332Total stockholders equity
    
    
    215,814
    
    
    
    177,242Total liabilities and stockholders equity
    
    $
    275,095
    
    
    $
    270,906
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) Years Ended December 312003
    
    2002
    
    2001Revenue:Product profit and royalty
    
    $
    23,315
    
    
    $
    10,843
    
    
    $
    Product development
    
    
    6,307
    
    
    
    9,786
    
    
    
    3,994Outlicensing revenue
    
    
    2,773
    
    
    
    634
    
    
    
    Contract research services
    
    
    1,762
    
    
    
    9,400
    
    
    
    25,178Other
    
    
    632
    
    
    
    238
    
    
    
    Total revenue
    
    
    34,789
    
    
    
    30,901
    
    
    
    29,172Operating expenses:Research and development costs
    
    
    49,026
    
    
    
    46,928
    
    
    
    33,798Licensing costs
    
    
    8,444
    
    
    
    5,657
    
    
    
    10,281Selling, general and administrative
    
    
    13,998
    
    
    
    11,326
    
    
    
    11,052Direct costs of research services
    
    
    1,341
    
    
    
    5,897
    
    
    
    19,535Depreciation & amortization
    
    
    7,542
    
    
    
    7,390
    
    
    
    2,415Settlement charge
    
    
    16,500
    
    
    
    
    
    
    
    Impairment charge
    
    
    213
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    86,112Total operating expenses
    
    
    97,064
    
    
    
    77,198
    
    
    
    163,193Operating loss:
    
    
    (62,275
    )
    
    
    (46,297
    )
    
    
    (134,021
    )Other income (expense):Interest income and other, net
    
    
    4,322
    
    
    
    7,084
    
    
    
    9,995Interest expense
    
    
    (4,137
    )
    
    
    (6,654
    )
    
    
    Equity in income of joint venture
    
    
    
    
    
    
    
    
    
    
    3,094Loss before income taxes:
    
    
    (62,090
    )
    
    
    (45,867
    )
    
    
    (120,932
    )Provision for foreign income taxes
    
    
    (24
    )
    
    
    (289
    )
    
    
    (22
    )Net loss
    
    $
    (62,114
    )
    
    $
    (46,156
    )
    
    $
    (120,954
    )Basic and diluted net loss per share
    
    $
    (1.76
    )
    
    $
    (1.42
    )
    
    $
    (4.48
    )Weighted average number of shares of common stock outstanding
    
    
    35,258
    
    
    
    32,476
    
    
    
    27,011
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except shares) Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated$0.01
    
    Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherPar
    
    Paid-In
    
    Deferred
    
    Treasury
    
    Accumulated
    
    ComprehensiveShares
    
    Value
    
    Capital
    
    Compensation
    
    Stock
    
    Deficit
    
    Income (Loss)
    
    TotalBALANCES, December 31, 2000
    
    
    25,776,243
    
    
    $
    258
    
    
    $
    312,687
    
    
    $
    
    
    
    $
    (517
    )
    
    $
    (116,320
    )
    
    $
    (103
    )
    
    $
    196,005Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,954
    )
    
    
    
    
    
    
    (120,954
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    (89
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121,043
    )Issuance of common shares for
acquisition of company
    
    
    521,121
    
    
    
    5
    
    
    
    13,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,907Issuance of common shares for
employee stock purchase plan
    
    
    23,148
    
    
    
    
    
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491Exercise of stock options and warrants
    
    
    246,317
    
    
    
    2
    
    
    
    2,494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,496Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266Issuance of common shares in
secondary offering, net of issuance
costs
    
    
    5,750,000
    
    
    
    58
    
    
    
    128,331
    
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    128,906BALANCES, December 31, 2001
    
    
    32,316,829
    
    
    
    323
    
    
    
    458,171
    
    
    
    
    
    
    
    
    
    
    
    (237,274
    )
    
    
    (192
    )
    
    
    221,028Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,156
    )
    
    
    
    
    
    
    (46,156
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    524
    
    
    
    524Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,632
    )Issuance of common shares for
employee stock purchase plan
    
    
    30,576
    
    
    
    1
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271Exercise of stock options
    
    
    199,485
    
    
    
    2
    
    
    
    1,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,575BALANCES, December 31, 2002
    
    
    32,546,890
    
    
    
    326
    
    
    
    460,014
    
    
    
    
    
    
    
    
    
    
    
    (283,430
    )
    
    
    332
    
    
    
    177,242Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,114
    )
    
    
    
    
    
    
    (62,114
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    363
    
    
    
    363Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,751
    )Issuance of common shares in
secondary offering, net of issuance
costs
    
    
    5,500,000
    
    
    
    55
    
    
    
    87,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,420Exercise of stock options
    
    
    230,067
    
    
    
    2
    
    
    
    1,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,912Issuance of common shares for
employee stock purchase plan
    
    
    33,708
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    294Issuance of restricted stock
    
    
    150,000
    
    
    
    1
    
    
    
    1,055
    
    
    
    (704
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345Issuance of common stock to
Millennium Pharmaceuticals, Inc.
    
    
    586,252
    
    
    
    6
    
    
    
    9,994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000BALANCES, December 31, 2003
    
    
    39,046,917
    
    
    $
    390
    
    
    $
    560,632
    
    
    $
    (359
    )
    
    $
    
    
    
    $
    (345,544
    )
    
    $
    695
    
    
    $
    215,814
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years Ended December 312003
    
    2002
    
    2001Cash flows from operating activities:Net loss
    
    $
    (62,114
    )
    
    $
    (46,156
    )
    
    $
    (120,954
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    7,542
    
    
    
    7,390
    
    
    
    2,415In-process research and development
    
    
    
    
    
    
    
    
    
    
    86,112Net activity of research and development partnership
    
    
    
    
    
    
    
    
    
    
    (3,955
    )Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (73
    )Impairment charge
    
    
    213
    
    
    
    
    
    
    
    Interest expense paid in stock
    
    
    929
    
    
    
    
    
    
    
    Non-cash compensation expense
    
    
    697
    
    
    
    
    
    
    
    266Reversal of bad debt provision
    
    
    (27
    )
    
    
    (134
    )
    
    
    (180
    )(Gain) Loss on investment in marketable securities
    
    
    (121
    )
    
    
    (435
    )
    
    
    435Loss on disposal of property and equipment
    
    
    38
    
    
    
    67
    
    
    
    173Changes in operating assets and liabilities:(Increase) decrease in receivables, net
    
    
    (1,428
    )
    
    
    5,070
    
    
    
    3,107Increase in prepaid expenses and other
    
    
    (160
    )
    
    
    (204
    )
    
    
    (640
    )(Increase) decrease in other non-current assets
    
    
    (406
    )
    
    
    226
    
    
    
    (261
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    964
    
    
    
    (14,214
    )
    
    
    7,704Increase (decrease) in deferred revenue
    
    
    583
    
    
    
    (2,761
    )
    
    
    (2,085
    )Increase in interest on note payable
    
    
    17
    
    
    
    4,324
    
    
    
    (Decrease) increase in other non-current liabilities
    
    
    (29
    )
    
    
    (3,816
    )
    
    
    281Net cash used in operating activities
    
    
    (53,302
    )
    
    
    (50,643
    )
    
    
    (27,655
    )Cash flows from investing activities:Net activity of marketable securities transactions
    
    
    26,449
    
    
    
    31,725
    
    
    
    (10,180
    )Net activity in restricted investments
    
    
    486
    
    
    
    1,117
    
    
    
    690Purchase of property and equipment
    
    
    (1,284
    )
    
    
    (1,680
    )
    
    
    (1,992
    )Advances to joint venture
    
    
    
    
    
    
    
    
    
    
    (3,369
    )License fees
    
    
    (2,000
    )
    
    
    
    
    
    
    Proceeds from sale of property and equipment
    
    
    11
    
    
    
    124
    
    
    
    59Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (22,875
    )Net cash provided by (used in) investing activities
    
    
    23,662
    
    
    
    31,286
    
    
    
    (37,667
    )Cash flows from financing activities:Issuance of common stock for cash, net of issuance costs
    
    
    87,420
    
    
    
    
    
    
    
    128,906Exercise of stock options and warrants
    
    
    1,912
    
    
    
    1,575
    
    
    
    2,496Issuance of common stock for employee stock purchase plan
    
    
    294
    
    
    
    271
    
    
    
    491Principal payments for capital lease obligations
    
    
    (37
    )
    
    
    (78
    )
    
    
    (78
    )Principal payment on note payable
    
    
    (26,809
    )
    
    
    (37,670
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    62,780
    
    
    
    (35,902
    )
    
    
    131,815Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    335
    
    
    
    420
    
    
    
    (74
    )Net increase (decrease) in cash and cash equivalents
    
    $
    33,475
    
    
    $
    (54,839
    )
    
    $
    66,419Cash and cash equivalents, beginning of year
    
    
    29,679
    
    
    
    84,518
    
    
    
    18,099Cash and cash equivalents, end of year
    
    $
    63,154
    
    
    $
    29,679
    
    
    $
    84,518
 The accompanying notes are an integral part of these consolidated financial statements. F-8




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##### Table of Contents



ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share information, per share information or as
otherwise indicated) 1. ORGANIZATION AND OPERATIONS ILEX Oncology, Inc. (ILEX) was incorporated in December 1993 under the laws of
the State of Delaware and is a biopharmaceutical company that is focused on
oncology. ILEX operates through its subsidiaries, ILEX Products, Inc. (ILEX
Products) and ILEX Oncology Services, Inc. (ILEX Services) and its affiliate
ILEX Pharmaceuticals LP (the Partnership). ILEX Products is focused in the areas of
identification, development, manufacturing and regulatory approval of cancer
therapeutics and is building a product platform concentrated primarily on
oncology. ILEX Services manages the clinical trials for oncology products
being developed by other companies. In 2001, we announced our intention to
transition out of the fee-for-service contract research organization (CRO)
business conducted by ILEX Services. The Partnership owns the rights to
CAMPATH®, our marketed product. In February 2001, we purchased Symphar S.A. (Symphar), now ILEX Oncology
Research Sarl (Research Sarl), a research organization located in Geneva,
Switzerland. Additionally, in December of 2001, we acquired Millennium
Pharmaceuticals, Inc.s (Millennium) 50% equity interest in the
Partnership formerly known as Millennium & ILEX Partners, L.P. We now own 100% of the Partnership. See Note 6 for further
details regarding these acquisitions. The accompanying consolidated financial statements include the accounts of ILEX
and its subsidiaries (collectively, we or us). All significant
intercompany transactions and accounts have been eliminated in consolidation. CAMPATH was developed within the Partnership. In August 1999, the Partnership
granted Schering AG (Schering) exclusive distribution and marketing rights to
CAMPATH in the United States, Europe and the rest of the world, other than
Japan and the Asian Pacific Basin. CAMPATH was approved for marketing in the
United States (U.S.) by the Food and Drug Administration (FDA) in May 2001. In
February 2003, Schering AG obtained marketing and distribution rights to
CAMPATH in Japan and the Asian Pacific Basin from ILEX. The European
Commission (EU) issued marketing authorization for MABCAMPATH®, the trade
name for CAMPATH in Europe, in July 2001. Under EU and authorizations in other
countries, the Partnership has the right to market MABCAMPATH in the United
Kingdom (U.K.) and 32 other non-U.S. countries. Schering AG began selling MABCAMPATH
in Europe in August 2001. Berlex Laboratories, Inc., (Berlex) the U.S.
affiliate of Schering AG, is marketing CAMPATH in the United States.
Commercial launch of CAMPATH began in the United States in May 2001. Additionally, we have other drugs in clinical development and several product
candidates in late preclinical research. All product rights are either acquired
or in-licensed. We have not generated any revenues from product sales of these
other drugs to date, and there can be no assurance that revenues from product
sales will be achieved. We have incurred net losses to date and our ability to
achieve a profitable level of operations in the future will depend in large
part on the ability to complete development of our compounds; obtain regulatory
approvals for such compounds; commercialize these potential products through
marketing agreements with other companies or, if we choose, market such
compounds independently; successfully manufacture such compounds; and achieve
market acceptance of such compounds. There can be no assurance that we will be
successful in developing such compounds, obtaining such approvals, bringing
such compounds to market, developing sales, marketing or distribution
capabilities, manufacturing such products or generating market acceptance. We expect that our current funds will be adequate to cover all of our
obligations for at least the next two years. Until the business can generate
sufficient levels of cash from product sales, we expect to continue to finance
our operations through existing cash, revenues from collaborative relationships
and proceeds from the sale of equity securities. F-9




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##### Table of Contents



ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K 2. SIGNIFICANT ACCOUNTING POLICIES Reclassifications and Conforming Disclosures 2001 For the years ended December 31, 2003 and 2002, reimbursable out-of-pocket
costs incurred related to CRO contracts were included in direct costs of
research services and contract research service revenues when
incurred in accordance with the Emerging Issues Task Forces (EITFs) Issue 01-14, Income
Statement Characterization of Reimbursements Received for Out of Pocket
Expenses Incurred. Corresponding amounts for the year ended December 31,
2001, as set forth in the table below, were reclassified to conform with such
presentation. Year EndedDecember 31,2001Increase in contract research services revenues
    
    $
    4,528Increase in direct cost of research services
    
    
    (4,528
    )Impact on net loss
    
    $
    
 Depreciation has been reclassified to be presented separately on the face of
the 2001 statement of operations. Depreciation expense was included in the
selling, general and administrative line item in the 2001 statement of
operations. Reclassifications were made to the 2001 statement of cash flows to conform to
the 2003 and 2002 presentations. As disclosed in Footnote 15, certain conforming disclosures of 2001 amounts
regarding income taxes have been provided. 2002 Certain 2002 amounts have been reclassified to conform to the 2003
presentation. These reclassifications are deemed immaterial to the overall
presentation of our consolidated financial statements and therefore have not
been shown in a tabular format. Revenue Recognition Product
profit and royalty  These revenues represent our profit share
resulting from net sales of CAMPATH in the U.S. and the royalties earned from
sales of CAMPATH in the rest of world. Our profit share from net U.S. sales
is calculated after deducting the manufacturing, marketing, selling and
distribution expenses incurred by Berlex. Product profit and royalty revenues
are recognized when the CAMPATH sale to the customer occurs. Product development  These revenues represent Schering AGs contribution to
our research and development costs incurred for CAMPATH in B-cell chronic
lymphocytic leukemia (CLL), multiple sclerosis (MS), non-Hodgkins lymphoma
(NHL) and solid organ transplantation. Revenue under research and
development cost reimbursement contracts is recognized as the related costs
are incurred. Advance payments received in excess of amounts earned are
classified as deferred revenue until earned. Outlicensing revenue -Outlicensing revenue is earned and recognized based on
the performance requirements of the respective outlicensing agreements.
Non-refundable license fees for which no further performance obligations
exist, and no continuing involvement by us is required, are recognized on the
earlier of when the payments are received or when collection is assured.
Revenue from non-refundable upfront license fees where we continue involvement
through development collaboration or have an obligation to supply product is
recognized ratably over the applicable development period or patent life.
Revenue associated with performance milestones is recognized based upon the
achievement of the milestones, as defined in the respective agreements. F-10




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Contract
research services - Revenues from contract research services are
related to both fixed-price and hourly-based customer contracts and are
recognized on a percentage-of-completion basis or as such services are
performed. Reimbursable out-of-pocket costs incurred related to such
contracts are included in direct costs of research services and contract
research service revenues when incurred. Cash and Cash Equivalents. We consider all highly liquid investments with a
maturity of three months or less when purchased to be cash and cash
equivalents. Restricted Investments.In connection with the lease of our corporate
headquarters, we maintain a letter of credit, with the lessor as beneficiary,
in the amount of approximately $1.9 million. The loan is 105% collateralized
with $2.0 million in cash. The letter of credit is reduced by approximately
$324.0 each year. The collateral is included in the current and noncurrent
portions of restricted investments on our consolidated balance sheets. Also
included in the current portion of restricted investments is our guarantee of a
line of credit for a site management organization. We maintained approximately
$492.0 in securities as collateral for this guarantee as of December 31, 2003
(see Note 16). Current Assets and Current Liabilities.The carrying value of current assets
and current liabilities, excluding investments in marketable securities,
approximates their fair value. Investments
in Marketable Securities. With the exception of securities held in
connection with the Executive Deferred Compensation Plan (EDCP), which are
classified as trading securities, all of our investments are held-to-maturity.
Securities are categorized as held-to-maturity when we have the positive
intent and ability to hold these securities to maturity. Held-to-maturity
securities are carried at amortized cost including adjustments for amortization
of premiums and accretion of discounts. Securities classified as trading in
connection with the EDCP are carried at current market value. Marketable
securities with an original maturity of less than one year are classified on
the balance sheet as current assets, while securities with a maturity of
greater than one year are classified as non-current assets. The fair value of
marketable securities is based on currently published market quotations (see
Note 3). Intangible Assets and Goodwill.In connection with our December 31, 2001
acquisition of Millenniums 50% equity interest in the Partnership, we have recorded a
completed technology asset that is classified as an intangible
asset in our consolidated balance sheets in the amount of $64.8 million and
a trademark that is classified as an intangible asset in our
consolidate balance sheets in the amount of $2.8 million. These intangible assets are being amortized under
the straight-line method over 14 years. As of December 31, 2003, we have
recorded accumulated amortization of $9.7 million related to these assets. In
December 2001, Genentech, Inc. (Genentech) announced that it was granted a
patent relating to fundamental methods and compositions for the production of
monoclonal antibodies using recombinant DNA technology as a result of a
favorable decision in a patent interference proceeding. This decision
entitled Genentech to priority over the patent held by the Celltech Group PLC,
who had first received the patent in 1989. In March 2003, we finalized a
license from Genentech covering the production of monoclonal antibodies, such
as CAMPATH, directed at the CD52 cell surface target. Accordingly, we have
recorded an intangible asset of $2.0 million associated with the license grant
fee paid to Genentech in April 2003, which is being amortized under the
straight-line method over approximately 13 years. We will also pay milestones
and royalties based upon net U.S. sales levels. As of December 31, 2003, we
have recorded accumulated amortization of $116.9 related to this asset. F-11




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K The following table shows the estimated amortization expense, in total for the
completed technology, trademark and Genentech license grant, to be incurred for
each of the next five years: Year ended
    
    Estimated amortizationDecember 31,
    
    expense2004
    
    $
    4,9842005
    
    
    4,9842006
    
    
    4,9842007
    
    
    4,9842008
    
    
    4,984
 We
perform an annual impairment test of our intangible assets. As of
December 31, 2003, we believe that these amounts are recoverable. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 142 (SFAS No. 142), Goodwill and Other
Intangible Assets.According to this statement, goodwill and intangible
assets with indefinite lives are no longer subject to amortization, but rather
an assessment of impairment must be made at least annually. This statement was
effective for fiscal years beginning after December 15, 2001. Under the
provisions of SFAS No. 142, the value of our goodwill recorded in connection
with our acquisition of Symphar and previously referred to as the assembled
workforce, was no longer subject to amortization. The following table shows
the pro forma effect of the adoption of SFAS No. 142 on our net loss for the
year ended December 31, 2001 as if the adoption had occurred on January 1,
2001: Year EndedDecember 31, 2001Net loss, as reported
    
    $
    (120,954
    )Amortization
    
    
    87Pro forma net loss
    
    $
    (120,867
    )Basic and diluted pro forma
net loss per share
    
    $
    (4.47
    )
 Our goodwill was reviewed as of September 30, 2003 and we determined that it
had been impaired due to recent research focus changes and personnel changes.
We recorded an impairment charge of $213.0 in the third quarter of 2003. Property and Equipment.Property and equipment are reported at cost and
depreciated over the estimated useful lives of the individual assets using the
straight-line method (see Note 5). Leasehold improvements are amortized over
the lesser of the life of the lease or the useful life of the related property.
Expenditures for maintenance and repairs are charged to expense as incurred.
The estimated lives used in computing depreciation and amortization are as
follows: Office equipment and furniture
    
    3  10 yearsLab equipment
    
    5  10 yearsLeasehold improvements
    
    1  15 yearsLeased equipment
    
    2  3 years
 Deferred Revenue.Deferred revenue includes advances for services not yet
rendered under contract research service agreements and billings in excess of
revenue recognized. Also included in deferred revenue is a portion of the
payment received from Schering AG for the exclusive development, marketing and
distribution rights to CAMPATH in Japan, China and other Asian countries (see
Note 12). Credit Risk, Major Customer and Supplier.We place a portion of our cash and
cash equivalents in money market accounts with high quality financial
institutions. At times, such amounts may be in excess of the Federal Deposit
Insurance Corporations insurance limit as well as the Securities Investor
Protection Corporations limit. Our accounts receivable are primarily from
pharmaceutical and biotechnology companies. Based on our evaluation of the
collectibility of these accounts receivable, an allowance for doubtful accounts
of $5.0 was necessary at December 31, 2003 and an allowance for
doubtful accounts of $30.1 was necessary at December 31, 2002.
We believe the exposure to credit risk related to the remaining accounts
receivable is minimal. Our top five CRO customers accounted for 5% of total revenue for the
year ended December 31, 2003, 23% of total revenue for the year ended
December 31, 2002 and 50% of total revenue for the year ended
December 31, 2001. The
following table represents revenue from significant CRO customers in excess of
10%: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001
    
    $
    3,037
    
    
    
    10
    %
    
    $
    4,141
    
    
    
    14
    %3,376
    
    
    
    12
    %3,361
    
    
    
    12
    %
 F-12




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K We also record product, profit and royalty revenue, which is our profit share
resulting from net sales of CAMPATH in the U.S. and the royalties earned from
sales of CAMPATH in the rest of the world. Schering AG sells CAMPATH to
numerous customers. We receive our proceeds from these sales directly from
Schering AG. All of our product development revenue recorded on
our statement of operations is from Schering AG. Additionally, our
sole supplier of CAMPATH is Boehringer Ingelheim Pharma KG (BI) in
Germany. Depreciation and Amortization.In connection with the acquisition of
Millenniums interest in the Partnership, we recorded intangible assets of
$67.6 million as of December 31, 2001. These intangible assets have been
amortized throughout the year ended December 31, 2003 based on the remaining
CAMPATH patent life. In connection with the license grant from Genentech, we
have recorded an intangible asset of $2.0 million as of April 30, 2003. This
intangible asset has also been amortized based on the remaining CAMPATH patent
life. Use of Estimates.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. Interest income and other, net.Included in 2001 interest income and other, net
is $435.0 related to the accrual of a non-cash loss on the impairment of a held
to maturity marketable security. In 2002, we sold this investment and recorded
a gain of $435.0, as the market value of the security had recovered. The gain
is included in interest income and other, net on our 2002 consolidated
statement of operations as of December 31, 2002. Included in 2003 interest
income and other is approximately $121.0 related to a gain on the EDCP
securities. Interest Expense. Interest expense relates to the imputed interest on the note
to Millennium for our purchase of their interest in the Partnership. We
recorded interest expense of $4.1 million for the year ended
December 31, 2003, $6.7 million for the year ended December 31, 2002
and $0 for the year ended December 31, 2001. Income Taxes.We account for income taxes using the liability method. Under
the liability method, deferred income taxes are recognized for the future tax
consequences attributable to the difference between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We have incurred losses
since inception for both book and tax purposes. The tax provisions recorded in
2003, 2002 and 2001 relate to amounts accrued for our wholly owned subsidiaries
which operate in the U.K. and Switzerland. F-13




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Stock-Based Compensation.We use the intrinsic value method in accounting for
our stock option plans. With the exception of the restricted stock grant (see
Note 8), no compensation costs have been recognized in the financial statements
for these plans. Had compensation cost for our stock-based employee
compensation plans been determined based upon a fair value method consistent
with SFAS No. 123, our net loss and loss per share would have been increased to
the pro forma amounts indicated below: December 31,2003
    
    2002
    
    2001Net loss
    
    As reported
    
    $
    (62,114
    )
    
    $
    (46,156
    )
    
    $
    (120,954
    )Fair value compensation cost
    
    
    (8,921
    )
    
    
    (8,168
    )
    
    
    (8,024
    )Stock grant compensation cost included in reported loss
    
    
    697
    
    
    
    
    
    
    
    Pro forma
    
    $
    (70,338
    )
    
    $
    (54,324
    )
    
    $
    (128,978
    )Loss per share basic and diluted
    
    As reported
    
    $
    (1.76
    )
    
    $
    (1.42
    )
    
    $
    (4.48
    )Fair value compensation cost
    
    
    (0.25
    )
    
    
    (.25
    )
    
    
    (.30
    )Stock grant compensation cost included in reported loss
    
    
    0.02
    
    
    
    
    
    
    
    Pro forma
    
    $
    (1.99
    )
    
    $
    (1.67
    )
    
    $
    (4.78
    )
 Statement of Cash Flows.Noncash financing and investing activities for the years ended December 31, 2003, 2002 and 2001, include the following: 2003
    
    2002
    
    2001Payment of principal portion of note payable in shares of our
Common Stock
    
    $
    9,071
    
    
    $
    
    
    
    $
    Issuance of common stock for acquisitions
    
    
    
    
    
    
    
    
    
    
    13,907Assets acquired in acquisitions
    
    
    
    
    
    
    
    
    
    
    72,449Liabilities assumed in acquisitions
    
    
    
    
    
    
    
    
    
    
    14,179Liability incurred in connection with acquisition
    
    
    
    
    
    
    
    
    
    
    107,600
 Supplemental disclosures of cash flow information for the years ended December 31, 2003, 2002 and 2001, include the following: 2003
    
    2002
    
    2001Cash paid during the year for-Interest
    
    $
    3,192
    
    
    $
    2,340
    
    
    $
    17Foreign income taxes
    
    
    195
    
    
    
    70
    
    
    
    93
 Foreign Currency Translation.We have wholly owned subsidiaries based in the
U.K and Switzerland. The financial statements of these subsidiaries
were prepared in British pounds and Swiss francs, respectively, and translated
to U.S. dollars based on the current exchange rate at the end
of the period for the assets and liabilities and a monthly average rate for the
period in the statements of operations. Such translation adjustments are
included in other comprehensive income or loss. Gains or losses on foreign
currency transactions are included in interest income and other. Net Loss Per Share.Basic net loss per share was computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
year. Diluted net loss per share is equal to basic net loss per share, as the
effect of all common stock equivalents is antidilutive. Business Segments.SFAS No. 131 Disclosure about Segments of an Enterprise
and Related Information  establishes standards for the way
publicly traded business enterprises report information about operating
segments in annual financial statements. SFAS No. 131 also establishes
standards for F-14




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K related disclosures about products, services, geographic areas and major
customers. In February 2001, we announced our intent to transition out of the
fee-for-service CRO business, operated by ILEX Services, and focus our in-house
drug development capabilities on our own proprietary products, including those
being jointly developed with partners. As a result of our transition out of the
fee-for-service CRO business, and subsequent transition of certain ILEX
Services employees to our own products, we no longer operate in two distinct
segments. Accounting Pronouncements.In January 2003, the Financial Accounting Standards
Board (FASB) issued interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entitiesand in December 2003 the FASB issued a revised interpretation (FIN
46R). FIN 46 and FIN 46R address the accounting for, and disclosure of ,
investments in variable interest entities and require that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the company that has a
controlling financial interest. FIN 46 and FIN 46R  provide a framework for determining
whether a variable interest entity should be consolidated based on voting
interest or significant financial support. We have evaluated FIN 46 and FIN
46R and determined that we do not have any variable interest entities requiring
consolidation. 3. INVESTMENTS IN MARKETABLE SECURITIES Securities
held-to-maturity at December 31, 2003 are carried at book value and
are summarized as follows: Gross Unrealized
    
    Gross UnrealizedBook Value
    
    Gains
    
    Losses
    
    Fair ValueGovernment/Agency securities:One year or less
    
    $
    28,312
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    28,311> 1 year and less than 2 years
    
    
    42,710
    
    
    
    25
    
    
    
    (8
    )
    
    
    42,727Corporate securities:One year or less
    
    
    46,584
    
    
    
    130
    
    
    
    (70
    )
    
    
    46,644> 1 year and less than 2 years
    
    
    13,499
    
    
    
    
    
    
    
    (19
    )
    
    
    13,480Total securities held-to-maturity
at December 31, 2003
    
    $
    131,105
    
    
    $
    157
    
    
    $
    (100
    )
    
    $
    131,162
 Included in investments in marketable securities on our consolidated balance
sheet as of December 31, 2003 are securities accounted for as trading
securities that are reflected at the December 31, 2003 current market value of
$895.0. These securities are recorded in connection with our EDCP (see Note
13). We recorded approximately $121.0 as unrealized gains on such securities
and this amount is included in interest income and other in our consolidated
statement of operations for the year ended December 31, 2003. We have also
recorded a corresponding expense of approximately $121.0 in our consolidated
statement of operations. Securities held-to-maturity at December 31, 2002 are summarized as follows: Gross Unrealized
    
    Gross UnrealizedBook Value
    
    Gains
    
    Losses
    
    Fair ValueAsset-backed securities:One year or less
    
    $
    26,093
    
    
    $
    291
    
    
    $
    
    
    
    $
    26,384Government/Agency securities:One year or less
    
    
    2,000
    
    
    
    41
    
    
    
    
    
    
    
    2,041> 1 year and less than 2 years
    
    
    8,000
    
    
    
    36
    
    
    
    
    
    
    
    8,036Municipal bonds:One year or less
    
    
    1,450
    
    
    
    4
    
    
    
    
    
    
    
    1,454
 F-15




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Gross Unrealized
    
    Gross UnrealizedBook Value
    
    Gains
    
    Losses
    
    Fair ValueCorporate securities:One year or less
    
    
    94,048
    
    
    
    762
    
    
    
    (59
    )
    
    
    94,751> 1 year and less than 2 years
    
    
    26,737
    
    
    
    440
    
    
    
    
    
    
    
    27,177Total securities held-to-maturity
at December 31, 2002
    
    $
    158,328
    
    
    $
    1,574
    
    
    $
    (59
    )
    
    $
    159,843
 During 2002, we
received cash proceeds of approximately $8.2 million from the
sale of five securities, classified as held-to-maturity securities, prior to their stated maturities resulting
in a net gain of $14.8. The gain on the sale of these investments is included
in interest income and other, net on our consolidated statement of operations
for the year ended December 31, 2002. The decision to sell these securities
was based upon the decline in the securities credit ratings. Due to that
decline, the securities no longer conformed to our investment policy. We did
not sell any securities prior to their stated maturities during 2003. We have
no securities with maturity dates greater than eighteen months. 4. ILEX PHARMACEUTICALS, L.P. In
May 1997, we entered into a distribution agreement with LeukoSite, Inc., now Millennium,
for an equally owned joint venture, L&I Partners, L.P., for research
collaboration endeavors. In March 2000, the joint venture changed its name to
Millennium & ILEX Partners, L.P. We entered in to an agreement to purchase
Millenniums interest in the Partnership on October 29, 2001 and the
transaction was completed on December 31, 2001 (see Note 6). Accordingly, the
balance sheet of the Partnership has been consolidated as of December 31, 2001.
Prior to December 31, 2001, we accounted for our investment in the Partnership
using the equity method of accounting. In
August 1999, the Partnership entered into a distribution agreement, which granted Schering AG exclusive marketing and distribution
rights to CAMPATH in the U.S., Europe and the rest of the world except Japan
and the Asian Pacific Basin, where ILEX had retained rights. In accordance
with the distribution agreement, Schering AG advanced $30.0 million to the
Partnership for these rights and for the achievement of certain regulatory
milestones. In January 2003, Schering AG obtained the marketing and
distribution rights to CAMPATH in Japan and the Asian Pacific Basin from us. The $30.0 million was initially recorded as a liability on the Partnerships
balance sheet described as Advances from Schering AG. In accordance with the
distribution agreement, and through the first quarter of 2003, the Partnership
recorded development revenues and reduced the advance balance for qualified
development expenses which it incurred. As of the first quarter of 2003, the
entire advance balance from Schering had been depleted. Schering AG continues
to fund a portion of the CAMPATH development costs and these proceeds are
recorded as product development revenue on our statement of operations. The following is summarized financial information for the Partnership before
its consolidation with us: Summarized Income Statement Information 2001Revenue
    
    $
    18,072Operating expenses
    
    
    11,414Operating income (loss)
    
    
    6,658Net income (loss)
    
    $
    6,188
 5. PROPERTY AND EQUIPMENT During 2003, we disposed of certain office furniture and equipment
with a cost of $386.6, and a net book value of
approximately $51.4. During 2002, we disposed of certain office
furniture and equipment with a cost of $482.0 and a net book value of
approximately $128.0. Net loss for the year ended December 31, 2003,
 includes a loss of $38.0; net loss for the year ended December 31,
2002 includes a loss of $67.0 and net loss for the year ended
December 31, 2001 includes a loss of $173.0. These losses resulted from F-16




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K the
disposition of furniture and equipment and have been included in our
operating expenses. Depreciation expense for the year ended December 31,
2003 was $2.6 million; depreciation expense for the year ended
December 31, 2002 was $2.6 million and depreciation expense
for the year ended December 31, 2001 was $2.4 million.
Property and equipment are composed of the following: December 31,2003
    
    2002Office equipment and furniture
    
    $
    8,806
    
    
    $
    8,455Lab equipment
    
    
    3,579
    
    
    
    3,145Leased equipment
    
    
    216
    
    
    
    216Leasehold improvements
    
    
    1,506
    
    
    
    1,27414,107
    
    
    
    13,090Accumulated depreciation and amortization
    
    
    (10,302
    )
    
    
    (7,950
    )Net property and equipment
    
    $
    3,805
    
    
    $
    5,140
 6. MERGERS AND ACQUISITIONS The Partnership As previously discussed, we closed our acquisition of Millenniums 50% equity
interest $40.0 million in the Partnership on December 31, 2001. The terms of the agreement
included an initial cash payment of $20.0 million and an additional $120.0
million in scheduled payments. The first payment of $40.0 million was made in
cash on December 31, 2002. In 2003, $30.0 million of the
$40.0 million scheduled payment was made in cash and $10.0 million of the scheduled payment was
made in our common stock. The remaining $40.0
million is due in 2004, $10.0 million of which may again be paid with our
common stock, subject to certain terms and conditions and at our option. In
2004, $20.0 million of the $40.0 million annual payment is due 45 days after
the end of the calendar quarter in which net U.S. CAMPATH sales exceed a
specified level. In addition to the scheduled payments, Millennium will be entitled to royalty payments
based on net U.S. CAMPATH sales above specified levels beginning in
2005. At closing, we estimated the purchase price at $127.6 million based on the net present value
of the cash payments discounted at approximately 6.5%, our estimated
incremental borrowing rate. The purchase price was allocated to the assets
purchased and in-process research and development costs based upon their
respective fair values. The purchase price was allocated as follows: Completed technology asset
    
    $
    64,800Trademark
    
    
    2,800In-process research and development
    
    
    60,000Total purchase price
    
    $
    127,600
 The purchase price was arrived at through negotiations between Millennium and
us and was based on a variety of factors, including but not limited to the
prospect for commercializing certain of the assets of the Partnership. We recorded a completed technology asset in the amount
of $64.8 million and a trademark asset in the amount of $2.8 million. These intangible assets are
being amortized over 14 years. Additionally, in connection with
the purchase, we consolidated approximately $14.0 million of
assets and liabilities of the Partnership. Additionally, in connection with the purchase price allocation, $60.0 million
was expensed as a charge for the purchase of in-process research and
development. We allocated values to the in-process research and development
based on an independent appraisal of the research and development projects.
The income approach was utilized to develop values for our completed technology
and know-how, in-process research and development and trademark. In assessing
the qualification of the acquired assets as in-process research and
development, the developmental projects were evaluated in the context of SFAS
No. 2 and SFAS No. 86.
The evaluation consisted of a specific review of the
efforts, including the overall objectives of the project, progress toward the
objectives and the uniqueness of the developments of these objectives. F-17




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Further, each in-process research and development project was reviewed to
determine if technological feasibility had been achieved. The acquired
in-process research and development was confined to new products and technologies
under development that were intended to address emerging market needs and
requirements. No routine efforts to incrementally refine or enhance existing
products or production activities were included in the acquired in-process
research and development. It was determined that the in-process technologies
could only be used for specific and intended purposes. Due to the specialized
nature of the CAMPATH clinical trial programs, management anticipated no
alternative future value from these efforts if the projects were not completed
as planned. As
of the acquisition date, we had initiated several research and
development programs including post-marketing CLL trials to obtain a first line
treatment label, as well as clinical studies related to potential new markets
such as NHL, MS and transplant indications. Projected revenues for in-process
R&D cash flows were based on forecasts provided by us and Schering AG
management. Revenues for non-CLL indications were estimated to begin
anywhere from 2002-2004. Revenues were expected to peak in 2010-11
and decline thereafter. Approximate market share ranges for the respective
indications were: CLL:10-24%; NHL:1-12%; MS: 1-20%; and transplant indications:
5-25%. Costs of revenue and selling, general and administrative expenses were
estimated as a percentage of revenue. Research and development expense was
segregated into (a) maintenance R&D and (b) development or cost-to-complete
R&D. Maintenance research and development was provided as a part of
managements forecast, which was estimated at $500.0 for 2001 with annual
increases of 5%. These expenses were charged to the in-process R&D cash flows
based on their respective share of overall revenue. Development R&D expense was
also projected by management for each indication. For the purposes of the independent appraisal, only the economics related to
the lead indications for CAMPATH were considered. These indications are CLL,
NHL, MS and transplant indications. CLL represents approximately 37% of the in-process research and development
value and approximately 77% of the completed technology asset based on discount
rates of 25% for both in-process research and development and the completed
technology asset. CLL is characterized by the abnormal accumulation of a
specific type of leukocyte, eventually leading to bone marrow dysfunction and
enlargement of the lymph nodes, liver and spleen. Our current FDA approval is
for third-line treatment of CLL. Preliminary research indicates that it may be
effective as a second-line or even primary agent for the disease. Based on
managements forecast, the breakdown of CLL patient treatments approximates the
following: third-line treatments (15%), second-line treatments (35%) and
first-line treatments (50%). The approximate CLL market size in the U.S. was
estimated at over $300.0 million in 2001 and was expected to grow to nearly
$400.0 million in 2005. As of the date of the acquisition, the project was
expected to generate net cash inflows no sooner than 2003 and we expected to
spend an additional $19.0 million to complete the ongoing development related
to the in-process research and development. Additionally, as of the date of
the acquisition, we had not abandoned, nor had any plans to abandon the CAMPATH
clinical trial programs related to first-line CLL treatments. NHL represents approximately 43% of the in-process research and development
value and 23% of the completed technology asset based on discount rates of
27.5% and 25%, respectively. NHL is a term that describes a collection of
lymphomas, or malignant tumors that develop in the lymphatic system, with
different natural courses, responses to treatment and overall survival rates.
Based on management forecast data, the approximate market size in the U.S. was
estimated at over $1.3 billion in 2001 and at nearly $1.6 billion in 2005. As
of the date of the acquisition, the project was expected to generate net cash
inflows no sooner than 2005 and we expected to spend an additional $20.0 to
$22.0 million in research and development to complete ongoing development
related to the in-process research and development. As of the date of the
acquisition, we had not abandoned, nor had any plans to abandon proposed
CAMPATH clinical trial programs related to the NHL indication. MS represents approximately 17% of the in-process research and development
value based on a discount rate of 30%. MS is signified by multiple areas of
inflammation and scarring of the myelin in the brain and spinal cord. Myelin
is the tissue that covers and protects nerve fibers. When this occurs, nerve
communication is disrupted. The necessity for early treatment is becoming
increasingly clearer, as such F-18




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K treatment appears to delay disability, presumably by decreasing the injury to
the nervous system by MS. Based on management forecast data, the approximate
MS treatment market size in the U.S. was estimated at over $650.0 million in
2001, increasing to over $750.0 million in 2005. As of the acquisition date,
this project was expected to generate net cash inflows no sooner than 2004 and
we expected to spend an additional $17.0 million in research and development to
complete ongoing development. Additionally, as of the date of the acquisition,
we had not abandoned, nor had any plans to abandon proposed CAMPATH clinical
trial programs related to the MS indication. Transplant indications represented approximately 3% of the in-process research
and development value based on a discount rate of 40%. As of the acquisition
date, this project was expected to generate net cash inflows no sooner than
2003 and we expected to spend an additional amount of $100.0 to $300.0, to
complete ongoing development related to the in-process research and
development. Additionally, as of the date of the acquisition, we had not
abandoned, nor had any intentions to abandon proposed CAMPATH clinical trial
programs related to transplant indications. A charge was assessed against the oncology projects (CLL and NHL) in-process
research and development cash flows to reflect the leverage of clinical trial
experience gained during the development and approval process for our current
CAMPATH label. Based on a standard rate calculation and review of comparable
industry data, a core charge of 3% was utilized. Other charges decreasing the
in-process research and development cash flows included the following: (i)
Schering AGs profit share interest; (ii) return on working capital and
fixed assets and (iii) return on the trademark intangible asset. According to
industry analyst reports, pharmaceutical product life cycles are generally
segmented into three categories based on several characteristics: short
(product revenue peaks 5-7 years post-launch), medium (revenue peaks 8-10 years
post-launch), and long (revenue peaks 12-15 years post-launch). The analysis
utilized a medium life cycle assessing the value of our in-process research
and development. Without successfully completing the in-process research and
development projects, we would be unable to realize product revenue for
additional indications. Our completed technology resides in our right to manufacture and market CAMPATH
specifically for patients with B-cell chronic lymphocytic leukemia who have
been treated with alkylating agents and have failed fludarabine therapy. The
current CAMPATH label is considered a third-line treatment for CLL. Since 1999
and through the date of the acquisition, we had spent over $18.0 million on
CAMPATH development efforts related to the approved indication. Projected
revenue for the completed technology cash flows were based on forecasts
provided by our management. The forecast for the U.S. market was a bottoms-up
approach beginning with the incidence of CLL. The forecast for the non-U.S.
market was provided to ILEX from Schering AG. Cost of revenue and selling,
general and administrative expenses were projected as a percentage of revenue.
These expenses were charged to the completed technology cash flows based on
their respective share of overall revenue. Other charges decreasing the
completed technology cash flows included: Schering AGs profit
share interest, return on working capital and fixed assets, and return on the trademark
intangible asset. The discount rate of 20% was used to reflect the lower
level of risk inherent in the approved CAMPATH label. The projected financial
data used in the analysis included only cash flows attributable to the acquired
Partnership assets. Our trademark value is attributable to CAMPATH and variations thereof,
including MABCAMPATH that is utilized in the European market. The analysis
utilized the relief from royalty method in determining the value of the CAMPATH
trademark. In applying this method, a hypothetical royalty expense is
calculated by applying a reasonable royalty rate to expected revenues.
Management anticipates using the CAMPATH trademark for oncology-related
indications. Non-oncology revenue streams will likely have different branding
and marketing. The trademark analysis considered only the CLL and NHL
projected revenues as a base for the royalty calculation. The analysis
considered several different royalty rate indications in estimating a royalty
rate that reflected the CAMPATH brands relative characteristics. In addition,
an industry accepted general rule for assessing intangible value was
considered. This rule indicates that 25% of operating income is an appropriate
royalty rate for key intellectual property. After consideration of each
indication, a pre-tax royalty of 1% was selected for the trademark analysis. A
discount rate similar to that of the overall Company was considered appropriate
for this analysis. F-19




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K As of December 31, 2003, we had no plans to abandon any of the projects
associated with the above indications. We believe that the foregoing
assumptions used in the purchase price allocation were reasonable at the time
of acquisition. No assurance can be given, however, that the underlying
assumptions used to estimate revenue, development costs or profitability or the
events associated with such projects will transpire as estimated. For these
reasons, actual results may vary from projected results. The most significant
and uncertain assumptions relating to the in-process projects relate to the
projected timing of completion and revenues attributable to each project. Symphar On February 13, 2001, we acquired Symphar, a research firm located in Geneva,
Switzerland. The acquisition has been accounted for using the purchase method
of accounting. Under the terms of the agreement, we acquired Symphar for
approximately $28.9 million, which included cash of $15.0 million and 521,121
shares of our common stock. The value of the common stock issued in connection
with this merger was calculated using a fair value of $26.6875 per share. This
per share fair value represents the closing price of our common stock on the
day the merger was announced. The Symphar purchase price was allocated to the assets purchased, liabilities
assumed, goodwill and in-process research and development expense based upon
their respective fair values as follows: Current assets
    
    $
    2,744Property and equipment
    
    
    215Goodwill
    
    
    300Current liabilities
    
    
    (464
    )In-process research and development
    
    
    26,112Total purchase price
    
    $
    28,907
 The cash portion of the purchase price came from our working capital. The
amount paid by us was arrived at through negotiations between the shareholders
of Symphar and us and was based on a variety of factors, including but not
limited to, the prospect for commercializing certain of the assets of Symphar
and the nature of the research-based pharmaceutical industry. The entity now
operates under the name ILEX Oncology Research Sarl (Research Sarl). Of the $15.0 million cash payment, we placed $4.5 million in escrow as a
reserve for possible indemnification against certain future claims. As of
December 31, 2002, the entire $4.5 million had been released from escrow.
Additionally, under the terms of the agreement, $5.0 million of the purchase
price was held as a contingent payment. The additional contingent payment was
earned in December 2001 and, accordingly, we recorded an additional $5.0
million in-process research and development expense, which is included in the
total purchase price of approximately $28.9 million. The agreement also
specified that, subject to the viability of performance, we agreed to fund a
minimum operating and capital budget between $4.0 to $5.0 million annually for
each of the three years following the acquisition. We recorded goodwill in the amount of $300.0 related to an assembled work
force. This asset was amortized throughout 2001 based on an estimated useful
life of three years. In accordance with SFAS No. 142, we ceased amortization
on January 1, 2002 and, as a result of a review of the goodwill as of September
30, 2003, we recorded an impairment charge of $213.0 due to recent research
focus changes and personnel changes. In accordance with purchase accounting,
we have included the results of operations for Research Sarl from the date of
acquisition. In connection with the purchase price allocation, $26.1 million was expensed as
a charge for the purchase of in-process research and development. We allocated
values to the in-process research and development based on an independent
appraisal of the research and development projects. The income approach was the
primary technique utilized in valuing the purchased research and development
projects. The value assigned was limited to significant research projects for
which technological feasibility had not been established, F-20




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K including development, testing and regulatory activities associated with the
introduction of Research Sarls projected product launches. The value assigned
to purchased in-process technology was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from the projects and discounting the
net cash flows to their present value. Due to the complexity of the acquired
research and development, the technologies under development could, once
completed, only be economically used for their specific and intended purposes
in the targeted disease segments. If we were to fail in our efforts to
commercialize these developmental drug candidates, no alternative economic
value is envisioned. The assembled work force was valued using the cost
approach. Under this approach, the work force is valued by calculating the
savings realized by us through obtaining a pre-existing, trained and fully
efficient operations and administrative team rather than incurring the costs to
assemble and train an equivalent workforce. The independent appraisal also considered the fact that the existing know-how
diminishes in value over time as new technologies are completed and changes in
market conditions render current products and methodologies obsolete. The
assumptions underlying the cash flow projections used were derived primarily
from investment banking reports, historical results, company records and
discussions with management. The revenue projection used to value the in-process research and development
was based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions by us and competitors. Future royalty revenue estimates were
aggregated for the APOMINE cancer indications and Lp(a) inhibitor based on
managements estimate of the following: (i) addressable number of patients in
the U.S. market, (ii) market penetration, (iii) average sales price, (iv)
estimate of remaining worldwide market and (v) the Companys projected royalty
rate received from its partner. The discount rate selected for the in-process
technology was 30% for both APOMINE and Lp(a). Due to the aggressive nature of
managements forecast and the high level of risk associated with the Company
achieving the projected cash flows, the discount rate was calculated using
venture capital-type rates of return. The rate was determined based on analysis
of three venture capital studies utilizing rates appropriate to start-up type
companies. For the purposes of the independent appraisal, only the economics related to
Research Sarls lead drug candidates, APOMINE and Lp(a) were considered. It was
determined that forecasting cash flows for Research Sarls other developmental
projects was not feasible at the time of acquisition due to their early stage
of development. At the time of acquisition, management estimated that
approximately $14.0 million to $15.0 million had been spent on APOMINE and
Lp(a), and an additional $17.0 million to $20.0 million was expected to
be incurred to complete clinical testing and gain marketing approval. APOMINE, targeted at oncology as well as osteoporosis, represented
approximately 45% of the in-process research and development value. As of the
date of the acquisition, the project was expected to be completed and
commercially available in the U.S. no sooner than 2007 for its first cancer
indication. Management believes that we may be able to license APOMINE and
related compounds to a pharmaceutical company or marketing partner for the
osteoporosis indication upon acquisition of the necessary clinical data in
2005. Accordingly, as of December 31, 2003, we continue to pursue and invest
resources in the clinical development of APOMINE for osteoporosis, however we
have determined that we will no longer pursue our development of APOMINE in
cancer. Lp(a), an inhibitor that may lead to a reduction in coronary heart disease,
represented approximately 55% of the in-process research and development value.
As of the date of the acquisition, the Lp(a) project was expected to be
completed and commercially available in the U.S. no sooner than 2007, with an
estimated cost to complete of approximately $5.0 million to $6.0 million. In
the second quarter of 2003, we signed an agreement with QuatRx Pharmaceuticals,
Co. granting them an exclusive worldwide license to certain cardiovascular
research platforms associated with Lp(a) (see Note 11). We believe that the foregoing assumptions used in the purchase price allocation
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate revenue, development
costs or profitability or the events associated with such projects will
transpire as estimated. For these reasons, actual results may vary from
projected results. The most significant and F-21




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K uncertain assumptions relating to the in-process projects relate to the
projected timing of completion and revenues attributable to each project. The following table reflects unaudited pro forma combined results of operations
of ILEX and Research Sarl, as if the acquisition had occurred on January 1,
2001. Included in pro forma results is amortization of the goodwill of $100.0
for the year ended December 31, 2001. Also included in the pro forma results is
$26.1 million recorded as in-process research and development for the year
ended December 31, 2001. Such pro forma information is presented for
informational purposes only and is not necessarily indicative of the
consolidated results that would have been achieved had the acquisition actually
been consummated at January 1, 2001. Year EndedDecember 31, 2001Total revenue
    
    $
    29,567Net loss
    
    
    (120,967
    )Basic and diluted net loss per share
    
    $
    (4.47
    )
 7. SETTLEMENT CHARGE In April 2003, our subsidiary, ILEX Services settled a dispute with a former
contract research organization (CRO) customer. As a result of this settlement,
ILEX Services paid the former CRO customer $20.0 million in the second quarter
of 2003. We recorded a settlement charge in the first quarter of 2003 of $16.5
million, which is net of insurance reimbursement of $3.5 million, related to
the settlement of this dispute. 8. STOCKHOLDERS EQUITY On August 4, 2003, we completed an underwritten public offering of our common
stock, pursuant to which we sold 5.5 million shares. In addition, the Cancer
Therapy and Research Center Endowment, an ILEX shareholder, offered
and sold 500,000 shares of our common stock. Proceeds, net of costs to us, from this
offering were approximately $87.4 million. The net
proceeds from this offering will be used to fund clinical trials of our lead
product candidates; for clinical and preclinical studies for our other product
candidates; for potential licenses and acquisitions of other businesses or
complementary products and technologies; and for working capital, capital
expenditures and other general corporate purposes. In March 2003, we granted 150,000 shares of restricted stock to one of our
officers. In accordance with the restricted stock agreement, 50,000 shares
vested immediately and the remaining 100,000 shares vest at a rate of 33% per
year over the following three years. The fair market value of the restricted stock on
the grant date was approximately $1.1 million. As of December 31, 2003, approximately $697.0
has been recognized as compensation expense in our consolidated statement of
operations and the remaining $359.0 is included in deferred compensation in our
consolidated balance sheet. In November 2001, we completed an underwritten public offering of our common
stock pursuant to which we sold 5.75 million shares. The number of shares sold
included the underwriters exercise of their overallotment option. Proceeds,
net of offering costs, to us from this offering were approximately $128.9
million, which includes the reissuance of our 39,000 treasury shares. On March 30, 2001, our Board of Directors declared a dividend of one Preferred
Share purchase right (Right) for each outstanding share of our common stock,
par value $.01 per share (the Common Shares), and authorized the issuance of
one Right for each Common Share which shall become outstanding between April
20, 2001, the Record Date and the earlier of the Distribution Date
(as defined in the Rights Agreement (Rights Agreement), filed with the
Securities and Exchange Commission as an exhibit to a Current Report
on Form 8-K dated April 1, 2001, and the first amendment to the
Rights Agreement filed herewith) or the final
expiration date of the Rights. The dividend was payable on, April 20, 2001, to
the stockholders of record on that date. Each Right entitles the registered
holder to purchase from us one one-thousandth interest in one share of our
Series I Preferred Stock, par value $.01 per share (the Preferred Shares), at a
price of $120 per one one-thousandth interest in a Preferred Share (the
Purchase Price), subject to adjustment. The Rights will become F-22




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K exercisable
ten days after (i) an Acquiring Person accumulates beneficial
ownership of 20% or more of our common stock or (ii) following the commencement
of, or announcement of an intention to make, a tender offer or exchange offer
the consummation of which would result in an Acquiring Person accumulating 20%
or more of the common stock. In the event
that we are, in effect, acquired by an Acquiring Person in a
merger or other business combination transaction or 50% or more of our
consolidated assets or earning power is sold to an Acquiring Person, proper provision will be made so
that each holder of a Right will thereafter generally have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the then
current Purchase Price of the Right. The description and terms of the Rights
are set forth in a Rights Agreement between us and American Stock Transfer &
Trust Co., as Rights Agent. The plan was not adopted in response to any
unsolicited offer or takeover attempt. 9. STOCK OPTIONS AND STOCK PURCHASE WARRANTS SFAS No. 123, Accounting for Stock-Based Compensation defines a fair value
based method of accounting for employee stock options or similar equity
instruments and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period of the award, which is
usually the vesting period. However, SFAS No. 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). We have adopted SFAS No. 123 and have elected to remain with the
accounting prescribed by APB 25. We have made the required disclosures
prescribed by SFAS No. 123. During 2001, we adopted the 2001 UK Stock Option Plan (the UK Plan). Under the
UK Plan, stock options may be granted to our key employees and directors. The
UK Plan is part of the 2000 Employee Stock Compensation Plan (2000 Plan).
Shares granted under the UK Plan are granted from the total shares available
for grant under the 2000 Plan. Stock options vest pursuant to the individual
stock option agreements, usually 25% per year beginning one year from the date
of grant, with unexercised options expiring ten years from the date of grant.
Pursuant to the UK Plan, as of December 31, 2003, options allowing the purchase
of 7,400 shares have been granted; options covering 5,280 shares have been
forfeited and all options remain unexercised. During
1995, we adopted a stock option plan (the 1995 Plan). Under the 1995 Plan, stock
options may be granted to our key employees and consultants as approved by a
committee of our board of directors. Originally, we had reserved 1,141,807
shares of common stock for issuance in accordance with the 1995 Plan. In May 1998,
our shareholders approved an increase in the number of authorized shares of common stock reserved for
issuance under the 1995 Plan to 1.8 million. Stock options vest pursuant to the
individual stock option agreements, usually 25% per year beginning one year
from the date of grant, with unexercised options expiring ten years from the
date of grant. As of December 31, 2003, 5,705 shares were available for grant
under the 1995 Plan. In October 1996, we adopted a nonemployee directors stock option plan (the
1996 Plan). The total number of options that may be granted under the
1996 Plan is 225,000. Under the 1996 Plan, each nonemployee
director is granted an option for up to 17,500 shares of common stock upon
appointment to the board. As of December 31, 2003, nonemployee directors had
been granted a total of 154,896 options upon appointment to the board which
vest at 1/48 per month. Additionally, each nonemployee director is
eligible, based on their participation in meetings of the board of
directors and committees thereof, to receive up to 6,000 stock options annually, which are fully
vested at the time of grant.
As of December 31, 2003, nonemployee directors had been granted 81,000 of these
options for participation. All options issued under the 1996 Plan expire
ten years from the date of grant unless the nonemployee director
resigns or is not reelected. Currently, options are granted to directors
under the 2000 Plan. Our directors have been granted a total of 131,576
options under the 2000 Plan. As of December 31, 2003, 17,768 shares were
available for grant under the 1996 Plan. F-23




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K In May 2000, shareholders approved a proposal to ratify the adoption of the
2000 Plan. The 2000 Plan authorizes a committee of the Board of Directors to
issue options intended to qualify as incentive stock options (ISOs) as
defined in Section 422 of the Internal Revenue Code of 1986 (the Code), stock
options that are not intended to conform to the requirements of Section 422 of
the Code (Non-ISOs), and restricted stock awards. Originally, we had
reserved 3.0 million shares of common stock for issuance under the 2000 Plan.
In 2002, we increased the authorized number of shares of common stock reserved
for issuance under the 2000 Plan to 3.25 million, and in January 2003, the
authorized number of shares was increased to 4.25 million. Stock options vest
pursuant to the individual stock option agreements, usually 25% per year
beginning one year from the date of grant, with unexercised options expiring
ten years from the date of grant. As of December 31, 2003, 913,066 shares were
available for grant under the 2000 Plan. In connection with a prior private placement of convertible preferred stock, we
issued 355,913 warrants for the purchase of common stock at approximately $8.76
per share. As a result of an additional private placement in July 1999, the
exercise price of the warrants was adjusted to $8.71. In July 2001, all
outstanding warrants associated with this prior private placement were
exercised. A summary of the status of our fixed stock option plans for the years ended
December 31, 2003, 2002 and 2001, and changes during these years on those dates
is presented below: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding, beginning of year
    
    
    3,863,312
    
    
    $
    18.17
    
    
    
    3,153,343
    
    
    $
    22.99
    
    
    
    2,476,424
    
    
    $
    21.72Granted
    
    
    1,249,686
    
    
    
    17.47
    
    
    
    1,459,416
    
    
    
    9.37
    
    
    
    1,208,100
    
    
    
    24.91Exercised
    
    
    (230,067
    )
    
    
    8.32
    
    
    
    (199,485
    )
    
    
    7.83
    
    
    
    (212,772
    )
    
    
    11.09Forfeited
    
    
    (870,061
    )
    
    
    21.36
    
    
    
    (549,962
    )
    
    
    26.24
    
    
    
    (318,409
    )
    
    
    28.27Outstanding, end of year
    
    
    4,012,870
    
    
    $
    17.94
    
    
    
    3,863,312
    
    
    $
    18.17
    
    
    
    3,153,343
    
    
    $
    22.99Options exercisable at end of year
    
    
    1,457,442
    
    
    $
    20.71
    
    
    
    1,387,432
    
    
    $
    21.19
    
    
    
    1,111,908
    
    
    $
    18.24Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    9.99
    
    
    
    
    
    
    $
    5.67
    
    
    
    
    
    
    $
    14.96
 The following table summarizes the information about fixed stock options
outstanding at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    NumberAverage
    
    Weighted
    
    Exercisable
    
    WeightedRemaining
    
    Average
    
    at
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    December 31,
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    2003
    
    Price$3.50
    
    
    30,496
    
    
    
    1.8
    
    
    $
    3.50
    
    
    
    30,496
    
    
    $
    3.50$5.78 - $8.63
    
    
    1,088,157
    
    
    
    8.3
    
    
    
    6.88
    
    
    
    230,757
    
    
    
    6.97$9.44 - $13.79
    
    
    224,579
    
    
    
    6.8
    
    
    
    11.15
    
    
    
    164,079
    
    
    
    11.11$14.75 - $21.49
    
    
    1,326,984
    
    
    
    9.2
    
    
    
    18.98
    
    
    
    206,748
    
    
    
    17.84$22.73 - $34.06
    
    
    1,281,070
    
    
    
    7.4
    
    
    
    26.72
    
    
    
    779,177
    
    
    
    27.08$36.25 - $50.00
    
    
    61,584
    
    
    
    6.3
    
    
    
    40.11
    
    
    
    46,185
    
    
    
    40.11$3.50 - $50.00
    
    
    4,012,870
    
    
    
    8.1
    
    
    $
    17.94
    
    
    
    1,457,442
    
    
    $
    20.71
 Had compensation cost for our stock-based employee compensation plans been
determined based upon a fair value method consistent with SFAS No. 123, our net
loss and loss per share would have been increased to the pro forma amounts
indicated below: F-24




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K Years Ended December 31,2003
    
    2002
    
    2001Net loss
    
    As reported
    
    $
    (62,114
    )
    
    $
    (46,156
    )
    
    $
    (120,954
    )Fair value compensation cost
    
    
    (8,921
    )
    
    
    (8,168
    )
    
    
    (8,024
    )Stock grant compensation cost included in reported loss
    
    
    697
    
    
    
    
    
    
    
    Pro forma
    
    $
    (70,338
    )
    
    $
    (54,324
    )
    
    $
    (128,978
    )Loss per share
basic and diluted
    
    As reported
    
    $
    (1.76
    )
    
    $
    (1.42
    )
    
    $
    (4.48
    )Fair value compensation cost
    
    
    (0.25
    )
    
    
    (.25
    )
    
    
    (.30
    )Stock grant compensation cost included in reported loss
    
    
    0.02
    
    
    
    
    
    
    
    Pro forma
    
    $
    (1.99
    )
    
    $
    (1.67
    )
    
    $
    (4.78
    )
 For options granted in 2003, 2002 and 2001, the fair value of each option grant
was estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions: dividend yield of 0% for
all years; expected volatility of 77.3% in 2003, 80.0% in 2002 and
78.4% in 2001: risk free interest rate of 2.7% in 2003, 3.2% in 2002 and 4.0% in 2001. The expected life of the options granted for 2003,
2002 and 2001 is 4.0 years. 10. RELATED-PARTY TRANSACTIONS CTRC Research Foundation, one of our stockholders, performs certain research
services for us. These services are provided at fair value. As described in
Note 14, we have a lease agreement with CTRC Research Foundation Building
Corporation, a joint venture comprised of CTRC Research Foundation and the
Texas Research Park Foundation, for the cGMP facility. Additionally, two
members of our Board of Directors are on the Board of Directors of CTRC. U.S. Oncology, Inc. provides clinical trial patients for trials conducted by
us on our own proprietary product pipeline and, in the past, on behalf of our
CRO sponsors. A member of our Board of Directors was the Executive Vice
President, Clinical Affairs at U.S. Oncology through January 1, 2004 and
currently serves as a policy advisor to U.S. Oncology. In May 2001, we entered into an agreement with the Arizona Board of Regents for
the University of Arizona for pancreatic cancer research. As of December 31,
2002, all amounts related to this research agreement had been expensed.
Additional amounts paid to the University of Arizona relate to payments to
investigators. A member of our Board of Directors is currently the Director of
the Arizona Health Science Centers Cancer Therapeutics Program and Professor
of Medicine at the University of Arizona Health Science Center in Tucson. In July 1997, we entered into a consulting agreement with Dr. Von Hoff, which
expired on December 31, 2002 and a new agreement was entered into in January
2003, which expires on December 31, 2004. Under the terms of the agreement,
we will pay Dr. Von Hoff an annual fee of $275.0 for services provided in
accordance with the agreement and reimbursement of out-of-pocket expenses
incurred in connection with the services provided. The related party subcontractors provide us with consulting services and
preclinical and clinical testing related to certain of our contracts. Such
costs may be included in either research and developments costs or direct costs
of research services in the accompanying consolidated financial statements. F-25




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K For the years ended December 31, 2003, 2002 and 2001, we incurred the following
related party expenses: Years Ended December 31,2003
    
    2002
    
    2001CTRC Research Foundation
    
    $
    350
    
    
    $
    504
    
    
    $
    159CTRC Research Foundation Building Corporation
    
    
    240
    
    
    
    240
    
    
    
    231Director of the Company
    
    
    280
    
    
    
    342
    
    
    
    403Stockholders
    
    
    
    
    
    
    
    
    
    
    291US Oncology
    
    
    758
    
    
    
    512
    
    
    
    (82
    )University of Arizona
    
    
    87
    
    
    
    856
    
    
    
    485$
    1,715
    
    
    $
    2,454
    
    
    $
    1,487
 At December 31, 2003 and 2002, the following subcontractor costs were payable
to related parties: December 31,2003
    
    2002CTRC Research Foundation
    
    $
    152
    
    
    $
    156University of Arizona
    
    
    21
    
    
    
    206US Oncology
    
    
    391
    
    
    
    93$
    564
    
    
    $
    455
 During 2001, we performed contract research services on behalf of the
Partnership at our standard billing rates. For the year ended December 31,
2001, we recorded associated revenues in the amount of $3.9 million.
Subsequent to the purchase of Millenniums interest in the Partnership, these
services are intercompany revenues which are eliminated. 11. LICENSING AGREEMENTS In December 2003 and in connection with our co-development agreement, we paid
Bioenvision $3.5 million, which was expensed, for the exclusive U.S. and
Canadian sublicense for clofarabine in oncology. Under the terms of the
agreement, an additional $4.0 million, payable in two payments, is owed upon
completing the submission of the New Drug Application (NDA) which has not yet
occurred. As a result, the $4.0 million has not been recorded as of December
31, 2003. In May 2003, we signed an agreement with QuatRx which granted them an
exclusive, worldwide license to certain lipid-focused research platforms. In
connection therewith, we received a payment of $2.5 million, which was
recognized as revenue in the third quarter of 2003, as the associated
technology transfer was completed during that period. We may also receive
payments upon the completion of certain milestones and royalties based on net
sales of a product developed from these research platforms. On
April 19, 2002, we entered into a collaboration agreement with Abgenix, Inc.
(Abgenix) to identify and develop fully human monoclonal antibody candidates to
the MUC1 protein, a dominant oncogene significantly overexpressed on a wide
range of solid tumors. Abgenix will grant ILEX an exclusive license to
commercialize products comprising one or more antibodies derived from this
program. Under this agreement, we paid Abgenix $100.0 for a technology access
fee. Additionally, we may be required to make future payments in accordance
with the agreement if certain milestones are met. On December 19, 2001, we entered into an agreement with Paralex, Inc. (Paralex)
whereby we have granted to Paralex an exclusive license to all of ILEXs rights
to oxypurinol under an original license agreement between ILEX, GlaxoSmithKline
(GSK), and The Wellcome Foundation (TWF) for the treatment of symptomatic
hyperuricemia (gout) in patients who are intolerant of allopurinol. In 2002,
Paralex was purchased by Cardiome Pharma Corporation (Cardiome). Under the
agreement, ILEX granted Paralex, now Cardiome, an exclusive license to develop
and commercialize oxypurinol in all fields under data and technology owned by
us, subject only to the terms of the original license agreement with GSK and F-26




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K TWF. Cardiome exercised its option to acquire ownership of the clinical trial
data package derived from the Phase II clinical study for the treatment of gout
patients who are intolerant to allopurinol. In the event oxypurinol is
commercialized, we will receive a milestone payment and a royalty from sales of oxypurinol.
Additionally, Cardiome is committed to purchasing a certain level of supplies
from us by year-end 2004. In July 2001, we entered into an agreement with the Dana-Farber Cancer
Institute at Harvard Medical School (DFCI) for an exclusive, worldwide license
for patent rights and technology relating to the MUC1 protein. The agreement
requires us to pay approximately $200.0 in past patent expenses and up to $1.0
million in license fees. As of December 31, 2003, we expensed the entire $1.2
million in license fees and past patent expenses in accordance with the
agreement. We may be required to make future payments in accordance with the
agreement if certain drug development milestones are met. In July 2000, we entered into an agreement with Knoll AG (Abbott Laboratories)
for an exclusive, worldwide license of ILX-651, a synthetic pentapeptide analog
of dolastatin. As of December 31, 2003, we had paid $16.1 million in license
fees. These fees have all been expensed. We may be required to pay future
license maintenance fees in either cash or unrestricted stock in accordance
with the agreement if certain drug development and time-based milestones are
met. 12. DEVELOPMENT AND DISTRIBUTION AGREEMENT In January 2003, Schering AG obtained from us the exclusive development,
marketing and distribution rights to CAMPATH in Japan, China and the Asian
Pacific Basin. We received an upfront payment and incurred an associated fee
of 50% of such payment to the licensor, both of which are being recognized over
the life of the patent in that region. We may also receive payments upon
completion of certain milestones and a royalty based on net sales of CAMPATH in
those areas. 13. EMPLOYEE BENEFITS We have an employee benefit plan and trust for certain employees who meet
specified length of service requirements. The plan qualifies under Section
401(k) of the Internal Revenue Code as a salary reduction plan. In January
2003, we increased the amount that employees may elect to contribute to a
maximum of 25% of their salaries on a before-tax basis. Prior to 2003,
employees were allowed to contribute up to 15% of their salaries on a
before-tax basis. The plan is a defined contribution plan with employer
contributions made solely at the discretion of the board of directors. For the
years ended December 31, 2003, 2002 and 2001, administrative expenses incurred
by us related to this plan were not significant. In January 2000, we elected
to begin making contributions of up to 3% of an employees salary. Our
contributions to the plan were $360.0 for the year ended
December 31, 2003, $397.7 for the year ended December 31, 2002
and $418.0 for the year ended December 31, 2001. Employees are immediately fully
vested in their contributions and begin vesting in employer contributions after
one year of service, as defined in the plan document. We do not provide
postretirement benefits or postemployment benefits to our employees. In 2001, we
adopted the EDCP, which became effective in 2002. The EDCP is a nonqualified deferred compensation plan available to a select group
of our officers and other key employees. Participants in the
EDCP are able to defer current federal income taxes on an
unlimited amount of compensation. We match 50% of the first 6% of each
participants contribution. Our contribution to the EDCP
was $94.8 for the year ended December 31, 2003 and $80.0 for the
year ended December 31, 2002.
Assets associated with the EDCP of $895.0 are accounted for as
trading securities and are included in investments in securities on our
consolidated balance sheet. We have also recognized a liability of $895.0
related to the EDCP which is included in accrued liabilities on our
consolidated balance sheet. The EDCP is unfunded for tax
purposes and for purposes of Title I of ERISA. Participation in the
EDCP constitutes a promise by ILEX to make payments in accordance
with the terms of the EDCP, and Participants and beneficiaries shall have the
status of general unsecured creditors. F-27




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K 14. LEASES We have several noncancelable operating leases for office space, equipment and
the cGMP facility. Rent expense associated with these leases was approximately
$2.8 million for the year ended December 31,
2003, $3.9 million for the year ended December 31, 2002 and $4.0
million for the year ended December 31, 2001. One of the leases is with CTRC Research
Foundation Building Corporation, a related party (see Note 10). At December 31, 2003, future minimum lease payments under all leases are as
follows: Related Party
    
    Other
    
    TotalYears ending December 31,2004
    
    $
    240
    
    
    $
    2,328
    
    
    $
    2,5682005
    
    
    240
    
    
    
    2,053
    
    
    
    2,2932006
    
    
    240
    
    
    
    2,032
    
    
    
    2,2722007
    
    
    240
    
    
    
    1,667
    
    
    
    1,9072008
    
    
    240
    
    
    
    1,363
    
    
    
    1,603Thereafter
    
    
    480
    
    
    
    521
    
    
    
    1,001Total
    
    $
    1,680
    
    
    $
    9,964
    
    
    $
    11,644
 In July 2000, we entered into an agreement to lease our current corporate
headquarters. The commencement date of the operating lease was October 20,
2000, with a lease term of eight years. Future minimum lease payments under
this lease agreement are between $941.0 and $1.3 million per year through
October 31, 2008. We account for these lease payments under the straight-line
method. The lease required a deposit of approximately $140.0, which was
recorded as other non-current assets. Additionally, in connection with the
lease, we maintain a letter of credit, with the lessor as beneficiary, in the
amount of $1.9 million. The letter of credit is 105% collateralized with $2.0
million in restricted cash. In 2000, we entered into capital lease agreements which expired by the end of
2003. Amortization expense was $59.0, for the
year ended December 31, 2003, $106.0 for the year ended December
31, 2002 and $105.0 for the year ended December 31, 2001. Interest
expense was $1.0 for the year ended December 31, 2003, $10.0 for the year ended December 31, 2002 and $13.0 for the year ended December 31, 2001. During 1995, we entered into the previously discussed related party lease
agreement. The leased cGMP facility is owned by a non-profit corporation
controlled by CTRC Research and the Texas Research Park Foundation. These two
organizations obtained a grant to build the facility from the Economic
Development Administration (EDA). The cGMP facility allows for the
manufacturing of oncology drugs. Currently, the facility is being used for
manufacturing support activities. Under the terms of the lease agreement,
which expires in 2010 and includes three additional five-year extension
options, we are required to make monthly payments, which commenced in 1998.
The payments are based on a fixed monthly rate plus a percentage of gross
sales, as defined in the agreement. This facility has produced no product
sales subject to such payments. In the event that there is an early
termination of the lease or a non-conforming use, there is a risk that we may
be required to repay a portion of the EDA grant. 15. INCOME TAXES As of December 31, 2003, we had net operating loss (NOL) carryforwards of
approximately $235.0 million for U.S. federal income tax purposes, which are
available to reduce future taxable income and which will expire in 2010 through
2023. As of December 31, 2003, we had federal research and development credit
carryforwards of $5.6 million that will expire in 2011 through 2023. Included
below in other tax differences, net is a gross capital loss carryforward of
$2.2 million, which will expire in 2004 if not utilized against capital gains. F-28




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K In addition,
as of December 31, 2003, we had Swiss NOLs of approximately $1.1
million and U.K. NOLs of approximately $0.8 million. The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows as of December 31,
2003 and 2002: December 31,2003
    
    2002Net operating loss carryforward
    
    $
    82,716
    
    
    $
    59,899Carrying value of technology
    
    
    20,621
    
    
    
    19,708Expense provisions
    
    
    474
    
    
    
    438Federal research and development credit
carryforwards
    
    
    5,611
    
    
    
    4,811Other tax differences, net
    
    
    703
    
    
    
    733Valuation allowance
    
    
    (110,125
    )
    
    
    (85,589
    )Total deferred income tax assets
    
    $
    
    
    
    $
    
 The valuation allowance as of December 31, 2003 and 2002 provides a reserve
against the above deferred tax assets, which were not realizable at the above
dates. The availability of the NOL and credit carryforwards to reduce U.S. federal
taxable income is subject to various limitations under Section 382 of the
Internal Revenue Code of 1986, as amended, in the event of a change in
ownership. Such an ownership change occurred in 1999. However, we believe
that the limitations will not significantly impact the ability to utilize the
NOL and tax credit carryforwards before their expiration periods. Our loss before income taxes for financial reporting purposes consists of the
following: Years Ended December 31,2003
    
    2002
    
    2001Domestic
    
    $
    (60,730
    )
    
    $
    (48,017
    )
    
    $
    (91,873
    )Foreign
    
    
    (1,360
    )
    
    
    2,150
    
    
    
    (29,059
    )Loss before
income taxes
    
    $
    (62,090
    )
    
    $
    (45,867
    )
    
    $
    (120,932
    )
 Our tax provision of $24.0 at
December 31, 2003, $289.0 at December 31, 2002 and
$22.0 at December 31, 2001, relates primarily to current taxes on foreign operations.
We have not provided any U.S. deferred income taxes on the undistributed
earnings of our foreign subsidiaries based on the determination that such
earnings will be indefinitely reinvested. Income tax expense attributable to income from continuing operations differed
from the amounts computed by applying the statutory tax rate of 35% to pre-tax
loss from continuing operations as a result of the following: Years Ended December 31,2003
    
    2002
    
    2001Computed expected tax expense
    
    $
    (21,731
    )
    
    $
    (16,053
    )
    
    $
    (42,327
    )Write-off of in-process research and
development for book purposes
    
    
    
    
    
    
    
    
    
    
    9,136Other permanent items
    
    
    (1,278
    )
    
    
    (127
    )
    
    
    86Change in valuation allowance
    
    
    24,536
    
    
    
    19,735
    
    
    
    32,271Research and development credit
    
    
    (800
    )
    
    
    (2,237
    )
    
    
    (1,208
    )Foreign income (loss) taxed at other
than U.S. rates and
other foreign items
    
    
    500
    
    
    
    (464
    )
    
    
    1,058Other, net
    
    
    (1,203
    )
    
    
    (565
    )
    
    
    1,006Provision for foreign income taxes
    
    $
    24
    
    
    $
    289
    
    
    $
    22
 F-29




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K 16. COMMITMENTS AND CONTINGENCIES In September 2003, certain former shareholders of Convergence Pharmaceuticals,
Inc. (Convergence) delivered to us a demand for arbitration under the Plan of
Merger and Acquisition Agreement executed in connection with our acquisition of
Convergence in July 1999. The demand for arbitration alleges that we breached
an obligation of good faith and fair dealing by intentionally delaying Phase II
trials of NM-3 in order to avoid making a milestone payment of 500,000 shares
of our Common Stock that would have become due pursuant to the Plan of Merger
and Acquisition Agreement if Phase II trials were initiated by December 31,
2002. The demand for arbitration was filed by former shareholders of
Convergence whose pro rata share of the 500,000 share milestone payment is
210,000 shares. The parties are in the discovery phase of the arbitration
proceedings. We believe that the claims made against us are without merit and
intend to defend the action vigorously. However, the arbitration process is
inherently uncertain and unpredictable, and accordingly there can be no
assurance as to the ultimate outcome of the arbitration. If we are required to
deliver shares subject to the current demand or otherwise pay damages in lieu
thereof, then we may be required to deliver up to an additional 290,000 shares
or pay damages to the other former Convergence shareholders in connection with
potential additional disputes with other former Convergence shareholders. During 1998, we guaranteed a line of credit for Clinical Research Group, Inc.
(CRG). The guarantee gave us access to a network of clinical sites managed by
CRG. If the guarantee comes to redemption, we will obtain an ownership
interest in CRG in accordance with the guarantee agreement. Under the terms of
the agreement, we maintained approximately $492.0 in the form of securities as
collateral for the guarantee as of December 31, 2003. At December 31, 2003, we
had yet to fund the guarantee, however it has been reserved for in prior
financial statements. In addition to matters described above, we are subject to various other claims
and assessments arising out of the ordinary course of business. We believe it
is unlikely that the final outcome of any such ordinary course of business
claims or proceedings to which we are a party will have a material adverse
effect on our financial position or results of operations. However, due to the
inherent uncertainty of litigation, there can be no assurance that the
resolution of any such claim or proceeding would not have a material adverse
effect on our results of operations for the period in which such resolution
occurred. Our sole
supplier of CAMPATH is BI in Germany.
The agreement with BI is payable in euros and contains a minimum purchase
quantity in kilograms, which equals approximately $4.5 million per year through
2006, or a total of approximately $13.5 million, to avoid a contractual
surcharge. The minimum purchase quantity of $4.5 million per year is
calculated based on the current exchange rate. We believe that the minimum
purchase quantity will be satisfied. In connection
with research and development efforts associated with our product
pipeline, we have entered into agreements with certain development partners,
which generally expire over several years. The terms of these agreements
require us to make payments in either cash or stock if certain drug development
or time-based milestones are met. Based upon the assumption that all milestones are
achieved at expected dates, total potential commitments for the next five
years under these agreements are estimated to be $48.9 million due as follows: Milestone paymentsYear ending December 31,2004
    
    $
    7,9282005
    
    
    8,4672006
    
    
    19,6752007
    
    
    10,6752008
    
    
    2,175Total
    
    $
    48,920
 F-30




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ILEX ONCOLOGY, INC.2003 ANNUAL REPORT ON FORM 10-K 17. NOTE PAYABLE In connection with the purchase of Millenniums interest in the Partnership we
were obligated to pay $140.0 million. The terms of the agreement required an
initial cash payment of $20.0 million and $120.0 million in scheduled payments.
The first two scheduled payments of $20.0 and $40.0 million were made on
December 31, 2001 and 2002, respectively. Additionally,
$40.0 million was paid
in 2003, $10.0 million of which was paid with our common stock.
The remaining $40.0 million is due in 2004, of which we may pay $10.0 million
in our common stock subject to certain terms and conditions and at our option.
Our $38.4 million current note payable balance as of December 31, 2003
represents the present value of the future payments to be made to Millennium.
Interest has been imputed on this note payable at the rate of 6.2%. 18. QUARTERLY FINANCIAL DATA (UNAUDITED) The tables below show our results of operations by quarter for the years ended
December 31, 2003 and 2002. Included in these results are certain prior year
reclassifications to conform to the current year presentation (see Note 2).
Amounts are in thousands, except per share amounts. 2003 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    YearRevenue
    
    $
    8,684
    
    
    $
    10,127
    
    
    $
    8,726
    
    
    $
    7,252
    
    
    $
    34,789Operating loss
    
    
    (24,962
    )
    
    
    (8,748
    )
    
    
    (10,761
    )
    
    
    (17,804
    )
    
    
    (62,275
    )Net loss
    
    
    (24,921
    )
    
    
    (8,792
    )
    
    
    (10,624
    )
    
    
    (17,777
    )
    
    
    (62,114
    )Net loss per share:Basic and diluted
    
    $
    (.76
    )
    
    $
    (.27
    )
    
    $
    (.29
    )
    
    $
    (.46
    )
    
    $
    (1.76
    )
 2002 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    YearRevenue
    
    $
    8,271
    
    
    $
    7,428
    
    
    $
    7,919
    
    
    $
    7,283
    
    
    $
    30,901Operating loss
    
    
    (9,860
    )
    
    
    (15,829
    )
    
    
    (10,038
    )
    
    
    (10,570
    )
    
    
    (46,297
    )Net loss
    
    
    (9,122
    )
    
    
    (15,486
    )
    
    
    (10,405
    )
    
    
    (11,143
    )
    
    
    (46,156
    )Net loss per share:Basic and diluted
    
    $
    (.28
    )
    
    $
    (.48
    )
    
    $
    (.32
    )
    
    $
    (.34
    )
    
    $
    (1.42
    )
 19. SUBSEQUENT EVENT On February 26, 2004, we entered into a definitive merger agreement with
Genzyme. Under the terms of the Merger Agreement, each
outstanding share of ILEX common stock, $0.01 par value per share, will be
converted into the right to receive a fraction of a share (the Exchange
Ratio) of Genzyme common stock. The Exchange Ratio will be calculated by
dividing $26.00 by the average per share closing price of Genzyme common stock
(the Genzyme Share Price) as reported by the NASDAQ National Market over the
twenty trading days ending on the fifth trading day prior to the closing date
of the Mergers, except that if the Genzyme Share Price is greater than $59.88,
the Exchange Ratio will be 0.4342, and if the Genzyme Share Price is less than
$46.58, the Exchange Ratio will be 0.5582. In addition, each outstanding option
to purchase ILEX common stock will be immediately vested and will be converted
into an option to purchase the
number of shares of Genzyme common stock equal to the number of shares of ILEX
common stock subject to such option multiplied by the Exchange Ratio, and the
associated exercise price will be adjusted accordingly. Until the closing date,
which is anticipated to occur in mid-2004, we will continue to operate
independently of Genzyme. The closing of the transaction is contingent upon
approval by certain regulatory authorities including the U.S. Federal Trade
Commission and our shareholders.  If the merger is not completed, we
maybe subject to payment of a $32.5 million termination fee
under certain circumstances and payment of a maximum of
$2.5 million in costs related to the merger, such as financial,
advisory, legal and accounting fees. Additionally, the Rights
Agreement discussed in Note 8 was amended on February 26, 2004
to, among other things, exclude Genzyme Corporation from the
definition of an Acquiring Person. F-31