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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ________________ Form 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004OR o
    
    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 ________________ Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or15(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. YesxNoo. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YesxNoo. The number of shares outstanding of the Registrants common stock as of
April 30, 2004 is 39,071,832.




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q   
 INDEX PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations  Three Month Periods Ended March
31, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows  Three Month Periods Ended March
31, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 6.Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    18Computation of Net Loss Per ShareCertification of President and CEO - Section 302Certification of Senior VP and CFO - Section 302Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350
 2




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts) March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    80,894
    
    
    $
    63,154Investments in marketable securities
    
    
    60,322
    
    
    
    75,791Restricted investments
    
    
    816
    
    
    
    816Accounts receivable, net of allowance for doubtful accounts of $5
in 2004 and 2003
    
    
    216
    
    
    
    166Accounts receivable from Schering AG
    
    
    11,327
    
    
    
    8,363Other receivables
    
    
    2,247
    
    
    
    2,152Prepaid expenses and other
    
    
    3,241
    
    
    
    2,433Total current assets
    
    
    159,063
    
    
    
    152,875Investments in marketable securities
    
    
    32,802
    
    
    
    56,209Restricted investments
    
    
    1,691
    
    
    
    1,691Completed technology asset, net of accumulated amortization
of $10,414 and $9,257 in 2004 and 2003, respectively
    
    
    54,386
    
    
    
    55,543Other intangible assets, net of accumulated amortization of $606 and
$517 in 2004 and 2003, respectively
    
    
    4,194
    
    
    
    4,283Other assets
    
    
    640
    
    
    
    689Property and equipment, at cost, net of accumulated depreciation
of $10,627 and $10,302 in 2004 and 2003, respectively
    
    
    3,356
    
    
    
    3,805TOTAL ASSETS
    
    $
    256,132
    
    
    $
    275,095
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts) March 31,
    
    December 31,2004
    
    2003(unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable-Related parties
    
    $
    12
    
    
    $
    Other
    
    
    13,140
    
    
    
    11,477Accrued liabilities-Related parties
    
    
    520
    
    
    
    564Other
    
    
    3,650
    
    
    
    6,646Deferred revenue
    
    
    382
    
    
    
    385Note payable
    
    
    38,978
    
    
    
    38,390Total current liabilities
    
    
    56,682
    
    
    
    57,462Deferred revenue
    
    
    990
    
    
    
    1,077Other non-current liabilities
    
    
    738
    
    
    
    742TOTAL LIABILITIES
    
    
    58,410
    
    
    
    59,281COMMITMENTS AND CONTINGENCIES (see Note 8)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;
39,068,506 and 39,046,917 issued and outstanding in 2004 and
2003, respectively
    
    
    391
    
    
    
    390Additional paid-in capital
    
    
    560,872
    
    
    
    560,632Deferred compensation
    
    
    (264
    )
    
    
    (359
    )Accumulated deficit
    
    
    (363,953
    )
    
    
    (345,544
    )Accumulated other comprehensive income
    
    
    676
    
    
    
    695Total stockholders equity
    
    
    197,722
    
    
    
    215,814TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    256,132
    
    
    $
    275,095
 The accompanying notes are an integral part of these consolidated financial statements. 4




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) Three Months Ended March 31,2004
    
    2003REVENUE:Product profit and royalty
    
    $
    6,794
    
    
    $
    4,499Product development
    
    
    2,115
    
    
    
    3,352Contract research services
    
    
    338
    
    
    
    630Outlicensing revenue
    
    
    88
    
    
    
    155Other
    
    
    765
    
    
    
    48Total revenue
    
    
    10,100
    
    
    
    8,684OPERATING EXPENSES:Research and development costs
    
    
    15,377
    
    
    
    10,611Licensing costs
    
    
    4,199
    
    
    
    558Selling, general and administrative
    
    
    6,888
    
    
    
    3,720Direct cost of research services
    
    
    212
    
    
    
    440Depreciation and amortization
    
    
    1,798
    
    
    
    1,817Settlement charge
    
    
    
    
    
    
    16,500Total operating expenses
    
    
    28,474
    
    
    
    33,646OPERATING LOSS
    
    
    (18,374
    )
    
    
    (24,962
    )OTHER INCOME (EXPENSE):Interest income and other, net
    
    
    561
    
    
    
    1,186Interest expense
    
    
    (588
    )
    
    
    (1,124
    )LOSS BEFORE INCOME TAXES
    
    
    (18,401
    )
    
    
    (24,900
    )Provision for foreign income taxes
    
    
    (8
    )
    
    
    (21
    )NET LOSS
    
    $
    (18,409
    )
    
    $
    (24,921
    )BASIC AND DILUTED NET LOSS PER SHARE
    
    $
    (0.47
    )
    
    $
    (0.76
    )WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING
    
    
    39,060
    
    
    
    32,580
 The accompanying notes are an integral part of these consolidated financial statements. 5




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (18,409
    )
    
    $
    (24,921
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    1,798
    
    
    
    1,817Non-cash compensation expense
    
    
    95
    
    
    
    372Gain on investment in marketable securities
    
    
    (12
    )
    
    
    Loss on disposal of equipment
    
    
    
    
    
    
    15Changes in operating assets and liabilities:Increase in receivables, net
    
    
    (3,109
    )
    
    
    (5,869
    )Increase in prepaid expenses and other
    
    
    (808
    )
    
    
    (122
    )Decrease (increase) in other non-current assets
    
    
    49
    
    
    
    (604
    )Decrease in accounts payable and accrued liabilities
    
    
    (1,365
    )
    
    
    (6,603
    )Increase in settlement-related liability
    
    
    
    
    
    
    20,000(Decrease) increase in deferred revenue
    
    
    (90
    )
    
    
    1,206Increase in interest on note payable
    
    
    588
    
    
    
    1,145Decrease in other non-current liabilities
    
    
    (4
    )
    
    
    (12
    )Net cash used in operating activities
    
    
    (21,267
    )
    
    
    (13,576
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net activity of marketable securities transactions
    
    
    38,888
    
    
    
    28,606Purchase of property and equipment
    
    
    (126
    )
    
    
    (265
    )Net cash provided by investing activities
    
    
    38,762
    
    
    
    28,341CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    241
    
    
    
    26Principal payments for capital lease obligations
    
    
    
    
    
    
    (15
    )Net cash provided by financing activities
    
    
    241
    
    
    
    11Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    4
    
    
    
    56NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    17,740
    
    
    
    14,832CASH AND CASH EQUIVALENTS, beginning of period
    
    
    63,154
    
    
    
    29,679CASH AND CASH EQUIVALENTS, end of period
    
    $
    80,894
    
    
    $
    44,511
 The accompanying notes are an integral part of these consolidated financial statements. 6




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share information, per share information or as
otherwise indicated) (unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation and basis of presentation The accompanying interim Consolidated Financial Statements presented herein
include the accounts of ILEX Oncology, Inc. and its subsidiaries (We or
ILEX). All significant intercompany transactions and accounts have been
eliminated in consolidation. These interim consolidated financial statements
have been prepared by us, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In managements opinion, all
adjustments, which consist of only normal, recurring adjustments that are
necessary for a fair presentation of financial position and results of
operations have been made. Certain prior year amounts have been reclassified
to conform to the 2004 presentation. It is recommended that these interim consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in our
Annual Report on Form 10-K, as amended by our Annual Report on Form 10-K/A for
the year ended December 31, 2003. The results of operations for any interim
period are not necessarily indicative of the results of operations for the
entire year. Stock-based compensation We use the intrinsic value method in accounting for our stock compensation
plans. Had compensation cost for our stock compensation plans been determined
based upon a fair value method consistent with Statement of Financial
Accounting Standard (SFAS) No. 123 our net loss and loss per share would have
been increased to the pro forma amounts indicated below: Three Months Ended March 31,2004
    
    2003Net loss
    
    As reported
    
    $
    (18,409
    )
    
    $
    (24,921
    )Stock grant compensation cost
included in reported loss
    
    
    95
    
    
    
    372Fair value compensation cost
    
    
    (2,927
    )
    
    
    (2,922
    )Pro forma
    
    $
    (21,241
    )
    
    $
    (27,471
    )Loss per share
basic and diluted
    
    As reported
    
    $
    (0.47
    )
    
    $
    (0.76
    )Stock grant compensation cost
included in reported loss
    
    
    
    
    
    
    0.01Fair value compensation cost
    
    
    (0.07
    )
    
    
    (0.09
    )Pro forma
    
    $
    (0.54
    )
    
    $
    (0.84
    )
 Intangible assets and goodwill In December 2001, Genentech, Inc. announced that it was granted a patent
relating to fundamental methods and compositions for the production of
monoclonal antibodies using anti-recombinant DNA technology. This proceeding
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 our CAMPATH 1-H monoclonal
antibody against the CD52 target. Accordingly, as of March 31, 2003, we
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 also pay royalties based
upon net U.S. sales levels. For the quarter ended March 31, 2004, we recorded
amortization expense of approximately $39.0. As of March 31, 2004, we recorded
accumulated amortization of $155.8 related to this asset. In connection with our December 31, 2001 acquisition of Millennium
Pharmaceuticals, Inc.s (Millenniums) 7




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  interest in ILEX Pharmaceuticals, L.P., formerly known as Millennium & ILEX,
L.P. (the Partnership), we have recorded intangible assets classified as
completed technology and a trademark in the amounts of $64.8 million and $2.8
million, respectively. These intangible assets are currently being amortized
under the straight-line method over 14 years. For the quarter ended March 31,
2004, we recorded amortization expense of approximately $1.2 million. As of
March 31, 2004, we recorded accumulated amortization of $10.9 million related
to these assets. 2. LOSS PER SHARE Diluted net loss per share is equal to basic net loss per share, as the effect
of all common stock equivalents is antidilutive. 3. STATEMENTS OF CASH FLOWS Non-cash investing and financing activities for the three months ended March
31, 2004 and 2003, include the following: 2004
    
    2003Other intangible assets  license grant
    
    $
    
    
    
    $
    2,000
 Supplemental disclosures of cash flow information for the three months ended
March 31, 2004 and 2003 include the following: 2004
    
    2003Cash paid for interest
    
    $
    
    
    
    $
    1
 4. SETTLEMENT CHARGE In April 2003, our subsidiary, ILEX Oncology Services, Inc, (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. 5. COMPREHENSIVE LOSS Comprehensive loss is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. The
following table presents the components of our comprehensive loss: Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (18,409
    )
    
    $
    (24,921
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    (19
    )
    
    
    62Comprehensive loss
    
    $
    (18,428
    )
    
    $
    (24,859
    )
 6. DEVELOPMENT AND DISTRIBUTION AGREEMENT In January 2003, Schering AG obtained exclusive rights to develop, sell and
distribute CAMPATH in Japan and the Asian Pacific Basin. We received a payment
and incurred an associated fee of 50% of such payment, both of which are being
recognized over the life of the patent in that region. We 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. 8




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  7. LICENSING AGREEMENT In December 2003, we signed an amendment to our co-development agreement with
Bioenvision, Inc. (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 milestone became due in two
equal payments upon completing the submission of the New Drug Application (NDA)
in March 2004. As a result, we have recorded an expense accrual of $4.0
million related to such submission as of March 31, 2004. We paid Bioenvision
$2.0 million of the $4.0 million in April 2004 and the remaining $2.0 million
is due in the third quarter of 2004. 8. COMMITMENTS AND CONTINGENCIES We are subject to various claims and assessments arising out of the ordinary
course of business. We believe it is unlikely that the final outcome of any of
the 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 particular claim or proceeding would not have a material
adverse effect on our results of operations for the period in which such
resolution occurred. 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 have maintained $492.0 in the form of securities as
collateral for the guarantee as of March 31, 2004. As of March 31, 2004 we had
yet to fund the guarantee, however it has been reserved for in prior financial
statements. 9. MERGER AGREEMENT 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, subject to certain restrictions contained
in the merger agreement. 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. If the merger is not completed,
we may be 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. As of March
31, 2004, we have recorded $3.6 million in merger-related costs and these costs
have been included in selling, general and administrative expenses in our
consolidated statement of operations. 9




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements  Cautionary Statements This Quarterly Report on Form 10-Q 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 affects 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 our
Report on Form 10-K filed on March 12, 2004, as amended by our Report on Form
10-K/A filed May 3, 2004, 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. The following discussion describes our financial position and results of
operations for the three-month period ended March 31, 2004. The consolidated
financial statements and notes thereto contain detailed information that should
be referred to in conjunction with this discussion. OUR BUSINESS 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 preclinical and 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
March 31, 2004 of $364.0 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 10




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  product profit and royalty revenue, product development revenue, interest
income and other miscellaneous income. 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. 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, subject to certain restrictions contained
in the merger agreement. 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 December 2003, we signed an amendment to our co-development agreement with
Bioenvision, Inc. (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 milestone became due in two
equal payments upon completing the submission of the New Drug
Application (NDA)
in March 2004. As a result, we have recorded an expense accrual of $4.0
million related to such submission as of March 31, 2004. We paid Bioenvision
$2.0 million of the $4.0 million in April 2004 and the remaining $2.0 million
is due in the third quarter of 2004. 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. 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. 11




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  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. RESULTS OF OPERATIONS  THREE MONTHS ENDED MARCH 31, 2004 AND 2003 Operating Revenues Product profit and royalty revenue, which is the Companys share of
CAMPATH net profits on U.S. sales and a royalty on the rest of the world sales,
increased to $6.8 million in the first quarter of 2004 compared to $4.5 million
in the first quarter of 2003 as a result of an increase in the global net sales
of CAMPATH. Global net sales of CAMPATH, recorded by our marketing and
distribution partner Schering AG and Berlex, increased to $21.1 million in the
first quarter of 2004 as compared to $13.9 million in the same period of 2003.
Product development revenue decreased to $2.1 million in the first quarter of
2004 from $3.4 million in the first quarter of 2003 primarily as a result of
the depletion of the advance balance from Schering AG in the first quarter of
2003. Revenue from the Companys contract research services (CRO) decreased
$0.3 million or 50% from the first quarter of 2003 as a result of the Companys
continued transition out of the fee-for-service CRO business. Other revenue
increased to $0.8 million in the first quarter of 2004 primarily due to the
sale of certain clinical trial materials. Operating Expenses Research and development costs. Research and development costs increased
to $15.4 million in the first quarter of 2004, from $10.6 million in the first
quarter of 2003. This increase of $4.8 million, or 45%, was due to an increase
in spending on our product pipeline, particularly for our trial of CAMPATH in
multiple sclerosis and other indications. The following table summarizes our major research and development
projects, including the costs incurred for each of the quarters ended March 31,
2004 and 2003, costs incurred to date and the estimated completion dates for
each project in development. The information contained in the column labeled
Estimated Completion Date is our estimate of the timing to complete only the
current in-process development phases. The actual timing to complete the
phases may differ materially from these estimates. Estimatedcompletion Date ofResearch and Development
    
    Research and
    
    
    
    
    
    our in-processExpenses for the Quarter
    
    Development
    
    Current Phases of
    
    Phase ofProject
    
    Ended March 31,
    
    Expenses to Date
    
    Development
    
    Development2004
    
    2003($ in millions)Direct costs(1) :CAMPATH(2)
    
    $
    7.4
    
    
    $
    2.9
    
    
    $
    46.0
    
    
    I - III
    
    
    2004 - 2007Clofarabine(3)
    
    
    2.4
    
    
    
    1.0
    
    
    
    21.2
    
    
    I and II
    
    
    2004 - 2006ILX-651(4)
    
    
    1.0
    
    
    
    0.5
    
    
    
    12.3
    
    
    II
    
    
    2005 - 2006MUC1(5)
    
    
    0.4
    
    
    
    0.4
    
    
    
    3.1
    
    
    Preclinical
    
    
    2005Other products(6)
    
    
    0.8
    
    
    
    1.6
    
    
    
    36.1
    
    
    Preclinical, Phase I and II
    
    
    2005Other operating costs(7)
    
    
    3.4
    
    
    
    4.2
    
    
    
    86.4Total research and
development costs
    
    
    15.4
    
    
    
    10.6
    
    
    
    205.1Licensing costs
    
    
    4.2
    
    
    
    0.6
    
    
    
    33.5Total project costs
    
    $
    19.6
    
    
    $
    11.2
    
    
    $
    238.6
 12




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q   (1)
    
    The major components of the direct costs include various clinical
expenses, consulting expenses, other third-party costs, salaries and
employee benefits, supplies and materials.  (2)
    
    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 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. We are now conducting a Phase III
post-approval study, Phase I/II trials in non-Hodgkins lymphoma, Phase II
trials in multiple sclerosis and a Phase III study with CAMPATH used in
conjunction with fludarabine. Although we are conducting other CAMPATH
studies, the research and development costs included in the table above
associated with CAMPATH primarily relate to the aforementioned studies.
We estimate our direct costs to complete these in-process clinical
development phases and studies in CAMPATH to be approximately $43 to
$48
million.  (3)
    
    Clofarabine is a next-generation, purine nucleoside antimetabolite that
is currently under investigation in pediatric and adult leukemias and
solid tumors. We initiated Phase II trials in 2002 in both children and
adults with refractory acute leukemia. We have completed the submission
of a New Drug Application with the U.S. Food and Drug Administration for
pediatric leukemias based on Phase II data. We have also completed a
Phase I trial of clofarabine in combination with the chemotherapy drug
ara-C (cytarabine) in adults with a spectrum of hematologic malignancies.
We are currently conducting a Phase I trial in adults with advanced solid
tumors and a Phase I trial using an oral formulation of clofarabine for
adults with advanced solid tumors. We estimate our direct costs to
complete the in-process clinical development phases and studies in
clofarabine to be approximately $2 to $4 million.  (4)
    
    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. We recently closed a Phase I study in patients with
solid tumors. We are currently conducting Phase II trials in recurrent or
metastatic melanoma and in locally advanced or metastatic non-small cell
lung cancer. We estimate our direct costs to complete the in-process
clinical development phases in ILX-651 to be approximately $7 to $9
million.  (5)
    
    MUC1 functions like an oncogene to promote cancer growth and is highly
overexpressed on the cell surface of approximately 70% of the 1.2 million
tumors diagnosed each year. Alteration in its function could potentially
impact the growth of many highly resistant tumor types. MUC1 also serves
an anti-apoptotic function, which could reduce the effectiveness of a
variety of standard anticancer agents. If so, it appears that drugs which
interfere with MUC1 could potentially improve the activity of other
chemotherapy agents already in use today. We have several parallel
programs under way to discover drug candidates that target MUC1. We are
developing monoclonal antibodies and are exploring small molecules to
disrupt MUC1 function as well as using small interfering RNA to explore
and/or validate molecular targets in the MUC1 oncogenic pathway. An
antibody program is being conducted through a research collaboration with
Abgenix, Inc. that was initiated in 2002 to develop a fully human
monoclonal antibody against MUC1 for the treatment of cancer. We estimate
our direct costs to complete our preclinical development work related to
MUC1 to be approximately $3 to $5 million.  (6)
    
    We currently have other products in clinical trials as well as a number
of preclinical programs. Other products also includes products that have
been discontinued.  (7)
    
    Other operating costs include allocations of various overhead costs. Actual future costs to complete each and all of the above-mentioned
in-process development phases could vary significantly from the estimates
provided. We believe that estimates of overall major project completion dates
and associated costs to complete such projects would be highly speculative due
to the numerous uncertainties inherent in the pharmaceutical industry including
the results of preclinical and clinical testing, competition, government
regulation and uncertainties related to manufacturing. Delays or
discontinuation of any of our projects could adversely impact our future
revenues, liquidity and overall financial position. For additional discussion
of the risks and uncertainties regarding our product development, see the
Additional Business Risks section of our Form 10-K for
the year ended December 31, 2003, filed on March 12, 2004. Licensing costs. Licensing costs increased to $4.2 million for the first
quarter of 2004 from $0.6 million in the first quarter of 2003. This increase
of $3.6 million was due to an expense accrual of $4.0 million for milestone
payments associated with the complete filing of the NDA for clofarabine under
our co-development agreement with Bioenvision. Selling, general and administrative costs. Selling, general and
administrative costs increased to $6.9 13




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  million for the first quarter of 2004, compared to $3.7 million for the same
quarter in 2003. This increase of $3.2 million, or 86%, is primarily due to
merger-related costs of $3.6 million, partially offset by decreases in
payroll-related costs. Direct cost of research services. Direct cost of research services
decreased to $0.2 million during the first quarter of 2004, from $0.4 million
during the first quarter of 2003. This decrease is attributable to the
Companys continued transition out of the fee-for-service CRO business. Depreciation and amortization. Depreciation and amortization of $1.8
million in the first quarter of 2004 remained consistent with the same period
in 2003. Settlement charge. We incurred a settlement charge of $16.5 million, or
$0.50 per share, in the first quarter of 2003. This charge is the result of
the settlement of a dispute with a former client of our contract research
organization. Interest Income and Other, Net Interest and other income decreased to $0.6 million during the first
quarter of 2004 from $1.2 million during the first quarter of 2003. This
decrease of $0.6 million is attributable to a decrease in the available
interest rates on investment balances compared to interest rates in 2003. Interest Expense Interest expense decreased to $0.6 million during the first quarter of
2004 from $1.1 million during the first quarter of 2003. Interest expense
relates to the imputed interest on the note to Millennium for our purchase of
their interest in the Partnership. The decrease of $0.5 million is a result of
the decrease in the outstanding balance on which interest expense is
calculated. Net Loss As a result of the above, net loss decreased $6.5 million in the first
quarter of 2004 to $18.4 million, from $24.9 million in 2003. Net loss per
share decreased $0.29 per share to $0.47 per share in 2004, from $0.76 per
share in 2003. 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, through our
product profit and royalty revenues resulting from global sales of CAMPATH and
through fee-for-service or participatory revenues pursuant to contracts with
our CRO clients. At March 31, 2004, we had cash, cash equivalents, restricted investments
and investments in marketable securities of $176.5 million and working capital
of $102.4 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, 14




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  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 non-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. At March 31, 2004,
we did not have any material commitments for capital expenditures. 
 ITEM 3. 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 of the Company 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 cash, cash equivalents, restricted investments and investments in
marketable securities of $176.5 million at March 31, 2004. These funds are
generally invested in interest-bearing securities, primarily with maturities of
one year or less. As such instruments 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 short-term 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 our investment portfolio. Our European operations are denominated in local currency. We have unhedged
transaction exposures in these currencies, which are not considered material.
We have not entered into any forward foreign exchange contracts for
speculative, trading or other purposes. 
 Item 4. CONTROLS AND PROCEDURES 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 March 31, 2004 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. 15




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q  
 PART II. OTHER INFORMATION 
 Item 1. 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. 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. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNumber2.1
    
    Agreement and Plan of Merger dated February 26,
2004 between the Company and
Genzyme Corp. (Incorporated herein by reference to Exhibit 2.1
of the Companys
Current Report Form 8-K filed February 26, 2004)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)11.1*
    
    Computation of Net Loss per Share31.1*
    
    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
 16




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q   (b)
    
    Reports on Form 8-K:  We filed the following reports on Form 8-K during the quarter ended
March 31, 2004: Dated January 27, 2004, to disclose the issuance of a press release
announcing fourth quarter 2003 results Dated February 26, 2004, to announce that we entered into an
Agreement and Plan of Merger with Genzyme Corp.  *
    
    Filed herewith.**
    
    Furnished herewith and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 17




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ILEX ONCOLOGY, INC.
MARCH 31, 2004  QUARTERLY REPORT ON FORM 10-Q    
 Signatures Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. Date: May 7, 2004 ILEX ONCOLOGY, INC.By:
    
    /s/ Jeffrey H. BuchalterJeffrey H. Buchalter
President and Chief Executive
Officer
(Principal Executive Officer)By:
    
    /s/ Mark P. MellinMark P. Mellin
Senior Vice President and
Chief Financial Officer
(Chief Financial and
Accounting Officer)
 18