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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ________________ Form 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
    
    74-2699185(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4545 Horizon Hill Blvd.San Antonio, Texas
    
    78229(Address of principal executive offices)
    
    (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. YesþNoo. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YesþNoo. The number of shares outstanding of the Registrants common stock as of
October 26, 2004 is 39,292,054.




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q   
 INDEX PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations  Three and Nine Month Periods Ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows  Nine Month Periods Ended September 30, 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
    
    
    17Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20Computation of Net Loss Per ShareCertification of President and CEO - Section 302Certification of Senior VP and CFO - Section 302Certification of President and CEO - Section 906Certification of Senior VP and CFO - Section 906
  2




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 CONSOLIDATED BALANCE SHEETS
(in thousands) ASSETS September 30,
    
    December 31,2004
    
    2003(unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    68,926
    
    
    $
    63,154Investments in marketable securities
    
    
    58,819
    
    
    
    75,791Restricted investments
    
    
    604
    
    
    
    816Accounts receivable, net of allowance for doubtful accounts of $5
in 2004 and 2003
    
    
    258
    
    
    
    166Accounts receivable from Schering AG
    
    
    10,306
    
    
    
    8,363Other receivables
    
    
    2,484
    
    
    
    2,152Prepaid expenses and other
    
    
    2,547
    
    
    
    2,433Assets held for sale
    
    
    197
    
    
    
    Total current assets
    
    
    144,141
    
    
    
    152,875Investments in marketable securities
    
    
    1,050
    
    
    
    56,209Restricted investments
    
    
    1,691
    
    
    
    1,691Completed technology asset, net of accumulated amortization
of $12,729 and $9,257 in 2004 and 2003, respectively
    
    
    52,071
    
    
    
    55,543Other intangible assets, net of accumulated amortization of $784 and
$517 in 2004 and 2003, respectively
    
    
    4,016
    
    
    
    4,283Other assets
    
    
    1,581
    
    
    
    689Property and equipment, at cost, net of accumulated depreciation
of $9,145 and $10,302 in 2004 and 2003, respectively
    
    
    2,450
    
    
    
    3,805TOTAL ASSETS
    
    $
    207,000
    
    
    $
    275,095
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts) LIABILITIES AND STOCKHOLDERS EQUITY September 30,
    
    December 31,2004
    
    2003(unaudited)CURRENT LIABILITIES:Accounts payable
    
    $
    7,768
    
    
    $
    11,477Accrued liabilities-Related parties
    
    
    531
    
    
    
    564Other
    
    
    5,493
    
    
    
    6,646Deferred revenue
    
    
    592
    
    
    
    385Note payable
    
    
    19,709
    
    
    
    38,390Total current liabilities
    
    
    34,093
    
    
    
    57,462Deferred revenue
    
    
    833
    
    
    
    1,077Other non-current liabilities
    
    
    729
    
    
    
    742TOTAL LIABILITIES
    
    
    35,655
    
    
    
    59,281COMMITMENTS AND CONTINGENCIES (see Note 9)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;
39,240,575 and 39,046,917 issued and outstanding
in 2004 and 2003, respectively
    
    
    392
    
    
    
    390Additional paid-in capital
    
    
    562,722
    
    
    
    560,632Deferred compensation
    
    
    (166
    )
    
    
    (359
    )Accumulated deficit
    
    
    (392,290
    )
    
    
    (345,544
    )Accumulated other comprehensive income
    
    
    687
    
    
    
    695Total stockholders equity
    
    
    171,345
    
    
    
    215,814TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    207,000
    
    
    $
    275,095
 The accompanying notes are an integral part of these consolidated financial statements. 4




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003REVENUE:Product profit and royalty
    
    $
    5,973
    
    
    $
    4,513
    
    
    $
    17,015
    
    
    $
    17,572Product development
    
    
    779
    
    
    
    985
    
    
    
    4,768
    
    
    
    5,196Contract research services
    
    
    173
    
    
    
    403
    
    
    
    785
    
    
    
    1,497Outlicensing revenue
    
    
    87
    
    
    
    2,581
    
    
    
    1,762
    
    
    
    2,685Other
    
    
    259
    
    
    
    244
    
    
    
    1,053
    
    
    
    587Total revenue
    
    
    7,271
    
    
    
    8,726
    
    
    
    25,383
    
    
    
    27,537OPERATING EXPENSES:Research and development costs
    
    
    13,299
    
    
    
    12,125
    
    
    
    44,894
    
    
    
    34,656Licensing costs
    
    
    561
    
    
    
    2,133
    
    
    
    5,134
    
    
    
    4,144Selling, general and administrative
    
    
    4,246
    
    
    
    2,789
    
    
    
    16,632
    
    
    
    9,663Direct cost of research services
    
    
    205
    
    
    
    370
    
    
    
    586
    
    
    
    1,119Depreciation and amortization
    
    
    1,646
    
    
    
    1,857
    
    
    
    5,216
    
    
    
    5,713Impairment charge
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    213Settlement charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,500Total operating expenses
    
    
    19,957
    
    
    
    19,487
    
    
    
    72,462
    
    
    
    72,008OPERATING LOSS
    
    
    (12,686
    )
    
    
    (10,761
    )
    
    
    (47,079
    )
    
    
    (44,471
    )OTHER INCOME (EXPENSE):Interest income and other, net
    
    
    477
    
    
    
    1,077
    
    
    
    1,683
    
    
    
    3,440Interest expense
    
    
    (292
    )
    
    
    (997
    )
    
    
    (1,319
    )
    
    
    (3,286
    )LOSS BEFORE INCOME TAXES
    
    
    (12,501
    )
    
    
    (10,681
    )
    
    
    (46,715
    )
    
    
    (44,317
    )(Provision) benefit for foreign income taxes
    
    
    (16
    )
    
    
    57
    
    
    
    (31
    )
    
    
    (20
    )NET LOSS
    
    $
    (12,517
    )
    
    $
    (10,624
    )
    
    $
    (46,746
    )
    
    $
    (44,337
    )BASIC AND DILUTED NET LOSS PER SHARE
    
    $
    (0.32
    )
    
    $
    (0.29
    )
    
    $
    (1.20
    )
    
    $
    (1.31
    )WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING
    
    
    39,161
    
    
    
    36,617
    
    
    
    39,090
    
    
    
    33,862
 The accompanying notes are an integral part of these consolidated financial statements. 5




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Nine Months EndedSeptember 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (46,746
    )
    
    $
    (44,337
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    5,216
    
    
    
    5,713Interest expense paid in stock
    
    
    
    
    
    
    929Non-cash compensation expense
    
    
    193
    
    
    
    589Impairment charge
    
    
    
    
    
    
    213Gain on investment in marketable securities
    
    
    (5
    )
    
    
    (52
    )Bad debt provision
    
    
    
    
    
    
    10(Gain) loss on disposal of equipment
    
    
    (11
    )
    
    
    40Changes in operating assets and liabilities:Increase in receivables, net
    
    
    (2,367
    )
    
    
    (2,068
    )Increase in prepaid expenses and other
    
    
    (114
    )
    
    
    (623
    )Increase in other non-current assets
    
    
    (892
    )
    
    
    (465
    )Decrease in accounts payable and accrued liabilities
    
    
    (4,895
    )
    
    
    (1,613
    )(Decrease) increase in deferred revenue
    
    
    (37
    )
    
    
    677(Decrease) increase in interest on note payable
    
    
    (1,337
    )
    
    
    1,428Decrease in other non-current liabilities
    
    
    (13
    )
    
    
    (29
    )Net cash used in operating activities
    
    
    (51,008
    )
    
    
    (39,588
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net activity of marketable securities transactions
    
    
    72,136
    
    
    
    51,869Net activity in restricted investments
    
    
    212
    
    
    
    161Increase in intangible asset
    
    
    
    
    
    
    (2,000
    )Purchase of property and equipment
    
    
    (317
    )
    
    
    (1,200
    )Proceeds from sale of property and equipment
    
    
    15
    
    
    
    11Net cash provided by investing activities
    
    
    72,046
    
    
    
    48,841CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of common stock for cash, net of issuance costs
    
    
    
    
    
    
    87,476Exercise of stock options
    
    
    2,091
    
    
    
    1,685Principal payments for note payable
    
    
    (17,344
    )
    
    
    (9,071
    )Principal payments for capital lease obligations
    
    
    
    
    
    
    (37
    )Net cash (used in) provided by financing activities
    
    
    (15,253
    )
    
    
    80,053Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    (13
    )
    
    
    227NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    5,772
    
    
    
    89,533CASH AND CASH EQUIVALENTS, beginning of period
    
    
    63,154
    
    
    
    29,679CASH AND CASH EQUIVALENTS, end of period
    
    $
    68,926
    
    
    $
    119,212
 The accompanying notes are an integral part of these consolidated financial statements. 6




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 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. 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 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. 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    As reported
    
    $
    (12,517
    )
    
    $
    (10,624
    )
    
    $
    (46,746
    )
    
    $
    (44,337
    )Stock grantcompensation costincluded inreported loss
    
    
    49
    
    
    
    110
    
    
    
    193
    
    
    
    589Fair value cost
    
    
    (2,425
    )
    
    
    (2,088
    )
    
    
    (7,984
    )
    
    
    (5,544
    )Pro forma
    
    $
    (14,893
    )
    
    $
    (12,602
    )
    
    $
    (54,537
    )
    
    $
    (49,292
    )Loss per share,
basic and diluted
    
    As reported
    
    $
    (0.32
    )
    
    $
    (0.29
    )
    
    $
    (1.20
    )
    
    $
    (1.31
    )Stock grantcompensation costincluded inreported loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Fair value cost
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.20
    )
    
    
    (0.17
    )Pro forma
    
    $
    (0.38
    )
    
    $
    (0.34
    )
    
    $
    (1.40
    )
    
    $
    (1.46
    )
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  Intangible assets 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. We recorded amortization expense of approximately
$39.0 for the quarter ended September 30, 2004 and $116.9 for the nine months
ended September 30, 2004. As of September 30, 2004, we recorded accumulated
amortization of $233.8 related to this intangible asset. In connection with our December 31, 2001 acquisition of Millennium
Pharmaceuticals, Inc.s (Millenniums) 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. We recorded amortization expense of approximately $1.2 million for the
quarter ended September 30, 2004 and $3.6 million for the nine months ended
September 30, 2004. As of September 30, 2004, we recorded accumulated
amortization of $13.3 million related to these assets. 2. 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 transaction, 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 the fourth quarter of
2004, we will continue to operate independently of Genzyme, subject to certain
restrictions contained in the merger agreement. On July 1, 2004, the holders
of a majority of the outstanding shares of our common stock voted to approve
the proposed transaction. The closing of the transaction remains subject to
clearance by the U.S. Federal Trade Commission and other customary closing
conditions. If the transaction 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 Genzymes costs related to the transaction, such as
financial, advisory, legal and accounting fees. As of September 30, 2004, we
have recorded $4.7 million in transaction-related costs and these costs have
been included in selling, general and administrative expenses in our
consolidated statement of operations. 3. 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. 4. STATEMENTS OF CASH FLOWS Non-cash investing and financing activities for the nine months ended September
30, 2004 and 2003, include the following: 2004
    
    2003Payment of principal portion of our
note payable in shares of our
common stock
    
    $
    
    
    
    $
    9,071
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  Supplemental disclosures of cash flow information for the nine months ended
September 30, 2004 and 2003 include the following: 2004
    
    2003Cash paid for interest
    
    $
    2,656
    
    
    $
    930
 5. 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. 6. 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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (12,517
    )
    
    $
    (10,624
    )
    
    $
    (46,746
    )
    
    $
    (44,337
    )Other comprehensive income:Foreign currency translation
adjustments
    
    
    
    
    
    
    127
    
    
    
    (8
    )
    
    
    219Comprehensive loss
    
    $
    (12,517
    )
    
    $
    (10,497
    )
    
    $
    (46,754
    )
    
    $
    (44,118
    )
 7. 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 may 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. LICENSING AGREEMENTS 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 completion of the submission of the New Drug Application
(NDA) in March 2004. We paid Bioenvision $2.0 million of the $4.0 million in
April 2004 and the remaining $2.0 million in the third quarter of 2004. In May 2003, the Company signed an agreement with QuatRx Pharmaceuticals, Co.
(QuatRx), granting QuatRx an exclusive, worldwide license to certain
cardiovascular 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. In June
2004, we received $1.5 million from QuatRx as a result of the acceptance of
their Investigational New Drug application filing. We are also eligible to
receive payments if certain additional milestones are completed and royalties
based on net sales, if any, of a product developed from these research
platforms. 9. 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 9




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  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 September 2004, we reached a cash settlement
with these certain former Convergence shareholders. The amount of this settlement was immaterial
in relation to our financial position and results of operations. Upon closing of the proposed merger agreement with Genzyme (see Note 2), we
would become obligated to pay approximately $8.4 million in investment banker
transaction fees. During 1998, we guaranteed a line of credit for Clinical Research Group, Inc.
(CRG) If the guarantee comes to redemption, we will obtain an ownership
interest in CRG after foreclosure of the collateral. Under the terms of the
agreement, we have maintained $280.1 in the form of a cash deposit as
collateral for the guarantee as of September 30, 2004. As of September 30,
2004 we had yet to fund the guarantee, however it has been reserved for in
prior financial statements. 10. ASSETS HELD FOR SALE During the third quarter of 2004, we committed to sell certain laboratory
equipment and other assets with a carrying value of $197.0 at our facility in
Geneva, Switzerland. We determined that there was no impairment of these
assets as their carrying value did not exceed their fair value less associated
selling costs. The carrying value of these assets is presented separately in
the Assets Held for Sale caption in our consolidated balance sheet as of
September 30, 2004. These assets were sold in October 2004 resulting in a gain
which will be recorded in our consolidated statement of operations in the
fourth quarter of 2004. 
 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 limitation: the proposed transaction between
Genzyme and ILEX and the time at which the companies expect the transaction to
be completed; the possibility that the transaction is not completed; the
possibility that the transaction may not obtain FTC clearance on terms
acceptable to the companies or that the companies may be required to modify
aspects of the transaction to achieve regulatory approval; the possibility that
other closing conditions of the transaction are not met; 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 10




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  our technologies obsolete; acquisitions, divestitures, mergers, restructurings
or strategic initiatives that change our structure; 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 and nine-month periods ended September 30, 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
September 30, 2004 of $392.3 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. 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 first quarter of 2005. 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 transaction, 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 the fourth quarter of
2004, we will continue to operate independently of Genzyme, subject to certain
restrictions contained in the merger agreement. On July 1, 2004, the holders
of a majority of the outstanding shares of our common stock voted to approve
the proposed transaction. The closing of the transaction remains subject to
clearance by the U.S. Federal Trade Commission and other customary closing
conditions. 11




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  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 completion of the submission of the New Drug Application
(NDA) in March 2004. We paid Bioenvision $2.0 million of the $4.0 million in
April 2004 and the remaining $2.0 million 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. In May 2003, the Company signed an agreement with QuatRx Pharmaceuticals, Co.
(QuatRx), granting QuatRx an exclusive, worldwide license to certain
cardiovascular 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. In June
2004, we received $1.5 million from QuatRx as a result of the acceptance of
their Investigational New Drug application filing. We are also eligible to
receive payments if certain additional milestones are completed and royalties
based on net sales of a product, if any, developed from these research
platforms. 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. RESULTS OF OPERATIONS  NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Operating Revenues Product profit and royalty revenue. 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, decreased to $17.0 million for the first nine
months of 2004 compared to $17.6 million for the first nine months of 2003
primarily as a result of an 12




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ILEX ONCOLOGY, INC.SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  increase in the marketing expenses incurred by Berlex in addition to certain
insurance and selling expenses. Global net sales of CAMPATH, recorded by our
marketing and distribution partner Schering AG and Berlex, its U.S. affiliate,
increased to $56.5 million in the first nine months of 2004 as compared to
$53.3 million in the same period of 2003. Product development revenue.Product development revenue, which
represents Schering AGs contribution of research and development expenses,
decreased to $4.8 million for the first nine months of 2004 from $5.2 million
in the first nine months of 2003 primarily as a result of the depletion of the
advance balance from Schering AG in the first quarter of 2003. Contract research services revenue.Revenue from the Companys contract
research services (CRO) decreased $0.7 million from the first nine
months of 2003 as a result of the Companys continued transition out of the
fee-for-service CRO business. Outlicensing revenue.Outlicensing revenue decreased to $1.8 million in
the first nine months of 2004 from $2.7 million in the first nine months of
2003. Outlicensing revenue for the first nine months of 2003 consisted
primarily of a $2.5 million payment received from QuatRx. The payment was
recognized as revenue in September 2003 as the technology transfer related to
the lipid-focused research platform was completed during such period.
Outlicensing revenue for the first nine months of 2004 consists primarily of
the recognition of $1.5 million received from QuatRx as a result of the
acceptance of their Investigational New Drug application filing. Other revenue.Other revenue increased to $1.1 million in the first nine
months of 2004 from $0.6 million for the same period in 2003. Included in
other revenue for the first nine months of 2004 is the sale of certain drug
products. Operating Expenses Research and development costs. Research and development costs increased
to $44.9 million in the first nine months of 2004, from $34.7 million in the
first nine months of 2003. This increase of $10.2 million, or 29%, was due to
an increase in spending on our product pipeline, particularly related to the
accelerated enrollment of our trials for CAMPATH in multiple sclerosis and for
our CAMPATH post-approval study in first-line chronic lymphocytic leukemia
(CLL). Also contributing to this increase is additional site initiation costs
for our trial of CAMPATH in combination with fludarabine. The following table summarizes our major research and development
projects, including the costs incurred for each of the three- and nine-month
periods ended September 30, 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. 13




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ILEX ONCOLOGY, INC.SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  EstimatedResearch and
    
    Research and
    
    Research and
    
    
    
    
    
    completion Date ofDevelopment Expenses
    
    Development Expenses
    
    Development
    
    Current
    
    our in-processfor the Three Months
    
    for the Nine Months
    
    Expenses to
    
    Phases of
    
    Phase ofProject
    
    Ended September 30,
    
    Ended September 30,
    
    Date
    
    Development
    
    Development2004
    
    2003
    
    2004
    
    2003($ in millions)Direct
costs(1) :CAMPATH(2)
    
    $
    5.4
    
    
    $
    3.8
    
    
    $
    20.6
    
    
    $
    9.6
    
    
    $
    59.2
    
    
    I - III
    
    
    2004 - 2007Clofarabine(3)
    
    
    2.4
    
    
    
    2.3
    
    
    
    7.0
    
    
    
    5.8
    
    
    
    25.8
    
    
    I and II
    
    
    2004 - 2005ILX-651(4)
    
    
    0.8
    
    
    
    0.8
    
    
    
    3.3
    
    
    
    1.9
    
    
    
    14.6
    
    
    II
    
    
    2005-2007MUC1(5)
    
    
    0.4
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    1.1
    
    
    
    3.9
    
    
    Preclinical
    
    
    2005Other
products(6)
    
    
    0.9
    
    
    
    1.7
    
    
    
    2.7
    
    
    
    4.0
    
    
    
    38.0
    
    
    Preclinical, Phase I and II
    
    
    2004 - 2005Other
operating costs(7)
    
    
    3.4
    
    
    
    3.1
    
    
    
    10.1
    
    
    
    12.3
    
    
    
    93.1Total research and
development costs
    
    
    13.3
    
    
    
    12.1
    
    
    
    44.9
    
    
    
    34.7
    
    
    
    234.6Licensing costs
    
    
    0.6
    
    
    
    2.1
    
    
    
    5.1
    
    
    
    4.1
    
    
    
    34.4Total project costs
    
    $
    13.9
    
    
    $
    14.2
    
    
    $
    50.0
    
    
    $
    38.8
    
    
    $
    269.0
  (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
combination 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 $50 to $55
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 $3 to $5 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, in locally advanced or metastatic non-small cell lung
cancer and in hormone-refractory prostate cancer. We estimate our direct
costs to complete the in-process clinical development phases in ILX-651 to
be approximately $6 to $8 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. 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, assuming completion of the current phase
of development, to be approximately $3 to $5 million. 14




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ILEX ONCOLOGY, INC.SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q     (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 $5.1 million for the first
nine months of 2004 from $4.1 million in the first nine months of 2003, an
increase of $1.0 million or 24%. Licensing costs for the first nine months of
2004 include a $4.0 million expense associated with our co-development
agreement with Bioenvision. Licensing costs for the first nine months of 2003
included expense accruals for the achievement of milestones associated with the
license grant from Genentech, a license fee expense accrual related to MUC-1,
and other filing fees. Selling, general and administrative costs. Selling, general and
administrative costs increased to $16.6 million for the first nine months of
2004, compared to $9.7 million for the first nine months of 2003. This
increase of $6.9 million, or 71%, is primarily due to merger-related costs of
approximately $4.7 million as well as increased product commercialization
expenses. Direct cost of research services. Direct cost of research services
decreased to $0.6 million during the first nine months of 2004, from $1.1
million during the first nine months 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 decreased
$0.5 million to $5.2 million in the first nine months of 2004 from $5.7 million
during the same period in 2003 due to fewer asset purchases throughout 2004 and
certain assets becoming fully depreciated. Impairment charge. We recorded an impairment charge of $213.0 in the
third quarter of 2003 based upon a review of our goodwill as of September 30,
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 Geneva, Switzerland. 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. Interest Income and Other, Net Interest and other income decreased to $1.7 million during the first nine
months of 2004 from $3.4 million during the first nine months of 2003. This
decrease of $1.7 million is attributable to a decrease in our investment
balances and a decline in interest rate returns throughout 2004. Interest Expense Interest expense decreased to $1.3 million during the first nine months of
2004 from $3.3 million during the first nine months 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 $2.0 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, our net loss increased $2.4 million in the first
nine months of 2004 to $46.7 million, from $44.3 million in 2003. Net loss per
share decreased $0.11 per share to $1.20 per share in 2004, from 15




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  $1.31 per share in 2003 as the weighted average number of shares outstanding
increased in 2004. RESULTS OF OPERATIONS  THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Operating Revenues Product profit and royalty revenue. 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 $6.0 million in the third quarter
of 2004 compared to $4.5 million in the third quarter of 2003 primarily 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, it U.S. affiliate, increased to $18.2 million in the third quarter of
2004 as compared to $16.1 million in the same period of 2003. Product development revenue.Product development revenue, which
represents Schering AGs contribution of research and development expenses,
decreased to $0.8 million in the third quarter of 2004 from $1.0 million in the
third quarter of 2003. Contract research services revenue.Revenue from the Companys contract
research services (CRO) decreased $0.2 million from the third quarter
of 2003 as a result of the Companys continued transition out of the
fee-for-service CRO business. Outlicensing revenue.Outlicensing revenue decreased to less than $0.1
million in the third quarter of 2004 from $2.6 million in the third quarter of
2003. Outlicensing revenues for the third quarter of 2003 consisted primarily
of a $2.5 million payment received from QuatRx. The payment was recognized as
revenue in the third quarter of 2003 as the technology transfer related to the
lipid-focused research platform was completed during such period. Operating Expenses Research and development costs. Research and development costs increased
to $13.3 million in the third quarter of 2004, from $12.1 million in the third
quarter of 2003. This increase of $1.2 million, or 10%, was due to an increase
in spending on our product pipeline, particularly related to the accelerated
enrollment of our trials for CAMPATH in multiple sclerosis and for our CAMPATH
post-approval study in first-line CLL. Also contributing to this increase is
additional site initiation costs for our trial of CAMPATH in combination with
fludarabine. Licensing costs. Licensing costs decreased to $0.6 million for the third
quarter of 2004 from $2.1 million in the third quarter of 2003, a decrease of
$1.5 million. Licensing costs for the third quarter of 2003 included expense
accruals for the achievement of milestones associated with the license grant
from Genentech and increased patent and filing fees. Selling, general and administrative costs. Selling, general and
administrative costs increased to $4.2 million for the third quarter of 2004,
compared to $2.8 million for the same quarter in 2003. This increase of $1.4
million is primarily due to increased product commercialization and product
launch costs as well as merger-related expenses. Direct cost of research services. Direct cost of research services
decreased to $0.2 million during the third quarter of 2004, from $0.4 million
during the third 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 decreased
$0.3 million to $1.6 million in the third quarter of 2004 from $1.9 million
during the same period in 2003 due to fewer asset purchases in the third
quarter of 2004 and certain assets becoming fully depreciated. Interest Income and Other, Net Interest and other income decreased to $0.5 million during the third
quarter of 2004 from $1.1 million during the third quarter of 2003. This
decrease is attributable to a reduction in our investment balances and a
decline in interest rate returns during the third quarter of 2004. 16




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ILEX ONCOLOGY, INC.SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  Interest Expense Interest expense decreased to $0.3 million during the third quarter of
2004 from $1.0 million during the third 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 $0.7 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, our net loss increased $1.9 million in the third
quarter of 2004 to $12.5 million, from $10.6 million in 2003. Net loss per
share increased $0.03 per share to $0.32 per share in 2004, from $0.29 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 revenues pursuant to contracts with our CRO clients. At September 30, 2004, we had cash, cash equivalents, restricted
investments and investments in marketable securities of $131.1 million and
working capital of $110.0 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 estimate our current funds will be adequate to cover all of our
obligations for the next two years. Until our business can generate sufficient
levels of cash from product sales, we expect to continue to supplement the
financing of 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 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 September 30,
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 $131.1 million at September 30, 2004. These 17




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2004 - QUARTERLY REPORT ON FORM 10-Q  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 September 30, 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. 18




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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 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 September 2004, we reached a cash settlement
with these certain former Convergence shareholders. The amount of this settlement was immaterial
in relation to our financial position and results of operations. 
 Item 6. Exhibits  (a)
    
    Exhibits ExhibitNumber2.1
    
    Agreement and Plan of Merger dated February 26, 2004 among the Company,
Genzyme Corp., GLBC Corp. and GLBC LLC (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
  *
    
    Filed herewith.**
    
    Furnished herewith and not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as
amended. 19




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ILEX ONCOLOGY, INC.SEPTEMBER 30, 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: November 9, 2004 ILEX ONCOLOGY, INC.By:
    /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) 20