**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**Form 10-Q**

 
|   | **(Mark One)** |                                                                                                                                                                |
|--------|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **ý**     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                        |
|   |           | **For the quarterly period ended June 30, 2003**                                                                                                                    |
|   |           |                                                                                                                                                                |
|   |           | **OR**                                                                                                                                                              |
|   |           |                                                                                                                                                                |
|   | o              | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                       |
|   |           | **For the transition period  from          to           ** |

 

**Commission filenumber 0-22147**

** **

**ILEX ONCOLOGY, INC.**

(Exact name of registrant asspecified 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**

 

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**Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ****ý  No  ****o.**

 

**Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act) Yes  ****ý  No  ****o.**

 

**The number of sharesoutstanding of the Registrant’s common stock as of August 6, 2003 is38,334,560.**

** **

 

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** **

**ILEX ONCOLOGY, INC.**

**JUNE 30, 2003 - QUARTERLY REPORT ON FORM 10-Q**

 

**INDEX**

 

**PART I. FINANCIAL INFORMATION**

 
| **Item 1. Financial Statements**                                                                         |
|----------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets - June 30, 2003 and December 31, 2002                                        |
|                                                                                                     |
| Consolidated Statements of Operations -  Three and Six Month Periods Ended June 30, 2003 and 2002        |
|                                                                                                     |
| Consolidated Statements of Cash Flows - Six  Month Periods Ended June 30, 2003 and 2002                  |
|  

                                                                                            |
| Notes to Consolidated Financial Statements                                                               |
|                                                                                                     |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations** |
|                                                                                                     |
| **Item 3.  Quantitative and  Qualitative Disclosures about Market Risk**                            |
|                                                                                                     |
| **Item 4. Controls and Procedures**                                                                      |
|                                                                                                     |
| **PART II. OTHER INFORMATION**                                                                           |
|                                                                                                     |
| **Item 1. Legal Proceedings**                                                                            |
|                                                                                                     |
| **Item 4. Submission of Matters to a Vote of  Security Holders**                                         |
|                                                                                                     |
| **Item 6. Exhibits and Reports on Form 8-K**                                                             |
|                                                                                                     |
| **SIGNATURES**                                                                                           |

 

2

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**PART I****.  FINANCIAL INFORMATION**

 

**Item 1.****  Financial Statements**

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per shareamounts)

 

ASSETS

 
|                                                                                                                   |   | **June 30,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                   |   | **(unaudited)**    |    |                    |   |
| CURRENT ASSETS:                                                                                                        |   |               |    |                    |   |
| Cash and cash equivalents                                                                                              |   | $                  | 40,170  |                    | $      | 29,679 |   |
| Investments in marketable securities                                                                                   |   | 105,847            |    | 123,591                 |   |
| Restricted investments                                                                                                 |   | 976                |    | 976                     |   |
| Accounts receivable, net of allowance for  doubtful accounts of  $23 and $30 in  2003 and 2002, respectively      |   | 856                |    | 1,025                   |   |
| Accounts receivable – Schering AG                                                                                 |   | 11,339             |    | 4,701                   |   |
| Other receivables                                                                                                      |   | 2,115              |    | 3,500                   |   |
| Prepaid expenses and other                                                                                             |   | 2,975              |    | 2,273                   |   |
|                                                                                                                   |   |               |    |                    |   |
| Total current assets                                                                                                   |   | 164,278            |    | 165,745                 |   |
|                                                                                                                   |   |               |    |                    |   |
| NON-CURRENT  ASSETS:                                                                                                   |   |               |    |                    |   |
| Investments in marketable securities                                                                                   |   | 4,294              |    | 34,737                  |   |
| Restricted investments                                                                                                 |   | 2,017              |    | 2,017                   |   |
| Completed technology asset, net of  accumulated amortization of $6,943 and $4,629 in 2003 and 2002, respectively       |   | 57,857             |    | 60,171                  |   |
| Other intangible assets, net of accumulated  amortization of $339 and $200 in 2003 and 2002, respectively              |   | 4,461              |    | 2,600                   |   |
| Goodwill                                                                                                               |   | 213                |    | 213                     |   |
| Other assets                                                                                                           |   | 855                |    | 283                     |   |
| Total non-current assets                                                                                               |   | 69,697             |    | 100,021                 |   |
|                                                                                                                   |   |               |    |                    |   |
| PROPERTY AND EQUIPMENT, at cost, net of  accumulated depreciation of $9,142 and $7,950 in 2003 and 2002, respectively. |   | 4,849              |    | 5,140                   |   |
|                                                                                                                   |   |               |    |                    |   |
| Total assets                                                                                                           |   | $                  | 238,824 |                    | $      | 270,906 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per shareamounts)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 
|                                                                                                                                                        |   | **June 30,  2003** |    | **December  31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                        |   | **(unaudited)**    |    |                    |   |
| CURRENT LIABILITIES:                                                                                                                                        |   |               |    |                    |   |
| Accounts payable—                                                                                                                                      |   |               |    |                    |   |
| Related parties                                                                                                                                             |   | $                  | 2       |                    | $      | 136 |   |
| Other                                                                                                                                                       |   | 7,203              |    | 8,214                   |   |
| Accrued liabilities—                                                                                                                                   |   |               |    |                    |   |
| Related parties                                                                                                                                             |   | 394                |    | 455                     |   |
| Other                                                                                                                                                       |   | 4,933              |    | 6,378                   |   |
| Deferred  revenue                                                                                                                                           |   | 2,824              |    | 879                     |   |
| Advances  from Schering AG                                                                                                                                  |   | —             |    | 2,577                   |   |
| Note payable                                                                                                                                                |   | 58,256             |    | 38,099                  |   |
|                                                                                                                                                        |   |               |    |                    |   |
| Total current liabilities                                                                                                                                   |   | 73,612             |    | 56,738                  |   |
|                                                                                                                                                        |   |               |    |                    |   |
| NON-CURRENT LIABILITIES:                                                                                                                                    |   |               |    |                    |   |
| Deferred  revenue                                                                                                                                           |   | 1,146              |    | —                  |   |
| Note  payable                                                                                                                                               |   | 18,287             |    | 36,155                  |   |
| Other non-current liabilities                                                                                                                               |   | 747                |    | 771                     |   |
|                                                                                                                                                        |   |               |    |                    |   |
| Total non-current liabilities                                                                                                                               |   | 20,180             |    | 36,926                  |   |
|                                                                                                                                                        |   |               |    |                    |   |
| Total liabilities                                                                                                                                           |   | 93,792             |    | 93,664                  |   |
|                                                                                                                                                        |   |               |    |                    |   |
| COMMITMENTS 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; 32,800,945 and 32,529,282 shares issued  and outstanding in 2003 and 2002, respectively |   | 329                |    | 326                     |   |
| Additional paid-in capital                                                                                                                                  |   | 461,998            |    | 460,014                 |   |
| Deferred compensation                                                                                                                                       |   | (576               | )       | —                  |   |
| Accumulated deficit                                                                                                                                         |   | (317,143           | )       | (283,430                | )      |
| Accumulated other comprehensive income                                                                                                                      |   | 424                |    | 332                     |   |
|                                                                                                                                                        |   |               |    |                    |   |
| Total stockholders’ equity                                                                                                                             |   | 145,032            |    | 177,242                 |   |
|                                                                                                                                                        |   |               |    |                    |   |
| Total liabilities and stockholders’ equity                                                                                                             |   | $                  | 238,824 |                    | $      | 270,906 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 
|                                                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                           |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| REVENUE:                                                       |   |                              |   |                            |   |   |   |   |   |
| Product  profit and royalty                                    |   | $                                 | 8,559  |                            | $      | 2,122 |   | $ | 13,058 |   | $ | 5,121 |   |
| Product development                                            |   | 859                               |   | 2,261                           |   | 4,211 |   | 3,984 |   |
| Contract research services                                     |   | 464                               |   | 2,550                           |   | 1,094 |   | 5,926 |   |
| Other                                                          |   | 245                               |   | 495                             |   | 449 |   | 668 |   |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| Total revenue                                                  |   | 10,127                            |   | 7,428                           |   | 18,812 |   | 15,699 |   |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| OPERATING EXPENSES:                                            |   |                              |   |                            |   |   |   |   |   |
| Research and development costs                                 |   | 11,920                            |   | 12,089                          |   | 22,532 |   | 23,023 |   |
| Selling, general and administrative                            |   | 3,154                             |   | 2,949                           |   | 6,874 |   | 5,837 |   |
| Depreciation and amortization                                  |   | 2,039                             |   | 1,817                           |   | 3,856 |   | 3,678 |   |
| Licensing costs                                                |   | 1,453                             |   | 4,675                           |   | 2,011 |   | 5,134 |   |
| Direct cost of research services                               |   | 309                               |   | 1,727                           |   | 749 |   | 3,716 |   |
| Settlement charge                                              |   | —                            |   | —                          |   | 16,500 |   | — |   |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| Total operating expenses                                       |   | 18,875                            |   | 23,257                          |   | 52,522 |   | 41,388 |   |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| OPERATING  LOSS                                                |   | (8,748                            | )      | (15,829                         | )      | (33,710 | ) | (25,689 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                        |   |                              |   |                            |   |   |   |   |   |
| Interest  income and other, net                                |   | 1,157                             |   | 2,158                           |   | 2,363 |   | 4,679 |   |
| Interest expense                                               |   | (1,145                            | )      | (1,808                          | )      | (2,289 | ) | (3,579 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| LOSS BEFORE INCOME TAXES                                       |   | (8,736                            | )      | (15,479                         | )      | (33,636 | ) | (24,589 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| Provision  for foreign income taxes                            |   | (56                               | )      | (7                              | )      | (77 | ) | (19 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| NET LOSS                                                       |   | $                                 | (8,792 | )                               | $      | (15,486 | ) | $ | (33,713 | ) | $ | (24,608 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| BASIC AND DILUTED NET LOSS PER SHARE                           |   | $                                 | (.27   | )                               | $      | (.48 | ) | $ | (1.03 | ) | $ | (.76 | ) |
|                                                           |   |                              |   |                            |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON  STOCK OUTSTANDING |   | 32,737                            |   | 32,476                          |   | 32,659 |   | 32,423 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

5

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 
|                                                                         |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **2003**                        |       | **2002** |   |
|                                                                         |   |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |   |                            |       |   |   |
| Net  loss                                                                    |   | $                               | (33,713    | ) | $ | (24,608 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                            |       |   |   |
|                                                                         |   |                            |       |   |   |
| **Depreciation and amortization**                                            |   | **3,856**                       | ** ** | **3,678** | ** ** |
| Non-cash compensation expense                                                |   | 479                             |       | — |   |
| Gain on investment in marketable securities                                  |   | —                          |       | (435 | ) |
| Bad  debt provision                                                          |   | (7                              | )          | (46 | ) |
| (Gain)  Loss on disposal of equipment                                        |   | (6                              | )          | 18 |   |
| Changes in operating assets and  liabilities:                                |   |                            |       |   |   |
| **(Increase) decrease in receivables, net**                                  |   | **(4,970**                      | **)**      | **2,294** | ** ** |
| Increase in prepaid expenses and other                                       |   | (702                            | )          | (319 | ) |
| (Increase) decrease in other non-current  assets                             |   | (572                            | )          | 226 |   |
| Decrease in accounts payable and accrued  liabilities                        |   | (5,191                          | )          | (7,771 | ) |
| Increase (decrease) in deferred revenue                                      |   | 3,091                           |       | (1,874 | ) |
| Increase in interest on note payable                                         |   | 2,289                           |       | 3,579 |   |
| Decrease in other non-current liabilities                                    |   | (24                             | )          | (3,642 | ) |
|                                                                         |   |                            |       |   |   |
| Net cash used in operating activities                                        |   | (35,470                         | )          | (28,900 | ) |
|                                                                         |   |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                            |       |   |   |
| Net activity of marketable securities’  transactions                    |   | 48,187                          |       | 1,962 |   |
| Increase in intangible assets                                                |   | (2,000                          | )          | — |   |
| Purchase of property and equipment                                           |   | (1,261                          | )          | (941 | ) |
| Proceeds from sale of property and  equipment                                |   | 10                              |       | — |   |
|                                                                         |   |                            |       |   |   |
| Net cash provided by investing activities                                    |   | 44,936                          |       | 1,021 |   |
|                                                                         |   |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |                            |       |   |   |
| Exercise of stock options and warrants                                       |   | 826                             |       | 1,552 |   |
| **Principal payments for capital lease obligations**                         |   | **(37**                         | **)**      | **(31** | **)** |
|                                                                         |   |                            |       |   |   |
| Net cash provided by financing activities                                    |   | 789                             |       | 1,521 |   |
|                                                                         |   |                            | ** ** |   | ** ** |
| **Effect of Exchange Rate Changes on Cash and Cash  Equivalents**            |   | **236**                         | ** ** | **274** | ** ** |
|                                                                         |   |                            |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                   |   | 10,491                          |       | (26,084 | ) |
|                                                                         |   |                            |       |   |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                              |   | 29,679                          |       | 84,518 |   |
|                                                                         |   |                            |       |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                     |   | $                               | 40,170     |   | $ | 58,434 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

6

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## ***NOTES TO CONSOLIDATED FINANCIAL STATEMENTS***

(amounts in thousands, except share information, per share informationor as otherwise indicated) (unaudited)

 

**1.     SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Principles of consolidation and basis ofpresentation*

 

The accompanying interim Consolidated Financial Statements presentedherein include the accounts of ILEX Oncology, Inc. and its subsidiaries (“theCompany” or “ILEX”). All significant intercompany transactions and accountshave been eliminated in consolidation. These interim consolidated financial statements have been prepared bythe Company, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant 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 financialposition and results of operations have been made.  Certain prior year amounts have been reclassified to conform tothe 2003 presentation.

 

It is recommended that these interim consolidated financial statementsbe read in conjunction with the financial statements and notes thereto includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2002.  The results of operations for anyinterim period are not necessarily indicative of the results of operations forthe entire year.

 

*Outlicensing Revenue*

 

Outlicensing revenue is earned and recognized based on the performancerequirements of the contract. Non-refundable license fees for which no furtherperformance obligations exist, and no continuing involvement by the Company isrequired, are recognized on the earlier of when the payments are received orwhen collection is assured.   Revenuefrom non-refundable upfront license fees where we continue involvement throughdevelopment collaboration or have an obligation to supply product is recognizedratably over the applicable development period or patent life.

 

Revenue associated with performance milestones is recognized based uponthe achievement of the milestones, as defined in the respective agreements.Revenue under research and development cost reimbursement contracts isrecognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified asdeferred revenue until earned.

 

*Stock-based compensation*

 

The Company uses the intrinsic value method in accounting for its stockcompensation plans.  Had compensationcost for the Company’s stock compensation plans been determined based upon afair value method consistent with Statement of Financial Accounting Standard(SFAS) No. 123 the Company’s net loss and loss per share would have beenincreased to the pro forma amounts indicated below:

 
|                              |                                                     | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------|----------------------------------------------------------|-----------------------------------|--------|---------------------------------|--------|
|                              |                                                     | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                              |                                                     |                              |   |                            |   |   |   |   |   |
| **Net loss**                      | **As reported**                                          |                              | **$**  | **(8,792**                      | **)**  | **$** | **(15,486** | **)** | **$** | **(33,713** | **)** | **$** | **(24,608** | **)** |
|                              | Stock grant compensation cost included in  reported loss |                              | 107    |                            | — |   | 479 |   | — |   |
|                              | Fair value cost                                          |                              | (1,391 | )                               | (2,749 | ) | (3,936 | ) | (5,485 | ) |
|                              | Pro forma                                                |                              | $      | (10,076                         | )      | $ | (18,235 | ) | $ | (37,170 | ) | $ | (30,093 | ) |
|                              |                                                     |                              |   |                            |   |   |   |   |   |   |
| Loss per share  basic and diluted | As reported                                              |                              | $      | (0.27                           | )      | $ | (0.48 | ) | $ | (1.03 | ) | $ | (0.76 | ) |
|                              | Stock grant compensation cost included in  reported loss |                              | — |                            | — |   | .01 |   | — |   |
|                              | Fair value cost                                          |                              | (0.04  | )                               | (0.08  | ) | (0.12 | ) | (0.17 | ) |
|                              | Pro forma                                                |                              | $      | (0.31                           | )      | $ | (0.56 | ) | $ | (1.14 | ) | $ | (0.93 | ) |

 

7

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*Intangible assetsand goodwill*

 

In December 2001, Genentech announced that it was granted a patentrelating to fundamental methods and compositions for the production ofmonoclonal antibodies using recombinant DNA technology, as a result of afavorable decision in a patent interference proceeding.  This proceeding entitled Genentech topriority over the patent held by the Celltech Group PLC, who had first receivedthe patent in 1989.   In March 2003, theCompany finalized a license from Genentech covering the production of itsCAMPATH 1-H monoclonal antibody against the CD52 target.  Accordingly, as of March 31, 2003, theCompany  recorded an intangible asset of$2.0 million associated with the license grant fee paid to Genentech in April2003, which is currently being amortized over the remaining CAMPATH patent lifeof 13 years.  The Company will also paymilestones and royalties based upon net U.S. sales levels.  As of June 30, 2003, the Company hasrecorded accumulated amortization of $39.0 related to this asset.

 

In connection with the Company’s December 31, 2001 acquisition ofMillennium Pharmaceuticals, Inc.’s (Millennium’s) interest in ILEXPharmaceuticals, L.P., formerly known as Millennium & ILEX, L.P. (thePartnership), the Company has recorded intangible assets classified ascompleted technology and a trademark in the amounts of $64.8 million and $2.8million, respectively.  These intangibleassets are currently being amortized under the straight-line method over 14years.   As of June 30, 2003, theCompany has recorded accumulated amortization of $7.2 million related to theseassets.

 

The Company acquired Symphar S.A. on February 13, 2001.  SFAS No. 141 required that the Companyrecognize its assembled workforce as goodwill rather than an intangible assetas it does not meet the specified criteria for recognition apart fromgoodwill.  The Company’s goodwill wasreviewed as of December 31, 2002 and will continue to be reviewed at least annuallyfor impairment.  The Company believesthat there was no impairment of its goodwill as of December 31, 2002.  As of June 30, 2003, no events have occurredthat would cause the Company to change its assessment of the recoverability ofits goodwill.

 

**2.     LOSS PER SHARE**

 

Diluted net loss per share is equal to basic net loss per share, as theeffect of all common stock equivalents is antidilutive.

 

**3.     STATEMENTSOF CASH FLOWS**

 

Non-cash investing and financing activities for the six months endedJune 30, 2003 and 2002, include the following:

 
|                                     |   | **2003** |   | **2002** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
| Receivable  from exercise of options     |   | 106      |   | —   |   |
| Deferred compensation – stock grant |   | (576     | )      | —   |   |

 

Supplemental disclosures of cash flow information for the six monthsended June 30, 2003 and 2002 include the following:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Cash  paid for interest |   | $        | 1      |     | $      | 6 |   |
|                         |        |          |        |          |        |  |  |

 

 

8

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**4.     CAMPATH SALES**

 

Our product profit and royalty revenue, which is based upon CAMPATHsales, was $8.6 million in the second quarter of 2003.  Global net sales of CAMPATH, recorded bySchering AG and Berlex were $23.3 million for the second quarter of 2003.  We estimate that approximately $7.0 millionof the Schering AG and Berlex global net sales in the second quarter of 2003represents increases in wholesaler inventory levels.  Accordingly, we believe that our second quarter of 2003 netresults were favorably impacted by the increases in wholesaler inventorylevels.

 

**5.     SETTLEMENTCHARGE**

 

In April 2003, the Company’s subsidiary, ILEX Oncology Services, Inc,(ILEX Services) settled a dispute with a former contract research organization(CRO) customer.  As a result of thissettlement, ILEX Services paid the former CRO customer $20.0 million in June of2003.  The Company recorded a settlementcharge in the first quarter of 2003 of $16.5 million, which is net of insurancereimbursement 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 periodfrom transactions and other events and circumstances from non-owner sources.The following table presents the components of the Company’s comprehensiveloss:

 
|                                         |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|----------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                         |   | **2003**                          |       | **2002**                        |       | **2003** |   | **2002** |   |
| Net loss                                     |   | $                                 | (8,792     | )                               | $          | (15,486 | ) | $ | (33,713 | ) | $ | (24,608 | ) |
| Other comprehensive income:                  |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Foreign currency translation adjustments** |   | **30**                            | ** ** | **235**                         | ** ** | **92** | ** ** | **318** | ** ** |
|                                         |   |                              |       |                            |       |   |   |   |   |
| Comprehensive loss                           |   | $                                 | (8,762     | )                               | $          | (15,251 | ) | $ | (33,621 | ) | $ | (24,290 | ) |

 

**7.     DEVELOPMENT AND DISTRIBUTION AGREEMENT**

 

In January 2003, Schering AGobtained from the Company the exclusive development, marketing and distributionrights to CAMPATH in Japan, China and other Asian countries.  The Company received an up-front payment andincurred an associated fee of 50% of such payment to the Licensor, both ofwhich are being recognized over the life of the patent in that region.  The Company may also receive payments uponcompletion of certain milestones and a royalty based on net sales of CAMPATH inthose areas.

 

**8.     LICENSINGAGREEMENTS**

 

In May 2003, the Company signed an agreement with QuatRxPharmaceuticals, Co. (QuatRx), granting QuatRx an exclusive, worldwide licenseto certain cardiovascular research platforms. The Company received an upfront payment of $2.5 million, which wasrecorded in deferred revenue at June 30, 2003. The Company believes it will berecognized as income in the third quarter of 2003, when all technicalinformation relating to the research platforms has been transferred toQuatRx.  ILEX may also receive paymentsupon the completion of certain milestones and royalties based on net sales of aproduct developed from these research platforms.

 

In March 2001, ILEX obtained the co-development rights to clofarabinein the U.S. and Canada from Bioenvision, Inc. (Bioenvision).  Under the co-development agreement, we havethe opportunity to obtain, after the satisfaction of certain conditions, theexclusive commercialization rights to clofarabine in the U.S. and Canada and aneconomic interest in the drug in Europe.  The Company also shares in clinical development costs for Europeandevelopment.

 

**9.     COMMITMENTS AND CONTINGENCIES**

 

The Company and its subsidiaries are subject to various claims andassessments arising out of the ordinary course of business. The Companybelieves it is unlikely that the final outcome of any of the claims orproceedings to which

 

9

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the Company is a party will have a material adverse effect on theCompany’s financial position or results of operations. However, due to theinherent uncertainty of litigation, there can be no assurance that theresolution of any particular claim or proceeding would not have a materialadverse effect on the Company’s results of operations for the period in whichsuch resolution occurred.

 

In connection with the license grant fee paid to Genentech in April2003, the Company will also pay milestones and royalties based upon net U.S.sales levels.  The Company anticipatesachievement of certain sales milestones and has expensed approximately $893.0associated with the achievement of these sales milestones as of June 30, 2003.

 

The Company acquired ConvergencePharmaceuticals in 1999 and is continuing Phase I testing of one of theConvergence molecules.  The Company isconsidering the extension of the second milestone date associated with clinicaltesting.  Depending upon the clinicaltrial results, such extension, if granted, may result in the Company issuing500,000 additional earn-out shares to the former Convergence owners.

 

During 1998, the Company guaranteed a line of credit for ClinicalResearch Group, Inc. (CRG).  Theguarantee gave the Company access to a network of clinical sites managed byCRG.  If the guarantee comes toredemption, the Company will obtain an ownership interest in CRG in accordancewith the guarantee agreement. Under the terms of the agreement, the Company hasmaintained $651.0 in the form of securities as collateral for the guarantee asof June 30, 2003.  As of June 30, 2003 theCompany had yet to fund the guarantee, however it has been reserved for inprior financial statements.

 

**10.  SUBSEQUENTEVENTS**

 

In the second quarter of 2003, the Company notifiedMillennium Pharmaceuticals, Inc. of its intent to pay $10.0 million of the$20.0 million debt maturity payment, due on August 14, 2003, in ILEXcommon stock and has filed an S-3 to register the resale of $10.0 millionin shares of common stock by Millennium. The remaining $20.0 million of the $40.0 million annual debt maturitywill be paid at the end of 2003.

 

On August 4, 2003, the Company completed anunderwritten public offering of our common stock, pursuant to which we sold 5.5million shares.  In addition, the CancerTherapy and Research Center Endowment, an ILEX shareholder, offered 500,000shares of our common stock.  Proceeds,net of costs to the Company, from this offering were approximately $87.5million.   The Company anticipates thatthe net proceeds from this offering will be used to fund clinical trials of theCompany’s lead product candidates; for clinical and preclinical studies for theCompany’s other product candidates; for potential licenses and acquisitions ofother businesses or complementary products and technologies; and for workingcapital, capital expenditures and other general corporate purposes.

 

**ITEM2****. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**Forward-LookingStatements – Cautionary Statements**

 

 

This Quarterly Report on Form10-Q contains certain forward-looking statements as such term is defined in thePrivate Securities Litigation Reform Act of 1995 and information relating tothe Company and its subsidiaries that are based on the beliefs of the Company’smanagement as well as assumptions made by and information currently availableto the Company’s management.  When usedin this report, the words “anticipate”, “believe”, “estimate”, “expect” and“intend” and words or phrases of similar import, as they relate to the Companyor its subsidiaries or Company management, are intended to identify forward-lookingstatements.  All statements other thanstatements of historical fact included in this Quarterly Report onForm 10-Q regarding our financial position, business strategy and plans orobjectives for future operations are forward-looking statements.  We cannot guarantee the accuracy of theforward-looking statements, and you should be aware that our actual resultscould differ materially from those contained in the forward-looking statementsdue to a number of factors, including: risks associated with preclinical andclinical developments in the biopharmaceutical industry in general and inILEX’s compounds under development in particular; the potential failure of theCompany’s compounds under development to prove safe and effective for treatmentof disease; uncertainties inherent in the early stage of the Company’scompounds under development; failure to successfully implement or completeclinical trials; failure to receive market clearance from regulatory agenciesfor our compounds under development; management’s ability to implementstrategic initiatives; the ability of the Company to predict its futureexpenses and capital needs; the development of competing products; the abilityof the Company to combine its disparate research capabilities and translatethem into clinical drug development programs; uncertainties related to theCompany’s dependence on and relationships with third parties and partners;general economic and market conditions; risks inherent in the biopharmaceuticalindustry; stock price volatility; variability of license, royalty and otherrevenue; risks related to the outcome of litigation and claims made against us;risks related to the market acceptance of CAMPATH; uncertainties related toprotection of our

 

10

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intellectual property; failure to satisfy performance obligations inour licenses or other contracts; uncertainty regarding our patents and patentrights (including the risk that we may be forced to engage in costly litigationto protect such patent rights and the material harm to us if there were anunfavorable outcome of any such litigation); rapid technological change couldrender our technologies obsolete; one-time events and those risks describedherein, in the Company’s Report on Form 10-K filed March 14, 2003, and in other filings made by the Company with theSEC. Based upon changing conditions, should any one or more of these risks oruncertainties materialize, or should any underlying assumptions proveincorrect, actual results may vary materially from those described herein asanticipated, believed, estimated, expected or intended.  The Company does not intend to update theseforward-looking statements*.*

 

The following discussion describes the Company’s financial position andresults of operations for the three and six-month periods ended June 30, 2003.The consolidated financial statements and notes thereto contain detailedinformation that should be referred to in conjunction with this discussion.

# ** **

# **OURBUSINESS**

 

We are a product-driven biopharmaceutical company focused on developingand commercializing a portfolio of novel therapeutic treatments primarily inoncology. We have leveraged our core competencies in clinical drug developmentto identify, develop and commercialize our proprietary product candidates.  Our lead product is marketed in the UnitedStates as CAMPATH® and in Europe and other countries as MABCAMPATH® for thetreatment of patients with B-cell chronic lymphocytic leukemia (CLL) who havebeen treated with alkylating agents and who have failed fludarabinetherapy.  CLL is a type of blood cancercharacterized by progressive accumulation of B-lymphocytes, a type of immunesystem 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 drugdiscovery programs.   Our pipelinecomprises product candidates at various stages of clinical development,including monoclonal antibodies, agents that have toxic effects on certaincells (cytotoxic agents) or inhibit cellular growth (cytostatic agents) withnovel mechanisms of action, agents that inhibit the formation of new bloodvessels (angiogenesis inhibitors) and agents which block cellular messaging associatedwith cancer growth and metastasis (signal transduction inhibitors).

 

We have incurred losses since inception and had an accumulated deficitthrough June 30, 2003 of $317.1 million. Our losses have resulted primarilyfrom research and product development activities, including licensing ofproducts and product and corporate acquisitions for which we incur in-processresearch and development fees and related administrative expenses. We plan tocontinue to invest in key research and development activities.  We expect to continue to incur operatinglosses throughout 2003.  Our revenue forthe foreseeable future will be limited to our product profit and royaltyrevenue, product development revenue, interest income and other miscellaneousincome.

 

In February 2001, we announced our intent to focus our in-house drugdevelopment capabilities on our own proprietary products, including those beingjointly developed with partners.  Atthat time, we began a transition out of the fee-for-service contract researchorganization (CRO) business.  We expectthis transition to be completed by the second quarter of 2004.  We will continue to recognize revenue fromcurrent client projects, but we do not intend to take on any newfee-for-service contracts.

# ** **

# **RECENTDEVELOPMENTS**

 

On August 4, 2003, the Company completed anunderwritten public offering of our common stock, pursuant to which we sold 5.5million shares.  In addition, the CancerTherapy and Research Center Endowment, an ILEX shareholder, offered 500,000shares of our common stock.  Proceeds,net of costs to the Company, from this offering were approximately $87.5million.   The Company anticipates thatthe net proceeds from this offering will be used to fund clinical trials of theCompany’s lead product candidates; for clinical and preclinical studies for theCompany’s other product candidates; for potential licenses and acquisitions ofother businesses or complementary products and technologies; and for workingcapital, capital expenditures and other general corporate purposes.

 

In the second quarter of 2003, we notified****Millennium Pharmaceuticals, Inc. of ourintent to pay $10.0 million of the $20.0 million debt maturity payment,due on August 14, 2003, in ILEX common stock and we filed a Form S-3 toregister the resale of $10.0 million in shares of common stock byMillenium.  The remaining $20.0 millionof the $40.0 million annual debt maturity will be paid at the end of 2003.

 

 

In May 2003, we signed an agreement with QuatRx Pharmaceuticals, Co.(QuatRx), granting QuatRx an exclusive, worldwide license to certaincardiovascular research platforms.  Wereceived an upfront payment of $2.5 million, which was recorded in deferredrevenue at June 30, 2003 and we believe it will be recognized as income in thethird quarter of 2003, when all technical information relating to the researchplatforms has been transferred to QuatRx. We may also receive payments upon the completion of certain milestonesand royalties based on net sales of a

 

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product developed from these research platforms.

 

In April 2003, our subsidiary, ILEX Oncology Services, Inc, (ILEXServices) settled a dispute with a former CRO customer.  As a result of this settlement, ILEXServices paid the former CRO customer $20.0 million in June 2003.  We have recorded a settlement charge in thefirst quarter of 2003 of $16.5 million, which is net of insurance reimbursementof $3.5 million, related to the settlement of this dispute.

 

In March 2003, we finalized a non-exclusive patent license fromGenentech covering the production of CAMPATH. The license grant fee of $2.0 million was paid in the second quarter of2003 and is currently being amortized over 13 years.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

We believe that our most critical accounting issues include our policyfor the recognition of revenue from outlicensing agreements, the valuation andimpairment review of the intangible assets acquired in connection with thepurchase of Millennium’s interest in the Partnership and the process ofdetermining the amount of in-process research and development obtained in anacquisition.

 

Outlicensing revenue is earned and recognized based on the performancerequirements of the contract. Non-refundable license fees for which no furtherperformance obligations exist, and no continuing involvement by the Company isrequired, are recognized on the earlier of when the payments are received orwhen collection is assured.   Revenuefrom non-refundable license fees where we continue involvement throughdevelopment collaboration or have an obligation to supply product is recognizedratably over the applicable development period or patent life.

 

Revenue associated with performance milestones is recognized based uponthe achievement of the milestones, as defined in the respective agreements.Revenue under research and development cost reimbursement contracts isrecognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified asdeferred revenue until earned.

 

The amount recorded as completed technology and the amount recorded astrademark within our other intangible assets were determined based on anindependent appraisal of the estimated timing and amount of revenue to begenerated from sales of CAMPATH.  Amounts recorded as in-process research and development are based uponassumptions and estimates regarding the amount and timing of projected revenuesand costs as well as the appropriate discount rates and expected trends intechnology.  No assurance can be given,however, that the underlying assumptions used to estimate revenue, developmentcosts or profitability or the events associated with such projects willtranspire as estimated.  For thesereasons, actual results may vary from projected results.  The most significant and uncertainassumptions relating to the in-process projects relate to the projected timingof completion and revenues attributable to each project.

 

**RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2003 AND2002**

 

**Operating Revenues**

 

Total revenueincreased to $18.8 million in the first six months of 2003, from $15.7 millionin the first six months of 2002, an overall increase of $3.1 million, or20%.  The increase is attributable toproduct profit and royalty revenue, which is the Company’s share of CAMPATH netprofits on U.S. sales and a royalty on the rest of the world sales.  Product profit and royalty revenue increasedto $13.1 million in the first six months of 2003 from $5.1 million in the firstsix months of 2002, an increase of $8.0 million.   Product development revenue increased slightly to $4.2 millionfor the first six months of 2003 from $4.0 million for the same period in 2002,an increase of $0.2 million or 5%. Revenue from the Company’s CRO services decreased $4.8 million or 81% to$1.1 million in the first six months of 2003 from $5.9 million in the first sixmonths of 2002.  This decrease is theresult of the Company’s continued transition out of the fee-for-service CRObusiness.

 

**Operating Expenses**

 

*Research and development costs*.  Research and development costs decreased to$22.5 million for the first six months of 2003, from $23.0 million in 2002.This decrease of $0.5 million, or 2%, was due to a decrease in payroll andfacility-related research and development costs, which were partially offset byincreased other direct research and development costs.

 

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*Selling, general and administrative costs*.  Selling, general and administrative costsincreased to $6.9 million for the six months of 2003, compared to $5.8 millionfor the same period in 2002.  Thisincrease of $1.1 million, or 19%, is primarily due to legal fees associatedwith the settlement charge  and non-cashcompensation charges.

 

*Depreciation and amortization*.  Depreciation and amortization increased to$3.9 million from $3.7 million in 2002, an increase of approximately $0.2million, or 5%.   The increase is theresult of an increase in intangible assets in 2003, and additional purchases offixed assets.

 

*Licensing costs*.  Licensing costs decreased to $2.0 millionfor the first six months of 2003 from $5.1 million in the first six months of2002, a decrease of $3.1 million, or 61%. Licensing costs for the first six months of 2003 consist primarily ofexpense accruals for the achievement of milestones associated with the licensegrant from Genentech, a license fee expense accrual related to MUC-1 and otherfiling fees.  Licensing costs in 2002consisted primarily of a  $4.0 millionlicense fee expense accrual related to an exclusive worldwide license from BASFPharma for ILX-651.

 

*Direct cost of research services*.  Direct cost of research services decreasedto $0.7 million during the first six months of 2003, from $3.7 million in2002.  This decrease of $3.0 million, or81%, is attributable to the Company’s continued transition out of thefee-for-service business.

 

*Settlement charge*.We incurred a settlement charge of $16.5 million in the first quarter of2003.  This charge is the result of thesettlement of a dispute with a former CRO client.

 

**Interest Income andOther, Net**

 

Interest andother income decreased to $2.4 million for the first six months of 2003 from$4.7 million for the first six months of 2002. This decrease of $2.3 million,or 49%, is attributable to a decrease in our cash balances from the same periodlast year as well as a decrease in the available interest rates on investmentbalances compared to interest rates in 2002.

 

**Interest Expense**

 

Interestexpense decreased to $2.3 million for the first six months of 2003 from $3.6million for the same period in 2002. Interest expense relates to the imputed interest on the note toMillennium for our purchase of their interest in the Partnership.  The decrease of $1.3 million, or 36% is aresult of the decrease in the outstanding balance on which interest expense iscalculated.

 

**Net Loss**

 

Net lossincreased $9.1 million in the first six months of 2003 to $33.7 million, from$24.6 million in the same period of 2002. Net loss per share increased $0.27per share for the same periods to $1.03 per share in 2003, from $0.76 per sharein 2002.  Excluding the settlementcharge of $16.5 million for the six months ended June 30, 2003, non-GAAP netloss was $17.2 million compared to $24.6 million in for the six months endedJune 30, 2002.  Management of theCompany believes that the aforementioned non-GAAP measure of net loss and netloss per share is useful for investors as it excludes the significant, unusualsettlement charge.  Management alsobelieves that excluding the settlement charge from our GAAP net loss providesusers of the Company’s financial statements an important insight into our netresults and the related trends, which are affecting our core business.  Non-GAAP net loss and loss per share shouldnot be considered in isolation and are not intended to represent an alternativemeasure of operating or net results or any other measure of performancedetermined in accordance with GAAP.  Thefollowing table shows the reconciliation of our GAAP net loss and net loss pershare to our non-GAAP net loss and net loss per share for the six months endedJune 30, 2003:

 
|                                  |   | **Net Loss** |    | **Loss per  share** |   |
|---------------------------------------|--------|--------------|---------|---------------------|--------|
|                                  |   |         |    |                |   |
| GAAP  net loss and loss per share     |   | $            | (33,713 | )                   | $      | (1.03 | ) |
| Settlement charge                     |   | 16,500       |    | 0.50                |   |
| Non-GAAP  net loss and loss per share |   | $            | (17,213 | )                   | $      | (0.53 | ) |

 

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**RESULTS OF OPERATIONS– THREE MONTHS ENDED JUNE 30, 2003 AND 2002**

 

**Operating Revenues**

 

Total revenueincreased to $10.1 million in the second quarter of 2003, from $7.4 million inthe second quarter of 2002. The overall increase of $2.7 million, or 36%, wasdue to the increase in the Company’s product profit and royalty revenue.  Product profit and royalty revenue, which isthe Company’s share of CAMPATH net profits on U.S. sales and a royalty on therest of the world sales, totaled $8.6 million in the second quarter of 2003compared to $2.1 million in the second quarter of 2002, and increase of $6.5million over the same period last year. Global net sales of CAMPATH, recorded by Schering AG and its U.S.affiliate, Berlex Laboratories, Inc. (Berlex), were $23.3 million in the secondquarter of 2003.   We estimate thatapproximately $7.0 million of these sales resulted from increases in wholesalerinventory levels.  We also estimate thatour product profit and royalty revenues were favorably impacted as a result ofthis increase by approximately $3.8 million. Product development revenue decreased to $0.9 million in the secondquarter of 2003 from $2.3 million in the second quarter of 2002, a decrease of$1.4 million, or 61%.  Productdevelopment revenue is based upon Schering AG’s contribution of research anddevelopment expenses and decreased primarily as a result of the advance balancefrom Schering AG being depleted in the first quarter of 2003.  Revenue from the Company’s CRO servicesdecreased $2.1 million, or 81% to $0.5 million in the second quarter of2003 from $2.6 million in the second quarter of 2002.  This decrease is the result of the Company’s continued transitionout of the fee-for-service CRO business.

 

**Operating Expenses**

 

*Research and Development Costs*.  Research and development costs decreased to$11.9 million in the second quarter of 2003, from $12.1 million in 2002. Thisdecrease of $0.2 million, or 2%, was due to a decrease in payroll andfacility-related research and development costs partially offset by otherdirect costs.

 

*Selling, General and Administrative Costs*.  Selling, general and administrative costsincreased approximately $0.2 million to $3.2 million for the secondquarter of 2003, compared to the same quarter in 2002.    This slight increase is primarily theresult of legal fees associated with the settlement charge and non-cashcompensation charges.

 

*Depreciation and Amortization*.  Depreciation and amortization increased to$2.0 million in the second quarter of 2003 from $1.8 million in 2002, anincrease of $0.2 million, or 11%.  Thisincrease is primarily the result of an additional intangible asset of $2.0million and the corresponding increase in amortization.

* *

*Licensing Costs*.  Licensing costs decreased to $1.5 million inthe second quarter of 2003, from $4.7 million in 2002, a decrease of  $3.2 million, or 68%.  Licensing costs for the second quarter of2003 consist primarily of expense accruals for the achievement of milestonesassociated with the license grant from Genentech, a license fee expense accrualrelated to MUC1 and additional filing fees. Licensing costs for the second quarter of 2002 consist primarily of alicense fee expense accrual of $4.0 million related to an exclusive worldwidelicense from BASF Pharma for ILX-651.

 

*Direct Costs of Research Services*.  Direct costs of research services decreasedto $0.3 million during the second quarter of 2003, from $1.7 million in2002.  This decrease of $1.4 million, or82%, is attributable to our continued transition out of CRO business.

 

**Interest Income andOther, Net**

 

Interest andother income decreased to $1.2 million for the quarter ended June 30, 2003,from $2.2 million for the quarter ended June 30, 2002. This decrease of $1.0million, or 45%, is attributable to a decrease in our cash balances from thesame period last year as well as a decrease in the available interest rates oninvestment balances compared to interest rates in 2002.

 

**Interest Expense**

 

Interestexpense decreased to $1.1 million for the second quarter of 2003 from $1.8million for the same period in 2002. Interest expense relates to the imputed interest on the note toMillennium for our purchase of their interest in the Partnership.  The decrease of $0.7 million, or 39%, is aresult of the decrease in the outstanding balance on which interest expense iscalculated.

 

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**Net Loss**

 

Net loss decreased $6.7 million in the second quarter of 2003, or 43%,to $8.8 million, from $15.5 million in 2002. Net loss per share decreased $0.21per share to $0.27 per share in 2003, from $0.48 per share in 2002.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

We havehistorically financed our operations primarily through the sale of our capitalstock, through development and licensing fee revenues provided by ourcollaborative partners under our collaborative agreements and throughfee-for-service or participatory revenues pursuant to contracts with our CROclients.

 

At June 30, 2003, we had cash, cash equivalents, restricted investmentsand investments in marketable securities of $153.3 million and working capitalof $90.7 million. Cash, cash equivalents, restricted investments and investmentsin marketable securities decreased by $37.7 million in the first six months of2003 as a result of general operating requirements, the previously discussedsettlement charge and the development spending on our product candidates.

 

On August 4, 2003, the Company completed an underwritten publicoffering of our common stock pursuant to which, we sold 5.5 millionshares.  Additionally, the CancerTherapy Research Center Endowment, an ILEX shareholder, offered 500,000 sharesof our common stock.  Proceeds, net ofcosts to the Company, from this offering were approximately $87.5 million.  The company anticipates that the netproceeds from this offering will be used to fund clinical trials of theCompany’s lead product candidates; for clinical and preclinical studies for theCompany’s other product candidates; for potential licenses and acquisitions ofother businesses or complementary products and technologies; and for workingcapital, capital expenditures and other general corporate purposes.

 

On October 29,2001, we announced that we had entered into a definitive agreement to purchaseMillennium’s 50% equity interest in the Partnership.  The acquisition closed on December 31, 2001.  We estimated the purchase price at $127.6million based on the net present value of the required future cash paymentsdiscounted at 6.5%, our estimated incremental borrowing rate on the date ofpurchase.  The terms of the agreementrequired an initial cash payment of $20.0 million and an additional $120.0million in scheduled payments over the following three years. The first ofthese scheduled payments of $40.0 million in cash was made on December 31,2002.  Additionally, $40.0 million isdue in 2003 and 2004, of which $10.0 million in each of those years may be paidwith our common stock at our option and subject to certain terms andconditions.   In 2003 and 2004, $20.0million of the $40.0 million is due following the calendar quarter in which netU.S. CAMPATH sales exceed a certain level. This first $20.0 million maturity, based on net U.S. CAMPATH sales,will be made in the third quarter of 2003 and we have notified Millennium ofour intent to pay $10.0 million of such maturities in shares of our commonstock.  The remaining $20.0 millionof the $40.0 million annual debt maturity for 2003 will be paid at the endof 2003.  In addition, Millennium willbe entitled to royalties based upon net U.S. CAMPATH sales above certain levelsin 2005 and continuing through 2008.

 

We plan tocontinue our policy of investing available funds in government securities andinvestment-grade, interest-bearing securities, none of which matures in morethan two years. We do not invest in derivative financial instruments, asdefined by Statement of Financial Accounting Standards No. 133 and 138.

 

Our futureexpenditures and capital requirements will depend on numerous factors,including but not limited to: the progress of our research and developmentprograms; the progress of our non-clinical and clinical testing; the magnitudeand scope of these activities; the time and costs involved in obtainingregulatory approvals; the cost of filing, prosecuting; defending and enforcingany patent claims and other intellectual property rights; competingtechnological and market developments; changes in or termination of existingcollaborative arrangements; the ability to establish, maintain and avoidtermination of collaborative arrangements and the purchase of capital equipmentand acquisitions of compounds, technologies or businesses.  At June 30, 2003, we did not have anymaterial commitments for capital expenditures.

# ** **

# **ITEM 3**.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk represents the risk of loss that may impact the financialposition, results of operations or cash flows of the Company due to adversechanges in financial market prices, including interest rate risk, foreigncurrency exchange rate risk, commodity price risk and other relevant marketrate or price risks.

 

We are exposed to some market risk through interest rates, related toour investment of cash, cash equivalents,

 

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restricted investments and investments in marketable securities of$153.3 million at June 30, 2003. These funds are generally invested ininterest-bearing securities, primarily with maturities of one year or less. Assuch instruments mature and the funds are reinvested, we are exposed to changesin market interest rates. This risk is not considered material and we managesuch risk by continuing to evaluate the best investment rates available forshort-term high quality investments.  Ifmarket interest rates were to increase or decrease immediately and uniformly by50 basis points, we would not expect there to be a material effect on ourresults of operations or on our balance sheet. We have not used derivativefinancial instruments in our investment portfolio.

 

Our European operations are denominated in local currency. We haveunhedged transaction exposures in these currencies, which are not consideredmaterial. We have not entered into any forward foreign exchange contracts forspeculative, trading or other purposes.

** **

**Item 4**. CONTROLS AND PROCEDURES

** **

In accordance with Exchange Act Rules 13a-15and 15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of June 30,2003 to provide reasonable assurance that information required to be disclosedin our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission's rules and forms.

 

There has been no change in our internalcontrols over financial reporting that occurred during the three months endedJune 30, 2003 that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

 

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**PART II**. OTHER INFORMATION

** **

**Item1. Legal Proceedings**

** **

**TheCompany is involved in various routine legal proceedings incidental to theCompany's business.  The Companybelieves it is unlikely that the final outcome of the legal proceedings towhich the Company is a party will have a material adverse effect on theCompany's financial position or results of operations.  However, due to the inherent uncertainty ofthe litigation process, there can be no assurance that the resolution of anyparticular legal proceeding will not have a material adverse effect on theCompany's results of operations for the period in which such resolutionoccurred.**

** **

**In April2003, our subsidiary, ILEX Oncology Services, Inc, (ILEX Services) settled adispute with a former contract research organization (CRO) customer.  As a result of this settlement, ILEXServices paid the former CRO customer $20.0 million in June 2003.  We have recorded a settlement charge in thefirst quarter of 2003 of $16.5 million, which is net of insurance reimbursementof $3.5 million, related to the settlement of this dispute.**

** **

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

** **

The following matters were voted upon at the Annual Meeting ofStockholders held on May 22, 2003, and received the votes set forth below:

 

1.                                       Allof the following persons nominated were elected to serve as directors andreceived the number of votes set forth opposite their respective names:

 
| **Name**                 |   | **For**    |   | **Withheld** |   |
|--------------------------|--------|------------|--------|--------------|--------|
|                     |   |       |   |         |   |
| Jeffrey H. Buchalter     |   | 23,691,230 |   | 136,608      |   |
| Joy A. Amundson          |   | 20,890,534 |   | 2,937,304    |   |
| Joseph S. Bailes, M.D.   |   | 23,693,409 |   | 134,429      |   |
| Jason S. Fisherman, M.D. |   | 23,693,409 |   | 134,429      |   |
| Richard L. Love          |   | 23,693,409 |   | 134,429      |   |
| Victor P. Micati         |   | 23,691,432 |   | 136,406      |   |
| Daniel D. Von Hoff, M.D. |   | 20,875,493 |   | 2,952,345    |   |
| Mark E. Watson, Jr.      |   | 23,693,409 |   | 134,429      |   |
| Gary V. Woods            |   | 20,890,332 |   | 2,937,506    |   |

 

2.                                       Aproposal to ratify the appointment of Ernst & Young LLP as IndependentPublic Accountants received 20,480,367 votes FOR and 3,340,253 votes AGAINST,with 7,218 abstentions.

** **

**Item 6**. Exhibits and Reports on Form 8-K

** **

**(a)**                                Exhibits

** **
| **Exhibit  Number** |   |                                                                                                                                                                                                                  |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **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 Share**                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                  |
| **31.1***           |   | **Certification  of President and Chief Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002**                                         |
|                |   |                                                                                                                                                                                                                  |
| **31.2***           |   | **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 2002**                             |
|                |   |                                                                                                                                                                                                                  |
| **32.1***           |   | **Certification  of  President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section  906 of  the Sarbanes-Oxley Act of 2002**                                    |
|                |   |                                                                                                                                                                                                                  |
| **32.2***           |   | **Certification  of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002**                               |

** **

**(b)**                               Reports on Form 8-K:

The Company has recently filed the following Reports on Form 8-K duringthe quarter ended June 30, 2003:

 

Dated April 14, 2003, to disclose a settlement of a dispute with aformer contract research

 

17

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organization customer

 

Dated April 29, 2003, to disclose issuance of a press releaseannouncing first quarter 2003 results.

** **

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***             **Filed herewith.

** **

**Signature**s

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the city of SanAntonio, Texas, on August 14, 2003.

 
|   |   | **ILEX ONCOLOGY, INC.**                             |
|--------|--------|-----------------------------------------------------|
|   |   |
|   | By:    | /s/  *Jeffrey H. Buchalter*                    |   |
|   |   | *Jeffrey H. Buchalter*                              |
|   |   | *President and Chief Executive Officer*             |
|   |   | *(Principal Executive Officer)*                     |
|   |   |
|   | By:    | /s/  *Mark P. Mellin*                          |   |
|   |   | *Mark P.  Mellin*                                   |
|   |   | *Senior Vice President and Chief Financial Officer* |
|   |   | *(Chief  Financial and Accounting Officer)*         |
|        |        |                                                     |  |  |

 

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