UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q





(Mark
One)





[X]           Quarterly
Report Pursuant To Section 13 Or 15(d) Of The


Securities Exchange Act Of
1934


For the quarterly period ended
September 30, 2008





OR





[   ]           Transition
Report Pursuant To Section 13 Or 15(d) Of The


Securities Exchange Act Of
1934


For the transition period from
_______________ to _______________








Commission
File Number: 0-23317












ORE
PHARMACEUTICALS INC.





(Exact
name of registrant as specified in its charter)








Delaware
              
              06-1411336(State or other
      jurisdiction of
              
              (I.R.S.
      Employerincorporation or
      organization)
              
              Identification
      No.)


610
Professional Drive, Suite 101


Gaithersburg,
Maryland 20879


(Address
of principal executive offices)


(240)
361-4400


(Registrant’s
phone number, including area code)










Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days:YESxNOo




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.






Large
      accelerated filer o
              Accelerated
      filero
              Non-accelerated
      filer o
              Smaller reporting
      company x(Do not check if
      smaller reporting company)


Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES oNO x





The number
of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
5,494,019 as of October 31, 2008.










ORE
PHARMACEUTICALS INC.
 
 
 TABLE
OF CONTENTS
  PART
I                     FINANCIAL INFORMATION
  Item
      1.
              
              Financial
      Statements
              3
 
 Consolidated
      Condensed Balance Sheets at September 30, 2008 and December 31,
      2007
              3
 Consolidated
      Condensed Statements of Operations for the Three and Nine Months Ended
      September 30, 2008 and 2007
              4
 Consolidated
      Condensed Statements of Cash Flows for the Nine Months Ended September 30,
      2008 and 2007
              5
 Notes
      to Consolidated Condensed Financial Statements
              6
 
 Item
      2.
              
              Management’s
      Discussion and Analysis of Results of Operations and Financial
      Condition
              11
 
 Item
      4.
              
              Controls
      and Procedures
              14
 
  PART
II                      OTHER INFORMATION
  Item
      1.
              
              Legal
      Proceedings
              14
 
 Item
      2.
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              14
 
 Item
      3.
              
              Defaults
      Upon Senior Securities
              14
 
 Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders
              14
 
 Item
      5.
              
              Other
      Information
              14
 
 Item
      6.
              
              Exhibits
              15
 
 Signatures
              
              
              16






2.


PART
I                               FINANCIAL
INFORMATION





Item
1.                      Financial
Statements


ORE PHARMACEUTICALS INC.





CONSOLIDATED
CONDENSED BALANCE SHEETS


(in
thousands, except share data)




September
      30,
              
              
              December
      31,2008
              
              
              2007(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              13,703
              
              
              $
              26,323Marketable
      securities available-for-sale
              
              
              497
              
              
              
              6,477Accounts
      receivable
              
              
              8
              
              
              
              1,953Prepaid
      expenses
              
              
              426
              
              
              
              910Notes
      receivable, net
              
              
              2,840
              
              
              
              -Other
      current assets
              
              
              71
              
              
              
              1,185Total
      current assets
              
              
              17,545
              
              
              
              36,848Property
      and equipment, net
              
              
              1,562
              
              
              
              2,101Long-term
      investments
              
              
              -
              
              
              
              2,964Goodwill
              
              
              -
              
              
              
              554Other
      intangibles, net
              
              
              565
              
              
              
              836Note
      receivable, net
              
              
              675
              
              
              
              2,676Other
      assets
              
              
              175
              
              
              
              -Total
      assets
              
              $
              20,522
              
              
              $
              45,979LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              862
              
              
              $
              1,120Accrued
      compensation and employee benefits
              
              
              1,536
              
              
              
              2,516Other
      accrued expenses
              
              
              2,143
              
              
              
              2,912Current
      portion of long-term debt
              
              
              490
              
              
              
              501Deferred
      revenue
              
              
              -
              
              
              
              1,500Total
      current liabilities
              
              
              5,031
              
              
              
              8,549Long-term
      debt, net of current portion
              
              
              -
              
              
              
              27Deferred
      rent
              
              
              3
              
              
              
              32Total
      liabilities
              
              
              5,034
              
              
              
              8,608Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders'
      equity:Preferred
      stock, $.01 par value; 10,000,000 shares authorized; and no shares issued
      andoutstanding
      as of September 30, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; 60,000,000 shares authorized;  5,494,019
      and 6,448,873 sharesissued
      and outstanding as of September 30, 2008 and December 31, 2007,
      respectively
              
              
              55
              
              
              
              64Additional
      paid-in-capital
              
              
              384,870
              
              
              
              387,721Accumulated
      other comprehensive loss
              
              
              -
              
              
              
              (46
              )Accumulated
      deficit
              
              
              (369,437
              )
              
              
              (350,368
              )Total
      stockholders' equity
              
              
              15,488
              
              
              
              37,371Total
      liabilities and stockholders' equity
              
              $
              20,522
              
              
              $
              45,979





See
accompanying notes.




3.


ORE PHARMACEUTICALS INC.





CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS


(in
thousands, except per share data)


(unaudited)




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue:Drug
      repositioning and development services
              
              $
              200
              
              
              $
              841
              
              
              $
              1,950
              
              
              $
              879Expenses:Research
      and development
              
              
              2,342
              
              
              
              2,748
              
              
              
              8,547
              
              
              
              7,801Selling,
      general and administrative
              
              
              2,632
              
              
              
              2,461
              
              
              
              10,302
              
              
              
              8,607Total
      expenses
              
              
              4,974
              
              
              
              5,209
              
              
              
              18,849
              
              
              
              16,408Loss
      from operations
              
              
              (4,774
              )
              
              
              (4,368
              )
              
              
              (16,899
              )
              
              
              (15,529
              )Interest
      (income), net
              
              
              (146
              )
              
              
              (463
              )
              
              
              (648
              )
              
              
              (1,595
              )Write-down
      of equity investment
              
              
              2,964
              
              
              
              -
              
              
              
              2,964
              
              
              
              -Gain
      on sale of DioGenix Inc.
              
              
              (146
              )
              
              
              -
              
              
              
              (146
              )
              
              
              -Loss
      from continuing operations
              
              
              (7,446
              )
              
              
              (3,905
              )
              
              
              (19,069
              )
              
              
              (13,934
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (4,001
              )
              
              
              -
              
              
              
              (11,951
              )Net
      loss
              
              $
              (7,446
              )
              
              $
              (7,906
              )
              
              $
              (19,069
              )
              
              $
              (25,885
              )Basic
      and diluted net loss per share:Loss
      from continuing operations
              
              $
              (1.36
              )
              
              $
              (0.61
              )
              
              $
              (3.33
              )
              
              $
              (2.19
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (0.63
              )
              
              
              -
              
              
              
              (1.87
              )Net
      loss
              
              $
              (1.36
              )
              
              $
              (1.24
              )
              
              $
              (3.33
              )
              
              $
              (4.06
              )Shares
      used in computing basic and dilutednet
      loss per share
              
              
              5,477
              
              
              
              6,379
              
              
              
              5,719
              
              
              
              6,373




See
accompanying notes.




4.


ORE PHARMACEUTICALS INC.





CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)






Nine
      Months EndedSeptember
      30,2008
              
              
              2007Cash
      flows from operating activities:Loss
      from continuing operations
              
              $
              (19,069
              )
              
              $
              (13,934
              )Adjustments
      to reconcile loss from continuing operations to net cash
    flowsfrom
      continuing operating activities:Depreciation
      and amortization
              
              
              847
              
              
              
              862Non-cash
      stock-based compensation expense
              
              
              130
              
              
              
              397Write-down
      of equity investment
              
              
              2,964
              
              
              
              -Gain
      on sale of DioGenix Inc.
              
              
              (146
              )
              
              
              -Other
      non-cash items
              
              
              294
              
              
              
              -Changes
      in continuing operating assets and liabilities:Accounts
      receivable
              
              
              1,945
              
              
              
              2,712Prepaids
      and other assets
              
              
              492
              
              
              
              51Accounts
      payable
              
              
              (244
              )
              
              
              (1,320
              )Accrued
      expenses and deferred rent
              
              
              (1,688
              )
              
              
              142Accrued
      restructuring
              
              
              -
              
              
              
              (1,632
              )Deferred
      revenue
              
              
              (1,500
              )
              
              
              -Net
      cash flows from continuing operating activities
              
              
              (15,975
              )
              
              
              (12,722
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (11,951
              )Adjustments
      to reconcile loss from discontinued operations to net cash
      flowsfrom
      discontinued operating activities:Depreciation
      and amortization and other non-cash items
              
              
              -
              
              
              
              6,404Changes
      in discontinued operating assets and liabilities
              
              
              -
              
              
              
              3,282Net
      cash flows from discontinued operating activities
              
              
              -
              
              
              
              (2,265
              )Net
      cash flows from operating activities
              
              
              (15,975
              )
              
              
              (14,987
              )Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (171
              )
              
              
              (157
              )Purchases
      of licenses and patent costs
              
              
              (383
              )
              
              
              (246
              )Proceeds
      from sale of marketable securities available-for-sale
              
              
              10,527
              
              
              
              32,794Purchase
      of marketable securities available-for-sale
              
              
              (4,501
              )
              
              
              (17,260
              )Net
      proceeds received from sale of Genomics Assets
              
              
              412
              
              
              
              -Net
      proceeds received from sale of Preclinical Division
              
              
              272
              
              
              
              -Net
      proceeds received from sale of DioGenix Inc.
              
              
              500
              
              
              
              -Payment
      related to sale of Preclinical Divison
              
              
              -
              
              
              
              (1,843
              )Net
      investing activities of discontinued operations
              
              
              -
              
              
              
              (1,335
              )Net
      cash flows from investing activities
              
              
              6,656
              
              
              
              11,953Cash
      flows from financing activities:Purchase
      of common stock
              
              
              (3,263
              )
              
              
              10Repayments
      of an equipment loan
              
              
              (38
              )
              
              
              (36
              )Net
      cash flows from financing activities
              
              
              (3,301
              )
              
              
              (26
              )Net
      decrease in cash and cash equivalents
              
              
              (12,620
              )
              
              
              (3,060
              )Cash
      and cash equivalents, beginning of period
              
              
              26,323
              
              
              
              25,700Cash
      and cash equivalents, end of period
              
              $
              13,703
              
              
              $
              22,640Supplemental
      disclosure:Interest
      paid
              
              $
              4
              
              
              $
              4Non-cash
      investing transactions:Fair
      value of promissiory note received in connection with the sale of DioGenix
      Inc.
              
              $
              673
              
              
              $
              -




See
accompanying notes.




5.


ORE PHARMACEUTICALS INC.





Notes
to Consolidated Condensed Financial Statements


September
30, 2008


(in
thousands, except share and per share data)


(unaudited)





Note
1 — Organization and summary of significant accounting policies





Description
of Business





Ore
Pharmaceuticals Inc. (the “Company”), is a commercial drug development company
focused on advancing a pipeline of compounds for uses identified by its
proprietary indication seeking program.  Over the past four years, the
Company has identified new therapeutic indications for a number of compounds
using its indication seeking program, which systematically revealed a compound’s
biological activity.  The Company is pursuing clinical development of
its compounds in parallel with its efforts to establish out-licensing or
partnering arrangements to advance those compounds.  In September
2008, the Company initiated a 14-day multiple ascending dose clinical trial for
its lead drug development candidate, GL1001, a first-in-class small molecule
intended for the treatment of inflammatory bowel disease.





In
December 2007, the Company sold the assets of its Genomics Division (“Genomics
Assets”) (see Note 3).  In September 2008, the Company sold its wholly
owned subsidiary, DioGenix Inc., its molecular diagnostics business (see Note
7).





Basis
of Presentation





The
accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with United States Generally Accepted Accounting
Principles (“GAAP”) for interim financial information and the instructions to
Form 10-Q and Article 8-03 of Regulation S-X.  The consolidated
condensed balance sheet as of September 30, 2008, consolidated condensed
statements of operations for the three and nine months ended September 30, 2008
and 2007 and the consolidated condensed statements of cash flows for the nine
months ended September 30, 2008 and 2007 are unaudited, but include all
adjustments (consisting of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial position, operating
results and cash flows, respectively, for the periods
presented.  Although the Company believes that the disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the United States Securities
and Exchange Commission (“SEC”).  All material intercompany accounts
and transactions have been eliminated in consolidation.





As a
result of the Company’s sale of its Genomics Assets and in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, the Company has classified the
results of operations of the Genomics Division (not including its molecular
diagnostics business) as a discontinued operation (see Note 3).  The
results of operations for the Company’s molecular diagnostic business are not
considered material and, therefore, have not been classified as a discontinued
operation.





Results
for any interim period are not necessarily indicative of results for any future
interim period or for the entire year.  The accompanying unaudited
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.





Use
of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.





Comprehensive
Loss





The
Company accounts for comprehensive loss as prescribed by SFAS No. 130,
“Reporting Comprehensive Income”.  Comprehensive income (loss) is the
total net income (loss) plus all changes in equity during the period except
those changes resulting from investment by and distribution to
owners.  Total comprehensive loss was $7,446 and $7,898 for the three
months ended September 30, 2008 and 2007, respectively, and $19,023 and $25,844
for the nine months ended September 30, 2008 and 2007,
respectively.






6.


New
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  SFAS 157 is effective for fiscal years
beginning after November 15, 2007.  In February 2008, the FASB decided
to issue a final Staff Position to allow a one-year deferral of adoption of SFAS
157 for non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  The
FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its
related interpretive accounting pronouncements that address leasing
transactions.  The Company adopted SFAS 157 for financial assets and
liabilities on January 1, 2008 and the adoption had no impact on the Company’s
financial position or results of operations.





SFAS
No. 157 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow) and the cost approach (cost to replace the service capacity of an
asset or replacement cost).  The statement utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels.  The following is a brief
description of those three levels:


·
            Level
      1:  Observable inputs such as quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.


·
            Level
      2:  Inputs other than quoted prices that are observable for the
      asset or liability, either directly or indirectly.  These
      include quoted prices for similar assets or liabilities in active markets
      and quoted prices for identical or similar assets or liabilities in
      markets that are not active.


·
            Level
      3:  Unobservable inputs that reflect the reporting entity’s own
      assumptions.




The
Company’s financial assets subject to fair value measurements and the necessary
disclosures are as follows:




Fair
      Value
              
              
              Fair
      Value Measurements at September 30, 2008as
      of
              
              
              Using
      Fair Value HierarchySeptember
      30, 2008
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Cash
      and cash equivalents
              
              $
              13,703
              
              
              $
              13,703
              
              
              $
              -
              
              
              $
              -Marketable
      securities available-for-sale
              
              
              497
              
              
              
              497
              
              
              
              -
              
              
              
              -Total
              
              $
              14,200
              
              
              $
              14,200
              
              
              $
              -
              
              
              $
              -




In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R revises SFAS 141, “Business
Combinations”.  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e., the date
the acquirer obtains control).  Presently, an acquisition is valued as
of the date the parties agree upon the terms of the transaction.  SFAS
141R also modifies, among other things, the accounting for direct costs
associated with an acquisition, contingencies acquired and contingent
consideration.  The Company will adopt SFAS 141R for business
combinations for which the acquisition date occurs on or after January 1,
2009.





In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for
Collaborative Agreements” (“EITF 07-1”).  EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative
arrangements, as defined therein.  EITF 07-1 is effective for the
Company as of January 1, 2009.  The Company is currently
evaluating its drug repositioning and development partnership agreements and has
not yet determined the effect, if any, the adoption of this statement may have
on its financial position, results of operations and cash flows.





Note
2 — Stock-based compensation





At
September 30, 2008, the Company has the following stock-based compensation
plans: 1997 Equity Incentive Plan (the “Stock Plan”) and 1997 Non-Employee
Directors’ Stock Option Plan (the “Directors’ Plan”).





The
Company recorded stock-based compensation expense (benefit) of ($99) and $235
for the three months ended September 30, 2008 and 2007, respectively, and $130
and $573 for the nine months ended September 30, 2008 and 2007,
respectively.  During the three months ended September 30, 2008, the
stock-based compensation benefit of ($99) is due to the reversal of previously
recognized expense for restricted stock awards that were forfeited, or that the
Company has determined is not probable to vest.






7.




Stock
Option Awards
 
 The
Company determined the fair value of each option grant on the date of grant
using the Black-Scholes option pricing model for the indicated periods, with the
following assumptions:
  Three
      Months Ended
                
                Nine
      Months EndedSeptember
      30,
                
                September
      30,2008
      (1)
                
                2007
                
                2008
                
                2007Weighted
      average fair value of grants
                -
                
                $2.95
                
                $0.97
                
                $3.75Expected
      volatility
                -
                
                59%
                
                63%
                
                58%Risk-free
      interest rate
                -
                
                4.47%
                
                2.53%
      to 3.04%
                
                4.47%
      to 4.51%Expected
      lives
                -
                
                3
      years
                
                3
      years
                
                3
      yearsDividend
      rate
                -
                
                0%
                
                0%
                
                0%(1)
      No stock option awards were granted during the three months ended
      September 30, 2008.
  The
following is a summary of option activity for the nine months ended September
30, 2008:
  Per
      ShareWeighted-
                
                
                AggregateNumber
      of
                
                
                Average
                
                
                IntrinsicShares
                
                
                Exercise
      Price
                
                
                ValueOutstanding
      at January 1, 2008
                
                
                904,856
                
                
                $
                28.60Options
      granted
                
                
                317,140
                
                
                $
                2.18Options
      exercised
                
                
                -
                
                
                $
                -Options
      cancelled
                
                
                (458,284
                )
                
                $
                19.91Outstanding
      at September 30, 2008
                
                
                763,712
                
                
                $
                22.85
                
                
                $
                -Exercisable
      at September 30, 2008
                
                
                511,414
                
                
                $
                32.11
                
                
                $
                -




The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on the last
trading day of the third quarter of 2008 and the exercise price, multiplied by
the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on September 30,
2008.  This amount is subject to change based on changes to the fair
market value of the Company’s Common Stock.





Restricted
Stock Awards





During
2007, the Committee approved grants for shares of restricted stock under the
Stock Plan subject to certain performance- or time-based vesting conditions
which, if not met, would result in forfeiture of the shares and the reversal of
any previously recognized related stock-based compensation expense.





The
following is a summary of restricted stock awards activity for the nine months
ended September 30, 2008:




Per
      ShareWeighted-AverageNumber
      of
              
              
              Grant-DateShares
              
              
              Fair
      ValueOutstanding
      at January 1, 2008
              
              
              61,525
              
              
              $
              6.53Restricted
      stock granted
              
              
              -
              
              
              $
              -Restricted
      stock vested
              
              
              (14,000
              )
              
              $
              6.65Restricted
      stock forfeited
              
              
              (34,428
              )
              
              $
              6.32Outstanding
      at September 30, 2008
              
              
              13,097
              
              
              $
              6.95




Performance-based
non-vested restricted stock awards are recognized as compensation expense over
the expected vesting period based on the fair value at the date of grant and the
number of shares ultimately expected to vest.  As of September 30,
2008, the remaining 13,097 outstanding shares of restricted stock will only vest
if certain performance milestones are achieved.  At September 30,
2008, the Company believes that the achievement of the performance milestones is
not probable and as a result has reversed the previously recognized related
stock-based compensation expenses for these restricted stock
awards.
 
 As of
September 30, 2008, $235 of total unrecognized compensation cost related to
stock option and restricted stock awards is expected to be recognized over a
weighted-average period of 1.6 years.  This estimate does not include
the impact of other possible stock-based awards that may be made during future
periods.




8.




Note
3 — Discontinued operation
 
 In
December 2007, the Company completed the sale of its Genomics Assets to Ocimum
Biosolutions Ltd. (“Ocimum”) for a sales price of $10,000, of which $7,000 was
received at closing, less transaction costs of $1,890, and the balance of the
sales price is payable pursuant to a $3,000 non-interest bearing promissory note
due 18 months from the date of closing.  The note has been recorded
net of a discount of $160 as of September 30, 2008 due to imputed
interest.  In connection with the sale of its Genomics Assets, the
Company agreed to indemnify Ocimum in the event of a breach of its
representations and warranties to, and agreements with,
Ocimum.  Ocimum assumed certain liabilities relating to the Genomics
Assets and the lease obligations for the Company’s former Genomics laboratory
and office facility, subject to the Company’s agreement to reimburse Ocimum for
50% of such lease obligations for 2008.  In March 2008, the Company
relocated its corporate headquarters and as a result recorded $470 of
accelerated lease expense upon abandonment of such space.In the event of
Ocimum’s default under the lease, which expires in February 2011, the Company
could be liable for amounts due under the lease that could total $2,346 at
September 30, 2008 (not including the Company’s remaining lease obligations in
2008).  At September 30,2008, Ocimum had on
deposit in escrow $743 to partially secure both Ocimum’s performance under the
lease and payment of the $3,000 promissory note.  The Company retained
full rights in perpetuity to use the databases of its former Genomics business,
existing as of closing, for its commercial drug development
business.  The Company also retained certain assets associated with
its molecular diagnostic business, which it sold in September 2008 (see Note
7).
 
 Due to the Company’s sale of its
Genomics Assets, the results of the former Genomics Division have been
classified as a discontinued operation. Summarized operating results for the
discontinued operation included in the Company’s Consolidated Condensed
Statements of Operations for the three and nine months ended September 30, 2007,
respectively, are as follows:




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2007
              
              
              2007Revenue
      from discontinued operations
              
              $
              3,684
              
              
              $
              12,356Loss
      from discontinued operations
              
              $
              (4,001
              )
              
              $
              (11,951
              )




The sale
of the Company’s Genomics Assets was part of its transformation into a
commercial drug development company.
 
 Note
4 — Long-term investments
 
 During the
three months ended September 30, 2008, the Company recorded a $2,964 write-down
of the remaining book value of its cost basis investment in Xceed Molecular Inc.
(formerly MetriGenix Corporation), due to an other-than-temporary decline in its
estimated fair value.
 
 Note
5 — Share purchase
 
 On March
14, 2008, the Company entered into an agreement with a then member of its Board
of Directors to purchase 920,426 shares owned directly or indirectly by that
Director for $3,263 (the “Share Purchase”).  In addition, the Company
agreed to pay the director $126 for certain fees and expenses.  In
connection with the Share Purchase, the director resigned from the Company’s
Board of Directors and surrendered stock options for 6,000 shares of the
Company’s Common Stock.  Of the purchase price of $3,263, the Company
allocated $272 to the price paid in excess of the fair value of the shares,
which was recorded as a Selling, General and Administrative
expense.  The remaining $2,991 was recorded as a reduction to Common
Stock, based on the par value, and to Additional Paid-in Capital.  The
shares purchased were cancelled and returned to the status of authorized and
unissued shares.
 
 Note
6 — Reverse stock split
 
 On May 23,
2008, the Company’s stockholders of record as of April 17, 2008 approved a
one-for-five reverse stock split of the Company’s outstanding Common
Stock.  The number of authorized shares of Common Stock and Preferred
Stock of the Company was not affected and remains at 60,000,000 and 10,000,000,
respectively, but the number of shares of Common Stock outstanding was reduced
from 27,515,461 to 5,503,447.  The aggregate par value of the issued
Common Stock was reduced by reclassifying a portion of the par value amount of
the outstanding common shares from Common Stock to Additional Paid-in Capital
for all periods presented.  In addition, all per share and share
amounts, including stock options and restricted stock awards, have been
retroactively restated in the accompanying Consolidated Condensed Financial
Statements and Notes to Consolidated Condensed Financial Statements for all
periods presented to reflect the reverse stock split.
 
 Note
7 — Sale of DioGenix Inc.
 
 In
September 2008, the Company sold to Nerveda Inc. (“Nerveda”) the
Company’s wholly owned subsidiary, DioGenix Inc., focused on molecular
diagnostics, for a sales price of $1,250, of which $500 was received at
closing and the balance is payable pursuant to a $750 promissory
note from Nerveda bearing interest at 2.38%, secured by the DioGenix
assets, with two principal payments of $375 plus interest due on December 31,
2009 and June 30, 2010.  Payments due under the note are subject to
acceleration if DioGenix secures




9.


institutional
investment or reaches a certain development milestone.  The note has been
recorded net of a discount of $75 as of September 30, 2008 due to imputed
interest.  In addition, if DioGenix commercializes a diagnostic
product or service for multiple sclerosis, DioGenix would pay the Company a
royalty equal to 3.5% on net sales of such tests and services, capped at an
aggregate of $1,500.  The Company and Nerveda have each agreed to
indemnify each other for the breach by either of any representation, warranty,
covenant or obligation made pursuant to the agreement.  During the
three months ended September 30, 2008, the Company recorded a gain on the sale
of DioGenix Inc. of $146.  The results for the Company’s molecular
diagnostic business are included in the Company’s operating expenses from
continuing operations; however, these expenses are not considered material and
there was no revenue from this business.





Note
8 — Segment information





Subsequent
to the sale of the Genomics Assets (see Note 3) and prior to the sale of
DioGenix Inc. (see Note 7), the Company managed its business as two operating
segments: commercial drug development and molecular diagnostics; however,
because these operating segments meet the aggregation criteria of SFAS 131
“Disclosures about Segments of an Enterprise and Related Information”, the
Company has aggregated its operating segments into one reporting
segment.  Subsequent to the sale of DioGenix Inc., the Company now
manages its business as one operating segment.  For the three months
ended September 30, 2008, one customer accounted for 10% or more of the
Company’s revenue from continuing operations (Customer A-100%) and for the nine
months ended September 30, 2008, two customers accounted for 10% or more of the
Company’s revenue from continuing operations (Customer A-21% and Customer
B-77%).  For the three months ended September 30, 2007, two customers
accounted for 10% or more of the Company’s total revenue from continuing
operations (Customer B-89% and Customer C-11%).  For the nine months
ended September 30, 2007, two customers accounted for 10% or more of the
Company’s total revenue from continuing operations (Customers B-85% and Customer
C-15%).






10.




Item
2.                     Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
 
 This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements
regarding future events and the future results of Ore Pharmaceuticals Inc. (“Ore
Pharmaceuticals”) that are based on current expectations, estimates, forecasts
and projections about the industries in which Ore Pharmaceuticals operates and
the beliefs and assumptions of the management of Ore Pharmaceuticals. Words such
as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are only predictions and are subject to risks,
uncertainties and assumptions. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking statements. Factors
that might cause or contribute to such differences include those discussed in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007
under the section entitled “Risk Factors” and in our subsequent filings with the
United States Securities and Exchange Commission (“SEC”). Ore Pharmaceuticals
undertakes no obligation to revise or update publicly any forward-looking
statements to reflect any change in management’s expectations with regard
thereto or any change in events, conditions, or circumstances on which any such
statements are based.
 
 Unless the
context otherwise requires, references in this Form 10-Q to “Ore
Pharmaceuticals,” “DioGenix,” the “Company,” “we,” “us,” and “our” refer to Ore
Pharmaceuticals Inc. and its formerly wholly owned subsidiary, DioGenix
Inc.
 
 Overview
 
 We are a
commercial drug development company focused on advancing a pipeline of compounds
for uses identified by our proprietary indication seeking program.  We
currently have three compounds in our development pipeline: romazarit (beginning
development for metabolic disorders), tiapamil (beginning development for
treatment of diseases of the central nervous system) and GL1001 (in development
for inflammatory bowel disease).  We are also in the process of
obtaining rights to several other compounds under our drug repositioning and
development partnership agreements; however, there can be no assurances that we
will be able to do so.  Our pipeline is unique in that all of the
compounds contained therein have been successfully tested for safety in
humans.  We believe that this gives our compounds a greater chance of
success.
 
 Over the
past four years, we identified new therapeutic indications for a number of
compounds using our indication seeking program, which systematically revealed a
compound’s biological activity.  We believe that these compounds may
be introduced into Phase Ib or IIa of human clinical trial testing because they
have already been successfully tested for safety in human clinical
trials.  We are pursuing clinical development of our compounds in
parallel with our efforts to establish out-licensing or partnering arrangements
to advance those compounds.
 
 In the
second quarter of 2008, we realigned our corporate resources to invest in the
clinical and business development of compounds in our pipeline.  As we
wind down our indication seeking program and eliminate certain administrative
activities, we expect our workforce will be reduced from 71 employees as of
December 31, 2007 to approximately 15 by December 31, 2008.  As of
September 30, 2008, we had 20 employees.
 
 In June
2008, we filed with the U.S. Food and Drug Administration an Investigational New
Drug Application (“IND”) for GL1001, our lead drug development candidate, for
the treatment of inflammatory bowel disease.  In September 2008, we
initiated a 14-day multiple ascending dose clinical trial while actively seeking
to out-license or partner the further clinical development and commercialization
of GL1001.
 
 Previously,
we had drug repositioning and development partnership agreements with
pharmaceutical companies to find new therapeutic uses for compounds they had
assessed as safe in human clinical trials, but for which development had been
discontinued.  These agreements with Pfizer, Inc., F. Hoffmann-La
Roche Ltd, Eli Lilly and Co., NV Organon, Abbott Laboratories, H. Lundbeck,
Merck-Serono and Solvay provided us with compounds that we analyzed using our
indication seeking program to identify new therapeutic uses.  We
obtained or are in the process of obtaining most of our pipeline compounds under
these agreements pursuant to options to obtain development rights to those
compounds that our partners decided not to take back into
development.  Although we have on-going discussions with these
partners as to the development rights for some of these compounds, our
obligations to evaluate compounds under these agreements have now been
substantially completed.  For each compound we obtained from a
partner, if we further develop it, alone or with others, we are obligated to pay
to the partner from whom we obtained the compound success-based milestone
payments and royalties on sales.
 
 In
December 2007, we completed the sale of the assets of our Genomics Division (the
“Genomics Assets”) to Ocimum Biosolutions Ltd. (“Ocimum”) for a sales price of
$10.0 million, of which $7.0 million was received at closing and the balance is
payable pursuant to a $3.0 million non-interest bearing promissory note due 18
months from the date of closing.  We agreed to indemnify Ocimum in the
event of a breach of our representations and warranties to, and agreements with,
Ocimum.  Ocimum assumed certain liabilities relating to the Genomics
Assets and the lease obligations of our former Genomics laboratory and office
facility, subject to our agreement to reimburse Ocimum for 50% of the lease
obligations for 2008.  In the event of Ocimum’s default under the
lease, which expires in February 2011, we could be liable for the amounts due
under the lease that could total $2.3 million at September 30, 2008 (not
including our remaining lease obligations in 2008).  At September 30,
2008, Ocimum had on deposit in escrow $0.7 million to partially secure both
Ocimum’s performance under the lease and payment of the $3.0 million promissory
note.




11.




In
September 2008, we sold to Nerveda Inc. our wholly owned subsidiary,
DioGenix Inc., focused on molecular diagnostics for a sales price of $1.3
million, of which $0.5 million was received at closing and the balance is
payable pursuant to a $0.8 million promissory note bearing interest at 2.38%,
secured by the DioGenix assets, with two principal payments of $0.4 million
plus interest due on December 31, 2009 and June 30, 2010, which are subject to
acceleration in certain events.  In addition, we may receive a small
royalty on net sales if DioGenix commercializes a diagnostic product or service
for multiple sclerosis.  We agreed to indemnify each other for the
breach by either of any representation, warranty, covenant or obligation made
pursuant to the agreement.  During the three months ended September
30, 2008, we recorded a gain on the sale of DioGenix Inc. of $0.1
million.
 
 The sale of our Genomics
Assets was part of ourtransformation into a commercial drug development
company.  We continue to consider other strategic opportunities and
paths to enhance shareholder value, including but not limited to, additional
sources of funding and new strategic relationships with pharmaceutical companies
and other third parties.
 
 On March
14, 2008, we entered into an agreement with a then member of our Board of
Directors to purchase 920,426 shares (as adjusted for the reverse stock split)
owned directly or indirectly by that Director for $3.3 million (the “Share
Purchase”).  In addition, we agreed to pay the director $0.1 million
for certain fees and expenses.  In connection with the Share Purchase,
the director resigned from the Company’s Board of Directors and surrendered
stock options for 6,000 shares (as adjusted for the reverse stock split) of our
Common Stock.
 
 We have
incurred net losses in each year since our inception, including losses of $34.7
million in 2007, $54.7 million in 2006 and $48.3 million in 2005.  At
September 30, 2008, we had an accumulated deficit of $369.4
million.  Our losses have resulted principally from costs incurred
from the businesses we sold and the development of our commercial drug
development business.  We expect to incur additional losses in the
future.
 
 Results
of Continuing Operations
 
 With the
completion of the sale of our Genomics Assets in December 2007, the Genomics
Division has been classified as a “Discontinued Operation” for historical
financial statement purposes.  Our remaining continuing operations
consist of our commercial drug development business and, to a much lesser
extent, our molecular diagnostics business.  In addition, certain
expenses previously allocated to the operations that were discontinued that we
have subsequently determined would not be eliminated as a result of the sale,
have been re-allocated to our commercial drug development business for all
periods presented.  Expenses for our molecular diagnostic business are
also included in our operating expenses from continuing operations; however,
these expenses are not considered material to Ore
Pharmaceuticals.   There was no revenue from our molecular
diagnostics business.
 
 Three
Months Ended September 30, 2008 and 2007
 
 Revenue.  Revenue
from continuing operations was $0.2 million for the three months ended September
30, 2008 and $0.8 million for the same period in 2007.  The $0.2
million in 2008 was due to the achievement of a milestone under a drug
repositioning and development partnership agreement; the $0.8 million in 2007
was primarily due to the licensing agreement with H. Lundbeck for certain
technology unrelated to our core commercial drug development
business.  We expect future revenue to be derived primarily from the
out-licensing or partnering of our lead drug candidate GL1001 (that would occur
no sooner than 2010) and of other compounds in our pipeline.
 
 Research and Development
Expense. Research and development expenses, which now consist primarily
of costs associated with the further development of our lead drug development
candidate, GL1001, decreased to $2.3 million for the three months ended
September 30, 2008 from $2.7 million for the same period in 2007.  The
decrease is primarily due to lower employee-related costs of $0.5 million and
third-party costs for projects other than GL1001 of $0.2 million, partially
offset by $0.4 million in increased third-party costs for further development of
ourlead drug
development compound, GL1001.  For 2008, we expect a slight increase
in research and development expenses over 2007, primarily as a result of further
development of GL1001.
 
 Selling, General and Administrative
Expense. Selling, general and administrative expenses from continuing
operations, which consist primarily of sales, marketing, accounting, legal,
human resources and other general corporate expenses, increased to $2.6 million
for the three months ended September 30, 2008 from $2.5 million for the same
period in 2007 as a result of $0.5 million in increased legal and advisory fees
associated with our strategic planning, partially offset by lower
employee-related expenses.  For 2008, we expect selling, general and
administrative expenses to be higher primarily due to our continuing strategic
planning activities and initiatives.
 
 Net Interest Income. Net
interest income decreased to $0.1 million for the three months ended September
30, 2008 from $0.5 million for the same period in 2007, due to the decline in
the balance of our cash and cash equivalents and marketable securities
available-for-sale and a decrease in our rates of return on
investments.
 
 Write-down of Equity
Investment. During the three months ended September 30, 2008, we recorded
a $3.0 million write-down of the remaining book value of our investment in Xceed
Molecular Inc. (“Xceed”, formerly MetriGenix Corporation), due to an
other-than-temporary decline in its estimated fair value.  We do not
expect this write-down will result in any future cash
expenditures.






12.




Nine
Months Ended September 30, 2008 and 2007
 
 Revenue.  Revenue
from continuing operations was $2.0 million for the nine months ended September
30, 2008 and $0.9 million for the same period in 2007.  The $2.0
million in 2008 was primarily due to $1.5 million from the licensing agreement
with H. Lundbeck and $0.4 million from the achievement of milestones under a
drug repositioning and development partnership agreement; the $0.9 million in
2007 was primarily due to the licensing agreement with H. Lundbeck.
 
 Research and Development
Expense. Research and development expenses increased to $8.5 million for
the nine months ended September 30, 2008 from $7.8 million for the same period
in 2007.  The increase is primarily due to $1.0 million in increased
third-party costs for further development of our lead drug development
candidate, GL1001.
 
 Selling, General and Administrative
Expense. Selling, general and administrative expenses from continuing
operations increased to $10.3 million for the nine months ended September 30,
2008 from $8.6 million for the same period in 2007.  The increase is
largely due to $1.4 million in increased legal and advisory fees associated with
the Share Purchase, strategic planning and our reverse split of the Company’s
shares, $0.4 million of expense related to the Share Purchase and $0.2 million
in accelerated lease costs resulting from the Company’s relocation of its
corporate headquarters.  This increase was partially offset by lower
employee-related expenses.
 
 Net Interest Income. Net
interest income decreased to $0.6 million for the nine months ended September
30, 2008 from $1.6 million for the same period in 2007, due to the decline in
the balance of our cash and cash equivalents and marketable securities
available-for-sale and a decrease in our rates of return on
investments.
 
 Write-down of Equity
Investment. During the nine months ended September 30, 2008, we recorded
a $3.0 million write-down of the remaining book value of our investment in
Xceed, due to an other-than-temporary decline in its estimated fair
value.
 
 Liquidity
and Capital Resources
 
 From
inception through September 30, 2008, we have financed our operations and
acquisitions through the issuance and sale of equity securities and payments
from customers.  As of September 30, 2008, we had approximately $14.2
million in cash, cash equivalents and marketable securities available-for-sale,
compared to $32.8 million as of December 31, 2007.  Currently, we have
no material commitments for capital expenditures.
 
 Net cash
from operating activities from continuing operations increased to a negative
$16.0 million for the nine months ended September 30, 2008 from a negative $12.7
million for the same period in 2007, primarily due to timing of customer
payments and our increased loss from continuing operations for the nine months
ended September 30, 2008.
 
 We expect
our cash burn (decrease in cash, cash equivalents, and marketable securities
available-for-sale) for the fourth quarter of 2008 to be higher than that of the
third ($3.6 million), primarily due to amounts associated with the further
development, including the initiation of our clinical trial, of our lead drug
development candidate, GL1001.
 
 Assuming
we realize our objective as to expense control, as to which there can be no
assurance, we believe that existing cash, cash equivalents and marketable
securities available-for-sale, receipt in June 2009 of $3.0 million relating to
the promissory note from Ocimum and receipt of $0.4 million relating to the
promissory note from Nerveda will be sufficient to support our operations
through December 31, 2009.  We expect long-term support of our
operations to come from additional out-licensing payments (including up-front
payments, milestones and royalties) from our drug development
pipeline.  These estimates are forward-looking statements that involve
risks and uncertainties.  Our actual future capital requirements and
the adequacy of our available funds will depend on many factors, including those
discussed under “Risks Factors” in our Form 10-K for the year ended December 31,
2007 and our subsequent filings with the SEC.
 
 Recently
Issued Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  SFAS 157 is effective for fiscal years
beginning after November 15, 2007.  In February 2008, the FASB decided
to issue a final Staff Position to allow a one-year deferral of adoption of SFAS
157 for non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  The
FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its
related interpretive accounting pronouncements that address leasing
transactions.  We adopted SFAS 157 for financial assets and
liabilities on January 1, 2008 and the adoption had no impact on our financial
position or results of operations.
 
 In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R revises SFAS 141, “Business
Combinations”.  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e., the date
the acquirer obtains control).  Presently, an acquisition is valued as
of the date the parties agree upon the terms of the transaction.  SFAS
141R also modifies, among other things, the accounting for direct costs
associated with an acquisition, contingencies acquired and contingent
consideration.  We will adopt SFAS 141R for business combinations for
which the acquisition date occurs on or after January 1,
2009.




13.




In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for
Collaborative Agreements” (“EITF 07-1”).  EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative
arrangements, as defined therein.  EITF 07-1 is effective for us as of
January 1, 2009.  We are currently evaluating our drug
repositioning and development partnership agreements and have not yet determined
the effect, if any, the adoption of this statement may have on our financial
position, results of operations and cash flows.
 
 Item
4.                     Controls
and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of September 30, 2008, under the supervision and with the
participation of our management, including the Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), an evaluation was performed of the
effectiveness of the design and operation of our “disclosure controls and
procedures” (“Disclosure Controls”).  These are controls and
procedures designed to reasonably assure that information required to be
disclosed in our reports filed under the Exchange Act, such as this Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.  Disclosure Controls are
also designed to reasonably assure that such information is accumulated and
communicated to our management, including the CEO and CFO as appropriate, to
allow timely decisions regarding required disclosure.  Based on that
evaluation, our CEO and CFO have concluded that, as of September 30, 2008, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified by the SEC, and that material information relating to us is made known
to management, including the CEO and CFO, particularly during the period when
our periodic reports are being prepared.
 
 Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
all errors and all instances of fraud.  A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met.  The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.  Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.  Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls.  The design of any system of
controls is based, in part, on certain assumptions about the likelihood of
future events and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions.  Projections of any evaluation of the effectiveness of
controls to future periods are subject to risks.  Over time, controls
may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
 
 Changes
in Internal Control Over Financial Reporting
 
 There were
no changes in our internal controls over financial reporting during the third
quarter of 2008 that materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
 
 PART
II                               OTHER
INFORMATION
 
 Item
1.                      Legal
Proceedings
 
 We are not
currently a party to any material legal proceedings.
 
 Item
2.                    Unregistered
Sales of Equity Securities and Use of Proceeds
 
 None.
 
 Item
3.                     Defaults
Upon Senior Securities
 
 None.
 
 Item
4.                      Submission
of Matters to a Vote of Security Holders
 
 None.
 
 Item
5.                    Other
Information
 
 None.




14.




Item
6.                      Exhibits
 
  31
              Certifications
      pursuant to Rule 13a-14(a)/15d-14(a).32
              Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
 
 15.




SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
  ORE PHARMACEUTICALS
      INC.Date:
              October
      31, 2008
              
              By:
              /s/
              Philip L.
      Rohrer, Jr.Philip L. Rohrer,
      Jr.Chief Financial
      Officer(Principal
      Financial and Accounting Officer)
   16.