** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 
| **ý** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                              |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | **for the Period Ended September 30, 2004.**                                                                                                                                                                                                              |
|       | ** **                                                                                                                                                                                                                                                |
| **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 file number 0-27436**

 

**Titan Pharmaceuticals, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **94-3171940**      |
|---------------------------------|------------|---------------------|
| (State or Other Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or Organization)  |       | Identification No.) |

 

**400 Oyster Point Blvd., Suite 505, South SanFrancisco, California 94080**

(Address of Principal Executive Officesincluding zip code)

** **

**(650) 244-4990**

(Registrant’s Telephone Number, IncludingArea Code)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined onRule 12B-2 of the Exchange Act).  Yes ý No  ̈

 

There were 32,302,602 shares of the Registrant’s Common Stock issuedand outstanding on November 1, 2004.

 

 

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**Titan Pharmaceuticals, Inc**.

**Index to Form 10-Q**

 
| **Part I.**    | **Financial Information**                                                                                      |       |
|----------------|----------------------------------------------------------------------------------------------------------------|------------|
|           |                                                                                                           |       |   |
|           | Item 1.  Condensed Financial Statements (unaudited)                                                  |       |
|           |                                                                                                           |       |   |
|           | Condensed Consolidated Balance Sheets  September 30, 2004 and December 31, 2003                                |       |
|           |                                                                                                           |       |   |
|           | Condensed Consolidated Statements of  Operations  Three and nine months ended September 30, 2004 and 2003      |       |
|           |                                                                                                           |       |   |
|           | Condensed Consolidated Statements of Cash  Flows  Nine months ended September 30, 2004 and 2003                |       |
|           |                                                                                                           |       |   |
|           | Notes to Condensed 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 6.  Exhibits and Reports on  Form 8-K                                                           |       |
|           |                                                                                                           |       |   |
| **SIGNATURES** |                                                                                                           |

 

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**Part I.  Financial Information**

** **

**TITAN PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                     | ** ** | **September  30,  2004** | ** ** | **December  31,  2003** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                           |       | **(unaudited)**          | ** ** | **(Note A)**            | ** ** |
| **Assets**                                                     |       |                     |       |                    |       |
| Current assets                                                 |       |                     |       |                    |       |
| Cash and cash equivalents                                      |       | $                        | 5,956      |                    | $          | 6,832 |   |
| Marketable securities                                          |       | 37,227                   |       | 39,723                  |       |
| Related party receivables                                      |       | 50                       |       | 123                     |       |
| Prepaid expenses, receivables, and other current  assets       |       | 1,138                    |       | 1,241                   |       |
| Total current assets                                           |       | 44,371                   |       | 47,919                  |       |
| Furniture and equipment, net                                   |       | 1,059                    |       | 789                     |       |
| Investment in other companies                                  |       | 150                      |       | 300                     |       |
|                                                           |       | $                        | 45,580     |                    | $          | 49,008 |   |
| **Liabilities and Stockholders'  Equity**                      |       |                     |       |                    |       |
| Current liabilities                                            |       |                     |       |                    |       |
| Accounts payable                                               |       | $                        | 678        |                    | $          | 1,505 |   |
| Accrued clinical trials expenses                               |       | 1,504                    |       | 634                     |       |
| Other accrued liabilities                                      |       | 1,142                    |       | 1,202                   |       |
| Total current liabilities                                      |       | 3,324                    |       | 3,341                   |       |
| Minority interest - Series B preferred stock of  Ingenex, Inc. |       | 1,241                    |       | 1,241                   |       |
| Stockholders' equity                                           |       |                     |       |                    |       |
| Common stock, at amounts paid-in                               |       | 209,889                  |       | 195,331                 |       |
| Additional paid-in capital                                     |       | 9,260                    |       | 9,047                   |       |
| Deferred compensation                                          |       | (152                     | )          | (211                    | )          |
| Accumulated deficit                                            |       | (177,947                 | )          | (159,741                | )          |
| Accumulated other comprehensive income                         |       | (35                      | )          | —                  |       |
| Total stockholders' equity                                     |       | 41,015                   |       | 44,426                  |       |
|                                                           |       | $                        | 45,580     |                    | $          | 49,008 |   |

 

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Note A:  The balance sheet has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesin the United States for complete financial statement presentation.

 

See Notes to Condensed Consolidated Financial Statements

 

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**TITAN PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

**(in thousands, except per share amount)**

 
| ** **                                                                      | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| License revenue                                                                 |       | $                                | —     |                            | $          | — |   | $ | 1 |   | $ | 28 |   |
| Total revenue                                                                   |       | —                           |       | —                          |       | 1 |   | 28 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                             |       |                             |       |                            |       |   |   |   |   |
| Research and development                                                        |       | 4,858                            |       | 5,262                           |       | 14,569 |   | 16,639 |   |
| General and administrative                                                      |       | 1,367                            |       | 1,239                           |       | 3,853 |   | 3,878 |   |
| Total operating expenses                                                        |       | 6,225                            |       | 6,501                           |       | 18,422 |   | 20,517 |   |
| Loss from operations                                                            |       | (6,225                           | )          | (6,501                          | )          | (18,421 | ) | (20,489 | ) |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):                                                         |       |                             |       |                            |       |   |   |   |   |
| Interest income, net                                                            |       | 175                              |       | 265                             |       | 512 |   | 1,062 |   |
| Other expense                                                                   |       | (220                             | )          | 67                              |       | (297 | ) | 47 |   |
| Other income (expense), net                                                     |       | (45                              | )          | 332                             |       | 215 |   | 1,109 |   |
| Net loss                                                                        |       | $                                | (6,270     | )                               | $          | (6,169 | ) | $ | (18,206 | ) | $ | (19,380 | ) |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted net loss per share                                            |       | $                                | (0.20      | )                               | $          | (0.22 | ) | $ | (0.59 | ) | $ | (0.70 | ) |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares used in computing basic  and diluted net loss per share |       | 32,137                           |       | 27,653                          |       | 31,084 |   | 27,646 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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** **

**TITAN PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

**(in thousands)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                                  |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (18,206    | ) | $ | (19,380 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                              |       | 334                             |       | 329 |   |
| Loss on investment activities                                                              |       | 150                             |       | — |   |
| Non-cash compensation related to stock options                                             |       | 272                             |       | 240 |   |
| Write-down of securities available-for-sale                                                |       | 110                             |       | — |   |
| Changes in operating assets and  liabilities:                                              |       |                            |       |   |   |
| Prepaid expenses, receivables and other  assets                                            |       | 176                             |       | (354 | ) |
| Accounts payable and other accrued  liabilities                                            |       | (17                             | )          | (160 | ) |
| Net cash used in operating activities                                                      |       | (17,181                         | )          | (19,325 | ) |
|                                                                                       |       |                            |       |   |   |
| **Cash flows from investing activities:**                                                  |       |                            |       |   |   |
| Purchases of furniture and equipment, net                                                  |       | (604                            | )          | (199 | ) |
| Purchases of marketable securities                                                         |       | (18,449                         | )          | (47,308 | ) |
| Proceeds from maturities of marketable  securities                                         |       | 20,800                          |       | 58,103 |   |
| Proceeds from sales of marketable securites                                                |       | —                          |       | 9,000 |   |
| Net cash provided by investing activities                                                  |       | 1,747                           |       | 19,596 |   |
|                                                                                       |       |                            |       |   |   |
| **Cash flows from financing activities:**                                                  |       |                            |       |   |   |
| Issuance of common stock, net                                                              |       | 14,558                          |       | 47 |   |
| Net cash provided by financing activities                                                  |       | 14,558                          |       | 47 |   |
|                                                                                       |       |                            |       |   |   |
| **Net increase in cash and cash equivalents**                                              |       | (876                            | )          | 318 |   |
| Cash and cash equivalents at beginning of  period                                          |       | 6,832                           |       | 7,155 |   |
| Cash and cash equivalents at end of period                                                 |       | 5,956                           |       | 7,473 |   |
| Marketable securities at end of period                                                     |       | 37,227                          |       | 46,147 |   |
| **Cash, cash equivalents and marketable  securities at end of period**                     |       | $                               | 43,183     |   | $ | 53,620 |   |

 

See Notes to Condensed Consolidated FinancialStatements

 

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**TITAN PHARMACEUTICALS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1.****             ****Organization and Summary ofSignificant Accounting Policies**

 

***The Company***

** **

Weare a biopharmaceutical company developing proprietary therapeutics for thetreatment of central nervous system disorders, cancer, and cardiovasculardisease.  We operate in one businesssegment, the development of biopharmaceutical products.

 

***Basisof Presentation***

*** ***

The accompanying unaudited condensedconsolidated financial statements include the accounts of Titan and itssubsidiaries after elimination of all significant intercompany accounts andtransactions. Certain prior year balances have been reclassified to conform tothe current year presentation.  Thesefinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor a complete financial statement presentation. In the opinion of management,all adjustments (consisting of normal recurring adjustments) considerednecessary for a fair presentation have been included.  Operating results for the three andnine-month periods ended September 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004.

 

The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and footnotes thereto included in the TitanPharmaceuticals, Inc. annual report on Form 10-K for the year ended December31, 2003.

 

***RevenueRecognition***

*** ***

We currently generate revenue principally fromcollaborative research and development arrangements, technology licenses, andgovernment grants. Revenue arrangements with multiple components are dividedinto separate units of accounting if certain criteria are met, includingwhether the delivered component has stand-alone value to the customer, andwhether there is objective and reliable evidence of the fair value of theundelivered items.  Consideration receivedis allocated among the separate units of accounting based on their respectivefair values, and the applicable revenue recognition criteria are then appliedto each of the units.

 

Revenue is recognized when the four basic criteria ofrevenue recognition are met: (1) a contractual agreement exists; (2) transferof technology has been completed or services have been rendered; (3) the fee isfixed or determinable; and (4) collectibility is reasonably assured.  For each source of revenue, we comply withthe above revenue recognition criteria in the following manner:

 

•                  Collaborative arrangements typicallyconsist of non-refundable and/or exclusive technology access fees, costreimbursements for specific research and development spending, and variousmilestone and future

 

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product royalty payments. If the delivered technologydoes not have stand-alone value or if we do not have objective or reliableevidence of the fair value of the undelivered components, the amount of revenueallocable to the delivered technology is deferred.  Non-refundable upfront fees with stand-alonevalue that are not dependent on future performance under these agreements arerecognized as revenue when received, and are deferred if Titan has continuingperformance obligations and has no evidence of fair value for thoseobligations. Payments received related to substantive, performance-based “at-risk”milestones are recognized as revenue upon achievement of the clinical successor regulatory event specified in the underlying contracts, which represent theculmination of the earnings process. Amounts received in advance are recordedas deferred revenue until the technology is transferred, costs are incurred, ormilestone is reached.

 

•                  Technology license agreementstypically consist of non-refundable upfront license fees and annual minimumaccess fees or royalty payments. Non-refundable upfront license fees and annual minimum payments receivedwith separable stand-alone values are recognized when the technology istransferred or accessed, provided that the technology transferred or accessedis not dependent on the outcome of our continuing research and developmentefforts.

 

•                  Government grants, which support ourresearch efforts in specific projects, generally provide for reimbursement ofapproved costs as defined in the notices of grants. Grant revenue is recognizedwhen associated project costs are incurred.

 

***OperatingSubsidiaries***

*** ***

Weconduct some of our operations through two subsidiaries: Ingenex, Inc. andProNeura, Inc.  At September 30,2004, we owned 81% of Ingenex (assuming the conversion of all preferred stockto common stock) and 79% of ProNeura. In October 2004, we entered into a share exchangeagreement with two of the minority shareholders of ProNeura that increased ourownership percentage to 89% in exchange for the issuance of 144,599 shares ofour common stock.  We intend to acquirethe remaining minority interest through a merger of ProNeura with and intoTitan.

 

***RecentAccounting Pronouncements***

*** ***

In March 2004, the EmergingIssues Task Force (EITF) reached several consensuses on accounting guidance anddisclosure of other-than-temporary impairment of debt and equity securitiesdiscussed in Issue No. 03-01, *“The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments.”*  These consensuses apply to investments indebt and equity securities within the scope of Statements 115 and 124.  They also apply to investments in equitysecurities that are both outside Statement 115’s scope and not accounted for bythe equity method, a group referred to as “cost method investments.”  The impairment accounting guidance iseffective for reporting periods beginning after June 15, 2004; the disclosurerequirements for annual reporting periods ending after June 15, 2004.

 

On March 31, 2004, the FASB issued anExposure Draft, “Share-Based Payment - An Amendment of FASB Statements No. 123and 95” (proposed FAS 123R), which currently is expected to be effective forpublic companies in periods beginning after June 15, 2005.  The cumulative effect of adoption, if any,applied on a modified prospective basis, would be measured and recognized onJuly 1, 2005. FAS 123R would eliminate the ability to account for share-basedcompensation transactions using Accounting Principles Board Opinion No. 25 (orAPB 25), “Accounting for Stock Issued to Employees,” and would instead requirecompanies to recognize compensation expense, using a fair-value based method,for costs related to share-based payments including stock options and employeestock purchase plans. The FASB expects to issue a final standard by December31, 2004. The adoption of FAS 123R could materially impact our results ofoperations

 

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**2.****             ****Stock Option Plans**

 

We have elected tocontinue to follow Accounting Principles Board Opinion No. 25 (or APB 25), *“Accounting for Stock Issued to Employees,”*rather than the alternative method of accounting prescribed by Statement ofFinancial Accounting Standards No. 123 (or SFAS 123), *“Accounting for Stock-Based Compensation.”*  Under APB 25, no compensation expense isrecognized when the exercise price of our employee stock options equals themarket price of the underlying stock on the date of grant.  The following table illustrates the effect onour net loss and net loss per share if Titan had applied the provisions of SFAS123 to estimate and recognize compensation expense for our stock-based employeecompensation.

 
| ** **                                                                                                                       | ** ** | **Three months ended Sept.  30,**           | ** ** | **Nine months ended Sept.  30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2004**                                    | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                       | ** ** | **(in thousands, except per share amount)** | ** ** |
| Net loss, as reported                                                                                                            |       | $                                           | (6,270     | )                                | $          | (6,169 | ) | $ | (18,206 | ) | $ | (19,380 | ) |
| Add: Stock-based employee  compensation expense included in reported net loss                                                    |       | 67                                          |       | 62                               |       | 201 |   | 240 |   |
| Deduct: Estimated stock-based  employee compensation expense determined in accordance with SFAS 123 for all  stock option grants |       | (447                                        | )          | (821                             | )          | (1,054 | ) | (2,129 | ) |
| Pro forma net loss                                                                                                               |       | $                                           | (6,650     | )                                | $          | (6,928 | ) | $ | (19,059 | ) | $ | (21,269 | ) |
|                                                                                                                             |       |                                        |       |                             |       |   |   |   |   |
| Basic and diluted net loss  per share, as reported                                                                               |       | $                                           | (0.20      | )                                | $          | (0.22 | ) | $ | (0.59 | ) | $ | (0.70 | ) |
| Pro forma basic and diluted  net loss per share                                                                                  |       | $                                           | (0.21      | )                                | $          | (0.25 | ) | $ | (0.61 | ) | $ | (0.77 | ) |

 

The fair valuefor these options was estimated at the date of grant using a Black-Scholesoption pricing model with the following assumptions for the three-month periodsended September 30, 2004 and 2003: weighted-average volatility factor of 0.70and 0.70, respectively; no expected dividend payments; weighted-average risk-freeinterest rates in effect of 2.5% and 1.1%, respectively; and a weighted-averageexpected life of 2.0 and 1.1 years, respectively. For purposes of disclosure,the estimated fair value of options is amortized to expense over the options’vesting period.

 

**3.****             ****Net Loss Per Share**

 

We calculate net loss per share using theweighted average common shares outstanding for the period.  For the periods ended September 30, 2004 and2003, the effect of an additional 6,683,739 and 6,397,433 shares, respectively,related to our authorized and issued convertible preferred stock and options,were not included in the computation of diluted earnings per share because theyare anti-dilutive.

 

**4.****             ****Comprehensive Loss**

 

Comprehensive loss is comprised of netloss and other comprehensive income or loss. The only component of other comprehensive income is unrealized gains andlosses on our marketable securities. Comprehensive loss for the three and nine months ended September 30, 2004were $6.1 million and $18.0 

 

7

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million,respectively, and for the three and nine months ended September 30, 2003 were$6.3 million and $19.7 million, respectively.

 

**5.****             ****Stockholders’ Equity**

 

In February 2004,we filed a shelf registration statement with the Securities and ExchangeCommission to sell up to $50 million of common or preferred stock.  Under this registration statement, shares maybe sold periodically to provide additional funds for our operations.  In March 2004, we completed a sale of 3,075,000shares of our common stock offered under the registration statement at a priceof $5.00 per share, for gross proceeds of approximately $15.4 million.  Net proceeds were approximately $14.4million.

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The following discussion contains certainforward-looking statements, within the meaning of the “safe harbor” provisionsof the Private Securities Reform Act of 1995, the attainment of which involvesvarious risks and uncertainties. Forward-looking statements may be identifiedby the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,”“estimate,” “plan,” “anticipate,” “continue,” or similar terms, variations ofthose terms or the negative of those terms. Our actual results may differmaterially from those described in these forward-looking statements due to,among other factors, the results of ongoing research and development activitiesand pre-clinical testing, the results of clinical trials and the availabilityof additional financing through corporate partnering arrangements or otherwise.*

 

*Spheramine®, Pivanex®, Probuphine®, Pro NeuraTM, CCMTM,CeaVac®, TriAb®, and TriGemTM are trademarks of Titan Pharmaceuticals, Inc.*

 

**Overview**

 

We are a biopharmaceutical company developing proprietary therapeuticsfor the treatment of central nervous system disorders, cancer, and cardiovascular disease.  Our product developmentprograms focus on large pharmaceutical markets with significant unmet medicalneeds and commercial potential. We have six products in clinical development:

 

•                  Iloperidone: for the treatment ofschizophrenia and related psychotic disorders (partnered with VandaPharmaceuticals, Inc.)

•                  Spheramine: for the treatment of advancedParkinson’s disease (partnered with Schering AG)

•                  Probuphine: for the treatment of opiate addiction

•                  DITPA: for the treatment of congestive heart failure

•                  Pivanex: for the treatment of chroniclymphocytic leukemia

•                  Gallium maltolate: for the treatment of bonerelated diseases and certain cancers.

 

Followingis an update on the status and progress of Titan’s core development programs:

 

***Iloperidone***

 

InJune 2004, we announced that Vanda Pharmaceuticals, Inc. had acquired fromNovartis Pharma AG the worldwide rights to develop and commercializeiloperidone, Titan’s proprietary antipsychotic agent in Phase III clinicaldevelopment for the treatment of schizophrenia and related psychoticdisorders.  Under its agreement withNovartis, Vanda will pursue advancement of the iloperidone Phase IIIdevelopment program.  All of Titan’srights and economic interests in iloperidone, including royalties on sales ofiloperidone, remain essentially unchanged under the agreement.

 

***Spheramine***

 

Enrollmentin a randomized, controlled, blinded, multi-center Phase IIb clinical study ofSpheramine in advanced Parkinson’s disease is continuing, and we estimate thatthis study will be completed in early 2006. Schering AG, Germany, Titan’s corporate partner for the development ofSpheramine, is funding the clinical development program for Spheramine.

 

InJuly 2004, we announced that the U.S. Food and Drug Administration had grantedFast Track designation for Spheramine for the treatment of advanced Parkinson’sdisease.  The Fast Track Program is 

 

9

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designed by the FDA to facilitate thedevelopment and expedite the review of drug candidates that demonstrate thepotential to treat serious or life-threatening diseases and address unmetmedical needs.

 

InJuly 2004, the safety review following treatment of the second cohort of 24patients in our Phase IIb clinical study was completed successfully, and theIndependent Data Monitoring Committee (IDMC) recommended that the studycontinue.  We are now in the process ofenrolling the third and final cohort of 32 patients in this study.

 

***Pivanex***

 

InJune 2004, we announced that an interim safety analysis by an independent datamonitoring committee (IDMC) for our Phase IIb study of Pivanex in non-smallcell lung cancer had identified significant safety issues in the combinationtreatment of Pivanex with docetaxel. This randomized study evaluating treatment with Pivanex and docetaxelversus docetaxel alone had completed its enrollment target of 225 patientsearlier this year.  As a result of theIDMC finding and upon their recommendation, Titan discontinued treatment withPivanex for the remaining patients on the study.  Data collection for this study is nowcomplete, and final analysis is expected to be completed by the first quarterof 2005.  Enrollment and furthertreatment with Pivanex as a single agent in the open label Phase IIa study inCLL is continuing.  The single agentPivanex study in melanoma was discontinued.

 

***Gallium Maltolate***

 

Titan is completing a dose ranging clinical study of galliummaltolate in patients with multiple myeloma,metastatic prostate cancer, metastatic bladder cancer and refractorylymphoma.  Titan is also developing a new formulation, andpreclinical testing of gallium maltolate in other disease settings is alsoongoing.  Gallium maltolate is a noveloral agent for the treatment of cancer and bone disease.

 

***Probuphine***

 

Titanhas completed a pilot clinical study of Probuphine, a novel long-term treatmentfor opiate addiction that utilizes Titan’s proprietary ProNeura drug deliverysystem.  In June 2004, the results werepresented at the Annual Meeting of The International Society of AddictionMedicine in Helsinki and demonstrated that all 12 patients switched from dailysublingual buprenorphine therapy to Probuphine had maintenance of therapeuticbenefit for a period of six months following a single treatment ofProbuphine.  Treatment with Probuphinewas also safe and well tolerated in this pilot study, with no significantadverse events.

 

Weare currently scaling up manufacturing process development for Probuphine insupport of planned Phase III clinical development activities and commercialsupply.  We expect to initiate randomizedclinical testing of Probuphine in the treatment of opiate addiction inmid-2005.

 

***DITPA***

 

DITPAhas completed Phase I and preliminary controlled Phase II clinical testing inthe treatment of congestive heart failure (CHF), and was shown in these studiesto improve cardiac function.  We areplanning to initiate a placebo controlled Phase II clinical study with DITPA inClass III and Class IV CHF patients with low thyroid hormone (T3) levels.  The FDA has completed its review of our INDfor this study, and we expect to initiate the study in the fourth quarter of2004.  In July 2004, the U.S. Departmentof Veterans Affairs (VA) initiated a 150 patient, randomized, double blindPhase II clinical study in patients with Class II - IV CHF.  This multicenter study is funded by a $3.8million grant from the VA.

 

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We are directlydeveloping our product candidates and also utilizing corporate partnerships,including a collaboration with Schering AG, Germany (Schering) for thedevelopment of Spheramine to treat Parkinson’s disease.  Spheramine development is primarily funded bySchering.  Iloperidone development andcommercialization for the treatment of schizophrenia and related psychoticdisorders is being pursued by Vanda Pharmaceuticals, as discussed above.  We also utilize grants from governmentagencies to fund development of our product candidates.

 

Atthis time, we are not devoting any additional internal resources to themonoclonal antibodies CeaVac, TriAb, and TriGem.  These treatments are currently being studiedin certain cancers by national oncology cooperative groups funded by theNational Cancer Institute.

 

Ourproducts are at various stages of development and may not be successfullydeveloped or commercialized. We do not currently have any products beingcommercially sold.  Our proposed productswill require significant further capital expenditures, development, testing,and regulatory clearances prior to commercialization.  We may experience unanticipated problemsrelating to product development and cannot predict whether we will successfullydevelop and commercialize any products. For a full discussion of risks and uncertainties of our productdevelopment, see “Risk Factors – Ourproducts are at various stages of development and may not be successfullydeveloped or commercialized” in our 2003 Annual Report on Form 10-K.

 

**Results of Operations**

 

Ournet loss for the third quarter 2004 was approximately $6.3 million, or $0.20per share, compared to approximately $6.2 million, or $0.22 per share, for thesame quarter in 2003.  For the first ninemonths of 2004, our net loss was approximately $18.2 million, or $0.59 pershare, compared to approximately $19.4 million, or $0.70 per share, for thesame nine-month period in 2003.

 

Wehad no revenues in the third quarters of 2004 and 2003.  For the first nine months of 2004, we hadapproximately $1,000 of revenue, compared to approximately $28,000 of revenuefor the same nine-month period in 2003.

 

Researchand development (R&D) expenses for the third quarter 2004 wereapproximately $4.9 million, compared to approximately $5.3 million for the samequarter in 2003, a decrease of $0.4 million, or 8%.  For the first nine months of 2004, R&Dexpenses were approximately $14.6 million, compared to approximately $16.6million for the same nine-month period in 2003, a decrease of $2.0 million, or12%.  The reduction in 2004 is a resultof discontinuing internal resources and associated expenses for the cancerimmunotherapy products.  External R&Dexpenses include direct expenses such as clinical research organizationcharges, investigator and review board fees, patient expense reimbursements,pre-clinical activities and contract manufacturing expenses.  Including external R&D expenses incurredin the third quarter 2004, our external R&D expenses to date relating toour core product development programs have been approximately: $11.4 millionrelated to Pivanex, $3.8 million related to Probuphine, $4.2 million related togallium maltolate, $7.0 million related to Spheramine, and $0.7 million relatedto DITPA.  Other R&D expenses includeinternal operating costs such as clinical research and developmentpersonnel-related expenses, clinical trials related travel expenses, and allocationof facility and corporate costs.  As aresult of the risks and uncertainties inherently associated with pharmaceuticalresearch and development activities described elsewhere in this report, we areunable to estimate the specific timing and future costs of our clinicaldevelopment programs or the timing of material cash inflows, if any, from ourproduct candidates.

 

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Generaland administrative expenses for the third quarter 2004 were approximately $1.4million, compared to approximately $1.2 million for the same quarter in 2003,an increase of $0.2 million, or 17%.  Forthe first nine months of 2004, general and administrative expenses wereapproximately $3.9 million, compared to approximately $3.9 million for the samenine-month period in 2003, or essentially unchanged.  Higher personnel-related costs for the firstnine months of 2004 were offset by a decrease in other general andadministrative costs, including professional fees.

 

Otherexpense for the third quarter 2004 was approximately $0.1 million, compared toother income of approximately $0.3 million in the same quarter in 2003. Thedecrease consisted primarily of a decrease of $0.2 million in interest incomeand a $0.2 million charge related to a loss on investing activities.  For the first nine months of 2004, otherincome, net, was approximately $0.2 million, compared to approximately $1.1million for the same nine-month period in 2003. The decrease, primarily in interest income, was a result of a lowerbalance of cash and marketable securities.

 

**Liquidity and CapitalResources**

 

We have funded our operations sinceinception through sales of our securities, as well as proceeds from warrant andoption exercises, corporate licensing and collaborative agreements, andgovernment sponsored research grants.  AtSeptember 30, 2004, we had $43.2 million of cash, cash equivalents, andmarketable securities compared to $46.6 million at December 31, 2003.

 

Ouroperating activities used $17.2 million in cash in the first nine months of2004.  This consisted primarily of thenet loss for the period of $18.2 million offset in part by non-cash charges of$0.3 million related to depreciation and amortization expenses, $0.2 millionrelated to a loss on investing activities, and $0.3 million related to theamortization of unearned stock-based compensation.  Uses of cash in operating activities wereprimarily to fund product development programs and administrative expenses.  We have entered into various agreements withresearch institutions, universities, and other entities for the performance ofresearch and development activities and for the acquisition of licenses relatedto those activities.  The aggregatecommitments we have under these agreements, including minimum license payments,for the next 12 months is approximately $0.3 million.  Certain of the licenses require us to payroyalties on future product sales, if any. In addition, in order to maintain license and other rights whileproducts are under development, we must comply with customary licenseeobligations, including the payment of patent related costs and diligent effortsin product development.

 

Netcash provided by investing activities of $1.8 million in the nine-month periodended September 30, 2004 consisted of sales and maturities of marketablesecurities of $20.1 million, partially offset by purchases of marketablesecurities of $18.4 million and capital expenditures of $0.6 million.  Cash invested in marketable securitiesdecreased by $2.5 million in the nine-month period ended September 30, 2004.

 

Netcash provided by financing activities for the nine-month period ended September30, 2004 was $14.6 million, which were the net proceeds from the sale of3,075,000 shares of common stock under our effective shelf registrationstatement on Form S-3 (File 333-112513).

 

Weexpect to continue to incur substantial additional operating losses from costsrelated to the continuation and expansion of product and technologydevelopment, clinical trials, and administrative activities.  We believe that we currently have funds sufficientfor greater than one year of operations.

 

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**Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

 

Ourmarket risk disclosures set forth in our Form 10-K for the period endedDecember 31, 2003, have not changed significantly.

 

**Item 4.    Controls and Procedures**

 

Wemaintain “disclosure controls and procedures,” as such term is defined underExchange Act Rule 13a-15(e), that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosures. Indesigning and evaluating the disclosure controls and procedures, our managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives and in reaching a reasonable level of assurance ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. We have carriedout an evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of September 30, 2004. Based upon their evaluation and subject tothe foregoing, the Chief Executive Officer and Chief Financial Officer concludedthat as of September 30, 2004 our disclosure controls and procedures wereeffective at the reasonable assurance level in ensuring that materialinformation relating to us, is made known to the Chief Executive Officer andChief Financial Officer by others within our company during the period in whichthis report was being prepared.

 

Therewere no changes in our internal controls or in other factors during the mostrecent quarter that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

**PARTII**

** **

**Item6.**    **Exhibits and Reports onForm 8-K**

 

(b)                                 Exhibits

 

31            Rule 13a-14(A) Certifications.

 

32                                    Section1350 Certifications.

 

(c)                                  Reportson Form 8-K

 

OnJuly 12, 2004, we filed a current report on Form 8-K to announce that the U.S.Food and Drug Administration has granted Fast Track designation for Spheraminefor the treatment of advanced Parkinson’s disease.

 

OnSeptember 3, 2004, we filed a current report on Form 8-K to announce that Ernst& Young LLP informed Titan that Ernst & Young LLP will resign as ourindependent registered public accounting firm following completion of servicesrelated to the review of our interim financial statements included in thisQuarterly Report on Form 10-Q.

 

OnSeptember 30, 2004, we filed a current report on Form 8-K to announce that wehad entered into an engagement letter with Odenberg, Ullakko, Muranishi &Co. LLP (OUM) to serve as our independent registered public accounting firm forthe fiscal year ending December 31, 2004. OUM’s engagement as our new auditors will be effective as of the filingdate of this Quarterly Report on Form 10-Q.

 

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** **

**SIGNATURES**

 

In accordance with the requirements ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|              | **TITAN PHARMACEUTICALS, INC.** |
|-------------------|---------------------------------|
|              |                            |
|              |                            |
| November  9, 2004 | By:                             |    /s/  Louis R. Bucalo |   |
|              |                            | Louis R. Bucalo, M.D. |
|              |                            | Chairman,  President and Chief Executive Officer |
|              |                            |
|              |                            |
| November  9, 2004 | By:                             |    /s/  Robert E. Farrell |   |
|              |                            | Robert E. Farrell, J.D. |
|              |                            | Executive Vice President and Chief Financial Officer |

 

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