**SECURITIESAND EXCHANGE COMMISSION**

**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 June 30, 2004.**                                                                                                                                                                                                                                                                                                                                   |
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| **or**                                                                                                                                                                                                                                                                                                                                                                              |
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| **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**                                                                                                                                                                                                                                                                                                                                                  |

 

**TitanPharmaceuticals, Inc.**

(Exact name of registrant as specified in itscharter)

 

|                                                                          | **Delaware**                                                    |   | **94-3171940**                        |
|-------------------------------------------------------------------------------|-----------------------------------------------------------------|--------|---------------------------------------|
|                                                                          | (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                                          |                                                            |   |                                  |
| **400 Oyster Point Blvd., Suite 505, South San Francisco, California  94080** |
| (Address of Principal Executive Offices  including zip code)                  |
|                                                                          |
| **(650) 244-4990**                                                            |
| (Registrant’s Telephone Number, Including  Area 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  ̈

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined on Rule 12B-2 of the Exchange Act).  Yes ý  No  ̈

 

There were 32,119,635 shares of the Registrant’s Common Stock issuedand outstanding on August 2, 2004.

 

 

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**TitanPharmaceuticals, Inc**.

**Indexto Form 10-Q**

 
| **Part I.**    | **Financial Information**                                                                                  |   |
|----------------|------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                       |   |
|           | Item 1.  Condensed Financial  Statements (unaudited)                                                  |   |
|           |                                                                                                       |   |
|           | Condensed Consolidated Balance Sheets  June 30, 2004 and December 31, 2003                       |   |
|           |                                                                                                       |   |
|           | Condensed Consolidated Statements of  Operations Three and six months ended June 30, 2004 and 2003    |   |
|           |                                                                                                       |   |
|           | Condensed Consolidated Statements of Cash  Flows Six months ended June 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**

##### ** **

**TITANPHARMACEUTICALS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands)**

 
|                                                           |   | **June 30,  2004** |   | **December 31,  2003** |   |
|----------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                           |   | **(unaudited)**         |   | **(Note A)**                |   |
| **Assets**                                                     |   |                    |   |                        |   |
| Current assets                                                 |   |                    |   |                        |   |
| Cash and cash equivalents                                      |   | $                       | 5,223  |                        | $      | 6,832 |   |
| Marketable securities                                          |   | 43,246                  |   | 39,723                      |   |
| Related party receivables                                      |   | 52                      |   | 123                         |   |
| Prepaid expenses, receivables, and other  current assets       |   | 1,215                   |   | 1,241                       |   |
| Total current assets                                           |   | 49,736                  |   | 47,919                      |   |
| Furniture and equipment, net                                   |   | 896                     |   | 789                         |   |
| Investment in other companies                                  |   | 300                     |   | 300                         |   |
|                                                           |   | $                       | 50,932 |                        | $      | 49,008 |   |
| **Liabilities and  Stockholders’ Equity**                 |   |                    |   |                        |   |
| Current liabilities                                            |   |                    |   |                        |   |
| Accounts payable                                               |   | $                       | 634    |                        | $      | 1,505 |   |
| Accrued clinical trials expenses                               |   | 893                     |   | 634                         |   |
| Other accrued liabilities                                      |   | 1,106                   |   | 1,202                       |   |
| Total current liabilities                                      |   | 2,633                   |   | 3,341                       |   |
| Minority interest - Series B preferred  stock of Ingenex, Inc. |   | 1,241                   |   | 1,241                       |   |
| Stockholders’ equity                                      |   |                    |   |                        |   |
| Common stock, at amounts paid-in                               |   | 209,834                 |   | 195,331                     |   |
| Additional paid-in capital                                     |   | 9,202                   |   | 9,047                       |   |
| Deferred compensation                                          |   | (179                    | )      | (211                        | )      |
| Accumulated deficit                                            |   | (171,677                | )      | (159,741                    | )      |
| Accumulated other comprehensive income                         |   | (122                    | )      | —                      |   |
| Total stockholders’ equity                                |   | 47,058                  |   | 44,426                      |   |
|                                                           |   | $                       | 50,932 |                        | $      | 49,008 |   |

 

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Note A: The balance sheet has been derived from the audited financial statementsat that date but does not include all of the information and footnotes requiredby generally accepted accounting principles in the United States for completefinancial statement presentation.

 

See Notes to Condensed Consolidated Financial Statements

 

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**TITANPHARMACEUTICALS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

**(inthousands, except per share amount)**

 
|                                                                            |   | **Three Months Ended June 30,** |     | **Six Months Ended June 30,** |     |
|---------------------------------------------------------------------------------|--------|--------------------------------------|----------|------------------------------------|----------|
| **2004**                                                                        |   | **2003**                             | **2004** |                               | **2003** |
|                                                                            |   |                                 |     |                               |     |   |   |   |   |
| License revenue                                                                 |   | $                                    | —   |                               | $        | 2 |   | $ | 1 |   | $ | 28 |   |
| Total revenue                                                                   |   | —                               |     | 2                                  |     | 1 |   | 28 |   |
|                                                                            |   |                                 |     |                               |     |   |   |   |   |
| Operating expenses:                                                             |   |                                 |     |                               |     |   |   |   |   |
| Research and development                                                        |   | 4,598                                |     | 5,735                              |     | 9,711 |   | 11,377 |   |
| General and administrative                                                      |   | 1,118                                |     | 1,257                              |     | 2,486 |   | 2,638 |   |
| Total operating expenses                                                        |   | 5,716                                |     | 6,992                              |     | 12,197 |   | 14,015 |   |
| Loss from operations                                                            |   | (5,716                               | )        | (6,990                             | )        | (12,196 | ) | (13,987 | ) |
|                                                                            |   |                                 |     |                               |     |   |   |   |   |
| Other income (expense):                                                         |   |                                 |     |                               |     |   |   |   |   |
| Interest income, net                                                            |   | 178                                  |     | 325                                |     | 337 |   | 796 |   |
| Other expense                                                                   |   | (17                                  | )        | (16                                | )        | (77 | ) | (20 | ) |
| Other income, net                                                               |   | 161                                  |     | 309                                |     | 260 |   | 776 |   |
| Net loss                                                                        |   | $                                    | (5,555   | )                                  | $        | (6,681 | ) | $ | (11,936 | ) | $ | (13,211 | ) |
|                                                                            |   |                                 |     |                               |     |   |   |   |   |
| Basic and diluted net loss per share                                            |   | $                                    | (0.17    | )                                  | $        | (0.24 | ) | $ | (0.39 | ) | $ | (0.48 | ) |
|                                                                            |   |                                 |     |                               |     |   |   |   |   |
| Weighted average shares used in computing  basic and diluted net loss per share |   | 32,108                               |     | 27,643                             |     | 30,558 |   | 27,643 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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**TITANPHARMACEUTICALS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

**(inthousands)**

 
|                                                                                       |   | **Six Months  Ended June 30,** |    |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **2004**                                                                                   |   | **2003**                            |
| **Cash flows from  operating activities:**                                                 |   |                                |    |   |   |
| Net loss                                                                                   |   | $                                   | (11,936 | ) | $ | (13,211 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                                |    |   |   |
| Depreciation and amortization                                                              |   | 207                                 |    | 219 |   |
| Non-cash compensation related to stock  options                                            |   | 187                                 |    | 177 |   |
| Write-down of securities available-for-sale                                                |   | 50                                  |    | — |   |
| Changes in operating assets and  liabilities:                                              |   |                                |    |   |   |
| Prepaid expenses, receivables and other  assets                                            |   | 97                                  |    | (662 | ) |
| Accounts payable and other accrued  liabilities                                            |   | (708                                | )       | 46 |   |
| Net cash used in operating activities                                                      |   | (12,103                             | )       | (13,431 | ) |
|                                                                                       |   |                                |    |   |   |
| **Cash flows from investing  activities:**                                                 |   |                                |    |   |   |
| Purchases of furniture and equipment, net                                                  |   | (314                                | )       | (169 | ) |
| Purchases of marketable securities                                                         |   | (18,494                             | )       | (32,561 | ) |
| Proceeds from maturities of marketable  securities                                         |   | 14,800                              |    | 48,540 |   |
| Proceeds from sales of marketable securites                                                |   | —                              |    | 9,000 |   |
| Net cash provided by investing activities                                                  |   | (4,008                              | )       | 24,810 |   |
|                                                                                       |   |                                |    |   |   |
| **Cash flows from  financing activities:**                                                 |   |                                |    |   |   |
| Issuance of common stock, net                                                              |   | 14,502                              |    | 10 |   |
| Net cash provided by financing activities                                                  |   | 14,502                              |    | 10 |   |
|                                                                                       |   |                                |    |   |   |
| **Net increase in  cash and cash equivalents**                                             |   | (1,609                              | )       | 11,389 |   |
| Cash and cash equivalents at beginning of  period                                          |   | 6,832                               |    | 7,155 |   |
| Cash and cash equivalents at end of period                                                 |   | 5,223                               |    | 18,544 |   |
| Marketable securities at end of period                                                     |   | 43,246                              |    | 41,097 |   |
| **Cash, cash equivalents  and marketable securities at end of period**                     |   | $                                   | 48,469  |   | $ | 59,641 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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**TITANPHARMACEUTICALS, INC.**

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

**(unaudited)**

 

**1.****              Organizationand Summary of Significant Accounting Policies**

 

***TheCompany***

** **

We are a biopharmaceutical company developing proprietary therapeuticsfor the treatment of central nervous system disorders, cancer, andcardiovascular disease.  We operate inone business segment, the development of biopharmaceutical products.

 

***Basis ofPresentation***

*** ***

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Titan and its subsidiaries afterelimination of all significant intercompany accounts and transactions. Certainprior year balances have been reclassified to conform to the current yearpresentation.  These financialstatements have been prepared in accordance with generally accepted accountingprinciples in the United States for interim financial information and with theinstructions 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 and six-month periods endedJune 30, 2004 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2004.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

These unaudited condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and footnotes thereto included in the TitanPharmaceuticals, Inc. annual report on Form 10-K for the year endedDecember 31, 2003.

 

***RevenueRecognition***

*** ***

We generate revenueprincipally from collaborative research and development arrangements,technology licenses, and government grants. Revenue arrangements with multiplecomponents are divided into separate units of accounting if certain criteriaare met, including whether the delivered component has stand-alone value to thecustomer, and whether there is objective and reliable evidence of the fairvalue of the undelivered items. Consideration received is allocated among the separate units of accountingbased on their respective fair values, and the applicable revenue recognitioncriteria are then applied to each of the units.

 

Revenue is recognizedwhen the four basic criteria of revenue recognition are met: (1) a contractualagreement exists; (2) transfer of technology has been completed or serviceshave been rendered; (3) the fee is fixed or determinable; and (4)collectibility is reasonably assured. For each source of revenue, we comply with the above revenue recognitioncriteria in the following manner:

 

•                  Collaborative arrangements typically consist ofnon-refundable and/or exclusive technology access fees, cost reimbursements forspecific research and development spending, and various milestone and future

 

5

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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-alone value that are notdependent on future performance under these agreements are recognized asrevenue when received, and are deferred if Titan has continuing performanceobligations and has no evidence of fair value for those obligations. Paymentsreceived related to substantive, performance-based “at-risk” milestones arerecognized as revenue upon achievement of the clinical success or regulatoryevent specified in the underlying contracts, which represent the culmination ofthe earnings process. Amounts received in advance are recorded as deferredrevenue until the technology is transferred, costs are incurred, or milestoneis reached.

 

•                  Technology license agreements typically consist ofnon-refundable upfront license fees and annual minimum access fees or royaltypayments.  Non-refundable upfrontlicense fees and annual minimum payments received with separable stand-alonevalues are recognized when the technology is transferred or accessed, providedthat the technology transferred or accessed is not dependent on the outcome ofour continuing research and development efforts.

 

•                  Government grants, which support our research effortsin specific projects, generally provide for reimbursement of approved costs asdefined in the notices of grants. Grant revenue is recognized when associatedproject costs are incurred.

 

***OperatingSubsidiaries***

*** ***

We conduct some of our operations through two subsidiaries:Ingenex, Inc. and ProNeura, Inc. At June 30, 2004, we owned 81% of Ingenex (assuming the conversionof all preferred stock to common stock) and 79% of ProNeura.

 

***Recent AccountingPronouncements***

*** ***

InMarch 2004, the Emerging Issues Task Force (EITF) reached severalconsensuses on accountingguidance and disclosure of other-than-temporary impairment of debt and equity securities discussed inIssue No. 03-01, *“The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”*  Theseconsensuses apply to investments in debt and equity securities within the scopeof Statements 115 and 124.  Theyalso apply to investments in equity securities that are both outside Statement115’s scope and not accounted for by the equity method, a group referred to as“cost method investments.”  Theimpairment accounting guidance is effective for reporting periods beginningafter June 15, 2004; the disclosure requirements for annual reportingperiods ending after June 15, 2004.

 

**2.****              StockOption Plans**

 

We have elected to continue to follow Accounting Principles BoardOpinion No. 25 (or APB 25), *“Accounting forStock Issued to Employees,”* rather than the alternative method ofaccounting prescribed by Statement of Financial Accounting Standards No. 123(or SFAS 123), *“Accounting for Stock-BasedCompensation.”*   Under APB25, no compensation expense is recognized when the exercise price of ouremployee stock options equals the market price of the underlying stock on thedate of grant.  The following tableillustrates the effect on our net loss and net loss per share if Titan hadapplied the provisions of SFAS 123 to estimate and recognize compensationexpense for our stock-based employee compensation.

 

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|                                                                                                                                   |   | **Three months ended June 30,**        |       | **Six months ended June 30,** |     |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|------------------------------------|----------|
| **2004**                                                                                                                               |   | **2003**                                    | **2004**   |                               | **2003** |
|                                                                                                                                   |   | **(in thousands, except per share amount)** | ** ** |
| Net  loss, as reported                                                                                                                 |   | $                                           | (5,555     | )                                  | $        | (6,681 | ) | $ | (11,936 | ) | $ | (13,211 | ) |
| Add:  Stock-based employee compensation expense  included in reported net loss                                                    |   | 71                                          |       | 83                                 |     | 134 |   | 177 |   |
| Deduct:  Estimated stock-based employee  compensation expense determined in accordance with SFAS 123 for all stock  option grants |   | (385                                        | )          | (416                               | )        | (607 | ) | (1,308 | ) |
| Pro  forma net loss                                                                                                                    |   | $                                           | (5,869     | )                                  | $        | (7,014 | ) | $ | (12,409 | ) | $ | (14,342 | ) |
|                                                                                                                                   |   |                                        |       |                               |     |   |   |   |   |
| Basic  and diluted net loss per share, as reported                                                                                     |   | $                                           | (0.17      | )                                  | $        | (0.24 | ) | $ | (0.39 | ) | $ | (0.48 | ) |
| Pro  forma basic and diluted net loss per share                                                                                        |   | $                                           | (0.18      | )                                  | $        | (0.25 | ) | $ | (0.41 | ) | $ | (0.52 | ) |

 

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The fair value for these options was estimated at the date of grantusing a Black-Scholes option pricing model with the following assumptions forthe three-month periods ended June 30, 2004 and 2003: weighted-averagevolatility factor of 0.70 and 0.70, respectively; no expected dividendpayments; weighted-average risk-free interest rates in effect of 3.8% and 2.1%,respectively; and a weighted-average expected life of 4.5 and 3.0 years,respectively. For purposes of disclosure, the estimated fair value of optionsis amortized to expense over the options’ vesting period.

 

**3.****              NetLoss Per Share**

 

We calculate net loss per share using the weighted averagecommon shares outstanding for the period. For the periods ended June 30, 2004 and 2003, the effect of anadditional 6,479,890 and 6,524,548 shares, respectively, related to ourauthorized and issued convertible preferred stock and options, were notincluded in the computation of diluted earnings per share because they areanti-dilutive.

 

**4.****              ComprehensiveLoss**

 

Comprehensive loss is comprised of net loss and othercomprehensive income or loss.  The onlycomponent of other comprehensive income is unrealized gains and losses on ourmarketable securities.  Comprehensiveloss for the three and six months ended June 30, 2004 were $5.8 millionand $12.1 million, respectively, and for the three and six months endedJune 30, 2003 were $6.7 million and $13.4 million, respectively.

 

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

 

In February 2004, we filed a shelfregistration statement with the Securities and Exchange Commission to sell upto $50 million of common or preferred stock.  Under this registration statement, shares may be soldperiodically to provide additional funds for our operations.  In March 2004, we completed a sale of3,075,000 shares of our common stock offered under the registration statementat a price of $5.00 per share, for gross proceeds of approximately $15.4million.  Net proceeds wereapproximately $14.4 million.

 

7

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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 of those terms or the negative of those terms. Our actual resultsmay differ materially from those described in these forward-looking statementsdue to, among other factors, the results of ongoing research and developmentactivities and pre-clinical testing, the results of clinical trials and theavailability of additional financing through corporate partnering arrangements orotherwise.*

 

*Spheramine®, Pivanex®, Probuphine®, ProNeuraTM, CCMTM, CeaVac®, TriAb®, and TriGemTM are trademarks of TitanPharmaceuticals, 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 of schizophrenia and related psychotic disorders (partneredwith Vanda Pharmaceuticals, Inc.)

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

•                  Probuphine:  for the treatment of opiate addiction

•                  DITPA:  for the treatment of congestive heartfailure

•                  Pivanex:for the treatment of chronic lymphocytic leukemia

•                  Galliummaltolate: for the treatment of several cancers and bone related disease

 

Following is an update on the status and progress of Titan’s core developmentprograms:

 

***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 clinical developmentfor the treatment of schizophrenia and related psychotic disorders.  Under its agreement with Novartis, Vandawill pursue advancement of the iloperidone Phase III development program.  All of Titan’s rights and economic interestsin iloperidone, including royalties on sales of iloperidone, remain essentiallyunchanged under the agreement.

 

***Spheramine***

 

Enrollment in a randomized, controlled, blinded, multi-center Phase IIbclinical study of Spheramine in advanced Parkinson’s disease is continuing, andwe estimate that this study will be completed in the second half of 2005.  Schering AG, Germany, Titan’s corporatepartner for the development of Spheramine, is fully funding the clinicaldevelopment program for Spheramine.

 

In July 2004, we announced that the U.S. Food and DrugAdministration had granted Fast Track designation for Spheramine for thetreatment of advanced Parkinson’s disease. The Fast Track Program is

 

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designed by the FDA to facilitate the development and expedite thereview of drug candidates that demonstrate the potential to treat serious orlife-threatening diseases and address unmet medical needs.

 

***Pivanex***

 

In June 2004, we announced that an interim safety analysis by anindependent data monitoring committee (IDMC) for our Phase IIb study of Pivanexin non-small cell lung cancer had identified significant safety issues in thecombination treatment of Pivanex with docetaxel.  This randomized study evaluating treatment with Pivanex anddocetaxel versus docetaxel alone had completed its enrollment target of 225patients earlier this year.  As a resultof the IDMC finding and upon their recommendation, Titan has discontinuedtreatment with Pivanex for the remaining patients on the study.  We will continue to monitor the study andperform a final analysis as planned. Titan plans to continue enrollment and further treatment with Pivanex asa single agent in the open label Phase IIa study in CLL.  The single agent Pivanex study in melanoma willbe discontinued.

 

***Gallium Maltolate***

 

Titanis conducting a dose ranging clinical study of gallium maltolatein patients with multiple myeloma, metastatic prostate cancer, metastatic bladder cancerand refractory lymphoma.  ThisPhase I clinical study is expected to be completed in the second half of2004.  We are also continuing tooptimize the formulation, and preclinical testing of gallium maltolate in otherdisease settings is also ongoing. Gallium maltolate is a novel oral agent for the treatment of cancer andbone disease.

 

***Probuphine***

 

Titan has completed a pilot clinical study of Probuphine, a novellong-term treatment for opiate addiction that utilizes Titan’s proprietaryProNeura drug delivery system.  InJune 2004, the results were presented at the Annual Meeting of TheInternational Society of Addiction Medicine in Helsinki and demonstrated thatall 12 patients switched from daily sublingual buprenorphine therapy toProbuphine had maintenance of therapeutic benefit for a period of six months followinga single treatment of Probuphine. Treatment with Probuphine was also safe and well tolerated in this pilotstudy, with no significant adverse events.

 

***DITPA***

 

DITPA has completed Phase I and preliminary controlled Phase IIclinical testing in the treatment of congestive heart failure (CHF), and wasshown in these studies to improve cardiac function without increasing heartrate.  Based on these encouragingresults, the U.S. Department of Veterans Affairs (VA) initiated a 150 patient,randomized, double blind Phase II clinical study in patients with Class II - IVCHF.  This multicenter study is fundedby a $3.8 million grant from the VA.  Inaddition, Titan plans to initiate placebo controlled Phase II clinical testingwith DITPA in Class III and Class IV CHF patients with low thyroid hormone (T3)levels in the second half of 2004.

 

Weare directly developing our product candidates and also utilizing corporatepartnerships, including a collaboration with Schering AG, Germany (Schering)for the development of Spheramine to treat Parkinson’s disease.  Spheramine development is primarily fundedby Schering.  Iloperidone developmentand commercialization for the treatment of schizophrenia and related psychoticdisorders will now be pursued by Vanda Pharmaceuticals, as discussedabove.  We also utilize grants fromgovernment agencies to fund development of our product candidates.

 

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At this time, we are not devoting any additional internal resources tothe monoclonal antibodies CeaVac, TriAb, and TriGem.  These treatments are currently being studied in certain cancersby national oncology cooperative groups funded by the National CancerInstitute.

 

Our products are at various stages of development and may not besuccessfully developed or commercialized. We do not currently have any productsbeing commercially sold.  Our proposedproducts will 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 ofOperations**

 

Inthe second quarter 2004, we had no revenues, compared to approximately $2,000of revenue for the same period in 2003. For the first six months of 2004, we had approximately $1,000 ofrevenue, compared to approximately $28,000 of revenue for the same six-monthperiod in 2003.

 

Research and development (R&D) expenses for the second quarter 2004were $4.6 million, compared to $5.7 million for the same quarter in 2003, adecrease of $1.1 million, or 20%.  Forthe first six months of 2004, R&D expenses were $9.7 million, compared to$11.4 million for the same six-month period in 2003, a decrease of $1.7million, or 15%.  Higher R&Dexpenses in 2003 were associated primarily with our immunotherapy program.  We are currently not devoting any additionalresources to this program.  ExternalR&D expenses include direct expenses such as clinical research organizationcharges, investigator and review board fees, patient expense reimbursements,pre-clinical activities and contract manufacturing expenses.  Including operating expenses for the secondquarter 2004, our external R&D expenses to date relating to our coreproduct development programs have been approximately: $10.3 million related toPivanex, $3.6 million related to Probuphine, $4.0 million related to galliummaltolate, $6.8 million related to Spheramine, and $0.3 million related to DITPA.  Other R&D expenses were attributable tointernal operating costs, which include clinical research and developmentpersonnel salaries and employment related expenses, clinical trials relatedtravel expenses, and allocation of facility and corporate costs.  As a result of the risks and uncertaintiesinherently associated with pharmaceutical research and development activitiesdescribed elsewhere in this report, we are unable to estimate the specifictiming and future costs of our clinical development programs or the timing ofmaterial cash inflows, if any, from our product candidates.

 

Generaland administrative expenses for the second quarter 2004 were $1.1 million,compared to $1.3 million for the same quarter in 2003, a decrease of $0.2million, or 11%.  For the first sixmonths of 2004, general and administrative expenses were $2.5 million, comparedto $2.6 million for the same six-month period in 2003, a decrease of $0.1million, or 6%.  The decrease in generaland administrative expenses from 2003 to 2004 was primarily due to a reductionin the number of our administrative personnel.

 

Otherincome, primarily interest income net of amortization and other expenses, forthe second quarter 2004 was approximately $0.2 million, compared to $0.3million in the same quarter in 2003. For the first six months of 2004, otherincome, net, was $0.3 million, compared to $0.8 million for the same six-monthperiod in 2003.  The decrease, primarilyin interest income, was a result of a lower balance of cash and marketablesecurities.

 

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Ournet loss for the second quarter 2004 was $5.6 million, or $0.17 per share,compared to $6.7 million, or $0.24 per share, for the same quarter in2003.  For the first six months of 2004,our net loss was $11.9 million, or $0.39 per share, compared to $13.2 million,or $0.48 per share, for the same six-month period in 2003.

 

**Liquidityand Capital Resources**

 

We have funded our operations since inception throughsales of our securities, as well as proceeds from warrant and option exercises,corporate licensing and collaborative agreements, and government sponsoredresearch grants.  At June 30, 2004,we had $48.5 million of cash, cash equivalents, and marketable securities.

 

Our operating activities used $12.1 million and $13.4 million of cashin the first six months of 2004 and 2003, respectively.  Uses of cash in operating activities wereprimarily to fund product development programs and administrativeexpenses.  We have entered into variousagreements with research institutions, universities, and other entities for theperformance of research and development activities and for the acquisition oflicenses related to those activities. The aggregate commitments we have under these agreements, includingminimum license payments, for the next 12 months is approximately $0.3million.  Certain of the licensesrequire us to pay royalties on future product sales, if any.  In addition, in order to maintain licenseand other rights while products are under development, we must comply withcustomary licensee obligations, including the payment of patent related costsand diligent efforts in product development.

 

We expect to continue to incur substantial additional operating lossesfrom costs related to continuation and expansion of product and technologydevelopment, clinical trials, and administrative activities.  We believe that we currently have sufficientworking capital to sustain our planned operations through mid-2006.

 

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

 

Our market risk disclosures set forth in our Form 10-K for the periodended December 31, 2003, have not changed significantly.

 

**Item 4.****           Controlsand 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 our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of June 30, 2004. Based upon their evaluation and subject tothe foregoing, the Chief Executive Officer and Chief Financial Officerconcluded that as of June 30, 2004 our disclosure controls and procedureswere effective at the reasonable assurance level in ensuring that

 

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material information relating to us, is made known to theChief Executive Officer and Chief Financial Officer by others within ourcompany during the period in which this 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.

 

**PART II**

** **

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

 
| (b)    | Exhibits            |
|--------|---------------------|
|   |                |   |
|   | 31                  | Rule 13a-14(A) Certifications. |
|   |                |   |
|   | 32                  | Section 1350 Certifications. |
|   |                |   |
| (c)    | Reports on Form 8-K |

 

OnJune 9, 2004, we filed a current report on Form 8-K to announce thatNovartis Pharma AG has licensed the worldwide rights to develop andcommercialize iloperidone, our proprietary antipsychotic agent in Phase IIIclinical development for the treatment of schizophrenia and related psychoticdisorders, to Vanda Pharmaceuticals, Inc., a pharmaceutical development companyheadquartered in Rockville, Maryland.

 

OnJune 21, 2004, we filed a current report on Form 8-K to announce that aninterim safety analysis by an independent data monitoring committee for ourPhase IIb study of Pivanex in non-small cell lung cancer had identifiedsignificant safety issues in the combination treatment of Pivanex withdocetaxel. As a result, we have discontinued treatment with the combinationregimen for the remaining patients on study.

 

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**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                | **TITAN  PHARMACEUTICALS, INC.** |
|---------------------|----------------------------------|
|                |                             |   |
|                |                             |   |
| August 6, 2004 | By:                              | /s/ Louis R. Bucalo |   |
|                |                             | Louis R. Bucalo, M.D. |
|                |                             | Chairman, President and Chief Executive Officer |
|                |                             |   |
| August 6, 2004 | By:                              | /s/ Robert E. Farrell |   |
|                |                             | Robert E. Farrell |
|                |                             | Executive Vice President and Chief Financial Officer |

 

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