**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

**ý****          ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2005**

 

**OR**

 

o            **TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

Commission File Number: **0-19410**

 

**POINTTHERAPEUTICS, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Delaware**                             | ** ** | **04-3216862**      |
|------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of          |       | (I.R.S. Employer    |
| Incorporation or Organization)           |       | Identification No.) |
|                                     |       |                |
| **155 FEDERAL STREET, BOSTON, MA**       | ** ** | **02110**           |
| (Address of Principal Executive Offices) |       | (Zip Code)          |

 

**(617) 933-2130**

Registrant’s Telephone Number, Including AreaCode

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    ý  Yes    o  No

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of1934).    ý  Yes    o  No

 

Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2of the Exchange Act).    o  Yes    ý  No

 

As of November 2, 2005, there were 23,494,559 shares of the Registrant’sCommon Stock, $0.01 par value per share, outstanding.

 

 

----

 

**POINT THERAPEUTICS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

 

**QUARTERLY REPORT ON FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL INFORMATION                                                                                                                                                                                      |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                    |   |
| Item 1.  Financial Statements (unaudited)                                                                                                                                                                               |   |
|                                                                                                                                                                                                                    |   |
| Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                                                                                                                                   |   |
|                                                                                                                                                                                                                    |   |
| Consolidated  Statements of Operations For The Three and Nine Month Periods Ended  September 30, 2005 and 2004 and For The Period From September 3,  1996 (Date of Inception) Through September 30, 2005 |   |
|                                                                                                                                                                                                                    |   |
| Consolidated Statements of Cash Flows for  the Nine Month Periods Ended September 30, 2005 and 2004 and For The  Period From September 3, 1996 (Date of Inception) Through  September 30, 2005           |   |
|                                                                                                                                                                                                                    |   |
| Notes to Consolidated Financial Statements                                                                                                                                                                              |   |
|                                                                                                                                                                                                                    |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                                                                                    |   |
|                                                                                                                                                                                                                    |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                     |   |
|                                                                                                                                                                                                                    |   |
| Item 4.  Controls and Procedures                                                                                                                                                                                        |   |
|                                                                                                                                                                                                                    |   |
| PART II. OTHER INFORMATION                                                                                                                                                                                         |   |
|                                                                                                                                                                                                                    |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                                                                            |   |
|                                                                                                                                                                                                                    |   |
| Item 6.  Exhibits                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                    |   |
| SIGNATURES                                                                                                                                                                                                              |   |

 

 

In this report, “Point,” “the Company,” “we,” “us” and “our” refer toPoint Therapeutics, Inc. and Subsidiaries.

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**POINT THERAPEUTICS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                              | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                                              |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                               |       | $                            | 18,569,282 |                        | $          | 13,905,993 |   |
| Restricted cash                                                                                                                                                                                                                         |       | 305,834                      |       | 86,001                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                               |       | 460,535                      |       | 288,511                     |       |
| Total current assets                                                                                                                                                                                                                    |       | 19,335,651                   |       | 14,280,505                  |       |
| Office and laboratory equipment, net                                                                                                                                                                                                    |       | 362,895                      |       | 205,323                     |       |
| Deposits and other assets                                                                                                                                                                                                               |       | 84,560                       |       | 10,247                      |       |
| Total assets                                                                                                                                                                                                                            |       | $                            | 19,783,106 |                        | $          | 14,496,075 |   |
|                                                                                                                                                                                                                                    |       |                         |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                                          |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                                        |       | $                            | 1,140,605  |                        | $          | 912,942 |   |
| Accrued clinical and drug development                                                                                                                                                                                                   |       | 3,099,952                    |       | 1,106,057                   |       |
| Accrued expenses                                                                                                                                                                                                                        |       | 767,107                      |       | 378,815                     |       |
| Short-term portion of capital lease                                                                                                                                                                                                     |       | 6,312                        |       | —                      |       |
| Total current liabilities                                                                                                                                                                                                               |       | 5,013,976                    |       | 2,397,814                   |       |
| Patent liability, less current portion                                                                                                                                                                                                  |       | 42,364                       |       | 47,604                      |       |
| Long-term portion of capital lease                                                                                                                                                                                                      |       | 7,139                        |       | —                      |       |
| Stockholders’ equity:                                                                                                                                                                                                              |       |                         |       |                        |       |
| Preferred stock, $0.01 par value, 1,000,000  shares authorized; no shares issued or outstanding as of September 30, 2005  and December 31, 2004                                                                                    |       | —                       |       | —                      |       |
| Common stock, $0.01 par value, 75,000,000  shares authorized, 23,713,104 shares issued and 23,494,559 outstanding at  September 30, 2005 and 18,435,375 shares issued and 18,263,298 shares  outstanding at December 31, 2004 |       | 237,131                      |       | 184,353                     |       |
| Treasury stock, 218,545 shares at cost as  of September 30, 2005 and 172,077 shares at cost as of December 31,  2004                                                                                                          |       | (978,290                     | )          | (767,338                    | )          |
| Additional paid-in capital                                                                                                                                                                                                              |       | 71,929,729                   |       | 52,328,072                  |       |
| Deficit accumulated during the development  stage                                                                                                                                                                                       |       | (56,468,943                  | )          | (39,694,430                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                         |       | 14,719,627                   |       | 12,050,657                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                         |       | $                            | 19,783,106 |                        | $          | 14,496,075 |   |

 

 

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

 

3

----

 

**POINT THERAPEUTICS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                              | ** ** | **Three  months ended September  30,** | ** ** | **Nine  months ended  September  30,** | ** ** | **Period  from  September 3, 1996  (date of inception)  through September  30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                         | ** ** | **2004**                                    | ** ** | **2005**                                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Revenues**                                            |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| License  revenue                                        |       | $                                                | —     |                                        | $          | —                                                                                          |       | $ | — |   | $ | — |   | $ | 5,115,041 |   |
| Sponsored  research revenue                             |       | —                                           |       | —                                      |       | —                                                                                          |       | — |   | 2,400,000 |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Total  revenues                                         |       | —                                           |       | —                                      |       | —                                                                                          |       | — |   | 7,515,041 |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| **Operating expenses**                                  |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Research  and development                               |       | 5,636,920                                        |       | 3,398,493                                   |       | 13,250,507                                                                                      |       | 7,628,886 |   | 45,473,902 |   |
| General  and administrative                             |       | 1,242,141                                        |       | 941,920                                     |       | 3,913,080                                                                                       |       | 2,906,753 |   | 19,955,856 |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Total  operating expenses                               |       | 6,879,061                                        |       | 4,340,413                                   |       | 17,163,587                                                                                      |       | 10,535,639 |   | 65,429,758 |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Net  loss from operations                               |       | (6,879,061                                       | )          | (4,340,413                                  | )          | (17,163,587                                                                                     | )          | (10,535,639 | ) | (57,914,717 | ) |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| **Interest income, net**                                |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Interest  income                                        |       | 163,172                                          |       | 46,530                                      |       | 389,074                                                                                         |       | 98,919 |   | 1,528,426 |   |
| Interest  expense                                       |       | —                                           |       | —                                      |       | —                                                                                          |       | — |   | (82,652 | ) |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Total  interest income, net                             |       | 163,172                                          |       | 46,530                                      |       | 389,074                                                                                         |       | 98,919 |   | 1,445,774 |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| **Net loss**                                            |       | $                                                | (6,715,889 | )                                           | $          | (4,293,883                                                                                      | )          | $ | (16,774,513 | ) | $ | (10,436,720 | ) | $ | (56,468,943 | ) |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| **Net loss per common share**                           |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Basic  and diluted                                      |       | $                                                | (0.29      | )                                           | $          | (0.24                                                                                           | )          | $ | (0.77 | ) | $ | (0.61 | ) |   |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| **Shares used in computing net loss per common  share** |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
|                                                    |       |                                             |       |                                        |       |                                                                                            |       |   |   |   |   |
| Basic  and diluted                                      |       | 23,456,469                                       |       | 18,254,331                                  |       | 21,798,934                                                                                      |       | 17,207,162 |   |   |   |

 

 

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

 

4

----

 

**POINT THERAPEUTICS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(unaudited)

 
| ** **                                                     | ** ** | **Nine months ended  September 30,** | ** **  | **Period from  inception  (September 3,  1996) through  September 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|-------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                  | ** **  | **2004**                                                                          | ** ** | **2005** | ** ** |
| **Operating  Activities**                                      |       |                                      |        |                                                                              |       |   |   |
| Net loss                                                       |       | $                                         | (16,774,513 | )                                                                                 | $          | (10,436,720 | ) | $ | (56,468,943 | ) |
| Adjustments to reconcile net loss to net  cash used:           |       |                                      |        |                                                                              |       |   |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| Depreciation                                                   |       | 76,130                                    |        | 80,544                                                                            |       | 409,601 |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| Stock-based compensation                                       |       | 186,684                                   |        | 49,212                                                                            |       | 882,876 |   |
| Common stock issued under license agreement                    |       | —                                    |        | —                                                                            |       | 910,677 |   |
| Accrued interest on convertible notes                          |       | —                                    |        | —                                                                            |       | 82,652 |   |
| Patent costs                                                   |       | —                                    |        | —                                                                            |       | 75,557 |   |
| Changes in assets and liabilities:                             |       |                                      |        |                                                                              |       |   |   |
| Restricted cash                                                |       | (219,833                                  | )           | (5,833                                                                            | )          | (305,834 | ) |
| Prepaid expenses and other assets                              |       | (246,337                                  | )           | (65,343                                                                           | )          | (564,372 | ) |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| Accounts payable and accrued expenses                          |       | 2,609,850                                 |        | 1,400,879                                                                         |       | 5,005,220 |   |
| Net cash used in operating activities                          |       | (14,368,019                               | )           | (8,977,261                                                                        | )          | (49,972,566 | ) |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| **Investing  activities**                                      |       |                                      |        |                                                                              |       |   |   |
| Purchase of office and laboratory equipment                    |       | (233,702                                  | )           | (58,180                                                                           | )          | (772,496 | ) |
| Net cash used in investing activities                          |       | (233,702                                  | )           | (58,180                                                                           | )          | (772,496 | ) |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| **Financing  activities**                                      |       |                                      |        |                                                                              |       |   |   |
| Proceeds from issuance of common stock, net  of issuance costs |       | 15,031,218                                |        | 12,137,228                                                                        |       | 48,133,931 |   |
| Proceeds from merger between Point and HMSR  Inc.              |       | —                                    |        | —                                                                            |       | 14,335,285 |   |
| Proceeds from issuance of convertible note                     |       | —                                    |        | —                                                                            |       | 1,892,904 |   |
| Proceeds from warrant exercises                                |       | 3,780,924                                 |        | 717,991                                                                           |       | 4,512,425 |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| Proceeds from stock option exercises                           |       | 444,657                                   |        | 6,000                                                                             |       | 457,097 |   |
| Proceeds from capital lease financing                          |       | 13,451                                    |        | —                                                                            |       | 13,451 |   |
| Principal payments of patent liability                         |       | (5,240                                    | )           | (4,763                                                                            | )          | (30,749 | ) |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| Net cash provided by financing activities                      |       | 19,265,010                                |        | 12,856,456                                                                        |       | 69,314,344 |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| **Net  increase in cash and cash equivalents**                 |       | 4,663,289                                 |        | 3,821,015                                                                         |       | 18,569,282 |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| **Cash and  cash equivalents, beginning of period**            |       | 13,905,993                                |        | 14,062,104                                                                        |       | — |   |
|                                                           |       |                                      |        |                                                                              |       |   |   |
| **Cash and  cash equivalents, end of period**                  |       | $                                         | 18,569,282  |                                                                              | $          | 17,883,119 |   | $ | 18,569,282 |   |

 

 

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

 

5

----

 

**POINT THERAPEUTICS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2005**

**(unaudited)**

 

**1. Nature of the Business**

 

Point Therapeutics, Inc. (“Point” or “the Company”) is abiopharmaceutical company developing a family of dipeptidyl peptidase (DPP)inhibitors for use in cancer, type 2 diabetes and as vaccine adjuvants.Talabostat (PT-100), the Company’s lead product candidate, is an orally-activesmall molecule currently in several Phase 2 clinical trials. Based on theclinical results observed to date, Point recently initiated its first pivotalPhase 3 clinical trial studying talabostat in combination with docetaxel inmetastatic non-small cell lung cancer (NSCLC).

 

In 2004, the Company initiated four Phase 2 clinical trials, studyingtalabostat in combination with docetaxel in metastatic NSCLC, as a single agentin metastatic melanoma, in combination with cisplatin in metastatic melanoma,and in combination with rituximab in advanced chronic lymphocytic leukemia(CLL). The clinical trials are single-arm studies using a two-stage design todetermine potential clinical activity (tumor response rate) as compared tohistorical rates. In 2005, Point initiated a fifth Phase 2 clinical trial,studying talabostat in combination with gemcitabine in metastatic pancreaticcancer. This trial is also a single-arm study using a two-stage design todetermine potential clinical activity (six month survival).

 

Point believes that talabostat could be used in both solid andhematologic malignancies and in combination with a range of chemotherapies,monoclonal antibodies, other forms of cancer treatment, and as a single agent.Because talabostat inhibits certain DPPs which causes an up-regulation of boththe innate and acquired arms of the immune system, Point believes talabostatcan be used in combination with existing chemotherapy regimens to stimulate anindependent attack on solid tumors, resulting in potentially better outcomesthan with chemotherapy alone. Point also believes that talabostat can enhancethe therapeutic effects of monoclonal antibodies against certain tumors bycausing an up-regulation of both the innate and acquired arms of the immunesystem and by facilitating the migration of certain immune system cells to thetumor sites. The Company is also exploring the possibility that a specific DPP,fibroblast activation protein (FAP), could be a tumor-associated target. FAPhas been reported to play a role in tumor growth and metastases, and theCompany is investigating whether the inhibition of FAP could potentially have adirect beneficial effect on some tumors.

 

In addition, Point’s portfolio includes two other DPP inhibitors inpreclinical development—PT-630 for type 2 diabetes, and PT-510 as a vaccineadjuvant. PT-630 has a high affinity for DPP-4 which is a target that numerouspharmaceutical companies are exploring as a potential promising therapy totreat type 2 diabetes. Point believes that PT-630 potentially hasdifferentiating characteristics from other DPP-4 inhibitors currently beingclinically developed. Some of these differentiating characteristics includepossible once-a-day dosage, higher potency, prolonged action, stabilization ofpancreatic beta cells, improved insulin sensitivity, better glycemic controland reduced triglyceride levels. Point’s second DPP inhibitor preclinicalcandidate, PT-510, is being developed as a potential vaccine adjuvant for bothcancer and infectious disease. Point has preclinical proof of principle datathat indicates PT-510 upregulates both cytokines and chemokines which arebelieved to be critical for the induction of an immune response.

 

In addition to these product opportunities, the Company from time totime evaluates new technologies to broaden its portfolio of potential products,including in-licensing and collaboration arrangements, as well as moreexpansive corporate relationships, including mergers and acquisitions.

 

**2. Significant Accounting Policies**

 

**Unaudited Interim Financial Statements**

 

The accompanying unaudited interim financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States and applicable Securities and Exchange Commission (the “SEC”)regulations for interim financial information. These financial statements areunaudited and, in the opinion of management, include all adjustments normal andrecurring in nature necessary to present fairly the balance sheets, statementsof operations, and statements of cash flows for the periods presented inaccordance with accounting principles generally accepted in the United States.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to SECrules and regulations. It is presumed that users of this interim financialinformation have read or have access to the audited financial statements andfootnote disclosure of Point for the year ended December 31, 2004,contained in a Form 10-K filed with the Securities and Exchange Commissionon March 15, 2005. Operating results for the quarter and nine months endedSeptember 30, 2005 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2005.

 

6

----

 

**Use of Estimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

**Reclassifications**

 

Certain amounts in 2004 have been reclassified to conform to the 2005presentation, including the reclassification of patent expenses from researchand development to general and administrative expenses in the Company’sstatement of operations.

 

**Net Loss Per Common Share**

 

Basic and diluted net loss per common share amounts are presented inconformity with Statement of Financial Accounting Standards No. (“SFAS”)128, “Earnings per Share”, for all periods presented. In accordance with SFAS128, basic and diluted net loss per common share amounts have been computedusing the weighted-average number of shares of common stock outstanding for thethree and nine month periods ended September 30, 2005 and 2004.Potentially dilutive securities, consisting of stock options of 4,117,031 andwarrants of 2,592,500 outstanding at September 30, 2005 and stock optionsof 3,188,221 and warrants of 4,100,143 outstanding at September 30, 2004 havebeen excluded from the diluted earnings per share calculations since theireffect is antidilutive.

 

**Stock-Based Compensation**

 

The Company has elected to follow Accounting Principles Board (“APB”)Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”),in accounting for its stock-based employee compensation plans using theintrinsic value method, rather than the alternative fair value accountingmethod provided for under SFAS No. 123, Accounting for Stock BasedCompensation (“SFAS No. 123”), as SFAS No. 123 requires the use ofoption valuation models that were not developed for use in valuing employeestock options. Under APB No. 25, when the exercise price of optionsgranted to employees under these plans equals the market price of theunderlying stock on the date of grant, no compensation expense is required. Thereconciliation of net loss and net loss per share, as reported, to pro formanet loss and net loss per share giving effect to employee stock-basedcompensation accounted for using the fair value accounting method, is asfollows:

 
| ** **                                                                                                                                                                         | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                                                                                              |       | $                                         | (6,715,889 | ) | $ | (4,293,883 | ) |
| Less: Stock based employee compensation  cost, that would have been included in the determination of net loss as  reported if the fair value method had been applied to all awards |       | (591,204                                  | )          | (467,627 | ) |
| Pro forma net loss                                                                                                                                                                 |       | $                                         | (7,307,093 | ) | $ | (4,761,510 | ) |
| Net loss per common share, as reported                                                                                                                                             |       | $                                         | (0.29      | ) | $ | (0.24 | ) |
| Net loss per common share, pro forma                                                                                                                                               |       | $                                         | (0.31      | ) | $ | (0.26 | ) |

 
| ** **                                                                                                                                                                         | ** ** | **Nine  Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                                                                                                         | ** ** | **2005**                                  | ** **  | **2004** | ** ** |
| Net loss, as reported                                                                                                                                                              |       | $                                         | (16,774,513 | ) | $ | (10,436,720 | ) |
| Less: Stock based employee compensation  cost, that would have been included in the determination of net loss as  reported if the fair value method had been applied to all awards |       | (1,518,945                                | )           | (1,319,774 | ) |
| Pro forma net loss                                                                                                                                                                 |       | $                                         | (18,293,458 | ) | $ | (11,756,494 | ) |
| Net loss per common share, as reported                                                                                                                                             |       | $                                         | (0.77       | ) | $ | (0.61 | ) |
| Net loss per common share, pro forma                                                                                                                                               |       | $                                         | (0.84       | ) | $ | (0.68 | ) |

 

These pro forma amounts disclosed above may not be representative ofthe effects for future years as options vest over several years and additionalawards are generally made each year.

 

7

----

 

The fair value of the stock options at the date of grant was estimatedusing the Black-Scholes option pricing model with the following averageassumptions:

 
| ** **               | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Expected  life (years)   |       | 4.00                                      |       | 4.00 |   |
| Risk-free  interest rate |       | 3.6-3.9                                   | %          | 3.3-3.8 | % |
| Volatility               |       | 93                                        | %          | 93 | % |
| Dividends                |       | None                                      |       | None |   |

 
| ** **               | ** ** | **Nine  Months Ended September 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Expected  life (years)   |       | 4.00                                      |       | 4.00 |   |
| Risk-free  interest rate |       | 3.6-3.9                                   | %          | 3.2-4.7 | % |
| Volatility               |       | 93                                        | %          | 93 | % |
| Dividends                |       | None                                      |       | None |   |

 

**3. New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment,” which will be effective for public entities no later than thebeginning of the first fiscal year beginning after June 15, 2005.  SFAS 123(R) replaces SFAS 123, “Accounting for Stock-Based Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” The new standard requires that the compensation cost relating toshare-based payment be recognized in financial statements at fair value. Assuch, reporting employee stock options under the intrinsic value-based methodprescribed by APB 25 will no longer be allowed. The Company has historicallyelected to use the intrinsic value method and has not recognized expense foremployee stock options granted. The Company will adopt this pronouncement onJanuary 1, 2006 and is currently evaluating the impact that thispronouncement will have on its consolidated financial statements.

 

In May 2005, the FASB issued Statement No. 154, “Accounting Changes andError Corrections” (“SFAS No. 154”), which will require entities that voluntarilymake a change in accounting principle to apply that change retrospectively toprior periods’ financial statements, unless this would be impracticable. SFASNo.154 supersedes Accounting Principles Board Opinion No. 20, “AccountingChanges”** **(“APB 20”), whichpreviously required that most voluntary changes in accounting principle berecognized by including in the current period’s net income the cumulativeeffect of changing to the new accounting principle. SFAS No.154 also makes adistinction between “retrospective application” of an accounting principle andthe “restatement” of financial statements to reflect the correction of anerror. Another significant change in practice under SFAS No.154 will be that ifan entity changes its method of depreciation, amortization, or depletion forlong-lived, nonfinancial assets, the change must be accounted for as a changein accounting estimate. Under APB 20, such a change would have been reported asa change in accounting principle. SFAS No.154 applies to accounting changes anderror corrections that are made in fiscal years beginning after December 15,2005.

 

**4. Common Stock**

 

On March 4, 2005, the Company consummated a registered directplacement of 3,650,000 shares of its common stock at a price of $4.50 per share,resulting in gross proceeds to the Company of $16,425,000. After placementagent fees of $1,149,500 and other expenses for legal, accounting and printingfees of $244,500, net proceeds to the Company were $15,031,000. The offeredshares are registered pursuant to Point’s $50,000,000 shelf registrationstatement that was declared effective by the Securities and Exchange Commissionon January 12, 2005.

 

As a result of this offering, 900,000 warrants with an initial exerciseprice of $6.25 have been repriced to $6.02 per share. These warrants wereoriginally issued in March 2004 and expire in 2009.

 

For the first nine months of 2005, the Company also received proceedsof $3,780,924 from the exercise of 1,501,623 warrants and proceeds of $444,657from the exercise of 126,106 stock options.

 

**5. Lease**

 

On March 16, 2005, the Company entered into a lease agreement withKNH Realty Trust, initially for approximately 15,000 square feet of officespace at 155 Federal Street, Boston, MA. The lease term began onJuly 9, 2005 and expires on July 8, 2010 with the option for anextension. The Company relocated its corporate headquarters from 125 SummerStreet, Boston, MA to 155 Federal Street, Boston, MA inJuly 2005.  In connection with this lease, the Company issued a letterof credit in the amount of $300,000 on March 28, 2005.  The letter ofcredit is renewable annually for the term of the sublease with the landlord andis collateralized by cash held in money market funds at the Company’s financialinstitution.

 

A Form 8-K, with a copy of the lease agreement, was filed with theSEC on March 17, 2005.

 

8

----

 

**6. Subsequent Event**

 

The Company announced on October 11, 2005 that it has been awarded anOrphan Products Development Grant from the Food and Drug Administration to fundits Phase 2 study of talabostat in combination with rituximab in advancedchronic lymphocytic leukemia (CLL).

 

The $600,000 grant will be paid to the Company during the two year periodbeginning October 1, 2005 and will fund costs related to the Company’s Phase2 CLL trial incurred during the grant period. Orphan Products Developmentgrants are awarded by the Food and Drug Administration to encourage clinicaldevelopment of products for use in rare diseases or conditions, usually definedas affecting less than 200,000 people in the United States. CLL is an incurabledisease that usually affects people over 60 years of age. Patients who presentwith advanced stage disease or who progress to the state of requiring treatmenthave a poor outcome with a median survival of only 18 to 36 months.

 

9

----

 

**Item 2.**                                                           **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Cautionary Factors with Respect toForward-Looking Statements**

 

Readers are cautioned that certain statements contained in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations that are not related to historical results are “forward-looking”statements as defined in the Private Securities Litigation Reform Act of 1995,as from time-to-time in effect. This information includes statements on theprospects for our drug development activities and results of operations basedon our current expectations, such as statements regarding certain milestoneswith respect to our clinical program and our product candidates.Forward-looking statements are statements that are not historical facts, andcan be identified by, among other things, the use of forward-looking language,such as “believe,” “expect,” “may,” “will,” “should,” “seeks,” “plans,” “schedule to,”“anticipates” or “intends” or the negative of those terms, or other variationsof those terms of comparable language, or by discussions of strategy or intentions.A number of important factors could cause actual results to differ materiallyfrom those projected or suggested in the forward looking statement, including,but not limited to, our ability to (i) successfully develop andmanufacture products, (ii) obtain the necessary governmental approvals,(iii) obtain external funding to finance the operations, and(iv) obtain and enforce intellectual property rights, as well as the riskfactors discussed below under the caption titled “Certain Factors ThatMay Affect Future Operating Results”.

 

**Overview**

 

We are a biopharmaceutical company developing a family of dipeptidylpeptidase (DPP) inhibitors for use in cancer, type 2 diabetes and as vaccineadjuvants. Talabostat (PT-100), our lead product candidate, is an orally-activesmall molecule currently in several Phase 2 clinical trials. Based on theclinical results observed to date, we recently initiated our first pivotalPhase 3 clinical trial studying talabostat in combination with docetaxel inmetastatic non-small cell lung cancer (NSCLC).

 

In 2004, we initiated four Phase 2 clinical trials, studying talabostatin combination with docetaxel in metastatic NSCLC, as a single agent inmetastatic melanoma, in combination with cisplatin in metastatic melanoma, andin combination with rituximab in advanced chronic lymphocytic leukemia (CLL).The clinical trials are single-arm studies using a two-stage design todetermine potential clinical activity (tumor response rate) as compared tohistorical rates. In 2005, we initiated a fifth Phase 2 clinical trial,studying talabostat in combination with gemcitabine in metastatic pancreaticcancer. This trial is also a single-arm study using a two-stage design todetermine potential clinical activity (six month survival).

 

We believe that talabostat could be used in both solid and hematologicmalignancies and in combination with a range of chemotherapies, monoclonalantibodies, other forms of cancer treatment, and as a single agent. Becausetalabostat inhibits certain DPPs which causes an up-regulation of both theinnate and acquired arms of the immune system, we believe talabostat can beused in combination with existing chemotherapy regimens to stimulate anindependent attack on solid tumors, resulting in potentially better outcomesthan with chemotherapy alone. We also believe that talabostat can enhance thetherapeutic effects of monoclonal antibodies against certain tumors by causingan up-regulation of both the innate and acquired arms of the immune system andby facilitating the migration of certain immune system cells to the tumorsites. We are also exploring the possibility that a specific DPP, fibroblastactivation protein (FAP), could be a tumor-associated target. FAP has beenreported to play a role in tumor growth and metastases, and we areinvestigating whether the inhibition of FAP could potentially have a directbeneficial effect on some tumors.

 

In addition, our portfolio includes two other DPP inhibitors inpreclinical development—PT-630 for type 2 diabetes, and PT-510 as a vaccineadjuvant. PT-630 has a high affinity for DPP-4 which is a target that numerouspharmaceutical companies are exploring as a potential promising therapy totreat type 2 diabetes. We believe that PT-630 potentially has differentiatingcharacteristics from other DPP-4 inhibitors currently being clinicallydeveloped. Some of these differentiating characteristics include possibleonce-a-day dosage, higher potency, prolonged action, stabilization ofpancreatic beta cells, improved insulin sensitivity, better glycemic controland reduced triglyceride levels. Our second DPP inhibitor preclinicalcandidate, PT-510, is being developed as a potential vaccine adjuvant for bothcancer and infectious disease. We have preclinical proof of principle data thatindicates PT-510 upregulates both cytokines and chemokines which are believedto be critical for the induction of an immune response.

 

In addition to these product opportunities, we from time to timeevaluate new technologies to broaden our portfolio of potential products,including in-licensing and collaboration arrangements, as well as moreexpansive corporate relationships, including mergers and acquisitions.

 

Our principal executive office is located at 155 Federal Street,Boston, MA, 02110 and our telephone number is (617) 933-2130. Our common stocktrades on the NASDAQ Capital Market under the symbol “POTP”. Our website iswww.pther.com.

 

To date, we have generated no revenues from product sales and haveprimarily depended upon equity financings, interest earned on invested funds,and collaboration payments received from pharmaceutical companies to providethe working capital required to pursue our intended business activities. Wehave a net accumulated deficit of $56,469,000 as of September 30, 2005. Theaccumulated deficit has resulted principally from our efforts to develop drugcandidates and the associated administrative

 

10

----

 

costs requiredto support these efforts. We expect to incur significant additional operatinglosses over the next several years due to our ongoing developmental andclinical efforts. Our potential for future profitability is dependent on ourability to effectively develop our current pharmaceutical product candidate,talabostat, to develop other currently in-licensed product candidates, and tolicense and develop new pharmaceutical compounds.

 

**Critical Accounting Policies and SignificantJudgments and Estimates**

 

***Critical AccountingPolicies***

 

In December 2001, the Securities and Exchange Commission (the “SEC”)requested that all registrants list their most “critical accounting policies”in Management’s Discussion and Analysis of Financial Condition and Results ofOperations. The SEC indicated that a “critical accounting policy” is one whichis both important to the portrayal of our financial condition and results andrequires management’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effect of matters that areinherently uncertain. Our significant accounting policies are summarized belowand are fully described in Note 2 to our consolidated financial statements,included in our Annual Report on Form 10-K filed with the SEC onMarch 15, 2005.

 

***Revenue Recognition***

 

Revenue is deemed earned when all of the following have occurred: thereis persuasive evidence of an arrangement; all of our obligations relating tothe revenue have been met and the earning process is complete; the moniesreceived or receivable are not refundable, irrespective of research results;and there are neither future obligations nor future milestones to be met by uswith respect to such revenue incurred.

 

Revenue from corporate collaborations is earned based upon researchexpenses incurred and milestones achieved. Non-refundable payments uponinitiation of contracts are deferred and amortized over the period which we areobligated to participate on a continuing and substantial basis in the researchand development activities outlined in each contract. Amounts received inadvance of reimbursable expenses are recorded as deferred revenue until therelated expenses are incurred. Milestone payments that are deemed substantive arerecognized as revenue in the period in which the parties agree that themilestone has been achieved.

 

Royalty revenue is recognized upon the sale of the related products,provided the royalty amounts are fixed or determinable and collection of therelated receivable is reasonably assured.

 

For the three and nine-month periods ended September 30, 2005 and2004, we recognized no revenue.

 

***Clinical TrialAccrual***

 

We accrue the estimated cost of our clinical trials including costs ofpatient recruitment and related supporting functions for our clinical trial aspatients are enrolled in the trial. We accrue the costs for the trials based onpercentage of completion of the contract entered into. In the past, ourestimates have been materially accurate with the actual costs incurred and billingsreceived. These costs consist primarily of payments made to the clinicalcenters and investigators for participating in our clinical trial. As actual orexpected costs become known, they may differ from estimated costs previouslyaccrued for and this clinical trial accrual would be adjusted accordingly.

 

***SignificantJudgments and Estimates***

 

The preparation of our consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresthat we make estimates and assumptions that affect the reported amounts and disclosureof certain assets and liabilities at our balance sheet date and the amount ofrevenue and expenses during the period. Such estimates include the carryingvalue of property and equipment and the value of certain liabilities. Actualresults may differ from such estimates.

 

**Results of Operations**

 

***Three-month periodended September 30, 2005 as compared to the three-month period endedSeptember 30, 2004***

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Percent Change** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| ** **                  | ** ** | **2005**                                  | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
|                        |       |                                      |       |               |       |   |   |
| Revenue                     |       | $                                         | —     |               | $          | — |   | — | % |
| Total  revenue              |       | —                                    |       | —             |       | — |   |
| Research and  development   |       | 5,636,920                                 |       | 3,398,493          |       | 65.9 |   |
| General and  administrative |       | 1,242,141                                 |       | 941,920            |       | 31.9 |   |
| Total  operating expenses   |       | 6,879,061                                 |       | 4,340,413          |       | 58.5 |   |
| Interest  income            |       | 163,172                                   |       | 46,530             |       | 250.7 |   |
| Net loss                    |       | $                                         | (6,715,889 | )                  | $          | (4,293,883 | ) | 56.4 | % |

 

11

----

 

***Nine-month periodended September 30, 2005 as compared to the nine-month period endedSeptember 30, 2004***

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** **  | **Percent Change** | ** ** |
|-----------------------------|------------|------------------------------------------|-------------|--------------------|------------|
| ** **                  | ** ** | **2005**                                 | ** **  | **2004**           | ** ** | **2005/2004** | ** ** |
|                        |       |                                     |        |               |       |   |   |
| Revenue                     |       | $                                        | —      |               | $          | — |   | — | % |
| Total  revenue              |       | —                                   |        | —             |       | — |   |
| Research and  development   |       | 13,250,507                               |        | 7,628,886          |       | 73.7 |   |
| General and  administrative |       | 3,913,080                                |        | 2,906,753          |       | 34.6 |   |
| Total  operating expenses   |       | 17,163,587                               |        | 10,535,639         |       | 62.9 |   |
| Interest  income            |       | 389,074                                  |        | 98,919             |       | 293.3 |   |
| Net loss                    |       | $                                        | (16,774,513 | )                  | $          | (10,436,720 | ) | 60.7 | % |

 

 

***Revenue***

 

We recorded no revenue during the three and nine-month periods endedSeptember 30, 2005 and 2004.

 

***Operating Expenses***

 

***Research anddevelopment***

 

During the three and nine month periods ending September 30, 2005and 2004, the majority of our research and development efforts have beenfocused on the preclinical and clinical development of talabostat. The expensedisclosed for research and development in our financial statements hasprimarily been directed towards developing talabostat, with the exception ofapproximately $514,000 and $150,000 spent during the first nine months of 2005and 2004 respectively, on external experiments for one of our other DPPinhibitors in preclinical development—PT-630 for type 2 diabetes.

 

In 2004, we initiated four Phase 2 clinical trials of talabostat. Thetrials are studying talabostat in combination with docetaxel in metastaticNSCLC, talabostat as a single agent in metastatic melanoma, talabostat incombination with cisplatin in metastatic melanoma, and talabostat incombination with rituximab in advanced CLL. In June 2005, we initiated afifth Phase 2 clinical trial to study talabostat in combination withgemcitabine in patients with metastatic pancreatic cancer.

 

In addition, during 2004 and 2005, we incurred expenses related to ourtwo other DPP inhibitors in preclinical development—PT-630 for type 2 diabetes,and PT-510 as a vaccine adjuvant.

 

Research and development expenses increased 65.9% to $5,637,000 for thethree-month period ended September 30, 2005 from $3,398,000 for thethree-month period ended September 30, 2004. Research and developmentexpenses increased 73.7% to $13,251,000 for the nine-month period endedSeptember 30, 2005 from $7,629,000 for the nine-month period endedSeptember 30, 2004.

 

 
| ** **                      | ** ** | **Three-months ended September 30,** | ** ** | **Percent Change** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| **Research and development**    | ** ** | **2005**                                  | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
| Drug  development               |       | $                                         | 4,597,841  |               | $          | 2,815,600 |   | 63.3 | % |
| Preclinical  development        |       | 1,039,079                                 |       | 582,893            |       | 78.3 |   |
| Total  research and development |       | $                                         | 5,636,920  |               | $          | 3,398,493 |   | 65.9 | % |

 

 
| ** **                      | ** ** | **Nine-months  ended September30,** | ** ** | **Percent  Change** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|---------------------|------------|
| **Research and development**    | ** ** | **2005**                            | ** ** | **2004**            | ** ** | **2005/2004** | ** ** |
| Drug development                |       | $                                   | 10,370,100 |                | $          | 5,632,186 |   | 84.1 | % |
| Preclinical  development        |       | 2,880,407                           |       | 1,996,700           |       | 44.3 |   |
| Total  research and development |       | $                                   | 13,250,507 |                | $          | 7,628,886 |   | 73.7 | % |

 

*Drug development:*Drug development expenses include costs of drug development and conductingclinical trials. Such costs include costs of personnel (including salary,fringe benefits, recruiting and relocation costs), external clinical testingand monitoring, drug supply, analytical testing costs and facility expenses,including depreciation.

 

Drug development expenses increased 63.3% to $4,598,000 for thethree-month period ended September 30, 2005 from $2,816,000 for thethree-month period ended September 30, 2004.  The increase wasprimarily due to increased external clinical and manufacturing costs($1,336,000) resulting from expenses incurred for analytical developmentactivities related to our clinical drug supply, expenses related to our fivePhase 2 clinical trials and start-up expenses related to our Phase 3 clinical trialwhich was initiated in the fourth

 

12

----

 

quarter of 2005. We also added seven employees during the first ninemonths of 2005 in order to internally manage the clinical trial process fortalabostat bringing the total employees in this area to sixteen.

 

For the nine-month period ended September 30, 2005, drugdevelopment expenses increased 84.1% to $10,370,000 from $5,632,000 for thenine-month period ended September 30, 2004.  The increase wasprimarily due to increased external clinical and manufacturing costs($3,644,000) resulting from expenses incurred for clinical trial costs relatedto our five Phase 2 clinical trials and start-up expenses related to our Phase3 clinical trial which was initiated in the fourth quarter of 2005, andanalytical development activities related to our clinical drug supply.  In addition, we have increased the number of employeesin this area, as noted above.

 

During the remainder of 2005, we anticipate that our drug development expenseswill continue to increase due to ongoing costs of our five Phase 2 talabostatclinical studies and expenses related to the Phase 3 clinical trial in NSCLCwhich was initiated in the fourth quarter of 2005. In addition, we currentlyanticipate hiring six additional employees in this area to manage our plannedPhase 3 clinical program, bringing the total employees in the drug developmentarea to twenty-two.

 

*Preclinical Development:*Preclinical development includes expenses associated with research and testingof our product candidates prior to reaching the clinical development stage.Such expenses primarily include the costs of internal personnel, outsidecontractors, facilities, including depreciation, and lab supplies.

 

Preclinical development expenses increased 78.3% to $1,039,000 for thethree-month period ended September 30, 2005 from $583,000 for thethree-month period ended September 30, 2004. The increase was primarilydue to external research collaborations to support talabostat ($248,000),increased lab supplies and services ($115,000) to support our clinical trialprogram and external research activities to support our preclinical researchfor PT-630 ($44,000).  In addition, we added two employees to ourpreclinical development group for the first nine months of 2005 bringing thetotal employees in this area to nine.

 

Preclinical development expenses increased 44.3% to $2,880,000 for thenine-month period ended September 30, 2005 from $1,997,000 for thenine-month period ended September 30, 2004. The increase was primarily dueto an increase in external research activities to support our preclinicalresearch for PT-630 ($364,000) and external research collaborations to supporttalabostat ($327,000).  In addition, as mentioned above, we added twoemployees to our preclinical development group bringing the total employees inthis area to nine.

 

During the remainder of 2005, we anticipate that preclinical expenseswill increase over 2004 levels due to additional external researchcollaborations to support our clinical program.  We also anticipateincreasing the total employees in this area from nine to ten.

 

***General andadministrative***

 

*General and administrative:*General and administrative costs include the associated administrative costsrequired to support the clinical development and research efforts includinglegal, patent, finance & accounting, business development, investorrelations and other administrative support functions.

 

General and administrative expenses increased 31.9% to $1,242,000during the three-month period ended September 30, 2005 from $942,000 forthe three-month period ended September 30, 2004. The increase wasprimarily due to increased salaries and fringe benefits ($67,000) due to thehiring of four new employees and increased facility costs ($78,000) resultingfrom expenses related to our new offices and move/close out expenses related toour previous offices.

 

General and administrative expenses increased 34.6% to $3,913,000during the nine-month period ended September 30, 2005 from $2,907,000 forthe nine-month period ended September 30, 2004.   The increasewas primarily due to salaries and related fringe benefits ($391,000) due to thehiring of four employees and increased bonuses in 2005 as compared to2004.  In addition, we recorded non-cash charges for stock compensation($229,000) relating to the extension of the exercise period for a formerexecutive’s stock option award and a stock option grant to a consultant.

 

During the remainder of 2005, we anticipate that general and administrativeexpenses will increase moderately from 2004 levels as we plan to continue toexpand our business development and investor relations efforts.  We alsoanticipate hiring one additional employee to support our Phase 3 clinicalprogram and other administrative functions in the general and administrativearea bringing total employees in this area to twelve.

 

***Interest Income***

 

Interest income includes interest earned on invested cash balances.During the nine-month periods ended September 30, 2005 and 2004, ourinvestments consisted entirely of funds deposited in money market funds.

 

Interest income increased to $163,000 in the three-month period endedSeptember 30, 2005 from $47,000 in the three-month period endedSeptember 30, 2004. Interest income increased to $389,000 in thenine-month period ended September 30, 2005 from $99,000 in the nine-monthperiod ended September 30, 2004. The increase in interest income in bothperiods resulted from a higher average cash balance and a slightly higherinterest rate.

 

13

----

 

***Net loss***

 

As a result of the foregoing, we incurred a net loss of $6,716,000, or$0.29 per common share, for the three-month period ended September 30,2005 compared to a net loss of $4,294,000, or $0.24 per common share, for thethree-month period ended September 30, 2004 and a net loss of $16,775,000or $0.77 per common share for the nine-month period ended September 30,2005 as compared to a net loss of $10,437,000 or $0.61 per common share for thenine-month period ended September 30, 2004.

 

**Liquidity and Capital Resources**

 

We have financed our operations since inception principally through thesale of equity securities and collaboration payments received frompharmaceutical companies. Since our inception in September 1996, we haveraised approximately $50,027,000, net of costs of raising capital, in equityfinancings and $7,515,000 from licensing and sponsored research collaborationswith pharmaceutical companies. In addition, we received $14,335,000 as a resultof the merger between Point Massachusetts and HMSR in March 2002. We havealso received $1,528,000 from interest earned in invested cash balances and$4,970,000 in proceeds from warrant and stock option exercises.

 

On March 4, 2005, we consummated a registered direct placement of3,650,000 shares of our common stock at a price of $4.50 per share, resultingin gross proceeds to us of $16,425,000. After placement agent fees of$1,149,500 and other expenses for legal, accounting and printing fees of$244,500, net proceeds to us were $15,031,000. The offered shares areregistered pursuant to our $50,000,000 shelf registration statement that wasdeclared effective by the Securities and Exchange Commission onJanuary 12, 2005.

 

At September 30, 2005, our cash and cash equivalents increased by$4,663,000 to $18,569,000 as compared to $13,906,000 at December 31, 2004.The increase was primarily due to net proceeds totaling $15,031,000 resultingfrom the sale of 3,650,000 shares of common stock in the recent placement andproceeds from warrant and stock option exercises of $4,226,000 offset in partby $14,368,000 used in operations and other items for the nine month periodended September 30, 2005, primarily to fund the clinical program fortalabostat and our other research and development initiatives. We alsoincreased our investment in office and laboratory equipment by $234,000 from$539,000 at December 31, 2004 to $773,000 at September 30, 2005. Theincrease resulted from purchases of laboratory equipment, computers andfurniture.

 

Since inception, we have incurred $45,474,000 in expenses on researchand development activities. Almost all of our research and development effortshave primarily been focused on the preclinical and clinical development oftalabostat for the treatment of solid tumors, hematologic malignancies andhematopoietic disorders with the exception of approximately $821,000 incurredduring 2004 and 2005 for our two other DPP inhibitors.

 

Since inception, we have incurred operating expenses of $65,430,000 andhave accumulated a deficit as of September 30, 2005 of $56,469,000. AtSeptember 30, 2005, we had $18,569,000 in cash and cash equivalents. Wecurrently anticipate that our existing capital resources and interest to bereceived on invested cash balances should enable us to maintain our current andplanned operations into the second quarter of 2006. We are currentlyconsidering several strategic options in order to ensure the continued fundingof our operations including, but not limited to, the sale of securities in bothpublic and private offerings as market conditions allow, raising additionalfunds through corporate collaborations as well as merger and acquisitionactivities and consolidations. There can be no assurance that a transactionwill be consummated in a reasonable time frame or on terms acceptable to us.Should we be unable to raise sufficient funds, we may be required to curtailour operations during 2006. In addition, increases in expenses or delays inproduct development not currently forecasted or anticipated may adverselyimpact our cash position and require further cost reductions.

 

Our expectations regarding our rate of spending and the sufficiency ofour cash resources over future periods are forward-looking statements. Ourfunding requirements are expected to increase over the next several years as wecontinue with the clinical development of talabostat and initiate humanclinical trials for additional clinical indications for talabostat, PT-630 andPT-510 and additional product candidates. The rate of spending and sufficiencyof such resources will be affected by numerous factors including the success ofour clinical trials and the rate of acquisition of new products andtechnologies. Success in early-stage clinical trials or acquisition of newproducts and technologies would lead to an increase in working capitalrequirements. Our actual cash requirements may vary materially from those nowplanned because of the results of research and development, clinical trials,product testing, relationships with strategic partners, acquisition of newproducts and technologies, changes in the focus and direction of our researchand development programs, competitive and technological advances, the processof obtaining United States Food and Drug Administration or other regulatoryapprovals and other factors.

 

14

----

 

**Contractual Obligations**

 

As of September 30, 2005, we had future payments required undercontractual obligations and other commitments approximately as follows:

 
| ** **                | ** ** | **Payments Due By Year** | ** ** |
|---------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **Q4 2005**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Capital  Leases           |       | $                        | 3,178      |   | $ | 7,627 |   | $ | 4,449 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating  Leases         |       | 37,712                   |       | 406,383 |   | 398,008 |   | 391,311 |   | 391,311 |   | 195,656 |   |
| Licensing  Obligations    |       | 50,000                   |       | 10,000 |   | 10,000 |   | 10,000 |   | 10,000 |   | 27,895 |   |
| Total Future  Obligations |       | $                        | 90,890     |   | $ | 424,010 |   | $ | 412,457 |   | $ | 401,311 |   | $ | 401,311 |   | $ | 223,551 |   |

 

 

In connection with the subleases for our offices at 125 Summer Streetin Boston, we issued two letters of credit on April 11, 2002 andJanuary 8, 2004 in the amounts of $80,168 and $5,833, respectively. Theletters of credit are renewable annually on April 11 and January 8,respectively for the terms of the subleases with the landlords.   Theletter of credit in the amount of $80,168 was terminated in September2005.  The letters of credit in theamount of $5,833 will be cancelled upon the termination of our remainingsublease in January 2006.   On March 28, 2005, in connection withour lease for our new corporate offices at 155 Federal Street, we issued aletter of credit in the amount of $300,000 which is renewable annually for theterm of the lease with the landlord.  All of the above described lettersof credit are collateralized by cash held in money market funds held at ourfinancial institution and are classified as restricted cash on our balancesheet at September 30, 2005 and December 31, 2004.

 

Included in the above is a payment totaling $50,000, which we arerequired to make to Tufts University School of Medicine (“Tutfs”) upon theinitiation of a Phase 3 clinical trial, which occurred in October 2005.  In addition, in accordance with the licenseagreement between us and Tufts, we are required to make payments totaling $250,000to Tufts upon commencement of marketing application of the first licensedproduct and marketing approval of the first licensed product, in addition to aroyalty based on future sales of products covered under the license agreement.

 

**Off-Balance Sheet Arrangements**

 

We had no off-balance sheet arrangements as of September 30, 2005that have or are reasonably likely to have a current or future effect on ourfinancial condition, changes in financial condition, revenue or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

 

**New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment,” which will be effective for public entities no later than the beginningof the first fiscal year beginning after June 15, 2005.  SFAS 123(R) replaces SFAS 123, “Accounting for Stock-Based Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” The new standard requires that the compensation cost relating toshare-based payment be recognized in financial statements at fair value. Assuch, reporting employee stock options under the intrinsic value-based methodprescribed by APB 25 will no longer be allowed. We have historically elected touse the intrinsic value method and have not recognized expense for employeestock options granted. We will adopt this pronouncement on January 1, 2006and are currently evaluating the impact that this pronouncement will have onour consolidated financial statements.

 

In May 2005, the FASB issued Statement No. 154, “Accounting Changes andError Corrections” (“SFAS No. 154”), which will require entities thatvoluntarily make a change in accounting principle to apply that changeretrospectively to prior periods’ financial statements, unless this would beimpracticable. SFAS No.154 supersedes Accounting Principles Board Opinion No.20, “Accounting Changes”** **(“APB 20”), whichpreviously required that most voluntary changes in accounting principle berecognized by including in the current period’s net income the cumulativeeffect of changing to the new accounting principle. SFAS No.154 also makes adistinction between “retrospective application” of an accounting principle andthe “restatement” of financial statements to reflect the correction of anerror. Another significant change in practice under SFAS No.154 will be that ifan entity changes its method of depreciation, amortization, or depletion forlong-lived, nonfinancial assets, the change must be accounted for as a changein accounting estimate. Under APB 20, such a change would have been reported asa change in accounting principle. SFAS No.154 applies to accounting changes anderror corrections that are made in fiscal years beginning after December 15,2005.

 

**Certain Factors that May Effect FutureOperating Results**

 

We operate in a rapidly changing environment that involves a number ofrisks, some of which are beyond our control. The following discusses theserisks. The risks and uncertainties described below are those that we currentlybelieve may materially affect us. Additional risks and uncertainties that weare unaware of or that we currently deem immaterial also may become importantfactors that affect us.

 

***If we fail to obtainthe capital necessary to fund our operations, we will be unable to successfullydevelop or commercialize talabostat***

 

As of September 30, 2005, we had a cash balance of approximately$18.5 million. We currently anticipate spending during the next twelvemonths, an average of at least $2.5 million per month to fund ourpreclinical and clinical programs and related general and administrativeactivities.Our current cash balance is expected to be sufficient to allow us tomaintain our current and planned operations into the first half of 2006. It isdifficult to estimate at this time the additional funds required to finance ouroperations as we are currently uncertain about the therapeutic indications thatwe will continue to clinically develop into later stages, the extent of theclinical program required to successfully develop a selected therapeuticindication, and if any of these programs will eventually be financed through acollaboration with a better funded partner. Also, we do not know whether

 

15

----

 

additional funding will be available when needed, or that, ifavailable, we will be able to obtain funding on satisfactory terms. We haveincurred approximately $65.4 million of expenses since inception throughSeptember 30, 2005, and expect our capital outlays and operatingexpenditures to increase over the next several years as we expand ourinfrastructure and preclinical and clinical trial activities. We may raise thesefunds through corporate partnerships, additional sales of securities in bothpublic and private offerings as market conditions allow, and merger andacquisition activities and consolidations.

 

In addition to the progress of our preclinical and clinical effort, ourfuture capital requirements depend on many other factors, including: the costand timing of regulatory approvals of talabostat, technological advances, thereevaluation of the commercial potential of talabostat in light of developmentsin our industry or market, the status of competitive products, the establishmentof a sales force and the development of manufacturing capacity. Unexpectedevents or other factors beyond our control could also impact our capitalrequirements.

 

We may be required to relinquish rights to our technologies ortalabostat, or grant licenses on terms that are not favorable to us, in orderto raise additional funds through alliance, joint venture and licensingarrangements. If adequate funds are not available, we will be required todelay, reduce the scope of or eliminate one or more of our preclinical andclinical programs.

 

***Our lead product*candidate, talabostat, is in human clinical development, and its safety andeffectiveness are still being determined**

 

Our lead product candidate, talabostat, is currently undergoingevaluation in clinical trials for the treatment of certain solid tumors andhematologic malignancies. To obtain regulatory approval for the commercial saleof talabostat for its intended therapeutic applications, we must demonstrate incarefully controlled and well-designed clinical trials that talabostat is safeand effective in humans for the proposed therapeutic indications. In additionto animal safety studies, we have conducted Phase 1 human clinical safetystudies, both in single and multiple doses, which have provided us sufficientsafety information to select dose ranges for our Phase 1 human clinical dosefinding studies. These Phase 1 dose finding studies have, in turn, provided ussafety and effectiveness information to select doses for our Phase 2 humanclinical studies which are evaluating safety and effectiveness of talabostat inlarger cohort groups. Although with the completion of each of our humanclinical studies we are learning more about the safety profile of talabostat,we cannot yet predict whether subjects in clinical trials will sufferunacceptable health consequences related to talabostat. In addition, success inpreclinical testing and early clinical trials does not ensure that laterclinical trials will be successful, and interim results of clinical trials donot necessarily predict final results. A number of biotechnology companies havesuffered significant setbacks in advanced clinical trials, even after promisingresults in earlier clinical trials. Our clinical trials may be suspended at anytime if the FDA or we believe that the participating subjects are exposed tounacceptable health risks. In addition, we cannot yet predict whethertalabostat will be effective treating the therapeutic applications for whichthe human clinical studies we are conducting have been designed or thatphysicians or the FDA will consider talabostat effective for such therapeuticapplications. In addition, even if talabostat is shown to be effective in ourclinical trials, we cannot predict whether the FDA will determine that thetherapeutic benefits of talabostat outweigh any perceived adverse effects ofthe drug. If talabostat is not safe or effective, or is perceived as not beingsafe or effective by the FDA or physicians, our business, financial condition,results of operations and prospects will be harmed.

 

***Our lead productcandidate, talabostat, is in human clinical development, and we may not be ableto design or implement an effective clinical development plan which will resultin timely FDA approval for the selected therapeutic applications***

 

Our lead product candidate, talabostat, is currently undergoingevaluation in clinical trials for the treatment of certain solid tumors andhematologic malignancies. Conducting clinical trials is a lengthy and highlyuncertain process. The length of time to complete clinical trials variesaccording to the type, complexity, novelty and intended use of the productcandidate. We may not have designed our clinical trials in a way that resultsin their fastest completion because of unforeseen safety or effectivenessissues. Our trials may take longer to complete than we anticipate because of aslower than expected rate of eligible subject recruitment in the trials. If ourclinical trials take longer than we expect, we may have greater expenses thanwe project and may have a more difficult time raising additional capital tofund future or even existing capital requirements.

 

Even if we are able to conduct our clinical trials in a timely manner,other factors related to the conduct of the trials could still adversely affectour chances of obtaining FDA approval. We may not be able to adequately followor evaluate the subjects of the clinical trials after their treatment toestablish a positive therapeutic effect. We may not be able to maintain a databaseof sufficient integrity to track safety and effectiveness information oftreated subjects that would withstand appropriate FDA scrutiny. We, or ourchosen vendors, may fail to comply with FDA regulations for good clinicalpractices.

 

If we obtain FDA approval for one or more therapeutic indications, wemay then elect to perform further clinical studies intended to broaden thelabeling indications. If such studies do not support expanding the labelingindications, our ability to promote and market such products will be limited.

 

***If talabostat is nota successful drug candidate, and we are unable to obtain or successfullydevelop other potential drug candidates, we may be adversely affected***

 

In addition to our substantial efforts developing talabostat on apreclinical and clinical basis, we from time to time evaluate new technologyopportunities to broaden our portfolio of potential drug candidates, includingin-licensing opportunities, collaboration

 

16

----

 

arrangements as well as more expansive corporate relationships, such asmergers and acquisitions. However, we may not be able to consummate atransaction to broaden our portfolio of potential drug candidates on termssatisfactory to us. If talabostat is not ultimately a successful drug candidateand we cannot obtain other potential drug candidates through one or morestrategic transactions, our business, financial condition and results ofoperations and prospects will be harmed.

 

***We have had ahistory of losses, and expect to continue to incur losses and may not achieveor maintain profitability***

 

As of September 30, 2005, we had an accumulated deficit ofapproximately $56.5 million. The extent of our future losses and thetiming of profitability are highly uncertain, and we may never achieveprofitable operations. We have not had any products that have generated anysales revenue, and we likely will not until talabostat or any other of ourproducts become commercially available, if ever. We expect to incur losses atleast until we begin commercial sales of our first approved product, if any. Weexpect that our operating expenses will increase and accelerate as ourpreclinical, clinical and support operations expand, even if we succeed indeveloping one or more commercial products. Our ability to achieve productrevenue and profitability is dependent on our capability, alone or withpartners, to successfully complete the development of talabostat, conductclinical trials, obtain necessary regulatory approvals, and manufacture,distribute, market and sell talabostat. We cannot provide assurance that wewill generate product revenues or achieve profitability.

 

***If Tufts UniversitySchool of Medicine terminates our license, we could experience delays or beunable to complete the development and commercialization of our potentialproducts***

 

We license key technology including the rights to talabostat, our leadproduct, from Tufts University School of Medicine (“Tufts”). The underlyinglicenses for this technology terminate on the later of the date of thelast-to-expire patents, or 15 years from the date of initial commercialsale of the licensed product. Termination of these licenses prior to or uponexpiration of the term could force us to delay or discontinue our developmentand commercialization programs. Pursuant to the terms of the license, Tufts hasthe right to terminate the license prior to expiration of the term upon amaterial breach of the license by us, our ceasing to do business or becominginsolvent, or our failure to sell a licensed product in the U.S. market byMay 2009. We have no assurance that we would be able to license substitutetechnology in the future. Our inability to do so could impair our ability toconduct our business because we may lack the technology, the necessary rightsto such technology, or the finances required, in each case, to develop andcommercialize our potential products.

 

***If we fail to obtainregulatory approval for talabostat in a timely manner, our operating resultsand business may be adversely affected***

 

We must obtain regulatory approval before marketing or sellingtalabostat in any major world pharmaceutical market for any therapeuticapplication for talabostat. Due to risks and uncertainties inherent in clinicaltesting and the regulatory process, we are not able to estimate when talabostatmay be commercially available for any application, if at all.

 

In the U.S., we must obtain FDA approval for talabostat and eachindication that we intend to commercialize. The FDA approval process istypically lengthy and expensive, and such approval is never certain and entailsa high degree of risk. Products marketed, manufactured or distributed abroadare also subject to foreign government regulation. Talabostat has not receivedregulatory approval to be commercially marketed and sold for any therapeuticindication. If we fail to obtain regulatory approval, we will be unable tomarket and sell talabostat. We cannot predict with certainty if or when wemight submit talabostat for regulatory approval for any therapeutic indication.Once we submit talabostat for review, we cannot assure you that the FDA orother regulatory agencies will grant approvals on a timely basis or at all. Ifregulatory approval for any therapeutic application for talabostat is delayed,our business, financial condition or results of operations would be materiallyadversely affected.

 

***Because we rely onthird parties to conduct human clinical studies, we may encounter delays inproduct development and commercialization***

 

We have relatively few employees and do not have sufficient internalresources or experience to conduct human clinical trials completely on our own.We must therefore contract with third parties to perform the clinical trialsneeded for us to submit talabostat to the FDA for marketing approval.

 

Although we continue to increase our internal clinical developmentcapability, including our ability to supervise, manage and, as necessary,replace outside vendors, we still outsource a substantial amount of the clinicaltrial development process. Thus, we may lose control over the cost of and timerequired to conduct these studies. In addition, these third parties might notconduct our clinical trials in accordance with regulatory requirements. Thefailure of any contractor to carry out its contractual duties could delay orincrease the cost of the successful development and commercialization oftalabostat.

 

17

----

 

***We may fail toadequately protect or enforce our intellectual property rights, and ourproducts and processes may infringe the intellectual property rights of others***

 

Protection of our compounds and technology owned or licensed by us isessential to our business. Our policy is to protect our technology by, amongother things, filing or causing to be filed on our behalf patent applicationsfor technology relating to the development of our business. We own or havelicensed 16 issued U.S. patents and 14 pending U.S. patent applications. Mostof these patents and patent applications relate to our oncology, diabetes andvaccine adjuvant technologies. If regulatory extensions are not taken intoaccount, one U.S. patent expires in 2007; one U.S. patent and one applicationexpire in 2011; one U.S. patent expires in 2012; and the remaining patents andapplications expire in 2016 and beyond. We also own or have licensed foreignpatents and patent applications corresponding to most of the U.S. patents andpatent applications. It is possible that no patents will be issued on ourpending patent applications, and it is possible that our patent claims, now orin the future issued, will not be sufficient to protect our products andtechnology, will not be sufficient to provide protection against competitiveproducts, or otherwise will not be commercially valuable. Any patents issued toor licensed by us could be challenged, invalidated, infringed, circumvented orheld unenforceable.

 

Our commercial success will also depend in part on our ability tocommercialize talabostat without infringing on patents or other proprietaryrights of others. Talabostat or our other drug candidates may infringe currentor future patents or other proprietary rights of others. To date, we have notreceived any communications from third parties nor are we aware of any claimsby third parties that talabostat or any of our other activities infringe uponthe patent or other proprietary rights of any third party. However, we cannotassure you that other companies or individuals have not or will not independentlydevelop substantially equivalent proprietary rights or that other parties havenot or will not be issued patents that may prevent the sale of our products orrequire licensing and the payment of significant fees or royalties in order forus to be able to carry on our business. If we are successful in the preclinicaland clinical development of PT-630, our lead drug candidate for the treatmentof type 2 diabetes, to market and sell that drug we may need to obtain at leasta non-exclusive license for relevant use patents from third parties, and therecan be no assurance that we will be able to obtain that license on economicallyfavorable terms. We from time to time engage in discussions with Tufts, otherlicensors, vendors and other parties about the scope and enforceability of ourcontractual rights that may include utilization of dispute resolutionprocedures contained in applicable agreements. Otherwise, we have not notifiedany third party that they are infringing any of our proprietary rights.

 

Litigation or other legal proceedings could result in substantial coststo us and may be necessary to enforce any of our patents or other proprietaryrights or to determine the scope and validity or enforceability of otherparties’ proprietary rights. The defense and enforcement of patent andintellectual property claims are both costly and time consuming, even if thelegal outcome is favorable to us. Any adverse legal outcome could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from third parties, or require us to cease manufacturing or sellingour future products.

 

Our employees, consultants and advisors are required to enter intowritten confidentiality agreements that prohibit the disclosure or use ofconfidential information. We also have entered into written confidentialityagreements that are intended to protect our confidential information deliveredto third parties for research and other purposes. However, these agreementscould be breached, and we may not have adequate remedies for any breach, or ourtrade secrets and proprietary information could otherwise become known or beindependently discovered by others. We have not notified any person of aviolation of a confidentiality agreement that has materially harmed ourbusiness.

 

***If our competitorsreach the market sooner or develop products and technologies that are moreeffective, less costly, or have reduced side effects, our commercialopportunity will be reduced or eliminated***

 

The pharmaceutical and biotechnology industries are intenselycompetitive. There are existing products on the market, including generics,that are used for the treatment of subjects with the same indications that wehave targeted including, among others, Chiron’s Proleukin®, Bayer’s DTIC-Dome®,Sanofi-Aventis’ Taxotere®, Bristol-Myers Squibb’sParaplatin® and Platinol AQ®,AstraZeneca’s Iressa®, Amgen Inc.’s Aranesp®, Neupogen® and Neulasta®,GSK’s Bexxar®, OSI Pharmaceutical’s/Genentech’sTarceva®, Eli Lilly’s Alimta® and Gemzar®, Genzyme’s/Berlex’sCampath®, JNJ’s Procrit®,and Biogen-IDEC’s Zevalin® and Roche / Genentech / Biogen-IDEC’s Rituxan®/MabThera®. There arealso several other potential competitive products in development at othercompanies. If any of these products are successful in the clinic, we mayexperience additional competition. Because talabostat is still in clinicaldevelopment, we do not have the sales, marketing, manufacturing or distributioncapabilities necessary to compete with well-established companies. If talabostatis approved by the FDA for one or more therapeutic applications, we may enterinto collaboration agreements with one or more established companies in orderto compete in the marketplace. There can be no assurances that we would be ableto successfully enter into any such collaborations with third parties or thatany such collaborations would be entered into on terms satisfactory to us.

 

There are also many public and private pharmaceutical companies,biotechnology companies, public and private universities, governmental agenciesand research organizations actively engaged in drug discovery and research anddevelopment of products for the treatment of subjects with the same indicationsthat we have targeted. Many of these organizations have financial, technical,regulatory, patenting, manufacturing and marketing resources that are fargreater than ours. If a competitor were to successfully

 

18

----

 

develop or acquire rights to a similar or more effective treatment ofsubjects with the same indications targeted by us or one that has reduced sideeffects or offers significantly lower costs of treatment, or were tosuccessfully enter the market in advance of us with a similar or superiortherapy, our business, financial condition or results of operations could bematerially adversely affected.

 

We cannot provide assurances that research and development by otherswill not render our technology or talabostat obsolete or non-competitive orresult in treatments superior to any therapy or drug developed by us, or thatany drug or therapy developed by us will be preferred to any existing or newlydeveloped technologies.

 

***Our manufacturingstrategy presents a number of risks***

 

We do not currently have our own manufacturing facilities. We expect inthe future to depend on outside contractors for the manufacture of talabostat.Completion of our clinical trials and the commercialization of talabostat willrequire access to, or development of, manufacturing capabilities.

 

We have entered into short-term arrangements with third parties withrespect to the manufacture of the quantities necessary for preclinical andclinical development. As we approach later-stage clinical development andcommercialization of a product candidate, however, our intention is to enterinto longer-term arrangements with multiple manufacturing sources. We may notbe able to enter into additional third-party manufacturing arrangements onacceptable terms, if at all. An outside contractor may give greater priority toother products or for other reasons may fail to manufacture or deliver therequired supply of talabostat in a cost-effective or timely manner. Our currentand future manufacturers are and will be subject to ongoing periodicunannounced inspection by the FDA and corresponding state and foreign agenciesfor compliance with strictly enforced good manufacturing practice regulationsand similar state and foreign standards, and we do not have control over ourthird-party manufacturers’ compliance with these regulations and standards.

 

Any of these factors could in the future delay clinical trials orcommercialization of talabostat, interfere with sales, entail higher costs orresult in us being unable to effectively sell our products. To the extent thatwe are reliant on a sole source of supply of a drug, any interruption in thatsupply could delay us in effectively developing, testing and commercializingthe drug.

 

***Our ability togenerate revenues will be diminished if talabostat is not accepted in the marketplace,if we fail to obtain acceptable prices or if adequate reimbursement is notavailable for talabostat from third-party payors***

 

There are competing products to talabostat already in the market forthe treatment of each therapeutic indication we are currently pursuing inclinical trials. Even if approved for sale and distribution for one or moretherapeutic indications, talabostat might not achieve market acceptance forsuch indications or remain on the market. Talabostat may be rejected by the marketplacedue to many factors, including cost and the perceived risks versus the benefitsof talabostat. Physicians, subjects, payors or the medical community in generalmay be unwilling to accept, prescribe, utilize, recommend or reimburse fortalabostat for such indications.

 

Our ability to commercialize our drugs may be limited due to thecontinuing efforts of government and third-party payors to contain or reducethe costs of health care through various means. For example, in many marketsoutside the U.S., the pricing and profitability of prescription pharmaceuticalsare subject to government control. In the U.S., we expect that there willcontinue to be federal and state proposals to implement additional governmentcontrol. For example, the recently enacted Medicare Prescription Drug,Improvement, and Modernization Act of 2003 provides a new Medicare prescriptiondrug benefit beginning in 2006 and mandates other reforms. Although we cannotpredict the full effects on our business of the implementation of this newlegislation, it is possible that the new benefit will result in decreasedreimbursement for prescription drugs which may further exacerbate industry-widepressure to reduce the prices charged for prescription drugs. This could harmour ability to market talabostat and generate revenues.

 

Also, increasing emphasis on managed care in the U.S. and thepossibility of government regulation of prescription drug prices will likelycontinue to put additional pressure on the pricing of pharmaceutical products.Cost control initiatives could decrease the price that we might otherwiseachieve for talabostat in the future. Further, cost control initiatives couldadversely affect our ability to commercialize talabostat and our ability torealize profits and revenues from this commercialization.

 

Our ability to commercialize pharmaceutical products, alone or withdistributors or others, may depend in part on the extent to which reimbursementfor the products will be available from:

 

•government and health administration authorities;

 

• privatehealth insurers; and

 

• otherthird-party payors.

 

19

----

 

Significant uncertainty exists as to the reimbursement status of newlyapproved healthcare products Third-party payors, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payors increasingly are attempting to contain healthcarecosts by limiting both coverage and the level of reimbursement for new drugs andby refusing, in some cases, to provide coverage for uses of approved productsfor disease indications for which the FDA has not granted labeling approval.Third-party insurance coverage may not be available to subjects for anyproducts we discover and develop, alone or with our strategic alliancepartners. If government and other third-party payors do not provide adequatecoverage and reimbursement levels for talabostat, the market acceptance ofthese products may be reduced.

 

***We use hazardouschemicals and radioactive and biological materials in our business; anydisputes relating to improper use, handling, storage or disposal of thesematerials could be time-consuming and costly***

 

Our preclinical and clinical operations involve the use of certainhazardous materials, including certain chemicals and radioactive and biologicalmaterials. The hazardous materials used most frequently by us in our operationsinclude sodium chromate containing chromium-51 (51 Cr), nucleotides containingphosphorus-32 (32 P) and phenol. Our operations also produce hazardouswaste products. We are subject to the risk of accidental contamination ordischarge or any resultant injury from these materials, and we do not maintainliability insurance for contamination or injury resulting from the use of thematerials. Federal, state and local laws and regulations govern the use,manufacture, storage, handling and disposal of these materials. We could besubject to damages, fines and penalties in the event of an improper orunauthorized release of, or exposure of individuals to, these hazardousmaterials, and our liability could exceed our total assets. Compliance withenvironmental laws and regulations may be expensive, and current or futureenvironmental regulations may impair our business. To date, our compliancecosts with respect to environmental laws and regulations have been minimal.

 

***We may be sued forproduct or operational liability***

 

We may be held liable if any of our products or operations cause injuryor death or are found otherwise unsuitable during product testing,manufacturing, marketing or sale. We currently maintain a $2 milliongeneral liability policy and a $5 million annual aggregate productliability insurance related to our clinical trials consistent with industry standards.When necessary for our products, we intend to obtain additional productliability insurance. Insurance coverage may be prohibitively expensive, may notfully cover our potential liabilities or may not be available in the future.Inability to obtain sufficient insurance coverage at an acceptable cost orotherwise to protect against potential product liability claims could preventor inhibit the commercialization of our products. If we are sued for any injurycaused by our products, the litigation could consume substantial time andattention of our management and our liability could exceed our total assets.

 

***If we lose keypersonnel or are unable to attract or retain additional personnel, we may beunable to develop talabostat or achieve commercialization objectives***

 

We are highly dependent on Donald R. Kiepert, Jr., our Chairman,President and Chief Executive Officer, Richard N. Small, our Senior VicePresident, Chief Financial Officer and Treasurer, Margaret J. Uprichard,our Senior Vice President and Chief Development Officer, Michael P. Duffy, ourSenior Vice President, General Counsel and Secretary, Barry Jones, our SeniorVice President for Research, as well as other key members of our management andscientific staff. To date, we have not maintained key-man liability insuranceto protect against the loss of any of these personnel, with the exception ofMr. Kiepert, for whom we maintain a key-man liability insurance policy.The loss of any of these personnel may have a disruptive effect on our operationsuntil they are replaced, and may have a material adverse effect on our productdevelopment and commercialization efforts if we are not able to attractqualified replacements.

 

Our success depends on our continued ability to attract, retain andmotivate highly qualified management and scientific personnel. In particular,our preclinical and clinical operations depend on our ability to attract andretain highly skilled scientists and clinical development and regulatoryaffairs personnel. In addition, we will need to hire additional personnel anddevelop additional collaborations as we continue to expand our preclinical andclinical operations. We are not aware of any key employee who plans to retireor terminate his or her employment with us in the near future. Despite ourability in the past in attracting and retaining key personnel, we cannotprovide assurances that we will be able to continue to attract, retain ormotivate personnel or develop or maintain such outside relationships in thefuture.

 

***We have contingentliabilities relating to our historical discontinued operations that could giverise to liability risks in the future***

 

Prior to the sale of substantially all of our non-cash assets toWhatman in May of 2001, we were engaged in the business of developing andsupplying blood filtration devices. Although Whatman contractually assumed andagreed to indemnify us and hold us harmless from and against most liabilitiesand obligations arising out of the conduct of our blood filtration business, weretained certain known and unknown risks that were not contractually assumed byWhatman including without limitation, (i) any of our liabilities under anybenefit plan, (ii) tax liabilities incurred which relate to periods priorto the closing of the Whatman transaction, (iii) accounts payable arisingprior to the closing of the Whatman transaction, (iv) any of ourliabilities which were owed to our security holders in their capacity as such,and (v) our liabilities which were owed to Sepracor, Inc. arising orresulting from its

 

20

----

 

respective contractual relationships with us. If for any reason Whatmanis not able to satisfy any of the assumed liabilities, such outcome could havea material and adverse effect on our financial condition. Accordingly, therecan be no assurances that claims arising out of our historical business andoperations would not be asserted against us in the future and, if asserted,there can be no assurances that we would prevail.

 

***If we are unable tomaintain compliance with NASDAQ listing requirements, our stock could bedelisted, and the trading price, volume and marketability of our stock could beadversely affected***

 

As of April 2, 2004, our common stock began trading on the NASDAQCapital Market. Previously, our common stock was traded on the OTC BulletinBoard. There can be no assurances, however, that we will be able to maintaincompliance with NASDAQ’s present listing standards, or that NASDAQ will notimplement additional listing standards with which we will be unable to comply.Failure to maintain compliance with NASDAQ listing requirements could result inthe delisting of our shares from trading on the NASDAQ system, which could havea material adverse effect on the trading price, volume and marketability of ourcommon stock.

 

***Our stock pricecould be volatile and our trading volume may fluctuate substantially***

 

The price of our common stock has been and may in the future continueto be extremely volatile, with the sale price fluctuating from a low of $3.05to a high of $6.95 in the two-year period ended November 2, 2005.

 

In addition, the stock market has from time to time experienced extremeprice and volume fluctuations which may be unrelated to the operatingperformance of particular companies. For the three-month period ended November2, 2005, the daily trading volume for shares of our common stock ranged from900****to 503,500 shares traded perday, and the average daily trading volume during such three-month period wasonly 42,806 shares traded per day. Accordingly, our investors who wish todispose of their shares of common stock on any given trading day may not beable to do so or may be able to dispose of only a portion of their shares ofcommon stock.

 

***The subsequent saleof a substantial number of shares of our common stock could cause our stockprice to decline and cause our stockholders to experience substantial dilution***

 

In total, certain entities and individuals hold existing warrants topurchase up to 2,592,500****shares ofour common stock at a weighted average exercise price of $4.10 as of November2, 2005.  In addition, certain entitiesand individuals hold existing options to purchase 4,213,531****shares of our common stock at an averageexercise price of $ 3.76. The exercise and subsequent sale of a substantialamount of these warrants and options could adversely affect the market price ofour common stock. To the extent we raise additional capital by issuing equitysecurities, all stockholders may experience substantial dilution.

 

21

----

 

**Item 3.****                                                           QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Our proceeds to date have been invested inmoney market funds that invest primarily in short-term, highly-ratedinvestments, including U.S. Government securities, commercial paper andcertificates of deposit guaranteed by banks. Currently, we do not use interestrate derivative instruments to manage exposure to interest rate changes.Because of the short-term maturities of our investments, we do not believe thata change in market rates would have a significant impact on the value of ourinvestment portfolio. Declines in interest rates will reduce our interestincome while increases in interest rates will increase our interest income.

 

** Item 4.****                                                        CONTROLS AND PROCEDURES**

 

(a) Evaluation of disclosure controls and procedures. Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) as of September 30, 2005. Based on this evaluation, our chiefexecutive officer and chief financial officer concluded that as ofSeptember 30, 2005, our disclosure controls and procedures were(1) designed to ensure that material information relating to us is madeknown to our chief executive officer and chief financial officer by others,particularly during the period in which this report was prepared and(2) effective, in that they provide reasonable assurance that informationrequired to be disclosed by us in the reports we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms.

 

(b) Changes in internal controls. No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedSeptember 30, 2005 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

22

----

 

**PART II. OTHERINFORMATION**

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

The Annual Meeting of Stockholders was held on July20, 2005. The holders of more than a majority of the shares entitled to votewere represented at the meeting in person or by proxy, constituting a quorum.At the meeting, the following matters were voted upon by the stockholders,receiving the number of affirmative (“for”) and withheld or negative (“withheld”)votes set forth below each matter.

 

1. To consider and act upon a proposal to electseven directors for a term ending at the next annual meeting and until eachsuch director’s successor is duly elected and qualified:

 

 
| ** **              | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Abstain** | ** ** |
|-------------------------|------------|------------|------------|--------------|------------|-------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** |
| Donald R.  Kiepert, Jr. |       | 19,969,213 |       | 28,001       |       | —      |       |
|                    |       |       |       |         |       |        |       |
| Timothy J.  Barberich   |       | 19,969,578 |       | 27,636       |       | —      |       |
|                    |       |       |       |         |       |        |       |
| Richard J.  Benjamin    |       | 19,969,578 |       | 27,636       |       | —      |       |
|                    |       |       |       |         |       |        |       |
| Thomas M.  Claflin, II  |       | 19,820,278 |       | 176,936      |       | —      |       |
|                    |       |       |       |         |       |        |       |
| Larry G.  Pickering     |       | 19,969,578 |       | 27,636       |       | —      |       |
|                    |       |       |       |         |       |        |       |
| Daniel T.  Roble        |       | 18,635,236 |       | 1,361,978    |       | —      |       |
|                    |       |       |       |         |       |        |       |
| William J.  Whelan, Jr. |       | 19,933,392 |       | 63,822       |       | —      |       |

 

2. To approve an amendment to the Company’s 2003Stock Option Plan for Non-Employee Directors to increase the aggregate numberof shares of common stock authorized for issuance under such plan by 400,000shares:

 

 

| **For**    | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** |
|------------|------------|--------------|------------|-------------|------------|---------------------|
| 12,032,542 |       | 202,975      |       | 2,190       |       | 7,759,507           |

 

3. To approve the Company’s 2005 Fee Deferral Planfor Non-Employee Directors:

 

 

| **For**    | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** |
|------------|------------|--------------|------------|-------------|------------|---------------------|
| 12,048,642 |       | 180,209      |       | 8,856       |       | 7,759,507           |

 

**Item 6. Exhibits**

 
| **Exhibit****Number** | ** ** | **Description**                                                                                                                                             |
|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                  |       | Certification of Donald R. Kiepert, Jr. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9,  2005, filed herewith. |
|                  |       |                                                                                                                                                        |
| 31.2                  |       | Certification of Richard N. Small pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, dated November 9, 2005, filed herewith.                  |
|                  |       |                                                                                                                                                        |
| 32.1                  |       | Certifications pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith.        |

 

23

----

 

**SIGNATURES**

 

**Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the Registrant has duly causedthis Quarterly Report on Form 10-Q to be signed on its behalf by theundersigned, thereunto duly authorized.**

 
|                   | **POINT THERAPEUTICS, INC.** |
|------------------------|----------------------------------------|
|                   |                                   |
| Date: November 9, 2005 | By:                                    | /s/    DONALD R. KIEPERT, JR. |
|                   |                                   | **Donald R. Kiepert, Jr.****Chief Executive Officer** |
|                   |                                   |
|                   | **POINT THERAPEUTICS, INC.** |
|                   |                                   |
| Date: November 9, 2005 | By:                                    | /s/   RICHARD N. SMALL |
|                   |                                   | **Richard N. Small**  **Chief  Financial Officer** |

 

24

----