**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark one)**

**ý****     ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005**

 

**OR**

 

**o****     ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number: 0-19410**

 

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**POINTTHERAPEUTICS, INC.**

(ExactName of Registrant as Specified in Its Charter)

 
| **Delaware**                                                     | ** ** | **04-3216862**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S.  Employer  Identification No.) |
|                                                             |       |                                   |
| **125 SUMMER STREET BOSTON, MASSACHUSETTS**                      | ** ** | **02110**                              |
| (Address of Principal Executive Offices)                         |       | (Zip Code)                             |

 

**(617)933-2130**

Registrant’s Telephone Number, Including Area Code

 

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.    ý  Yes    o  No

 

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

 

As of May 6, 2005, there were 22,418,269 shares ofthe Registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

(A Development StageCompany)

 

**QUARTERLYREPORT ON FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL  INFORMATION                                                                                                                                                          |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                    |   |
| Item 1. Financial  Statements (unaudited)                                                                                                                                               |   |
|                                                                                                                                                                                    |   |
| Consolidated Balance Sheets  as of March 31, 2005 and December 31, 2004                                                                                                                 |   |
|                                                                                                                                                                                    |   |
| Consolidated  Statements of Operations for the Three Month Periods Ended March 31, 2005 and  2004 and for the Period From September 3, 1996 (Date of Inception) Through  March 31, 2005 |   |
|                                                                                                                                                                                    |   |
| Consolidated  Statements of Cash Flows for the Three Month Periods Ended March 31, 2005 and  2004 and for the Period From September 3, 1996 (Date of Inception) Through  March 31, 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 6. Exhibits                                                                                                                                                                        |   |
|                                                                                                                                                                                    |   |
| SIGNATURES                                                                                                                                                                              |   |

 

Inthis report, “Point,” “the Company,” “we,” “us” and “our” refer to PointTherapeutics, Inc.

 

2

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

 

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

 

**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **Assets**                                                                                                                                                                                                                |       |                |       |                   |       |
| Current assets:                                                                                                                                                                                                           |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                 |       | $                   | 24,837,840 |                   | $          | 13,905,993 |   |
| Restricted cash                                                                                                                                                                                                           |       | 386,001             |       | 86,001                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                                 |       | 822,838             |       | 288,511                |       |
| Total current assets                                                                                                                                                                                                      |       | 26,046,679          |       | 14,280,505             |       |
| Office and laboratory equipment, net                                                                                                                                                                                      |       | 193,270             |       | 205,323                |       |
| Other assets                                                                                                                                                                                                              |       | 4,878               |       | 10,247                 |       |
| Total assets                                                                                                                                                                                                              |       | $                   | 26,244,827 |                   | $          | 14,496,075 |   |
|                                                                                                                                                                                                                      |       |                |       |                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                             |       |                |       |                   |       |
| Current liabilities:                                                                                                                                                                                                      |       |                |       |                   |       |
| Accounts payable                                                                                                                                                                                                          |       | $                   | 1,312,148  |                   | $          | 912,942 |   |
| Accrued clinical and drug development                                                                                                                                                                                     |       | 1,228,484           |       | 1,106,057              |       |
| Accrued expenses                                                                                                                                                                                                          |       | 511,448             |       | 378,815                |       |
| Total current liabilities                                                                                                                                                                                                 |       | 3,052,080           |       | 2,397,814              |       |
| Patent liability, less current portion                                                                                                                                                                                    |       | 47,604              |       | 47,604                 |       |
| Stockholders’ equity:                                                                                                                                                                                                |       |                |       |                   |       |
| Preferred stock, $0.01 par value, 1,000,000  shares authorized; no shares issued or outstanding as of March 31, 2005 and  December 31, 2004                                                                               |       | —              |       | —                 |       |
| Common stock, $0.01 par value, 75,000,000  shares authorized, 22,415,346 shares issued and 22,243,269 outstanding at  March 31, 2005 and 18,435,375 shares issued and 18,263,298 shares outstanding  at December 31, 2004 |       | 224,154             |       | 184,353                |       |
| Treasury stock, 172,077 shares at cost, as  of March 31, 2005 and December 31, 2004                                                                                                                                       |       | (794,611            | )          | (767,338               | )          |
| Additional paid-in capital                                                                                                                                                                                                |       | 68,325,375          |       | 52,328,072             |       |
| Deficit accumulated during the development  stage                                                                                                                                                                         |       | (44,609,775         | )          | (39,694,430            | )          |
| Total stockholders’ equity                                                                                                                                                                                           |       | 23,145,143          |       | 12,050,657             |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                           |       | $                   | 26,244,827 |                   | $          | 14,496,075 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

3

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Period from Inception  (September 3, 1996)  through March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **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                                |       | 3,552,984                         |       | 2,025,617                                                         |       | 35,776,379 |   |
| General and administrative                              |       | 1,443,632                         |       | 1,127,681                                                         |       | 17,486,408 |   |
| Total operating expenses                                |       | 4,996,616                         |       | 3,153,298                                                         |       | 53,262,787 |   |
| Net loss from operations                                |       | (4,996,616                        | )          | (3,153,298                                                        | )          | (45,747,746 | ) |
|                                                    |       |                              |       |                                                              |       |   |   |
| **Interest income, net**                                |       |                              |       |                                                              |       |   |   |
| Interest income                                         |       | 81,271                            |       | 18,786                                                            |       | 1,220,623 |   |
| Interest expense                                        |       | —                            |       | —                                                            |       | (82,652 | ) |
| Total interest income, net                              |       | 81,271                            |       | 18,786                                                            |       | 1,137,971 |   |
| **Net loss**                                            |       | $                                 | (4,915,345 | )                                                                 | $          | (3,134,512 | ) | $ | (44,609,775 | ) |
|                                                    |       |                              |       |                                                              |       |   |   |
| **Net loss per common share**                           |       |                              |       |                                                              |       |   |   |
| Basic and diluted                                       |       | $                                 | (0.25      | )                                                                 | $          | (0.21 | ) |   |   |
|                                                    |       |                              |       |                                                              |       |   |   |
| **Shares used in computing net loss per  common share** |       |                              |       |                                                              |       |   |   |
| Basic and diluted                                       |       | 19,439,848                        |       | 15,168,907                                                        |       |   |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

4

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Period from  Inception  (September 3,  1996) through  March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                          | ** ** | **2004**                                                            | ** ** | **2005** | ** ** |
| **Operating activities**                                       |       |                              |       |                                                                |       |   |   |
| Net loss                                                       |       | $                                 | (4,915,345 | )                                                                   | $          | (3,134,512 | ) | $ | (44,609,775 | ) |
| Adjustments to reconcile net loss to net  cash used:           |       |                              |       |                                                                |       |   |   |
| Depreciation                                                   |       | 26,387                            |       | 24,789                                                              |       | 359,858 |   |
| Stock-based compensation expense                               |       | 112,358                           |       | 16,404                                                              |       | 808,550 |   |
| 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                                                |       | (300,000                          | )          | —                                                              |       | (386,001 | ) |
| Prepaid expenses and other current assets                      |       | (534,327                          | )          | (156,707                                                            | )          | (842,115 | ) |
| Other assets                                                   |       | 5,369                             |       | 7,398                                                               |       | (4,878 | ) |
| Accounts payable and accrued liabilities                       |       | 654,266                           |       | 946,990                                                             |       | 3,049,636 |   |
| Net cash used in operating activities                          |       | (4,951,292                        | )          | (2,295,638                                                          | )          | (40,555,839 | ) |
|                                                           |       |                              |       |                                                                |       |   |   |
| **Investing activities**                                       |       |                              |       |                                                                |       |   |   |
| Purchase of office and laboratory equipment                    |       | (14,334                           | )          | (31,471                                                             | )          | (553,128 | ) |
| Net cash used in investing activities                          |       | (14,334                           | )          | (31,471                                                             | )          | (553,128 | ) |
|                                                           |       |                              |       |                                                                |       |   |   |
| **Financing activities**                                       |       |                              |       |                                                                |       |   |   |
| Proceeds from merger between Point and HMSR  Inc.              |       | —                            |       | —                                                              |       | 14,335,285 |   |
| Proceeds from issuance of common stock, net  of issuance costs |       | 15,031,218                        |       | 12,294,662                                                          |       | 48,133,931 |   |
| Proceeds from exercise of common stock  warrants               |       | 866,255                           |       | 516,040                                                             |       | 1,597,756 |   |
| Proceeds from exercise of common stock  options                |       | —                            |       | —                                                              |       | 12,440 |   |
| Proceeds from issuance of convertible note                     |       | —                            |       | —                                                              |       | 1,892,904 |   |
| Principal payments of patent liability                         |       | —                            |       | —                                                              |       | (25,509 | ) |
| Net cash provided by financing activities                      |       | 15,897,473                        |       | 12,810,702                                                          |       | 65,946,807 |   |
|                                                           |       |                              |       |                                                                |       |   |   |
| **Net increase in cash and cash equivalents**                  |       | 10,931,847                        |       | 10,483,593                                                          |       | 24,837,840 |   |
|                                                           |       |                              |       |                                                                |       |   |   |
| **Cash and cash equivalents, beginning of  period**            |       | 13,905,993                        |       | 14,062,104                                                          |       | — |   |
|                                                           |       |                              |       |                                                                |       |   |   |
| **Cash and cash equivalents, end of period**                   |       | $                                 | 24,837,840 |                                                                | $          | 24,545,697 |   | $ | 24,837,840 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

5

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2005**

**(unaudited)**

 

**1. Nature of the Business**

 

PointTherapeutics, Inc. (the “Company” or “Point”) is a Boston-basedbiopharmaceutical company developing a family of dipeptidyl peptidase (DPP)inhibitors for a variety of cancers, certain hematopoietic disorders, type 2diabetes and as vaccine adjuvants. Point’s lead product candidate, talabostat(PT-100), is a small molecule drug in Phase 2 clinical trials. Talabostat isorally-active and, through a novel mechanism of action, has the potential toinhibit the growth of malignant tumors and to accelerate the reconstitution ofthe hematopoietic system.

 

Pointbelieves that talabostat and its other in-licensed DPP inhibitors represent alarge market opportunity because of their wide range of potential applications,including:

 

• Cancers: talabostat is being tested inclinical trials for use as a single agent and in combination withchemotherapeutic agents and monoclonal antibodies to potentially treat bothsolid tumors and hematologic malignancies. Talabostat could also be potentiallyused in combination with cancer vaccines;

• Hematopoietic Disorders: talabostat is beingtested in clinical trials to treat both neutropenia and anemia;

• Type 2 Diabetes: our preclinical productcandidate, PT-630, is being tested as a high affinity DPP-4 inhibitor to treattype 2 diabetes; and

• Vaccine Adjuvants: our preclinical productcandidate, PT-510, is being tested as an adjuvant to improve the response todifferent vaccine regimens.

 

Thestrategy of the Company’s current clinical development program is to developthe full range of potential commercial applications of talabostat withpriorities given to the fastest-to-market applications. In 2004, Pointinitiated four Phase 2 clinical trials of talabostat which will be ongoingthrough 2005. The trials are studying talabostat in combination with Taxotere®for the treatment of advanced non-small cell lung cancer (NSCLC), talabostat asa single agent to treat advanced metastatic melanoma, talabostat in combinationwith cisplatin also to treat advanced metastatic melanoma, and talabostat incombination with rituximab to treat advanced chronic lymphocytic leukemia(CLL). The Company also plans to initiate a fifth Phase 2 clinical trial,talabostat in combination with gemcitabine to treat pancreatic cancer, by theend of the second quarter of 2005. Based upon results from our Phase 2 clinicaltrial in NSCLC, the Company is moving forward in planning a Phase 3 program forNSCLC which it plans to initiate in the second half of 2005.  The Company is also studying talabostat inclinical trials to potentially treat both neutropenia and anemia.

 

Inaddition, the Company’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 currently beingdeveloped by several pharmaceutical companies as a promising therapy to treattype 2 diabetes. PT-630 has demonstrated the ability *in vitro* to rapidly inhibit DPP-4 for a prolonged duration.Also, PT-630 has demonstrated in *in vivo*animal models increased GLP-1 and insulin levels while lowering blood glucoselevels. Point’s second preclinical DPP inhibitor, PT-510, is being developed asa potential vaccine adjuvant for both cancer and infectious disease. TheCompany has preclinical proof of principle data that indicates PT-510upregulates both cytokines and chemokines which are believed to be critical forthe induction of an immune response.

 

Inaddition to these product opportunities, the Company from time to timeevaluates new technologies to broaden its portfolio of potential products,including in-licensing, collaboration arrangements, as well as more expansivecorporate relationships, including mergers and acquisitions.

 

**2. Significant Accounting Policies**

 

**Unaudited Interim Financial Statements**

 

The accompanying unaudited interim financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States and applicable Securities and ExchangeCommission (the “SEC”) regulations for interim financial information. Thesefinancial statements are unaudited and, in the opinion of management, includeall adjustments necessary to present fairly the balance sheets, statements ofoperations, and statements of cash flows for the periods presented inaccordance with

 

6

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accounting principlesgenerally accepted in the United States. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to SEC rules and regulations. It is presumed thatusers of this interim financial information have read or have access to theaudited financial statements and footnote disclosure of Point for the yearended December 31, 2004, contained in a Form 10-K filed with the Securities andExchange Commission on March 15, 2005. Operating results for the quarter endedMarch 31, 2005 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2005.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.

 

**Reclassifications**

 

Certainamounts in 2004 have been reclassified to conform to the 2005 presentation,including the reclassification of patent expenses from research and developmentto general and administrative expenses in the Company’s statement of operations.

 

**Net Loss Per Common Share**

 

Basicand diluted net loss per common share amounts are presented in conformity withStatement of Financial Accounting Standards No. (“SFAS”) 128, “Earnings perShare”, for all periods presented. In accordance with SFAS 128, basic anddiluted net loss per common share amounts have been computed using theweighted-average number of shares of common stock outstanding for the threemonth periods ended March 31, 2005 and 2004. Potentially dilutive securities,consisting of stock options of 3,905,721 and warrants of 3,766,944 outstandingat March 31, 2005 have been excluded from the diluted earnings per sharecalculations since their effect is antidilutive.

 

**Stock-Based Compensation**

 

The Company has elected to follow Accounting PrinciplesBoard (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APBNo. 25”), in accounting for its stock-based employee compensation plansusing the intrinsic value method, rather than the alternative fair valueaccounting method provided for under SFAS No. 123, Accounting for StockBased Compensation (“SFAS No. 123”), as SFAS No. 123 requires the useof option 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 the underlyingstock 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 March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                                                                                                                           |       | $                                | (4,915,345 | ) | $ | (3,134,512 | ) |
| Less: Stock based employee compensation  cost, net of related tax effects, that would have been included in the determination  of net loss as reported if the fair value method had been applied to all  awards |       | (421,996                         | )          | (252,492 | ) |
| Pro forma net loss                                                                                                                                                                                              |       | $                                | (5,337,341 | ) | $ | (3,387,004 | ) |
| Net loss per common share, as reported                                                                                                                                                                          |       | $                                | (0.25      | ) | $ | (0.21 | ) |
| Net loss per common share, pro forma                                                                                                                                                                            |       | $                                | (0.28      | ) | $ | (0.22 | ) |

 

These proforma amounts disclosed above may not be representative of the effects forfuture years as options vest over several years and additional awards aregenerally made each year.

 

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

 

7

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| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Expected life (years)   |       | 4.00                             |       | 4.00 |   |
| Risk-free interest rate |       | 3.8                              | %          | 3.4 | % |
| Volatility              |       | 93                               | %          | 93 | % |
| Dividends               |       | None                             |       | None |   |

 

**3. New Accounting Pronouncement**

 

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,”which will be effective for public entities no later than the beginning of thefirst fiscal year beginning after June 15, 2005.   SFAS 123(R)replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” The newstandard requires that the compensation cost relating to share-based payment berecognized in financial statements at fair value. As such, reporting employeestock options under the intrinsic value-based method prescribed by APB 25 willno longer be allowed. The Company has historically elected to use the intrinsicvalue method and has not recognized expense for employee stock options granted.The Company will adopt this pronouncement on January 1, 2006 and iscurrently evaluating the impact that this pronouncement will have on itsconsolidated financial statements.

 

**4. Common Stock**

 

OnMarch 4, 2005, the Company closed on a registered direct placement of3,650,000 shares of its common stock at a price of $4.50 per share, resultingin gross proceeds to the Company of $16,425,000. After placement agent fees of$1,149,500 and other expenses for legal, accounting and printing fees ofapproximately $244,500, net proceeds to the Company was approximately$15,031,000. The offered shares are registered pursuant to Point’s $50,000,000shelf registration statement that was declared effective by the SEC onJanuary 12, 2005.

 

Asa result of this offering, 900,000 warrants with an initial exercise price of$6.25 have been repriced to $6.02 per share. These warrants were originallyissued in March 2004 and expire in 2009.

 

**5.**** ****Lease**

 

OnMarch 16, 2005, the Company entered into a lease agreement with KNH RealtyTrust, initially for approximately 15,000 square feet of office space at155 Federal Street, Boston MA. The lease term begins on June 15, 2005and expires on June 14, 2010 with the option for extension. The Companywill be relocating its corporate headquarters from 125 Summer Street, Boston MAto 155 Federal Street, Boston MA in June 2005.  In connection with this lease, the Company issueda letter of credit in the amount of $300,000 on March 28, 2005.  The letter of credit is collateralized bycash held in a money market fund at the Company’s financial institution and isclassified as restricted cash on the Company's balance sheet at March 31, 2005.The letter of credit is renewable annually in June for the term of the subleasewith the landlord.

 

AForm 8-K, with a copy of the lease agreement, was filed with the SEC on March17, 2005.

 

8

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

 

**Cautionary Factors with Respect to Forward-LookingStatements**

 

Readers are cautioned that certain statementscontained in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations 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 the prospectsfor our drug development activities and results of operations based on ourcurrent expectations, such as statements regarding certain milestones withrespect to our clinical program and our product candidates. Forward-lookingstatements are statements that are not historical facts, and can be identifiedby, 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 variations of those termsof comparable language, or by discussions of strategy or intentions. A numberof important factors could cause actual results to differ materially from thoseprojected or suggested in the forward looking statement, including, but notlimited to, our ability to (i) successfully develop products, (ii) obtain thenecessary governmental approvals, (iii) effectively commercialize any productsdeveloped before our competitors and (iv) obtain and enforce intellectual propertyrights, as well as the risk factors discussed below under the caption titled “CertainFactors That May Affect Future Operating Results”.

 

**Overview**

 

Weare a Boston-based biopharmaceutical company developing a family of dipeptidylpeptidase (DPP) inhibitors for a variety of cancers, certain hematopoieticdisorders, type 2 diabetes and as vaccine adjuvants. Our lead productcandidate, talabostat (PT-100), is a small molecule drug in Phase 2 clinicaltrials. Talabostat is orally-active and, through a novel mechanism of action,has the potential to inhibit the growth of malignant tumors and to acceleratethe reconstitution of the hematopoietic system.

 

Webelieve that talabostat and our other in-licensed DPP inhibitors represent alarge market opportunity because of their wide range of potential applications,including:

 

• Cancers: talabostat is being tested inclinical trials for use as a single agent and in combination withchemotherapeutic agents and monoclonal antibodies to potentially treat bothsolid tumors and hematologic malignancies. Talabostat could also be potentiallyused in combination with cancer vaccines;

• Hematopoietic Disorders: talabostat is beingtested in clinical trials to treat both neutropenia and anemia;

• Type 2 Diabetes: our preclinical productcandidate, PT-630, is being tested as a high affinity DPP-4 inhibitor to treattype 2 diabetes; and

• Vaccine Adjuvants: our preclinical productcandidate, PT-510, is being tested as an adjuvant to improve the response todifferent vaccine regimens.

 

Thestrategy of our current clinical development program is to develop the fullrange of potential commercial applications of talabostat with priorities givento the fastest-to-market applications. In 2004, we initiated four Phase 2clinical trials of talabostat which will be ongoing through 2005. The trialsare studying talabostat in combination with Taxotere® for the treatment ofadvanced non-small cell lung cancer (NSCLC), talabostat as a single agent totreat advanced metastatic melanoma, talabostat in combination with cisplatinalso to treat advanced metastatic melanoma, and talabostat in combination withrituximab to treat advanced chronic lymphocytic leukemia (CLL). We also plan toinitiate a fifth Phase 2 clinical trial, talabostat in combination withgemcitabine to treat pancreatic cancer, by the end of the second quarter of2005. Based upon results from our Phase 2 clinical trial in NSCLC, we aremoving forward in planning a Phase 3 program for NSCLC which we plan toinitiate in the second half of 2005.  Weare also studying talabostat in clinical trials to potentially treat bothneutropenia and anemia.

 

Inaddition, our portfolio includes two other DPP inhibitors in preclinicaldevelopment—PT-630 for type 2 diabetes, and PT-510 as a vaccine adjuvant.PT-630 has a high affinity for DPP-4 which is currently being developed byseveral pharmaceutical companies as a promising therapy to treat type 2diabetes. PT-630 has demonstrated the ability *invitro* to rapidly inhibit DPP-4 for a prolonged duration. Also,PT-630 has demonstrated in *in vivo*animal models increased GLP-1 and insulin levels while lowering blood glucoselevels. Our second preclinical DPP inhibitor, PT-510, is being developed as apotential vaccine adjuvant for both cancer and infectious disease. We havepreclinical proof of principle data that indicates PT-510 upregulates bothcytokines and chemokines which are believed to be critical for the induction ofan immune response.

 

Inaddition to these product opportunities, we from time to time evaluate newtechnologies to broaden our portfolio of potential products, includingin-licensing, collaboration arrangements, as well as more expansive corporaterelationships, including mergers and acquisitions.

 

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Ourprincipal executive office is located at 125 Summer Street, Boston,Massachusetts, 02110 and our telephone number is (617) 933-2130. The shares ofour common stock trade on the NASDAQ SmallCap Market under the symbol “POTP”.Our website address is www.pther.com.

 

Todate, we have generated no material 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 $44,610,000 through March 31, 2005. Theaccumulated deficit has resulted principally from our efforts to develop drugcandidates and the associated administrative costs required to support theseefforts. We expect to incur significant additional operating losses over thenext several years due to our ongoing developmental and clinical efforts. Ourpotential for future profitability is dependent on our ability to effectivelydevelop our current pharmaceutical product candidate, talabostat, to developother currently in-licensed product candidates, and to license and develop newpharmaceutical compounds.

 

**Critical Accounting Policies and Significant Judgmentsand Estimates**

 

***Critical Accounting Policies***

 

In December 2001, the Securities and ExchangeCommission (the “SEC”) requested that all registrants list their most “criticalaccounting policies” in Management’s Discussion and Analysis of FinancialCondition and Results of Operations. The SEC indicated that a “criticalaccounting policy” is one which is both important to the portrayal of ourfinancial condition and results and requires management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain. Oursignificant accounting policies are fully described in Note 2 to ourconsolidated financial statements, included in our Annual Report on Form 10-Kfiled with the SEC on March 15, 2005.

 

***Revenue Recognition***

 

Revenue is deemed earned when all of the followinghave occurred: there is persuasive evidence of an arrangement; all of ourobligations relating to the revenue have been met and the earning process iscomplete; the monies received or receivable are not refundable, irrespective ofresearch results; and there are neither future obligations nor futuremilestones to be met by us with respect to such revenue incurred.

 

Revenue from corporate collaborations is earnedbased upon research expenses incurred and milestones achieved. Non-refundablepayments upon initiation of contracts are deferred and amortized over theperiod which we are obligated to participate on a continuing and substantialbasis in the research and development activities outlined in each contract.Amounts received in advance of reimbursable expenses are recorded as deferredrevenue until the related expenses are incurred. Milestone payments arerecognized as revenue in the period in which the parties agree that themilestone has been achieved.

 

For the three-month periods ended March 31, 2005 and2004, we recognized no revenue.  Royaltyrevenue is recognized upon the sale of the related products, provided theroyalty amounts are fixed or determinable and collection of the relatedreceivable is reasonably assured.

 

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***Clinical Trial Accrual***

 

We accrue the estimated cost of patient recruitmentand related supporting functions for our clinical trial as patients areenrolled in the trial. We accrue the costs for the trials based on percentageof completion of the contract entered into. In the past, our estimates havebeen materially accurate with the actual billings received. These costs consistprimarily of payments made to the clinical centers, investigators and patientsfor participating in our clinical trial. As actual or expected costs becomeknown, they may differ from estimated costs previously accrued for and thisclinical trial accrual would be adjusted accordingly.

 

***Significant Judgments and Estimates***

 

The preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires that we make estimates and assumptions that affect thereported amounts and disclosure of certain assets and liabilities at ourbalance sheet date and the amount of revenue and expenses during the period.Such estimates include the carrying value of property and equipment and thevalue of certain liabilities. Actual results may differ from such estimates.

 

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**Results of Operations**

 

*** Three-month period ended March 31, 2005 ascompared to the three-month period ended March 31, 2004***

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** | **Percent Change** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**                         | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
|                       |       |                             |       |               |       |   |   |
| License revenue            |       | $                                | —     |               | $          | — |   | — | % |
| Total revenue              |       | —                           |       | —             |       | — |   |
| Research and development   |       | 3,552,984                        |       | 2,025,617          |       | 75.4 |   |
| General and administrative |       | 1,443,632                        |       | 1,127,681          |       | 28.0 |   |
| Total operating expenses   |       | 4,996,616                        |       | 3,153,298          |       | 58.5 |   |
| Interest income            |       | 81,271                           |       | 18,786             |       | 332.6 |   |
| Net loss                   |       | $                                | (4,915,345 | )                  | $          | (3,134,512 | ) | 56.8 | % |
|                            |            |                                  |            |                    |            |  |  |  |  |  |

 

***Revenue***

 

We recorded no revenue during the three-month periodsended March 31, 2005 and 2004.

 

***Operating Expenses***

 

***Research anddevelopment***

 

During the three-month periods ending March 31, 2005 and 2004, almostall of our research and development efforts have been focused on thepreclinical and clinical development of talabostat for the treatment of solidtumors, hematologic malignancies and hematopoietic disorders. We had no othermaterial research and development programs during this time period and thus theexpenses disclosed for research and development in our financial statements hasprimarily been directed towards developing talabostat, with the exception ofapproximately $203,000 spent during the first three months of 2005 on externalexperiments for one of our other DPP inhibitors in preclinicaldevelopment—PT-630 for type 2 diabetes.

 

In2004, we initiated four Phase 2 clinical trials of talabostat. The trials arestudying talabostat in combination with Taxotere® for the treatment of NSCLC,talabostat as a single agent to treat advanced metastatic melanoma, talabostatin combination with cisplatin to treat advanced metastatic melanoma, andtalabostat in combination with rituximab to treat CLL.

 

Weare also clinically developing talabostat as a potential therapy for thetreatment of hematopoietic disorders. During 2004, we completed a Phase 1 humanclinical study in which patients undergoing chemotherapy were treated withtalabostat for neutropenia.

 

Researchand development expenses increased 75.4% to $3,553,000 for the three-monthperiod ended March 31, 2005 from $2,026,000 for the three-month period endedMarch 31, 2004.

 
| ** **                     | ** ** | **Three-months ended March 31,** | ** ** | **Percent Change** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------|------------|
| **Research and development**   | ** ** | **2005**                         | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
| Clinical development           |       | $                                | 2,595,098  |               | $          | 1,249,200 |   | 107.7 | % |
| Preclinical development        |       | 957,886                          |       | 776,417            |       | 23.4 |   |
| Total research and development |       | $                                | 3,552,984  |               | $          | 2,025,617 |   | 75.4 | % |

 

*Clinical development:* Clinical development expenses include costsof drug development and conducting clinical trials. Such costs include costs ofpersonnel (including salary, fringe benefits, recruiting and relocation costs),drug supply and testing costs and facility expenses, including depreciation.Total clinical development expenses increased 107.7% to $2,595,000 for thethree-month period ended March 31, 2005 from $1,249,000 for the three-monthperiod ended March 31, 2004.

 

Theincrease in 2005 was primarily due to increased internal clinical and related manufacturingcosts of $1,075,000 related to ongoing costs for our Phase 2 clinical trials. Inaddition, bonuses incurred and paid during the first three months of 2005 wereapproximately $208,000 in this area as compared to bonuses paid and incurred inthe first three months of 2004 of $111,000 in this area.  We also added five employees during the last half of 2004 and the first three months of2005 in order to internally manage the clinical trial process fortalabostat in placeofutilizing outside contractors, bringing total employees in this area to eleven.

 

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Duringthe remainder of 2005, we anticipate that our clinical development costs willcontinue to increase due to ongoing costs of the four Phase 2 talabostatclinical studies and the initiation of a fifth Phase 2 clinical trial inpancreatic cancer by the end of the second quarter of 2005 and a Phase 3 clinicaltrial in NSCLC in the second half of 2005. In addition, we are currentlyplanning to hire eleven****additionalemployees in this area to manage our planned Phase 3 clinical program, bringingtotal employees in the clinical development area to twenty-two.

 

*Preclinical Development:* Preclinical development includes expensesassociated with research and testing of our product candidates prior toreaching the clinical development stage. Such expenses primarily include thecosts of internal personnel, outside contractors, facilities, includingdepreciation, and lab supplies.

 

Preclinicaldevelopment expenses increased 23.4% to $958,000 for the three-month periodended March 31, 2005 from $776,000 for the three-month period ended March 31,2004. The increase was primarily due to external preclinical researchexperiments totaling approximately $203,000 for our preclinical DPP inhibitor, PT-630for type 2 diabetes. In addition, bonuses incurred and paid during the first threemonths of 2005 were approximately $178,000 in this area as compared to bonusespaid and incurred in the first three months of 2004 of $159,000 in this area.

 

Duringthe remainder of 2005, we currently anticipate that preclinical expenses will increaseover 2004 levels as activity levels will increase as we anticipate additionalresearch collaborations to further explore the full capabilities of our productcandidates and increase total employees in this area from seven to ten.

 

***General and administrative***

 

*General and administrative:* General and administrative costs include theassociated administrative costs required to support the clinical developmentand research efforts including legal, finance & accounting, businessdevelopment, investor relations and other administrative support functions.

 

General and administrative expenses increased 28.0%to $1,444,000 during the three-month period ended March 31, 2005 from $1,128,000for the three-month period ended March 31, 2004. The increase was primarily dueto bonuses totaling approximately $386,000 in this area in the first threemonths of 2005 as compared to bonuses totaling approximately $251,000 in thefirst quarter of 2004. We also added three additional employees inadministration in the last half of 2004 and the first three months of 2005bringing total employees in this area to nine. In addition, we recorded anon-cash charge for stock compensation of approximately $155,000 in the first threemonths of 2005 related to the extension of the exercise period for a former executive’sstock option award.

 

During the remainder of 2005, we currentlyanticipate that general and administrative expenses will increase moderatelyfrom 2004 levels as we plan to expand our business development and investorrelations efforts by allocating additional resources. We also anticipate hiringtwo additional employees in the general and administrative area bringing totalemployees to eleven in this area to assist in supporting our Phase 3 clinicalprogram and other administrative functions.

 

***Interest Income***

 

Interest income includes interest earned on investedcash balances. During the three-month periods ended March 31, 2005 and 2004,our investments consisted entirely of funds deposited in money market funds.

 

Interest income increased 332.6% to $81,000 in thethree-month period ended March 31, 2005 from $19,000 in the three-month periodended March 31, 2004. The increase in interest income resulted from a higheraverage cash balance and slightly higher interest rates earned on investedbalances.

 

***Net loss***

 

As a result of the foregoing, we incurred a net lossof $4,915,000, or $0.25 per common share, for the three-month period endedMarch 31, 2005 compared to a net loss of $3,135,000, or $0.21 per common share,for the three-month period ended March 31, 2004.

 

**Liquidity and Capital Resources**

 

We have financed our operations since inceptionprincipally through private placements of equity securities and collaborationpayments received from pharmaceutical companies. Since our inception inSeptember 1996, we have raised approximately $50,027,000, net of costs ofraising capital, in private equity financings and $7,515,000 from licensing andsponsored researchcollaborationswith pharmaceutical companies. In addition, we received $14,335,000 as a resultof the merger between Point Massachusetts and HMSR in March 2002. We have alsoreceived $1,221,000 from interest earned in invested cash balances and $1,610,000in proceeds from warrant and stock option exercises.

 

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On March 4, 2005, we closed on a registereddirect placement of 3,650,000 shares of our common stock at a price of $4.50per share, resulting in gross proceeds to us of $16,425,000. After placementagent fees of $1,149,500 and other expenses for legal, accounting and printingfees of approximately $244,500, net proceeds to us was approximately$15,031,000. The offered shares are registered pursuant to our $50,000,000shelf registration statement that was declared effective by the Securities andExchange Commission on January 12, 2005.

 

At March 31, 2005, our cash and cash equivalentsincreased $10,932,000 as compared to December 31, 2004. The increase wasprimarily due to net proceeds totaling approximately $15,031,000 resulting fromthe sale of 3,650,000 shares of common stock in the recent placement andproceeds from warrant exercises of $866,000 offset in part by $4,951,000 usedin operations for the three-month period ended March 31, 2005, primarily tofund the clinical program for talabostat and our other research and developmentinitiatives. We also increased our investment in office and laboratoryequipment by $14,000 from $539,000 at December 31, 2004 to $553,000 at March31, 2004. The increase resulted from purchases of laboratory equipment,computers and furniture.

 

Sinceinception, we have incurred $35,776,000 in expenses on research and developmentactivities. Almost all of our research and development efforts have beenfocused on the preclinical and clinical development of talabostat for thetreatment of solid tumors, hematologic malignancies and hematopoieticdisorders. We have had no other material research and development programs, andthus the $35,776,000 disclosed for research and development in our financialstatements has primarily been directed towards developing talabostat with theexception of external costs incurred during the first quarter of 2005 and 2004for our two other DPP inhibitors in preclinical development described below. In2004, we initiated four Phase 2 clinical trials of talabostat. The trials arestudying talabostat in combination with Taxotere® for the treatment of advancednon-small cell lung cancer, talabostat as a single agent to treat advancedmetastatic melanoma, talabostat in combination with cisplatin to treat advancedmetastatic melanoma, and talabostat in combination with rituximab to treatadvanced chronic lymphocytic leukemia. We also plan to initiate a fifth Phase 2clinical trial, talabostat in combination with gemcitabine to treat pancreaticcancer, by the end of the second quarter of 2005. Based upon results from ourPhase 2 clinical trial in NSCLC, we are moving forward in planning a Phase 3program for NSCLC which we plan to initiate in the second half of 2005.  We are also clinically developing talabostatas a potential therapy for the treatment of hematopoietic disorders.

 

Ourportfolio also includes two other DPP inhibitors in preclinicaldevelopment—PT-630 for type 2 diabetes, and PT-510 as a vaccine adjuvant. Todate, we have spent approximately $501,000 on external laboratory andconsulting costs for PT-630 and approximately $10,000 on external laboratorycosts for PT-510.

 

Since inception, we have incurred operating expensesof $53,263,000 and have accumulated a deficit as of March 31, 2005 of $44,610,000.At March 31, 2005, we had $24,838,000 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 current andplanned operations through at least January of 2006. Therefore, theaccompanying financial statements have been prepared assuming that we willcontinue as a going concern. We are currently considering several strategicoptions in order to ensure the continued funding of our operations including,but not limited to, the sale of securities in both public and private offeringsas the markets allow, raising additional funds through corporate collaborationsand merger and acquisition activities and consolidations. There can be noassurance that a transaction will be consummated in a reasonable time frame oron terms acceptable to us. Should we be unable to raise sufficient funds, wemay be required to curtail our operating plans after 2005. In addition,increases in expenses or delays in product development not currently forecastedor anticipated may adversely impact our cash position and require further costreductions.

 

Our expectations regarding our rate of spending andthe sufficiency of our cash resources over future periods are forward-lookingstatements. Our funding requirements are expected to increase over the nextseveral years as we continue with the clinical development of talabostat andinitiate human clinical trials for additional clinical indications fortalabostat and additional product candidates. The rate of spending andsufficiency of such resources will be affected by numerous factors includingthe success of our clinical trials and the rate of acquisition of new productsand technologies. 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.

 

**Contractual Obligations**

 

As of March 31, 2005, we had future paymentsrequired under contractual obligations and other commitments approximately asfollows:

 
| ** **               | ** ** | **Payments Due By Year** | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **Q2- Q4 2005**          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Operating Leases         |       | $                        | 138,971    |   | $ | 406,383 |   | $ | 398,008 |   | $ | 391,311 |   | $ | 391,311 |   | $ | 179,351 |   |
| Licensing Obligations    |       | 10,000                   |       | 10,000 |   | 10,000 |   | 10,000 |   | 10,000 |   | 27,895 |   |
| Total Future Obligations |       | $                        | 148,971    |   | $ | 416,383 |   | $ | 408,008 |   | $ | 401,311 |   | $ | 401,311 |   | $ | 207,246 |   |
|                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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In connection with the subleases for our offices at125 Summer Street in Boston, we issued two letters of credit on April 11,2002 and January 8, 2004 in the amounts of $80,168 and $5,833,respectively. The letters of credit are renewable annually on April 11 andJanuary 8, respectively for the terms of the subleases with thelandlords.   Both of these subleasesterminate in 2005 and we anticipate the letters of credit will be cancelledupon the termination of the subleases.  In addition, on March 28, 2005, in connection with our lease for our newcorporate offices at 155 Federal Street, we issued a letter of credit in theamount of $300,000 which is renewable annually on June 15 for the term of thelease with the landlord.  All of theabove described letters of credit are collateralized by cash held in moneymarket funds held at our financial institution and are classified as restrictedcash on our balance sheet at March 31, 2005.

 

**Off-Balance Sheet Arrangements**

 

We had no off-balance sheet arrangements as of March31, 2005 that have or are reasonably likely to have a current or future effecton our financial condition, changes in financial condition, revenue orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

 

**New Accounting Pronouncement**

 

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,”which will be effective for public entities no later than the beginning of thefirst fiscal year beginning after June 15, 2005.   SFAS 123(R)replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” The newstandard requires that the compensation cost relating to share-based payment berecognized in financial statements at fair value. As such, reporting employeestock options under the intrinsic value-based method prescribed by APB 25 willno longer be allowed. We have historically elected to use the intrinsic valuemethod and have not recognized expense for employee stock options granted. Wewill adopt this pronouncement on January 1, 2006 and are currentlyevaluating the impact that this pronouncement will have on our consolidatedfinancial statements.

 

**Certain Factors that May EffectFuture Operating Results**

 

Weoperate in a rapidly changing environment that involves a number of risks, someof which are beyond our control. The following discusses these risks. The risksand uncertainties described below are those that we currently believe maymaterially affect us. Additional risks and uncertainties that we are unaware ofor that we currently deem immaterial also may become important factors thataffect us.

 

***If we fail to obtain the capital necessaryto fund our operations, we will be unable to successfully develop or commercializetalabostat***

 

Asof March 31, 2005, we had a cash balance of approximately $24.8 million.We currently anticipate spending approximately $2.0 million per month tofund our preclinical and clinical programs and related general andadministrative activities.  Our currentcash balance is expected to be sufficient to allow us to maintain current andplanned operations through at least January 2006. It is difficult to estimateat this time the additional funds required to finance our operations as we arecurrently uncertain about the therapeutic indications that we will continue toclinically develop into later stages, the extent of the clinical programrequired to successfully develop a selected therapeutic indication, and if anyof these programs will eventually be financed through a collaboration with abetter funded partner. Also, we do not know whether additional funding will beavailable when needed, or that, if available, we will be able to obtain fundingon satisfactory terms. We have incurred approximately $53.3 million ofexpenses since inception through March 31, 2005, and expect our capital outlaysand operating expenditures to increase over the next several years as we expandour infrastructure and preclinical and clinical trial activities. We may raisethese funds through corporate partnerships, additional sales of securities inboth public and private offerings as the markets allow, and merger andacquisition activities and consolidations.

 

Inaddition to the progress of our preclinical and clinical effort, our futurecapital requirements depend on many other factors, including: the cost andtiming 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, theestablishment of a sales force and the development of manufacturing capacity.Unexpected events or other factors beyond our control could also impact ourcapital requirements.

 

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Wemay be required to relinquish rights to our technologies or talabostat, orgrant licenses on terms that are not favorable to us, in order to raiseadditional funds through alliance, joint venture and licensing arrangements. Ifadequate funds are not available, we will be required to delay, reduce thescope of or eliminate one or more of our preclinical and clinical programs.

 

***Our lead product candidate, talabostat, isin the early stages of human clinical development, and its safety andeffectiveness are still being determined***

 

Ourlead product candidate, talabostat, is currently undergoing evaluation inearly-stage clinical trials for the treatment of solid tumors and neutropenia.To obtain regulatory approval for the commercial sale of talabostat for itsintended therapeutic applications, we must demonstrate in carefully controlledand well-designed clinical trials that talabostat is safe and effective inhumans for the proposed therapeutic indications. In addition to animal safetystudies, we have conducted Phase 1 human clinical safety studies, both insingle and multiple doses, which have provided us sufficient safety informationto select dose ranges for our Phase 1 human clinical dose finding studies.These Phase 1 dose finding studies have, in turn, provided us safety andeffectiveness information to select doses for our Phase 2 human clinical studieswhich are evaluating safety and effectiveness of talabostat in larger cohortgroups. Although with the completion of each of our human clinical studies weare learning more about the safety profile of talabostat, we cannot yet predictwhether subjects in clinical trials will suffer unacceptable healthconsequences related to talabostat. 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 can not predict whether the FDA will determine that thetherapeutic benefits of talabostat outweigh any perceived adverse effects ofthe drug.

 

Iftalabostat is not safe or effective, or is perceived as not being safe oreffective by the FDA or physicians, our business, financial condition, resultsof operations and prospects will be harmed.

 

***Our lead product candidate, talabostat, isin the early stages of human clinical development, and we may not be able todesign or implement an effective clinical development plan which will result intimely FDA approval for the selected therapeutic applications***

 

Ourlead product candidate, talabostat, is currently undergoing evaluation inearly-stage clinical trials for the treatment of solid tumors and neutropenia.Conducting clinical trials is a lengthy and highly uncertain process. Thelength of time to complete clinical trials varies according to the type,complexity, novelty and intended use of the product candidate. We may not havedesigned our clinical trials in a way that results in their fastest completionbecause of unforeseen safety or effectiveness issues. Our trials may takelonger to complete than we anticipate because of a slower than expected rate ofeligible subject recruitment in the trials. If our clinical trials take longerthan we expect, we may have greater expenses than we project and may have amore difficult time raising additional capital to fund future or even existingcapital requirements.

 

Evenif we are able to conduct our clinical trials in a timely manner, other factorsrelated to the conduct of the trials could still adversely affect our chancesof obtaining FDA approval. We may not be able to adequately follow or evaluatethe subjects of the clinical trials after their treatment to establish apositive therapeutic effect. We may not be able to maintain a database ofsufficient integrity to track safety and effectiveness information of treatedsubjects that would withstand appropriate FDA scrutiny. We, or our chosenvendors, may fail to comply with FDA regulations for good clinical practices.

 

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

 

***If talabostat is not a successful drugcandidate, we may be unable to obtain other potential drug candidates***

 

Inaddition to our substantial efforts developing talabostat on a preclinical andearly-stage clinical basis, we from time to time evaluate new technologyopportunities to broaden our portfolio of potential drug candidates, includingin-licensing opportunities, collaboration arrangements as well as moreexpansive corporate relationships, such as mergers and acquisitions. However,we may not be able to consummate a transaction to broaden our portfolio ofpotential drug candidates on terms satisfactory to us. If talabostat is notultimately a successful drug candidate and we cannot obtain other potentialdrug candidates through one or more strategic transactions, our business,financial condition and results of operations and prospects will be harmed.

 

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***We have had a history of losses, and expectto continue to incur losses and may not achieve or maintain profitability***

 

Asof March 31, 2005, we had an accumulated deficit of approximately $44.6 million.The extent of our future losses and the timing of profitability are highlyuncertain, and we may never achieve profitable operations. We have not had anyproducts that have generated any sales revenue, and we likely will not until talabostat or any otherof our products become commercially available, if ever. We expect to incurlosses at least until we begin commercial sales of our first approved product,if any. We expect that our operating expenses will increase and accelerate asour preclinical, 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 University School of Medicineterminates our license, we could experience delays or be unable to complete thedevelopment and commercialization of our potential products***

 

Welicense key technology including the rights to talabostat, our lead product,from Tufts University School of Medicine. The underlying licenses for thistechnology terminate on the later of the date of the last-to-expire patents, or15 years from the date of initial commercial sale of the licensed product.Termination of these licenses prior to or upon expiration of the term couldforce us to delay or discontinue our development and commercializationprograms. Pursuant to the terms of the license, Tufts University School ofMedicine has the right to terminate the license prior to expiration of the termupon a material breach of the license by us, our ceasing to do business orbecoming insolvent, or our failure to sell a licensed product in the U.S.market by May 2009. We have no assurance that we would be able to licensesubstitute technology in the future. Our inability to do so could impair ourability to conduct our business because we may lack the technology, thenecessary rights to such technology, or the finances required, in each case, todevelop and commercialize our potential products.

 

***If we fail to obtain regulatory approvalfor talabostat in a timely manner, our operating results and business may beadversely affected***

 

Wemust obtain regulatory approval before marketing or selling talabostat in anymajor world pharmaceutical market for any therapeutic application fortalabostat. Due to risks and uncertainties inherent in clinical testing and theregulatory process, we are not able to estimate when talabostat may becommercially available for any application, if at all.

 

Inthe U.S., we must obtain FDA approval for talabostat and each indication thatwe intend to commercialize. The FDA approval process is typically lengthy andexpensive, and such approval is never certain and entails a high degree ofrisk. Products marketed, manufactured or distributed abroad are also subject toforeign government regulation. Talabostat has not received regulatory approvalto be commercially marketed and sold for any therapeutic indication. If we failto obtain regulatory approval, we will be unable to market and sell talabostat.We cannot predict with certainty if or when we might submit talabostat forregulatory approval for any therapeutic indication. Once we submit talabostatfor review, we cannot assure you that the FDA or other regulatory agencies willgrant approvals on a timely basis or at all. If regulatory approval for anytherapeutic application for talabostat is delayed, our business, financialcondition or results of operations would be materially adversely affected.

 

***Because we rely on third parties to conducthuman clinical studies, we may encounter delays in product development andcommercialization***

 

Wehave relatively few employees and do not have sufficient internal resources orexperience to conduct human clinical trials completely on our own. We musttherefore contract with third parties to perform the clinical trials needed forus to submit talabostat to the FDA for marketing approval.

 

Althoughwe continue to increase our internal clinical development capability, includingour ability to supervise, manage and, as necessary replace, outside vendors, westill outsource a substantial amount of the clinical trial development process.Thus, we may lose control over the cost of and time required to conduct thesestudies. In addition, these third parties might not conduct our clinical trialsin accordance with regulatory requirements. Currently, we rely on a smallnumber of contractors for conducting clinical trials of talabostat, although webelieve we can replace these contractors, as necessary, on terms acceptable tous. The failure of any contractor to carry out its contractual duties coulddelay or increase the cost of the successful development and commercializationof talabostat.

 

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***We may fail to adequately protect orenforce our intellectual property rights, and our products and processes mayinfringe the intellectual property rights of others***

 

Protectionof our compounds and technology owned or licensed by us is essential to ourbusiness. Our policy is to protect our technology by, among other things,filing or causing to be filed on our behalf patent applications for technologyrelating to the development of our business. We own or have licensed 15 issuedU.S. patents and 13 pending U.S. patent applications. These patents and patentapplications relate to our anti-tumor, hematopoiesis, diabetes and vaccineadjuvant technologies. If regulatory extensions are not taken into account, oneU.S. patent expires in 2007; one U.S. patent and two applications expire in2011; and the remaining patents and applications expire in 2016 and beyond. Wealso own or have licensed foreign patents and patent applications correspondingto most of the U.S. patents and patent applications. It is possible that nopatents will be issued on our pending patent applications, and it is possiblethat our patent claims, now or in the future issued, will not be sufficient toprotect our products and technology, will not be sufficient to provide protectionagainst competitive products, or otherwise will not be commercially valuable.

 

Ourcommercial success will also depend in part on our ability to commercializetalabostat without infringing on patents or other proprietary rights of others.Any patents issued to or licensed by us could be challenged, invalidated,infringed, circumvented or held unenforceable. Talabostat or our other leaddrug candidates may infringe current or future patents or other proprietaryrights of others. To date, we have not received any communications from thirdparties nor are we aware of any claims by third parties that talabostat or anyof our other activities infringe upon the patent or other proprietary rights ofany third party. However, we cannot assure you that other companies orindividuals have not or will not independently develop substantially equivalentproprietary rights or that other parties have not or will not be issued patentsthat may prevent the sale of our products or require licensing and the paymentof significant fees or royalties in order for us to be able to carry on ourbusiness. If we are successful in the preclinical and clinical development ofPT-630, our lead drug candidate for the treatment of type 2 diabetes, to marketand sell that drug we may need to obtain at least a non-exclusive license forrelevant use patents from third parties. We have not notified another partythat they are infringing any of our proprietary rights although we do from timeto time engage in discussions with licensors, vendors and other parties aboutthe scope and enforceability of our contractual rights.

 

Litigationor other legal proceedings could result in substantial costs to us and may benecessary to enforce any of our patents or other proprietary rights or todetermine the scope and validity or enforceability of other parties’proprietary rights. The defense and enforcement of patent and intellectualproperty claims are both costly and time consuming, even if the legal outcomeis favorable to us. Any adverse legal outcome could subject us to significantliabilities to third parties, require disputed rights to be licensed from thirdparties, or require us to cease manufacturing or selling our future products.

 

Ouremployees, consultants and advisors are required to enter into writtenconfidentiality agreements that prohibit the disclosure or use of confidentialinformation. We also have entered into written confidentiality agreements thatare intended to protect our confidential information delivered to third partiesfor research and other purposes. However, these agreements could be breached,and we may not have adequate remedies for any breach, or our trade secrets andproprietary information could otherwise become known or be independentlydiscovered by others. We have not notified any person of a violation of aconfidentiality agreement that has materially harmed our business.

 

***If our competitors reach the market sooneror develop products and technologies that are more effective or have reducedside effects, our commercial opportunity will be reduced or eliminated***

 

Thepharmaceutical and biotechnology industries are intensely competitive. Thereare existing products on the market that are used for the treatment of subjectswith the same indications that we have targeted including, among others, Chiron’sProleukin®, Bayer’s DTIC-Dome®, Sanofi-Aventis’ Taxotere®, Bristol-Myers Squibb’sParaplatin® and Platinol AQ®, AstraZeneca’s Iressa®, Amgen Inc.’sAranesp®, Neupogen® and Neulasta®, GSK’s Bexxar®, OSI Pharmaceutical’s Tarceva®,Eli Lilly’s Alimta® and Gemzar®, Genzyme’s Campath®, JNJ’s Procrit®, andBiogen-IDEC’s Zevalin®. Because talabostat is still in the early stages ofclinical development, we do not have the sales, marketing, manufacturing ordistribution capabilities necessary to compete with well-established companies.If talabostat is approved by the FDA for one or more therapeutic applications,we may enter into collaboration agreements with one or more establishedcompanies in order to compete in the marketplace. There can be no assurancesthat we would be able to successfully enter into any such collaborations withthird parties or that any such collaborations would be entered into on termssatisfactory to us.

 

Thereare also many public and private pharmaceutical companies, biotechnologycompanies, public and private universities, governmental agencies and researchorganizations actively engaged in drug discovery and research and developmentof products for the treatment of subjects with the same indications that wehave 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 develop or acquirerights to a similar or more effective treatment of subjects with the sameindications targeted by us or one that has reduced side effects or offerssignificantly lower costs of treatment, or were to successfully enter themarket in advance of us with a similar or superior therapy, our business,financial condition or results of operations could be materially adverselyaffected.

 

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Wecannot provide assurances that research and development by others will notrender our technology or talabostat obsolete or non-competitive or result intreatments superior to any therapy or drug developed by us, or that any drug ortherapy developed by us will be preferred to any existing or newly developedtechnologies.

 

***Our manufacturing strategy presents a numberof risks***

 

Wedo not currently have our own manufacturing facilities. We expect in the futureto depend on outside contractors for the manufacture of talabostat. Completionof our clinical trials and the commercialization of talabostat will requireaccess to, or development of, manufacturing capabilities. We have entered intoshort-term arrangements with third parties with respect to the manufacture ofthe quantities necessary for preclinical and early-stage clinical development.As we approach later-stage clinical development and commercialization of aproduct candidate, however, our intention is to enter into longer-termarrangements with multiple manufacturing sources. We may not be able to enterinto additional third-party manufacturing arrangements on acceptable terms, ifat all. An outside contractor may give greater priority to other products orfor other reasons may fail to manufacture or deliver the required supply oftalabostat in a cost-effective or timely manner. Our current and futuremanufacturers are and will be subject to ongoing periodic unannouncedinspection by the FDA and corresponding state and foreign agencies forcompliance with strictly enforced good manufacturing practice regulations andsimilar state and foreign standards, and we do not have control over ourthird-party manufacturers’ compliance with these regulations and standards.

 

Anyof these factors could in the future delay clinical trials or commercializationof talabostat, interfere with sales, entail higher costs or result in us beingunable to effectively sell our products. To the extent that we are reliant on asole source of supply of a drug, any interruption in that supply could delay usin effectively developing, testing and commercializing the drug.

 

***Our ability to generate revenues will bediminished if talabostat is not accepted in the marketplace, if we fail toobtain acceptable prices or if adequate reimbursement is not available fortalabostat from third-party payors***

 

Thereare competing products to talabostat already in the market for the treatment ofeach therapeutic indication we are currently pursuing in clinical trials. Evenif approved for sale and distribution for one or more therapeutic indications,talabostat might not achieve market acceptance for such indications or remainon the market. Talabostat may be rejected by the marketplace due to manyfactors, including cost and the perceived risks versus the benefits oftalabostat. Physicians, subjects, payors or the medical community in generalmay be unwilling to accept, prescribe, utilize, recommend or reimburse fortalabostat for such indications.

 

Ourability to commercialize our drugs may be limited due to the continuing effortsof government and third-party payors to contain or reduce the costs of healthcare through various means. For example, in many markets outside the U.S., thepricing and profitability of prescription pharmaceuticals are subject togovernment control. In the U.S., we expect that there will continue to befederal and state proposals to implement additional government control. Forexample, the recently enacted Medicare Prescription Drug, Improvement, andModernization Act of 2003 provides a new Medicare prescription drug benefitbeginning in 2006 and mandates other reforms. Although we cannot predict thefull effects on our business of the implementation of this new legislation, itis possible that the new benefit will result in decreased reimbursement forprescription drugs which may further exacerbate industry-wide pressure toreduce the prices charged for prescription drugs. This could harm our abilityto market talabostat and generate revenues.

 

Also,increasing emphasis on managed care in the U.S. and the possibility ofgovernment regulation of prescription drug prices will likely continue to putadditional pressure on the pricing of pharmaceutical products. Cost controlinitiatives could decrease the price that we might otherwise achieve fortalabostat in the future. Further, cost control initiatives could adverselyaffect our ability to commercialize talabostat and our ability to realizeprofits and revenues from this commercialization.

 

Ourability to commercialize pharmaceutical products, alone or with distributors orothers, may depend in part on the extent to which reimbursement for theproducts will be available from:

 

• government and health administrationauthorities;

• private health insurers; and

• other third-party payors.

 

Significantuncertainty exists as to the reimbursement status of newly approved healthcareproducts. Third-party payors, including Medicare, are challenging the pricescharged for medical products and services. Government and other third-partypayors increasingly are attempting to contain healthcare costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing, in somecases, to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted

 

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labeling approval. Third-party insurancecoverage may not be available to subjects for any products we discover anddevelop, alone or with our strategic alliance partners. If government and otherthird-party payors do not provide adequate coverage and reimbursement levelsfor talabostat, the market acceptance of these products may be reduced.

 

***We use hazardous chemicals and radioactiveand biological materials in our business; any disputes relating to improperuse, handling, storage or disposal of these materials could be time consumingand costly***

 

Ourpreclinical and clinical operations involve the use of certain hazardousmaterials, 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 for product or operationalliability***

 

Wemay be held liable if any of our products or operations cause injury or deathor are found otherwise unsuitable during product testing, manufacturing,marketing or sale. We currently maintain a $2 million general liabilitypolicy and a $5 million annual aggregate product liability insurancerelated to our clinical trials consistent with industry standards which webelieve is adequate to insure us against such potential losses. When necessaryfor our products, we intend to obtain additional product liability insurance.Insurance coverage may be prohibitively expensive, may not fully cover ourpotential liabilities or may not be available in the future. Inability toobtain sufficient insurance coverage at an acceptable cost or otherwise toprotect against potential product liability claims could prevent or inhibit thecommercialization of our products. If we are sued for any injury caused by ourproducts, the litigation could consume substantial time and attention of ourmanagement and our liability could exceed our total assets.

 

***If we lose key personnel or are unable toattract or retain additional personnel, we may be unable to develop talabostator achieve commercialization objectives***

 

Weare highly dependent on Donald R. Kiepert, Jr., our Chairman, President andChief Executive Officer, Richard N. Small, our Senior Vice President, ChiefFinancial Officer and Treasurer, Margaret J. Uprichard, our Senior VicePresident and Chief Development Officer, Michael P. Duffy, our Senior VicePresident, General Counsel and Secretary, Barry Jones, our Senior VicePresident 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 ouroperations until they are replaced, and may have a material adverse effect onour product development and commercialization efforts if we are not able toattract qualified replacements.

 

Oursuccess depends on our continued ability to attract, retain and motivate highlyqualified management and scientific personnel. In particular, our preclinicaland clinical operations depend on our ability to attract and retain highlyskilled scientists and clinical development and regulatory affairs personnel.In addition, we will need to hire additional personnel and develop additionalcollaborations as we continue to expand our preclinical and clinicaloperations. To date, we have been able to attract and retain key personnel whenneeded. We are not aware of any key employee who plans to retire or terminatehis or her employment with us in the near future. Despite our ability in the pastin attracting and retaining key personnel, we cannot provide assurances that wewill be able to continue to attract, retain or motivate personnel or develop ormaintain such outside relationships in the future.

 

***We have contingent liabilities relating to ourhistorical discontinued operations that could give rise to liability risks inthe future***

 

Priorto the sale of substantially all of our non-cash assets to Whatman in May of2001, we were engaged in the business of developing and supplying blood filtrationdevices. Although Whatman contractually assumed and agreed to indemnify us andhold us harmless from and against most liabilities and obligations arising outof the conduct of our blood filtration business, we retained certain known andunknown risks that were not contractually assumed by Whatman including withoutlimitation, (i) any of our liabilities under any benefit plan,(ii) tax liabilities incurred which relate to periods prior to the closingof the Whatman transaction, (iii) accounts payable arising prior to theclosing of the Whatman transaction, (iv) any of our liabilities which wereowed to our security holders in their capacity as such, and (v) ourliabilities which were owed to Gambro Inc. or Sepracor, Inc. arisingor resulting

 

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from their respective contractualrelationships with us. If for any reason Whatman is not able to satisfy any ofthe assumed liabilities, such outcome could have a material and adverse effecton our financial condition. Accordingly, there can be no assurances that claimsarising out of our historical business and operations would not be assertedagainst us in the future and, if asserted, there can be no assurances that wewould prevail.

 

***If we are unable to maintain compliancewith NASDAQ listing requirements, our stock could be delisted***

 

As of April 2, 2004, our common stock begantrading on the NASDAQ SmallCap Market. Previously, our common stock was tradedon the OTC Bulletin Board. There can be no assurances, however, that we will beable to maintain compliance with NASDAQ’s present listing standards, or thatNASDAQ will not implement additional listing standards with which we are unableto comply. Failure to maintain compliance with NASDAQ listing requirements couldresult in the delisting of our shares from trading on the NASDAQ system, whichcould have a material adverse effect on the trading price, volume andmarketability of our common stock.

 

***Our stock price could be volatile and ourtrading volume may fluctuate substantially***

 

The price of our common stock has been and may inthe future continue to be extremely volatile, with the sale price fluctuatingfrom a low of $0.79 to a high of $6.95 in the two-year period ended May 6,2005. Factors such as the announcements of results from our clinical trials,technological innovations or new products of our competitors, governmentalregulation, health care legislation, developments in patent or otherproprietary rights of us or our competitors, including litigation, fluctuationsin operating results and market conditions for health care and life sciencesstocks in general could have a significant impact on the future price of ourcommon stock. In addition, the stock market has from time to time experiencedextreme price and volume fluctuations which may be unrelated to the operatingperformance of particular companies. For the three-month period ended May 6,2005, the daily trading volume for shares of our common stock ranged from 700to 1,055,300 shares traded per day, and the average daily trading volume duringsuch three-month period was only 55,163 shares traded per day. Accordingly, ourinvestors who wish to dispose of their shares of common stock on any giventrading day may not be able to do so or may be able to dispose of only aportion of their shares of common stock.

 

***The subsequent sale of a substantial numberof shares of our common stock could cause our stock price to decline and causeour stockholders to experience substantial dilution***

 

In total, certain entities and individuals holdexisting warrants to purchase up to 3,591,944 shares of our common stock at aweighted average exercise price of $3.69 as of May 6, 2005. In addition, certainentities and individuals hold existing options to purchase 3,935,721 shares ofour common stock at an average exercise price of $3.62. The exercise andsubsequent sale of a substantial amount of these warrants and options couldadversely affect the market price of our common stock. To the extent we raiseadditional capital by issuing equity securities, all stockholders mayexperience substantial dilution.

 

**Item 3****. QUANTATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our proceeds to date have been invested in moneymarket funds that invest primarily in short-term, highly-rated investments,including U.S. Government securities, commercial paper and certificates ofdeposit guaranteed by banks. Our current policies do not use interest ratederivative instruments to manage exposure to interest rate changes. Because ofthe short-term maturities of our investments, we do not believe that a decreasein market rates would have a significant negative impact on the value of ourinvestment portfolio. Declines in interest rates will, however, reduce ourinterest income while increases in interest rates will increase our interestincome.

 

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

 

(a)Evaluation of disclosure controls and procedures. Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our “disclosure controls and procedures” (asdefined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))as of March 31, 2005. Based on this evaluation, our chief executive officer andchief financial officer concluded that as of March 31, 2005, ourdisclosure controls and procedures were (1) designed to ensure thatmaterial information relating to us is made known to our chief executiveofficer and chief financial officer by others, particularly during the periodin which this report was prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in

 

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thereports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

 

(b)Changes in internal controls. No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) occurred during the fiscal quarter ended March 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II****. OTHER INFORMATION**

 

**Item 6****. Exhibits**

 

(a) Exhibits

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification  of Donald R. Kiepert, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002, dated May 10, 2005, filed herewith.   |
|                |       |                                                                                                                                       |
| 31.2                |       | Certification  of Richard N. Small pursuant to Section 302 of the Sarbanes-Oxley Act of  2002, dated May 10, 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. |

 

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**SIGNATURES**

 

**Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this QuarterlyReport on Form 10-Q to be signed on its behalf by the undersigned, thereunto dulyauthorized.**

 
|                | **POINT THERAPEUTICS, INC.** |
|---------------------|----------------------------------------|
|                | ** **                             |
| Date:  May 10, 2005 | By:                                    | /s/   DONALD R. KIEPERT, JR. |
|                |                                   | ** Donald  R. Kiepert, Jr.   Chief Executive Officer** |
|                |                                   |   |
|                | **POINT THERAPEUTICS, INC.** |
|                | ** **                             |
| Date:  May 10, 2005 | By:                                    | /s/   RICHARD N. SMALL |
|                |                                   | **Richard N.  Small   Chief Financial Officer** |

 

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