CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2004 September (Form 10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

[x]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                    .

Commission file number 0-20713

ENTREMED, INC.

9640 Medical Center Drive
Rockville, Maryland

20850

(240) 864-2600

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

YES [X] NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [X] NO [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most recent practicable date.

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ENTREMED, INC.
Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains and incorporates by reference certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “will,” “expect,” “anticipate” or similar words. These forward-looking statements include, among others, statements regarding the timing of our clinical trials and the expected increases in our expenses.

Our forward-looking statements are based on information available to us today, and we will not update these statements. Our actual results may differ significantly from those discussed in our forward-looking statements due to, among other factors, operating losses and anticipation of future losses; the value of our common stock; uncertainties relating to our technological approach; uncertainty of our product candidate development; our need for additional capital and uncertainty of additional funding; our dependence on collaborators and licensees; intense competition and rapid technological change in the biopharmaceutical industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to clinical trials, our success in further clinical development of Panzem^®NCD, government regulation and uncertainties of obtaining regulatory approval on a timely basis or at all; our dependence on key personnel, research collaborators and scientific advisors; uncertainties relating to health care reform measures and third-party reimbursement; risks associated with product liability; and other factors discussed in our other filings with the Securities and Exchange Commission.

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

EntreMed, Inc.
Consolidated Balance Sheets

See accompanying notes.

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EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)

See accompanying notes.

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EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes.

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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (unaudited)

     Our accompanying 2004 unaudited consolidated financial information includes the accounts of our controlled subsidiary, Cytokine Sciences, Inc. All intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. This report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2003.

     Short-term investments consist of corporate debt and collateralized securities, all of which mature within one year. We classify these investments as available for sale. Such securities are stated at market value. The unrealized gains and losses are nominal as of September 30, 2004. Realized gains and losses and declines in value judged to be other than temporary on securities available for sale, if any, are included in operations. The cost of securities sold is calculated using the specific identification method. As of September 30, 2004, the cost of the investments was $15,098,000. Realized gains and losses have been insignificant.

     The Company recognizes expense for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any. The Company accounts for equity instruments issued to non-employees in accordance with EITF 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring Or in Conjunction with Selling, Goods, or Services.

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     The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) , to stock-based compensation:

The effect of applying SFAS No. 123 on a pro forma net loss as stated above is not necessarily representative of the effect on reported net loss for future years due to, among other things, the vesting period of the stock options and the fair value of additional stock options in future years.

     In September 2004, we sold certain securities of an independent private biotechnology company. The securities were acquired in 1996 through 1999 and accounted for using the equity method. The cost of these securities was written off in prior periods and we had no residual cost basis in the securities when sold. As such, we have recorded a gain on the sale equal to the sale proceeds of $520,000.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

     Since our inception in September 1991, we have devoted substantially all of our efforts and resources to sponsoring and conducting research and development on our own behalf and through collaborations. Through September 30, 2004, all of our revenues have been generated from license fees, research and development funding, royalty payments, the sale of royalty rights and certain research grants; we have not generated any revenue from direct product sales. We anticipate our primary revenue sources for the next few years will include research grants and collaboration payments under current or future arrangements. The timing and amounts of such revenues, if any, will likely fluctuate and depend upon the achievement of specified research and development milestones. Results of operations for any period may be unrelated to the results of operations for any other period.

     Historically our research and development efforts are focused on the identification and development of new compounds for the treatment of certain diseases utilizing our understanding of the interrelationships of angiogenesis, cell cycle regulation, and inflammation – processes vital to the treatment of multiple diseases, including cancer. Currently, our main focus is on the reformulation of 2ME2, our lead drug candidate Panzem^® , which has been administered in capsule form to oncology patients in Phase I and Phase II trials. The goal of our reformulation effort is to increase the level of Panzem^® in the patient’s bloodstream. Based on preclinical findings and data from healthy human subjects, we have selected a new Panzem^® formulation that is a liquid suspension approach that we believe will increase the Panzem^® bloodstream levels in oncology patents. In July, we announced that we have entered into a Clinical Supply Agreement with Elan to produce reformulated Panzem^® . We refer to the liquid product format as Panzem^® NCD and we expect to begin clinical trials with this new Panzem^® formulation in early 2005.

     In addition to our work with Panzem^® , we are evaluating various next generation analogs of 2ME2 in preclinical studies. We expect at least one of these compounds to progress into IND-directed development with the goal of entering clinical trials in oncology. We have three additional programs with compounds in various stages of discovery and preclinical research. Our expenses will exceed our revenues as we continue the development of Panzem^® and bring our other drug candidates through preclinical research to clinical trials.

     With Panzem^® NCD moving into the clinic and other pipeline candidates moving towards IND, we are progressing from a fundamentally research organization to that of a product development and commercialization organization. We have already begun de-emphasizing early discovery activities and are reducing certain operating expenses in order to devote more resources to key preclinical development activities. We also will seek product acquisitions, co-development alliances and in-licensing opportunities to build a broader portfolio of late preclinical and clinical product candidates.

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RESULTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2004 and September 30, 2003.

     Revenues. Revenues decreased to $143,000 in the three-month period ended September 30, 2004 compared to $258,000 in the corresponding 2003 period. For the nine-month period ended September 30, 2004, revenues decreased 64% to $380,000 from $1,058,000 for the 2003 nine-month period. Revenues recorded in 2004 reflect the amortization of the initial licensing fees received from Allergan and Alchemgen. The 2003 amount results primarily from two sources: orphan drug grant revenue of $300,000 received to support our Endostatin Phase II clinical trial in patients with neuroendocrine tumors and (2) contract revenues of $635,000 resulting from performance as a subcontractor under an NIH sponsored Malaria Vaccine program, which contract was completed during 2003. We did not record any grant or subcontract revenues in the first nine months of 2004. Licensing revenues during the first nine-month period ended September 30, 2004 increased to $363,000 from $72,000 in the corresponding 2003 period. This increase is attributable to the recognition of amortized licensing revenues from a February 2004 agreement with Alchemgen.

Research and Development Expenses. We are a clinical-stage pharmaceutical company developing therapeutic candidates for the treatment of cancer and inflammatory diseases. Our development programs are focused on drug candidates with antiproliferative, and anti-inflammatory properties – processes vital to the treatment of multiple diseases, including cancer. Panzem^® , our lead drug candidate, is currently in clinical trials for cancer, as well as preclinical development for indications outside of oncology. At September 30, 2004, accumulated direct project expenses for Panzem^® totaled $26,929,000. Reflected in our 2004 R&D expenses totaling $8,095,000 for the nine-month period ended September 30, 2004 are direct project expenses for Panzem^® of $2,561,000 and $1,358,000 related to our 2ME2 analog program.

     Also reflected in our 2004 R&D expenses are project costs of $334,000 related to the Endostatin and Angiostatin compounds, programs that have been discontinued and will not be funded in the future. The balance of our R&D expenditures includes facilities costs and other departmental overhead, and expenditures related to the advancement of our pre-clinical pipeline.

     Pursuant to the February 2004 Alchemgen licensing agreement we are no longer responsible for the further development of these two compounds. Research and development expenses for the corresponding 2003 period were $9,701,000, including direct project costs for Panzem^® , Endostatin and Angiostatin of $3,734,000, $782,000 and $578,000, respectively. For the three-month period ended September 30, 2004, research and development expenses totaled $2,553,000, a decrease from $3,151,000 for the comparable 2003 period. Included in the 2004 three-month period are expenses related to Panzem^® of $714,000 versus $1,063,000 in 2003. The higher 2003 amounts for Panzem^® reflect reformulation activities including material acquisition, animal testing and sample analysis.

     The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of September 30, 2004, our proprietary product candidate, Panzem^® , is in Phase I and Phase II clinical trials. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

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     We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

     The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

     We test our potential product candidates in numerous pre-clinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

     Our proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval for our product candidates, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from pre-clinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

     An important element of our business strategy is to pursue the research and development of a range of product candidates for a variety of oncology and non-oncology indications. This allows us to diversify the risks associated with our research and development expenditures. As a result, we intend to pursue development of our existing product candidates internally or through development partnerships, as well as through the acquisition and subsequent development of promising

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candidates. The goal is to align our capital requirements with multiple product candidates so as to increase the likelihood that our future financial success is not substantially dependent on any one product candidate. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

     Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our products. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements.

     As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There is no assurance that such additional capital would be available to us if needed. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

     Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract pre-clinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Our 2004 research and development expenses reflect continuing preclinical costs and the cost of a Phase I clinical trial to test various dosing approaches for reformulated Panzem^® . The 2004 amount also includes increased costs associated with further development of various drug candidates, including analogs of 2ME2. These expenses, however, were offset by decreased expenditures for Endostatin and Angiostatin versus the corresponding 2003 period. The decrease in R&D expenses during the quarter and nine months ended September 30, 2004 was specifically impacted by the following:

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     Also reflected in our 2004 research and development expenses for the three-month period ended September 30, 2004 are personnel costs of $800,000, patent costs of $119,000 and facility and related expenses of $243,000. In the corresponding 2003 period, these expenses totaled $662,000, $263,000 and $266,000, respectively. For the nine-month period ended September 30, 2004, personnel costs were $2,409,000, patent costs were $341,000 and facility and related expenses were $701,000. In the corresponding 2003 period, these expenses totaled $2,261,000, $703,000 and $710,000, respectively. The decrease in 2004 patent costs reflects our shift in focus to small molecules, which resulted in the elimination of some programs including the associated patent coverage.

     Other items contributing to the decrease in research and development expenses for the three-month period ended September 30, 2004 are reduced depreciation expense of $154,000 and the receipt of reimbursements for expenditures relating to the transition of Endostatin and Angiostatin totaling $209,000. In the corresponding 2003 period we did not record any reimbursements and depreciation expense totaled $280,000. Also reflected in the 2003 three month period were subcontract costs relating to our Malaria contract of $268,000. For the nine-month period ended September 30, 2004, there were no subcontract costs, depreciation expense was $507,000 and we received expense reimbursements of $226,000. In the corresponding 2003 period, subcontract costs were $499,000, depreciation expense was $843,000 with no reimbursements.

     General and Administrative Expenses. General and administrative expenses decreased to $1,338,000 in the three-month period ended September 30, 2004 from $1,748,000 in the

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corresponding 2003 period, reflecting the impact of personnel reductions and the elimination of certain expenditures beginning in the third quarter. For the nine-month period general and administrative expenses increased in 2004 to $5,394,000 from $5,050,000 for the corresponding 2003 period. The 2004 nine-month increase results from increased costs for professional services related to Sarbanes-Oxley Act, Nasdaq and SEC compliance, executive management changes and costs associated with settling certain disputes.

     Investment income. Investment income increased by 51% in the nine-month period ended September 30, 2004 to $221,000 from $146,000 in the corresponding 2003 period as a result of higher invested balances and higher yields in interest bearing cash accounts and investments during the 2004 period.

     Dividends on Series A convertible preferred stock. The Consolidated Statement of Operations for the nine-month periods ended September 30, 2004 and 2003 reflect a dividend of $753,750 relating to Series A Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The Series A Preferred Stock will accumulate dividends at a rate of 6% and will participate in dividends declared and paid on the common stock, if any. All accrued dividends must be paid before any dividends may be declared or paid on the Common Stock. The Company has no plans to pay any dividends in the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES

     To date, we have been engaged primarily in research and development activities. As a result, we have incurred and expect to continue to incur operating losses for 2004 and the foreseeable future before we commercialize any products. In addition, under the terms of the license agreement for 2ME2, we must be diligent in bringing potential products to market and may be required to make future milestone payments of up to $850,000. If we fail to comply with the milestones or fail to make any required sponsored research or milestone payment, we could face the termination of the relevant sponsored research or license agreements.

     We have not sold any securities during the first nine months of 2004 versus the comparable period in 2003 when we raised $18.3M in net proceeds from the sale of common stock and warrants. At September 30, 2004, we had cash and short-term investments of approximately $23,401,000 with working capital of approximately $21,764,000. We invest our capital resources with the primary objective of capital preservation. As a result of trends in interest rates in 2004 we have invested in some securities with maturity dates of more than 90 days to enhance our investment yields. As such, some of our invested balances are classified as short-term investments rather than cash equivalents in our financial statements.

     To accomplish our business plans, we will be required to continue to conduct substantial development activities for some or all of our proposed products. Under our current plans, results of operations are expected to reflect a loss of approximately $18,000,000 in 2004.

     Under our licensing agreements with Allergan and with Oxford Biomedica, PLC and Oxford Biomedica (UK) Limited Oxford, we are entitled to receive payments upon the achievement of certain milestones. We do not control the drug development efforts of Allergan or Oxford and have

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no control over when or whether such milestones will be reached. We do not believe that we will receive any developmental milestone payments under these agreements in 2004.

     Based on our assessment of our current capital resources coupled with anticipated inflows, in the absence of additional financing, we believe that we will have adequate resources to fund planned operations through 2005. Our estimate may change, however, based on our decisions with respect to future clinical trials related to Panzem^®, developments in our business including the acquisition of additional intellectual property, other investments in new or complementary technology, and our success in executing our current business plan.

     To address our long-term capital needs, we intend to continue to pursue strategic relationships to provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may continue to seek capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders likely will experience substantial dilution, or the equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences and privileges senior to those of our common stock. There can be no assurance that we will be successful in seeking additional capital.

INFLATION AND INTEREST RATE CHANGES

     Management does not believe that our working capital needs are sensitive to inflation and changes in interest rates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on our invested capital. Due to the short-term nature of our investment holdings, a 10% movement in market interest rates would not materially impact on the total fair market value of our portfolio as of September 30, 2004.

ITEM 4. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of September 30, 2004. There were no significant changes in our internal control over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     EntreMed is subject in the normal course of business to various legal proceedings in which claims for monetary or other damages may be asserted. Management does not believe such legal proceedings, except as otherwise disclosed herein, are material.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

Item 5. OTHER INFORMATION

     Not applicable

Item 6. EXHIBITS

     (a) Exhibits

     (b) Reports on Form 8-K

     None

Through its website at www.entremed.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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