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

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

For the quarterly period ended March 31, 2004

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, 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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EntreMed, Inc.

See accompanying notes.

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EntreMed, Inc.

See accompanying notes.

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EntreMed, Inc.

See accompanying notes.

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ENTREMED, INC.

1. Basis of Presentation

     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 three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to our audited consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2003.

2. Recent Accounting Standards

     In April 2002, the Financial Accounting Standards Board issued SAFS No. 145, Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (SFAS No. 145). Among other things, SFAS No. 145 generally prohibits the classification of gains or losses from the early extinguishments of debt as an extraordinary item, and therefore rescinds the previous requirements to do so. Gains and losses from the early debt extinguishments recorded in prior periods are required to be reclassified. The Company elected to early adopt SFAS No. 145. There was no impact on the consolidated financial statements as presented.

     In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual

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periods ended after December 31, 2002. The adoption of FIN 45 did not have a material effect on the Company’s financial condition, results of operations or liquidity.

     In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003. The Company has evaluated its equity investments, loans, leases, service and management contracts and other instruments whose value may change with changes in the other parties’ net assets and has concluded the adoption of FIN 46 will not have a significant impact on its financial condition, results of operations or liquidity.

3. Short-Term Investments

     Short-term investments consist of corporate debt 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 March 31, 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 March 31, 2004, the cost of the investments was $4,399,931. Realized gains have been insignificant.

4. Stock-Based Compensation

     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.

     Disclosures regarding alternative fair values of measurement and recognition methods prescribed by Statement of Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure and Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) are presented in Note 9 and in the table below. The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based compensation:

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     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 options to be granted in future years.

6. License Agreement

     In February 2004, we transferred certain rights for our protein-based drug candidate programs, endostatin and angiostatin, in an agreement with Children’s Medical Center Corporation in Boston (CMCC) and Alchemgen Therapeutics, Inc. (Alchemgen). Under the agreement, CMCC and Alchemgen are continuing the development of endostatin and angiostatin and bear all expenses associated with the programs, including costs that we may incur in transferring these compounds. In exchange, we receive upfront and future cash and royalty payments. Under the terms of the three-party agreement Alchemgen received exclusive rights to market endostatin and angiostatin in Asia. CMCC holds the license for the rest of the world therefore we have no future milestone payment obligations. We will receive 20% of all future proceeds (e.g. upfront, milestone and royalty payments) resulting from any subsequent CMCC license outside of Asia.

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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 March 31, 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 to 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.

     Our research and development efforts are focused on the identification and development of new chemical entities utilizing our understanding of the interrelationships of cell cycle regulation, inflammation, coagulation and angiogenesis — processes vital to the treatment of multiple diseases, including cancer. In 2003 we reformulated our lead drug candidate Panzem^® and we are evaluating various oral dosage forms. Our expenses will likely exceed our revenues as we continue the development of Panzem® and bring other drug candidates into clinical trials.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

     The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The items in our financial statements requiring significant estimates and judgments are as follows:

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RESULTS OF OPERATIONS

     For the Three Months Ended March 31, 2004 and March 31, 2003.

     Revenues. Revenues decreased to $98,000 in the three month period ending March 31, 2004 compared to $514,000 in the corresponding 2003 period. 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 $188,000 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 quarter of 2004. Licensing revenues during the quarter ended March 31, 2004 increased to $97,000 from $24,000 in the corresponding 2003 period. This increase is attributable to the recognition of amortized licensing revenues from a February 2004 agreement with Alchemgen.

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     Research and Development Expenses. From inception through March 31, 2004, we have incurred research and development expenses of $213,688,000. Included in this amount are the expenses related to our three product candidates, Panzem®, Endostatin and Angiostatin. At March 31, 2004, the accumulated expenses for each of these development projects are $25,352,000, $71,521,000 and $35,568,000, respectively. Project expenses for Panzem® of $1,209,000, Endostatin of $222,000 and Angiostatin of $84,000 are reflected in our 2004 R&D expenses totaling $3,057,000 for the three-month period ending March 31, 2004. Research and development expenses for the corresponding 2003 period were $2,631,000. As discussed below, the increase in 2004 reflects continuing preclinical costs and the initiation of Phase I clinical trial to test various dosing approaches for reformulated Panzem®. The 2004 increase also reflects increased costs associated with further development of our pipeline drug candidate, particularly our New Chemical Entities (NCE). These expenses, however, were offset by decreased expenditures on Endostatin and Angiostatin, as we are no longer responsible for further development of these compounds. Pursuant to the Alchemgen licensing agreement we will be reimbursed for Endostatin and Angiostatin costs incurred during transition of these programs to Alchemgen and CMCC. Project costs for Panzem®, Endostatin and Angiostatin were $496,000, $391,000 and $294,000, respectively, for the three-month period ending March 31, 2003.

     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. Prior to licensing Endostatin and Angiostatin in February 2004, we had three product candidates in various stages of clinical trials. As of March 31, 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.

     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:

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     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.

     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 believe our future capital requirements and our future financial success are 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.

     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, 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.

     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. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. There is no assurance that such additional capital would be available to us if needed.

     Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with pre-clinical testing and clinical trials of our product candidates, including the

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costs of manufacturing the product candidates, and facilities expenses. Research and development expenses increased to $3,057,000 in the quarter ended March 31, 2004 from $2,631,000 for the corresponding period in 2003. The increase in 2004 reflects continuing preclinical costs and the initiation of a Phase I clinical trial to test various dosing approaches for reformulated Panzem®. The 2004 amount also reflects increased costs associated with further development of our pipeline drug candidate, particularly our New Chemical Entities (NCE). These expenses, however, were offset by decreased expenditures on Endostatin and Angiostatin versus the corresponding period of 2003. The increase in R&D expenses during the quarter ended March 31, 2004 was specifically impacted by the following:

     Also reflected in our 2004 research and development expenses are personnel costs of $819,000, patent costs of $112,000 and facility and related expenses of $382,000. In the

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corresponding 2003 period, these expenses totaled $820,000, $234,000 and $470,000, respectively. The 2004 decrease in patent cost reflects our shift in focus to small molecules, which resulted in the elimination of some programs and corresponding patent coverage.

     General and Administrative Expenses. General and administrative expenses increased to $2,093,000 in the three-month period ended March 31, 2004 from $1,627,000 in the corresponding 2003 period. The 2004 difference resulted primarily from costs associated with settling certain disputes.

     Investment income. Investment income increased by 58% in the period ending March 31, 2004 to $85,000 from $54,000 in the corresponding 2003 period as a result of higher invested balances 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 periods ended March 31, 2004 and 2003 reflect a dividend of $251,250 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.

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 Panzem® license agreement, 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.

     At March 31, 2004, we had cash and short term investments of approximately $30,699,000 with working capital of approximately $28,566,000. To accomplish our business plans, we will be required to continue to conduct substantial development activities for all of our proposed products. Under our current operating plans, expenditures on development activities are expected to be approximately $21,000,000, net of operating revenues, 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 no control over when or whether such milestones will be reached. We do not believe that we will receive any such milestone payments under these agreements in 2004.

     Based on our assessment of our current capital resources and the actions discussed below, and in the absence of additional financing, we believe that we will have adequate resources to

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fund operations into 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 and other investments in new or complimentary technology and our success in executing our current business plan.

     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 cash and cash equivalents. Due to the short term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact on the total fair market value of our portfolio as of March 31, 2004.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s President and Chief Operating 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 Operating Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of March 31, 2004. There were no significant changes in our internal control over financial reporting during the quarter ended March 31, 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. CHANGES IN SECURITIES AND USE OF PROCEEDS

     Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     Not applicable.

Item 5. OTHER INFORMATION

     Not applicable

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

10.50 Employment Agreement between EntreMed and Neil J. Campbell effective January 1, 2004

31.1 Rule 13a-14(a) Certification of President and Chief Operating Officer

31.2 Rule 13a-14(a) Certification of Chief Financial Officer

32.1 Rule 13a-14(b) Certification of Equivalent of Chief Executive Officer

32.2 Rule 13a-14(b) Certification of Chief Financial Officer

     (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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