CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2006 March (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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

For the transition period from                      to                     .

ENTREMED, INC.

Delaware		58-1959440
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

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

Class		Outstanding at May 5, 2006
Common Stock $.01 Par Value		74,051,323

 

 

ENTREMED, INC.
Table of Contents

		PAGE
PART I. FINANCIAL INFORMATION
Item 1 — Financial Statements
Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005			3
Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005			5
Notes to Consolidated Financial Statements			6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			18
Item 4 — Controls and Procedures			18
Part II. OTHER INFORMATION
Item 1 — Legal Proceedings			18
Item 1A – Risk Factors			19
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3 — Defaults upon Senior Securities			19
Item 4 — Submission of Matters to a Vote of Security Holders			19
Item 5 — Other Information			19
Item 6 — Exhibits			20
SIGNATURES			21

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. These statements can generally be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “will,” “should,” or “anticipates” or similar terminology. These forward-looking statements include, among others, statements regarding the timing of our clinical trials, our cash position and future expenses, and our future revenues.

Our forward-looking statements are based on information available to us today, and we will not update these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date thereof, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to the early stage of our product candidates under development, operating losses and anticipated future losses; the value of our common stock; our need for additional capital; intense competition and rapid technological change in the biopharmaceutical industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to clinical trials, estimated clinical trial commencement dates, government regulation and uncertainties of obtaining regulatory approval on a timely basis or at all. Additional information on the factors and risks that could affect our business, financial condition and results of operations, are contained in our filings with the U.S. Securities and Exchange Commission (SEC), which are available at www.sec.gov.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EntreMed, Inc.
Consolidated Balance Sheets

		March 31, 2006				December 31, 2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	20,803,773			$	11,407,652
Short-term investments			29,320,615				18,674,736
Accounts receivable			89,615				3,723,433
Note receivable			—				1,000,000
Interest receivable			68,203				181,231
Prepaid expenses and other			379,877				338,462
Total current assets			50,662,083				35,325,514
Property and equipment, net			976,032				915,337
Other assets			9,812				191,034
Total assets		$	51,647,927			$	36,431,885
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,986,836			$	5,487,014
Payable to related parties			188,827				228,380
Accrued liabilities			1,921,235				1,038,975
Current portion of loan payable			793,431				—
Current portion of deferred rent			68,083				60,969
Total current liabilities			5,958,412				6,815,338
Deferred rent, less current portion			211,372				230,206
Loan payable, less current portion			542,686				—
Total liabilities			6,712,470				7,045,544
Minority interest			17,242				17,151
Stockholders’ equity:
Convertible preferred stock, $1.00 par value; 5,000,000 shares authorized and 3,350,000 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively (liquidation value — $43,715,500 and $33,500,000, respectively)			3,350,000				3,350,000
Common stock, $.01 par value:
120,000,000 shares authorized, 74,051,323 and 51,106,857 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively			740,513				511,069
Additional paid-in capital			345,320,478				295,392,194
Deferred stock-based compensation			—				(102,000	)
Treasury stock, at cost: 874,999 shares held at March 31, 2006 and
December 31, 2005, respectively			(8,034,244	)			(8,034,244	)
Accumulated deficit			(296,458,532	)			(261,747,829	)
Total stockholders’ equity			44,918,215				29,369,190
Total liabilities and stockholders’ equity		$	51,647,927			$	36,431,885

See accompanying notes.

EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)

		Three Months Ended
		March 31, 2006				March 31, 2005
Revenues:
Licensing		$	—			$	23,874
Royalties			—				1,375
			—				25,249
Costs and expenses:
Research and development			4,011,100				4,379,356
General and administrative			1,816,694				1,260,822
Acquired In-Process R&D			29,128,061				—
			34,955,855				5,640,178
Investment income			278,465				158,461
Interest expense			(48,713	)			—
Gain on sale of assets			15,400				—
Net loss		$	(34,710,703	)		$	(5,456,468	)
Dividends on Series A convertible preferred stock			(251,250	)			(251,250	)
Net loss attributable to common shareholders		$	(34,961,953	)		$	(5,707,718	)
Net loss per share (basic and diluted)		$	(0.53	)		$	(0.13	)
Weighted average number of common shares outstanding (basic and diluted)			66,297,950				43,345,118

See accompanying notes.

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

		THREE MONTH PERIOD ENDED
		MARCH 31,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(34,710,703	)		$	(5,456,468	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			121,375				127,825
Gain on sale of fixed assets			(15,400	)			—
Write-off of acquired in-process R&D			29,128,061				—
Discount of premium on ST investments			(116,513	)			—
Stock-based compensation expense			348,909				—
Amortization of deferred stock-based compensation expense			43,713				—
Minority interest			90				10
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			3,683,100				2,937,469
Interest receivable			113,028				(44,102	)
Prepaid expenses and other			998				103,500
Deferred rent			(11,720	)			(4,813	)
Accounts payable			(2,575,813	)			744,539
Payable to related parties			(39,553	)			1,576,679
Accrued liabilities			(1,426,803	)			(884,209	)
Deferred revenue			—				(23,874	)
Net cash used in operating activities			(5,457,231	)			(923,444	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition, net of cash received			(2,552,385	)			—
Proceeds from sale of property and equipment, net			15,400				—
Purchases of short term investments			(17,959,367	)			(8,407,078	)
Maturities of short term investments			7,430,000				—
Purchases of furniture and equipment			(32,599	)			(4,457	)
Net cash used in investing activities			(13,098,951	)			(8,411,535	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loan			(112,006	)			—
Net proceeds from sale of common stock			28,064,309				9,978,274
Net cash provided by financing activities			27,952,303				9,978,274
Net increase in cash and cash equivalents			9,396,121				643,295
Cash and cash equivalents at beginning of period			11,407,652				20,425,495
Cash and cash equivalents at end of period		$	20,803,773			$	21,068,790
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	48,713			$	—
Non-cash investing activity:
Stock issued in connection with the acquisition		$	21,920,801			$	—

See accompanying notes.

ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (unaudited)

1. Basis of Presentation

     Our accompanying 2006 unaudited consolidated financial information includes the accounts of our controlled subsidiaries, Miikana Therapeutics, Inc. (Miikana) and 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 U. S. 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 U. S. 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, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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, 2005.

2. Short-Term Investments

     Short-term investments consist primarily of corporate debt securities, all of which mature within one year. The Company has classified these investments as available for sale. Such securities are carried at aggregate cost which approximates market. The cost of securities sold is calculated using the specific identification method. Unrealized gains and losses on these securities, if any, are reported as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity. There were no unrealized gains or losses as of March 31, 2006. 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. Short-term investments are principally uninsured and subject to normal credit risk.

3. Stock-Based Compensation

     The Company has adopted incentive and nonqualified stock option plans whereby 10,983,333 shares of the Company’s common stock were reserved for grants to various executive, scientific and administrative personnel of the Company as well as outside directors and consultants, of which 589,536 shares remain available for grant under the Company’s 2001 Long-term Incentive Plan as of March 31, 2006. Options granted under the plan generally vest over a period of up to four years, are not transferable and generally expire ten years from the date of grant.

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) and interpretative literature within SEC Staff Accounting Bulletin No. 107, Share-Based Payment, (SAB 107), using the

modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the three months ended March 31, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the original grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs for stock options granted prior to January 1, 2006 on an accelerated method, and for stock options granted after January 1, 2006 the compensation costs are recognized based on a straight-line method over the requisite service period, which is generally the option vesting term ranging from three to four years. Prior to the adoption of SFAS 123R, the Company recorded stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

     The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock options granted to employees. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions include the risk free rate of interest, expected dividend yield, expected volatility, and the expected life of the award.

     Expected Volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility based on the weekly price observations of its common stock during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term (up to a maximum of five years). EntreMed believes that historical volatility within the last five years represents the best estimate of future long term volatility.

     Risk-Free Interest Rate—This is the average interest rate consistent with the yield available on a U.S. Treasury note (with a term equal to the expected term of the underlying grants) at the date the option was granted.

     Expected Term of Options—This is the period of time that the options granted are expected to remain outstanding. EntreMed adopted SAB 107’s simplified method for estimating the expected term of share-based awards granted during the three months ending March 31, 2006.

     Expected Dividend Yield—EntreMed has never declared or paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. As such, the dividend yield percentage is assumed to be zero.

     Forfeiture Rate—This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on historical forfeiture experience for similar levels of employees to whom options were granted.

     Following are the weighted-average assumptions used in valuing the stock options granted to employees during the three-month periods ended March 31, 2006 and 2005:

		THREE MONTH PERIOD ENDED
		MARCH 31
		2006				2005
Expected volatility			103.40	%			121.00	%
Risk-free interest rate			4.75	%			4.00	%
Expected term of option		5 years				5 years
Forfeiture rate			5.00	%			0.00	%
Expected dividend yield			0.00	%			0.00	%

     A summary of the Company’s stock options and warrants granted to employees and directors and related information for the three months ended March 31, 2006 follows:

						Weighted
						Average
		Number of				Exercise
All Employee Options		Shares				Price
Outstanding at January 1, 2006			7,962,017			$	9.04
Granted			41,640				2.27
Exercised			(7,500	)			1.09
Expired			(66,668	)			15.00
Forfeited			—				—
Outstanding at March 31, 2006			7,929,489			$	8.97
Vested and expected to vest at March 31, 2006			7,921,104			$	9.25
Exercisable at March 31, 2006			6,761,613			$	10.07

     As of March 31, 2006, there was approximately $2 million of total unrecognized compensation cost related to nonvested employee stock options. That cost is expected to be recognized over a weighted-average period of up to four years.

     Cash received from option exercises under all share-based payment arrangements for the three months ended March 31, 2006 and 2005, was $11,456 and $150,095, respectively. Due to the availability of net operating loss carryforwards and research tax credits, tax deductions for option exercises were not recognized in the three months ended March 31, 2006.

     Total employee share-based compensation expense recognized for the three months ended March 31, 2006 are as follows:

		Three Months Ended
		March 31, 2006
Research and development			103,955
General and administrative			288,667
Share-based compensation expense		$	392,622
Net share-based compensation expense, per common share:
Basic and diluted		$	0.006

     The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provision of Statement 123 to options granted under the Company’s stock option plans for the three months ended March 31, 2005. For purposes of this pro-forma disclosure, the value of the options is estimated using a Black-Scholes Merton option-pricing formula and amortized to expense over the options’ vesting periods.

		Three months ended
		March 31, 2005
Actual net loss		$	(5,456,468	)
Deduct: Stock-based employee compensation expense if SFAS No. 123 had been applied to all awards			(692,891	)
Add: Stock-based employee compensation included in reported net loss			—
Proforma net loss		$	(6,149,359	)
Dividend on Series A convertible preferred stock			(251,250	)
Proforma net loss per share available to common shareholders		$	(6,400,609	)
Net loss per share:
Basic and diluted — as reported		$	(.13	)
Basic and diluted — pro forma		$	(.15	)

4. Acquisition

     In January 2006 the Company acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the Merger Agreement, EntreMed acquired all of the outstanding capital stock of Miikana Therapeutics, Inc. in exchange for 9.96 million shares of EntreMed common stock and the assumption of certain obligations. In addition, based on the success of the acquired pre-clinical programs, EntreMed may pay up to an additional $18 million upon the achievement of certain clinical and regulatory milestones. Such additional payments will be made in cash or shares of stock at EntreMed’s option. Through the acquisition we acquired rights to MCK-1 a Phase 2 clinical candidate licensed from Hoffman-LaRoche, Inc. (“Roche”) by Miikana in April 2005. Under the terms of the agreement Roche may be entitled to receive future payments upon successful completion of developmental milestones. We do not anticipate paying any of these milestones in 2006. Roche is also eligible to receive royalties on sales and certain one-time payments based on attainment of annual sales milestones. The Company has also acted as guarantor on the unpaid balance of approximately $1.5 million under a loan agreement with Venture Lending & Leasing IV, Inc. dated October 1, 2004. The final payment is due in October 2007.

     Miikana purchase price allocation

      Miikana is a development stage company, accordingly the acquisition of Miikana is treated as an asset purchase. In accordance with EITF 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Asset or of a Business,” the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on our estimated fair values at the acquisition date. An independent third-party valuation firm was engaged to assist in determining the fair values of various research and development projects in Miikana’s pipeline that, as of the acquisition date, had not reached technological feasibility and had no alternative use. This valuation required the use of significant estimates and assumptions including but not limited to:

	•		determining the timing and expected costs to complete the in-process projects,
	•		projecting regulatory approvals,
	•		estimating future cash flows from product sales resulting from in-process projects, and
	•		developing appropriate discount rates and probability rates by project.

     We believe the fair values assigned to the assets acquired and liabilities assumed are based upon reasonable assumptions given current available facts and circumstances.

     The total purchase price allocated was $29.7 million, consisting of 9,964,000 shares of our common stock with a fair value of $21.9 million, assumed debt of $1.5 million, assumed current liabilities of $2.3 million, $1 million loaned to Miikana prior to the closing and acquisition costs of $3 million. The fair value of common stock was determined using the closing price at the date of acquisition.

     We allocated the purchase price to the tangible assets and in-process research and development based on their estimated fair market values. The purchase price allocation was as follows:

Fair value of assets acquired		$	600,000
In-process research and development			29,100,000
Total		$	29,700,000

     The value of the in-process research and development was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value. A discount rate of 18.5% was used which approximates the cost of equity capital based on a composite of measures including, risk free rates, equity risk premiums, market capitalization and industry.

5. Licensing Agreement

     In January 2006 the Company entered into a License Agreement with Elan Corporation, plc in which EntreMed has been granted rights to utilize Elan’s proprietary NanoCrystal Technology to develop the oncology product candidate, Panzem^® NCD (2ME2 or 2-methoxyestradiol). Under the terms of the License Agreement, Elan is eligible to receive payments upon the achievement of certain clinical, manufacturing, and regulatory milestones. Milestones related to the initiation of Phase 2 clinical trials have been paid and there are no additional milestones due at this time. Additionally, Elan will receive royalty payments based on sales of Panzem^® NCD. Under the License Agreement and corresponding Services Agreement, Elan will manufacture EntreMed’s Panzem^® NCD, a NanoCrystal Technology formulation with improved bioavailability and absorption.

6. Sale of Securities

     In February 2006 the Company entered into definitive agreements with institutional investors for the private placement of units consisting of shares of common stock and warrants at a purchase price of $2.3125 per unit. In connection with the placement, the Company received gross proceeds

of approximately $30 million and issued approximately 13 million shares of common stock and warrants to purchase up to 6.5 million additional shares of common stock at an exercise price of $2.50 per share. The warrants are not exercisable until six months after the closing. In April 2006, the Company registered the resale of the shares and the shares underlying the warrants.

7. Related Party Transactions

     The Company receives legal services from a law firm with which one of the Company’s officers is associated. During the three months ended March 31, 2006 these services totaled $278,000, the majority representing patent work. These costs are recorded as research and development expenses of $208,000, general and administrative expenses of $54,000 and costs related to the Miikana acquisition of $16,000. At March 31, 2006 amounts payable to these parties are reflected on our balance sheet as payable to related parties in the amount of $189,000. The Company completed a sale of common stock and warrants in February 2006. Celgene Corporation, the Company’s largest shareholder, acquired 864,864 shares of common stock and 432,432 warrants convertible into shares of common stock in the transaction (see footnote 6).

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

OVERVIEW

     We are a clinical-stage pharmaceutical company focused on developing next generation multi-mechanism oncology and anti-inflammatory drugs that target disease cells directly and the blood vessels that nourish them. We are focused on developing drugs that are safe and convenient, and provide the potential for improved patient outcomes. Panzem^® (2-methoxyestradiol or 2ME2), one of our lead drug candidates, is currently in Phase 2 clinical trials for cancer, as well as in preclinical development for rheumatoid arthritis. MKC-1, a novel cell cycle inhibitor acquired through the acquisition of Miikana Therepeutics, is also in Phase 2 clinical trials for cancer. We also recently announced that ENMD-1198, a novel tubulin binding agent discovered by EntreMed, commenced a Phase 1 clinical trial for cancer.

     In January 2006, we acquired Miikana Therepeutics, Inc., a clinical-stage biopharmaceutical company with research laboratories in Toronto, Canada. As a result of the transaction, we enhanced our pipeline with the addition of a Phase 2 drug candidate, MKC-1, and two preclinical programs, one in aurora kinase inhibition and one in HDAC inhibition.

     Our goal is to develop and commercialize therepeutics based on our scientific expertise in angiogenesis, cell cycle regulation and inflammation — processes vital to the progression of cancer and other diseases. Our three product candidates are based on these mechanisms. Our expertise has also led to the identification of new molecules, including new chemical entities derived from 2ME2, modulators of fibroblast growth factor-2 (FGF-2) activity, proteinase activated receptor-2 (PAR-2) antagonists, and tissue factor pathway inhibitor (TFPI) peptides.

     In order to further advance of our commercial objectives, we may seek strategic alliances, licensing relationships and co-development partnerships with other companies to develop compounds for both oncology and non-oncology therapeutic areas.

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. Our critical accounting policies, including the items in our financial statements requiring significant estimates and judgments, are as follows:

-

Revenue Recognition — The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition, whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectibility is reasonably assured.

-

Royalty Revenue — Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured. We expect that the majority of our 2006 revenues will be from royalties on the sale of Thalomid®, which we expect to begin to recognize in the third quarter. In 2004 certain provisions of a purchase agreement dated June 14, 2001 by and between Bioventure Investments kft (“Bioventure”) and the Company were satisfied, and, as a result, beginning in 2005 we are entitled to share in the royalty payments received by Royalty Pharma Finance Trust, successor to Bioventure, on annual Thalomid® sales above a certain threshold. Based on the licensing agreement royalty formula, annual royalty sharing commences with Thalomid® annual sales of approximately $225 million. The Company is eligible to receive royalty payments under a February 2004 agreement with Children’s Medical Center Corporation (“CMCC”) and Alchemgen Therapeutics. Under the agreement, Alchemgen received rights to market endostatin and angiostatin in Asia. We do not expect to receive royalties under this agreement in 2006. In the future, royalty payments, if any, will be recorded as revenue when received and/or when collectibility is reasonably assured.

	-		Research and Development — 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 costs of manufacturing the product candidates, and facilities expenses. Research and development costs are expensed as incurred.
	-		Stock-Based Compensation — Issued in December 2004, Statement of Financial Accounting Standards No. 123R (“SFAS 123R”) requires public companies to recognize expense associated with share-based compensation arrangements, including employee stock options and stock purchase plans, using a fair value-based option pricing model, and eliminates the alternative to use the intrinsic value method of accounting for share-based payments. SFAS 123R is effective for our fiscal year beginning January 1, 2006. Adoption of the expense provisions of SFAS 123R have a material impact on our results of operations. We have applied the modified prospective transition method; accordingly, compensation expense is reflected in the financial statements beginning January 1, 2006 with no restatement of prior

periods. Compensation expense is recognized for awards that are granted, modified, repurchased or cancelled on or after January 1, 2006, as well as for the portion of awards previously granted that have not vested as of January 1, 2006. For the adoption of SFAS 123R, we have selected the straight-line expense attribution method, whereas our previous expense attribution method was the graded-vesting method, an accelerated method, described by FIN 28.

     Any future changes to our share-based compensation strategy or programs would likely affect the amount of compensation expense recognized under SFAS 123R and the comparability to our prior period footnote disclosures of pro forma net earnings and earnings per share. Share-based compensation expense recognized in Q1 2006 totaled $393,000.

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2006 and March 31, 2005.

     - Revenues. There were no revenues recorded during the quarter ended March 31, 2006 compared to $25,000 in the corresponding 2005 period. We do not expect to record revenue in 2006 until the third quarter. Our 2006 revenues, if any, will result from Celgene’s sale of Thalomid^®. We earn royalties pursuant to a 2001 agreement with Royalty Pharma, as noted above.

     Research and Development Expenses. From inception through March 31, 2006, we have incurred research and development expenses of $242,491,000. At March 31, 2006, accumulated direct project expenses for Panzem^®, our lead drug candidate, totaled $36,574,000. Reflected in our R&D expenses totaling $4,011,000 for the three-month period ended March 31, 2006 are direct project expenses for Panzem^® of $1,280,000, $414,000 related to ENMD-1198, a tubulin binding agent that recently entered Phase 1 trials for cancer, and $432,000 related to MKC-1, a Phase 2 clinical candidate acquired with Miikana in January 2006. Research and development expenses for the corresponding 2005 period were $4,379,000, which included $1,380,000 direct project expenses for Panzem^® and $810,000 related to ENMD-1198. There were no Miikana costs reported in 2005. The 2006 decrease results primarily from the recording of a $1,000,000 upfront licensing fee in the period ended March 31, 2005 related to the license of Celgene’s small molecule tubulin inhibitor compounds.

     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. These costs totaled $1,885,000 and $1,189,000 for the three-month period ended March 31, 2006 and 2005, respectively. The 2006 increase is primarily attributable to the Miikana asset acquisition.

     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 March 31, 2006, we have two product candidates, Panzem^® NCD and MKC-1, in Phase 2 clinical trials for cancer. We expect our R&D expenses to trend higher reflecting the costs of supporting multiple Phase 2 trials including the costs of securing clinical drug supply. In addition, ENMD-1198 recently commenced Phase 1 clinical trials in cancer. 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:

		ESTIMATED
		COMPLETION
CLINICAL PHASE		PERIOD
Phase I		1 Year
Phase II		1-2 Years
Phase III		2-4 Years

     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:

	-		the number of patients that ultimately participate in the trial;
	-		the duration of patient follow-up that seems appropriate in view of the results;
	-		the number of clinical sites included in the trials; and
	-		the length of time required to enroll suitable patient subjects.

     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, 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 candidates. The goal is to align our future capital requirements with multiple product candidates and 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. 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. Research and development expenses decreased to $3,907,000 in the quarter ended March 31, 2006 from $4,379,000 for the corresponding period in 2005. The 2006 expenses include Miikana research and development costs of $914,000; however the decrease in 2006 primarily results from the recording of a $1,000,000 upfront fee associated with the license of Celgene’s small molecule tubulin inhibitor compounds for the treatment of cancer in the corresponding 2005 period. In addition to the absence of the licensing fee, the overall decrease in R&D expenses during the quarter ended March 31, 2006 was specifically impacted by the following:

	-		Outside Services — We utilize outsourcing to conduct our product development activities. Larger-scale small molecule synthesis, in vivo testing and data analysis are examples of the services that we outsource. In the three-month period ended March 31, 2006, EntreMed expended $338,000 on these activities versus $482,000 in the same 2005 period. The decrease reflects the progression of ENMD-1198 from the preclinical to the clinical stage of development. The 2006 expense includes $35,000 related to Miikana’s outside services.
	-		Collaborative Research Agreements — EntreMed made payments to collaborators of $201,000 and $105,000 for the three months ended March 31, 2006 and 2005, respectively. Our collaborative efforts are primarily directed towards further exploration of 2ME2 mechanism-of-action (MOA) and PanzemÒ non-oncology applications. The 2006 expense includes $85,000 related to Miikana’s collaborative efforts in regard to MKC-1.
	-		Clinical Trial Costs — Clinical trial costs increased to $475,000 in the three months ended March 31, 2006, from $201,000 in the three-month period ended March 31, 2005. The increase reflects the initiation of Phase 2 clinical trials for PanzemÒ NCD, in addition to $161,000 related to the initiation of Phase 2 clinical trials for MKC-1. Costs of such trials include the clinical site fees, monitoring costs and data management costs.

-

Contract Manufacturing Costs — The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, and product release costs. Contract manufacturing costs for the three months ended March 31, 2006 decreased to $774,000 from $879,000 during the same period in 2005. Included in the 2006 amount is $73,000 related to the encapsulation of material for the Phase 2 trials for MKC-1. The 2006 decrease results from the timing of manufacturing activities.

     Also reflected in our 2006 research and development expenses for the three-month period ended March 31, 2006 are personnel costs of $1,135,000, patent costs of $225,000 and facility and related expenses of $341,000, including Miikana’s expenses of $389,000, $46,000 and $20,000, respectively. In the corresponding 2005 period, these expenses totaled $735,000, $121,000 and $336,000, respectively.

     Our 2005 research and development expenses for the three-month period ended March 31, 2005 also include an upfront payment of $1,000,000 to Celgene Corporation for the license of tubulin inhibitor compounds. In connection with this license agreement, we paid a $200,000 success fee to Ferghana Partners, Inc.

     General and Administrative Expenses. General and administrative expenses include compensation and other expenses related to finance, business development and administrative personnel, professional services and facilities.

     General and administrative expenses increased to $1,865,000, including Miikana’s expenses of $239,000, in the three-month period ended March 31, 2006 from $1,260,000 in the corresponding 2005 period. In addition to Miikana’s general and administrative expenses, the increase relates to the recording of stock-based compensation in the amount of $289,000, pursuant to the adoption of SFAS 123R.

     Investment income. Investment income increased by 76% in the three-month period ended March 31, 2006 to $278,000 from $158,000 in the corresponding 2005 period as a result of higher yields on higher invested balances in interest bearing cash accounts and investments during the 2006 period.

     Dividends on Series A convertible preferred stock. The Consolidated Statement of Operations for the periods ended March 31, 2006 and 2005 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 holders of Series A Preferred Stock will accumulate dividends at a rate of 6% and will participate in dividends declared and paid on our common stock, if any. All accumulated 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 2006 and the foreseeable future before we commercialize any products. Under the terms of the license agreements for 2ME2 and Celgene’s tubulin inhibitor program, we must be diligent in bringing potential products to market

and may be required to make future milestone payments totaling approximately $850,000 and $25.25 million, respectively. In addition, pursuant to the MKC-1 license agreement with Roche, we may be required to make payments based upon the attainment of certain milestones. 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 license agreement. As of March 31, 2006, none of these milestones have been reached and, as such, there are no payments due.

     In February 2006, we raised gross proceeds of approximately $30 million through the sale of units consisting of warrants and shares of common stock. At March 31, 2006, we had cash and short term investments of approximately $50 million with working capital of approximately $45 million.

     We invest our capital resources with the primary objective of capital preservation. As a result of trends in interest rates, 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 unaudited consolidated financial statements at March 31, 2006.

     To accomplish our business plans, we will be required to continue to conduct substantial development activities for some or all of our proposed products. The acquisition of Miikana Therapeutics in January 2006 provides an additional product pipeline, including MKC-1, a cell cycle regulator, which entered Phase 2 oncology trials in January 2006. In conjunction with the acquisition, we assumed certain separation obligations totaling approximately $500,000. Under our current operating plans, which include supporting two Phase 2 and one Phase 1 clinical trials for oncology compounds, we expect our 2006 results of operations to reflect a net loss of approximately $60 million which reflects non-cash charges of $29,100,000 associated with the Miikana asset acquisition and $2 million pursuant to the adoption of SFAS 123R. This projection is subject to judgment and estimation and could significantly change. We expect that the majority of our 2006 revenues will continue to be from royalties on the sale of Thalomid^®. Based on historical trend and analyst consensus for Thalomid^® sales in 2006, we expect to record royalty sharing revenues in excess of $3 million in 2006; however, there can be on assurance in this regard. In addition, under our licensing agreement with Oxford Biomedica, PLC and Oxford Biomedica (UK) Limited Oxford, we are entitled to receive payments upon the achievement of certain milestones. However, we do not control the drug development efforts of Oxford and have 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 2006.

     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 for more than twelve months. Our estimate may change, however, based on our decisions with respect to future clinical trials related to our three clinical drug candidates, the timing of receipt of milestone payments, 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 that would 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 will likely 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, 2006.

ITEM 4. CONTROLS AND PROCEDURES

     The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the first quarter of 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that the Company (including its consolidated subsidiaries) records, processes, summarizes and reports information it is required to disclose in its Exchange Act filings within the required time periods.

     There was no change in the Company’s internal control over financial reporting that occurred during the first quarter of 2006 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

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 1A. RISK FACTORS

     For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of EntreMed’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the information under “Special Note Regarding Forward-Looking Statements” included in this report.

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

Exhibits
2.1		Agreement and Plan of Merger By and Among EntreMed Inc., E.M.K. Sub Inc., Miikana Therapeutics Inc., and Stockholder Representative, effective December 22, 2005 (filed on December 23, 2005 as Exhibit 2.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference)
10.1		License Agreement By and Between Elan Pharma International Ltd., and EntreMed Inc., effective January 9, 2006*
10.2		Research, Development, and Commercialization Agreement By and Between Hoffmann-La Roche Inc., F. Hoffmann-La Roche Ltd., and Miikana Therapeutics Inc., effective April 20, 2005*
31.1		Rule 13a-14(a) Certification of President and Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer

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.

				ENTREMED, INC.
				(Registrant)
Date: May 10, 2006				/s/ James S. Burns
				James S. Burns
				President and Chief Executive Officer
Date: May 10, 2006				/s/ Dane R. Saglio
				Dane R. Saglio
				Chief Financial Officer

EXHIBIT INDEX

2.1		Agreement and Plan of Merger By and Among EntreMed Inc., E.M.K. Sub Inc., Miikana Therapeutics Inc., and Stockholder Representative, effective December 22, 2005 (filed on December 23, 2005 as Exhibit 2.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference)
10.1		License Agreement By and Between Elan Pharma International Ltd., and EntreMed Inc., effective January 9, 2006
10.2		Research, Development, and Commercialization Agreement By and Between Hoffmann-La Roche Inc., F. Hoffmann-La Roche Ltd., and Miikana Therapeutics Inc., effective April 20, 2005
31.1		Rule 13a-14(a) Certification of President and Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer