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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

Commission file number 0-26866

Sonus Pharmaceuticals, Inc.

22026 20th Ave. SE, Bothell, Washington 98021
(Address of Principal Executive Offices)

(425) 487-9500
(Registrant’s Telephone Number, Including Area Code)

Indicate by check 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 [   ]  No [X]

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

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Sonus Pharmaceuticals, Inc.
Index to Form 10-Q

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Part I. Financial Information

Item 1. Financial Statements

Sonus Pharmaceuticals, Inc.
Balance Sheets

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Statements of Operations
(Unaudited)

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Statements of Cash Flows
(Unaudited)

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Notes to Financial Statements
(Unaudited)

1. Basis of Presentation

     The unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

     The financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Form 10-K for the year ended December 31, 2002 and filed with the Securities and Exchange Commission on March 10, 2003.

2. Comprehensive Income (Loss)

3. Cash, Cash Equivalents and Marketable Securities

     Cash, cash equivalents and marketable securities consist of the following:

4. Accounting for Stock Options

	Under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” companies may continue to follow Accounting Principles Board Opinion No. 25 (APB 25) in accounting for stock-based compensation and provide footnote disclosure of the proforma impact of expensing stock options. We have elected to follow the disclosure-only provisions of SFAS

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No. 123 and continue to apply APB 25 and related interpretations in accounting for our stock option plans. Under the provisions of APB 25 and related interpretations, employee stock-based compensation expense is recognized based on the intrinsic value of the option on the date of grant (the difference between the market value of the underlying common stock on the date of grant and the option exercise price, if any). At June 30, 2003 we had several stock-based employee compensation plans. All options granted under these plans had exercise prices equal to the market value of the underlying common stock on the date of grant and therefore, in accordance with APB 25, no stock-based employee compensation cost has been recorded.

	As required under SFAS 123, the following table illustrates the effect on net loss and net loss per share if we had applied the fair value expense recognition provision of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

The fair value of each option used in the calculations under SFAS 123 is estimated using the Black-Scholes option pricing model. The assumptions used in this model include (1) the stock price at grant date, (2) the exercise price, (3) an estimated option life of four years, (4) no expected dividends for each period presented, (5) stock price volatility factor of 1.135 and 1.154 as of June 30, 2003 and 2002, respectively, and (6) a risk-free interest rate of 2.36% and 3.82% as of June 30, 2003 and 2002, respectively.

5. Subsequent Event

In July 2003, the Company sold 3.9 million shares of common stock in a private placement transaction for gross proceeds of $14.2 million (approximately $13.1 million net of transaction costs). As part of the private placement, the Company issued warrants to purchase up to 1.95 million shares of common stock. The common stock was sold at a price of $3.56 per share. The warrants were sold at a price of $0.125 per share underlying each warrant, have an exercise price of $4.09 per share and expire in July 2008.

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

          Forward-Looking Statements

	This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

	•		Progress and preliminary results of clinical trials;
	•		Anticipated regulatory filings, requirements and future clinical trials;
	•		Market acceptance of our products and the estimated potential size of these markets;
	•		Our anticipated future capital requirements and the terms of any capital financing; and
	•		Timing and amount of future contractual payments, product revenues and operating expenses.

While these forward-looking statements made by us are based on our current beliefs and judgement, they are subject to risks and uncertainties that could cause actual results to vary from the projections in the forward-looking statements. You should consider the risks below carefully in addition to other information contained in this report and in our Annual Report on Form 10-K for the year ended December 31, 2002 before engaging in any transaction involving shares of our common stock. If any of these risks occur, they could seriously harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

	The discussion and analysis set forth in this document contains trend analysis, discussions of regulatory status and other forward-looking statements. Actual results could differ materially from those projected in the forward-looking statement as a result of the following factors, among others:

	•		Dependence on the development and commercialization of products;
	•		History of operating losses and uncertainty of future financial results;
	•		Uncertainty of governmental regulatory requirements and lengthy approval process;
	•		Future prospects heavily dependent on results of TOCOSOL Paclitaxel;
	•		Dependence on third parties for funding, clinical development, manufacturing and distribution;
	•		Future capital requirements and uncertainty of additional funding;
	•		Uncertainty of U.S. or international legislative or administrative actions;
	•		Continued listing on the Nasdaq National Market;
	•		Competition and risk of technological obsolescence;
	•		Limited manufacturing experience and dependence on a limited number of contract manufacturers and suppliers;
	•		Ability to obtain and defend patents, protect trade secrets and avoid infringing patents held by third parties;
	•		Limitations on third-party reimbursement for medical and pharmaceutical products;
	•		Acceptance of our products by the medical community;
	•		Dependence on key employees;
	•		Potential for product liability issues and related litigation;
	•		Potential for claims arising from the use of hazardous materials in our business; and
	•		Volatility in the value of our common stock.

             See “Certain Factors That May Affect Our Business and Future Results” on page 16.

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MD&A Overview

     In Management’s Discussion and Analysis of Financial Condition and Results of Operations we explain the general financial condition and the results of operations for our Company, including:

	•		An overview of our business;
	•		Results of operations and why those results are different from the prior year; and
	•		Our current capital resources and possible sources of additional funding for future capital requirements.

Business Overview

     Sonus Pharmaceuticals is applying its novel TOCOSOL™ drug delivery technology to make therapeutic drugs safer, easier to administer and potentially more effective. Our business strategy is as follows:

	•		Develop proprietary, novel formulations of therapeutic drugs based on our TOCOSOL drug delivery technology. Our objective is to advance these proprietary products through Phase 1 and 2 clinical trials and then enter into collaborative agreements with larger companies to: (i) fund the pivotal clinical studies that would serve as the basis for submitting a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA); and (ii) maximize the commercial opportunity of the product.
	•		License our TOCOSOL drug delivery technology to other companies to enable them to improve formulations of their existing drugs or new compounds under development.
	•		Expand the TOCOSOL technology to other dosage forms (e.g. oral) and site-specific delivery of therapeutic drugs.

TOCOSOL Drug Delivery Technology

     Our proprietary TOCOSOL technology platform has been designed to address the formulation challenges of certain categories of therapeutic drugs. Development of drugs with our TOCOSOL technology may result in products with decreased incidences of side effects, improved dosing convenience and equivalent or better efficacy. The TOCOSOL technology uses vitamin E oil (tocopherol) to solubilize the drugs and tocopherol-based surfactants to control the size of drug delivery particles and make the product more compatible with the human body. It is this compatibility characteristic that makes our TOCOSOL technology particularly suited to injectable therapeutic drugs that are poorly soluble in water. In addition, the TOCOSOL technology may also be used in future applications to formulate oral dosage forms of hydrophobic (poorly soluble in water) and hydrophilic (water-based) drugs to improve their absorption and therapeutic utility.

Products Under Development

     TOCOSOL Paclitaxel. Our lead product, TOCOSOL Paclitaxel, is a novel formulation of paclitaxel, one of the world’s most widely prescribed anti-cancer drugs. Paclitaxel is the active ingredient in Taxol^®, which is approved in the U.S. for the treatment of breast, ovarian and non-small cell lung cancers and Kaposi’s sarcoma. Our product, TOCOSOL Paclitaxel, is a ready-to-use injectable paclitaxel emulsion. TOCOSOL Paclitaxel is currently under study in Phase 2 clinical trials to evaluate safety and efficacy in multiple tumor types. We have demonstrated that TOCOSOL

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Paclitaxel can be administered to patients by a short 15 minute injection, instead of the typical three-hour infusion that is required with the currently marketed paclitaxel products.

     We concluded a Phase 1 study for TOCOSOL Paclitaxel in August 2002 with a total of 37 patients. The objectives of the Phase 1 study were to estimate the maximum tolerated dose of TOCOSOL Paclitaxel in patients with advanced cancers, and to evaluate the safety of repeated doses of TOCOSOL Paclitaxel given every 3 weeks.

     In the Phase 1 study, 30 of the 37 patients were treated at doses ranging from 175 mg/m² to 225 mg/m² every three weeks. The maximum tolerated dose (MTD) was estimated to be 200 mg/m² every three weeks, slightly higher than the approved dose of Taxol^® at 175 mg/m² every three weeks. TOCOSOL Paclitaxel was generally well tolerated in all patients treated. All patients in the Phase 1 study had advanced cancers that were no longer responding to previous therapies or for which no standard therapy existed. Five patients with different types of cancers had objective partial responses during the course of the study, including four patients who had previously been treated with taxane-containing chemotherapy regimens. Dose-limiting toxicities included myalgia (muscle aches), fatigue, and neutropenia (low neutrophilic white cell count). No Grade 4 neuropathy (damage to the peripheral nerves) was seen at or below the estimated MTD levels.

     We initiated Phase 2a studies for TOCOSOL Paclitaxel in March 2002. Our goal with the Phase 2a studies is to estimate the safety and efficacy of TOCOSOL Paclitaxel in selected tumor types. The Phase 2a studies are evaluating TOCOSOL Paclitaxel in ovarian, non-small cell lung and bladder cancers using weekly dosing of the product. These are single agent, open label studies enrolling patients who have had progressive disease despite one regimen of prior chemotherapy but who have not previously had taxane chemotherapy. Each Phase 2a study began with a dose escalation phase to estimate the best tolerated dose of TOCOSOL Paclitaxel using weekly administration. Overall, the best dose estimated for TOCOSOL Paclitaxel given weekly is 120 mg/m².

     As of June 2003, patient enrollment in the Phase 2a clinical trials has been completed. We enrolled a total of 122 patients in the ovarian, non-small cell lung and bladder cancer studies. Of the 122 patients enrolled in these studies, 98 are evaluable according to the RECIST criteria, which means that the patients have received at least 8 weekly cycles of TOCOSOL Paclitaxel and have had at least one CT scan to confirm anti-tumor responses. Among the 98 evaluable patients to date, we have seen 25 objective responses and an additional 39 patients have been reported to have stable disease. Of the objective responses, 20 are partial responses and five are complete responses. Complete response is defined as no evidence of remaining tumor, confirmed on two CT scans at least 4 weeks apart, while partial response is defined as reduction in the sums of the longest tumor dimensions of ³ 30% for at least 4 weeks. Stable disease is defined as no increase in any tumor size ³ 20%. We expect to have efficacy data on the remaining 24 patients in the next several months.

     In the ovarian cancer study, 28 of 52 enrolled patients have been evaluated for anti-tumor effect. Seven of the 28 evaluable patients (25%) were reported as objective responses, including 1 complete response and 6 partial responses; 9 additional patients were reported to have stable disease. In the non-small cell lung cancer study, all 43 enrolled patients have had anti-tumor effect evaluated. Nine of the 43 evaluable patients (21%) were reported as objective responses, including 2 complete responses and 7 partial responses; 19 additional patients were reported to have stable disease. In the bladder cancer study, all 27 patients enrolled have had anti-tumor effect evaluated. Nine of the 27 evaluable patients (33%) were reported as objective responses, including 2 complete responses and 7 partial responses; 11 additional patients were reported to have stable disease.

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     The Phase 2a clinical ef