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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2002

Commission File No. 0-16614

NEORX CORPORATION
(Exact name of Registrant as specified in its charter)

        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 ý    No o

        As of August 14, 2002, approximately 26.6 million shares of the Registrant's Common Stock, $.02 par value per share, were outstanding.

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEORX CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements include the accounts of NeoRx Corporation and subsidiary (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.

        The interim financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2001.

        In the opinion of management, the interim financial statements reflect all adjustments, consisting only of normal recurring accruals necessary to present fairly the Company's financial position as of June 30, 2002 and the results of its operations and cash flows for the periods ended June 30, 2002 and 2001.

        The results of operations for the quarters ended June 30, 2002 and 2001 are not necessarily indicative of the expected operating results for the full year.

Note 2. Line of Credit

        In May 2002, the Company received a commitment for a general-purpose line of credit of $10,000,000 with Silicon Valley Bank (SVB). In July 2002, the Company concluded that the requirements of the proposed SVB credit line were not in its best interests and elected not to approve the proposed line of credit.

Note 3. Net Loss Per Common Share

        Basic and diluted loss per share are based on net loss applicable to common shares, which is comprised of net loss and preferred stock dividends in all periods presented. Shares used to calculate basic loss per share are based on the weighted average number of common shares outstanding during the period. Shares used to calculate diluted loss per share are based on the potential dilution that would occur upon the exercise or conversion of securities into common stock using the treasury stock method. Calculations of basic and diluted loss per share for the quarters ended June 30, 2002 and 2001 exclude the effect of options and warrants to purchase additional shares of common stock because the share increments would be antidilutive.

        The computation of diluted net loss per share excludes the following options and warrants to acquire shares of common stock for the periods indicated because their effect would be antidilutive:

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        In addition, 234,088 shares of common stock that would be issuable upon conversion of the Company's preferred stock are not included in the calculation of diluted loss per share for the quarters ended June 30, 2002 and 2001 because the effect of including such shares would be antidilutive.

Note 4. Comprehensive Loss

        The Company's comprehensive loss for the quarters ended June 30, 2002 and 2001 was $7,530,000 and $5,522,000, respectively. The comprehensive loss for the quarters ended June 30, 2002 and 2001 consisted of net loss of $7,416,000 and $5,570,000, respectively, and a net unrealized gain (loss) on investment securities of $(114,000) and $48,000 for the quarters ended June 30, 2002 and 2001, respectively. The Company's comprehensive loss for the six months ended June 30, 2002 and 2001 was $14,925,000 and $8,819,000, respectively. The comprehensive loss for the six months ended June 30, 2002 and 2001 consisted of net loss of $14,483,000 and $9,151,000, respectively, and a net unrealized gain (loss) on investment securities of $(442,000) and $332,000 for the quarters ended June 30, 2002 and 2001, respectively.

Note 5. New Accounting Pronouncements

        In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that all business combinations be accounted for under a single method—the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which was adopted by the Company on January 1, 2002. The adoption of Statements No. 141 and 142 did not have any impact on the Company's consolidated financial statements.

        In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company will adopt this Statement on January 1, 2003. Management has not yet determined the impact of adopting this statement on its consolidated financial statements.

        In October 2001, the FASB issued Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component

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of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. The Company adopted the provisions of Statement No. 144 on January 1, 2002. The adoption of this statement did not have any impact on the Company's consolidated financial statements.

        In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. Statement No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002 although earlier application is encouraged. The Company will adopt this Statement on January 1, 2003. Management has not yet determined the impact of adopting this statement on its consolidated financial statements.

Note 6. Liquidity

        The Company has incurred losses annually since inception and has limited working capital. The Company believes its existing working capital will be sufficient to fund operations into the first quarter of 2003. In July 2002, the Company decided to focus its efforts on its STR product candidate and discontinue its Pretarget® technology activities. Also in July 2002, the Company reduced its staff by 34 persons, or approximately 30%. The cost associated with the reduction in force is approximately $529,000 and will be incurred primarily over a four-month time period beginning in August 2002. The Company's decisions to curtail Pretarget® activities and reduce staff were in response to the anticipated clinical development timeline of the Pretarget® product candidates and the current economic environment. The discontinued Pretarget® activities include Pretarget® Lymphoma and Pretarget® Carcinoma phase I trials and manufacturing development activities associated with the Pretarget® project. The Company will seek to sell or outlicense the Pretarget® patent portfolio and other assets in an effort to raise additional funds. The Company is also addressing its need for additional capital by exploring opportunities for the licensing or divestiture of non-core technology assets and through the sale of equity securities. In the event that sufficient additional funds are not obtained through asset sales, strategic partnering opportunities and/or sales of securities on a timely basis, the Company plans to reduce expenses through the reduction or delay of STR development activities and/or costs for facilities and administration. The Company's actual capital requirements will depend on numerous factors, including the rate of progress and results of research and development activities and clinical trials, actions by the U.S. Food and Drug Administration (FDA) and other regulatory authorities, the levels of resources that the Company devotes to establishing and maintaining marketing and manufacturing capabilities, the emergence of competing technologies and other adverse market developments, the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, and the timing and amount of revenues and expense reimbursements resulting from relationships with third parties or collaborative agreements. There can be no assurance that the Company will be able to obtain such additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, reduce, or eliminate expenditures for certain of its programs or

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products or enter into relationships with corporate partners to develop or commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. These financial statements are prepared on a going concern basis and if the Company were forced to liquidate its assets, it may not recover the carrying amount of such assets.

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

        This Form 10-Q contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "propose" or "continue," the negative of these terms or other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors described below in the section entitled "Additional factors that may affect results." These factors may cause our actual results to differ materially from any forward-looking statement.

        Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on our forward-looking statements, which apply only as of the date of this report.

Critical Accounting Policies

        Basis of Revenue Recognition:    The Company does not have any significant revenue sources. On occasion the Company derives revenue from licensing its non-strategic patented technologies and government grants. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 101, revenues from collaborative agreements are recognized as earned as the Company performs research activities under the terms of each agreement. Billings in excess of amounts earned are classified as deferred revenue. Non-refundable upfront technology license fees, where the Company is providing continuing services related to product development, are deferred. Such fees are recognized as revenue over the product development periods based on estimated total development costs.

Quarter and six months ended June 30, 2002 compared to quarter and six months ended June 30, 2001

        Revenue for the quarter ended June 30, 2002 was $1,219,000 compared to $135,000 for the quarter ended June 30, 2001. Revenue for the six months ended June 30, 2002 was $1,529,000 compared to $1,174,000 for the six months ended June 30, 2001. Revenue for the quarter and six months ended June 30, 2002 consisted of a milestone payment of $1,000,000 from Angiotech Pharmaceuticals, Inc. along with revenue from government grants and a facilities lease agreement. Revenue for the quarter and six months ended June 30, 2001 consisted primarily of revenue from government grants and a facilities lease agreement. The Company recognizes revenue from government grants as earned. The Company does not have any significant revenue sources. On occasion the Company derives revenue from licensing its non-strategic patent technologies and from government grants. Pursuant to SAB 101, the timing and amount of license revenue recognized during an accounting period is determined by the nature of the contractual provisions included in the license arrangement.

        Total operating expenses for the quarter ended June 30, 2002 increased 37% to $8,856,000 from $6,444,000 in the quarter ended June 30, 2001, and increased 39% to $16,636,000 for the six months ended June 30, 2002 from $11,930,000 for the six months ended June 30, 2001. Research and development expenses for the quarter ended June 30, 2002 increased 47% to $6,993,000 from $4,751,000 for the same time period in 2001, and increased 50% to $13,034,000 for the six months

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ended June 30, 2002 from $8,671,000 for the six months ended June 30, 2001. The increase in research and development expenses for the second quarter ended June 30, 2002 was predominantly due to the addition of the Company's radiopharmaceutical manufacturing facility in Denton, Texas. Second quarter research and development expenses also increased from clinical activities related to the Company's Pretarget® Lymphoma and Pretarget® Carcinoma product development programs.    In July 2002, the Company began enrolling and dosing multiple myeloma patients in a dosimetry study for STR. This study was requested by the FDA to validate the method proposed for calculating radiation dose in a planned pivotal clinical trial program. The Company is in discussions with the FDA on the design of its STR pivotal trials, with the goal of initiating the pivotal program in 2003.

        We expect research and development expenses to decrease by approximately 15%-20%, starting in September 2002, due to the curtailment of Pretarget® project activities. The discontinued Pretarget® activities include our Pretarget® Lymphoma and Pretarget® Carcinoma phase I trials and manufacturing development activities associated with the Pretarget® project. We will seek to sell or license our Pretarget® patent portfolio and other assets in an effort to raise additional funds. We plan to focus our resources on our STR project.

        General and administrative expenses for the quarter ended June 30, 2002 increased 10% to $1,863,000 versus $1,693,000 for the quarter ended June 30, 2001, and increased 11% to $3,602,000 for the six months ended June 30, 2002 compared to $3,259,000 for the six months ended June 30, 2001. The increase in general and administrative costs during the second quarter and six months ended June 30, 2002 was due to increased staff, legal and corporate communications expenses. In July 2002, the Company reduced its staff size by 34 persons, or 30%. Costs for general and administrative are also expected to decrease in the second half of 2002 as a result of the 30% reduction in force taken by the Company in July 2002.

        Other income for the second quarter of 2002 was $221,000 compared to $739,000 for the second quarter of 2001. Other income for the six months ended June 30, 2002 was $624,000 compared to $1,605,000 for the same time period in 2001. Other income included interest income for the second quarter of 2002 of $312,000 compared to $845,000 for the second quarter of 2001. Other income included interest income for the six months ended June 30, 2002 of $708,000 compared to $1,658,000 for the same time period in 2001. Other income is expected to decline due to declining balances of cash and cash equivalents.

Liquidity and capital resources

        The Company has financed its operations primarily through the sale of equity securities, collaborative agreements and debt instruments. The Company invests excess cash in investment securities that will be used to fund future operating costs. Cash, cash equivalents and investment securities totaled $18,313,000 at June 30, 2002 versus $33,581,000 at December 31, 2001. The Company primarily funds current operations with its existing cash and investments. On occasion, the Company derives revenue from licensing its non-strategic patent technologies and from government grants.

        In May 2002, the Company received a commitment for a general-purpose line of credit of $10,000,000 with Silicon Valley Bank (SVB). In July 2002, the Company concluded that the requirements of the proposed SVB credit line were not in its best interests and elected not to approve the proposed line of credit.

        The Company currently maintains a line of credit with Pharmaceutical Product Development, Inc. (PPD) of up to $5.0 million to assist in funding the pivotal phase III trial of its STR product in development. This line of credit is available to the Company only upon the successful resumption of

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phase III trials and the proceeds can only be applied to the expenses related to the phase III trials. The Company has not drawn funds on this line of credit to date, which carries an annual interest rate of 16%.

        In January 2002, the Company sold the remainder of its investment in Angiotech Pharmaceuticals, Inc. for $1.4 million and recognized a gain on the sale of approximately $109,000.

        The Company will need to raise additional capital to fund its planned STR pivotal phase III trials, and its current operating cash needs. The Company expects that its cash, cash equivalents, investment securities and interest income will be sufficient to fund its anticipated working capital and capital requirements into the first quarter of 2003. In July 2002, the Company decided to focus its efforts on its STR product candidate and discontinue all of its Pretarget® technology activities. The discontinued Pretarget® activities include its Pretarget® Lymphoma and Pretarget® Carcinoma phase I trials and manufacturing development activities associated with the Pretarget® project. Also in July 2002, the Company reduced its staff size by 34 persons, or 30%. The cost associated with the reduction in force is approximately $529,000 and will be incurred primarily over a four-month time period beginning in August 2002. The Company's decision to curtail Pretarget® activities and reduce staff was in response to the anticipated clinical development timeline of the Pretarget® candidates and the current economic environment. The Company will seek to sell or outlicense the technology for Pretarget® patent portfolio and other assets in an effort to raise additional funds. The Company is also addressing its need for additional capital by exploring opportunities for the licensing or divestiture of non-core technology assets and through the sale of equity. In the event sufficient additional funds are not obtained through the sale of assets, strategic partnering opportunities and/or sales of securities on a timely basis, the Company plans to reduce expenses through the reduction or delay of STR development activities and/or costs for facilities and administration. The Company's actual capital requirements will depend on numerous factors, including the progress and results of research and development activities and clinical trials, actions by the FDA and other regulatory authorities, the levels of resources that the Company devotes to establishing and maintaining marketing and manufacturing capabilities, the emergence of competitive technologies and other adverse market developments and the timing and amount of revenues and expense reimbursements resulting from relationships with third parties or collaborative agreements. There can be no assurance that the Company will be able to obtain such additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, reduce, or eliminate expenditures for certain of its programs or products or enter into relationships with corporate partners to develop or commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. These financial statements are prepared on a going concern basis and if the Company were forced to liquidate its assets, it may not recover the carrying amount of such assets.

Related party transactions

        The Company's Chairman of the Board of Directors, Dr. Fred Craves, had a consulting agreement with the Company that provided that he shall be retained as a general advisor and consultant to the Company's management on all matters pertaining to the Company's business. In exchange for such services, he was compensated $30,000 for each calendar quarter of services, plus reasonable travel and other expenses. Compensation payments under this agreement totaled $30,000 for the second quarter ended June 30, 2001, and $60,000 for the six months then ended. In addition, payments for travel and other expenses totaled approximately $6,160 for the quarter ended June 30, 2001, and $29,611 for the six months then ended. In 2002, the Company did not renew this agreement with Dr. Craves.

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        Dr. Craves is a founder and Managing Director of Bay City Capital BD LLC, also known as BCC, a merchant bank focused on the life sciences industry. As of June 30, 2002, BCCF, an affiliate of BCC, owned 8.89% of the Company's common stock. Dr. Carl Goldfischer, a member of the NeoRx Board of Directors, is a Managing Director of BCC; Jack L. Bowman, a member of the NeoRx Board of Directors, is on the business advisory board of BCC; and Dr. Douglass B. Given, President and CEO and a Director of NeoRx, is an Executive in Resident at BCC.

        The Company and BCC entered into an agreement whereby BCC will act as the Company's advisor for the purpose of identifying opportunities to enter into strategic alliances. The Company paid a retainer fee of $50,000 in cash for each calendar quarter through the end of 2001. The Company renewed the agreement for 2002 and pays a retainer fee of $80,000 per quarter, plus reasonable travel and other expenses. The agreement also includes a percentage of consideration, ranging from one to five percent, depending on the ultimate amount of capital raised. Retainer fee payments under this agreement totaled $80,000 and $50,000 for the quarters ended June 30, 2002 and 2001, respectively, and $160,000 and $150,000 for the six months ended June 30, 2002 and 2001, respectively, which included the balance payable of $100,000 at December 31, 2000. In addition, payments for travel and other expenses totaled approximately $10,870 for the quarter ended June 30, 2002 and approximately $31,523 for the six months ended June 30, 2002. The Company also paid BCC approximately $612,000 during the second quarter of 2001 for commissions related to the Company's purchase of the radiopharmaceutical manufacturing facility located in Denton, Texas.

        In connection with an agreement to provide financial consulting services in 2001, Dr. Goldfischer received fees in the second quarter ended June 30, 2001 of $20,000 and $45,000 during the six months then ended, along with stock option grants of 10,000 shares in December 2000 and 150,000 shares in January 2001. Services related to these stock options were fully provided by December 31, 2001, after which this agreement was terminated. As of January 29, 2002, vesting was accelerated for those options granted under the agreement that had not already vested. The Company recorded an expense in the amount of $526,000 during 2001 for the fair value of the option grants on the date the services were completed.

        In connection with consulting services performed in 2002 and 2001, Dr. Paul G. Abrams, the former CEO of the Company, received consulting fees in the amount of $153,270 and $127,725, respectively. Prior to his appointment as CEO in July 2001, Dr. Given provided consulting services to the Company. The total consulting fees paid to Dr. Given in 2001 were $225,000.

        The Company had a demand note receivable from an officer with a balance of approximately $49,675 as of June 30, 2001 that was recorded in other assets. This note was paid in full on July 31, 2001. The Company had another demand note receivable from an officer with a balance of approximately $90,990 during the first half of 2002. This note was paid in full on May 24, 2002. There were no demand note receivables to related parties outstanding at June 30, 2002.

Additional factors that may affect results

        In addition to the other information contained in this report, the following factors could affect the Company's actual results and could cause our actual results to differ materially from those achieved in the past or expressed in our forward looking statements.

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We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.

        We have not been profitable for any year since our formation in 1984. As of June 30, 2002, we had an accumulated deficit of $198 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative activities. To date, we have been engaged only in research and development activities and have not generated any significant revenues from product sales. We do not anticipate that our proposed STR product will be commercially available for several years. We expect to incur additional operating losses in the future. These losses may increase significantly as we expand development and clinical trial efforts. Our ability to achieve long-term profitability is dependent upon obtaining regulatory approvals for our STR and any other proposed products and successfully commercializing our products alone or with third parties. However, our operations may not be profitable even if we succeed in commercializing any product.

We will need to raise additional capital, and our future access to capital is uncertain.

        It is expensive to develop cancer therapy products and conduct clinical trials for these products. Although we currently are focusing on our STR product candidate, we may in the future simultaneously conduct clinical trials and preclinical research for a number of different indications and cancer therapy product candidates, which is costly. Our future revenues may not be sufficient to support the expense of our operations and the conduct of our clinical trials and preclinical research. We will need to raise additional capital:

•

to fund operations;



•

to continue the research and development of our STR product candidate; and



•

to commercialize our STR and any other proposed products.

        We expect that our cash, cash equivalents, investment securities and interest income will be sufficient to fund our anticipated working capital and capital requirements into the first quarter of 2003. We will seek to sell or outlicense the Pretarget® patent portfolio and other assets in an effort to raise additional funds. We are also addressing our need for additional capital by exploring opportunities for the licensing or divestiture of non-core technology assets and through the sale of equity securities. In the event additional funds are not obtained through asset sales, strategic partnering opportunities and/or sales of securities on a timely basis, we plan to reduce expenses through the reduction or delay of STR development activities and/or costs for facilities and administration. The amount of additional financing we may need within this time frame depends on a number of factors, including the following:

•

the rate of progress and costs of our clinical trial and research and development activities;



•

actions taken by the FDA and other regulatory authorities;



•

the costs of developing and maintaining manufacturing operations;



•

the costs of developing marketing operations, if we undertake those activities;



•

the timing and amount of milestone payments we might receive from potential strategic partners;



•

the timing and amount of payments we might receive from potential licenses;



•

our degree of success in commercializing our cancer therapy product candidates;



•

the emergence of competing technologies and other adverse market developments;

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•

the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

        We may not be able to obtain additional financing on favorable terms or at all. If we are unable to raise additional funds when we need them, we may be required further to delay, reduce or eliminate some or all of our development programs and some or all of our clinical trials. We also may be required to enter into relationships with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently. If we raise additional funds by issuing equity securities, further dilution to shareholders may result, and new investors could have rights superior to current security holders.

        The financial statements included in this report are prepared on a going concern basis and if the we were forced to liquidate our assets, we may not recover the carrying amount of such assets.

Our potential products must undergo rigorous clinical testing and regulatory approvals, which could be costly, time consuming, and subject us to unanticipated delays or prevent us from marketing any products.

        The manufacture and marketing of our proposed products and our research and development activities are subject to regulation for safety, efficacy and quality by the FDA in the United States and comparable authorities in other countries.

        The process of obtaining FDA and other required regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Our STR product candidate is novel; therefore, regulatory agencies lack direct experience with it. This may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our STR product candidate. An earlier phase III study of STR was placed on clinical hold by the FDA after some patients in our STR phase I/II multiple myeloma trials developed a serious delayed toxicity. The FDA requested that we collect additional radiation dosimetry data from a small number of patients to validate the method proposed for calculating radiation dose in our pivotal trials. Under the dosimetry study, in which we plan to enroll approximately 12 patients, tracer doses of the STR therapeutic initially are administered to determine skeletal uptake and eligibility for treatment. Eligible patients then receive a treatment dose of the STR therapeutic, followed by a high-dose chemotherapy and peripheral blood stem cell transplantation to restore bone marrow function. Patients are carefully monitored throughout the study. Follow-up evaluations will include STR safety and efficacy.

        We have discussed with the FDA a revised plan for a pivotal phase III program of STR in patients with multiple myeloma, submitted a protocol for the requested dosimetry study, and begun enrolling and dosing multiple myeloma patients in this dosimetry study at several clinical sites. We also have submitted to the FDA a draft protocol for a revised phase III pivotal program. Based on the results of the dosimetry study and subject to authorization by the FDA, we plan to resume STR clinical trials under a revised pivotal phase III program in 2003.

        In July 2002 we decided to halt further Pretarget® product development activities. The discontinued Pretarget® activities include our Pretarget® Lymphoma and Pretarget® Carcinoma phase I trials and manufacturing development activities associated with the Pretarget® programs. We will seek to sell or license our Pretarget® patent portfolio. We have completed patient enrollment in phase I safety studies for Pretarget® Lymphoma in patients with non-Hodgkin's lymphoma, and for Pretarget® Carcinoma in patients with gastrointestinal adenocarcinoma. The FDA has required that we complete a

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90-day follow-up on all patients treated to date with Pretarget® Lymphoma and review the data with the FDA. We plan to complete the necessary patient follow-up and review, but do not plan to enroll additional patients in either the Pretarget Lymphoma or Pretarget Carcinoma program, or otherwise further pursue development of its Pretarget® product candidates.

        No cancer product using our technologies has been approved for marketing. Consequently, there is no precedent for the successful commercialization of products based on our technologies. In addition, we have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. This may impede our ability to obtain timely approvals from the FDA or foreign regulatory agencies, if at all. We will not be able to commercialize STR until we obtain regulatory approval, and consequently any delay in obtaining, or inability to obtain, regulatory approval could harm our business.

        If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined, forced to remove a product from the market or experience other adverse consequences, including delay, which could materially harm our financial results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for product promotion. We also may be required to undertake post-marketing trials. In addition, if we or other parties identify side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products, and additional marketing applications may be required.

        The requirements governing the conduct of clinical trials and manufacturing and marketing of our proposed STR product outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can involve additional testing. Foreign regulatory approval processes include all of the risks associated with the FDA approval processes. Also, approval of a product by the FDA does not ensure approval of the same product by the health authorities of other countries.

We may take longer to complete our clinical trials than we project, or we may be unable to complete them at all.

        Although for planning purposes we project the commencement, continuation and completion of our clinical trials, a number of factors, including scheduling conflicts with participating clinicians and clinical institutions and difficulties in identifying and enrolling patients who meet trial eligibility criteria, may cause significant delays. We may not commence or complete clinical trials involving our STR product candidate as projected or may not conduct them successfully.

        We rely on academic institutions and clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our STR and any other proposed products. We will have less control over the timing and other aspects of those clinical trials than if we conducted them entirely on our own. If we fail to commence or complete, or experience delays in, any of our planned clinical trials, our stock price and our ability to conduct our business as currently planned could be harmed.

If testing of a particular product does not yield successful results, we will be unable to commercialize that product.

        Our research and development programs are designed to test the safety and efficacy of our proposed products in humans through extensive preclinical and clinical testing. We may experience

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numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our STR and any other proposed products, including the following:

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safety and efficacy results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;



•

the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;



•

after reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising;



•

our potential collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and



•

the effects of our potential products may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

        Clinical testing is very expensive, can take many years, and the outcome is uncertain. We cannot at this time predict if, when or under what conditions we will be permitted to initiate our revised pivotal phase III program for STR. The data collected from our clinical trials may not be sufficient to support regulatory approval of our proposed STR multiple myeloma product, or any other proposed products. The clinical trials of our proposed STR multiple myeloma product and other proposed products may not be completed on schedule, and the FDA or foreign regulatory agencies may not ultimately approve any of our product candidates for commercial sale. Our failure to adequately demonstrate the safety and efficacy of a cancer therapy product under development would delay or prevent regulatory approval of the product, which could prevent us from achieving profitability.

We are dependent on suppliers for the timely delivery of materials and services and may experience in the future interruptions in supply.

        To be successful, we need to develop and maintain reliable and affordable third-party suppliers of commercial quantities of holmium-166, the radionuclide used in our STR product candidate, and DOTMP, the small-molecule compound used in our STR product candidate to deliver holmium-166 to the bone. Sources of these materials may be limited, and we may be unable to obtain these materials in amounts and at prices necessary to successfully commercialize our proposed STR product. Timely delivery of materials is critical to our success. For example, holmium-166 loses its effectiveness for treating patients within a short period of time. As a result, the STR product must be shipped within 24 hours of its manufacture to the site where the patient is to be treated. Failures or delays in the manufacturing and shipping processes could compromise the quality and effectiveness of our product. We currently depend on a single source vendor, University of Missouri Research Reactor facility group (MURR), for the holmium-166 component of our STR product candidate. We plan to establish an additional supplier for this material. There are, in general, relatively few alternative sources of holmium-166. While the current vendor generally has provided us these materials with acceptable quality, quantity and cost in the past, it may be unable or unwilling to meet our future demands. If we have to switch to a replacement vendor, the manufacture and delivery of our STR product could be interrupted for an extended period.

        In December 2001 we entered into a contract with MURR to supply holmium-166. MURR is responsible for the manufacture of holmium-166, including process qualification, quality control,

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packaging and shipping, from its Columbia, Missouri reactor facility. This supply contract follows a previous arrangement in which MURR provided NeoRx supplies of holmium-166 for the STR product in development. Our business and operations could be materially adversely affected if MURR does not continue to perform satisfactorily under this agreement. We intend to negotiate a long-term supply contract for holmium-166. If we are unable to negotiate a long-term contract in a timely fashion upon favorable terms, or if under our current supply contract, MURR is unable or unwilling to provide supplies of holmium-166 in a satisfactory manner, we may suffer delays in, or be prevented from, initiating or completing pivotal phase III clinical trials of our STR product.

If we fail to negotiate and maintain collaborative arrangements with third parties, our research, development, manufacturing, clinical testing, sales and marketing activities may be delayed or reduced.

        We rely in part on third parties to perform for us or assist us with a variety of important functions, including research and development, manufacturing and clinical trials management. We also license technology from others to enhance or supplement our technologies. We may not be able to locate suppliers to manufacture our product components or products at a cost or in quantities necessary to make them commercially viable. We intend to rely on third-party contract manufacturers to produce large quantities of certain materials needed for clinical trials and product commercialization. Third-party manufacturers may not be able to meet our needs with respect to timing, quantity or quality. If we are unable to contract for a sufficient supply of needed