UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

For the transition period from                     to

Commission File Number: 000-50516

Eyetech Pharmaceuticals, Inc.

3 Times Square, 12th Floor
New York, New York 10036
(Address of Principal Executive Offices including Zip Code)

(212) 824-3100
(Registrant’s Telephone Number, Including Area Code)

No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     The number of shares of registrant’s common stock outstanding on August 11, 2004 was 41,028,816.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

EYETECH PHARMACEUTICALS, INC.

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiary (“Eyetech” or the “Company”), is a biopharmaceutical company that specializes in the development and commercialization of novel therapeutics to treat diseases of the eye. The Company’s initial focus is on diseases affecting the back of the eye, particularly the retina. The Company’s most advanced product candidate is Macugen^TM (pegaptanib sodium injection), which it is developing in a collaboration with Pfizer Inc. (“Pfizer”) for the treatment of both the wet form of age-related macular degeneration, known as AMD, and for the treatment of diabetic macular edema, known as DME, which is a complication of diabetic retinopathy. In the second half of 2001, the Company initiated two Phase 2/3 pivotal clinical trials of Macugen for the treatment of wet AMD. Based on the results from the first year of these trials, the Company has filed a new drug application with the United States Food and Drug Administration seeking marketing approval of Macugen for the treatment of wet AMD. The Company is also currently conducting a Phase 2 clinical trial for the use of Macugen in the treatment of DME.

The Company formed a wholly owned subsidiary in Ireland in 2002. There has been no activity in this company since inception in 2002. The Company operates in a single business segment.

Prior to February 2003, the Company operated as a development-stage company and did not generate any revenue. Effective February 2003, the Company exited the development stage when its several concurrent agreements with Pfizer became effective.

On February 4, 2004, the Company successfully completed an initial public offering of its common stock. The initial public offering consisted of the sale of 6,500,000 shares of common stock at a price of $21.00 per share. As part of the offering, the Company granted to the underwriters an option to purchase an additional 975,000 shares within 30 days of the initial public offering to cover over-allotments. This option was exercised in full in February 2004. Net proceeds from the initial public offering after deducting underwriters’ discounts and expenses were $142.9 million, including the exercise of the over-allotment option. In addition, 476,190 shares of common stock were purchased concurrently with the initial public offering by Pfizer for $10 million as part of its commitment under Pfizer’s collaboration with the Company.

The Company issued 5,073,435 warrants in connection with original issuances of preferred stock from April 2000 to August 2002 and the in-licensing of Macugen in April 2000. Prior to the closing of our initial public offering, 1,511,381 shares of preferred stock were issued in connection with warrant exercises providing $10.4 million in aggregate proceeds. Included in this amount were 73,581 shares issued pursuant to conditional exercises received during the quarter ended December 31, 2003 for proceeds of $0.5 million. An additional 1,867,124 shares of preferred stock were issued on a cashless basis to the holders of 2,728,721 preferred stock warrants, who surrendered 861,597 preferred stock warrants as payment for those shares. All outstanding shares of preferred stock, including those shares issued in connection with warrant exercises, were automatically converted to an equivalent number of shares of common stock upon the closing of our initial public offering. Additionally, warrants to purchase 833,333 shares of Series B preferred stock converted to an equal number of warrants to purchase an equal number of shares of common stock upon the closing of the initial public offering. These warrants were exercised during the quarter ended March 31, 2004 on a cashless basis, resulting in the issuance of 680,509 shares of common stock in exchange for the surrender of warrants to purchase 152,824 shares of common stock. No warrants are outstanding at June 30, 2004.

On June 2, 2004, the Company successfully completed a secondary public offering of its common stock. The secondary public offering consisted of the sale of 3,860,000 shares of common stock at a price of $38.50 per share. As part of the offering, the selling stockholders granted to the underwriters an option to purchase an additional 579,000 shares within 30 days of the secondary public offering to cover over-allotments. This option was exercised in full in June 2004. All shares sold were offered by existing stockholders and employees holding options. Shares

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outstanding increased by 106,735 shares after the offering as a result of option exercises, which provided proceeds to the Company of $0.1 million. The costs associated with the offering, excluding underwriters’ discounts and commissions payable by the selling stockholders, were approximately $1.0 million and have been paid by the Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented.

The results of operations for the three-month and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2004. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification

Certain reclassifications have been made to the prior year’s information to conform to the 2004 presentation.

Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. At June 30, 2004, the Company had substantially all of its cash and cash equivalents in investment grade obligations.

Marketable Securities

     Marketable securities are classified as “available-for-sale” and are carried at market value with unrealized gains and losses reported as other comprehensive income or loss, which is a separate component of stockholders’ (deficit) equity.

Restricted Cash

Restricted cash collateralizes outstanding letters of credit associated with the leases of the Company’s office and laboratory facilities. The funds are invested in certificates of deposit.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash equivalents and marketable securities. The Company has established guidelines relating to diversification and maturities that allow the Company to manage risk.

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Revenue Recognition

Revenues associated with the Company’s collaboration with Pfizer consist of non-refundable, license payments, reimbursement of development expenses and costs associated with the validation of the manufacturing process. The Company expects to record revenues and expenses in future periods related to equipment purchased which, under the terms of our agreement, Pfizer will reimburse to the Company a portion of the total cost of the equipment which will be recognized over the life of the equipment.

The Company uses revenue recognition criteria outlined in Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” and Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable license payments, where the Company has an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the statement of operations over the term of the performance obligation.

Revenues derived from reimbursements of costs associated with the development of Macugen are recorded in compliance with EITF Issue 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”), and EITF Issue 01-14, “Income Statement Characterization of Reimbursements Received For “Out-of-Pocket” Expenses Incurred” (“EITF 01-14”). According to the criteria established by these EITF Issues, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company has met the criteria to record revenue for the gross amount of the reimbursements.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company adopted the disclosure requirements of SFAS 148 effective December 31, 2002. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic value-based method of accounting prescribed in APB 25 and, accordingly, does not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant.

Had compensation cost for the Company’s outstanding employee stock options been determined based on the fair value at the grant dates for those options consistent with SFAS 123, the Company’s net loss and basic and diluted net loss per share, would have been changed to the following pro forma amounts:

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SFAS 123 pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its stock-based employee compensation under the fair value method prescribed in SFAS 123. The fair value of the options prior to completion of the Company’s initial public offering was estimated at the date of grant using the minimum value pricing model. Upon completion of the initial public offering in February, 2004, the Company began using the Black-Scholes model to estimate fair value. The following assumptions were utilized for the calculations during each period:

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Pro forma compensation related to stock option grants is expensed over their respective vesting periods.

The Company accounts for options issued to nonemployees under SFAS 123 and EITF Issue 96-18 “Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or

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Services” (“EITF 96-18”). As such, the value of such unvested options is periodically remeasured and income or expense is recognized during their vesting terms.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Recently Issued Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” “SFAS No. 146”). This standard addresses financial accounting and reporting for costs associated with an exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This standard nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.” This Standard is effective for exit or disposal activities initiated after December 31, 2002. Adoption of this statement resulted in the recognition of a loss of $1.5 million during the quarter ended June 30, 2004. The loss was incurred because the Company has not subleased its previous corporate offices at 500 Seventh Avenue in New York City and office equipment associated with that facility.

During 2003, the FASB issued various accounting standards and interpretations, including SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51” and Interpretation No. 46-R “Consolidation of Variable Interest Entities” (“FIN 46-R”). Adoption of these standards and interpretations has not had a material effect on the Company’s financial condition, results of operations or liquidity. There have been no other accounting pronouncements made through June 30, 2004 that the Company expects would have a material effect on its results of operations, cash flows or financial position.

3. Net Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted-average number of common shares and dilutive common share equivalents then outstanding. Common equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options and the conversion of preferred stock upon the exercise of warrants. Diluted EPS is identical to Basic EPS since common equivalent shares are excluded from the calculation, as their effect is anti-dilutive.

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The following table sets forth the computation of basic and diluted net loss per share for the three-month and six-month periods ended June 30, 2003 and 2004:

Pro forma basic and diluted net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of all outstanding convertible preferred stock into shares of the Company’s common stock effective upon the closing of the Company’s initial public offering, as if such conversion had occurred at the date of the original issuance. Accordingly, pro forma basic and diluted net loss per common share has been calculated assuming the preferred stock was converted as of the original date of issuance of the preferred stock.

The following table shows dilutive common share equivalents outstanding on a weighted average basis, which are not included in the above historical calculations, as the effect of their inclusion is anti-dilutive during each period:

4. Comprehensive Loss

Comprehensive losses are primarily comprised of net losses and unrealized gains and losses on available for sales securities. Comprehensive losses for the six months ended June 30, 2003 and 2004 are detailed below.

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5. Pfizer Collaboration

In December 2002, Pfizer and the Company entered into several concurrent agreements to jointly develop and commercialize Macugen. Under the terms of the agreement, which became effective February 3, 2003 when government approval was obtained, Pfizer made initial payments of $100 million, which included the purchase of 2,747,253 shares of the Company’s Series D preferred stock for $24.7 million, net of issuance costs and a $75 million initial license fee which is being amortized over the expected term of the agreement (estimated at 15 years). In addition, the Company agreed to sell to Pfizer and Pfizer agreed to purchase from the Company, up to an additional $25 million of the Company’s capital stock at the then current market price upon the completion of certain events. Pursuant to this agreement, concurrent with the initial public offering, Pfizer purchased 476,190 shares of common stock at $21.00 per share, resulting in gross proceeds to the Company of approximately $10 million.

Under the terms of the agreement, both parties will expend funds related to the co-promotion and development of Macugen. Pfizer will generally fund a majority of the ongoing development costs incurred pursuant to an agreed upon development plan covering the development of Macugen for AMD, DME, retinal vein occlusion and other agreed upon ophthalmic indications. In certain instances, the Company will reimburse Pfizer for the Company’s share of costs that Pfizer incurs. This funding resulted in the recognition by the Company of $11.2 million in revenue during the three month period ended June 30, 2003 and $12.5 million in revenue and $1.8 million in research and development and marketing expenses during the three month period ended June 30, 2004. The Company recognized $16.4 million in revenue for the six month period ending June 30, 2003 and $21.8 million in revenue and $2.5 million in research and development and marketing expenses during the six month period ending June 30, 2004. At June 30, 2004, the Company has recorded a collaboration receivable in the amount of $1.8 million. In addition, the Company recognized $1.3 million in connection with the amortization of the $75 million initial license fee paid by Pfizer for the three month periods ending June 30, 2003 and 2004, respectively, and $2.1 million and $2.5 million for the six month periods ended June 30, 2003 and 2004, respectively.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors that May Affect Results” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biotechnology company with our first product candidate, Macugen, currently in two Phase 2/3 pivotal clinical trials for use in the treatment of the wet form of age-related macular degeneration, known as AMD. Based on the results from the first year of these ongoing Phase 2/3 pivotal clinical trials, we and Pfizer have filed a new drug application with the FDA as a rolling submission to seek marketing approval for Macugen in the treatment of wet AMD. We are seeking marketing approval for the use of Macugen in the treatment of all angiographic subtypes of active subfoveal neovascular AMD, which represents the same broad patient population we studied in our clinical trials. Macugen is also in a Phase 2 clinical trial for use in the treatment of diabetic macular edema, known as DME. Our revenues for the six months and the quarter ended June 30, 2004 were $24.3 million and $12.6 million, respectively, consisting of amortization of the initial non-refundable, license payment that we received from Pfizer under our collaboration with Pfizer and reimbursement to us by Pfizer of a portion of the ongoing development costs for Macugen. As a result of our collaboration with Pfizer, we ceased to be a development-stage company in February 2003. We have had no other income since inception other than interest on short-term investments.

We commenced operations in April 2000. Since our inception, we have generated significant losses. As of June 30, 2004, we had an accumulated deficit of $184.3 million. We expect to continue to spend significant amounts on the development of Macugen and our other programs. We expect to incur significantly greater commercialization costs as we continue to prepare for the anticipated commercial launch of Macugen. We expect to begin to participate in selling activities, or detailing, of Pfizer’s product, Xalatan®, for the treatment of glaucoma together with Pfizer three to six months prior to our planned commercial launch of Macugen. We also plan to continue to invest in research for additional applications of Macugen and to develop new drugs and drug delivery technologies and to build the appropriate infrastructure to support our business. We have recently entered into a lease for new research and development space that will increase our annual facilities expenses by $1.6 million. Additionally, we plan to continue to evaluate possible acquisitions or licenses of rights to potential new drugs, drug targets and drug delivery technologies that would fit within our growth strategy. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.

Most of our expenditures to date have been for research and development activities and general and administrative expenses. Research and development expenses represent costs incurred for product acquisition, clinical trials and activities relating to regulatory filings and manufacturing development efforts. We outsource our foreign clinical trials and our global manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred.

Our research and development expenses incurred through June 30, 2004 were expenses related primarily to the development of Macugen. We expect to incur addi