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

FORM 10-K

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

        The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant was approximately $31.9 million as of June 28, 2002, based on a per share closing price of $1.20 on the Nasdaq National Market on that date. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of March 14, 2003, 26,845,082 shares of the Registrant's Common Stock, $.02 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on May 9, 2003 are incorporated by reference in Part III of this Form 10-K.

PART I

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        This Form 10-K 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 reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in greater detail under the heading "Risk Factors" below. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report.

        You should read this Form 10-K and the documents that we incorporate by reference completely and with the understanding that our actual results, performance and achievements may be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date of this report, or to reflect the occurrence of unanticipated events.

RISK FACTORS

        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 or implied by our forward-looking statements.

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 December 31, 2002, we had an accumulated deficit of $206.9 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 anticipate that our proposed Skeletal Targeted Radiotherapy (STR) product will not be commercially available for several years. We expect to incur additional operating losses in the future. These losses may increase significantly if we expand development and clinical trial efforts. Our ability to achieve long-term profitability is dependent upon obtaining regulatory approvals for STR or 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:

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to fund operations;



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



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to commercialize STR or any other proposed products.

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        We expect that our cash, cash equivalents, investment securities and interest income will be sufficient to fund our anticipated working capital and capital requirements only through the first quarter of 2004.

        We are addressing our need for additional capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other assets, including our Pretarget® technology platform. In addition, we are seeking a buyer or partner for our manufacturing facility in Denton, TX, interested in continuing the facility's radiopharmaceutical manufacturing operations and producing the STR compound. We also may seek to raise capital through the sale of equity and/or debt securities, or the establishment of other funding facilities. We cannot provide assurance, however, that any sale or license of assets, strategic collaborations, or sales of securities will be available to the Company on a timely basis or on acceptable terms, if at all. On March 20, 2003, the Company transferred the listing of its Common Stock from The Nasdaq National Market to The Nasdaq SmallCap Market. This transfer may adversely affect our ability to raise capital through the sale of securities. We 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; moreover, such relationships may not be on terms as commercially favorable to us as might otherwise be the case. 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 terms of additional funding also may limit our operating and financing flexibility. In the event that sufficient additional funds are not obtained through asset sales, licensing arrangements, strategic partnering opportunities and/or sales of securities on a timely basis, we plan to reduce expenses through the delay, reduction or curtailment of our STR development activities and/or further reduction of costs for facilities and administration.

        The amount of additional financing we need will depend on a number of factors, including the following:

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the rate of progress and costs of our clinical trial and research and development activities, including costs of procuring clinical materials;



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actions taken by the US Food and Drug Administration (FDA) and other regulatory authorities;



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the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities;



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



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



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our degree of success in commercializing STR or other cancer therapy product candidates;



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the emergence of competing technologies and products, 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.

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

        In connection with our 2001 purchase of the radiopharmaceutical manufacturing plant and other assets of International Isotopes Inc. located in Denton, TX, we assumed $6,000,000 principal amount of restructured debt held by Texas State Bank, McAllen, TX (the "Loan"). The Loan, which matures in April 2009, is secured by the assets acquired in the transaction. During 2002 and early 2003, we reduced the staff at the Denton facility to four employees, and we are operating the facility in standby mode pending a decision to resume clinical testing of STR and production of clinical materials. We are seeking a buyer or partner interested in continuing the facility's radiopharmaceutical manufacturing

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operations. Under the terms of the Loan, the Denton facility and the assets used in the facility cannot be transferred without the written approval of Texas State Bank. Moreover, the Loan states that an event of default may be deemed to occur if the Company abandons, vacates or discontinues operations on a substantial portion of the Denton facility or there is a material adverse change in the Company's operations. We do not believe that operating the facility in its current standby mode violates these provisions, nor has Texas State Bank suggested that it views such operation as a potential violation. We can provide no assurance, however, that Texas State Bank will not, some time in the future, seek to rely on these or other provisions of the Loan to declare the Company in default of the Loan. If this were to occur, Texas State Bank could declare the entire outstanding amount of the Loan ($5,694,000 at December 31, 2002) due and immediately payable by the Company. In such case, our cash resources and assets could be severely and immediately impaired, depending on our ability to raise funds through a sale of the Denton facility and other means. Based on a recent appraisal of the Denton facility the fair market value of the facility and its assets exceeds the outstanding debt.

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 STR product 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. We are developing STR for treatment of multiple myeloma, a cancer of the bone marrow. 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 in multiple myeloma was placed on clinical hold by the FDA after some patients in our STR phase I/II trials developed a serious delayed toxicity. The FDA requested that we collect additional radiation dosimetry data from a small number of multiple myeloma patients to validate the patient-specific dosing method we used in earlier studies of STR and had proposed to use in our planned pivotal trial program. The study also used an adjusted radiation dose and a revised administration regimen. We completed patient enrollment in this dosimetry study of STR in late 2002. Follow-up evaluations are ongoing, and include assessments of STR safety and efficacy. In February 2003 we submitted to the FDA data from our phase II dosimetry study of STR in patients with multiple myeloma. We also submitted to the FDA a proposal for further clinical development of STR in patients with primary refractory or relapsed multiple myeloma, using a revised dosing method. We anticipate receiving the FDA's response to our data submission and proposal for clinical studies by mid-year. Based on the results of the dosimetry study and subject to authorization by the FDA, we plan to resume STR clinical trials. However, we cannot currently predict the timing for resumption of such trials, whether such trials will be resumed as a phase II or phase III program, or whether they will be resumed at all.

        In July 2002 we decided to curtail further Pretarget® product development activities. The discontinued Pretarget activities include our Pretarget® Lymphoma and Pretarget® Carcinoma phase I/II clinical programs and manufacturing development activities associated with the Pretarget programs. We are seeking to sell or license our Pretarget patent portfolio. We have completed phase I safety studies for Pretarget Lymphoma in patients with non-Hodgkin's lymphoma, and for Pretarget Carcinoma in patients with gastrointestinal adenocarcinoma. We have complied with the FDA's requirement that we complete a 90-day follow-up on all patients treated to date with Pretarget Lymphoma. We submitted the follow-up data to the FDA for review and obtained clearance for

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continued clinical development of this product. We do not plan to enroll additional patients in either the Pretarget Lymphoma or Pretarget Carcinoma program, or otherwise further pursue development of these Pretarget product candidates internally.

        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/or 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, the time to initiation and completion of our STR clinical trial program depends upon numerous factors, including:

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our ability to obtain adequate funding;



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our receipt of approvals by the FDA and other regulatory agencies and the timing thereof;



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other actions by regulators;



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



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our ability to access sufficient, reliable and affordable supplies of the STR compound for clinical studies, including third-party supplies of holmium-166, the radionuclide used in our STR product candidate, as well as other materials used in the manufacture of the STR compound;



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the costs of ramping up and maintaining manufacturing operations, should we determine this to be necessary;



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the extent of scheduling conflicts with participating clinicians and clinical institutions; and



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our ability to identify and enroll patients who meet trial eligibility criteria.

        We may not commence or complete our proposed clinical trial program for our STR product candidate as projected, may not conduct it successfully, or may not conduct it at all.

        We currently rely on academic institutions and clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our proposed STR product. Further, we are

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seeking to enter into license agreements, partnerships or other collaborative arrangements to support financing and development of STR. To the extent that we now or in the future participate in such collaborative arrangements, we will have less control over the timing, planning and other aspects of our clinical trials. In addition, if sufficient additional funds are not obtained by the Company through sale and/or license of assets, strategic partnering opportunities and/or sales of securities on a timely basis, we may be required to reduce expenses by delaying, reducing or curtailing our STR development activities. If we fail to commence or complete, or experience delays in or are forced to curtail our proposed clinical program, our stock price and our ability to conduct our business 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 numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of STR or any other proposed products, including the following:

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



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



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



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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



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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 undertake further clinical studies, including initiating a 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 product, or any other proposed products. The clinical trials of our proposed STR 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.

        For our STR product in development to be successful, we need access to sufficient, reliable and affordable supplies of the STR compound for clinical studies. Moreover, STR requires sufficient, reliable and affordable 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, or potential third-party suppliers of the STR compound, may be unable to obtain these materials in amounts and at prices necessary to successfully commercialize our proposed STR product. Timely delivery of the holmium-166 component material and of the STR compound is critical. 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

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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. There are, in general, relatively few sources of holmium-166. To date, we have depended on a single source vendor, the University of Missouri Research Reactor facility group (MURR), for the holmium-166 component of our STR product candidate. In December 2001 we entered into a contract with MURR to supply holmium-166, under which MURR was responsible for the manufacture of holmium-166, including process qualification, quality control, packaging and shipping, from its Columbia, MO reactor facility. This supply contract expired in December 2002. We, or potential third-party suppliers of our STR compound, may pursue negotiation of a long-term supply contract for holmium-166 for our proposed further clinical studies, including a revised pivotal phase III program. There can be no assurance that such a contract can be negotiated on acceptable terms. While MURR generally has provided us materials with acceptable quality, quantity and cost in the past, it may be unable or unwilling to meet our future demands, or demands of potential third-party suppliers of our STR compound. If MURR or an alternate supplier is unable or unwilling to provide supplies of holmium-166 at a cost and on other terms acceptable to the Company, the manufacture and delivery of our STR product could be impaired, and we may suffer delays in, or be prevented from, initiating or completing further 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 any proposed 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, potentially including the STR compound, for clinical trials and product commercialization. Third-party manufacturers may not be able to meet our needs with respect to timing, quantity, quality or cost. If we are unable to contract for a sufficient supply of needed materials or products on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our clinical testing may be delayed, thereby delaying the submission of products for regulatory approval or market introduction and subsequent sales. Any such delay may reduce our revenues and potential profitability.

        Moreover, any potential third-party manufacturers and NeoRx must continually adhere to current Good Manufacturing Practices (cGMP) regulations enforced by the FDA through its facilities inspection program. If our facilities, or the facilities of these manufacturers, cannot pass a pre-approval plant inspection, the FDA will not grant pre-market approval of our proposed products. In complying with cGMP and foreign regulatory requirements, we and any of our potential third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our products meet applicable specifications and other requirements. If we, or any of our potential third-party manufacturers, fail to comply with these requirements, we may be subject to regulatory action.

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        In April 2001, we purchased a radiopharmaceutical manufacturing facility and certain other assets located in Denton, TX from International Isotopes Inc. In addition to the manufacturing facility, we purchased existing equipment, documentation, and certain processes. The facility achieved cGMP status and was issued appropriate radiation permits by the State of Texas. This radiopharmaceutical manufacturing facility has assumed responsibility for all aspects of the manufacture of the STR compound, including process qualification, quality control, packaging and shipping, and production of the clinical material for the completed STR dosimetry study. In October 2002, we reduced staffing at the facility to a total of 21 employees. During the third quarter of 2002, we recognized a non-cash asset impairment charge of $5.6 million on certain facilities, equipment and intangibles, resulting in part from our decision to reduce staff at the Denton facility and to eliminate contract manufacturing activities at this facility. The loss on the Denton facility and related equipment was determined via outside appraisals.

        In January 2003 we implemented a further reduction in staff and laid off an additional 13 employees at the Denton manufacturing facility. We are operating the Denton facility on a standby basis pending a decision to resume clinical testing of STR and production of clinical materials. An additional impairment charge of $0.6 million relating to intangible assets for licenses and processes at the Denton manufacturing facility was recorded in the fourth quarter of 2002. The fourth quarter impairment charge is associated with our decision to suspend production of STR and to operate the Denton facility on a standby basis.

        We believe that the Denton facility has the capabilities and capacity to serve as the principal manufacturing site for the STR compound for our proposed clinical studies, including a revised pivotal phase III program, and for potential commercial manufacture. We may operate the facility ourselves, or alternatively, engage a buyer or partner interested in continuing the facility's radiopharmaceutical manufacturing operations and producing the STR compound. Our decision whether to continue to utilize the Denton facility as our primary manufacturing site for STR in the future will depend on a number of factors, including:

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actions taken by the FDA and the timing thereof;



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our ability to obtain adequate funding and the timing thereof;



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our ability to access sufficient, reliable and affordable third-party supplies of holmium-166;



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the costs of ramping up and maintaining manufacturing operations;



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the availability of qualified personnel;



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the availability and nature of strategic partnering opportunities; and



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the availability and cost of potential third-party suppliers of STR.

        There can be no assurance that acceptable manufacturing alternatives will be available to us on a timely or cost-effective basis. If we use the Denton facility to produce the STR compound for our proposed future clinical studies, we may be required to re-certify the facility with the FDA. The ramp-up and re-certification processes at the Denton facility could take up to six months or more. If we transition the STR production process to a third-party supplier, such third-party supplier also could require significant start-up time to qualify and implement the manufacturing process. In either case, our ability to move forward with further STR clinical studies could be adversely affected, and we may incur significant additional costs in connection with manufacturing operations.

        We intend to enter into collaborations for one or more of the research, development, manufacturing, marketing and other commercialization activities relating to our STR product candidate. If we are unable to secure collaborators, or if we lose collaborators, our product development and potential for profitability may suffer. If any collaborator breaches or terminates an agreement with us,

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or fails to conduct its collaborative activities in a timely manner, the commercialization of our STR product candidate could be slowed down or blocked completely. Disputes may arise between NeoRx and collaborators on a variety of matters, including financial or other obligations under our agreements. These disputes may be both expensive and time-consuming and may result in delays in the development and commercialization of our proposed STR product.

Our Common Stock listing was transferred from The Nasdaq National Market to The Nasdaq SmallCap Market; failure to maintain continued listing on Nasdaq could affect its market price and liquidity.

        Our Common Stock listing was transferred from The Nasdaq National Market to The Nasdaq SmallCap Market on March 20, 2003. We elected to seek a transfer to The Nasdaq SmallCap Market because we have been unable to regain compliance with The Nasdaq National Market minimum $1.00 bid price requirement for continued listing. By transferring to The SmallCap Market, we may be afforded extended grace periods in which to satisfy the minimum bid price requirement, potentially until September 2, 2003, provided we meet other applicable listing criteria. Furthermore, we may be eligible to transfer our Common Stock back to The Nasdaq National Market if our bid price maintains the $1.00 per share requirement for 30 consecutive trading days and we maintain compliance with all other continued listing requirements on The Nasdaq National Market. The transfer from The Nasdaq National Market to The Nasdaq SmallCap Market may have a negative impact on the value of our Common Stock, because securities trading on The Nasdaq SmallCap Market typically are less liquid than those traded on The Nasdaq National Market.

        Moreover, there can be no assurance that we will be able to achieve compliance with the SmallCap Market minimum $1.00 bid price requirement within the time period required by Nasdaq. If we were to be delisted from The Nasdaq SmallCap Market, our Common Stock would be listed on the over-the-counter bulletin board or another quotation system or exchange on which we would qualify. Such delisting would have a material adverse effect on the trading price and liquidity of our stock, and shareholders' ability to sell shares of our stock would be severely limited. Among other things, our Common Stock may then constitute "penny stock," which would place an increased regulatory burden upon brokers, making them less likely to make a market in our stock.

We face substantial competition in the development of cancer therapies and may not be able to compete successfully, and our potential products may be rendered obsolete by rapid technological change.

        The competition for development of cancer therapies is intense. There are numerous competitors developing products to treat the diseases for which we are seeking to develop products. We initially are focusing our STR product candidate on the treatment of multiple myeloma. Several companies, including Celgene Corp. and Millennium Pharmaceuticals Inc., also are developing therapeutics for multiple myeloma. In addition, a number of established pharmaceutical companies, including GlaxoSmithKline, Amersham PLC, Mallinckrodt, Inc. (Tyco Healthcare) and Bristol-Myers Squibb Co., are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with technologies applicable to the treatment of cancer. Many of our existing or potential competitors have, or have access to, substantially greater financial, research and development, marketing and production resources than we do and may be better equipped than we are to develop, manufacture and market competing products. Our competitors may have, or may develop and introduce, new products that would render our technology and proposed STR product less competitive, uneconomical or obsolete.

        We also expect to face increasing competition from universities and other non-profit research organizations. These institutions carry out a significant amount of cancer research and development.

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These institutions are becoming increasingly aware of the commercial value of their findings and more active in seeking patent and other proprietary rights, as well as licensing revenues.

If we are unable to protect our proprietary rights, we may not be able to compete effectively, or operate profitably.

        Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights and our ability to avoid infringing the proprietary rights of others. Patent law relating to the scope of claims in the biotechnology field in which we operate is still evolving and, consequently, patent positions in our industry may not be as strong as in other, better-established fields. Accordingly, the United States Patent and Trademark Office (USPTO) may not issue patents from the patent applications owned by or licensed to us. If issued, the patents may not give us an advantage over competitors with similar technologies.

        We own over 100 issued United States patents and have licenses to additional patents. However, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings, such as oppositions, which may be brought in foreign jurisdictions to challenge the validity of a patent. A third party may challenge the validity or enforceability of a patent after its issuance by the USPTO. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting their coverage. Moreover, the cost of litigation to uphold the validity of patents and to prevent infringement can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without payment to us. Moreover, it is possible that competitors may infringe our patents or successfully avoid them through design innovation. To stop these activities we may need to file a lawsuit. These lawsuits can be expensive and would consume time and other resources, even if we were successful in stopping the violation of our patent rights. In addition, there is a risk that a court would decide that our patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of our patents were upheld, a court would refuse to stop the other party on the ground that its activities do not infringe our patents.

        In addition to the intellectual property rights described above, we rely on unpatented technology, trade secrets and confidential information. Therefore, others may independently develop substantially equivalent information and techniques or otherwise gain access to, or disclose our technology. We may not be able to effectively protect our rights in unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. However, these agreements may not provide effective protection of our information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

The use of our technologies could potentially conflict with the rights of others.

        Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our products, pay licensing fees or cease activities. If our products conflict with patent rights of others, third parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any legal action and a required license under the patent may not be available on acceptable terms or at all.

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We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

        The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. If there is litigation against us, we may not be able to continue our operations. If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the USPTO to determine priority of invention. We may be required to participate in interference proceedings involving our issued patents and pending applications. We may be required to cease using the technology or license rights from prevailing third parties as a result of an unfavorable outcome in an interference proceeding. A prevailing party in that case may not offer us a license on commercially acceptable terms or at all.

Product liability claims in excess of the amount of our insurance would adversely affect our financial condition.

        The testing, manufacturing, marketing and sale of STR and any other proposed cancer therapy products that we may have under development may subject us to product liability claims. We are insured against such risks up to a $10 million annual aggregate limit in connection with clinical trials of our products under development and intend to obtain product liability coverage in the future. However, insurance coverage may not be available to us at an acceptable cost, if at all. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material.

Our use of radioactive and other hazardous materials exposes us to the risk of material environmental liabilities, and we may incur significant additional costs to comply with environmental laws in the future.

        Our research and development and manufacturing processes, as well as the manufacturing processes that may be used by our collaborators, involve the controlled use of hazardous and radioactive materials. As a result, we are subject to foreign, federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes in connection with our use of these materials. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. In the event that we discontinue operations in facilities that have had past research and manufacturing processes where hazardous and radioactive materials have been in use, we may have significant decommissioning costs associated with the termination of operation of these facilities. These potential decommissioning costs also may reduce the market value of the facilities and may limit our ability to sell or otherwise dispose of these facilities in a timely and cost-effective manner, if at all. In addition, the risk of accidental contamination or injury from hazardous and radioactive materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources.

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Even if we bring products to market, changes in healthcare reimbursement could adversely affect our ability to effectively price our products or obtain adequate reimbursement for sales of our products.

        The levels of revenues and profitability of biotechnology companies may be affected by the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation. Even in the absence of statutory change, market forces are changing the healthcare sector. We cannot predict the effect healthcare reforms may have on the development, testing, commercialization and marketability of our proposed cancer therapy products. Further, to the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of other companies that are prospective collaborators for certain of our potential products, our ability to commercialize our products under development may be adversely affected. In addition, both in the United States and elsewhere, sales of prescription pharmaceuticals depend in part on the availability of reimbursement to the consumer from third-party payors, such as governmental and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. If we succeed in bringing one or more products to market, we cannot be certain that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive or profitable basis.

The loss of key employees could adversely affect our operations.

        Since July 2002, we have implemented three reductions in force. In July 2002, we reduced staff by 31 persons. In October 2002, we further reduced our work force, primarily at our Denton, TX manufacturing facility, by an additional 13 persons. In January 2003, we reduced staff by an additional 21 persons. Also in January 2003, we accepted the resignations of Richard Ghalie, MD, Vice President, Medical and Regulatory Affairs, and Les Sabo, Vice President, Manufacturing. On March 11, 2003 Jack L. Bowman was named Executive Chairman of the Company and Chairman of its Board of Directors. As of March 20, 2003, we had a total work force of 35 full-time employees and one part-time employee. Our success depends, to a significant extent, on the continued contributions of our principal management and scientific personnel. The loss of the services of one or more of the principal members of our scientific and management staff could delay our STR product development activities or other programs and research and development efforts. We do not maintain key-person life insurance on any of our officers, employees or consultants.

        Competition for qualified employees among companies in the biotechnology and biopharmaceutical industry is intense. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our proposed products successfully, we will in the future, be required to expand substantially our work force, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. Our current financial situation may make it more difficult to attract and retain key employees.

Our stock price is volatile and, as a result, you could lose some or all of your investment.

        There has been a history of significant volatility in the market prices of securities of biotechnology companies, including our Common Stock, and it is likely that the market price of our Common Stock

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will continue to be highly volatile. Our business and the relative price of our Common Stock may be influenced by a large variety of industry factors, including:

•

announcements by us or our competitors concerning acquisitions, strategic alliances, technological innovations and new commercial products;



•

the availability of critical materials used in developing and manufacturing our proposed STR product;



•

the progress and results of clinical trials;



•

developments concerning patents, proprietary rights and potential infringement; and



•

the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals.

        In addition, public concern about the safety of STR and any other products we develop, comments by securities analysts, our ability to maintain the listing of our Common Stock on the Nasdaq system and conditions in the capital markets in general and in the life science capital market specifically, may have a significant effect on the market price of our Common Stock. The realization of any of the risks described in this report, as well as other factors, could have a material adverse impact on the market price of our Common Stock and may result in a loss of some or all of your investment.

        In the past, securities class action litigation often has been brought against companies following periods of volatility in their stock prices. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert our management's time and resources, which could cause our business to suffer.

Certain provisions in our articles of incorporation and Washington state law could discourage a change of control.

        Our articles of incorporation authorize our Board of Directors to issue up to 3,000,000 shares of preferred stock and to determine the price, rights, preference, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control, even if this change would benefit our shareholders. In addition, the issuance of preferred stock may adversely affect the market price of our Common Stock and the voting and other rights of the holders of our Common Stock.

        We have adopted a shareholders' rights plan, which is intended to protect the rights of shareholders by deterring coercive or unfair takeover tactics. The Board of Directors declared a dividend to holders of our Common Stock of one preferred share purchase right for each outstanding share of Common Stock. The right is exercisable ten days following the offer to purchase or acquisition of beneficial ownership of 20% of the outstanding Common Stock by a person or group of affiliated persons. Each right entitles the registered holder, other than the acquiring person or group, to purchase from NeoRx one-hundredth of one share of Series A Junior Participating Preferred Stock at the price of $40, subject to adjustment. The rights expire April 10, 2006. In lieu of exercising the right by purchasing one one-hundredth of one share of Series A Preferred Stock, the holder of the right, other than the acquiring person or group, may purchase for $40 that number of shares of our Common Stock having a market value of twice that price.

        Washington law imposes restrictions on certain transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless

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the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the acquisition. Prohibited transactions include, among other things:

•

a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person;



•

termination of 5% or more of the employees of the target corporation; or



•

receipt by the acquiring person of any disproportionate benefit as a shareholder.

        A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of NeoRx or limiting future investment in NeoRx by significant shareholders and their affiliates and associates.

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Item 1. BUSINESS

The Company

        NeoRx is a cancer therapeutic product development company, with technologies for targeted delivery of therapeutic agents, including radiopharmaceuticals, to tumor sites. Our lead product candidate, Skeletal Targeted Radiotherapy (STR), is in clinical development for treatment of multiple myeloma, a cancer of the bone marrow. STR targets bone and bone marrow with a small-molecule bone-seeking agent coupled to a radionuclide to deliver high doses of radiation to tumor sites. We are developing STR for use with high-dose chemotherapy and stem cell transplantation (SCT), with the goal of prolonging survival of patients with this as yet incurable disease.

        Phase I/II trials of STR in patients with multiple myeloma demonstrated positive clinical activity of STR among the 82 patients treated according to the protocol, including a complete response rate of 35%. A long-term follow-up study of phase I/II patients showed further promising results; with a minimum follow-up of 24 months, median survival had not been reached, and the median event-free survival period was 22 months. Follow-up of these patients is ongoing. The FDA placed our earlier phase III study of STR on clinical hold after some patients in our phase I/II trials developed a serious delayed toxicity. The FDA requested that we collect additional radiation dosimetry data from a small number of multiple myeloma patients to validate the patient-specific dosing method we used in earlier studies of STR and that we had proposed to use in our planned pivotal trial program. The study also used an adjusted radiation dose and a revised administration regimen. We completed a phase II dosimetry study of STR in December 2002. Follow-up for safety and efficacy is ongoing. We submitted data from this dosimetry study to the FDA in February 2003. We also submitted to the FDA a proposal for further clinical development of STR in patients with primary refractory or relapsed multiple myeloma, using a revised dosing method. We anticipate receiving the FDA's response to our data submission and proposal for clinical studies by mid-year. Based on the results of the dosimetry study and subject to authorization by the FDA, we plan to resume STR clinical trials. However, we cannot currently predict the timing for resumption of such trials, whether such trials will be resumed as a phase II or phase III program, or whether they will be resumed at all.

        During 2002 we executed a series of management, organizational and operational decisions with the goal of improving the Company's cash position and advancing development of STR. We took steps to reduce expenditures and to restructure and re-scale the organization in line with its opportunities and the economic environment. In July 2002 we curtailed further internal development of our early-stage Pretarget® product development programs, eliminating positions and expenses associated with these programs. We implemented further staff reductions in the second half of the year, primarily in research and development, manufacturing operations and administration. We also reduced our expenditures on facilities by eliminating, consolidating or relocating certain functions at our Seattle, WA operations, and by reducing activities and staffing at our Denton, TX manufacturing facility.

        In 2002 we received $9.9 million in funds through the sale and licensing of non-core technology assets. Of this amount $7.9 million was realized in the fourth quarter of 2002 with the sale to IDEC Pharmaceutical Corp. of certain NeoRx intellectual property and the grant to IDEC of certain license rights. We received the $7.9 million in cash from IDEC and may in the future receive royalty payments with respect to certain products. The intellectual property addressed in the IDEC transaction included a portfolio of NeoRx US and international patents and certain associated technology and know-how relating to antibody-based therapeutics and ligand-linker technology. The intellectual property rights transferred to IDEC did not include rights to our STR or Pretarget programs. With respect to the patents involved in the sale, NeoRx retains a license for the development of certain NeoRx products.

        Our business strategy moving forward is to enter into license agreements, partnerships or other collaborative arrangements to support the development and commercialization of STR. We also are pursing opportunities to sell or license our Pretarget technology platform. In addition, we are seeking

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to raise cash through licensing, sale or divestiture of certain non-core technology assets. These assets include United States and foreign patents for therapeutic, diagnostic and imaging technologies with potential applications in cardiovascular disease and cancer. We also are seeking a buyer or partner interested in continuing the radiopharmaceutical operations at our Denton, TX manufacturing facility and producing the STR compound. Further, we may seek to address our need for capital through the sale of equity and/or debt securities or the establishment of other funding facilities. We cannot be assured, however, that any sale or license of assets, strategic collaboration, or sales of securities will be available to the Company on a timely basis or on acceptable terms, if at all. The transfer of our Common Stock from The Nasdaq National Market to The Nasdaq SmallCap Market may adversely affect our ability to raise capital through the sale of stock. In the event that sufficient additional funds are not obtained through asset sales or licensing arrangements, strategic partnering opportunities and/or sales of securities on a timely basis, we plan to reduce expenses through the delay, reduction or curtailment of our STR development activities and/or further reduction of costs for facilities and administration.

Cancer and its Treatment

        Cancer is a broad group of diseases characterized by the uncontrolled growth and spread of abnormal cells. Cancer cells have the ability to migrate from their sites of origin to invade and damage other tissues and organs, through a process called metastasis. The American Cancer Society estimated that nearly 1,284,900 new cancer cases would be diagnosed in the United States in 2002, and 555,000 Americans would die from cancer. Following heart disease, cancer is the second leading cause of death in the United States and in many other industrialized nations. The incidence of cancer is expected to increase in the coming decades, as life expectancies continue to increase in the industrialized world.

        There is considerable need for better treatments for cancer. Available therapies afford limited success. Even with the recent introduction of new therapies, there have been few significant improvements in patient survival, and any improvements in survival typically are measured in months, not years. Current treatments for cancer include surgery, external-beam radiation, chemotherapy, hormone therapy for some tumors and, more recently, interferons, antibodies and antibody-based radiotherapeutics. Conventional treatments sometimes can be curative, but generally are effective only if the cancer is detected early. Chemotherapeutics, which in general act by interfering with DNA synthesis and cell replication, are generally palliative in their effects, and seldom provide a long-term cure. Chemotherapy is typically the primary therapy for tumors that have metastasized. Chemotherapy drugs usually are administered systemically so that the drug can circulate throughout the body to reach the metastases. As chemotherapy drugs circulate, they exert their toxic effects on healthy cells as well as cancer cells. Consequently, cancer patients receiving chemotherapy often suffer severe, even life-threatening side effects, such as damage to bone marrow, lungs, heart, kidneys and nerves. Therefore, the optimal drug dose for killing cancer cells often must be reduced to avoid intolerable damage to normal cells and vital organs. Similarly, conventional methods of delivering radiation therapy, such as total body irradiation (TBI), can result in high exposure of non-target tissues and serious side effects, limiting the ability to deliver an effective therapeutic dose to the patient.

        In recent years there has been a significant effort to develop and introduce targeted therapies that deliver chemotherapeutic or radiotherapeutic agents directly to cancer cells, to increase the efficacy and mitigate the adverse side effects of these cytotoxic (cell-killing) agents. The promise of targeted therapies is enhanced therapeutic benefit and improved safety, through localization of intense doses of therapeutic molecules to specific sites of disease, while sparing healthy tissues. A variety of targeting agents has been investigated, including antibodies, peptides, small-molecule drugs and chelating agents. For example, our lead product in development, STR, targets bone and adjacent marrow with DOTMP, a small tetraphosphonate chelator that localizes to the skeleton by its high affinity for bone mineral.

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        Much research and development also has focused on the use of tumor antigen-specific monoclonal antibodies to target cancer cells. Antibodies are specific proteins produced by the immune system in response to an antigen, such as a foreign substance, pathogen or protein on the surface of cancer cells. Since the early 1980s, a number of cell-surface antigens specific to certain types of tumor cells have been identified, and antibodies that specifically bind these antigens have been developed. Monoclonal antibody technology, and methods to genetically engineer human/mouse chimeric monoclonal antibodies or humanized antibodies, have enabled introduction of monoclonal antibody therapeutics for cancer and other diseases. Herceptin® (Trastuzumab) and Rituxan®(Rituximab) are examples of monoclonal antibodies introduced in the late 1990s for cancer therapy. The anti-tumor effects of specific monoclonal antibodies may be enhanced significantly by conjugating these antibodies to chemotherapeutic or radiotherapeutic agents. IDEC Pharmaceuticals received FDA approval in 2002 for Zevalin™, a radioimmunotherapeutic for non-Hodgkin's lymphoma (NHL) consisting of an anti-CD20 antibody chemically linked to the radionuclide yttrium-90. Several other companies, including Immunomedics, Inc. and Corixa Corp., also are developing radioimmunotherapeutics for NHL consisting of a tumor-specific antibody linked to a radionuclide. Though such constructs may augment the cancer-killing power of "naked" antibodies, these relatively large molecules circulate and reach their target slowly, exposing healthy tissues to their radioactive payload.

        Antibody fragments and fusion proteins that incorporate the tumor-specific binding of antibodies, but have improved biodistribution and pharmacokinetic properties, offer promise for further progress in the development of targeted therapies. Our Pretarget technology platform uses tumor-specific fusion proteins to target intense doses of radiation directly to tumors, with the goal of improved safety and efficacy, and greater patient benefit. We expect that targeted therapeutics will play a significant role alongside conventional therapies in the treatment of cancer for years to come.

Skeletal Targeted Radiotherapy (STR)

Multiple Myeloma and the Lack of Effective Treatments

        NeoRx is developing Skeletal Targeted Radiotherapy (STR) for treatment of multiple myeloma and potentially other bone and bone marrow-related cancers. Multiple myeloma is a cancer of the plasma cells, the antibody-producing cells of the bone marrow. The disease is characterized by impaired blood cell formation, multiple tumor sites in the bone marrow, and widespread bone lesions that result in bone pain and fractures. Multiple myeloma typically strikes between ages 65 and 70, though there is a recent trend towards an earlier age of onset. Multiple myeloma is the second most common blood cancer. The Multiple Myeloma Research Foundation estimates that more than 45,000 Americans currently have this disease, and over 14,600 new cases of multiple myeloma are diagnosed annually in the United States.

        There is a significant unmet medical need for effective treatments for multiple myeloma. Available therapies are intended to prolong life, and to relieve pain and other symptoms, but are not curative. Moreover, existing treatments have serious side effects, and not all patients are candidates for treatment because of these side effects. Chemotherapy can prolong the median survival of multiple myeloma patients to 3 to 4 years. Even with good response to therapy and achievement of remission, all patients eventually experience relapse of their disease due to proliferation of resistant myeloma cells. Fewer than 5% of patients survive more than 10 years after diagnosis.

        Myeloma cells are sensitive to radiation. Total body irradiation (TBI) and other conventional methods of delivering radiation therapy can result in high exposure of non-target tissues and serious side effects, limiting the ability to deliver an effective therapeutic dose to the patient. Though widely used in the past in treatment regimens for multiple myeloma, TBI has not been demonstrated to provide a benefit in long-term disease control. Currently, the primary treatment for multiple myeloma

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is chemotherapy, which may be followed by high-dose chemotherapy and autologous stem cell transplantation (SCT) in transplant-eligible patients.

        Dose intensification with or without SCT has been widely explored as a means of overcoming myeloma resistance. Treatment with high-dose chemotherapy and SCT involves collection of the patient's peripheral blood stem cells, followed by a preparative regimen with high-dose chemotherapy that destroys healthy bone marrow cells and myeloma cells. Transplantation of the patient's stem cells following chemotherapy allows reconstitution of the bone marrow so that normal blood cell production can resume. This treatment is difficult for patients to tolerate. Because of its toxicity, only about 25% of patients are eligible for high-dose chemotherapy and SCT. However, in treatment-eligible patients, this regimen has been shown to improve complete response (CR) rates, progression-free survival, and overall survival, and is becoming the standard of care for multiple myeloma patients with good performance status. Depending on definition of response criteria, CRs are achieved in approximately 20% to 25% of SCT patients who responded well to initial chemotherapy. Achievement of a CR is associated with extended survival, although relapses occur frequently because of myeloma cell resistance.

        Further increasing the chemotherapy dose potentially would eradicate resistant myeloma cells, but this approach is not practical because current high-dose chemotherapy regimens already are at the limits of tolerance. Alternate methods of delivering radiotherapy may enable administration of more intense yet less toxic radiation within the treatment regimen. In particular, if treatment could be targeted directly to the tumor sites, it is likely that more effective doses could be delivered, with fewer side effects.

        Patients with multiple myeloma that is refractory to initial chemotherapy have a poor outcome. The CR rate to subsequent conventional-dose salvage chemotherapy is low, and the overall response rate (complete responses and partial responses combined) is usually less than 50%. Survival of these patients is limited. Cytostatic agents with lower-toxicity profiles, such as thalidomide, are in development for front-line therapy and for patients with relapsed disease. However, these agents generally provide a low CR rate.

        We anticipate that over the next several years, slightly fewer than half of all newly-diagnosed, treatment-eligible multiple myeloma patients will be candidates for high-dose chemotherapy and SCT, following response to initial chemotherapy. An additional number of patients who are poor responders to initial chemotherapy, and relapsed patients undergoing second-line therapy, also may be candidates for SCT. We believe that STR, if successfully developed and approved for commercial sale, may be appropriate for use as a preparative regimen with high-dose chemotherapy for multiple myeloma patients undergoing SCT. We also expect that cytostatic agents in development may gain use in initial therapy alongside chemotherapeutics, since they appear to have complementary tolerability profiles. Improvements in response to initial therapy may in turn increase the number of multiple myeloma patients eligible for SCT.

        In addition to multiple myeloma, other cancers originating or present in the bone marrow, such as Ewing's sarcoma, and cancers that metastasize to the bone, such as breast and prostate cancer, are potential indications for STR. Enrollment was completed in late 2002 in a small phase I trial of STR in patients with metastatic Ewing's sarcoma, under a physician-sponsored Investigational New Drug Application (IND). Ewing's sarcoma is a bone cancer that occurs in children and young adults. STR also potentially may be used in conditioning regimens prior to SCT in patients with acute leukemias, Hodgkin's disease, or other hematological cancers.

The STR Concept

        NeoRx is developing STR for use with high-dose chemotherapy and stem cell transplantation (SCT) for treatment of multiple myeloma. STR is designed to deliver high doses of radiotherapy to

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tumor sites throughout the skeleton, producing both a direct therapeutic effect on disseminated disease sites, plus a general marrow-ablative effect. The goal of STR is to achieve high complete response (CR) rates in transplant-eligible patients, to bring about long-term disease-free survival, and overall survival. There is strong evidence correlating longer median overall survival with the achievement of a CR after high-dose marrow-ablative chemotherapy and SCT in multiple myeloma patients. STR seeks to improve upon the CR rates achieved with high-dose chemotherapy and SCT, and thus improve patient survival.

        STR targets bone and adjacent marrow with a small-molecule bone-seeking agent, DOTMP, stably complexed with the beta-emitting radionuclide holmium-166. The high energy of holmium-166 allows optimal penetration of marrow and bone disease sites, while its short half-life minimizes the time required between treatment and reinfusion of the patient's stem cells. Upon administration, the STR compound localizes almost exclusively to the bone. This localization brings high doses of radiation in close proximity to multiple myeloma tumor cells. The radiation destroys the DNA of the cells, preventing the rapid replication associated with tumor growth. STR compound that does not localize to the bone is eliminated through the kidneys shortly after administration.

STR Clinical Development

        NeoRx completed phase I/II trials of STR in combination with high-dose chemotherapy (melphalan) in patients with multiple myeloma and initiated a phase III trial in 2000. The phase I/II trials demonstrated positive clinical activity of STR, including substantial response rates. The FDA placed the phase III trial on clinical hold after some phase I/II patients developed a serious delayed toxicity. In 2001 we convened an expert panel to conduct a comprehensive scientific peer review of the STR development program and data from the phase I/II trials. The expert review of phase I/II data confirmed the positive clinical activity of STR in patients with multiple myeloma. Using patient response criteria established by the Autologous Blood and Marrow Transplant Registry (ABMTR), the panel noted substantial response rates among the 82 phase I/II patients treated according to the protocol, including a complete response rate of 35% and a 29% partial response rate, for an overall response rate of 64%. The expert panel determined that the delayed toxicities seen in some phase I/II patients who received the highest doses could be prevented effectively with modified administration and patient management, and an adjusted radiation dose. Long-term follow-up data for patients treated in the phase I/II study were presented at the American Society of Hematology (ASH) annual meeting in December 2002. Median survival had not been reached in the initial patient follow-up period, which was a minimum of 24 months. The median event-free survival period was 22 months. Follow-up of these patients is ongoing

        In late 2002 we completed a phase II dosimetry study of STR. This study was requested by the FDA to validate the patient-specific dosing method we used in the phase I/II studies and had proposed to use in our planned pivotal trial program. The dosimetry study also used an adjusted radiation dose and a revised administration regimen. In addition to evaluating radiation dose to tumor and normal tissues, the study further evaluated STR safety and efficacy. Follow-up evaluations are ongoing. We submitted data from this dosimetry study to the FDA in February 2003. We also submitted a proposal for further clinical development of STR in patients with primary refractory or relapsed multiple myeloma, using a revised dosing method. We anticipate receiving the FDA's response to our data submission and proposal for clinical studies by mid-year. Based on the results of the dosimetry study and subject to authorization by the FDA, we plan to resume STR clinical trials. However, we cannot currently predict the timing for resumption of such trials, whether such trials will be resumed as a phase II or phase III program, or whether they will be resumed at all.

        STR has been designated an Orphan Drug by the FDA, which qualifies NeoRx for certain tax credit and marketing exclusivity provisions of the Orphan Drug Act (as amended). The manufacture

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and marketing of STR are subject to regulation for safety, efficacy and quality by the FDA and comparable authorities in other countries.

        In April 2001, we purchased a radiopharmaceutical manufacturing facility and certain other assets located in Denton, TX from International Isotopes Inc. In addition to the manufacturing facility, we purchased existing equipment, documentation and certain processes. The facility achieved cGMP status and was issued appropriate radiation permits by the State of Texas. This radiopharmaceutical manufacturing facility has assumed responsibility for all aspects of the manufacture of the STR compound, including process qualification, quality control, packaging and shipping, and production of the clinical material for the completed STR dosimetry study. In October 2002, we reduced staffing at the facility to a total of 21 employees. During the third quarter of 2002, we recognized a non-cash asset impairment charge of $5.6 million on certain facilities and equipment, resulting in part from our decisions to reduce staff and eliminate contract manufacturing activities at the Denton facility. The loss on the Denton facility and related equipment was determined via outside appraisals.

        In January 2003 we implemented a further reduction in staff and laid off an additional 13 employees at the Denton facility. We are operating the Denton facility on a standby basis pending a decision to resume clinical testing of STR and production of clinical materials. An additional impairment charge of $0.6 million relating to intangible assets for licenses and processes at the Denton manufacturing facility was recorded in the fourth quarter of 2002. The fourth quarter impairment charge is associated with our decision to suspend production of STR and operate the Denton facility on a standby basis.

        We believe that the Denton facility has the capabilities and capacity to serve as the principal manufacturing site for the STR compound for our proposed clinical studies, including a revised pivotal phase III program, and for potential commercial manufacture. We may operate the facility ourselves, or alternatively, engage a buyer or partner interested in continuing the facility's radiopharmaceutical manufacturing operations and producing the STR compound. Our decision whether to continue to utilize the Denton facility as our primary manufacturing site for STR in the future will depend on a number of factors, including:

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actions taken by the FDA and the timing thereof;



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our ability to obtain adequate funding and the timing thereof;



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our ability to access sufficient, reliable and affordable third-party supplies of holmium-166;



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the costs of ramping up and maintaining manufacturing operations;



•

the availability of qualified personnel;



•

the availability and nature of strategic partnering opportunities; and



•

the availability and cost of potential third-party suppliers of STR.

        There can be no assurance that acceptable manufacturing alternatives will be available to us on a timely or cost-effective basis. If we use the Denton facility to produce STR for our proposed future clinical studies, we may be required to re-certify the facility with the FDA. The ramp-up and re-certification processes at the Denton facility could take up to six months or more. If we transition the STR production process to a third-party supplier, such third-party supplier also could require significant start-up time to qualify and implement manufacturing operations. In either case, our ability to move forward with further STR clinical studies could be adversely affected, and we may incur significant additional costs in connection with manufacturing operations.

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Additional Technologies for Targeted Therapeutics and Drug Delivery

        NeoRx has developed a variety of other proprietary technologies and product candidates for targeted therapeutics and drug delivery for cancer and other diseases. We are seeking to raise cash through the licensing, sale or divestiture of certain non-core technology assets, including our Pretarget® technology, and US and foreign patents for therapeutic, diagnostic and imaging technologies with potential applications in cancer, cardiovascular disease, and other diseases and disorders.

Pretarget® Technology

        Pretarget technology is a development platform for targeted therapeutics that deliver intense doses of anti-cancer agents to tumor cells, while largely sparing healthy tissues. The Pretarget platform seeks to improve on first-generation radioimmunotherapy (RIT) technology, maximizing the therapeutic dose delivered to sites of disease, while minimizing exposure of normal tissues and organs to radiation. The multi-step Pretarget approach uncouples the targeting agent from the radiotherapeutic agent, with separate administration of a recombinant fusion protein to target tumor cells, a synthetic clearing agent to remove unbound fusion protein, and a small-molecule radiotherapeutic that attaches rapidly to the pre-localized fusion protein to destroy tumor cells. Pretarget technology potentially can incorporate a wide range of specific fusion proteins and other targeting agents, and different therapeutic agents, including chemotherapeutics, to address various cancers and other diseases. NeoRx has over 30 issued US patents relating to Pretarget technology, with additional US and foreign applications pending.

        In 2002 NeoRx completed phase I safety studies for Pretarget® Lymphoma in patients with non-Hodgkin's lymphoma (NHL), and Pretarget® Carcinoma in patients with gastrointestinal adenocarcinoma. We also completed a 90-day follow-up on all patients treated with Pretarget Lymphoma, as required by the FDA, submitted the follow-up data for the FDA's review, and obtained clearance for continued clinical development of this product candidate. Due to the anticipated clinical development timetable for the Pretarget candidates and our limited resources, we announced in July 2002 our decision to curtail further internal Pretarget product development activities, including patient enrollment in clinical trials, and to seek to sell or out-license rights to the Pretarget technology platform. We do not plan to enroll additional patients in either the Pretarget Lymphoma or Pretarget Carcinoma program, or otherwise further pursue development of these Pretarget product candidates internally.

        Pretarget® Lymphoma employs a fusion protein with the targeting specificity of the well-characterized and clinically successful anti-CD20 monoclonal antibody, to deliver the radionuclide yttrium-90. CD20 is the tumor antigen targeted by both Rituxan® (Rituximab), a whole-antibody non-radiolabeled therapeutic, and by Zevalin™, a whole-antibody radioimmunotherapeutic, which were approved in recent years for treatment of NHL. We reported phase I results for Pretarget Lymphoma at the American Society of Hematology (ASH) 2002 annual meeting. NHL patients treated in the study had been heavily pretreated and had failed one or more prior therapies, including treatment with standard chemo- or radiotherapy, Rituximab, or SCT. Treatment with Pretarget Lymphoma was usually well tolerated. Three of the 15 patients in the study achieved an objective response to the therapy. Median patient survival was 316 days. The investigators concluded that the phase I dosimetry, safety and efficacy data for Pretarget Lymphoma are encouraging, and that this product candidate shows promise as a new form of RIT.

        Pretarget® Carcinoma uses a fusion protein with the specificity and avidity of the CC49 monoclonal antibody that binds the well-characterized TAG-72 antigen on adenocarcinomas (including many gastrointestinal, pancreatic, prostate, breast, ovary and other tumors). Pretarget Carcinoma also delivers yttrium-90 to tumor cells. Results of the phase I study for Pretarget Carcinoma in patients with gastrointestinal adenocarcinoma were published for the ASH 2002 annual meeting. In the phase I treatment regimen, Pretarget Carcinoma was generally safe and well tolerated, with high tumor uptake

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of the radiotherapeutic relative to other organs, and less bone marrow exposure than is typically seen with directly radiolabeled antibody targeting agents. We anticipate that if successfully developed and approved for marketing, Pretarget Carcinoma may be used in combination with chemotherapy, since many widely used chemotherapeutics (e.g., 5-fluorouracil and gemcitabine) increase the radiation sensitivity of tumor cells.

Other Technologies

        We also have patent coverage, including issued US and foreign patents, relating but not limited to the following non-core technologies, which have potential applications in imaging, diagnostics, therapeutics, or other biomedical fields: cardiovascular technologies, ligand-linker technologies, annexin-based conjugates, humanized antibodies with modified glycosylation, endogenous opioid and steroid receptor targeting, antibody production and preparation, stabilization of antibody coupling, blood pool agents, improved targeting, drug and toxin technology, blood clot imaging, bone imaging and therapy, radioprotection, rhenium production and uses, and astatine-related applications. As noted above, we are seeking opportunities to license or sell these technologies.

Patents and Proprietary Rights

        Our policy is to aggressively protect our proprietary technologies. We have filed applications for US and foreign patents on many aspects of our technologies. We currently have more than 100 issued US patents in our portfolio.

        Our Skeletal Targeted Radiotherapy (STR) portfolio includes US patents covering the STR product composition and its use, with corresponding international patent coverage. NeoRx has an exclusive worldwide license, except in Australia, from The Dow Chemical Company for the use of holmium-166-DOTMP for bone marrow ablation with stem cell support.

        NeoRx has been awarded over 30 US patents relating to our Pretarget® technology, and has additional US and foreign applications pending. We also have licensed the rights to certain other patents relating to Pretarget products in development.

        Risks associated with the protection of our patents and other proprietary technologies are described under the heading "Risk Factors" above. Pending or future applications of NeoRx or its collaborators will not necessarily result in issued patents. Moreover, the current patents owned by or licensed to NeoRx may not provide substantial protection or commercial benefit. In addition to patent protection, we rely upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain our competitive position. Third parties could acquire or independently develop the same or similar technology, or our issued patents or those licensed could be circumvented, invalidated or rendered obsolete by new technology. Third parties also could gain access to or disclose our proprietary technology, and we may be unable to meaningfully protect our rights in such unpatented proprietary technology.

        The rapid rate of development and the intense research efforts throughout the world in biotechnology, the significant time lag between the filing of a patent application and its review by appropriate authorities, and the lack of significant legal precedent involving biotechnology inventions make it difficult to predict accurately the breadth or degree of protection that patents will afford the Company's or its licensees' biotechnology products or their underlying technology. It also is difficult to predict whether valid patents will be granted based on biotechnology patent applications or, if such patents are granted, to predict the nature and scope of the claims of such patents or the extent to which they may be enforceable.

        Under United States law, although a patent has a statutory presumption of validity, the issuance of a patent is not conclusive as to validity or as to the enforceable scope of its claims. Accordingly, the

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patents owned or licensed by NeoRx could be infringed or designed around by third parties, and third parties could obtain patents that we would need to license or design around.

Competition

        We face significant competition from emerging and established biotechnology and pharmaceutical companies. There are numerous competitors developing products to treat the diseases for which we have developed technologies and for which we are seeking to develop products. We initially are focusing our STR product candidate on the treatment of multiple myeloma. Several companies, including Celgene Corp. and Millennium Pharmaceuticals Inc., also are developing therapeutics for multiple myeloma. Other companies also may develop and introduce products and processes competitive with or superior to those of NeoRx. Further, the development by others of new disease treatment or prevention products could render our technology and products under development less competitive, uneconomical or obsolete.

        Many biotechnology companies, including Immunomedics, Inc., IDEC Pharmaceuticals Corp. and Corixa Corp., have corporate partnership arrangements with large, established companies to support research, development and commercialization efforts of products that may be competitive with our product candidates. In addition, a number of established pharmaceutical companies, including GlaxoSmithKline, Amersham PLC, Mallinckrodt, Inc. (Tyco Healthcare) and Bristol-Myers Squibb Co., are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with proprietary monoclonal antibody-based technology or other technologies applicable to cancer therapy. Many of our existing or potential competitors have or have access to substantially greater financial, research and development, marketing and production resources than those of NeoRx.

        We also expect to face increasing competition from universities and other non-profit research organizations. These institutions carry out a significant amount of research and development in the field of antibody-based technology. These institutions are becoming increasingly aware of the commercial value of their findings and more active in seeking patent and other proprietary rights, as well as licensing revenues.

        Timing of market introduction and healthcare reform, both uncertainties, will affect the competitive position of our potential products. We believe that competition among products approved for sale will be based, among other things, on product safety, efficacy, reliability, availability, third-party reimbursement, price and patent protection.

Government Regulation and Product Testing

        The manufacture and marketing of our proposed Skeletal Targeted Radiotherapy (STR) product and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and other countries. In the United States, drugs and biologics are subject to rigorous regulation by the Food and Drug Administration (FDA). The Federal Food, Drug and Cosmetic Act of 1976, as amended, the regulations promulgated there under, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our STR product candidate. Product development and approval within this regulatory framework take a number of years to accomplish, if at all, and involve the expenditure of substantial resources.

        The steps required before a pharmaceutical product may be marketed in the United States include:

•

preclinical laboratory tests, in vivo preclinical studies and formulation studies;

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•

submission to the FDA of an Investigational New Drug Application (IND), which must become effective before clinical trials can commence;



•

adequate and well-controlled clinical trials to establish the safety and efficacy of the drug;



•

the submission of a Biologic License Application (BLA) or New Drug Application (NDA) to the FDA; and



•

FDA approval of the BLA or NDA prior to any commercial sale or shipment of the drug.

        In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and inspected by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current Good Manufacturing Practice (cGMP) regulations, which are enforced by the FDA through its facilities inspection program for biologics, drugs and devices. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in such countries under reciprocal agreements with the FDA.

        Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as animal studies, to assess the potential safety and efficacy of the proposed product. Laboratories that comply with the FDA regulations regarding Good Laboratory Practice must conduct preclinical safety tests. The results of the preclinical studies are submitted to the FDA as part of an IND and are reviewed by the FDA prior to commencement of clinical trials. Unless the FDA provides comments to an IND, the IND will become effective 30 days following its receipt by the FDA. Submission of an IND does not assure FDA authorization to commence clinical trials.

        Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with the FDA's Protection of Human Subjects regulations and Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board (IRB) at the institution where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.

        Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In phase I, the drug is tested for:

•

safety (adverse effects);



•

dosage tolerance;



•

metabolism;



•

distribution;



•

excretion; and



•

pharmaco-dynamics (clinical pharmacology).

        In phase II, a limited patient population is studied to:

•

determine the efficacy of the drug for specific, targeted indications;



•

determine dosage tolerance and optimal dosage; and



•

identify possible adverse effects and safety risks.

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        If a compound is found to have potential efficacy and to have an acceptable safety profile in phase II clinical trials, phase III clinical trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. With respect to any of our proposed products subject to clinical trials, there can be no assurance that phase I, phase II or phase III studies will be completed successfully within any specific time period, if at all. Furthermore, we or the FDA may suspend clinical trials at any time if it is determined that the subjects or patients are being exposed to an unacceptable health risk.

        The results of the pharmaceutical development, preclinical studies and clinical trials are submitted to the FDA in the form of a Biologic License Application (BLA), or New Drug Application (NDA), for approval of the marketing and commercial shipment of the drug. The testing and approval processes are likely to require substantial cost, time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a BLA or an NDA if applicable regulatory criteria are not satisfied, may require additional testing or information, or may require post-market testing and surveillance to monitor the safety of the product. If regulatory approval is granted, such approval may entail limitations on the indicated uses for which the product may be marketed. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for BLA or NDA approval is the requirement that the prospective manufacturers' quality control and manufacturing procedures conform to cGMP regulations. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance.

Employees

        As of March 20, 2003, we had 35 full-time employees and one part-time employee. Of these full-time employees, 8 hold PhD degrees, 2 hold MD degrees, one holds both a PhD and a MD, one holds a JD degree and one holds a DVM degree. Of the total full-time employees, 22 employees were engaged in research, development, or clinical development activities, and 13 were employed in general administration. In January 2003, the Company accepted the resignations of Richard Ghalie, MD, Vice President, Medical and Regulatory Affairs, and Les Sabo, Vice President, Manufacturing. On March 11, 2003 Jack L. Bowman was named Executive Chairman of the Company and Chairman of its Board of Directors.

        We consider our relations with employees to be good. None of our employees is covered by a collective bargaining agreement.

Where You Can Find More Information

        NeoRx files annual, quarterly and current reports, as well as registration and proxy statements and other information, with the Securities and Exchange Commission. These documents may be read and copied at the SEC's public reference rooms in Washington, DC, New York, NY and Chicago IL. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings also are available to the public at the Internet website maintained by the SEC at www.sec.gov. The Company's reports filed with the SEC after January 1, 2003 also are available on our website, www.neorx.com. We will provide paper copies of our SEC filings free of charge upon request.

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Item 2. PROPERTIES

        NeoRx occupies approximately 21,000 square feet of office space located at 300 Elliott Avenue West in Seattle, WA, under a lease that expires July 21, 2009. In February 2003, the administrative offices previously located at 410 West Harrison Street, Seattle, WA, were consolidated into this location.

        In October 2002, NeoRx terminated a lease on approximately 36,000 square feet of office laboratory and manufacturing space at 410 West Harrison Street, Seattle, WA. The cost of terminating the lease includes base rent, moving, decontamination and repair costs and is expected to total approximately $290,000. We will continue to occupy approximately 2,900 square feet for storage purposes in a building adjacent to the 410 West Harrison Street building and a parking area.

        We believe that these facilities are in good condition and are adequate for all present uses.

        In April 2001 NeoRx purchased a radiopharmaceutical manufacturing facility located on 12 acres in Denton, TX. The facility has achieved current Good Manufacturing Practice (cGMP) status and has been issued appropriate radiation permits from the State of Texas. The main building is approximately 88,000 square feet and houses approximately 12,000 square feet of cleanrooms. The area has been used for radiopharmaceutical manufacturing, quality control laboratories and support functions. Current capabilities include terminal and aseptic processing and filling of radiopharmaceuticals. The facility was designed to allow for future expansion.

        In October 2002, we reduced staffing at the facility to a total of 21 employees. At that time, we also recognized a non-cash asset impairment loss of $5.6 million on certain facilities and equipment, resulting in part from our decisions to reduce staff and eliminate contract manufacturing activities at the Denton facility. The loss on the Denton facility and related equipment was determined via outside appraisals.

        In January 2003, we implemented a further reduction in staffing and laid off an additional 13 employees. We are operating the Denton facility on a standby basis. An additional impairment charge of $0.6 million relating to intangible assets for licenses and processes at the Denton facility was recorded in the fourth quarter of 2002.

        The fourth quarter impairment charge is associated with our decision to suspend production of STR and run the manufacturing facility on standby until a decision is made to resume clinical testing of STR and production of clinical materials.

Item 3. LEGAL PROCEEDINGS

        Not Applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not Applicable.

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock traded on The Nasdaq National Market System until March 20, 2003, when its listing was transferred to The Nasdaq SmallCap Market. The following table sets forth, for the periods indicated, the high and low sales prices for NeoRx Common Stock as reported on The Nasdaq National Market. These quotations reflect inter-dealer prices without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.