PROGENICS PHARMACEUTICALS INC - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2004

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

For the transition period from ___________________ to

Commission file number 000-23143

PROGENICS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE	13-3379479
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

777 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive offices)
(Zip Code)

(914) 789-2800
(Registrant’s telephone number, including area code)

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 No

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

As of May 5, 2004 there were 16,899,621 shares of common stock, par value $.0013 per share, of the registrant outstanding.

PROGENICS PHARMACEUTICALS, INC.

INDEX

			Page No.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

	Condensed Balance Sheets at March 31, 2004 and
		December 31, 2003	3

	Condensed Statements of Operations for the
		Three Months ended March 31, 2004 and 2003	4

	Condensed Statement of Stockholders’ Equity and Comprehensive Loss
		for the Three Months ended March 31, 2004	5

	Condensed Statements of Cash Flows
		for the Three Months ended March 31, 2004 and 2003	6

	Notes to Condensed Financial Statements		7

Item 2. Management’s Discussion and Analysis of
	Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures about Market Risk			28

Item 4. Controls and Procedures			28


PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K			29

	Certifications		31

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PROGENICS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
AT MARCH 31, 2004 AND DECEMBER 31, 2003
(Unaudited)

		March 31,			December 31,
		2004			2003

	ASSETS:
Current assets:
	Cash and cash equivalents	$	33,881,729		$	47,737,467
	Marketable securities		11,642,483			11,383,535
	Amount due from joint venture		582,213
	Accounts receivable		282,255			796,929
	Other current assets		1,107,424			1,462,904

	Total current assets		47,496,104			61,380,835

	Marketable securities		11,848,345			6,541,730
	Fixed assets, at cost, net of accumulated
	depreciation and amortization		4,096,280			3,890,991
	Investment in joint venture		681,669			541,078
	Restricted cash		532,198			531,570

	Total assets	$	64,654,596		$	72,886,204

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current Liabilities:
	Accounts payable and accrued liabilities	$	5,058,773		$	5,044,459
	Amount due to joint venture					108,687

	Total current liabilities		5,058,773			5,153,146
	Deferred lease liability		48,318			50,364

	Total liabilities		5,107,091			5,203,510

Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.001 par value, 20,000,000 shares
	authorized; none issued and outstanding
	Common stock—$.0013 par value, 40,000,000 shares		21,836			21,633
	authorized; issued and outs tanding—16,796,609
	in 2004 and 16,640,866 in 2003
	Additional paid-in capital		147,020,351			144,940,151
	Accumulated deficit		(87,518,034	)		(77,293,367	)
	Accumulated other comprehensive income		23,352			14,277

	Total stockholders’ equity		59,547,505			67,682,694

	Total liabilities and stockholders’ equity	$	64,654,596		$	72,886,204

The accompanying notes are an integral part of these condensed financial statements.

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PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months ended March 31,

		2004			2003

Revenues:
Contract research and development
from joint venture	$	556,682		$	792,922
Research grants and contracts		1,186,135			1,117,418
Product sales		5,278			59,566

Total revenues		1,748,095			1,969,906

Expenses:
Research and development		8,373,487			5,752,146
General and administrative		2,814,862			1,621,837
Loss in joint venture		675,191			619,863
Depreciation and amortization		326,114			303,931

Total expenses		12,189,654			8,297,777

Operating loss		(10,441,559	)		(6,327,871	)

Other income (expense):
Interest income		216,892			224,126

Net loss	$	(10,224,667	)	$	(6,103,745	)


Net loss per share – basic and diluted	$	(0.61	)	$	(0.48	)

Weighted-average shares – basic and diluted		16,707,680			12,729,898

The accompanying notes are an integral part of these condensed financial statements.

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PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)

						ACCUMULATED
	COMMON STOCK		ADDITIONAL			OTHER	TOTAL
			PAID-IN	ACCUMULATED		COMPREHENSIVE	STOCKHOLDERS’		COMPREHENSIVE
	Shares	Amount	CAPITAL	DEFICIT		INCOME(LOSS)	EQUITY		LOSS

Balance at December 31, 2003	16,640,866	$21,633	$144,940,151	($77,293,367	)	$14,277	$67,682,694

Issuance of compensatory stock options			156,053				156,053

Sale of Common Stock under employee stock purchase plans and exercise of stock options	155,743	203	1,924,147				1,924,350

Net loss				(10,224,667	)		(10,224,667	)	(10,224,667	)

Change in unrealized gain on marketable securities						9,075	9,075		9,075

Balance at March 31, 2004	16,796,609	$21,836	$147,020,351	($87,518,034	)	$23,352	$59,547,505		($10,215,592	)

The accompanying notes are an integral part of these condensed financial statements.

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PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three months ended March 31,

		2004			2003

Cash flows from operating activities:
Net loss	$	(10,224,667	)	$	(6,103,745	)

Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		326,114			303,931
Amortization of discounts, net of premiums, on
marketable securities		202,087			244,049
Loss in joint venture		675,191			619,863
Adjustment to loss in joint venture		134,218			259,778
Noncash expenses incurred in connection with issuance of
common stock and stock options		156,053			45,503
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		514,674			(44,455	)
Increase in amount due from joint venture		(582,213	)
Decrease in other assets		355,480			480,114
Decrease in accounts payable and accrued expenses		(84,069	)		(962,817	)
Increase in investment in LLC		(950,000	)		(1,500,000	)
Decrease in deferred lease liability		(2,046	)		(7,126	)

Total adjustments		745,489			(561,160	)

Net cash used in operating activities		(9,479,178	)		(6,664,905	)

Cash flows from investing activities:
Capital expenditures		(541,707	)		(387,363	)
Increase in restricted cash		(628	)		(492	)
Sales of marketable securities		4,290,000			15,739,000
Purchase of marketable securities		(10,048,575	)

Net cash (used in) provided by investing activities		(6,300,910	)		15,351,145

Cash flows from financing activities:
Proceeds from the exercise of stock options and sale of common
stock under the Employee Stock Purchase Plan		1,924,350			499,257

Net cash provided by financing activities		1,924,350			499,257

Net (decrease) increase in cash and cash equivalents		(13,855,738	)		9,185,497


Cash and cash equivalents at beginning of period		47,737,467			9,446,982

Cash and cash equivalents at end of period	$	33,881,729		$	18,632,479


Supplemental disclosure of noncash investing and financing activities:
Net fixed assets included in accounts payable and accrued expenses:		10,304			10,110

The accompanying notes are an integral part of these condensed financial statements.

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PROGENICS PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.	Interim Financial Statements

Progenics Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. The Company’s principal programs are directed toward symptom management and supportive care, HIV infection and cancer. The Company has five product candidates in clinical development and several others in preclinical development. The Company was incorporated in Delaware on December 1, 1986. All of the Company’s operations are located in New York. The Company operates in a single segment.

The Company believes that its existing capital resources together with revenue from currently approved government grants and contracts and revenue from its services provide to the PSMA Development Company LLC should be sufficient to fund operations for at least the next 12 months. There could be changes that would consume the Company’s assets before such time. The Company will require substantial funds to conduct research and development activities, preclinical studies, clinical trials and other related general and administrative activities. In addition, the Company’s cash requirements may vary materially from those now planned because of results of research and development and product testing, changes in existing relationships with, or new relationships with, licensees, licensors or other collaborators, changes in the focus and direction of the Company’s research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing patent claims, the regulatory approval process, manufacturing and marketing and other costs associated with the commercialization of products following receipt of regulatory approvals and other factors. Other than currently approved grants and research contracts and contract research and development revenue from the Company’s joint venture with Cytogen Corporation, the Company has no committed external sources of capital and expects no significant product revenues for a number of years as it will take at least that much time, if ever, to bring the Company’s products to the commercial marketing stage. For periods beyond 12 months, we may seek additional financing to fund operations through future offerings of equity or debt securities or agreements with corporate partners and collaborators with respect to the development of our technologies. We also plan to seek funding from additional grants and government contracts. We cannot assure you, howeve r, that we will be able to obtain additional funds on acceptable terms, if at all. We will require substantial funds to continue to conduct research and development activities, preclinical studies, clinical trials and other general and administrative activities. Our expenditures for these activities will include required payments under operating leases and licensing, collaboration and service agreements.

The interim Condensed Financial Statements of the Company included in this report have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for such periods. The results of operations for interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

2.	Summary of Significant Accounting Policies

Revenue Recognition

Payments received from PSMA Development Company LLC (“PSMA”) (a related party), the Company’s joint venture with Cytogen Corporation, for contract research and development are recognized as revenue as the related services are performed by the Company (see Note 6). The gross profit margin on such revenues is not material.

The Company has been awarded government research grants and contracts from the National Institutes of Health (the “NIH”). The NIH grants and contracts are used to subsidize the Company’s research projects (“Projects”). NIH grant revenue is recognized on a pro rata basis as subsidized Project costs are incurred. Such

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PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

method approximates the straight-line basis over the lives of the Projects. The NIH contract reimburses the Company for costs associated with the preclinical research, development and early clinical testing of a prophylactic vaccine designed to prevent HIV from becoming established in uninfected individuals exposed to the virus, as requested by the NIH.

The Company has derived all of its product revenue from the sale of research reagents. Product sales revenue is recognized at the time reagents are shipped. The reagents are products of the Company’s research and development efforts. The Company maintains no inventory of reagents and cost of product sales is not material.

In accordance with SAB 104, “Revenue Recognition”, and EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, non-refundable fees, including payments for services, up-front licensing fees and milestone payments are recognized as revenue based on the percentage of costs incurred to date, estimated costs to complete, and total expected contract revenue in accordance with EITF Issue No. 91-6, “Revenue Recognition of Long-Term Power Sales Contract,” which is a systematic method that is representative of the revenue earned on obligations fulfilled under those arrangements. However, revenue recognized is limited to the amount of non-refundable fees received.

Interest income is recognized as earned.

For three months ended March 31, 2004 and 2003, the Company’s research grant and contract revenue and contract research and development revenue came from the NIH and the PSMA Development Company LLC, respectively.

Research and Development Expenses

Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors, including services related to the Company’s clinical trials, clinical trial expenses, the cost of manufacturing drug for use in research, preclinical development, and clinical trials. All costs associated with research and development are expensed as incurred.

For each clinical trial that the Company conducts, certain clinical trials costs, which are included in research and development expenses, are expensed based on the total number of patients in the trial, the rate at which patients enter the trial, and the period over which clinical investigators or contract research organizations provide services. At each period end, we evaluate the accrued expense balance related to these activities based upon information received from the suppliers and estimated progress towards completion of the research or development objectives to ensure that the balance is reasonably stated. Such estimates are subject to change as additional information becomes available.

3.	Stock-Based Employee Compensation

The accompanying financial position and results of operations of the Company have been prepared in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Under APB No. 25, compensation expense is generally not recognized in connection with the awarding of stock option grants to employees, provided that, as of the grant date, all terms associated with the award are fixed and the quoted market price of the Company’s stock as of the grant date is equal to or less than the option exercise price.

In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS 123” (SFAS No. 148), pro forma operating results have been determined as if the Company had prepared its financial statements in accordance with the fair value-based method of accounting. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value-based method of accounting to compute compensation expense for all stock based awards. Since option grants awarded during 2004 and 2003 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value-based method.

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PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

			Three Months Ended March 31,

			2004		2003

Net loss, as reported		$	(10,224,667	)	(6,103,745	)
Add: Stock-based employee
compensation expense included
in reported net loss			––		––
Deduct:	Total stock-based employee
	compensation expense
	determined under fair value
	based method for all awards		(2,430,991	)	(1,983,405	)

Pro forma net loss		$	(12,655,658	)	(8,087,150	)


Net loss per share amounts, basic
and diluted:
As reported		$	(0.61	)	(0.48	)
Pro forma		$	(0.76	)	(0.64	)

For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used in computing the fair value of options granted: expected volatility of 92% in 2004 and 79% in 2003, expected lives of five years (six months for the employee stock purchase plan), zero dividend yield, and weighted-average risk-free interest rate of 3.10% in 2004 and 3.02% in 2003.

The fair value of options and warrants granted to non-employees for goods or services is expensed as the goods are utilized or the services performed.

4.	Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses as of March 31, 2004 and December 31, 2003 consist of the following:

		March 31,		December 31,
		2004		2003

Accounts payable	$	1,363,228	$	1,300,104
Accrued consulting and clinical trial costs		2,287,468		2,883,366
Accrued payroll and related costs		524,114		700,963
Professional fees payable		883,963		133,526
Other				26,500

	$	5,058,773	$	5,044,459


5.	Net Loss Per Share

The Company’s basic net loss per share amounts have been computed by dividing net loss by the weighted average number of common shares outstanding during the respective periods. For the three months ended March 31, 2004 and 2003, the Company reported a net loss and, therefore, no common stock equivalents were included in the computation of diluted net loss per share since such inclusion would have been antidilutive.

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PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

	Net Loss			Shares	Per Share
	(Numerator)			(Denominator)	Amount

Three months ended March 31,
2004:
Basic and Diluted	$	(10,224,667	)	16,707,680	$	(0.61	)
Three months ended March 31,
2003:
Basic and Diluted	$	(6,103,745	)	12,729,898	$	(0.48	)

Options which have been excluded from the diluted per share amounts because their effect would have been antidilutive include the following:

	Three Months Ended March 31,

	2004			2003

			Wtd. Avg.			Wtd. Avg.
	Wtd. Avg.		Exercise	Wtd. Avg.		Exercise
	Number		Price	Number		Price


Options	5,149,962	$	10.19	4,673,046	$	8.99

Total	5,149,962	$	10.19	4,673,046	$	8.99


6.	PSMA Development Company LLC

PSMA Development Company LLC (the “JV”) was formed on June 15, 1999 as a joint venture between Progenics Pharmaceuticals, Inc. (“Company”) and Cytogen Corporation (each a “Member” and collectively, the “Members”) for the purposes of conducting research, development, manufacturing and marketing of products related to prostate-specific membrane antigen (“PSMA”). Each Member has equal ownership and equal representation on the JV’s management committee and equal voting rights and rights to profits and losses of the JV, as defined. In connection with the formation of the JV, the Members entered into a series of agreements, including an LLC Agreement, a Licensing Agreement and a Services Agreement (collectively, the “Agreements”) which generally define the rights and obligations of each Member, including but not limited to the obligations of the Members with resp ect to capital contributions and funding of research and development of the JV for each coming year.

The Company is engaged in a research program on behalf of the JV. In January 2004, the Members approved an annual budget and work plan in order to provide funding for 2004. The Services Agreement referred to above expired effective January 31, 2004, and the Members have not yet agreed upon the terms of a replacement services agreement, if any. In the interim, the Members have agreed that they will continue to perform research and development in accordance with the approved annual budget and work plan for 2004.

The Company was originally required to fund the cost of research up to $3.0 million. As of December 31, 2001, the Company had surpassed the $3.0 million in funding for research costs. Accordingly, each Member makes capital contributions to fund research costs and shares such costs equally. The level of commitment by the Members to fund the JV is based on an annual budget that is approved by both Members.

Amounts received from the JV as reimbursement of research and development costs in excess of the initial $3.0 million (see above) are recognized as contract research and development revenue. For the three months ended March 31, 2004 and 2003, such amounts totaled approximately $557,000 and $793,000, respectively, and the gross profit margin on such revenue was not material. According to the joint venture agreement, and in consideration of the Company’s initial incremental capital contribution and recognition of

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PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

$3.0 million of joint venture research expenditures, the Company may directly pursue and obtain government grants directed to the conduct of research utilizing PSMA related technologies and retain amounts received not to exceed $3.0 million. During the three months ended March 31, 2004 and 2003, the Company recognized $134,218 and $259,778, respectively, from five such government grants, which is included in research grant revenue in our accompanying financial statements. Through March 31, 2004, the Company had recognized approximately $1,061,000 of such revenue. Proceeds received from the joint venture for research activities for which the Company has also received such corresponding grant revenue is reflected in the accompanying financial statements as an adjustment to joint venture losses and contract revenue from the joint venture. Contract research and development revenue recognized by the Company related to services provided to the JV may va ry in the future due to potential future funding limitations on the part of the Members, the extent to which the JV continues to rely on Progenics to perform research and development and the terms of a new Services Agreement or other form of agreement, if any, between the Members with respect to such services. All inventions made by the Company in connection with the Services Agreement are required to be assigned to the JV for its use and benefit.

The Agreements generally terminate upon the last to expire of the patents granted by the Members to the JV or upon breach by either party, which is not cured within 60 days of written notice or upon dissolution of the JV in accordance with the LLC Agreement.

The Company accounts for its investment in the JV in accordance with the equity method of accounting. Selected financial statement data of the JV are as follows:

Balance Sheet Data		March 31,			December 31,
		2004			2003

Cash	$	2,307,393		$	1,172,705
Accounts receivable from Progenics					108,687

Total assets	$	2,307,393		$	1,281,392

Accounts due to Progenics	$	582,213
Accounts payable and accrued expenses		361,839			199,233

Total liabilities		944,052			199,233
Stockholders’ (deficit) equity		1,363,341			1,082,159

Total liabilities and stockholders’ equity	$	2,307,393		$	1,281,392


Statement of Operations Data:		For the Year Ended March 31,

		2002			2003

Total revenue (interest income)	$	2,623		$	493
Total expenses (1)		1,621,441			1,759,774

Net loss	$	(1,618,818	)	$	(1,759,281	)


(1)	Includes research and development services performed by the Company during the three months ended March 31, 2004 and 2003.

7.	Comprehensive Loss

Comprehensive loss represents the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-own