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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ILEX ONCOLOGY, INC.

Registrant’s telephone number, including area code: (210) 949-8200

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

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

     Indicate by check mark 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 if the issuer is an accelerated filer (as defined in Exchange Act rule 12b-2). Yes x No o.

     The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 28, 2002 was approximately $431,259,085 based upon the closing price of $14.09 for such date reported on The Nasdaq National Stock Market.

     The number of shares outstanding of the Registrant’s common stock as of March 7, 2003 is 32,546,890.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the registrant’s 2003 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission not later than April 30, 2003, are incorporated by reference into Part III of this Form 10-K.

ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

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This Annual Report on Form 10-K contains certain forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words anticipate, believe, estimate, expect and intend and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitations, risks associated with preclinical and clinical developments in the biopharmaceutical industry in general and in ILEX’s compounds under development in particular; the potential failure of the Company’s compounds under development to prove safe and effective for treatment of disease; uncertainties inherent in the early stage of the Company’s compounds under development; failure to successfully implement or complete clinical trials; failure to receive market clearance from regulatory agencies for our compounds under development; management’s ability to implement strategic initiatives; the ability of the Company to predict its future expenses and capital needs; the development of competing products; the ability of the Company to combine its disparate research capabilities and translate them into clinical drug development programs; uncertainties related to the Company’s dependence on and relationships with third parties and partners; general economic and market conditions; risks inherent in the biopharmaceutical industry; stock price volatility; variability of license, royalty and other revenue; risks related to the outcome of litigation and claims made against us; risks related to the market acceptance of CAMPATH; uncertainties related to protection of our intellectual property; rapid technological change could render our technologies obsolete; one-time events and those risks described herein, in the Company’s Form S-3 filed November 15, 2001, as amended (Commission file #333-72396) and in other filings made by the Company with the SEC. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

     In this Annual Report on Form 10-K, “ILEX,” the “Company,” “we,” “our” or “us” refer to ILEX Oncology, Inc. and its wholly owned partnership and subsidiaries, “common stock” or “our stock” refers to ILEX’s common stock, par value $0.01 per share.

PART I.

Summary

     We are building a product-driven biopharmaceutical company, primarily focused on oncology, by developing and commercializing a portfolio of novel treatments for both early and late stage cancers. We are leveraging our core competencies in clinical drug development to identify, develop and commercialize our proprietary product candidates. Our lead product, CAMPATH®, has been approved in the United States and Europe for treating patients with refractory chronic lymphocytic leukemia (CLL) and is distributed by Schering AG and its United States (U.S.) subsidiary, Berlex Laboratories, Inc. (Berlex). CAMPATH was developed in a 50/50 partnership with Millennium Pharmaceuticals, Inc. (Millennium). In December 2001, we acquired Millennium’s equity interest in ILEX Pharmaceuticals, L.P. (formerly known as Millennium & ILEX Partners, L.P. (the Partnership)). This transaction has helped streamline the process of developing CAMPATH in additional indications including nononcology indications. In addition to CAMPATH, we have four oncology product candidates in clinical trials, as well as several active preclinical programs. To date, we have built this pipeline primarily through the licensing and acquisition of promising drug candidates. In addition to our clinical development programs, we conduct drug discovery research, translational research and preclinical studies in the fields of signal transduction, angiogenesis inhibition, molecular receptor chemistry and medicinal phosphonate chemistry.

     We plan to continue to invest in key research and development activities. Since inception, we have incurred losses and have an accumulated deficit through December 31, 2002, of $283.4 million. Our losses have resulted primarily from research and product development activities, including licensing of products and product and corporate acquisitions for which we incur in-process research and development expenses, and related administrative expenses. We expect to continue to incur losses in 2003. With the exception of CAMPATH, none of our other drug candidates has been approved for sale. Our revenue for the foreseeable future will be limited to our profit participation and royalty revenue, product development revenue, interest income and other miscellaneous income.

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2002 ANNUAL REPORT ON FORM 10-K

     In February 2001, we announced our intent to focus our in-house drug development capabilities on our own proprietary products, including those being jointly developed with partners. At that time, we began a transition out of the fee-for-service CRO business, which was expected to take from two to three years. We will continue to recognize revenue from current client projects, but we do not intend to take on any new fee-for-service contracts, except where we have or can obtain an ownership interest. We have and will continue to transition certain CRO employees to develop our own products.

OUR STRATEGY

     Our strategic vision is to be a product-driven biopharmaceutical company, focused primarily on oncology. We plan to achieve this vision through our aggressive pursuit of development and commercialization of the product candidates in our pipeline. The key elements of our strategy to accomplish this objective are to:

	•		Establish CAMPATH as an effective treatment in oncology, autoimmune diseases and organ transplantation. By broadening the approved label indications, we can greatly increase our target markets for CAMPATH. Together with Schering AG, we are sponsoring or supporting more than 40 post-marketing studies to evaluate CAMPATH in both current and new areas.
	•		Continue to build our commercialization strength. As products in our pipeline reach later stages of development, we want to be aptly prepared to maximize their potential. We have recently hired six medical science liaisons (MSLs) and plan to hire more in 2003, to help us better interact with the marketplace.
	•		Build a diversified pipeline of product candidates. We are developing a focused pipeline of product candidates that are in various stages of clinical and preclinical development and that are based on different technology platforms. We believe this strategy increases the likelihood that we will successfully develop commercially viable pharmaceutical products. Our approach is intended to reduce our exposure to the impact of any single product failure and increase our flexibility to eliminate programs we deem less promising.
	•		License or otherwise acquire complementary products or technologies. In addition to our internal drug discovery efforts, we plan to continue expanding our product candidate pipeline by identifying and evaluating potential products and technologies developed by third parties that we believe fit within our overall pipeline strategy.
	•		Potentially out-license our products in areas that are not within our main areas of focus. By utilizing the strengths of other companies, we hope to maximize our financial returns and minimize our requirements for additional investments.

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  OUR PRODUCT CANDIDATE PIPELINE

     As noted above, our product candidate pipeline includes oncology compounds at various stages of development, with significant therapeutic targets and unique mechanisms of action. The following chart identifies the clinical progress of these product candidates as of December 31, 2002:

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2002 ANNUAL REPORT ON FORM 10-K

CAMPATH

     CAMPATH is a humanized monoclonal antibody that binds to a specific target, CD52, on cell surfaces leading the body’s immune system to destroy malignant cells. CAMPATH was launched in May 2001 in the United States and in August 2001 in Europe. In its first full year on the market, CAMPATH generated global net sales of approximately $44.1 million and we record a portion of these sales as product profit and royalty revenue. CAMPATH is in the early stages of commercialization. It was approved for use in leukemia but we are now conducting trials in Non-Hodgkin’s Lymphoma (NHL) and multiple sclerosis (MS) as well. CAMPATH is also being evaluated in more than 40 additional studies in oncology and non-oncology by clinical investigators; we will continue to support selected investigator initiatives in areas of interest beyond our current indications.

Eflornithine

     Eflornithine is an orally bioavailable compound that has demonstrated the ability to block ornithine decarboxylase, an enzyme that is known to promote carcinogenesis. In Phase II trials, Eflornithine exhibited the ability to reduce the severity of premalignant lesions and thereby help prevent such lesions from progressing to cancer. In collaboration with the National Cancer Institute, we are conducting a randomized placebo-controlled Phase III trial to evaluate Eflornithine as a treatment for patients at risk for recurrence of superficial bladder cancer. We expect to complete this trial in 2003.

Clofarabine

     Clofarabine is a second-generation, synthetic nucleoside analog that interrupts the metabolism of cancer cells. It is in the same class as fludarabine, cladribine and gemcitabine, all approved oncology drugs. Early clinical studies of clofarabine in patients with relapsed or refractory acute myelogenous leukemia (AML) and acute lymphocytic leukemia (ALL) showed promising results. Based on these early studies, we initiated Phase II trials in 2002 in both children and adults with refractory acute leukemia. In October 2002, we launched a Phase I trial of clofarabine in combination with the chemotherapy drug ara-C (cytarabine) in adults with a spectrum of hematologic malignancies. We also initiated a Phase I trial in adults with advanced solid tumors in mid-2002, based on favorable preclinical results. Additional studies are under review and are expected to be started in 2003.

APOMINE^TM

     APOMINE^TM is the first candidate from ILEX’s unique class of non-hormonal agents known as phosphonate esters. It is orally bioavailable and has been shown, in preclinical models, to inhibit osteoclasts and block bone resorption, like the currently marketed bisphosohonic acids such as Fosamax® and Actonel®. Unlike the currently marketed drugs, APOMINE appears to activate osteoblasts with potential bone-building effects. We initiated a double-blinded, placebo-controlled PHASE I/II proof-of-principle trial in 2002 to evaluate the effects of APOMINE in post-menopausal women with osteoporosis. Results of the trial are expected to be available in 2003.

ILX-651

     ILX-651 is a second-generation synthetic dolastatin pentapeptide derivative that targets tubulin and interrupts cell mitosis with a different mechanism of action than taxanes. In preclinical studies, ILX-651 was determined to have potent anti-tumor activity against a wide range of solid tumor types, including tumors that are resistant to treatment with taxanes. We expect to complete and analyze Phase I trial results of this compound during the first part of 2003.

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NM-3

     NM-3 is an orally bioavailable inhibitor of proliferating endothelial cells. Preclinical studies have determined that NM-3 inhibits growth in a variety of tumor models, both as a stand-alone therapy and as a radiation and chemotherapy sensitizer. We are currently conducting Phase I trials with this compound.

Drug Discovery and Preclinical Programs

     In addition to our product candidates in clinical trials, we have a number of preclinical programs, including signal transduction and angiogenesis inhibitors.

OUR TARGET MARKET

     We are currently focused primarily on the oncology market. Cancer encompasses a large number of discrete diseases that afflict many different parts of the human body. The diversity of cancer types and their overall prevalence create a large need for new and improved treatments. It is estimated that one in three Americans will be diagnosed with cancer, making it the second leading cause of death in the United States. We have chosen to focus initially on the oncology market because there is a great need for more effective treatments. It is often the case that a drug’s mechanistic effects may have therapeutic relevance in other human diseases and we will continue to evaluate these opportunities as appropriate.

INTELLECTUAL PROPERTY, PATENTS AND TRADEMARKS

     Patents and other proprietary rights are vital to our business. Our policy is to seek appropriate patent protection both in the United States and abroad for our proprietary technologies. In addition to seeking our own patents, we enter into license agreements with various pharmaceutical companies and research, educational and governmental institutions to obtain patent rights from them to develop and potentially sell products which use the compounds and technologies protected by those patents.

     CAMPATH is protected by patents issued in the U.S., European major market countries, Australia, Canada, New Zealand, Japan and South Africa, which expire between 2009 and 2015. The European patent was issued in February 1989 and the U.S. patent in December 1998. We have licensed U.S. patents on the use of Eflornithine that expire between 2008 and 2017. Our Eflornithine patent rights also include Company-owned patent application filings in the United States and major foreign markets directed to the D-enantiomer of Eflornithine and its therapeutic use. In addition, we have filed patent applications for the use of Eflornithine alone and in combination with other drugs to treat and to prevent various cancers and in certain novel formulations. Eflornithine currently does not have composition of matter patent protection, but we have applied for orphan drug designation. APOMINE^TM is covered by an issued composition of matter patent. In addition, numerous patent applications have been filed on our portfolio of angiogenesis inhibitors including one issued patent in the U.S.

     Additionally, as a result of an agreement with BASF Pharma (BASF), ILEX has acquired a worldwide license for ILX-651 including composition of matter patent coverage, which is filed in 43 countries, including the U.S. patent expiring at the end of 2015. Clofarabine is protected by core patent rights held by Southern Research Institute and licensed to Bioenvision, including pharmaceutical composition and cancer treatment patent claims coverage expiring between 2008 and 2014 in the U.S.

     We have a broad patent estate. This patent estate includes patents and patent applications directed to compositions, pharmaceutical formulations and methods-of-use within our research and development pipeline. In addition to the 36 United States patents and approximately 290 foreign patents we have licensed from others, we own approximately 15 issued patents in the United States and approximately 70 issued foreign patents. We also have approximately 20 pending patent applications in the United States and approximately 60 foreign applications and we have licensed from others the rights to approximately 20 United States pending patent applications and over 200 foreign pending patent applications. Patent coverage for our MUC1 program includes 3 issued United States patents, expiring between 2013 and 2016, and 9 issued foreign patents, all of which we have in-licensed on an exclusive basis. Also, the MUC1 patent portfolio includes 5 pending United States patent applications and 6 foreign patent applications to which we hold exclusive rights through both in-licensing and co-ownership.

     In December 2001, Genentech, Inc. (Genentech) announced that it was granted a patent relating to fundamental methods and compositions for the production of monoclonal antibodies using anti-recombinant DNA technology. The proceeding entitled Genentech to priority over the patent held by the Celltech Group PLC, who had first received the patent in 1989 and, to whom we are currently paying royalty fees related to the use of this technology platform in the manufacture of CAMPATH. Based on this decision, which was favorable to Genentech,

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we have negotiated and are finalizing a license from Genentech covering production of monoclonal antibodies, such as CAMPATH, directed at the CD52 cell surface target.

     Our compounds acquired pursuant to in-licensing arrangements are normally protected by patents obtained or applied for by our licensors. This includes U.S. patents, U.S. patent applications and foreign patents and patent applications. We have not conducted in-depth validity and infringement studies on the patents and patent applications that we have in-licensed from major biotechnology and pharmaceutical companies, and it is possible that these patents or patent applications will be challenged or will not provide protection for our compounds.

     The patent positions of biotechnology and pharmaceutical companies are generally uncertain and involve complex legal and factual issues. No assurance can be given that any patent issued to or licensed by us will provide protection that has commercial significance. We cannot assure you that:

•		our patents will afford protection against competitors with similar compounds or technologies;
•		our patent applications will be issued;
•		others will not obtain patents claiming aspects similar to those covered by our patents or applications;
•		the patents of others will not have an adverse effect on our ability to do business; or
•		the patents issued to or licensed by us will not be infringed, challenged, invalidated or circumvented.

     Moreover, we believe that obtaining foreign patents may, in some cases, be more difficult than obtaining domestic patents because of differences in patent laws. We also recognize that our patent position may generally be stronger in the U.S. than abroad. Conversely, the protection provided by foreign patents may be weaker than that provided by domestic patents.

     CAMPATH® and MABCAMPATH® are our trademarks. We have filed for trademark protection on various other product candidates in the development pipeline, including worldwide filings for APOMINE. Additionally, we anticipate we will have additional filings on new product candidates entering development as they progress through the development process.

     We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with confidentiality agreements that provide that all confidential information developed or made known to others during the course of their employment, consulting or business relationship with us shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual while employed by us are our exclusive property. We cannot guarantee, however, that these agreements will be honored, that we will have adequate remedies for breach if they are not honored or that our trade secrets will not otherwise become known or be independently discovered by competitors.

RECENT DEVELOPMENTS

     In February 2003, Schering AG obtained exclusive rights to develop, sell and distribute CAMPATH in Japan and the Asian Pacific Basin. We will receive an up-front payment, which will be recognized as revenue over the life of the patent. The Partnership will also receive payments upon completion of certain milestones and a royalty based on net sales of CAMPATH in Japan and the Asian Pacific Basin.

     In February 2003, we finalized an amendment to the CAMPATH therapeutic license agreement with BTG International Ltd. (BTG), whereby we gained access to rights to develop and commercialize all remaining human therapeutic uses of CAMPATH.

     In September 2002, we acquired global, exclusive, commercial rights to CAMPATH-related diagnostics including CD52 antigen testing from BTG. The agreement is subject to annual maintenance payments as well as milestone payments and royalties, subject to specific terms and conditions.

     On April 19, 2002, ILEX entered into a collaboration agreement with Abgenix, Inc. (Abgenix), to identify and develop fully human monoclonal antibody candidates to the MUC1 protein, a dominant oncogene significantly overexpressed on a wide range of solid tumors. Abgenix will grant ILEX an exclusive license to commercialize products comprising one or more antibodies derived from this program. Under this agreement, ILEX paid Abgenix a minimal technology access fee. Additionally, the Company may be required to make future payments in accordance with the agreement if certain milestones are met.

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     In October 2001, we entered into a definitive agreement to give us sole ownership of the Partnership by acquiring Millennium’s interest in the Partnership. The transaction closed on December 31, 2001, and the terms of the agreement include an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments. The first payment of $40.0 million was made on December 31, 2002. Additionally, $40.0 million is due in 2003 and 2004, of which $10.0 million in each of those years may be paid in shares of our common stock, subject to certain terms and conditions and at our option. In addition, Millennium will be entitled to royalty payments based on net U.S. CAMPATH sales above certain levels in 2005 and continuing through 2008.

STRATEGIC ALLIANCES

     ILEX may eventually develop and commercialize its own products by forming its own sales, marketing and distribution capabilities. However, in some instances we may form corporate partnerships with larger pharmaceutical companies, particularly for development of non-oncology uses and for commercialization outside the U.S. In a typical partnership arrangement, a corporate partner may bear the substantial cost of clinical development, scale-up production, U.S. Food and Drug Administration (FDA) and European Agency for the Evaluation of Medicinal Products (EMEA) approval and marketing.

     We do not currently have our own sales force and we have contracted with Schering AG for its sales and distribution capabilities. We have recently hired six medical science liaisons to enhance our direct interface with oncology physicians and opinion leaders. However, all CAMPATH sales responsibilities remain with our partner, Schering AG. In August 1999, the Partnership and Schering AG entered into a distribution and development agreement that grants Schering AG exclusive worldwide marketing and distribution rights to CAMPATH, except in Japan and East Asia, where the Partnership had retained rights. However, in January 2003, Schering AG obtained the marketing and distribution rights to CAMPATH in Japan and the Asia Pacific Basin from the Partnership.

POTENTIAL FUTURE ALLIANCES AND COLLABORATIONS

     In the ordinary course of its business, the Company investigates, evaluates and discusses with others the potential creation of strategic collaborations, and the acquisition of businesses, technologies and compounds that complement the Company’s business. Although the Company currently has no definitive understandings or agreements with respect to any such strategic collaboration or acquisition, the Company is continually engaged in discussions with parties which may either singly or in the aggregate materially impact the Company’s business, financial condition and results of operations. No assurance can be given, however, that any such strategic collaboration or acquisition will be made or, if made, that it will prove to be successful.

OTHER RELATIONSHIPS

     In March 2001, we paid $1.1 million to enter a definitive agreement to co-develop clofarabine, a nucleoside analog, with Bioenvision, Inc. (Bioenvision). In clinical studies, clofarabine has shown promise as a potential new treatment for patients with hematological malignancies, including ALL and AML, and in preclinical studies, for solid tumors. ILEX has taken the lead role in developing clofarabine in the United States and Canada, where we will have exclusive manufacturing and marketing rights in exchange for an in-licensing fee, milestone payments and royalties. Bioenvision retained the lead role in developing the compound in Europe, where it will have exclusive manufacturing and marketing rights and we will have rights to royalties.

LICENSING AGREEMENTS

     As a part of its business strategy, the Company actively seeks to expand its product portfolio. Historically, these acquisitions have been in the form of exclusive licensing arrangements.

     The Company’s in-license agreements (the Licenses) generally require the Company to undertake and pursue with diligence and best efforts the development of the compounds and technologies licensed and to report on a regular basis on the Company’s development, progress and plans. Each of the Licenses requires payments of royalties on sales of products covered by the License. Under most of the Licenses, the licensor has the first right to sue for infringement of, and defend invalidity charges against, the licensed patents. All of the Licenses provide that the licensor or sublicensor may terminate all or a portion of the license or sublicense in the event of the Company’s default in its obligations, including the obligations to diligently pursue and apply best efforts to the development of the licensed compound or technology, and, in some instances, in the event of the Company’s insolvency or bankruptcy.

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     In addition, certain Licenses will automatically terminate if the Company does not achieve certain development milestones by specified dates or, in lieu thereof, make payments extending such dates. If we default under any of these license agreements, we may lose our right to market and sell any products based on the licensed technology. Losing our marketing and sales rights could materially harm our business and financial condition. The Company believes it has complied in all material respects with the terms of all of its Licenses to date. The Company intends to continue its licensing program and to engage in compound acquisitions with a primary focus on clinical stage oncology compounds. There can be no assurance that any such licenses or acquisitions will be on terms similar to the Licenses or favorable to the Company.

     All of the company’s in-licensing agreements follow standard practice in the industry with differential royalty rates for patent versus non-patent countries and a royalty off-set if additional licenses are required from other third parties with conflicting/complementary intellectual property rights. In patent countries, the royalty is usually payable for the life of the patent rights while in non-patent countries; the royalty is typically payable for a fixed period of time after the first commercial sale.

PEOPLE

     As of February 28, 2003, we had 277 employees, the majority of whom were located at our corporate headquarters in San Antonio, Texas.

COMPETITION

Product Development

     The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including a number of large pharmaceutical companies as well as several specialized biotechnology companies, are developing cancer drugs similar to ours. There are products on the market that will compete directly with the products that we are seeking to develop. In addition, colleges, universities, governmental agencies and other public and private research institutions will continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect license fees, milestone payments and royalties in exchange for license rights to technologies that they have developed, some of which may directly compete with our technologies. These companies and institutions also compete with us in recruiting qualified scientific personnel. Many of our competitors have substantially greater financial, research and development, human and other resources than we do. Furthermore, large pharmaceutical companies have significantly more experience than we do in preclinical testing, human clinical trials and regulatory approval procedures. Our competitors may:

•		develop safer and more effective products than ours;
•		obtain patent protection or intellectual property rights that limit our ability to commercialize products; or
•		commercialize products earlier than we can.

     We expect technology developments in our industry to continue to occur at a rapid pace. Commercial developments by our competitors may render some or all of our potential products obsolete or non-competitive, which would materially harm our business and financial condition.

GOVERNMENT REGULATION

     The design, research, development, testing, manufacturing, labeling, promotion, marketing, advertising and distribution of drug products are extensively regulated by the FDA in the U.S. and similar regulatory bodies in other countries. The regulatory process is similar for a Biologics License Application (BLA) and a New Drug Application (NDA). The steps ordinarily required before a new drug may be marketed in the U.S., which are similar to steps required in most other countries, include:

•		preclinical laboratory tests, preclinical studies in animals, formulation studies and the submission to the FDA of an IND application;
•		adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication;
•		the submission of a BLA/NDA to the FDA; and
•		FDA review and approval of the BLA/NDA.

     Preclinical tests include laboratory evaluation of product chemistry, Good Laboratory Practices, toxicology studies, formulation development, animal preclinical efficacy studies and manufacturing of current good manufacturing practices (cGMP)

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grade clinical trial material. The results of preclinical testing are submitted to the FDA as part of an IND application. A 30-day waiting period after the filing of each IND application is required prior to the commencement of clinical testing in humans. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified terms. The IND application process may be extremely costly and substantially delay development of our products. Moreover, positive results of preclinical tests will not necessarily indicate positive results in subsequent clinical trials.

     Clinical trials to support BLA/NDAs are typically conducted in three sequential phases, although the phases may overlap. During Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to:

•		assess the clinical activity of the drug in specific, targeted indications;
•		assess dosage tolerance and optimal dosage; and
•		continue to identify possible adverse effects and safety risks.

     If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites.

     After successful completion of the required clinical trials, a BLA/NDA is generally submitted. The FDA may request additional information before accepting a BLA/NDA for filing, in which case the application must be resubmitted with the additional information. Once the submission has been accepted for filing, the FDA reviews the application and responds to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the BLA/NDA to an appropriate advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.

     If FDA evaluations of the BLA/NDA and the manufacturing facilities are favorable, the FDA may issue an approval letter or an approvable letter. An approvable letter will usually contain a number of conditions that must be met in order to secure final approval of the BLA/NDA and authorization of commercial marketing of the drug for certain indications. The FDA may also refuse to approve the BLA/NDA or issue a not approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information.

     The manufacturers of approved products and their manufacturing facilities are subject to continual review and periodic inspections. Because we currently intend to contract with third parties for commercial scale manufacturing of our products, our ability to control compliance with FDA requirements will be limited.

     Approved drugs and manufacturing facilities are subject to ongoing compliance requirements. Identification of certain side effects or the occurrence of manufacturing problems after any of our drugs are on the market could cause issuance of warning letters, subsequent withdrawal of approval, reformulation of the drug, and additional preclinical studies or clinical trials.

     Outside the U.S., our ability to market our products will also be contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the complexities associated with FDA approval described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Union, or the EU, procedures are available to companies wishing to market a product in more than one member state.

     Under the regulatory system in the EU, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology products and high technology products and available at the applicant’s option for other products. The centralized procedure provides for the grant of a single marketing authorization that is valid in all EU member states. The decentralized procedure is available for all medicinal products that are not subject to the centralized procedure. The decentralized procedure provides for mutual recognition of national approval decisions, changes existing procedures for national approvals and establishes procedures for coordinated EU actions on products, suspensions and withdrawals. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more EU member states, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to all member states for which recognition is sought. Within 90 days of receiving the application and assessment report, each EU member state must decide whether to recognize approval. The procedure encourages member states to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. Lack of objection of a given country within 90 days automatically results in approval from the member state.

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     We will choose the appropriate route of European regulatory filing to accomplish our regulatory objectives most efficiently. However, the chosen regulatory strategy may not secure regulatory approvals or approvals of the chosen product indications. The clinical development path for oncology agents is uncertain and may require long-term clinical studies.

PRODUCT LIABILITY AND INSURANCE

     Our business involves the risk of product liability claims. We have not experienced any product liability claims to date. We maintain product liability insurance consistent with industry standards and our product liability insurance related to CAMPATH is consistent with a contractual agreement that we have with Millennium Pharmaceuticals as a result of our purchase of its interest in the Partnership. There can be no assurance that product liability claims will not exceed such insurance coverage limits, which could have a materially adverse effect on our business, financial condition or results of operations, or that such insurance will continue to be available on commercially reasonable terms, if at all.

ACCESS TO COMPANY INFORMATION

     ILEX electronically files the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically, including ILEX.

     ILEX makes available, free of charge, through its website, and by responding to requests addressed to our director of investor relations office, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. ILEX’s website address is http://www.ilexonc.com. The information contained on our website, or on other websites linked to our website, is not part of this document.

ADDITIONAL BUSINESS RISKS

We have a limited operating history and we expect to continue to generate losses for the foreseeable future.

     We began operations in October 1994 and have only a limited operating history upon which you can evaluate our business. We have incurred losses every year since we began operations. As of December 31, 2002, our accumulated deficit was approximately $283.4 million, including net losses of approximately $46.2 million, $121.0 million and $39.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. We expect to continue to incur losses in 2003. It is possible that we will never achieve profitable operations.

We may be unable to obtain additional capital if needed to accelerate our product candidate development or for licensing or acquisition opportunities.

     We believe that our existing capital will fund our activities for at least the next year. We may use these existing resources more quickly if we decide to accelerate the development of our pipeline or because of changes in our research and development programs, potential licenses or acquisitions, commercialization plans or other factors affecting our operating expenses or capital expenditures. We may not be able to obtain any future funds that we require, either in the public or private markets or otherwise, on acceptable terms, or at all.

     If adequate funds are not available, we may have to delay, scale back or eliminate one or more of our development programs, or obtain funds by entering into more arrangements with collaborative partners or others that may require us to relinquish rights to certain of our products or technologies that we would not otherwise relinquish.

CAMPATH is still a relatively new oncology treatment and is in a competitive marketplace

     Although CAMPATH is the only product that has been approved by the FDA and the European Commission for treating CLL in patients who have failed fludarabine therapy, there are other products that compete with CAMPATH. Patients with CLL are generally treated with alkylating agents first, and, if that treatment fails, then with fludarabine. Some of our competitors may have greater financial resources.

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Because we have limited manufacturing capabilities, we are dependent on third-party manufacturers to manufacture products for us. We may be required to incur significant costs and devote significant efforts to establish our own manufacturing capabilities.

     We have limited manufacturing experience and no commercial scale manufacturing capabilities. In order to continue to develop products, apply for regulatory approvals and ultimately commercialize additional products, we need to subcontract or otherwise arrange for the necessary manufacturing.

     There are a limited number of manufacturers that operate under the FDA’s cGMP capable of manufacturing for us. As a result, we have experienced some difficulty finding manufacturers with adequate capacity for our anticipated future needs. If we are unable to arrange for third party manufacturing on commercially reasonable terms, we may not be able to complete development of our product candidates or market them on a timely basis, if at all.

     Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party and the possibility of termination or non-renewal of the agreement by the third party, based on its business priorities, at a time that is costly or inconvenient for us. If our third party manufacturers fail to maintain regulatory compliance, our product supply will be interrupted resulting in lost or delayed revenues and delayed clinical trials. We may not have adequate business interruption insurance.

     Drug manufacturing facilities are subject to continual review and periodic inspection and manufacturing modifications. Domestic manufacturing facilities are subject to biennial inspections by the FDA, and foreign facilities are inspected by the FDA less frequently. Both domestic and foreign facilities must comply with the FDA’s cGMP, and other regulations. In complying with these regulations, manufacturers must spend funds, time and effort in the areas of production, record keeping, personnel and quality control to ensure full compliance. The FDA stringently applies regulatory standards for manufacturing. Failure to comply with any of these post-approval requirements can result in, among other things, warning letters, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecutions. This could interrupt our supply for our marketed products and for our clinical trials.

We have limited marketing capabilities and we are currently dependent upon third parties to sell and market CAMPATH. We will be required to incur significant expense to develop our own marketing capabilities.

     We depend on Schering AG and its U.S. affiliate, Berlex Laboratories, to market and sell CAMPATH. Our reliance on Schering AG subjects us to various risks. The terms of our contract with Schering AG may not be favorable to us in the future. The amount and timing of resources dedicated by Schering AG to marketing CAMPATH is not within our control, and Schering AG may not commit enough resources to marketing CAMPATH. Schering AG could develop, independently or with a third party, a drug that competes with CAMPATH. Schering AG may not perform its obligations as expected and our revenues will be decreased or delayed if Schering AG breaches or terminates its agreement with us. We will need to develop a marketing and sales force with sufficient technical expertise and distribution capability, which will require substantial expenditures and management resources. The creation of infrastructure to commercialize pharmaceutical products is an expensive and time-consuming process, and we may be unable to develop the necessary marketing, sales and distribution capabilities.

Our competitors may develop products superior to those we are developing.

     The technological areas in which we work evolve at a rapid pace. Our future success depends upon our ability to compete in the research, development and commercialization of products and technologies in oncology, our area of focus. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial and managerial resources than do we. These competitors may develop products that are superior to those we are developing and render our products or technologies non-competitive or obsolete. In addition, we may not be able to keep pace with technological change.

     Significant competitive factors determining whether we will be able to compete successfully include:

	•		efficacy and safety of our product candidates;
	•		timing and scope of regulatory approvals;

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	•		product availability;
	•		marketing and sales capabilities;
	•		reimbursement coverage from insurance companies and others;
	•		degree of clinical benefits of our product candidates relative to their costs;
	•		method of administering a product;
	•		price; and
	•		patent protection.

There are potential limitations on third-party reimbursement and other pricing-related matters that could reduce sales of our products and may delay or impair our ability to generate significant revenues.

     The business and financial condition of pharmaceutical and biotechnology companies will continue to be affected by the efforts of government and third-party payors to reduce the cost of health care through various means. In the United States, there have been, and we expect that there will continue to be, a number of legislative proposals aimed at changing the nation’s healthcare system. In certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. These legislative proposals may impair our ability to raise capital, and our business could be adversely affected if these legislative proposals are adopted. In particular, individual pricing negotiations are often required in many countries of the European Union, irrespective of separate government approval to market a drug.

     Although third-party reimbursement is currently not an issue for us, there is a risk that reimbursement will not be available in the future for our products or will not be adequate. Third-party payors are increasingly challenging the price of medical products and services. If government entities and third-party payors do not provide adequate reimbursement levels, then our revenues will be adversely affected and could cause our stock price to decline.

Market volatility may affect our stock price and the value of an investment in our stock may be subject to sudden decreases.

     The trading prices for securities of biotechnology companies, including our stock, have been and are likely to continue to be volatile. Our stock price depends upon a number of factors, including our historical and anticipated operating results, our and our competitors’ preclinical and clinical trial results, market perception of the prospects for biotechnology companies as an industry sector and general market and economic conditions, some of which are beyond our control. Factors such as fluctuations in our financial and operating results, changes in government regulations affecting product approvals, reimbursements or other aspects of our or our competitors’ businesses, announcements of technological innovations or new commercial products by us our competitors, developments concerning key personnel and our intellectual property rights, significant collaborations or strategic alliances and publicity regarding actual or potential performance of products under development by us or our competitors could also cause our stock price to fluctuate substantially. In addition, the United States securities markets, including the NASDAQ National Market on which our stock is listed, have from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may lower our stock price. Moreover, during periods of stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to the companies’ operating performance. Accordingly, our stock price may be subject to greater volatility than the stock prices of other companies during periods of stock market price volatility.

We do business internationally and are subject to additional political, economic and regulatory uncertainties.

     We may not be able to operate successfully in any foreign market. We currently conduct drug discovery research in our laboratory in Geneva, Switzerland. We also conduct drug development operations near London, England. Schering AG sells CAMPATH in the United Kingdom (UK) and 24 other non-U.S. countries. We believe that, because the pharmaceutical industry is global in nature, international activities will continue to be a significant part of our future business activities and that a substantial portion of our revenues will be derived from outside the United States. Foreign regulatory agencies often establish standards different from those in the United States, and an inability to obtain foreign regulatory approvals on a timely basis could have an adverse effect on our business. Our international operations may be limited or disrupted by:

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	•		imposition of government controls;
	•		political or economic instability;
	•		trade restrictions;
	•		changes in tariffs;
	•		restrictions on repatriating profits;
	•		taxation; and
	•		difficulties in staffing and managing international operations.

Also, our business may be adversely affected by fluctuations in currency exchange rates.

We may be unsuccessful in our efforts to expand the number and scope of authorized uses of CAMPATH, which would hamper sales growth and make it more difficult for us to attain profitability.

     CAMPATH is approved for sale in the United States and Europe for use by patients with refractory CLL. Under current FDA regulations, we are prohibited from promoting the use of CAMPATH outside of this approved indication.

     We are conducting clinical trials to examine whether or not CAMPATH can be used to treat indications other than refractory CLL. Additional trials in these indications are necessary before we can apply to expand the authorized uses of CAMPATH. We do not know whether these trials will demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market CAMPATH for additional indications. If the results of these trials are negative, or if adverse experiences are reported in these trials or otherwise in connection with the use of CAMPATH by patients, this could adversely affect existing regulatory approvals, undermine physician and patient comfort with the product, reduce sales of the product and diminish the acceptance of CAMPATH in the hematological and autoimmune markets. Even if the results of these trials are positive, the impact on sales of CAMPATH may be minimal unless they are accepted by the medical community and we are able to obtain regulatory approval to expand the authorized use of CAMPATH. FDA regulations restrict our ability to communicate the results of additional clinical trials to patients, and to a lesser extent, physicians, without first obtaining approval from the FDA to expand the authorized uses for this product.

If we are not able to demonstrate the safety and efficacy of our product candidates in clinical trials or if our clinical trials are delayed, we will not be able to obtain regulatory approval to market these drugs, or regulatory approval to market these drugs will be delayed.

     Clinical testing is a long, expensive and uncertain process. With the exception of CAMPATH, no regulatory agency has approved any of our product candidates and the data we collect from our clinical trials may not be sufficient to support approval. Our clinical trials may not be completed on schedule and the FDA may never approve our product candidates for commercial sale. Furthermore, even if initially positive preclinical studies or clinical trial results are achieved, it is possible that we will obtain different results in the later clinical trials or the FDA will interpret pivotal trial results unfavorably. Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. For example, positive results in early Phase I or Phase II trials may not be repeated in larger Phase II or Phase III trials.

All of our product candidates are subject to the risks of failure inherent in drug development.

     Many of our research and development programs are at an early stage. In addition to the risks described above, there is a possibility that none of our product candidates will or can:

	•		meet applicable regulatory standards;
	•		be manufactured or produced economically and on a large scale;
	•		be a commercially viable drug; or

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•

be successfully marketed, particularly if a third party introduces an equivalent or superior product.

Delays in patient enrollment for clinical trials could increase costs and delay regulatory approvals.

     The rate of completion of our clinical trials will depend on the rate of patient enrollment. Substantial competition to enroll patients in clinical trials has delayed some of our clinical trials in the past. In addition, recent improvements in existing drug therapy, particularly for some cancers, may make it more difficult for us to enroll patients in our clinical trials as the patient population may choose to enroll in clinical trials sponsored by other companies or choose alternative therapies. Delays in patient enrollment can result in increased development costs and delays in regulatory approvals.

If we fail to comply with extensive regulations enforced by the FDA and its foreign counterparts, the commercialization of our product candidates would be prevented or delayed.

     Our products are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. The process of obtaining FDA and foreign regulatory marketing and pricing approvals is costly, time-consuming, uncertain and subject to unanticipated delays. For example, although CAMPATH has been approved for marketing in the UK and 24 other non-U.S. countries, to market future products in Europe we must apply to the European Commission for marketing approval. After receiving marketing approval, we then must mutually agree on a pricing structure with each country’s regulatory authority prior to launching sales in that particular country. We are unable to predict how long this process will take.

     The FDA will refuse to approve an application if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy. Foreign regulatory authorities may also refuse to accept an application or grant any marketing approval.

     The FDA and European Commission approvals for CAMPATH require us to conduct a post-approval clinical trial comparing the safety and efficacy of CAMPATH to that of chlorambucil, an alkylating agent that is a frontline treatment for CLL. Alkylating agents work by disrupting the DNA structure and are believed to be effective in treating CLL. The post-approval clinical trial and report must be completed by 2006, according to the approvals given in 2001. If we discover adverse safety or efficacy data, our marketing approvals may be revoked.

If any of our license agreements for intellectual property underlying a product candidate is terminated, we may lose our rights to develop or market that product.

     We have licensed intellectual property, including patents, patent applications and know-how, from pharmaceutical companies, research institutions and others, including the intellectual property underlying CAMPATH, Eflornithine, clofarabine, ILX-651 and NM-3 .

     Each licensor has the power to terminate its agreement with us if we fail to meet our obligations under that license. We may not be able to meet our obligations under these license agreements. Generally, we have to diligently develop and commercialize the compounds we have licensed and make milestone payments.

     If we default under any of these license agreements, we may lose our right to market and sell any products based on the licensed technology. If we were to lose our marketing and sales rights to a compound, we would not be able to replace the resources we used in developing the compound, and we will have to spend additional time and capital resources in finding a replacement product candidate.

We may not be able to obtain effective patents to protect our technologies from use by other companies, and patents of other companies could prevent us from developing or marketing our other product candidates.

     Our success will depend to a significant degree on our ability to:

	•		obtain, maintain and enforce patents;
	•		license rights to patents from third parties;
	•		protect trade secrets; and

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operate without infringing on the proprietary rights of others.

     It is possible that we will not develop technologies, drugs or processes that result in obtaining a patent. It is also possible that our patent position will not provide sufficient protection against competitors, or that patents issued to or licensed by us will be infringed or will be challenged, invalidated or circumvented. Competitors may develop products, which compete against our products but fall outside the scope of our patents. In addition, competitors may have filed patent applications, may have been issued patents or may obtain additional patents and proprietary rights relating to technologies, drugs and processes that compete with our technologies, drugs and processes.

     If we infringe on the intellectual property rights of others, we will have to either obtain a license for the use of these intellectual property rights, or terminate our use of these rights. We may not be able to obtain licenses to use the technology on commercially reasonable terms, or at all.

     We also rely on trade secret protection for our unpatented proprietary technology. Trade secrets are difficult to protect. Other parties could independently develop substantially equivalent proprietary information and techniques or gain access to our trade secrets.

     We have attempted to prevent the disclosure and use of our know-how and trade secrets by entering into confidentiality agreements with our employees, consultants and third parties. However, there are risks that:

	•		these parties will not honor our confidentiality agreements;
	•		others will independently develop equivalent or superior technologies;
	•		disputes will arise concerning the ownership of intellectual property or the applicability of confidentiality obligations; or
	•		disclosure of our trade secrets will occur regardless of these contractual protections.

     We often work with consultants and research collaborators at universities and other research organizations. If any of these consultants or research collaborators use intellectual property owned by others as part of their work with us, disputes may arise between us and these other parties as to which one of us has the rights to intellectual property related to or resulting from the work done.

     Costly litigation might be necessary to protect our orphan drug designations or patent positions, or to determine the scope and validity of third-party proprietary rights. It is possible that we will not have the required resources to pursue such litigation or to protect our patent rights. An adverse outcome in litigation with respect to the validity of any of our patents could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using a product or technology. Any of these results could materially harm our business and financial condition.

We may be subject to costly and damaging liability claims

     Although we take what we believe to be appropriate precautions, our business exposes us to many liability risks, which are inherent in the testing, manufacturing and sale of pharmaceutical products. We could face exposure to product liability claims if the use of CAMPATH or any of our product candidates is alleged to have harmed someone. We could also face exposure to breach of contract claims arising in the normal course of business or claims based upon errors or omissions in connection with our ongoing or completed CRO activities.

     We currently have product liability insurance related to CAMPATH in the aggregate limit of $25.0 million; $25.0 million product liability insurance related to other investigational drug candidates in the aggregate limit of $10.0 million and professional liability insurance or related to contract research organization services in the aggregate limit of $5.0 million. Adequate insurance coverage may not be available in the future at acceptable prices or at all. It is possible that claims against us could exceed our coverage limits. The successful assertion of an uninsured or underinsured claim against us could cause us to incur a significant expense, could adversely affect our product development activities and could divert management’s attention from running the business. In addition, regardless of merit eventual outcome, product liability claims may result in decreased demand for the applicable product or our products in general and in injury to our general reputation. Thus, whether or not we are adequately insured, a product liability or other claim or product recall may result in losses that could be material.

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We are subject to influence from executive officers, directors and senior management, and we have adopted a shareholder rights plan, which could discourage or prevent stockholders from selling their shares at a premium.

     Our rights plan provides, among other things, that if a person or group attempts to acquire 20% or more of our common stock on terms not approved by our Board of Directors, stockholders will be entitled to purchase additional shares of our stock at 50% of the then-current market price. These purchase rights would cause substantial dilution to a person or group that acquires or attempts to acquire 20% or more of our common stock in this manner and, as a result, could delay or prevent a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests.

     Our executive officers, directors (and their affiliates) and senior management, in the aggregate, beneficially owned or controlled approximately 5.9% of our outstanding common stock at January 31, 2003 and therefore have the ability to exercise substantial influence over the outcome of most stockholders’ actions, including the election of the members of the Board of Directors and approval of any change in control transaction. This concentration of ownership could have an adverse effect on the price of our common stock or have the effect of delaying or preventing a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests.

     In July 2000, we entered into a lease that expires in November 2008 for our corporate headquarters consisting of approximately 86,000 square feet of office space in San Antonio, Texas.

     We lease approximately 21,000 square feet of office and laboratory space, and operate a 7,200-square-foot manufacturing facility located in San Antonio that has been designed to produce multi-kilogram lot sizes of anticancer compounds under cGMP. The design of this facility, prepared by ILEX staff, has been reviewed by the Regional Compliance Office of the FDA and found to be suitable for production of bulk drugs. Currently, the facility is being used for manufacturing support activities. The facility is owned by a non-profit corporation controlled by the CTRC Research Foundation Building Corporation and the Texas Research Park Foundation, and provides for the payment by us of fixed monthly rent plus a percentage of gross sales generated from the facility. These two organizations obtained a $1.5 million grant to build the facility from the Economic Development Administration (EDA). We have a 15-year lease to the facility with three five-year-extension options. The lease expires in December 2010. In the event that there is an early termination of the lease or a non-conforming use, there is a risk that we may be required to repay a portion of the EDA grant.

     Our subsidiary, ILEX Products, formerly Convergence Pharmaceuticals, Inc., leases approximately 9,800 square feet of office and research space in Boston, Massachusetts. The lease expires in July 2004. Additionally, we have approximately 2,600 square feet of leased office space in Guildford, England utilized by our subsidiary, ILEX Services Limited. Our subsidiary ILEX Oncology Research, Sarl, formerly Symphar, S.A., leases approximately 31,000 square feet of office and research space in Geneva, Switzerland expiring between 2006 and 2007.

     We also leased approximately 7,200 square feet of space in Annapolis, Maryland. This lease was terminated in February 2003.

     The Company is involved in various routine legal proceedings incidental to the company's business. The Company believes it is unlikely that the final outcome of the legal proceedings to which the Company is a party will have a material adverse effect on the Company’s financial position or results of operations. However, due to the inherent uncertainty of the litigation process, there can be no assurance that the resolution of any particular legal proceeding will not have a material adverse effect on the Company’s results of operations for the period in which such resolution occurred.

Not applicable.

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PART II.

     As of February 12, 2003, the Company had approximately 4,944 beneficial holders of common stock, including approximately 196 record holders. The Company’s common stock is traded on the Nasdaq National Market under the symbol ILXO. The following table sets forth, for the calendar periods indicated, the range of high and low sales prices for the Company’s common stock, as reported by the Nasdaq National Market:

     These price quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The Company’s common stock began trading February 20, 1997. The closing price of the Company’s common stock on March 7, 2003 was $7.23.

     The Company has never paid dividends on its common stock and anticipates that it will not pay such dividends in the foreseeable future.

Recent Sales of Unregistered Securities

     In February 2001, we acquired Symphar, a research firm located in Geneva, Switzerland. We acquired Symphar for $28.9 million, which included cash of $15.0 million and 521,121 shares of our common stock. The value of the common stock issued in connection with this merger was calculated using a fair value of $26.6875 per share. These shares were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2), as a transaction by an issuer not involving any public offering.

     In March 2000, we sold 3.0 million shares of our common stock at $45.00 per share to selected institutional and other accredited investors. Gross proceeds from this sale of our common stock were approximately $135.0 million. Net proceeds were approximately $127.0 million. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended and Rule 506 promulgated there under due to the fact that all of these shares were sold to accredited investors. Prudential Vector Healthcare Group acted as the placement agent for this transaction and received commission of approximately $7.4 million and out-of-pocket expenses and other fees of $200.0.

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     The information below was derived from the audited consolidated financial statements included in this report and in reports we have previously filed with the SEC. This information should be read together with those consolidated financial statements and the notes to the consolidated financial statements. These historical results are not necessarily indicative of the results to be expected in the future.

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     The following discussion is included to describe the Company’s financial position and results of operations for each of the previous three years in the period ended December 31, 2002. The Consolidated Financial Statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.

GENERAL

     We are building a product-driven biopharmaceutical company, focused primarily on oncology, by developing and commercializing a portfolio of novel treatments for both early and late stage cancers. We are leveraging our core competencies in clinical drug development to identify, develop and commercialize our proprietary product candidate pipeline. Our lead product, CAMPATH, has been approved in the United States and Europe for treating patients with refractory chronic lymphocytic leukemia and is distributed by Schering AG and its U.S. subsidiary, Berlex Laboratories, Inc. (Berlex). CAMPATH was developed in a 50/50 partnership with Millennium Pharmaceuticals, Inc (Millennium). In December 2001, we acquired Millennium’s equity interest in the Partnership. This transaction has helped streamline the process of developing CAMPATH in additional indiciations. In addition to CAMPATH, we have four oncology product candidates in clinical trials, as well as several active preclinical programs. To date, we have built this pipeline primarily through the licensing and acquisition of promising drug candidates. In addition to our clinical development programs, we conduct drug discovery research, translational research and preclinical studies in the fields of angiogenesis inhibition, molecular receptor chemistry and targeted medicinal phosphonate chemistry.

     We have incurred losses and had an accumulated deficit through December 31, 2002 of $283.4 million. Our losses have resulted primarily from product research and development activities, including in-licensing of products for which we pay fees, and related administrative expenses. We expect to continue to incur losses in 2003. Our revenue for the foreseeable future will be limited to our profit participation and royalty revenue, product development revenue, interest income, and other miscellaneous income.

     Currently the revenues recorded in product profit and royalty revenue consist of our profit share from net U.S. sales of CAMPATH and royalty revenue from rest of world sales. Participation from our distribution and development partner for services performed and costs incurred in connection with the development of CAMPATH for all indications are recorded as product development revenues. Indications for which the development of CAMPATH is ongoing include chronic lymphocytic leukemia (CLL), multiple sclerosis (MS) and non-Hodgkins lymphoma (NHL).

     Prior to January 1, 2002, we accounted for CAMPATH activities as follows:

•		our operating revenue included product development revenue we received from the Partnership;
•		our research and development expenses included all of the development costs for CAMPATH, which were largely offset by the revenue we received from the Partnership;
•		our portion of the profits resulting from CAMPATH sales and the other revenues and expenses of the Partnership was recorded in equity in income (loss) of joint venture.

     In November 2001, we completed an underwritten public offering of our common stock pursuant to which we sold 5.75 million shares. The number of shares sold includes the underwriters’ exercise of their overallotment option. Proceeds, net of offering costs, to us from this offering were approximately $128.9 million. The net proceeds from this offering have been and will continue to be used to fund a portion of the acquisition of Millennium’s partnership interest in the Partnership. The balance of the net proceeds will be used to expand clinical trials and preclinical research; to fund research and development programs; for potential licenses or other acquisitions of complementary technologies or products; for general corporate purposes and for working capital.

     On October 29, 2001, we entered into an agreement with Millennium Pharmaceuticals, Inc. to purchase Millennium’s 50% interest in the Partnership for a total purchase price of approximately $127.6 million based on the net present value of the required cash payments, discounted at 6.5%, our estimated incremental borrowing rate on the date of the purchase. The terms of the agreement required an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments over the following three years. The first of these scheduled payments of $40.0 million in cash was made on December 31, 2002. Additionally, $40.0 million is due in 2003 and 2004, of which $10.0 million in each of those years may be paid with our common stock, at our option and subject to certain terms and conditions. In 2003 and 2004, $20.0 million of the $40.0 million is due 45 days following the calendar quarter in which net U.S. CAMPATH sales exceed a certain level. In addition, Millennium will be entitled to royalties based upon net U.S. CAMPATH sales above certain levels in 2005 and continuing through 2008.

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     In March 2001, we entered a definitive agreement to co-develop clofarabine, a nucleoside analog, with Bioenvision Inc. We paid $1.1 million upon execution of the agreement and may be required to make future payments in accordance with the agreement if certain drug development milestones are met. In clinical studies, clofarabine has shown promise as a potential new treatment for patients with hematological malignancies, including acute lymphocytic leukemia (ALL) and acute myelogenous leukemia (AML), and in preclinical studies, for solid tumors. We are taking the lead role in developing clofarabine in the U.S. and Canada, where we will have exclusive manufacturing and marketing rights in exchange for the afore-mentioned $1.1 million in-licensing fee, milestone payments and royalties. Bioenvision will retain the lead role in developing the compound in Europe, where it will have exclusive manufacturing and marketing rights and we will have rights to royalties.

     In February 2001, we acquired Symphar and its research platform in medicinal chemistry and nuclear receptor biology, which has led to drug candidates in several therapeutic fields, including cardiovascular and bone disease. The Symphar acquisition, combined with our preclinical signal transduction and angiogenesis inhibition programs in Boston, gives us the capability to translate early-stage research leads into clinical drug development programs. Under the terms of the agreement, we acquired Symphar for $28.9 million, including $15.0 million in cash and 521,121 shares of our common stock.

CRITICAL ACCOUNTING POLICIES

     We believe that our most critical accounting issues include the process we use to evaluate an impairment on the intangible assets acquired in the purchase of Millennium’s interest in the Partnership and the process of determining the amount of in-process research and development obtained in an acquisition.

     The amounts recorded as completed technology and trademark were determined based on an independent appraisal of the estimated timing and amount of revenue to be generated from sales of CAMPATH.

     Amounts recorded as in-process research and development are based upon assumptions and estimates regarding the amount and timing of projected revenues and costs as well as the appropriate discount rates and expected trends in technology. No assurance can be given, however, that the underlying assumptions used to estimate revenue, development costs or profitability or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion and revenues attributable to each project.

RESULTS OF OPERATIONS — DECEMBER 31, 2002 AND 2001

     The following discussion addresses our consolidated results of operations for 2002, 2001 and 2000 and our liquidity and capital resources. It should be read in conjunction with our Financial Statements, the Notes thereto and other financial information beginning on page F-1 of this report.

Operating Revenues

     Total revenue increased to $30.9 million in 2002, from approximately $29.2 million in 2001. The increase of approximately $1.7 million, or 6%, was largely due to product profit and royalty revenue, which is our share of CAMPATH net profits on U.S. sales and a royalty on the rest of the world sales. Product profit and royalty revenue totaled $10.8 million through December 31, 2002. Prior to January 1, 2002, our share of CAMPATH net profits on U.S. sales and royalties on the rest of the world sales was included in equity in income (losses) of joint venture. Product development revenue increased to $9.8 million through December 31, 2002 from $4.0 million through December 31, 2001, an increase of $5.8 million or 145%. This increase reflects the recognition of our revenues from our development and distribution partner, which prior to January 1, 2002 were included in equity in income (losses) of joint venture. These increases were partially offset by the decrease in revenue from our fee-for-service Contract Research Organization (CRO) business. The decrease of 63% in our CRO revenues is consistent with our plan to transition out of the fee-for-service CRO business.

Operating Expenses

     Research and Development Costs. Research and development costs increased to $46.4 million in 2002, from approximately $33.8 million in 2001. This increase of $12.6 million, or 37%, was due to increased development spending on our product candidates, particularly for clofarabine and CAMPATH.

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     Licensing Costs. Licensing costs decreased to $5.7 million in 2002 from $10.3 million in 2001 or a decrease of $4.6 million or 45%. In 2002, licensing costs consisted primarily of a license fee expense of $4.0 million related to an exclusive, worldwide license from Knoll AG (Abbott Laboratories) for ILX-651, a synthetic pentapeptide analog of dolastatin. In 2001, licensing costs consisted of a $6.0 million expense accrual, also related to the exclusive worldwide license of ILX-651. Additionally, a payment of $1.1 million was made to Bioenvision upon our execution of a license agreement to acquire U.S. rights to clofarabine, a nucleoside analog. We may be required to make future payments in accordance with these agreements if certain drug development and time-based milestones are met.

     Selling, General and Administrative Costs. Selling, general and administrative costs increased to $11.8 million in 2002, from approximately $11.1 million in 2001. This increase of $0.7 million, or 6%, was due in part to our transition out of the fee-for-service CRO business, and the corresponding transition of our internal resources to focus on new business opportunities, build strategic relationships and develop our proprietary product candidates. The costs associated with these management and business development activities were previously included in direct costs of research services and are now reflected in general and administrative costs.

     Depreciation and Amortization. Depreciation and amortization increased to $7.4 million in 2002 from $2.4 million in 2001, an increase of $5.0 million. This increase was primarily the result of the amortization of the completed technology asset and trademark, which we obtained through the acquisition of Millennium’s interest in the Partnership on December 31, 2001. Total amortization expense related to these acquired intangible assets for the year ended December 31, 2002 was $4.8 million.

     Direct Cost of Research Services. Direct costs of research services expense decreased to $5.9 million in 2002, from $19.5 million in 2001. This decrease of $13.6 million, or 70%, is consistent with our aforementioned transition out of the fee-for-service CRO business.

     In-process Research and Development. In-process research and development was $86.1 million in 2001, due to the acquisitions of Symphar in February 2001 and Millennium’s interest in the Partnership in December 2001. The in-process research and development charge associated with the Symphar acquisition was $26.1 million, and the charge related to the acquisition of the 50% interest in the Partnership was $60.0 million.

Equity in Income (Loss) of Joint Venture

     Equity in income (loss) of joint venture was income of $3.1 million in 2001. This amount included the Company’s profit share of CAMPATH sales, which are now shown as product profit and royalty revenue. We purchased Millennium’s interest in the Partnership on December 31, 2001 and, as a result, activity related to the Partnership was included in the consolidated statement of operations of ILEX Oncology Inc. as of January 1, 2002.

Interest Income and Other, Net

     Interest income and other decreased to $7.1 million in 2002, from approximately $10.0 million in 2001, a decrease of $2.9 million, or 29%. Included in interest income and other in 2001 is the accrual of a non-cash loss on the impairment of a held-to-maturity marketable security of $435,000. In 2002, this investment was sold and we recorded a $435,000 gain. The decrease of $2.9 million is primarily attributable to a decline in interest rates throughout 2002, which offset the gain on the sale of our held-to-maturity marketable security.

Interest Expense

     Interest expense of $6.7 million relates to the imputed interest on the note to Millennium for our purchase of their interest in the Partnership. This transaction closed on December 31, 2001, and as such, a comparable amount does not exist for 2001.

Net Loss

     Net loss decreased $74.8 million in 2002, or 62%, to $46.2 million, from $121.0 million in 2001. Net loss per share decreased $3.06 per share to $1.42 per share in 2002, from $4.48 per share in 2001. Excluding in-process research and development expense, net loss increased $11.4 million, or 33%, to $46.2 million, from $34.8 million in 2001, and net loss per share increased $0.13 per share to $1.42 per share, from $1.29 per share in 2001.

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2002 ANNUAL REPORT ON FORM 10-K

RESULTS OF OPERATIONS — DECEMBER 31, 2001 AND 2000

Operating Revenues

     Total revenue decreased to $29.2 million in 2001, from approximately $32.8 million in 2000. The decrease of approximately $3.6 million, or 11%, was due to our decision to discontinue our fee-for-service CRO business. This decision was announced in February 2001. We expect our revenue from contract research services to further decrease as we complete our existing contracts. The increase in product development revenues of $613.0 reflects an increase in development revenue for CAMPATH in indications other than CLL.

Operating Expenses

     Research and Development Costs. Research and development costs increased to $33.8 million in 2001, from approximately $24.4 million in 2000. This increase of $9.4 million, or 39%, was due to increased development spending on our product candidates, particularly for clofarabine, Eflornithine and ILX-651. Additionally, research and development costs increased due to the acquisition of Symphar, our drug discovery research firm in Geneva, Switzerland.

     Licensing Costs. Licensing costs increased to $10.3 million in 2001 from $6.1 million in 2000 or an increase of $4.2 million or 69%. The primary reason for the increase is a license fee expense accrual of $6.2 million related to an exclusive, worldwide license from Knoll AG (Abbott Laboratories) for ILX-651, a synthetic pentapeptide analog of dolastatin. Additionally, a payment of $1.1 million was made to Bioenvision upon our execution of a license agreement to acquire U.S. rights to clofarabine a nucleoside analog.

     Selling, general and Administrative Costs. Selling, general and administrative costs increased to $11.1 million in 2001, from approximately $5.1 million in 2000. This increase of $6.0 million, or 118%, was due in part to our transition out of the fee-for-service CRO business, and the corresponding transition of our internal resources to focus on commercialization of our own products, build strategic relationships and develop our proprietary product candidates. The costs associated with these management and business development activities were previously included in direct costs of research services and are now reflected in general and administrative costs. Additionally, we incurred $1.6 million in professional and legal fees, recorded a reserve of $750.0 for office space that is no longer being utilized and, incurred a non-cash compensation charge for an employee incentive program.

     Direct Cost of Research Services. Direct costs of research services expense decreased to $19.5 million in 2001, from $25.1 million in 2000. This decrease of $5.6 million, or 22%, is attributable to the decrease in revenue from these services. Our margins have increased as a result of shifting various resources from the CRO business to our own products.

     In-process Research and Development. In process research and development increased to $86.1 million in 2001 from $14.6 million in 2000. This increase of $71.5 million was due to the acquisitions of Symphar in February 2001 and Millennium’s interest in the Partnership in December 2001. The in-process research and development charge associated with the Symphar acquisition was $26.1 million and the charge related to the acquisition of the 50% interest in the Partnership was $60.0 million.

Interest Income and Other, Net

     Net interest income and other decreased to $10.0 million in 2001, from approximately $11.7 million in 2000. This decrease of $1.7 million, or 15%, is attributable to the accrual of a non-cash loss on the impairment of a held-to-maturity marketable security of $435.0 as well as the decline in interest rates throughout 2001.

Equity in Income (Losses) of Joint Venture

     Equity in income (losses) of joint venture was income of $3.1 million in 2001, compared to a loss of $5.4 million in 2000, an improvement of $8.5 million. The income for 2001 includes pre-commercialization marketing and selling expenses incurred by the Partnership, which are offset by the Partnership’s portion of global net earnings for the year. Global net sales of CAMPATH for the year 2001 were $27.1 million.

Net Loss

     Net loss increased $82.0 million in 2001, or 210%, to $121.0 million, from $39.0 million in 2000. Net loss per share increased $2.87 per share to $4.48 per share in 2001, from $1.61 per share in 2000. Excluding in-process research and development expense, net loss increased $10.4 million, or 43%, to $34.8 million, from $24.4 million in 2000, and net loss per share increased $0.28 per share to $1.29 per share, from $1.01 per share in 2000.

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2002 ANNUAL REPORT ON FORM 10-K

LIQUIDITY AND CAPITAL RESOURCES

     We have historically financed our operations primarily through the sale of our capital stock, through development and licensing fee revenues provided by our collaborative partners under our collaborative agreements and through fee-for-service or participatory revenues pursuant to contracts with our CRO clients.

     At December 31, 2002, we had cash, cash equivalents, restricted investments and investments in marketable securities of $191.0 million and working capital of $109.0 million. Cash, cash equivalents, restricted investments and investments in marketable securities decreased by $87.2 million as a result of our payment of $40.0 million to Millennium on December 31, 2002 as well as development spending on our product candidates.

     In November 2001, we completed an underwritten public offering of our common stock pursuant to which we sold 5.75 million shares. The number of shares sold includes the underwriters’ exercise of their overallotment option. Proceeds, net of offering costs, to us from this offering were approximately $128.9 million. The net proceeds from this offering have been and will continue to be used to fund a portion of the acquisition of Millennium’s partnership interest in the Partnership. The balance of the net proceeds will be used to expand clinical trials and preclinical research; to fund research and development programs; for potential licenses or other acquisitions of complementary technologies or products; for general corporate purposes and for working capital.

     On October 29, 2001, we announced that we had entered into a definitive agreement to purchase Millennium’s 50% equity interest in the Partnership. The acquisition closed on December 31, 2001. We estimated the purchase price at $127.6 million based on the net present value of the required future cash payments discounted at 6.5%, our estimated incremental borrowing rate on the date of purchase. The terms of the agreement required an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments over the following three years. The first of these scheduled payments of $40.0 million in cash was made on December 31, 2002. Additionally, $40.0 million is due in 2003 and 2004, of which $10.0 million in each of those years may be paid with our common stock at our option and subject to certain terms and conditions. In 2003 and 2004, $20.0 million of the $40.0 million is due following the calendar quarter in which net U.S. CAMPATH sales exceed a certain level. In addition, Millennium will be entitled to royalties based upon net U.S. CAMPATH sales above certain levels in 2005 and continuing through 2008.

     In February 2001, we acquired Symphar and its research platform for approximately $30.0 million, including $15.0 million in cash and 521,121 shares of our common stock. The agreement specifies that, subject to the viability of performance, we agree to fund a minimum operating and capital budget between $4.0 to $5.0 million annually for each of the three years following the agreement date.

     As previously discussed, we have numerous products in our pipeline. In connection with these research and development efforts, the Company has entered into agreements with certain development partners, which generally expire over several years. The terms of these agreements require the Company to make payments in either cash or stock if certain drug development or time-based milestones are met. Total potential future commitments under these agreements are approximately $25.1 million.

     We have several noncancelable operating leases for office space, equipment and the cGMP facility. One of our operating leases is with CTRC Research Foundation, a related party. Total future commitments under these leases is $14.5 million.

     We expect our current funds will be adequate to cover all of our obligations for at least the next year. Until our business can generate sufficient levels of cash from product sales, we expect to continue to finance our operations through existing cash, revenue from collaborative relationships, and proceeds from the sale of equity securities.

     We plan to continue our policy of investing available funds in government securities and investment-grade, interest-bearing securities, none of which matures in more than five years. We do not invest in derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 133 and 138.

     Our future expenditures and capital requirements will depend on numerous factors, including but not limited to, the progress of our research and development programs, the progress of our non-clinical and clinical testing, the magnitude and scope of these activities, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in or termination of existing collaborative arrangements, the ability to establish, maintain and avoid termination of collaborative arrangements and the purchase of capital equipment and acquisitions of compounds, technologies or businesses. As of December 31, 2002, we did not have any material commitments for capital expenditures.

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ACCOUNTING PRONOUNCEMENTS

     In 2002, reimbursable out-of-pocket costs incurred related to our contract research organization (CRO) contracts were included in direct costs of research services when incurred and included in contract research services revenue when these costs were billed to the customer. The accounting for out-of-pocket costs for the year ended December 31, 2002 is in accordance with the Emerging Issues Task Force’s (EITF’s) Issue 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred". Corresponding amounts for the years ended December 31, 2001 and December 31, 2000 were reclassified to conform to the 2002 presentation.

     In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” This statement, which supersedes Accounting Principles Board Opinion No. 16, “Business Combinations” (APB No. 16) and SFAS No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises,” requires that all business combinations be accounted for by the purchase method. SFAS No. 141 also required that acquired intangible assets should be recognized as assets apart from goodwill if they meet one of two specified criteria. Additionally, the statement adds certain disclosure requirements to those required by APB 16, including disclosure of the primary reasons for the business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. This statement is required to be applied to all business combinations initiated after June 30, 2001. As previously discussed, the Company acquired Symphar S.A. on February 13, 2001. The adoption of SFAS No. 141 requires the Company to recognize its assembled workforce as goodwill rather than an intangible asset as it does not meet the specified criteria for recognition apart from goodwill.

     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather we must make an assessment of impairment by applying a fair-value-based test at least annually. This statement is effective for fiscal years beginning after December 15, 2001. Under the provisions of SFAS No. 142, the value of our goodwill is no longer subject to amortization. We have reviewed our goodwill for impairment as of December 31, 2002 and will continue to review it at least annually for impairment. The Company believes that there is no impairment of its goodwill as of December 31, 2002.

     In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 will not have a material impact on our results of operations and financial position.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation", to provide alternate methods of transition for an entity that changes to the fair-value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require expanded and more prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. The amendment of the annual disclosure requirements of SFAS No. 123 is effective for fiscal years ending after December 15, 2002. The Company has adopted SFAS No. 148.

     Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.

     We are exposed to some market risk through interest rates, related to our investment of our current cash, cash equivalents, restricted investments and marketable securities of approximately $191.0 million at December 31, 2002. These funds are generally invested in highly liquid treasury bills, money market accounts and corporate bonds. As such instruments mature and the funds are reinvested, we are exposed to changes in market interest rates. This risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short- and long-term high quality investments. If market interest rates were to increase or decrease immediately and uniformly by 50 basis paints, we would not expect there to be a material effect on our results of operations or on our balance sheet. We have not used derivative financial instruments in its investment portfolio.

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2002 ANNUAL REPORT ON FORM 10-K

     Our European operations are denominated in local currency. We have unhedged transaction exposures in these currencies that are not considered material. We have not entered into any forward foreign exchange contracts for speculative, trading or other purposes.

     The report of our Independent Public Accountants, Consolidated Financial Statements and Notes to Consolidated Financial Statements appears herein commencing on page F-1.

     A change in independent auditors from Arthur Andersen LLP to Ernst & Young LLP was reported in a Current Report on Form 8-K/A dated March 27, 2002.

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

PART III.

     The information called for by item 10 of Form 10-K is incorporated herein by reference to such information included in our Proxy Statement for the 2003 Annual Meeting of Stockholders.

     The information called for by item 11 of Form 10-K is incorporated herein by reference to such information included in our Proxy Statement for the 2003 Annual Meeting of Stockholders.

     The information called for by item 12 of Form 10-K is incorporated herein by reference to such information included in our Proxy Statement for the 2003 Annual Meeting of Stockholders.

     The information called for by item 13 of Form 10-K is incorporated herein by reference to such information included in our Proxy Statement for the 2003 Annual Meeting of Stockholders.

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

PART IV.

Evaluation of Disclosure Controls and Procedures.

     As of Decermber 31, 2002, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in rule 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2002.

Changes in Internal Controls.

     There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.

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2002 ANNUAL REPORT ON FORM 10-K

Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Antonio, Texas, on March 14, 2003.

Pursuant to the requirements of Section 13 of 15(d) of the Securities Act of 1934, this report has been signed below on March 14, 2003 by the following persons in the capacities indicated.

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

CERTIFICATIONS

I, Jeffrey H. Buchalter, certify that:

1.     I have reviewed this annual report on Form 10-K of ILEX Oncology, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 14, 2003

/s/ Jeffery H. Buchalter

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

CERTIFICATIONS

I, Mark P. Mellin, certify that:

1.     I have reviewed this annual report on Form 10-K of ILEX Oncology, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 14, 2003

/s/ Mark P. Mellin

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2002 ANNUAL REPORT ON FORM 10-K

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of ILEX Oncology, Inc. and Subsidiaries:

We have audited the consolidated balance sheet of ILEX Oncology Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of ILEX Oncology Inc. and subsidiaries as of December 31, 2001 and 2000, and for the years then ended were audited by other auditors who have ceased operations and whose report dated February 25, 2002 expressed an unqualified opinion on those statements before the reclassification adjustments and conforming disclosures described in Note 2.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ILEX Oncology, Inc. and subsidiaries at December 31, 2002 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, in 2002 the company adopted Statement of Financial Accounting Standards No. 42, "Goodwill and other Intangible Assets."

As discussed above, the consolidated financial statements of ILEX Oncology Inc. and subsidiaries as of December 31, 2001 and 2000, and for the years then ended were audited by other auditors who have ceased operations. As described in Note 2, these financial statements have been revised. We audited the reclassification adjustments and conforming disclosures described in Note 2 that were applied to revise the 2001 and 2000 financial statements. In our opinion, such reclassification adjustments and conforming disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such reclassification adjustments and conforming disclosures and, accordingly, we do express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

/s/ Ernst & Young LLP

San Antonio, Texas
January 23, 2003

F-2

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ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ILEX Oncology, Inc.:

We have audited the accompanying consolidated balance sheets of ILEX Oncology, Inc. (a Delaware corporation), and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ILEX Oncology, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ILEX ONCOLOGY, INC.’S FITTING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.

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Table of Contents

ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

CONSOLIDATED BALANCE SHEETS
(in thousands)

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

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Table of Contents

ILEX ONCOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)