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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One)
    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2003
 
 
OR
 
 
    
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from _____________to _____________
 
 
Commission file number 000-23143
 
PROGENICS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
13-3379479
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
777 Old Saw Mill River Road
Tarrytown, New York  10591
(Address of principal executive offices)
(Zip Code)
 
(914) 789-2800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  
 
As of March 31, 2003 there were 12,788,788 shares of common stock, par value $.0013 per share, of the registrant outstanding.
 
 
PROGENICS PHARMACEUTICALS, INC.
 
INDEX
 
 
Page No.
 
PART I  -  FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 
 
2
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PROGENICS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
AT MARCH 31, 2003 AND DECEMBER 31, 2002
(Unaudited)
 
 
 
March 31, 2003
 
December 31, 2002
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
18,632,479
 
$
9,446,982
 
Marketable securities
 
 
14,396,143
 
 
27,753,984
 
Accounts receivable
 
 
378,461
 
 
334,006
 
Other current assets
 
 
1,093,701
 
 
1,573,815
 
 
 
 
 
Total current assets
 
 
34,500,784
 
 
39,108,787
 
Marketable securities
 
 
2,526,418
 
 
5,172,808
 
Fixed assets, at cost, net of accumulated depreciation and amortization
 
 
3,799,073
 
 
3,705,531
 
Investment in joint venture
 
 
613,232
 
 
 
 
Restricted cash
 
 
131,287
 
 
130,795
 
 
 
 
 
Total assets
 
$
41,570,794
 
$
48,117,921
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
1,940,194
 
$
2,900,028
 
 
 
 
 
Total current liabilities
 
 
1,940,194
 
 
2,900,028
 
Deferred lease liability
 
 
64,138
 
 
71,264
 
 
 
 
 
Total liabilities
 
 
2,004,332
 
 
2,971,292
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
Preferred stock, $.001 par value, 20,000,000 authorized; none issued and outstanding
 
 
 
 
 
 
 
Common stock - $.0013 par value, 40,000,000 authorized; issued and outstanding – 12,788,788 in 2003, 12,681,585 in 2002
 
 
16,625
 
 
16,486
 
Additional paid-in capital
 
 
91,876,727
 
 
91,332,106
 
Accumulated deficit
 
 
(52,411,387
)
 
(46,307,642
)
Accumulated other comprehensive income
 
 
84,497
 
 
105,679
 
 
 
 
 
Total stockholders’ equity
 
 
39,566,462
 
 
45,146,629
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
41,570,794
 
$
48,117,921
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
3
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PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three months ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Contract research and development from joint venture
 
$
1,052,700
 
$
1,007,119
  
Other contract research and development
 
 
 
193,734
  
Research grants
 
 
1,117,418
 
 
1,155,798
 
Product sales
 
 
59,566
 
 
13,428
 
 
 
 
 
Total revenues
 
 
2,229,684
 
 
2,370,079
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Research and development
 
 
5,752,146
 
 
4,566,549
 
General and administrative
 
 
1,621,837
 
 
1,247,170
 
Loss in joint venture
 
 
879,641
 
 
502,319
 
Depreciation and amortization
 
 
303,931
 
 
201,938
 
 
 
 
 
Total expenses
 
 
8,557,555
 
 
6,517,976
 
 
 
 
 
Operating loss
 
 
(6,327,871
)
 
(4,147,897
)
 
 
 
 
Other income:
 
 
 
 
 
 
 
Interest income
 
 
224,126
 
 
546,882
 
Payment from insurance settlement
 
 
 
 
 
1,600,000
 
 
 
 
 
Total other income
 
 
224,126
 
 
2,146,882
 
 
 
 
 
Net loss
 
$
(6,103,745
)
$
(2,001,015
)
 
 
 
 
Net loss per share – basic and diluted
 
$
(0.48
)
$
(0.16
)
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
4
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PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
 
 
 
 
 
ADDITIONAL PAID-IN
CAPITAL
 
ACCUMULATED
DEFICIT
 
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
TOTAL STOCKHOLDERS’
EQUITY
 
COMPREHENSIVE
LOSS
 
 
 
 
 
 
 
 
 
COMMON STOCK
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2002
 
 
12,681,585
 
$
16,486
 
$
91,332,106
 
$
(46,307,642
)
$
105,679
 
$
45,146,629
 
 
 
 
Issuance of compensatory stock options
 
 
 
 
 
 
 
 
45,503
 
 
 
 
 
 
 
 
45,503
 
 
 
 
Sale of Common Stock under employee stock purchase plans and exercise of stock options and warrants
 
 
107,203
 
 
139
 
 
499,118
 
 
 
 
 
 
 
 
499,257
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
(6,103,745
)
 
 
 
 
(6,103,745
)
 
(6,103,745
)
Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(21,182
)
 
(21,182
)
 
(21,182
)
 
 
 
 
 
 
 
 
 
Balance at March 31, 2003
 
 
12,788,788
 
$
16,625
 
$
91,876,727
 
$
(52,411,387
)
$
84,497
 
$
39,566,462
 
$
(6,124,927)
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
5
 
PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Three months ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
 
$
(6,103,745
)
$
(2,001,015
)
 
 
 
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
303,931
 
 
201,938
 
Amortization of discounts, net of premiums, on marketable securities
 
 
244,049
 
 
292,776
 
Loss in joint venture
 
 
879,641
 
 
502,319
 
Noncash expenses incurred in connection with issuance of common stock, stock options and warrants
 
 
45,503
 
 
152,021
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
Increase in accounts receivable
 
 
(44,455
)
 
(119,499
)
Decrease in prepaid expenses and other assets
 
 
480,114
 
 
507,836
 
Decrease in accounts payable and accrued expenses
 
 
(962,817
)
 
(581,280
)
Increase in investment in LLC
 
 
(1,500,000
)
 
(500,000
)
(Decrease) increase in deferred lease liability
 
 
(7,126
)
 
8,117
 
 
 
 
 
Total adjustments
 
 
(561,160
)
 
464,228
 
 
 
 
 
Net cash used in operating activities
 
 
(6,664,905
)
 
(1,536,787
)
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
 
 
(387,363
)
 
(397,004
)
Purchase of certificate of deposit
 
 
 
 
 
(1,000,000
)
Increase in restricted cash
 
 
(492
)
 
(120,225
)
Sales of marketable securities
 
 
15,739,000
 
 
9,935,000
 
Purchase of marketable securities
 
 
 
 
 
(4,733,783
)
 
 
 
 
Net cash provided by investing activities
 
 
15,351,145
 
 
3,683,988
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from the exercise of stock options and sale of common stock under the Employee Stock Purchase Plan
 
 
499,257
 
 
579,678
 
 
 
 
 
Net cash provided by financing activities
 
 
499,257
 
 
579,678
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
9,185,497
 
 
2,726,879
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
 
9,446,982
 
 
10,759,636
 
 
 
 
 
Cash and cash equivalents at end of period
 
$
18,632,479
 
$
13,486,515
 
 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
 
 
 
 
Fixed assets included in accounts payable and accrued expenses:
 
 
 
 
 
 
 
At beginning of period
 
$
 
$
25,352
 
At end of period
 
 
10,110
 
 
311,884
 
 
The accompanying notes are an integral part of these financial statements.
 
6
 
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
1.   Interim Financial Statements
 
Progenics Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to address the unmet medical needs of patients with debilitating conditions and life-threatening diseases.  The Company applies its expertise in clinical medicine, immunology and molecular biology to develop biopharmaceuticals to fight viral diseases, such as human immunodeficiency virus (“HIV”) infection, and cancers, including malignant melanoma and prostate cancer as well as to enhance symptom management and supportive care.  The Company was incorporated in Delaware on December 1, 1986. All of the Company’s operations are located in New York. The Company operates under a single segment.
 
The interim Condensed Financial Statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for such periods.  The results of operations for interim periods are not necessarily indicative of the results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
 
2.   Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses as of March 31, 2003 and December 31, 2002 consist of the following:
 
 
 
March 31, 2003
 
December 31, 2002
 
 
 
 
 
Accounts payable
 
$
764,024
 
$
1,199,998
 
Accrued consulting and clinical trial
 
 
537,946
 
 
557,113
 
Accrued payroll and related costs
 
 
141,523
 
 
568,358
 
Accrued legal and accounting fees
 
 
496,701
 
 
567,432
 
Other
 
 
 
 
 
7,127
 
 
 
 
 
 
 
$
1,940,194
 
$
2,900,028
 
 
 
 
 
 
3.   Net Loss Per Share
 
The Company’s basic net loss per share amounts have been computed by dividing net loss by the weighted average number of common shares outstanding during the respective periods.  For the three months ended March 31, 2003 and 2002, the Company reported a net loss and, therefore, no common stock equivalents were included in the computation of diluted net loss per share since such inclusion would have been antidilutive.
 
7
 
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (cont.)
 
 
 
Net Loss (Numerator)
 
Shares (Denominator)
 
Per Share Amount
 
 
 
 
 
 
Three months ended March 31, 2003:
 
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
$
(6,103,745
)
 
12,729,898
 
$
(0.48
)
Three months ended March 31, 2002:
 
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
$
(2,001,015
)
 
12,454,287
 
$
(0.16
)
 
Options and warrants which have been excluded from the diluted per share amounts because their effect would have been antidilutive include the following:
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
 
 
Wtd. Avg. Number
 
Wtd. Avg. Exercise Price
 
Wtd. Avg. Number
 
Wtd. Avg. Exercise Price
 
 
 
 
 
 
 
Options
 
 
4,673,046
 
$
8.99
 
 
4,031,720
 
$
8.53
 
Warrants
 
 
 
 
 
 
 
 
55,222
 
$
4.00
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
4,673,046
 
$
8.99
 
 
4,086,942
 
$
8.46
 
 
 
 
 
 
 
 
 
 
 
 
4.   PSMA Development Company LLC
 
On June 15, 1999, the Company and Cytogen Corporation (collectively, the “Members”) formed a joint venture in the form of a limited liability company (the “LLC” or “JV”) for the purposes of conducting research, development, manufacturing and marketing of products related to prostate-specific membrane antigen (“PSMA”).  Each Member currently owns 50% of the JV and accounts for such investment under the equity method.  In connection with the formation of the JV, the Members entered into a series of agreements, including an LLC Agreement, a License Agreement and a Services Agreement (collectively, as amended, the “Agreements”).
 
The Company accounts for its investment in the JV in accordance with the equity method of accounting. The Company is engaged in a research program on behalf of the JV under the Services Agreement and is compensated for its services based on agreed upon terms.  For the quarter ended March 31, 2003, we performed services for the JV under a month-to-month extension of the Services Agreement and an annual work plan and budget approved by the Members for that quarter.  At March 31, 2003, the Members were negotiating the terms of a new Services Agreement.  The Company recognizes contract research and development revenue for all amounts earned for research and development services rendered to the JV.  For the three months ended March 31, 2003 and 2002, the Company recognized approximately $1,053,000 and $1,007,000, respectively, of contract research and development revenue for services performed on behalf of the JV.  The level of future revenues from the JV will be dependent upon the extent of research and development services requested by the JV, the future financial position of the JV and the form and content of subcontractor arrangements entered into by the JV.
 
The level of commitment by the Members to fund the JV is based on an annual budget that is subject to approval by both Members.  As of March 31, 2003, the Members were in the process of negotiating the 2003 annual budget for the JV and have committed to the JV that the operating budget for 2003 will be no less than the total expenses as set forth on the Statement of Operations for the JV for the year ended December 31, 2002.
 
8
 
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (cont.)
 
During the quarter ended March 31, 2003, each Member made a capital contribution of $1.5 million to fund the operation of the JV.  No such capital contributions were made during the first quarter of 2002.  Contract research and development revenue recognized by the Company related to services provided to the JV may vary in the future due to potential future funding limitations on the part of the Members, the extent to which the JV continues to rely on the Company to perform research and development under the Services Agreement and the terms of any amendments to the Services Agreement.
 
Selected financial statement data of the JV are as follows:
 
Statement of Operations Data:
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
Total revenue
 
$
493
 
$
2,480
 
Total expenses (1)
 
 
1,759,774
 
 
1,007,119
 
 
 
 
 
Net loss
 
$
(1,759,281
)
$
(1,004,639
)
 
 
 
 
 
(1)
Includes $1,052,700 and $1,007,119 of contract research and development services performed by the Company in 2003 and 2002, respectively.
 
5.   Insurance Settlement
 
In the first quarter of 2002, the Company received a $1.6 million insurance settlement in connection with a casualty loss that had occurred in 2001.
 
6.   Comprehensive Loss
 
Comprehensive loss represents the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  Comprehensive loss of the Company includes net loss adjusted for the change in net unrealized gain or loss on marketable securities.  The net effect of income taxes on comprehensive loss is immaterial.  For the three months ended March 31, 2003 and 2002, the components of comprehensive loss are:
 
 
 
 
Three Months Ended March 31,
 
 
 
2003
 
2002
 
 
 
 
 
Net loss
 
$
(6,103,745
)
$
(2,001,015
)
Change in unrealized gain/loss on Marketable securities
 
 
(21,182
)
 
(276,019
)
 
 
 
 
Comprehensive loss
 
$
(6,124,927
)
$
(2,277,034
)
 
 
 
 
 
7.   Stock-Based Employee Compensation
 
The accompanying financial position and results of operations of the Company have been prepared in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).  Under APB No. 25, compensation expense is generally not recognized in connection with the awarding of stock option grants to employees, provided that, as of the grant date, all terms associated with the award are
 
9
 
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (cont.)
 
fixed and the quoted market price of the Company’s stock as of the grant date is equal to or less than the option exercise price.
 
In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS 123” (“SFAS No. 148”), pro forma operating results have been determined as if the Company had prepared its financial statements in accordance with the fair value based method of accounting.  The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value based method of accounting to compute compensation expense for all stock-based awards.  Since option grants awarded during 2003 and 2002 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value-based method.
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
Net loss, as reported
 
$
(6,103,745
)
 
(2,001,015
)
Add: Stock-based employee compensation expense included in reported
net loss
 
 
 
 
 
 
 
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards
 
 
(1,983,405
)
 
(1,592,986
)
 
 
 
 
Pro forma net loss
 
$
(8,087,150
)
 
(3,594,001
)
 
 
 
 
Net loss per share amounts, basic and diluted:
 
 
 
 
 
 
 
As reported
 
$
(0.48
)
 
(0.16
)
Pro forma
 
$
(0.64
)
 
(0.29
)
 
For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model.  The following assumptions were used in computing the fair value of options granted: expected volatility of 79% in 2003 and 2002, expected lives of five years (six months for the employee stock purchase plan), zero dividend yield, and weighted-average risk-free interest rate of 3.02% in 2003, and 3.99% in 2002.
 
The fair value of options and warrants granted to non-employees for goods or services is expensed as the goods are utilized or the services performed.
 
8.   Reclassification
 
Certain reclassifications have been made to the financial statements for 2002 to conform with the currents year’s presentation.
 
10
 
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (cont.)
 
9.   Impact of the Adoption of Recently Issued Accounting Standards
 
On January 17, 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB 51.  FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”).  This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties.  In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.  FIN 46 is effective no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003 for VIEs created before February 1, 2003 and is effective immediately for VIEs created after January 31, 2003.  The Company does not expect FIN 46 to have a material impact on its financial statements.
 
11
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any expected future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following:  technological uncertainties related to early stage product development, uncertainties associated with preclinical and clinical testing, the risk that necessary regulatory approvals will not be received, risks relating to corporate collaborations, the lack of product revenue and the uncertainty of future profitability, the need for additional financing and other factors set forth more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and other periodic filings with the Securities and Exchange Commission to which investors are referred for further information.
 
General
 
Progenics is a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to address the unmet medical needs of patients with debilitating conditions and life-threatening diseases.  We commenced principal operations in late 1988 and since that time have been engaged primarily in research and development efforts, development of our manufacturing capabilities, establishment of corporate collaborations and raising capital.  In order to commercialize the principal products that we have under development, we will need to address a number of technological challenges and comply with comprehensive regulatory requirements.  Accordingly, it is not possible to predict the amount of funds that we will require, or the length of time that will pass, before we receive revenues from sales of any of our products.  To date, product sales have consisted solely of limited revenues from the sale of research reagents.  We expect that sales of research reagents in the future will not significantly increase over current levels.  Our other sources of revenues through March 31, 2003 have been payments received under our collaboration agreements and from our joint venture with Cytogen Corporation, research grants and contracts related to our cancer and HIV programs and interest income.
 
To date, a majority of our expenditures have been for research and development activities.  We expect that our research and development expenses will increase significantly as our programs progress and we make filings for related regulatory approvals.  With the exception of the years ended December 31, 1997 and 1998, we have had recurring losses and had, at March 31, 2003, an accumulated deficit of approximately $52,411,000.  We will require additional funds to complete the development of our products, to fund the cost of clinical trials, and to fund operating losses that are expected to continue for the foreseeable future.  We do not expect our products under development to be commercialized in the near future.
 
12
 
Results of Operations
 
Three Months Ended March 31, 2003 and 2002
 
Revenues:
 
Contract research and development revenue from joint venture increased to approximately $1,053,000 for the three months ended March 31, 2003 from approximately $1,007,000 for the three months ended March 31, 2002.  Such revenue represents research and development services performed by us for the PSMA Development Company, LLC, our joint venture with Cytogen Corporation (the “JV”).  We were required to fund the first $3.0 million of research and development costs and such amounts were recorded as capital contributions to the JV.  During the fourth quarter of 2001, we surpassed the $3.0 million threshold, at which time we began recognizing revenue for services and costs being provided to and paid by the JV.  The level of future revenues from the JV will be dependent upon the extent of research and development services requested by the JV and the future financial position of the JV.  We provide services to the JV under a Services Agreement.  For the quarter ended March 31, 2003, we performed services for the JV under a month-to-month extension of the Services Agreement and an annual work plan and budget approved by the Members for that quarter.  At March 31, 2003, the Members of the JV were negotiating the terms of a new Services Agreement.  Accordingly, future revenue will also be dependent upon the extension, if any, and terms of an amended Services Agreement.  The level of commitment by Progenics and Cytogen (collectively, the “Members”) to fund the JV is based on an annual budget that is approved by both of the Members.  As of March 31, 2003, the Members were in the process of negotiating the 2003 annual budget for the JV and have committed to the JV that the operating budget for 2003 will be no less than the total expenses as set forth on the Statement of Operations for the JV for the year ended December 31, 2002.
 
Other contract research and development revenue decreased to zero for the three months ended March 31, 2003 from approximately $194,000 for the three months ended March 31, 2002.  We did not perform any contract research and development services in the first quarter of 2003 other than that for the JV. 
 
Revenues from research grants decreased to approximately $1,117,000 for the three months ended March 31, 2003 from approximately $1,156,000 for the three months ended March 31, 2002.  The decrease resulted from the funding of fewer grants during the current period. 
 
Expenses:
 
Research and development expenses include scientific labor, supplies, facility costs, clinical trial costs, patent costs, and product manufacturing costs.  In late 2001, we in-licensed MNTX (methylnaltrexone), an investigational drug in late-stage clinical development designed to reverse certain side effects of opioid pain medications.  As of March 31, 2003, the product had recently entered Phase III clinical trials and has become our lead product.  A major portion of our spending has been and will continue to be concentrated on this product, and such expenses are expected to increase significantly as clinical trials progress.  Research and development expenses increased to approximately $5,752,000 for the three months ended March 31, 2003 from approximately $4,567,000 for the three months ended March 31, 2002.  The increase was principally due to (i) an increase in headcount from 50 in 2002 to 72 in 2003 in the research and development, manufacturing and medical departments, (ii) an increase in manufacturing supplies (particularly for MNTX), (iii) additional rent for new laboratory space as we expanded our programs to include MNTX and, (iv) increased spending on PSMA and HIV research programs. 
 
General and administrative expenses include executive and administrative labor, professional fees, office rent and supplies.  General and administrative expenses increased to approximately $1,622,000 for the three months ended March 31, 2003 from approximately $1,247,000 for the three months ended March 31, 2002.  The increase was
 
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principally due to an increase in professional fees, specifically related to patents, and an increase in the cost of insurance.
 
Loss in joint venture increased to approximately $880,000 for the three months ended March 31, 2003 from approximately $502,000 for the three months ended March 31, 2002.  The Company recognizes its share of the loss under the terms of the joint venture with Cytogen Corporation.  The increase was due to an increase in the headcount assigned to the PSMA project and the related cost of supplies.  The level of future losses from the JV will be dependent upon the extent of research and development costs expended by the JV, the future financial position of the JV and the extension, if any, and terms of an amended Services Agreement.  The level of commitment by Progenics and Cytogen to fund the JV is based on an annual budget that is subject to approval by the Members.  As of March 31, 2003, the Members were in the process of negotiating the 2003 annual budget for the JV and have committed to the JV that the operating budget for 2003 will be no less than the total expenses as set forth on the Statement of Operations for the JV for the year ended December 31, 2002.
 
Depreciation and amortization expense increased to approximately $304,000 for the three months ended March 31, 2003 from approximately $202,000 for the three months ended March 31, 2002 as new capital equipment was purchased and leasehold improvements were incurred in connection with the Company’s growth.
 
Interest income decreased to approximately $224,000 for the three months ended March 31, 2003 from approximately $547,000 for the three months ended March 31, 2002 as cash available for investment decreased and was subject to lower interest rates in 2003.
 
A payment of $1,600,000 from an insurance settlement was received in 2002 related to a heat excursion in a storage facility.
 
The Company’s net loss for the three months ended March 31, 2003 was approximately $6,104,000 compared to net loss of approximately $2,001,000 for the three months ended March 31, 2002.
 
Liquidity and Capital Resources
 
We have funded our operations since inception primarily through private placements of equity securities, loans that were subsequently converted into equity securities, a line of credit that was repaid and terminated, payments received under collaboration agreements, two public offerings of common stock, funding under government research grants and contracts, interest on investments, and the proceeds from the exercise of outstanding options and warrants. 
 
At March 31, 2003, we had cash, cash equivalents and marketable securities, including non-current portion, totaling approximately $35.6 million compared with approximately $42.4 million at December 31, 2002.  The cash used in operations for the quarter ended March 31, 2003 was approximately $6.7 million compared with approximately $1.5 million of cash used in operations for the same period in 2002.  The increase in cash used in operations for the quarter ended March 31, 2003 resulted primarily from higher net losses resulting from increased research and development activity in connection with MNTX and PSMA, increased contributions to the JV, and the greater reduction of accounts payable in 2003, partially offset by a non-recurring insurance settlement received in 2002.
 
The cash provided by investing activities for the quarter ended March 31, 2003 was approximately $15.4 million compared with approximately $3.7 million of cash provided by investing activities for the same period in 2002.  The cash provided by investing activities for the quarter ended March 31, 2003 resulted primarily from the sale of approximately $15.7 million of marketable securities offset by the purchase of approximately $387,000 of fixed assets including capital equipment and leasehold improvements as we acquired and built out additional research and development space.  We expect to spend an additional $2.5 million during 2003 to install a new bioreactor.
 
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Cash provided by financing activities for the quarter ended March 31, 2003 was approximately $499,000 as compared with approximately $580,000 of cash provided by financing activities for the same period in 2002.  The cash provided by financing activities for both quarters reflects the exercise of stock options under our Employee Stock Option Plans and the sale of common stock under the Employee Stock Purchase Plans.
 
We are required to make capital contributions to fund 50% of the current and future spending on the PSMA projects under the terms of the JV.  Such amount was $1.5 million during the quarter ended March 31, 2003.  The level of commitment by Progenics and Cytogen to fund the JV is based on a budget that is subject to approval by both parties.  That budget is intended to be sufficient to fund research and development projects for the current year.  The budget must also consider the ability of the Members to fund the JV.  As of March 31, 2003, the Members were in the process of negotiating the 2003 annual budget for the JV and have committed to the JV that the operating budget for 2003 will be no less than the total expenses as set forth on the Statement of Operations for the JV for the year ended December 31, 2002.
 
We provide services to the JV under a Services Agreement.  For the quarter ended March 31, 2003, we performed services for the JV under a month-to-month extension of the Services Agreement and an annual work plan and budget approved by the Members for that quarter.  At March 31, 2003, the Members were negotiating the terms of a revised Services Agreement.  For the quarter ended March 31, 2003, we recognized approximately $1,053,000 of contract research and development revenue for services performed on behalf of the JV.  A portion of these revenues is reimbursement for costs expended to outside parties.  The level of future revenues from the JV will be dependent upon the extent of research and development services requested by the JV, the future financial position of the JV and the extension, if any, and terms of an amended Services Agreement.
 
We have no off-balance sheet arrangements and do not guarantee the obligations of any other entity.
 
We believe that our existing capital resources should be sufficient to fund operations beyond one year.  However, this is a forward-looking statement based on our current operating plan and the assumptions on which it relies.  There could be changes that would consume our assets before such time.  We will require substantial funds to conduct research and development activities, preclinical studies, clinical trials and other activities relating to the commercialization of any potential products.  In addition, our cash requirements may vary materially from those now planned because of results of research and development and product testing, changes in existing relationships with, or new relationships with, licensees, licensors or other collaborators, changes in the focus and direction of our research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing patent claims, the regulatory approval process, manufacturing and marketing and other costs associated with the commercialization of products following receipt of regulatory approvals and other factors.  We have no committed external sources of capital and, as discussed above, expect no significant product revenues for a number of years as it will take at least that much time, if ever, to bring our products to the commercial marketing stage.  We may seek additional financing, such as through future offerings of equity or debt securities or agreements with corporate partners and collaborators with respect to the development of our technology, to fund future operations.  We cannot assure you, however, that we will be able to obtain additional funds on acceptable terms, if at all.
 
Impact of the Adoption of Recently Issued Accounting Standards
 
On January 17, 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB 51.  FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”).  This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties.  In addition, FIN 46 requires that both
 
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the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.  FIN 46 is effective no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003 for VIEs created before February 1, 2003 and is effective immediately for VIEs created after January 31, 2003.  The Company does not expect FIN 46 to have a material impact on its financial statements.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Our primary investment objective is to preserve principal while maximizing yield without significantly increasing our risk.  Our investments consist of taxable auction securities, euro dollar bonds, and corporate notes.  Our investments totaled approximately $34.4 million at March 31, 2003.  Approximately $16.9 million of these investments had fixed interest rates, and approximately $17.5 had interest rates that were variable.
 
Due to the conservative nature of our short-term fixed interest rate investments, we do not believe that we have a material exposure to interest rate risk.  Our fixed interest rate long-term investments are sensitive to changes in interest rates.  Interest rate changes would result in a change in the fair value of these investments due to differences between the market interest rate and the rate at the date of purchase of the investment.  A 100 basis point increase in the March 31, 2003 market interest rates would result in a decrease of approximately $0.89 million in the market values of these investments.
 
Item 4.  Controls and Procedures
 
The Company maintains “disclosure controls and procedures”, as such term is defined under Exchange Act Rules 13a-14(c) and 15d-14, that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Principal Finance and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We also established a disclosure committee that consists of certain members of the Company’s senior management.
 
Within the 90 days prior to the date of filing of this report, the disclosure committee, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Finance and Accounting Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Principal Finance and Accounting Officer concluded that the Company’s disclosure controls and procedures were effective in ensuring that material information relating to the Company is made known to the Chief Executive Officer and Principal Finance and Accounting Officer by others within the Company during the period in which this report was being prepared.
 
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company completed its evaluation.
 
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PART II  -  OTHER INFORMATION
 
Item 6.  Exhibits and Reports on Form 8-K
 
(a) Exhibits  
  99.1 Certification of Paul J. Maddon, M.D., Ph.D., Chairman and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350
  99.2 Certification of Robert A. McKinney, Vice President, Finance and Operations (Principal Finance and Accounting Officer) of the Registrant pursuant to 18 U.S.C. Section 1350
     
(b)
Reports on Form 8-K
 
 
  
 
During the quarter ended March 31 2003, there were no reports on Form 8-K.
     
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PROGENICS PHARMACEUTICALS, INC.
 
 
Date:  May 15, 2003
by  /s/ ROBERT A. MCKINNEY
 
Robert A. McKinney
 
Vice President
 
Finance and Operations
 
(Duly authorized officer of the Registrant
 
and
 
Principal Financial
 
and Accounting Officer)
 
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CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Paul J. Maddon, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Progenics Pharmaceuticals, Inc.;
 
 
2.
Based on my knowledge, this quarterly 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 quarterly report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
 
4.
The registrant’s other certifying officer 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 we have:
 
 
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
 
 
c)
presented in this quarterly 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 officer 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 officer and I have indicated in this quarterly report whether or not 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.
 
 
/s/ PAUL J. MADDON
Date:  May 15, 2003
Paul J. Maddon, M.D., Ph.D.
 
Chairman  & Chief Executive Officer
 
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CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Robert A. McKinney, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Progenics Pharmaceuticals, Inc.;
 
 
2.
Based on my knowledge, this quarterly 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 quarterly report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
 
4.
The registrant’s other certifying officer 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 we have:
 
 
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
 
 
c)
presented in this quarterly 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 officer 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 officer and I have indicated in this quarterly report whether or not 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.
 
 
/s/ ROBERT A. MCKINNEY
Date:  May 15, 2003
Robert A. McKinney
 
Vice President, Finance & Administration
 
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EXHIBIT INDEX
 
Exhibit
 
Description
 
Page
99.1
 
Certification of Paul J. Maddon, M.D., Ph.D., Chairman and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350
 
 
 
 
 
 
 
99.2
 
Certification of Robert A. McKinney, Vice President, Finance and Operations (Principal Finance and Accounting Officer) of the Registrant pursuant to 18 U.S.C. Section 1350
 
 
 
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