As filed with the Securities and Exchange Commission on January 25, 2007

Registration No. 333-129570

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 5 to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

MOLECULAR INSIGHT PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

160 Second Street

Cambridge, Massachusetts 02142

(617) 492-5554

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

David S. Barlow

Chairman and Chief Executive Officer

160 Second Street

Cambridge, Massachusetts 02142

(617) 492-5554

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

  Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

 

  If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

  If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

  If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

  If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

 

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to completion, dated January 25, 2007

 

5,000,000 Shares

Common Stock

Price $      per share

We are offering 5,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share.

We expect our common stock to be listed on the Nasdaq Global Market under the symbol “MIPI.”

This investment involves risk.  See “Risk Factors” beginning on page 8.

 

 

 

The underwriters have a 30-day option to purchase up to 750,000 additional shares of common stock from us to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about          , 2007.

 

The date of this prospectus is      , 2007.

 

You should rely only on the information contained in the prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or solicitation is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

We currently use Molecular Insight^tm and the Molecular Insight logo as trademarks in the United States and other countries. We have sought trademark registration for the Molecular Insight Pharmaceuticals logo, Azedra^tm, Ultratrace^tm, Nanotrace^tm, Zemiva^tm, SAAC^tm, and SAACQ^tm in the United States and in countries outside the United States. We have sought trademark registration for Molecular Insight^tm, Onalta^tm, Solazed^tm, Rintara^tm, Unectra^tm and Velepin^tm in the United States . All other trademarks, trade names or services marks appearing in this prospectus belong to their respective holders.

 

 

PROSPECTUS SUMMARY

*	Known molecule commercialized outside the United States
**	Orphan Drug status
***	Fast Track designation

	•	Seek regulatory approval for Azedra, Onalta and Zemiva in the United States, and selectively in other countries;
	•	Develop our own specialty sales and marketing teams to market Azedra, Onalta and Zemiva in the United States;

	•	Expand the indications for which Azedra and Onalta may be used, beginning with indications earlier in the treatment regimen and in additional neuroendocrine indications;
	•	Expand the indications for which Zemiva may be used, beginning with indications in the non-acute settings;
	•	Advance the development of our preclinical product candidates; and
	•	Expand our product pipeline through our proprietary platform technologies, acquisitions and strategic licensing arrangements.

Common stock offered by us		5,000,000 shares
Common stock to be outstanding after the offering		24,664,560 shares
Use of proceeds		We intend to use the net proceeds of this offering to further develop and expand the clinical development of Azedra and Onalta, our lead targeted radiotherapeutic product candidates for cancer; to continue the development and preparation for the commercialization of our lead molecular imaging pharmaceutical product candidate, Zemiva; and for other working capital and general corporate activities. We may use a portion of the net proceeds to pay off outstanding debts. See “Use of Proceeds.”
Cash dividend to be paid in connection with the offering		Contingent upon the closing of this offering, we intend to pay to certain existing preferred stockholders a cash dividend in an aggregate amount of $18,007. Purchasers of our common stock in this offering will not be entitled to receive any portion of this dividend.
Proposed Nasdaq Global Market symbol		MIPI

	•	1,928,142 shares of common stock issuable upon the exercise of stock options granted under our 1997 Stock Option Plan and outstanding as of September 30, 2006 with a weighted-average exercise price of $2.40 per share;
	•	203,000 shares of common stock issuable upon the exercise of stock options under our 1997 Stock Option Plan that were issued on January 3, 2007 with a weighted-average exercise price equal to the greater of $12.00 per share or the initial public offering price per share;
	•	2,300,000 shares of common stock available for future grants under our Amended and Restated 2006 Equity Incentive Plan;
	•	394,877 shares of common stock issuable upon the exercise of common stock warrants outstanding as of September 30, 2006 with an exercise price of $7.80 per share;
	•	61,538 shares of common stock issuable upon the exercise of common stock warrants that were issued on November 6, 2006 with an exercise price of $7.80 per share; and
	•	750,000 shares of our common stock that may be purchased by the underwriters pursuant to the underwriters’ over-allotment option.

														Nine Months Ended
		Year Ended December 31,												September 30,
		2003				2004				2005				2005				2006
														(Unaudited)
		(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue — Research and development grants		$	723			$	569			$	1,232			$	681			$	206
Operating expenses:
Research and development			2,775				5,381				8,855				6,318				11,696
General and administrative			1,266				3,520				11,025				6,041				7,402
Total operating expenses			4,041				8,901				19,880				12,359				19,098
Loss from operations			(3,317	)			(8,332	)			(18,648	)			(11,678	)			(18,892	)
Other (expense) income
Interest income			1				20				488				300				301
Interest expense			(3	)			(3	)			(141	)			(15	)			(394	)
Interest expense — related parties			(29	)			—				—				—				—
Total other (expense) income, net			(30	)			17				347				285				(93	)
Net loss			(3,348	)			(8,315	)			(18,301	)			(11,393	)			(18,985	)
Redeemable convertible preferred stock dividends and accretion of issuance costs			(613	)			(1,312	)			(4,046	)			(2,772	)			(2,886	)
Net loss attributable to common stockholders		$	(3,961	)		$	(9,628	)		$	(22,347	)		$	(14,165	)		$	(21,871	)
Basic and diluted net loss per share attributable to common stockholders		$	(1.13	)		$	(2.55	)		$	(5.30	)		$	(3.38	)		$	(4.90	)
Weighted average shares used to compute basic and diluted net loss per share attributable to common stockholders			3,515				3,773				4,213				4,193				4,461
Basic and diluted pro forma net loss per share attributable to common stockholders										$	(0.95	)						$	(0.97	)
Weighted average shares used to compute pro forma basic and diluted net loss per share attributable to common stockholders											19,241								19,488

		As of September 30, 2006
										Pro Forma
		Actual				Pro Forma(1)				As Adjusted(2)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	16,315			$	16,334			$	82,910
Working capital			8,591				8,610				75,176
Total assets			18,395				18,414				84,980
Long-term obligations, net of current portion			16,206				2,159				2,159
Redeemable convertible preferred stock			47,372				—				—
Total stockholders’ (deficit) equity			(53,831	)			7,625				74,191

(1)	On a pro forma basis to give effect to (i) the conversion of all of our shares of preferred stock outstanding as of September 30, 2006 into 10,518,975 shares of common stock upon the completion of this offering, (ii) the payment to certain preferred stockholders of a cash dividend in an aggregate amount of $18,007, (iii) the election of certain preferred stockholders to receive in the aggregate 2,067,739 shares of common stock in lieu of a cash payment for accrued dividends and (iv) the exercise of warrants outstanding as of September 30, 2006 that will expire on or prior to the completion of this offering for 406,334 shares of common stock, (v) the election of the convertible note holders to convert their outstanding notes into 2,034,019 shares of common stock and (vi) an aggregate of 40,236 shares of common stock issued upon the exercise of stock options after September 30, 2006.
(2)	On a pro forma as adjusted basis to give effect to the sale of all of the shares of common stock in this offering at an assumed public offering price of $15.00 per share (the midpoint of the expected price range), after deducting estimated underwriting discounts and commissions and our estimated offering expenses.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before making an investment decision. If any of the possible adverse events described below actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the market price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.

We have incurred and will continue to incur significant costs relating to the development and marketing of our lead product candidates, Azedra, Onalta and Zemiva. We have not obtained approval to market these potential products in any jurisdiction and we may never be able to obtain approval or, if approvals are obtained, to commercialize these products successfully. If we fail to successfully commercialize these products, we may be unable to generate sufficient revenue to sustain and grow our business, and our business, financial condition and results of operations will be adversely affected.

We have recently begun to direct significant efforts toward the expansion of our scientific staff and research capabilities to identify and develop product candidates in addition to Azedra, Onalta and Zemiva. We do not know whether our planned preclinical development or clinical trials for these other product candidates will begin on time or be completed on schedule, if at all. In addition, we do not know whether any of our clinical trials will result in marketable products. We do not anticipate that any additional product candidates will reach the market for at least several years, if at all.

The development, testing, manufacturing and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States. In particular, the process of obtaining FDA approval is costly and time consuming, and the time required for such approval is uncertain. Our product candidates must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA. Such regulatory review includes the determination of manufacturing capability and product performance. Generally, only a small percentage of pharmaceutical products are ultimately approved for commercial sale.

We can give no assurance that our current or future product candidates will be approved by the FDA or any other governmental body. In addition, there can be no assurance that all necessary approvals will be granted for future product candidates or that FDA review or actions will not involve delays caused by requests for additional information or testing that could adversely affect the time to market for and sale of our product candidates. Further failure to comply with applicable regulatory requirements can, among other things, result in the suspension of regulatory approval as well as possible civil and criminal sanctions.

We may encounter delays in the development and commercialization, or fail to obtain marketing approval, of Azedra, Onalta or Zemiva or any other future product candidate if we are unable to enroll enough patients to complete clinical trials. Our ability to enroll sufficient numbers of patients in our

clinical trials depends on many factors, including the severity of illness of the population, the size of the patient population, the nature of the clinical protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and competing clinical trials. Delays in planned patient enrollment may result in increased costs and harm our ability to complete our clinical trials and obtain regulatory approval.

Significant delays in clinical testing could materially impact our product development costs. We currently expect that, following this offering and based on our current expected clinical protocols, we will expend at least $35 million of the net proceeds raised in this offering in connection with additional clinical trials for Azedra, Onalta and Zemiva. We do not know whether planned clinical trials will begin on time, will need to be restructured or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence and continue a study, delays in reaching agreement on acceptable clinical study terms with prospective sites, delays in obtaining institutional review board approval to conduct a study at a prospective site and delays in recruiting patients to participate in a study.

In addition, we typically rely on third-party clinical investigators to conduct our clinical trials and other third-party organizations to oversee the operations of these clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion. Significant delays in testing or regulatory approvals for any of our current or future product candidates, including Azedra, Onalta and Zemiva, could prevent or cause delays in the commercialization of such product candidates, reduce potential revenues from the sale of such product candidates and cause our costs to increase.

We will only receive regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA, or the applicable foreign regulatory agency, that the product candidate is safe and effective. In April 2005, we completed a Phase 2b clinical trial for Zemiva and are currently planning a pivotal Phase 2 clinical trial for Zemiva. A Phase 2b clinical trial is a stage of drug development for an experimental drug designed to assess short-term safety and efficacy as well as therapeutic value. In addition, we commenced a Phase 1 clinical trial for Azedra in 2006, which is ongoing. Although Novartis has conducted clinical trials for Onalta, we have not. We intend to start discussions with the FDA regarding the clinical investigation plan, which may include a radiation dosimetry component in addition to safety and efficacy studies. We do not know whether our existing or future clinical trials will demonstrate safety and efficacy sufficiently to result in marketable products. Because our clinical trials for Azedra, Onalta and Zemiva and our other product candidates may produce negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing for these product candidates or cease our clinical trials. If this occurs, we may not be able to obtain approval for these product candidates or our anticipated time to market for these product candidates may be substantially delayed and we may also experience significant additional development costs. We may also be required to undertake additional clinical testing if we change or expand the indications for our product candidates.

In order for the commercialization of our potential products to be profitable, our products must be cost-effective and economical to manufacture on a commercial scale. Subject to regulatory approval, we

expect to incur significant sales, marketing, distribution and, to the extent we do not outsource manufacturing, manufacturing expenses in connection with the commercialization of Azedra, Onalta and Zemiva and our other potential products as we do not currently have a dedicated sales force, we do not have manufacturing capability, and we have no experience in the sales, marketing and distribution of pharmaceutical products. In order to commercialize Azedra, Onalta and Zemiva or any of our other potential products that we develop, we must develop sales, marketing and distribution capabilities or make arrangements with a third party to perform these functions. Developing a sales force is expensive and time-consuming, and we may not be able to develop this capacity. If we are unable to establish adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant revenue and may not become profitable. Our future profitability will depend on many factors, including, but not limited to:

Even if we receive regulatory approval for Azedra, Onalta, Zemiva or any of our other product candidates, we may never receive significant revenues from any of them. To the extent that we are not successful in commercializing our potential products, we will incur significant additional losses and the price of our common stock will be negatively affected.

We do not have patent rights to the composition of Zemiva. The original patent protecting BMIPP, the underlying active molecule in Zemiva, expired in 2003. We believe that Zemiva is a new chemical entity in the United States and should be eligible for market exclusivity under the Food, Drug & Cosmetic Act, or FDCA, as amended by the Hatch-Waxman Act of 1984. A drug can be classified as a new chemical entity if the FDA has not previously approved any other new drug containing the same active agent. Under sections 505(c)(3)(D)(ii) and 505(j)(5)(D)(ii) of the FDCA, as amended by the Hatch-Waxman Act of 1984, a new chemical entity that is granted regulatory approvals may, in the absence of patent protections, be eligible for five years of marketing exclusivity in the United States following regulatory approval. This marketing exclusivity will protect us from any other applicant utilizing the materials in support of our new drug application, or NDA, during the exclusivity period. However, there is no assurance that Zemiva will be considered a new chemical entity for these purposes or be entitled to the period of marketing exclusivity. If we are not able to gain or exploit the period of marketing exclusivity, we may not be able to successfully commercialize Zemiva or may face significant competitive threats to such commercialization from other manufacturers, including the manufacturers of generic alternatives. Further, even if Zemiva is considered a new chemical entity and we are able to gain five years of marketing exclusivity, another company could also gain such marketing exclusivity under

the provisions of the FDCA, as amended by the Hatch-Waxman Act if such company can complete a full NDA with a complete human clinical trial process and obtain regulatory approval of its product.

Our commercial success will depend in part on obtaining and maintaining intellectual property protection for our technologies and product candidates. We will only be able to protect our technologies and product candidates from unauthorized use by third parties to the extent that valid and enforceable patents cover them, or that other market exclusionary rights apply. Our lead cardiovascular molecular imaging candidate, Zemiva, is not covered by patent rights. We hold the patent rights to our second generation cardiac candidate, a derivative of Zemiva. Because Zemiva itself is not patented, we depend on obtaining the five year period of marketing exclusivity under the FDCA for Zemiva as a new chemical entity. Failure to obtain this marketing exclusivity right would permit competitors to gain access to the market for Zemiva.

While we have issued enforceable patents covering our oncology product candidate MIP-220, our neurology product candidate MIP-170 and our Ultratrace radiolabeling technology platform, some of our patent rights for these compounds and technologies are still pending patent applications. We cannot guarantee these patent applications will issue as patents. The patent positions of life sciences companies, like ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. The general patent environment outside the United States also involves significant uncertainty. Accordingly, we cannot predict the breadth of claims that may be allowed or that the scope of these patent rights would provide a sufficient degree of future protection that would permit us to gain or keep our competitive advantage with respect to these products and technology. Additionally, life science companies like ours are dependent on creating a pipeline of products. We may not be able to develop additional proprietary technologies or product candidates that produce commercially viable products, or that are themselves patentable.

Our issued patents may be subject to challenge and possibly invalidated by third parties. Changes in either the patent laws or in the interpretations of patent laws in the United States or other countries may diminish the market exclusionary ability of our intellectual property.

In addition, others may independently develop similar or alternative compounds and technologies that may be outside the scope of our intellectual property. Should third parties obtain patent rights to similar compounds or radiolabeling technology, this may have an adverse effect on our business.

We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. In particular, we rely on trade secrets to protect certain manufacturing aspects of our compound Zemiva. Trade secrets, however, are difficult to protect. While we believe that we use reasonable efforts to protect our trade secrets, our own or our strategic partners’ employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. We seek to protect this information, in part, through the use of non-disclosure and confidentiality agreements with employees, consultants, advisors and others. These agreements may be breached, and we may not have adequate remedies for a breach. In addition, we cannot ensure that those agreements will provide adequate protection for our trade secrets, know-how or other proprietary information and prevent their unauthorized use or disclosure.

To the extent that consultants or key employees apply technological information independently developed by them or by others to our product candidates, disputes may arise as to the proprietary rights of the information, which may not be resolved in our favor. Consultants and key employees that work with our confidential and proprietary technologies are required to assign all intellectual property rights in their discoveries to us. However, these consultants or key employees may terminate their

relationship with us, and we cannot preclude them indefinitely from dealing with our competitors. If our trade secrets become known to competitors with greater experience and financial resources, the competitors may copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies. If we were to prosecute a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts in the United States. Moreover, if our competitors independently develop equivalent knowledge, we would lack any contractual claim to this information, and our business could be harmed.

There are a number of factors that raise substantial doubt about our ability to continue as a going concern.

Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued its report dated December 8, 2006 in connection with the audit of our consolidated financial statements as of and for the nine months ended September 30, 2006, that included an explanatory paragraph relating to our ability to continue as a going concern due to our history of net losses and negative operating cash flows since inception. If we are unable to successfully complete this offering, we will need to obtain additional financing. If we are not able to continue as a going concern, it is likely our holders of capital stock will lose all of their investment. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our ability to commercialize our product candidates will depend on our ability to sell such products without infringing the patent or proprietary rights of third parties. If we are sued for infringing intellectual property rights of third parties, such litigation will be costly and time consuming and an unfavorable outcome would have a significant adverse effect on our business.

Our ability to commercialize our product candidates will depend on our ability to sell such products without infringing the patents or other proprietary rights of third parties. Third-party intellectual property in the fields of cardiology, oncology, neurology, and radiopharmaceutical technologies are complicated, and third-party intellectual property rights in these fields are continuously evolving. We have not performed searches for third-party intellectual property rights that may raise freedom-to-operate issues, and we have not obtained legal opinions regarding commercialization of our product candidates. As such, there may be existing patents that may affect our ability to commercialize our product candidates.

In addition, because patent applications are published 18 months after their filing, and because applications can take several years to issue, there may be currently pending third-party patent applications that are unknown to us, which may later result in issued patents. If a third-party claims that we infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:

Such actions could harm our competitive position and our ability to generate revenue and could result in increased costs.

We may be unable to obtain Orphan Drug marketing exclusivity for certain of our product candidates and if another party obtains Orphan Drug exclusivity instead, approval of our product for the same indication could be prevented for seven years.

Under the Orphan Drug Act, the FDA may grant Orphan Drug designation to drugs intended to treat a rare disease or condition, which is defined by the FDA as a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan Drug designation does not shorten the development or regulatory review time of a drug, but does provide limited advantages in the regulatory review and approval process. The company that obtains the first FDA approval for a designated Orphan Drug indication receives marketing exclusivity for use of that drug for that indication for a period of seven years. Moreover, even if we obtain Orphan Drug exclusivity for one or more indications, our exclusivity may be lost if the FDA later determines that the request for designation was materially defective, or if we are unable to assure sufficient quantity of the drug. Orphan Drug exclusivity for Azedra and Onalta also would not prevent a competitor from obtaining approval of a different drug to treat the same Orphan Drug indications.

If our product candidates, including Azedra, Onalta and Zemiva, do not gain market acceptance among physicians, patients and the medical community, we will be unable to generate significant revenue, if any.

The products that we develop may not achieve market acceptance among physicians, patients, third-party payers and others in the medical community. If we receive the regulatory approvals necessary for commercialization, the degree of market acceptance will depend upon a number of factors, including:

The market may not accept Azedra, Onalta or Zemiva based on any number of the above factors. If Zemiva is approved, its primary competition in the emergency department setting will be the then current standard of care, which involves several diagnostic products, and its primary competition in the non-acute setting will be existing perfusion agents such as Cardiolite and Myoview. As of the time that Azedra and Onalta are approved, there may be other therapies available which directly compete for the same indications. The market may choose to continue utilizing the existing products for any number of reasons, including familiarity with or pricing of these existing products. The failure of any of our product candidates to gain market acceptance could impair our ability to generate revenue, which could have a material adverse effect on our future business, financial condition and results of operations.

We have no commercial manufacturing facility for Azedra, Onalta, Zemiva or our other product candidates and no experience in manufacturing commercial quantities of our product candidates. As such, we are dependent on third parties to supply our product candidates according to our specifications, in sufficient quantities, on time, in compliance with appropriate regulatory standards and at competitive prices. We cannot be sure that we will be able to obtain an adequate supply of our product candidates on acceptable terms, or at all.

Zemiva is BMIPP that has been radiolabeled with I-123. We are currently aware of only one commercial provider of BMIPP, MDS Nordion, in the United States. There is no assurance that we will be able to obtain sufficient amounts of BMIPP from this provider to produce adequate quantities of Zemiva. If this provider is unable to meet our demand, we would be required to find alternative sources of BMIPP, including producing BMIPP ourselves or contracting with third parties to produce BMIPP. We are not aware of any proprietary or technical reasons prohibiting the manufacture of BMIPP by us or a third party. However finding an alternative source for Zemiva would likely result in unforeseen costs and delays to the commercialization of Zemiva.

We have contracted with a Canadian company, MDS Nordion, to construct a manufacturing facility to radiolabel BMIPP and supply Zemiva. There can be no assurance that there will not be delays in the construction or completion of this facility. Such delays may adversely affect our ability to meet demand for Zemiva. In addition, we may be required to use a portion of the proceeds from this offering to assist in the funding of the manufacture of Azedra, Onalta and Zemiva and our other product candidates.

Manufacturers supplying biopharmaceutical products must comply with FDA regulations which require, among other things, compliance with the FDA’s evolving regulations on cGMPs, which are enforced by the FDA through its facilities inspection program. The manufacture of products at any facility will be subject to strict quality control, testing and record keeping requirements, and continuing obligations regarding the submission of safety reports and other post-market information. Since the commercial manufacturing facility for Zemiva has not been constructed, the FDA has not certified the cGMP compliant manufacture of Zemiva. We cannot guarantee that the resultant facility will pass FDA inspection, or that future changes to cGMP manufacturing standards will not also affect the cGMP compliant manufacture of Zemiva.

Azedra is in a Phase 1 clinical trial and MIP-220, MIP-190 and MIP-170 are in preclinical or discovery stages. We have no commercial cGMP manufacturing capability for these candidates, and currently no third-party manufacturer for them. As such, we may not be able to obtain sufficient quantities of these product candidates as we develop our pre-clinical or clinical programs for these compounds. We will need to enter into additional manufacturing arrangements for the manufacturing needs for all other product candidates. We have not yet determined if we will construct our own manufacturing facility for these product candidates, or if MDS Nordion will be contracted to fulfill this role, or if another manufacturer will be sought. We cannot guarantee that a suitable manufacturer for these product candidates will be found, or that we will be able to secure manufacturing agreements on acceptable terms with any of these manufacturers. We also cannot guarantee that such manufacturer will be able to supply sufficient quantities of our product candidates, or that they will meet the requirements for clinical testing and cGMP manufacturing.

Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel, particularly David Barlow, our Chairman and Chief Executive Officer,

and John Babich, our President and Chief Scientific Officer. Although we have entered into employment agreements with five members of our senior management, David Barlow, John Babich, John McCray, Nicholas Borys and Bob Gallahue, there is no assurance that they will remain in our employ for the entire term of such employment agreements. The loss of the services of any member of our senior management or our scientific or technical staff may significantly delay or prevent the development of our product candidates and other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, if any, and could have a material adverse effect on our business, operating results and financial condition. We maintain key man life insurance on David Barlow and John Babich.

We also rely on consultants and advisors to assist us in formulating our research and development strategy. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us.

In addition, we believe that we will need to recruit additional executive management and scientific and technical personnel. There is currently intense competition for skilled executives and employees with relevant scientific and technical expertise, and this competition is likely to continue. The inability to attract and retain sufficient scientific, technical and managerial personnel could limit or delay our product development efforts, which would adversely affect the development of our product candidates and commercialization of our potential products and growth of our business.

We expect to have significant growth in expenditures, the number of our employees and the scope of our operations, in particular with respect to those potential products that we elect to commercialize independently or together with others. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to train qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plan or disrupt our operations.

We will need to raise additional funds in order to finance the anticipated commercialization of our product candidates by incurring indebtedness, through collaboration and licensing arrangements, or by issuing securities which may cause dilution to existing stockholders or require us to relinquish rights to our technologies and our product candidates.

Developing our product candidates, conducting clinical trials, establishing manufacturing facilities and developing marketing and distribution capabilities is expensive. We will need to finance future cash needs through additional public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution. Debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that are not favorable to us.

We have a history of losses and expect to continue to incur losses and may not achieve or maintain profitability.

We have incurred net losses every year since our inception in 1997 and have generated no revenue during the development stage from product sales or licenses to date. As of September 30, 2006, we had a deficit accumulated during the development stage of approximately $77 million. We expect to incur additional losses for at least the next several years and cannot be certain that we will ever achieve profitability. As a result, our business is subject to all of the risks inherent in the development of a new business enterprise, such as the risk that we may not obtain substantial additional capital needed to support the expenses of developing our technology and commercializing our potential products; develop a market for our potential products; successfully transition from a company with a research focus to a company capable of either manufacturing and selling potential products or profitably licensing our potential products to others; and/or attract and retain qualified management, technical and scientific staff.

We currently have no significant source of revenue and may never become profitable.

To date, we have not generated any revenue for product sales and we do not know when or if any of our product candidates will generate revenue. Our ability to generate revenue depends on a number of factors, including our ability to successfully complete clinical trials for Azedra, Onalta and Zemiva and obtain regulatory approval to commercialize these potential products. Even then, we will need to establish and maintain sales, marketing, distribution and to the extent we do not outsource manufacturing, manufacturing capabilities. We plan to rely on one or more strategic collaborators to help generate revenues in markets outside of the United States, and we cannot be sure that our collaborators, if any, will be successful. Our ability to generate revenue will also be impacted by certain challenges, risks and uncertainties frequently encountered in the establishment of new technologies and products in emerging markets and evolving industries. These challenges include our ability to:

We cannot be certain that our business model will be successful or that it will successfully address these and other challenges, risks and uncertainties. If we are unable to generate significant revenue, we may not become profitable, and we may be unable to continue our operations. Even if we are able to commercialize Azedra, Onalta and Zemiva, we may not achieve profitability for at least several years, if at all, after generating material revenue.

We license patent rights from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.

We are party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful for our business. In particular, we have obtained the nonexclusive rights from Novartis Pharma AG, or Novartis, for certain radiolabeled somatostatin analogs and the exclusive rights to the particular somatostatin analog compound edotreotide, along with know how related to the manufacture and use of this compound. We may enter into additional licenses to third-party intellectual property in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for their intellectual property, in particular, those patents to which we

have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue with respect to these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. In addition, our licensors may terminate their agreements with us in the event we breach the applicable license agreement and fail to cure the breach within a specified period of time. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Under the license agreement with Novartis Pharma AG, Novartis has retained an option to reacquire rights in the compound if annual sales exceed a certain threshold level. If Novartis does exercise this call back option, we will be required to sell to Novartis the rights in the compound which may have a negative affect on our operating results.

In connection with the audits of our consolidated financial statements, as of and for the year ended December 31, 2005 and as of and for the nine months ended September 30, 2006, management identified a material weakness in our internal control over financial reporting. This was a matter that, in our judgment could adversely affect our ability to record, process, summarize and report financial information consistent with the assertions of management in our financial statements. A material weakness is defined as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Specifically, our controls over the application of generally accepted accounting principles were ineffective as a result of insufficient resources and training in the accounting and finance function. This resulted in a number of post-close adjustments and corrections. We cannot be certain that the measures we have taken or plan to take will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal control could also cause investors to lose confidence in our reported financial information.

Beginning no later than with our Annual Report on Form 10-K for the fiscal year ending December 31, 2007, we will be required to furnish a report by our management on the effectiveness of our internal control over financial reporting. This report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. This report must also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal control. If we are unable to assert that our internal control over financial reporting is effective as of December 31, 2007 (or if our independent registered public accountants are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal control), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

We are a small company with limited resources. We have operated as a private company not subject to many of the requirements applicable to public companies including Section 404 of the Sarbanes-Oxley Act of 2002. The number and qualifications of our finance and accounting staff are consistent with those of a private company. We may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. Furthermore, we have only recently begun a formal process to evaluate our internal control over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal control over financial reporting continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines.

 

We have relied on government research grants for a portion of our funding, including grants awarded by the National Institutes of Health under the Small Business Innovation Research program and the Small Business Technology Transfer program. As of September 30, 2006, we had been awarded a total of approximately $797,000 in grants pursuant to these programs and have recognized approximately $206,000 of such awards as revenue, representing approximately 1.8% of our total research and development expenses through September 30, 2006. Most of our government grants have been awarded as Phase 1 grants and we expect to file Phase 2 grant applications where appropriate, but we cannot be assured that these grants or any new Phase 1 grant applications will be awarded to us, nor can we be sure that we will continue to be eligible to receive such grants once this offering is completed.

 

Under the terms of our government grants, we have all right, title and interest in our patents, copyrights and data pertaining to our product development, subject to certain rights of the government. Under existing regulations, the government receives a royalty-free license for federal government use for all patents developed under a government grant. In addition, under certain circumstances the government may require us to license technology resulting from the government funded projects to third parties and may require that we manufacture our product in the United States, even if we determine that such actions are not in our best interest.

 

Funding of government grants is subject to government appropriation and all of our government contracts contain provisions which make them terminable at the convenience of the government. The government could terminate, reduce or delay the funding under any of our grants at any time. Accordingly, there is no assurance that we will receive funding of any grants that we may be awarded, including the approximately $13,000 remaining portion of grants that we had been awarded as of September 30, 2006. In the event we are not successful in obtaining any new government grants or extensions to existing grants, our research and development efforts could be adversely affected.

 

If our competitors market products that are less expensive, safer or more effective than our future products developed from our product candidates, or that reach the market before our product candidates, we may not achieve commercial success. For example, if approved, Zemiva will compete in the emergency department setting with the current standard of care in the assessment of chest pain patients who present to emergency departments. This standard involves several diagnostic products and procedures, in some cases involving the use of perfusion imaging agents, which in the aggregate may require several hours or days of hospitalization to reach an ultimate diagnosis. If approved, Zemiva’s primary competition in the non-acute setting will be perfusion imaging agents such as Cardiolite

produced by Bristol-Myers Squibb Medical Imaging, Myoview produced by GE Healthcare, and generic thallium, the primary U.S. supplier being Tyco Healthcare/Mallinckrodt. The market may choose to continue utilizing the existing products for any number of reasons, including familiarity with or pricing of these existing products. The failure of Zemiva or any of our product candidates to compete with products marketed by our competitors would impair our ability to generate revenue, which would have a material adverse effect on our future business, financial condition and results of operations.

 

We expect to compete with several pharmaceutical companies including Bristol-Myers Squibb Medical Imaging, GE Healthcare and Tyco Healthcare/Mallinckrodt, and our competitors may:

 

We expect to compete for market share against large pharmaceutical and biotechnology companies, smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations.

 

In addition, the life sciences industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our product discovery process that we believe we derive from our research approach and proprietary technologies.

 

Our research and development activities involve the use of hazardous materials, including chemicals and biological and radioactive materials. Injury or contamination from these materials may occur and we could be held liable for any damages, which could exceed our available financial resources. This liability could materially adversely affect our business, financial condition and results of operations.

 

We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We may be required to incur significant costs to comply with environmental laws and regulations in the future that could materially adversely affect our business, financial condition and results of operations.

 

Research, preclinical development, clinical trials, manufacturing and marketing of our product candidates are subject to extensive regulation by various government authorities. We have not received marketing approval for Azedra, Onalta, Zemiva or our other product candidates. The process of

obtaining FDA and other required regulatory approvals is lengthy and expensive, and the time required for such approvals is uncertain. The approval process is affected by such factors as:

 

Any regulatory approvals that we or our partners receive for our product candidates may also be subject to limitations on the indicated uses for which the product candidate may be marketed or contain requirements for potentially costly post-marketing follow-up studies. The subsequent discovery of previously unknown problems with the product candidate, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the product candidate and withdrawal of the product candidate from the market.

 

U.S. manufacturing, labeling, storage and distribution activities also are subject to strict regulating and licensing by the FDA. The manufacturing facilities for our biopharmaceutical products are subject to periodic inspection by the FDA and other regulatory authorities and from time to time, these agencies may send notice of deficiencies as a result of such inspections. Our failure, or the failure of our biopharmaceutical manufacturing facilities, to continue to meet regulatory standards or to remedy any deficiencies could result in corrective action by the FDA or these other authorities, including the interruption or prevention of marketing, closure of our biopharmaceutical manufacturing facilities, and fines or penalties.

 

Regulatory authorities also will require post-marketing surveillance to monitor and report to the FDA potential adverse effects of our product candidates. Congress or the FDA in specific situations can modify the regulatory process. If approved, any of our product candidates’ subsequent failure to comply with applicable regulatory requirements could, among other things, result in warning letters, fines, suspension or revocation of regulatory approvals, product recalls or seizures, operating restrictions, injunctions and criminal prosecutions.

 

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action. If we are not able to maintain regulatory compliance, we might not be permitted to market our product candidates and our business could suffer.

 

In addition to seeking approval from the FDA for Azedra, Onalta and Zemiva in the United States, we intend to seek the governmental approval required to market Azedra, Onalta and Zemiva and our other potential products in European Union countries such as the United Kingdom, France, Germany, Belgium, Holland and Italy through third-parties. We may in the future also seek approvals for additional countries. The regulatory review process varies from country to country, and approval by foreign government authorities is unpredictable, uncertain and generally expensive. Our ability to market our potential products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances. We anticipate commencing the applications required in some or all of these countries following approval by the FDA; however, we may decide to file

applications in advance of the FDA approval if we determine such filings to be both time and cost effective. If we export any of our potential products that have not yet been cleared for domestic commercial distribution, such products may be subject to FDA export restrictions. Marketing of our potential products in these countries, and in most other countries, is not permitted until we have obtained required approvals or exemptions in each individual country. Failure to obtain necessary regulatory approvals could impair our ability to generate revenue from international sources.

 

Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like our product candidates, and our commercial success will depend in part on these third-party payers agreeing to reimburse patients for the costs of our potential products. Even if we succeed in bringing any of our product candidates to market, we cannot assure you that third-party payers will consider our potential products cost effective or provide reimbursement in whole or in part for their use.

 

Significant uncertainty exists as to the reimbursement status of newly approved health care products. Each of our product candidates is intended to replace or alter existing therapies or procedures. These third-party payers may conclude that our product candidates are less safe, effective or cost-effective than these existing therapies or procedures. Therefore, third-party payers may not approve our products candidates for reimbursement.

 

If third-party payers do not approve our product candidates for reimbursement or fail to reimburse for them adequately, sales will suffer as some physicians or their patients will opt for a competing product that is approved for reimbursement or is adequately reimbursed. Even if third-party payers make reimbursement available, these payers’ reimbursement policies may adversely affect our ability and the ability of our potential collaborators to sell our potential products on a profitable basis.

 

The trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could adversely affect our business, financial condition and results of operations.

 

In addition, legislation and regulations affecting the pricing of our product candidates may change in ways adverse to us before or after the FDA or other regulatory agencies approve any of our product candidates for marketing. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals, they could materially adversely affect our business, financial condition and results of operations.

 

We may be exposed to the risk of product liability claims that is inherent in the biopharmaceutical industry. A product liability claim may damage our reputation by raising questions about our product’s safety and efficacy and could limit our ability to sell one or more products by preventing or interfering with commercialization of our potential products.

 

In addition, product liability insurance for the biopharmaceutical industry is generally expensive to the extent it is available at all. There can be no assurance that we will be able to obtain and maintain such insurance on acceptable terms or that we will be able to secure increased coverage if the commercialization of our potential products progresses, or that future claims against us will be covered by our product liability insurance. Moreover, there can be no assurance that the existing coverage of our insurance policy and/or any rights of indemnification and contribution that we may have will offset any future claims. We currently maintain product liability insurance of $10 million per occurrence and in the aggregate for clinical trial related occurrences only. We believe that this coverage is currently adequate

based on current and projected business activities and the associated risk exposure, although we expect to increase this coverage as our business activities and associated risks grow. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage and not subject to any indemnification or contribution could have a material adverse effect on our business, financial condition and results of operations.

 

We are not aware of any current business practice which is in violation of any federal or state fraud and abuse law. However, continued vigilance to assure compliance with all potentially applicable laws will be a necessary expense associated with product development. For example, all product marketing efforts must be strictly scrutinized to assure that they are not associated with improper remunerations to referral sources in violation of the federal Anti-Kickback Statute and similar state statutes. Remunerations may include potential future activities for our product candidates, including discounts, rebates and bundled sales, which must be appropriately structured to take advantage of statutory and regulatory “safe harbors.” From time to time we engage physicians in consulting activities. In addition, we may decide to sponsor continuing medical education activities for physicians or other medical personnel. We also may award or sponsor study grants to physicians from time to time. All relationships with physicians, including consulting arrangements, continuing medical education and study grants, must be similarly reviewed for compliance with the Anti-Kickback Statute to assure that remuneration is not provided in return for referrals. Patient inducements may also be unlawful. Inaccurate reports of product pricing, or a failure to provide product at an appropriate price to various governmental entities, could also serve as a basis for an enforcement action under various theories.

 

Claims which are “tainted” by virtue of kickbacks or a violation of self-referral rules may be alleged as false claims if other elements of a violation are established. The federal False Claims Act, which includes a provision allowing whistleblowers to bring actions on behalf of the federal government and receive a portion of the recovery, applies to those who submit a false claim and those who cause a false claim to be submitted. Because our potential customers may seek payments from the federal healthcare programs for our product candidates, even during the clinical trial stages, we must assure that we take no actions which could result in the submission of false claims. For example, free product samples which are knowingly or with reckless disregard billed to the federal healthcare programs could constitute false claims. If the practice was facilitated or fostered by us, we could be liable. Moreover, inadequate accounting for or a misuse of federal grant funds used for product research and development could be alleged as a violation of the False Claims Act or other relevant statutes.

 

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations, and additional legal or regulatory change.

 

Purchasers of our common stock in this offering will pay a price per share that substantially exceeds the per share value of our tangible assets after subtracting our liabilities and the per share price paid by our existing stockholders and by persons who exercise currently outstanding options to acquire our common stock. Accordingly, assuming an initial public offering price of $15.00 per share, you will experience immediate and substantial dilution of approximately $11.99 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of our common stock in this offering will have contributed approximately 51.9% of the aggregate price paid by all purchasers of our common stock but will own only approximately 20.3% of our common stock outstanding after this offering. See the section captioned “Dilution.”

 

Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering. We will negotiate and determine the initial public offering price with the representatives of the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price due to fluctuation in the market price of the common stock arising from changes in our operating performance or prospects. In addition, the stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include:

 

 

These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

 

Our executive officers, directors, and their affiliates will beneficially own or control approximately 18.06% of the outstanding shares of our common stock (after giving effect to the conversion of all outstanding convertible preferred stock following the completion of this offering). Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of our company, even if

such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that entrenchment of management or conflicts of interest may exist or arise.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 24,664,560 shares of common stock based on the number of shares outstanding as of September 30, 2006. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 19,664,560 shares, or 79.73% of our outstanding shares after this offering, are currently restricted as a result of securities laws or lock-up agreements, but will be able to be sold in the near future as set forth below.

 

We intend to register the shares of common stock issuable or reserved for issuance under our equity plans within 180 days after the date of this prospectus. In addition to the foregoing, there were options to purchase 883,174 shares of common stock and warrants to purchase 801,211 shares of common stock outstanding and exercisable as of September 30, 2006.

 

We have not paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. Contingent upon the closing of this offering, we intend to pay to certain existing preferred stockholders a one-time cash dividend in an aggregate amount of $18,007. Following the completion of this offering and except for the one-time dividend payment to certain preferred holders, we do not anticipate paying any cash dividends on our capital stock for the foreseeable future. In addition, the terms of existing or any future debt facilities may preclude us from paying dividends on our stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We will have considerable discretion in the application of the net proceeds of this offering. We expect to use the majority of the net proceeds of this offering to continue the development and prepare for the commercialization of our lead molecular imaging pharmaceutical candidate, Zemiva, and to expand the clinical development of Azedra, our lead targeted radiotherapeutic candidate for cancer. We may also use a portion of the net proceeds to fund partnerships with third parties for the commercial manufacturing and production of Zemiva. Because of the number and variability of factors that determine our use of the proceeds from this offering, our intended uses for the proceeds of this offering may vary

substantially from our currently planned uses. Stockholders may not deem such uses desirable, and our use of the proceeds may not yield a significant return or any return at all for our stockholders.

 

Our Restated Articles of Organization and Amended and Restated Bylaws contain provisions that may enable our Board of Directors to resist a change in control of our company even if a change in control were to be considered favorable by stockholders. These provisions include:

 

These and other provisions contained in our charter and bylaws could delay or discourage transactions involving an actual or potential change in control of us or our management, including transactions which our stockholders might otherwise receive a premium for their shares over then current prices, and may limit the ability of stockholders to remove our current management or approve transactions that our stockholders may deem to be in their best interest and, therefore, could adversely affect the price of our common stock.

This prospectus contains forward-looking statements, principally in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Generally, you can identify these statements because they include words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. These statements are only predictions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which cannot be foreseen. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons including, among others, the risks we face that are described in the section entitled “Risk Factors” and elsewhere in this prospectus.

We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. The risk factors listed on the previous pages, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the previous risk factors and elsewhere in this prospectus could negatively impact our business, operating results, financial condition and stock price.

Forward-looking statements include, but are not limited to, statements about:

Forward-looking statements speak only as of the date on which they are made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We will have approximately $67.0 million in net proceeds from the sale of our common stock in this offering at an assumed public offering price of $15.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and our estimated expenses. If the underwriters’ over-allotment option is exercised in full, we estimate that the net proceeds will be approximately $77.0 million.

The principal purposes of this offering are to obtain additional working capital, establish a public market for our common stock and facilitate our future access to public markets. We anticipate using the net proceeds of this offering to:

We may use a portion of the net proceeds for the repayment of the remaining portion of a $5 million loan and related interest under the terms of a Loan and Security Agreement with BlueCrest Venture Finance Master Fund Limited, assignee of Ritchie Multi-Strategy Global, L.L.C., dated as of September 30, 2005. The proceeds of this borrowing have been used for working capital and general corporate activities. The obligations are secured by a first priority security interest in our assets excluding intellectual property. We are required to pay interest only during the first three months of the term of this loan, and thereafter the entire loan will amortize over 35 months with equal monthly principal and interest payments. The interest rate of the debt is 7.93%. In connection with this financing arrangement, we are obligated to pay a fee to BlueCrest in the amount of $300,000 should a liquidation event, such as an initial public offering, occur. A liquidation event is defined in the agreement as including, among other things, a change in control, a sale of all or substantially all of our assets or an initial public offering of our common stock.

We expect to use approximately $18,007 of the net proceeds to pay to certain existing preferred stockholders a one-time cash dividend; all other preferred stockholders chose to convert their accrued dividends into our common stock.

The amounts and timing of our use of proceeds will vary depending on a number of factors, including the amount of cash generated or used by our operations, the success of our product development efforts, competitive and technological developments, and the rate of growth, if any, of our business. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, our management will have broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds of this offering in cash, cash-equivalents, money market funds or short-term interest-bearing, investment-grade securities to the extent consistent with applicable regulations. We cannot predict whether the proceeds will be invested to yield a favorable return.

Based on our operating plans, we believe that the proceeds from this offering, together with our existing cash resources and government grant funding will be sufficient to finance our planned operations, including increases in spending for our Azedra, Onalta and Zemiva clinical programs and for our preclinical product candidates into the second half of 2008. During the second half of 2008, we will need to raise substantial additional capital to fund our operations and to complete clinical development of our product candidates. At that time, and based on current projections which are subject to change, we expect that our current product candidates will not yet be approved by the FDA, and that Azedra will have completed a Phase 2 registrational clinical trial, Onalta will be in a Phase 2 clinical trial, and Zemiva will have completed a pivotal Phase 2 clinical trial to support registration. We project that we will require between $70 million to $100 million in additional capital to fund our operations through the commercialization of our first product candidate. We may obtain this funding by a variety of means in the future, including through debt and equity financings and strategic partnering arrangements and collaborations.

We have never declared or paid any cash dividends on our capital stock. Upon effectiveness of this offering, all issued and outstanding shares of our preferred stock will automatically convert into shares of common stock. Pursuant to the terms of our preferred stock each holder has the right to receive payment of all accrued but unpaid dividends in the form of common stock or cash. All but two holders of our preferred stock have elected to receive their dividend in the form of common stock. We expect to pay a cash dividend in an aggregate of $18,007 to the holders that have elected to receive their dividends in the form of cash. Following the completion of this offering and except for the one-time dividend payment to certain preferred holders, we anticipate that any earnings will be retained for development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future on our common stock. Our Board of Directors has sole discretion to pay cash dividends based on our financial condition, results of operation, capital requirements, contractual obligations and other relevant factors. In the future, we may also obtain loans or other credit facilities that may restrict our ability to declare or pay dividends.

The following table sets forth our capitalization as of September 30, 2006:

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and with the sections of this prospectus entitled “Use of Proceeds,” “Description of Capital Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The above table does not include:

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. We calculate net tangible book value per share by calculating the total assets less intangible assets and total liabilities, and dividing it by the number of outstanding shares of common stock.

After giving effect to the sale of shares of common stock at an assumed initial public offering price of $15.00 per share (less estimated underwriting discounts and commissions and estimated expenses), our pro forma net tangible book value as of September 30, 2006 would have been $7,625,000, or $0.39 per share. This represents an immediate increase in the pro forma as adjusted net tangible book value of $2.62 per share to existing stockholders and an immediate dilution of $11.99 per share to you, as illustrated in the following table:

If the underwriters exercise their option to purchase additional shares of our common stock in full, the pro forma net tangible book value per share after the offering would be $3.33 per share, the increase per share to existing stockholders would be $2.94 per share and the dilution to new investors would be $11.67 per share.

The following table shows on a pro forma basis at September 30, 2006, the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

You will experience additional dilution upon exercise of outstanding options. See “Management — 1997 Stock Option Plan” and “Management — 2006 Equity Incentive Plan.”

The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2003, 2004 and 2005 and the selected consolidated balance sheets data as of December 31, 2004 and 2005 and September 30, 2006 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended September 30, 2006 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2001 and 2002 and the selected consolidated balance sheets data as of December 31, 2001, 2002 and 2003 are derived from audited consolidated financial statements not included in this prospectus. The selected consolidated statements of operations data for the nine months ended September 30, 2005 is derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of results to be expected in any future period.

 

footnotes on following page

 

When you read this section of this prospectus, it is important that you also read the financial statements and related notes included elsewhere in this prospectus. This section of this prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the factors described below and in the “Risk Factors” section of this prospectus.

We are a development stage biopharmaceutical company that commenced operations in 1997. We specialize in the emerging field of molecular medicine, applying advancements in the identification and targeting of disease at the molecular level to advance patient healthcare by addressing significant unmet needs. We focus on discovering, developing and commercializing innovative and targeted radiotherapeutics and molecular imaging pharmaceuticals with initial applications in the areas of oncology and cardiology. We have devoted substantially all of our efforts towards the research and development of our product candidates. We have had no revenue from product sales and have funded our operations through the private placement of equity securities, debt financings and government grant funding. We have never been profitable and have incurred an accumulated deficit during the development stage of $77 million from inception through September 30, 2006.

We expect to incur significant operating losses for the next several years. Research and development expenses relating to our clinical and pre-clinical product candidates will continue to increase. In particular, we expect to incur increased development costs in connection with our ongoing and expected clinical trials for Azedra, Onalta and Zemiva. We expect general and administrative expense to increase as we prepare for the commercialization of our product candidates and as we begin to operate as a public company.

Revenue—Research and Development Grants.  Our revenue to date has been derived from National Institutes of Health, or NIH, grants. We have not had any product sales and do not expect product sales in the near future. In the future, we expect our revenue to consist of product sales and payments from collaborative or strategic relationships, as well as from additional grants.

Research and Development Expense.  Research and development expense consists of expenses incurred in developing and testing product candidates. These expenses consist primarily of salaries and related expenses for employees, as well as fees for consultants engaged in research and development activities, fees paid to professional service providers for monitoring our clinical trials and for acquiring and evaluating clinical trial data, costs of contract manufacturing services and materials used in clinical trials, depreciation of capital resources used to develop our product candidates and facilities costs. We expense research and development costs as incurred. Certain research and development activities are partially funded by NIH grants described above. All costs related to such grants are included in research and development costs. We believe that significant investment in product development is necessary and plan to continue these investments as we seek to develop our product candidates and proprietary technologies.

For the periods indicated, research and development expenses for our programs in the development of Azedra, Zemiva and our other platform and general R&D programs were as follows (in thousands):

We in-licensed Onalta and Solazed in November 2006 and January 2007, respectively. Therefore, for the periods indicated above, we had no research and development expenses for the development of Onalta and Solazed.

We do not know if we will be successful in developing our drug candidates. While we expect that expenses associated with the completion of our current clinical programs would be substantial, we believe that such expenses are not reasonably certain. The timing and amount of these expenses will depend upon the costs associated with potential future clinical trials of our drug candidates, and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing costs, many of which cannot be determined with accuracy at this time based on our stage of development. This is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of unanticipated events arising during clinical development, including with respect to:

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals and the expense of filing, prosecuting, defending or enforcing any patent claims or other intellectual property rights. In addition, we may obtain unexpected or unfavorable results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some drug candidates or focus on others. A change in the outcome of any of the foregoing variables in the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in any of our clinical trials, we would be required to expend significant additional financial resources and time on the completion of clinical development. Additionally, future commercial and regulatory factors beyond our control will evolve and therefore impact our clinical development programs and plans over time.

Despite this uncertainty, however, our development strategy for our lead clinical-stage drug candidates, Azedra, Onalta and Zemiva is currently based on a number of assumptions that allow us to make broad estimates of certain clinical trial expenses. For Azedra, one of our lead radiotherapeutic product candidates under development for the treatment for cancer, we expect to initiate a Phase 1/2 safety, dose ranging and efficacy clinical trial in adults in the first half of 2007 and if results are positive, we believe that the resulting data together with data from our previous clinical trials will provide a basis for us to file for regulatory approval in the United States. For Onalta, our other lead radiotherapeutic product candidate under development for the treatment of cancer, we are currently in discussions with the FDA regarding further clinical studies. For Zemiva, our lead molecular imaging pharmaceutical product

candidate under development for the diagnosis of cardiac ischemia, or insufficient blood flow to the heart, we expect to finish our Zemiva Phase 2 Normals study and begin a pivotal Phase 2 study in the first half of 2007. If successful we will begin a similar size confirmatory Phase 3 registration trial. We expect the cost to complete clinical trials and their related costs necessary for FDA approval of our drug candidates, to be in the range of $100 to $160 million (exclusive of our overall costs of operations and without giving effect to the proceeds raised in this offering or potential revenues generated from commercialization of our first product candidate). To date, we have not entered into any collaboration with a strategic corporate partner for the development of any of our drug candidates, and unless we do so in the future, we expect to internally finance all clinical development of these candidates. We do not expect to receive regulatory approval of any of our drug candidates until 2009 or 2010 at the earliest, if at all.

Beyond our three lead drug candidates, we anticipate that we will select drug candidates and research projects for further development on an ongoing basis in response to the preclinical and clinical success, as well as the commercial potential of such drug candidates.

General and Administrative Expense.  General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology and human resource functions. Other costs include facility costs not otherwise included in research and development expense, legal fees relating to patent and corporate matters and fees for accounting services.

Costs Related to Delays in Initial Public Offering.  We expensed the costs associated with the initial filing of our registration statement on Form S-1. Our initial public offering was delayed for a period in excess of 90 days, and as a result it was deemed an aborted offering in accordance with Staff Accounting Bulletin Topic 5A. These costs which total $2.2 million and $720,000 are included in general and administrative expenses in the Statements of Operations for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively. We have capitalized costs associated with our subsequent offering process as of September 30, 2006.

Stock-Based Compensation Expense.  Operating expenses include stock-based compensation expense. Stock-based compensation expense results from the issuance of stock-based awards, such as options and restricted stock to employees, members of our Board of Directors and consultants in lieu of cash consideration for services received. Prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R) Share-Based Payment, we used the intrinsic value method of accounting for awards to employees and members of our Board of Directors and the fair value method for nonemployees in accordance with SFAS No. 123 Accounting for Stock-Based Compensation and Emerging Issues Task Force “EITF” Issue No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. On January 1, 2006 we adopted SFAS No. 123(R) to account for stock-based awards. We use the fair value method of accounting for all other awards. Compensation expense for options and restricted stock granted to employees and nonemployees is classified either as research and development expense or general and administrative expense based on the job function of the individual receiving the grant. See discussion under “Critical Accounting Policies and Estimates — Stock-Based Compensation.”

Other (Expense) Income, Net.  Other (expense) income, net includes interest income and interest expense. Interest income consists of interest earned on our cash, cash equivalents and short-term investments. Interest expense consists of interest incurred on equipment leases and on debt instruments.

Redeemable Convertible Preferred Stock Dividends and Accretion of Issuance Costs.  Redeemable convertible preferred stock dividends and accretion of issuance costs consists of cumulative, undeclared dividends payable on the securities and accretion of the issuance costs and costs allocated to issued warrants to purchase common stock. The issuance costs on these shares and warrants were recorded as a reduction to the carrying value of the redeemable convertible preferred stock when issued, and are accreted to redeemable convertible preferred stock using the interest method through the earliest

redemption dates of each series of redeemable convertible preferred stock (A, B and C) by a charge to additional paid-in capital and net loss attributable to common stockholders. Upon the completion of this offering, the redeemable convertible preferred stock automatically converts into common stock on a 33-for-1 basis and the cumulative but unpaid dividends are either convertible into common stock (based upon formulas established at each issuance date of the securities) or payable in cash (at the accrued amount), at the election of each holder of the redeemable convertible preferred stock. Accordingly, upon completion of this offering, we will no longer record dividends and accretion on the redeemable convertible preferred stock.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Expenses.  As part of the process of preparing consolidated financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of services performed and the associated cost incurred for such services as of each balance sheet date in our consolidated financial statements. Examples of estimated expenses for which we accrue include: professional service fees, such as legal and accounting fees; contract service fees, such as fees paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials; fees paid to contract manufacturers in conjunction with the production of clinical materials; and employee bonuses. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs which have begun to be incurred, or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. Determining the date on which certain services commence, the level of services performed on or before a given date and the cost of such services often involves judgment. We make these judgments in accordance with GAAP based upon the facts and circumstances known to us.

We attempt to mitigate the risk of inaccurate estimates, in part, by communicating with our service providers when other evidence of costs incurred is unavailable.

Stock-Based Compensation.  We issue stock awards such as options and restricted stock to employees, members of our Board of Directors and consultants for incentive purposes and in lieu of cash consideration for services received. Prior to the adoption of SFAS No. 123(R), we used the intrinsic value method of accounting for awards to employees and members of our Board of Directors. Under the intrinsic value method, all terms are fixed, the measurement date is the date of grant. Stock-based compensation to the extent the fair value of our common stock exceeds the exercise price of stock options granted to employees on the measurement date is recorded as deferred stock-based compensation in the equity section of the consolidated balance sheets and is amortized on a straight-line basis over the vesting period of the awards, typically four years, in the consolidated statement of operations.

In the notes to our consolidated financial statements, we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.

On January 1, 2006 we adopted SFAS No. 123(R) to account for stock-based awards. We historically have not recorded stock-based compensation expense for stock awards issued to employees with fixed terms and with exercise prices at least equal to the fair value of the underlying common stock on the measurement date. Effective January 1, 2006, we began recording compensation costs over the vesting period for the unvested portion of the other awards issued after being considered a public company, which would include awards granted after November 8, 2005, using the grant date fair value. We will continue to record compensation cost on awards issued prior to this date following the provisions of APB Opinion No. 25, i.e. the prospective transition method under SFAS No. 123(R) for the awards granted while not a public company. Compensation cost for awards granted after January 1, 2006 will be accounted for under the fair value method and recognized over the requisite service period.

We use the fair value method of accounting for all other awards. For stock options granted to nonemployees, the fair value of the stock options is estimated using the Black-Scholes valuation model. This model utilizes the estimated fair value of the common stock and requires that, at the measurement date of the award, which is usually the date services are completed, we make assumptions with respect to the expected life of the option, the volatility of the fair value of the common stock, risk free interest rates and expected dividend yields of our common stock. Higher estimates of volatility and expected life of the option increase the value of an option and the resulting expense. Stock-based compensation computed on awards to nonemployees is recognized over the period of expected service by the nonemployee (which is generally the vesting period). As the service is performed, we are required to update these assumptions and periodically revalue unvested options and make adjustments to the stock-based compensation expense using the new valuation. These adjustments have resulted in stock-based compensation expense in addition to the amount originally estimated or recorded as the deemed fair value of our stock has increased over the last two years, with a corresponding increase in compensation expense in the consolidated statements of operations in the periods of re-measurement. Ultimately, the final compensation charge for each option grant to nonemployees is unknown until the performance of services is completed. We account for transactions in which services are received in exchange for equity instruments based either on the fair value of such services received from nonemployees or of the equity instruments issued, whichever is more reliably measured. The two factors which most effect charges or credits to operations related to stock-based compensation for nonemployee awards are the fair value of the common stock underlying stock options for which such stock-based compensation is recorded and the volatility of such fair value.

The following table summarizes equity instruments granted January 1, 2004 through September 30, 2006 with our Board of Directors’ determined fair value of common stock on those dates:

In determining the exercise prices for awards and options granted, our Board of Directors has considered the fair value of the common stock as of the measurement date. The fair value of the common stock has been determined by our Board of Directors after considering a broad range of factors including, but not limited to, the illiquid nature of an investment in common stock, our historical financial performance and financial position, our significant accomplishments and future prospects, opportunity for liquidity events and recent sale and offer prices of the common and redeemable convertible preferred stock in private transactions negotiated at arm’s length.

Some of the specific factors considered by our Board of Directors in determining the fair value of our common stock of $1.68 per share during 2004 included the $3.96 per share offering price of our last round of Series B convertible preferred stock financing in March 2004; the uncertainty of obtaining the necessary capital to continue our research and development efforts; reliance of our business on a single product candidate; the absence of a fully developed management team; difficulties in identifying and attracting key candidates for scientific and management positions given the uncertainty surrounding our viability as an ongoing enterprise; and significant risks surrounding the early clinical trials of Zemiva.

In determining the $3.24 per share fair value of our common stock for the period January 1, 2005, through July 1, 2005, our Board of Directors took into account a number of significant milestones achieved by us since the previous $1.68 per share valuation of the common stock. These include the completion of our Series C convertible preferred stock financing in the first half of 2005; the completion of the Phase 2a clinical trials for Zemiva; and the gradual strengthening of our management team and Board of Directors, including the hiring of our Vice President of Commercial and Business Development and our Chief Regulatory Officer.

In determining the $6.00 per share fair value of our common stock for the awards granted on September 13, 2005, our Board of Directors took into account additional significant milestones achieved by us, including the completion of a Phase 2b clinical trial for Zemiva during the first half of 2005, as well as the availability of the data produced by those trials during the third quarter of 2005 and the hiring of our Vice President of Corporate Communications, our Chief Financial Officer and our Vice President of Research.

For the awards granted on November 16, 2005, our Board of Directors determined a $7.20 per share fair value of our common stock, based upon positive meetings with the FDA regarding Azedra and submission of an application for Orphan Drug and Fast Track designations from the FDA for Azedra; and the filing of our Registration Statement on Form S-1 on November 8, 2005.

In determining the $4.80 per share fair value for our common stock for the awards granted on March 16 and May 9, 2006, our Board of Directors considered the delay in our IPO process, the potential enhanced risks of obtaining the necessary financing to fund our continued operations and the delays in both the Zemiva clinical trials and our other research and development efforts.

In the valuation of our common stock in connection with awards granted on September 30, 2006 at $5.22 per share, our Board of Directors noted the recent completion of our convertible note financing, which afforded us the required funds in the short term for continued operations, as well as positive developments in our various research and development efforts in determining an estimated fair value of $5.22 per share. These developments include the improved recruitment in our Zemiva Phase 2 Normals clinical study and initiation of our Azedra Phase 1 dosimetry study.

Since September 2006, we have made progress in our various product development efforts, including:

Through a combination of the factors elaborated above, we believe that we have positioned ourselves as a developer of an entire portfolio of interrelated, yet diverse, imaging and therapeutic pharmaceuticals. We believe that this diversity of product mix, as it evolves, may lessen the risk of setbacks in the clinical efficacy of one or more product candidates.

Beginning in September 2005, we performed valuations to provide further information for us to consider in determining the fair value of our common stock at various dates. As a result, we obtained retrospective valuations covering each of the periods during which the options shown in the above table were granted. The first of these retrospective valuations indicated that the fair value of our common stock was $1.68 per share as of December 31, 2004 and $3.24 per share as of June 30, 2005. Based on these valuations, we concluded that the per share fair value of our common stock on each measurement date in 2004 and through July 1, 2005 for measuring stock-based compensation was $1.68 and $3.24, respectively.

For the awards granted on September 13, 2005 and November 16, 2005, our Board of Directors determined, on a contemporaneous basis, the fair value of the common stock to be $6.00 and $7.20 per share, respectively. On a retrospective basis in May 2006, the Board of Directors determined a fair value for the common stock for the September 30, 2005 and December 31, 2005 periods to be $4.20 and $4.56 per share, respectively. Our Board of Directors decided to maintain the fair values previously determined because those fair values were prepared using information available at the time and were based on a reasonable approach.

For the awards granted on March 16, 2006 and May 9, 2006, our Board of Directors retrospectively determined a $4.80 per share fair value of common stock. The retrospective valuation completed in May 2006 indicated a $4.80 per share fair value for the common stock at March 31, 2006 based upon the factors above.

Our Board of Directors chose to maintain the $4.80 per share fair value for the May 9, 2006 grants given the relative similarity of the two valuation outcomes.

For awards granted on September 30, 2006, our Board of Directors determined a $5.22 per share fair value of common stock based upon the recent completion of our convertible note financing, as well as positive developments in our various research and developments efforts.

An average IPO fair value of $15.00 per share has been estimated based on the management’s discussion of possible IPO pre-money valuation ranges raised by the underwriters, noting that the mid-point of the range was $300.0 million.

The determination of the deemed fair value of our common stock has involved significant judgments, assumptions, estimates and complexities that impact the amount of deferred stock-based compensation recorded and the resulting amortization in future periods. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation expense, operating loss, net loss attributable to common stockholders and net loss per share attributable to common stockholders amounts could have been significantly different. We believe that we have used reasonable methodologies, approaches and assumptions to determine the fair value of our common stock and that stock-based deferred compensation and related amortization have been recorded properly for accounting purposes.

Income Taxes.  As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities. As a result of our historical operating losses, as of September 30, 2006, we had federal tax net operating loss carryforwards of approximately $46.0 million and research and development tax credits of $1.7 million, which expire at various dates through 2026. As of September 30, 2006 we had a deferred tax asset aggregating $23.6 million. We have recorded a full valuation allowance of these otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event that we determine in the future that we will be able to realize all or a portion of the deferred tax asset, a reduction in the deferred tax valuation allowance would increase net income or reduce the net loss in the period in which such a determination is made. The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss carryforwards and credits available to be used in any given year in the event of significant changes in ownership interest, as defined. The amount of the net operating loss carryforwards that may be utilized to offset future taxable income, when earned, may be subject to certain limitations, based upon changes in the ownership of our stock that have and/or may occur. We have not conducted an evaluation as to whether any portion of our tax loss carryforwards have been limited, and therefore, based upon the changes in ownership, a limitation may have occurred.

Revenue — Research and Development Grants.  Revenue decreased by $475,000, or 70%, to $206,000 for the nine months ended September 30, 2006 from $681,000 for the nine months ended September 30, 2005. During each of the 2006 and 2005 periods we received funding under eight grants with the majority of effort and reimbursable expenses incurred in the 2005 period.

Research and Development Expense.  Research and development expense increased $5.4 million, or 86%, to $11.7 million for the nine months ended September 30, 2006 from $6.3 million for the nine months ended September 30, 2005. The nine months ended September 30, 2006 included $2.4 million of costs for the Zemiva Normals and Azedra dosimetry clinical trials as well as $1.6 million of costs for manufacturing set-up for future Zemiva and Azedra clinical trials, while the nine months ended September 30, 2005, included Phase 2b Zemiva clinical trial costs in the first half of 2005. Also contributing to the increase, was $1.4 million in additional compensation related expense in the 2006 period compared to the 2005 period due to growth in personnel hired in the second half of 2005 outstanding for the full nine months in 2006. Stock-based compensation expense decreased by $47,000 to $92,000 in the 2006 period from $139,000 in the 2005 period.

As clinical sites are initiated and patients are enrolled in our clinical programs, we anticipate incurring increased costs from professional service firms helping to support the clinical program by performing independent clinical monitoring, data acquisition and data evaluation. We also anticipate incurring increased costs related to hiring of additional research and development and clinical personnel and increased costs associated with production and distribution of clinical trial material. We also expect that our research and development expense will increase as we pursue the identification and development of other product candidates, which we plan to fund through our own resources or through strategic collaborations.

General and Administrative Expense.  General and administrative expense increased $1.4 million, or 23%, to $7.4 million for the nine months ended September 30, 2006 from $6.0 million for the nine months ended September 30, 2005. Of the increase, $506,000 resulted primarily from compensation expenses related to our growth in administrative headcount as personnel hired in the second half of 2005 were outstanding for the full nine months in 2006. Legal costs increased $210,000 resulting primarily from legal fees associated with patent applications and patent management, offset in part by a decrease in stockholder litigation and general corporate representation. Board of Director and Scientific Advisory Board costs and corporate communications increased $290,000 during 2006 over 2005. Stock-based compensation decreased $643,000 to $1.3 million in the 2006 period compared to $1.9 million in the 2005 period, due primarily to decrease in the estimated fair value of our stock price in 2006. During 2005, we experienced a rise in our common stock fair value which increased costs associated with certain awards subject to variable accounting treatment. The 2006 period decrease in stock-based compensation was offset in part by adoption of SFAS No. 123(R), which resulted in an increase of $127,000.

After completing this offering, we anticipate greater general and administrative expenses, such as additional costs for investor relations, increased costs for Sarbanes-Oxley compliance and other activities associated with operating as a publicly-traded company. These increases will also likely include the hiring of additional finance and administrative personnel. We expect to continue to incur greater internal and external business development costs to support our various product development efforts, which can vary from period to period.

Other (Expense) Income, Net.  Other (expense) income, net decreased $378,000 to ($93,000) for the nine months ended September 30, 2006 from net other income of $285,000 for the nine months ended September 30, 2005. During the nine months ended September 30, 2006 and 2005, interest income was $301,000 and $300,000, respectively, and other interest expense was $394,000 and $15,000,

respectively. The increase in interest expense for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to interest expense on the note issued to Ritchie Debt Acquisition Fund Ltd., or the Ritchie Note.

Redeemable Convertible Preferred Stock Dividends and Accretion of Issuance Costs.  Redeemable convertible preferred stock dividends and accretion of issuance costs increased to $2.9 million for the nine months ended September 30, 2006 from $2.8 million for the nine months ended September 30, 2005. This slight increase was attributable to Series C outstanding for the entire nine months in 2006 compared to only six months in the 2005 period. A 2005 period special dividend related to the nine months ending September 30, 2005 was accrued and largely contributed to the 2005 dividend amount. Upon completion of this offering no redeemable convertible preferred stock will be outstanding, and, accordingly, there will be no further accrual of dividends or accretion of issuance costs on these shares after completion of a public offering and the required conversion.

Revenue — Research and Development Grants.  Revenue increased $631,000, or 111%, to $1.2 million for the year ended December 31, 2005 from $569,000 for the year ended December 31, 2004. During 2005 and 2004, we received funding under eight grants, however, the majority of effort and reimbursable expenses were incurred in 2005.

Research and Development Expense.  Research and development expense increased $3.5 million, or 65%, to $8.9 million for the year ended December 31, 2005 from $5.4 million for the year ended December 31, 2004. The year ended December 31, 2004 included the Phase 2a Zemiva clinical trial costs, while the year ended December 31, 2005 included costs for the Phase 2b Zemiva clinical trial which began in the second half of 2004 and continued through the first half of 2005. The Phase 2b Zemiva clinical trial enrolled a greater number of patients, resulting in an increase of approximately $745,000 from the 2004 to the 2005 period. Also contributing to the increase was the growth in the number of research and development personnel, which resulted in $1.8 million of additional compensation expense in the 2005 period relative to the 2004 period. Stock-based compensation contributed to a lesser extent to the increase, increasing by $182,000 to $230,000 in the 2005 period from $48,000 in the 2004 period.

General and Administrative Expense.  General and administrative expense increased $7.5 million, or 214%, to $11 million for the year ended December 31, 2005 from $3.5 million for the year ended December 31, 2004. Costs associated with our postponed initial public offering totaled $2.2 million for the year ended December 31, 2005. Also contributing to the increase was growth in administrative headcount from five to 10 personnel, which amounted to $900,000 of additional expense from 2004 to 2005. A $593,000 increase in legal costs resulted primarily from legal fees associated with stockholder litigation, patent applications, patent management and general corporate representation. Marketing costs increased $549,000 during 2005 over 2004 for costs associated primarily with market research for the Zemiva program. Stock-based compensation increased $2.3 million to $2.6 million in 2005 increasing from $311,000 in 2004, due primarily to the effect of an increase in the fair value of our common stock on awards subject to variable accounting treatment.

Other (Expense) Income, Net.  Other income, net increased $332,000 to $348,000 for the year ended December 31, 2005 from $16,000 for the year ended December 31, 2004. During the year ended December 31, 2005 and 2004, interest income was $489,000 and $20,000, respectively, and other interest expense was $141,000 and $3,000, respectively. The increase in interest income for the year ended December 31, 2005 compared to the twelve months ended December 31, 2004 was primarily due to increased yields on investments resulting from greater average cash balances available for investment as a result of the sales of Series C redeemable convertible preferred stock in March and April of 2005 and the Ritchie Note at September 30, 2005. The increase in interest expense for the year ended December 31, 2005 compared to the year ended December 31, 2004 was primarily due to interest expense on the Ritchie Note.

Redeemable Convertible Preferred Stock Dividends and Accretion of Issuance Cost.  Redeemable convertible preferred stock dividends and accretion of issuance costs increased to $4.0 million for the year ended December 31, 2005 from $1.3 million for the year ended December 31, 2004. This increase was attributable to Series B redeemable convertible preferred stock outstanding for 2005 plus the Series C redeemable convertible preferred stock outstanding after the first quarter of 2005. Also contributing to the increase in 2005 was a special dividend accrued related to the Series A redeemable convertible preferred stock in February 2005. Upon completion of this offering no redeemable convertible preferred stock will be outstanding, and, accordingly, there will be no further accrual of dividends or accretion of issuance costs on these shares after completion of a public offering and the required conversion.

Revenue — Research and Development Grants.  Revenue decreased $154,000 or 21% to $569,000 for 2004 from $723,000 for 2003. During 2004 and 2003 we received funding under eight and six grants, respectively, with the majority of reimbursable expenses recorded in 2003.

Research and Development Expense.  Research and development expense increased $2.6 million, or 93%, to $5.4 million for 2004 from $2.8 million for 2003. The increase resulted primarily from Phase 2b clinical trial costs for Zemiva. The Phase 2a clinical trial was completed in the first quarter of 2003 and the Phase 2b clinical trial, which commenced in the second half of 2004, had greater than three times the number of patients (105 versus 32) and greater than twice as many sites (10 versus 4) than the Phase 2a clinical trial. Clinical trial costs increased by $1.7 million from 2003 to 2004. Also contributing to the increase were increased consulting costs of approximately $570,000 in 2004, primarily for Zemiva, and general research and development costs. Personnel and related costs increased by $300,000 for 2004 due to an increase in staffing and bonuses. The increased costs were offset in part by a decrease in stock-based compensation of $188,000 to $48,000 for 2004 from $236,000 for 2003. In 2003 certain employees received stock in lieu of cash bonuses. The balance of our research and development expense primarily consisted of indirect costs, such as costs for facilities and depreciation, as well as preclinical evaluation of other product candidates.

As clinical sites are initiated and patients are enrolled in our clinical programs, we anticipate incurring increased costs from professional service firms helping to support the clinical program by performing independent clinical monitoring, data acquisition and data evaluation. We anticipate incurring increased costs related to hiring additional research and development and clinical personnel and increased costs associated with production and distribution of clinical trial material. We also expect that our research and development expense will increase as we pursue the identification and development of other product candidates, which we plan to fund through our own resources or through strategic collaborations.

General and Administrative Expense.  General and administrative expense for 2004 was $3.5 million compared to $1.3 million in 2003, an increase of $2.2 million or 169%. In 2004, legal costs related to stockholder litigation increased by $550,000 from 2003 and personnel costs, including bonuses increased by $560,000. Contributing to the increase were business consultant costs of $400,000, advertising, marketing studies and investor relations costs of $235,000 and accounting and auditing fees of $75,000, all of which increased for the period 2004. Stock-based compensation contributed to the increase to a lesser extent, with an increase of $54,000 to $311,000 in 2004 from $257,000 in 2003.

After completing this offering, we anticipate higher general and administrative expenses, such as increased costs for investor relations, Sarbanes-Oxley compliance and other activities associated with operating as a publicly-traded company. These increases will also likely include the hiring of additional personnel. We intend to continue to incur greater internal and external business development costs to support our various product development efforts, which can vary from period to period.

Other (Expense) Income, Net.  Other income, net increased to $16,000 for 2004 from a net expense of $30,000 for 2003. During 2004 and 2003, interest income was $20,000 and $1,000, respectively, and interest expense was $3,000 and $3,000, respectively. The increase in interest income for 2004 compared to 2003 was primarily due to greater average cash balances available for investment, due to the sales of Series B redeemable convertible preferred stock. The decrease in interest expense was due to a decrease in indebtedness as a result of the conversion of promissory notes to Series B redeemable convertible stock.

Redeemable Convertible Preferred Stock Dividends and Accretion of Issuance Costs.  Redeemable convertible preferred stock dividends and accretion of issuance costs increased to $1.3 million for 2004 and $613,000 for 2003. This increase is the result of the accrual of dividends on the Series B redeemable convertible preferred stock issued in 2004. Upon completion of this offering, no redeemable convertible preferred stock will be outstanding, and, accordingly, there will be no further accrual of dividends and accretion issuance costs on these shares.

Historically, we have financed our business primarily through the issuance of equity securities, revenues from government grants, debt financings and equipment leases. Through September 30, 2006, we had received net cash proceeds of $49.3 million from the issuance of shares of preferred and common stock, $15.0 million from issuance of convertible notes payable, $5.0 million from a note payable, and $4.3 million from government grants. At September 30, 2006, we had $16.3 million in cash and cash equivalents available to finance future operations. Our cash and cash equivalents are held at two financial institutions to reduce our concentration risk. Management believes that the financial institutions it uses are of high credit quality. Since our inception, we have generated significant operating losses in developing our product candidates. Accordingly, we have historically used cash in our operating activities, and for the nine months ending September 30, 2006 we used approximately $15.4 million to fund these activities. As we continue to develop our product candidates and begin to incur increased sales and marketing costs related to commercialization of our future products, we expect to incur additional operating losses until such time, if any, as our efforts result in commercially viable products.

Based on our operating plans, we believe that the expected proceeds from this offering, together with our existing cash resources and government grant funding, will be sufficient to finance our planned operations through the second half of 2008. However, over the next several years, we will require significant additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals and, subject to such approvals, commercially launch Azedra, Onalta and Zemiva. Our future capital requirements will depend on many factors, including the scope of progress made in our research and development activities and our clinical trials. We may also need additional funds for possible future strategic acquisitions of businesses, products or technologies complementary to our business. If additional funds are required, we may raise such funds from time to time through public or private sales of equity or from borrowings. Financing may not be available to us on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition and results of operations. If available, additional equity financing may be dilutive to holders of our common stock and debt financing may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

Net cash used in operating activities increased by $5.7 million to $15.4 million for the nine months ended September 30, 2006 compared to $9.7 million for the same period in 2005. The increase in cash used was due primarily to an increase in the net loss of $7.5 million primarily related to expenditures on Zemiva and Azedra clinical trials and manufacturing. Net cash provided by investing activities increased by $20.9 million to $12.0 million for the nine months ended September 30, 2006 compared to $8.9 million used for the same period in 2005. This increase was due to the maturity of investments

during the nine months ended September 30, 2006. Net cash provided by the financing activities decreased by $17.5 million to $13.9 million for the nine months ended September 30, 2006 compared to $31.4 million for the same period in 2005. The primarily reason for the decrease was due to proceeds from Series C redeemable preferred stock in the nine months ended September 30, 2005. In the nine months ended September 30, 2006 we received proceeds of $15 million from the issuance a convertible note and to offset these proceeds, payments of $1.1 million for the payment of notes payable and $202,000 for offering costs.

Net cash used in operating activities increased by $8.0 million to $14.2 million for the year ended December 31, 2005 compared to $6.2 million for the year ended December 31, 2004. The increase in cash used was due primarily to an increase in the net loss of $10.0 million primarily related to expenditures on the Phase 2b clinical trial for Zemiva. Net cash used by investing activities increased $12.6 million to $12.8 million for the year ended December 31, 2005 compared to $203,000 for the same period in 2004. This increase was due to the purchase of investments from funds raised in financing activities. Net cash provided by financing activities increased by $26.5 million to $32.0 million for the year ended December 31, 2005 compared to $5.5 million for the same period in 2004. In the year ended December 31, 2005, we raised $26.4 million from the issuance of Series C redeemable convertible preferred stock, and in 2004, we raised $4.7 million from the issuance of Series B redeemable convertible preferred stock, all net of expenses incurred. Also during the year ended December 31, 2005, we received $5.4 million from the issuance of notes payable.

Net cash used in operating activities increased $3.2 million from $3.0 million for 2003 to $6.2 million for 2004. This increase in cash used in operations is due primarily to the significant increase in clinical trial activity surrounding Zemiva. Net cash used by investing activities increased by $177,000, from $26,000 in 2003 to $203,000 in 2004. Net cash used in investing activities in 2003 was primarily for office leasehold improvements and the purchase of property and equipment. In 2004 net cash used in investing activities was primarily for expansion of research facilities and the purchase of property and equipment. Net cash provided by financing activities increased by $756,000, from $4.8 million in 2003 to $5.5 million in 2004. In 2004, we raised $4.7 million in Series B redeemable convertible preferred stock, received $250,000 in cash from the sale of common stock and warrants and issued $700,000 in promissory notes. In 2003, we received proceeds of $2.7 million from the issuance of Series A redeemable convertible preferred stock and $2.1 million in advances for Series B stock subscriptions.

The following table summarizes our outstanding contractual obligations as of December 31, 2005:

 

On September 28, 2006, we issued convertible notes in the amount of $15.4 million. The convertible notes are due three years from the date of issuance and bear interest at a rate of 8% per annum.

Our commitments under operating leases consist of payments relating to our real estate leases in Cambridge, Massachusetts, expiring in 2008. The commitments are $94,000, $377,000 and $188,000 for the years 2006 (balance of year), 2007 and 2008, respectively.

We had no capital leases as of September 30, 2006.

On September 28, 2006, we executed agreements to issue convertible notes in the amount of $15.4 million with detachable warrants with existing shareholders and new third parties. The convertible notes are due three years from the date of issuance and bear an interest rate of eight percent (8%) per annum. The interest is compounded quarterly and calculated on the basis of actual days elapsed based upon a 365-day year. Interest is payable on the maturity date. A beneficial conversion charge will not initially be recognized as the conversion price exceeded the current stock value at the date the convertible notes were issued. The detachable warrants issued with the convertible notes were valued under a Black-Scholes model using a volatility factor of 64.92%, which resulted in a debt discount of approximately $954,758. The discount was added to paid-in capital and amortized over the life of the convertible notes as additional interest expense. In the event that a Qualified Public Offering, as defined, is completed on or prior to the maturity date or at any time such convertible notes are outstanding, at the election of the holder the full outstanding principal amount of these convertible notes plus accrued but unpaid interest will automatically be converted into that number of fully paid, validly issued and non-assessable shares of our common stock obtained by dividing (i) the principal and all accrued interest at maturity date by (ii) $7.80. This number is subject to equitable adjustment in the event of a stock split, subdivision, reclassification or other similar transaction. No fractional shares of common stock will be issued upon conversion of the convertible notes, but a cash payment will be made with respect to any fraction of a share which would otherwise be issued upon the surrender of the convertible notes, or portion thereof, for conversion. Such payment shall be based upon the applicable conversion price per share.

In December 2004, we issued an unsecured convertible promissory note for $700,000, due one year from the date of issuance, at an annual rate of 3%. In 2005, the principal balance of $700,000 plus accrued interest of $6,000 were converted into 3,493 shares of Series C redeemable convertible preferred stock. On September 30, 2005, we issued a $5.0 million note payable to Ritchie Multi-Strategy Global, LLC (Ritchie) pursuant to a Loan and Security Agreement (Ritchie Note), to be used for working capital and general corporate activities. The Ritchie Note is secured by a first priority security interest in our assets, excluding intellectual property and contains non-financial covenants. We are required to pay interest only during the first three months of the term of the Ritchie Note, and, thereafter, the principal and interest is payable in equal monthly amounts over 35 months. The interest rate of the debt is 7.93%. In addition, as a condition to Ritchie extending the credit we agreed to pay a fee to Ritchie in the amount of $300,000 should a liquidation event occur. A liquidation event is defined in the agreement as including, among other things, a change in control, a sale of all or substantially all of our assets or an initial public offering of our common stock.

Other than the operating leases for our office, pilot manufacturing and laboratory space, we do not engage in off-balance sheet financing arrangements.

We have entered into three agreements with MDS Nordion, a division of MDS (Canada). The first Nordion agreement is a process development and manufacturing agreement to develop a facility for the cGMP manufacture of our cardiology product, Zemiva, and to supply Zemiva during the clinical trials process. The second Nordion agreement is a supply agreement for expanded production and supply of Zemiva to us during the clinical trials and thereafter for commercial production of Zemiva. The third Nordion agreement is a development agreement to establish a suitable dose configuration and batch process to support clinical trials of our oncology product Azedra.

Pursuant to the first Nordion agreement, Nordion has a manufacturing facility at its premises in Vancouver, British Columbia, which is to be used for the production and supply of Zemiva during our clinical trials. An expanded facility contemplated by this agreement is to be owned by Nordion, and is to be used for the production and supply of Zemiva on a priority basis. We were obligated to pay a facility fee upon execution of the first Nordion agreement. We are also obliged to make milestones payments for various phases of the process development. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $999,000. A percentage of each milestone payment was due upon execution of the agreement, another percentage is due upon commencement of the milestone, and the remainder of each milestone payment is due upon completion of the milestone. As of September 30, 2006, we had made aggregate payments under this agreement in the amount of approximately $2.1 million. The term of the first Nordion agreement initially was through 2005, but the agreement has been extended through December 31, 2007.

Pursuant to the second Nordion agreement, Nordion is constructing an expanded manufacturing facility at their premises in Vancouver, British Columbia, which, when completed, will handle the production and supply of Zemiva during the remainder of our clinical trials and, upon regulatory approval of Zemiva, during commercial production. This expanded facility is to be owned by Nordion, and is to be used exclusively for the production and supply of Zemiva to us. We are obligated to pay a monthly facility reservation fee following validation of the production capability of the facility. We are also obligated to make milestone payments for various phases of the facility construction and for process development. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total approximately $2.1 million. A percentage of each milestone payment was due upon execution of the agreement, another percentage is due upon commencement of the various phases of construction and process validation, and the remainder of each milestone payment is due upon facility commissioning and demonstration of production capability. As of September 30, 2006, we had made payments under this agreement in the amount of $725,000 upon execution of the agreement. The term of the second Nordion agreement is initially through 2012, and the agreement automatically renews for six successive two-year terms.

Pursuant to the third Nordion agreement, Nordion will undertake development of a suitable dose configuration and batch process to support clinical trials of our oncology product Azedra. We are obligated to pay a facility establishment fee, and to make various payments for certain phases of the development project. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $750,000. As of September 30, 2006, we had made payments totaling $593,000 under this agreement. The term of the third Nordion agreement is through completion of the development process or through March 22, 2007, whichever occurs earlier.

We have entered into a license agreement with Novartis Pharma AG. This agreement relates to certain aspects of our oncology product candidate Onalta.

Pursuant to the Novartis Agreement, we have licensed, on a worldwide basis in the field of oncology, the nonexclusive rights for certain radiolabeled somatostatin analogs and the exclusive rights to the particular somatostatin analog compound edotreotide. We have also been granted an exclusive license to know-how related to the manufacture and use of this compound, further including rights to all information and the right to sponsor and conduct, on a going-forward basis, Novartis’ clinical trial applications relating to edotreotide. Pursuant to this agreement, we also have exclusive worldwide rights to the Novartis trademark OctreoTher for edotreotide, but we have the discretionary right to rebrand and market edotreotide with our proprietary trademark. We have the ability to sublicense our rights under this agreement. We also have the right to enforce the patent rights, secondary to Novartis’ rights to bring such enforcement. In exchange for these exclusive rights, we are obligated to pay a royalty on net sales of the product, for the life of the patents or alternatively for a term following first commercial sale, whichever is longer. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $4.6 million. We are also obligated to pay milestone payments upon the attainment of certain approvals in the regulatory process. Milestone payments are partially creditable against future royalty payments. Novartis has retained a one-time call-back option under this agreement to reacquire rights in the compound if annual sales exceed a threshold level. If Novartis does not exercise this call back option, then additional milestone payments will be due from us upon attainment of certain targets for net sales of product. As of September 30, 2006, we have made no payments under this license. The term of this agreement is ten years following the latter of either first commercial sale of edotreotide, or the expiration of the patents. After the expiration of this ten year period, the license becomes a perpetual, fully paid, nonexclusive and transferable worldwide license as to any know-how then existing, as well as to the trademark OctreoTher.

We have entered into three license agreements with Georgetown University, with Johns Hopkins University also participating jointly in one such license. These agreements pertain to certain aspects of our oncology product candidate MIP-220 and our neurology product candidate MIP-170.

The first Georgetown license agreement relates to our product candidate MIP-220, a prostate specific membrane antigen, or PSMA, inhibitor, for the detection and monitoring of prostate cancer. Pursuant to the first Georgetown license agreement, we license on an exclusive basis in the field of imaging applications the rights to certain compounds that bind to proteins found on prostate cancers. MIP-220 is the lead compound under development in this series of compounds. We have the right to sublicense this agreement. We also have the right to enforce the patent rights, and are under an obligation to maintain them. In exchange for these exclusive rights, we are obligated to pay a royalty on net sales of MIP-220, for the term of the patent rights, with a reduction in royalties following expiration or invalidation of the patent rights. We are also obligated to pay milestone payments upon the attainment of certain approvals in the regulatory process for MIP-220. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $800,000 for the first licensed product and $250,000 for subsequent licensed products. Such milestone payments may be reduced for subsequent NDAs submitted for new uses of MIP-220, and these milestone payments are creditable against future earned royalty payments. As of September 30, 2006, we had made no payments under this license. The term of this agreement is ten years following the latter of either first commercial sale of MIP-220, or expiration of the patents, after which time the license becomes a fully paid nonexclusive license. We also have the right to terminate this license in our discretion, upon providing 90 days written notice.

The second Georgetown license agreement was jointly executed with Johns Hopkins University, and it also relates to our product candidate MIP-220, addressing methods of using MIP-220 in radioimaging

applications. Pursuant to the second Georgetown license agreement, we license on an exclusive basis, for diagnostic imaging and radiotherapeutic applications, the rights to use certain compounds that bind to the protein NAALADase and PSMA. We have the right to sublicense this agreement. We also have the right to enforce the patent rights, and are under an obligation to maintain them. In exchange for these exclusive rights, we are obligated to pay royalties on net sales of MIP-220 for the term of the patent rights and on a country-by-country basis, with a reduction in royalties following expiration or invalidation of the patent rights. We are also obligated to pay a one-time license fee, an annual license maintenance fee and milestone payments upon the attainment of certain approvals in the regulatory process for MIP-220. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $825,000 for the first licensed product and $412,500 for subsequent licensed products. Such milestone payments may be reduced for subsequent NDAs submitted for new uses of MIP-220 and are creditable against annual license maintenance fees. As of September 30, 2006, we had made payments of $17,500 under this license. The term of this agreement and our obligation to pay royalties persists on a country-by-country basis until expiration of the last of the patent rights. We also have the right to terminate this license in our discretion, upon providing 90 days written notice.

The third Georgetown license agreement relates to certain aspects of our product MIP-170, a compound for the detection of Parkinson’s disease and attention deficit hyperactivity disorder, or ADHD, and imaging of dopamine-rich areas of the brain. Pursuant to the third Georgetown license agreement, we licensed, on an exclusive basis, the rights to certain piperidine analogs for the therapeutic and diagnostic uses of these compounds in substance abuse, obesity, depression, Parkinson’s disease and related neuropsychological conditions and diseases. MIP-170 is the lead compound under development in this series of piperidine analogs. We have the right to sublicense this agreement. We also have the right to enforce the patent rights, and are under an obligation to maintain them. In exchange for these exclusive rights, we are obligated to pay royalties on net sales of products for the term of the patent rights, with a reduction in royalties following expiration or invalidation of the patent rights. We are also obligated to pay an upfront license fee, a one-time reimbursement of patent costs, a one-time fee for sponsored research and milestone payments upon the attainment of certain approvals in the regulatory process. Aggregate milestone payments under this agreement, assuming all milestones are achieved, wold total $900,000 for first licensed product and $375,000 for subsequent licensed products. Such milestone payments may be reduced for subsequent NDAs submitted for new uses of MIP-170 and are creditable against future earned royalty payments. As of September 30, 2006, we had made aggregate payments under this license in the amount of $10,000. The term of this agreement is perpetual, provided there is continued development and sales of MIP-170 or other licensed piperidine analog products.

We have entered into two license agreements with the University of Western Ontario, or UWO, both of which relate to certain aspects of our Ultratrace radiolabeling technology platform. At present, the Ultratrace technology platform is used for the production of our product candidate Azedra, our lead oncology compound for the diagnosis and treatment of neuroendocrine cancer.

Pursuant to the first UWO license agreement, we licensed, on a worldwide exclusive basis, all rights in certain radiolabeling technology and the compounds used in the radiolabeling process. We have the right to sublicense this agreement. We have the right to enforce the patent rights and are also under an obligation to maintain them and to reimburse UWO for such costs. While UWO retains the ownership of the existing patent rights, we own any improvements to the radiolabeling technology that are made by us or for us on our behalf. In exchange for these exclusive rights, we are obligated to pay a royalty on net sales of the product for the term of the patent rights. We are also obligated to pay an initial license fee and minimum annual payments for each calendar year for which we do not sponsor research in the area of radiolabeling technology. We are also obligated to pay milestone payments upon the attainment of certain approvals in the regulatory process for Azedra. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $187,500 Canadian dollars per licensed product. Such milestone payments apply only once, regardless of the number of other products

developed with the radiolabeling technology described in the patent rights. As of September 30, 2006, we had made aggregate payments under this license in the amount of $155,210. The term of this agreement is perpetual.

Pursuant to the second UWO license agreement, we licensed, on a worldwide exclusive basis, all rights in certain radiolabeling technology and the compounds used in the radiolabeling process. We have the right to sublicense this agreement. We have the right to enforce the patent rights and are also under an obligation to maintain them and to reimburse UWO for such costs. While UWO retains the ownership of the patent rights, we own any improvements to the radiolabeling technology and compounds used in the radiolabeling process that are made by us, or for us on our behalf. In exchange for these exclusive rights, we are obligated to pay a royalty on net sales of products, on a country-by-country basis for the term of the patent rights. For products developed using the Ultratrace labeling technology platform as a research tool, where the products do not themselves employ the Ultratrace technology, we are obligated to pay a royalty on net sales of these products, further including a royalty on net revenue received from third parties on a fee-for service basis for research services, and still further including a royalty on net revenue received from sales of third-party products developed using the Ultratrace labeling technology platform as a research tool, where the products do not themselves employ the Ultratrace technology and where the third party does not have a sublicense. We are also obligated to pay an initial license fee and minimum annual payments for each calendar year through 2012. We are also obligated to pay milestone payments upon the attainment of certain approvals in the regulatory process for Azedra. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $187,500 Canadian dollars per licensed product. Such milestone payments apply for each of the first products developed in each indication class: cardiology, oncology, central nervous system, infection, and vascular disease. As such, subsequently developed products for oncology applications, that employ the Ultratrace labeling process, would not be subject to milestone payments. As of September 30, 2006, we had made aggregate payments under this license in the amount of $80,855. The term of this agreement is twenty years (2023) or the expiration of patent rights on a country-by-country basis (2022-2024).

We have entered into a license agreement with Nihon Medi-Physics Co. Ltd., or Nihon, for access to its confidential clinical information relating to its Cardiodine brand I-123-BMIPP product. As of September 30, 2006, we had made no payments under this license. This information licensed from Nihon has been used in a supportive manner to advance our own I-123-BMIPP product, Zemiva, through FDA clinical trials. Pursuant to the Nihon agreement, we are obligated to pay Nihon certain royalties on net sales of Zemiva for its first indication if the use of Nihon’s clinical data enables us to omit or limit any of the clinical trial phases in the U.S. regulatory approval process for Zemiva. As of September 30, 2006, we had not yet been able to omit or limit any of the clinical trial phases for Zemiva. We may also be obligated to pay Nihon certain royalties on net sales of Zemiva for additional indications. The terms of the Nihon agreement provide that it is to remain in effect as long as we or our successors sell Zemiva in North America.

We have entered into an exclusive license agreement with McMaster University, or McMaster, for worldwide rights to a certain platform technology used for radiolabeling compounds. This technology platform is not currently used with any of our existing product candidates, but we are exploring its applicability to radiolabeling our oncology product candidates.

Pursuant to the McMaster license agreement, we have licensed on an exclusive basis for diagnostic and therapeutic applications, the rights to McMaster’s proprietary solid-phase radiolabeling methods and process intermediates. We have the right to sublicense the rights under agreement. We also have the right to enforce the patent rights, and are under an obligation to maintain them. In exchange for these exclusive rights, we are obligated to pay a royalty on net sales of any products that are radiolabeled

using this platform technology for the term of the patent rights. In the event a license to third-party patents is needed to practice this technology, a reduction in royalties due to McMaster will apply. We are obligated to pay minimum annual royalties under this license, and if the minimum annual royalties due in a particular year exceed the earned royalties for that year, we may credit such excess payment against any royalty payments due in the subsequent year. Milestone payments apply only for the first product in clinical trials for particular indications, and are due for certain stages of the regulatory process. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $575,000. As of September 30, 2006, we have made no payments under this license. The term of this agreement is through the last to expire of the patent rights. We also have the right to terminate this license in our discretion, upon providing 90 days written notice.

We have entered into a license and technology transfer agreement with Mallinckrodt, Inc. This agreement relates to our oncology product candidate Onalta, and it complements the rights obtained in our agreement with Novartis Pharma, AG, by providing manufacturing rights and production know-how for Onalta.

Pursuant to the Mallinckrodt Agreement, we have licensed on a worldwide basis, the nonexclusive rights in the field of therapeutic human oncology, certain patent rights and know-how related to radiolabeled somatostatin analogs and their manufacture, including the particular compound DOTA-Tyr³-Octreotride, or Onalta. We have the ability to sublicense our rights under this agreement, conditioned upon approval by Mallinckrodt. Under this agreement, we are obligated to make an upfront payment of $250,000, and various payments for phases in the technology transfer process. We are also obligated to make a one-time purchase of certain existing quantities of production supplies from Mallinckrodt. As of September 30, 2006, we had made no payments under this license. The term of this agreement is for as long as we manufacture and sell Onalta, on a country-by-country basis.

We have entered into a license agreement with Bayer Schering Pharma Aktiengesellschaft, or Schering. This agreement relates to our oncology product candidate Solazed.

Pursuant to the Schering Agreement, we have licensed on a worldwide basis, the exclusive rights in the field of oncology, certain patents and know-how related to a new class of benzamide compounds and their derivatives, the lead product candidate in the class being Solazed. We have an option to obtain a license to certain Schering patents and technology relating to administration of these benzamide compounds in combination with other agents to reduce the potential side effects to the human eye, from the benzamide compounds. We have the ability to sublicense our rights under this agreement. We are obligated to make an upfront payment of $1.0 million, and various payments related to the achievement of certain milestones in the clinical trial process. Aggregate milestone payments under this agreement, assuming all milestones are achieved, would total $9.0 million. We are also obligated to pay royalties on net sales of products beginning with the first commercial sale of Solazed, for the duration of the patent rights, which is in 2025. We have the right under this agreement to enforce the patents. The term of the license is on a country-by-country basis, through the last to expire of the patent rights. As of September 30, 2006, we had made no payments under this agreement.

 

The principal purposes of this offering are to obtain additional working capital, establish a public market for our common stock and facilitate our future access to public markets. We anticipate using the net proceeds of this offering to:

 

 

We may also use a portion of the net proceeds for the repayment of the remaining portion of a $5 million loan and related interest under the terms of a Loan and Security Agreement with BlueCrest Venture Finance Fund Limited, assignee of Ritchie Multi-Strategy Global, L.L.C., dated as of September 30, 2005. For a description of the terms of the loan, see “Debt” above.

 

We expect to use a portion of the net proceeds to pay to certain existing preferred stockholders a one-time cash dividend in an aggregate amount of $18,007.

 

The amounts and timing of our use of proceeds will vary depending on a number of factors, including the amount of cash generated or used by our operations, the success of our product development efforts, competitive and technological developments, and the rate of growth, if any, of our business. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, our management will have broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds of this offering in cash, cash-equivalents, money market funds or short-term interest-bearing, investment-grade securities to the extent consistent with applicable regulations. We cannot predict whether the proceeds will be invested to yield a favorable return.

 

Based on our operating plans, we believe that the proceeds from this offering, together with our existing cash resources and government grant funding will be sufficient to finance our planned operations, including increases in spending for our Azedra, Onalta and Zemiva clinical programs and for our preclinical product candidates into the second half of 2008. During the second half of 2008, we will need to raise substantial additional capital to fund our operations and to complete clinical development of our product candidates. At that time, and based on current projections which are subject to change, we expect that our current product candidates will not yet be approved by the FDA, and that Azedra will have completed a Phase 2 registrational clinical trial, Onalta will be in a Phase 2 clinical trial, and Zemiva will have completed a pivotal Phase 2 clinical trial to support registration. We project that we will require between $70 million to $100 million in additional capital to fund our operations through the commercialization of our first product candidate. We may obtain this funding by a variety of means in the future, including through debt and equity financings and strategic partnering arrangements and collaborations. Our future capital requirements will depend on many factors, including the scope of progress made in our research and development activities and our clinical trials. We may also need additional funds for possible future strategic acquisitions of businesses, products or technologies complementary to our business. If additional funds are required, we may raise such funds from time to time through public or private sales of equity or from borrowings. Financing may not be available to us on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

 

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. FIN 48 requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the “more likely than not” recognition criteria,

FIN 48 requires the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. We do not believe the effect, if any, of adopting FIN 48 will have a material impact on our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which establishes a framework for measuring fair value and expands disclosures about the use of fair value measurements and liabilities in interim and annual reporting periods subsequent to initial recognition. Prior to the issuance of SFAS 157, which emphasizes that fair value is a market-based measurement and not an entity-specific measurement, there were different definitions of fair value and limited definitions for applying those definitions in GAAP. SFAS 157 is effective for us on a prospective basis for the reporting period beginning January 1, 2008. We do not believe the effect, if any, of adopting SFAS 157 will have a material impact on our financial position and results of operations.

 

We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, with original maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in corporate debt, commercial paper and U.S. government securities with maturities of more than three months and less than a year. These securities are classified as available-for-sale and are recorded on the balance sheet at fair market value with any unrealized gains or losses reported as a separate component of stockholders’ deficit (accumulated other comprehensive loss). Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the short-term nature of these investments. In particular, as of September 30, 2006, because our available funds are invested solely in cash equivalents, our risk of loss due to changes in interest rates is not material, even if market interest rates were to increase or decrease immediately and uniformly by 10% from levels at September 30, 2006.

 

Our assets are primarily monetary, consisting largely of cash, cash equivalents and investments in debt securities with short-term maturities. Because of their liquidity, these assets are not directly affected by inflation. Due to the nature of our intellectual property, inflation is not a significant factor. Because we intend to retain and continue to use our existing equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations or cash flows. However, the effects of inflation on our expenditures, the most significant of which are for personnel (existing and new) and contract services, could increase our level of expenses and impact the rate at which we use our resources.

We are a biopharmaceutical company specializing in the emerging field of molecular medicine, applying innovations in the identification and targeting of disease at the molecular level to improve patient healthcare by addressing significant unmet needs. We are focused on discovering, developing and commercializing innovative and targeted radiotherapeutics and molecular imaging pharmaceuticals with initial applications in the areas of oncology and cardiology. Radiotherapeutics are radioactive drugs, or radiopharmaceuticals, that are systemically administered and selectively target cancer cells to deliver radiation for therapeutic benefit. This ability to selectively target cancer cells allows therapeutic radiation to be delivered to tumors while minimizing radiation exposure to normal tissues. Molecular imaging pharmaceuticals are radiopharmaceuticals that enable early detection of disease through the visualization of subtle changes in biochemical and biological processes. Our key scientists and scientific advisory board members are thought leaders in radiochemistry and together have created technological solutions to facilitate the rapid discovery and commercialization of innovative and enhanced molecular radiopharmaceuticals. We currently have two clinical-stage radiotherapeutic product candidates, Azedra and Onalta, and one clinical-stage molecular imaging pharmaceutical product candidate, Zemiva. In addition, we have a growing pipeline of product candidates resulting from application of our proprietary platform technologies to new and existing compounds. We believe that our product candidates offer significant benefits to patients, healthcare providers, and third-party payers by enabling improved diagnosis, treatment and monitoring of disease in a more cost-effective manner.

Azedra and Onalta, our lead radiotherapeutic product candidates under development for the treatment of cancer, bind selectively to molecular targets on neuroendocrine cancer such as carcinoid, pheochromocytoma, pancreatic neuroendocrine and neuroblastoma. Neuroendocrine cancer is a tumor of the neuroendocrine system, a diffuse system involving the nervous system and the endocrine glands. Azedra is a targeted radiotherapeutic that has been chemically bound with a radioactive isotope, or radiolabeled, to deliver therapeutic doses of radiation directly to the neuroendocrine tumor site. Azedra consists of the MIBG molecule radiolabeled to an iodine isotope through our proprietary Ultratrace technology. MIBG is a known chemical compound that is commercially available from third parties in Europe and Japan. Azedra is currently in a Phase 1 trial for pheochromocytoma or carcinoid tumors, and has received Orphan Drug status and a Fast Track designation by the United States Food and Drug Administration, or the FDA. A Phase 1 clinical trial is a stage of drug development when a product candidate is first researched in humans. Subject to trial results and input from the FDA, we expect to begin a Phase 1/2 safety, dose ranging and efficacy clinical trial with Azedra in adults in the first half of 2007. A Phase 1/2 safety, dose ranging and efficacy clinical trial is a stage of drug development which incorporates under a single protocol both a traditional Phase 1 dose escalation study with safety and anti-tumor efficacy assessments at a range of doses, and a Phase 2 efficacy study in a larger study population, using the maximum tolerated dose determined in the Phase 1 trial. Onalta is a targeted radiotherapeutic that we recently in-licensed from Novartis Pharma AG, or Novartis. Onalta has recently completed several Phase 2 trials for the treatment of carcinoid and pancreatic neuroendocrine tumors, and has been granted Orphan Drug status by the FDA. A Phase 2 clinical trial is a stage of drug development for an experimental drug designed to assess short term safety and efficacy. We are currently in communication with the FDA regarding the clinical investigation plan and path to approval for Azedra and Onalta.

Zemiva, our lead molecular imaging pharmaceutical product candidate, is a radiolabeled fatty acid analog for the diagnosis of insufficient blood flow to the heart, or cardiac ischemia. A radiolabeled fatty acid analog is a fat-like molecule that allows doctors to visualize the heart’s use of fats as an energy source. Visualizing the changes in the use of fats by the heart can provide doctors with important information about the state of health of heart tissue, including the diagnosis of cardiac ischemia. If approved for marketing by the FDA, we believe that Zemiva has the potential to enable improved diagnosis and

management of heart disease in a more timely and cost-effective manner to provide significant advantages over the current standard of care in both the emergency department and non-acute settings. Zemiva is based on I-123-BMIPP, a known chemical compound which has been commercially available in Japan under the name Cardiodine in the non-acute setting for over ten years. We have conducted two multi-center Phase 2 trials and intend to commence a pivotal Phase 2 clinical trial for Zemiva in the first half of 2007. The pivotal Phase 2 trial, if successful, will be followed by a similar sized confirmatory Phase 3 registration trial. A Phase 3 clinical trial is a stage of drug development for an experimental drug in which the safety and efficacy is ascertained in a larger number of patients than the Phase 2 clinical trials. We believe that these two trials will form the basis for an NDA submission.

We are also developing additional product candidates by leveraging our expertise in radiochemistry and radiolabeling founded on our core proprietary technologies, including our Ultratrace technology and Single Amino Acid Chelate, or SAAC, technology. Using our proprietary technologies, we have identified potential candidates that may be useful in the detection or treatment of prostate cancer, heart failure and neurodegenerative disease, which is a disease characterized by the gradual and progressive loss of nerve cells. Additionally, several other indications relating to the future development for Zemiva have been identified, such as diabetes, chronic kidney disease and heart failure.

Radiation therapy has long been used effectively in the treatment and cure of cancer, particularly with tumors that are not amenable to treatment with surgery. Between 50% to 60% of cancer patients undergo some form of radiation therapy in the course of their treatment. The field of molecular medicine is improving radiation therapy through the use of targeted radiotherapeutics, compounds with the ability to selectively seek out tumor sites that exhibit specific molecular configurations. Radiotherapeutics are radiopharmaceuticals that are systemically administered and that selectively target tumors by binding to unique molecular targets (proteins) found on tumors. Therapeutic radiopharmaceuticals contain radioisotopes that emit beta particles. Beta particles only travel a short distance in the body, thus allowing selective and localized delivery of radiation to tumors while sparing surrounding normal

tissues. This selective delivery enables highly targeted radiotherapy whereby more radiation reaches the tumor site while neighboring tissues are spared excess radiation exposure. We believe there is an opportunity to further improve many targeted radiotherapeutics through the application of our proprietary Ultratrace technology. Ultratrace is designed to further refine the targeting capabilities of radiotherapeutics by providing ultrapure compounds that enhance delivery of radiation to a tumor site while reducing the potential risk of side effects from unnecessary non-radioactive cold contaminants in current products and technologies.

Our radiotherapeutic product candidates, Azedra and Onalta, are being developed as treatments for various neuroendocrine tumors. Azedra is designated as a Fast Track drug, and both product candidates are designated as Orphan Drugs by the FDA and are being developed to serve a patient population where currently there are no approved therapies for reducing tumor size. Orphan Drug status is designed to facilitate the development of new therapies for rare diseases or conditions, those which generally affect fewer than 200,000 individuals in the United States. Additional criteria include the ability of a product to address a medical need where there are no other treatment options or to provide a significant benefit over other therapies.

The initial target market for Azedra is for the treatment of metastatic neuroendocrine tumors, such as pheochromocytoma, carcinoid and neuroblastoma that are not amenable to treatment with surgery or conventional chemotherapy. Metastatic tumors are tumors that spread to other organs or parts of the body. We intend to develop Azedra for the treatment of pheochromocytoma and carcinoid in adults, and for neuroblastoma in children. Greater than 90% of neuroblastoma and pheochromocytoma tumors are candidates for MIBG therapy. The initial target market for Onalta is for the treatment of metastatic carcinoid and pancreatic neuroendocrine tumors in patients whose symptoms are not controlled by somatostatin analog therapy. Somatostatin is a hormone distributed throughout the body that acts as a regulator of endocrine and nervous system function by inhibiting the secretion of several other hormones such as growth hormones, insulin and gastrin. Somatostatin analog therapy (or octreotide or sandostatin) is used to alleviate the symptoms associated with carcinoid syndrome. Approximately 95% of carcinoid patients that cannot be treated by surgery would be candidates for Onalta therapy. Conventional somatostatin analogs, such as Sandostatin, are indicated for the alleviation of symptoms of carcinoid syndrome. However, patients become refractory to the treatment after an average duration of effect of six months and once refractory, there currently are no approved treatment options available to alleviate carcinoid syndrome symptoms.

Neuroendocrine tumors originate from cells that play a role in both the endocrine and nervous systems. They may arise in multiple sites in the body, including the head and neck, adrenal gland, intestinal tract and in the spinal ganglia that support the peripheral nervous system. Neuroendocrine tumors may secrete a variety of regulatory hormones, neurotransmitters, growth factors and neuropeptides. There are a variety of types of neuroendocrine tumors, including pheochromocytoma, carcinoid, pancreatic endocrine and neuroblastoma. The annual incidence of neuroendocrine tumors in the United States is approximately 6,000 carcinoid patients, 2,000 pancreatic neuroendocrine patients, 800 pheochromocytoma patients and 600 neuroblastoma patients. While neuroendocrine tumors occur in relatively small patient populations, a very large percentage of those patients have advanced disease. There are currently no approved treatments in the United States for metastatic neuroendocrine tumors.

Carcinoid tumors arise from cells of the neuroendocrine system located in the wall of the gastrointestinal tract. They often release certain hormones into the bloodstream. These hormones cause severe symptoms such as facial flushing, wheezing, acute diarrhea, and a fast heartbeat termed collectively as “carcinoid syndrome.”

Pancreatic neuroendocrine tumors, also known as pancreatic islet cell tumors, are located in the endocrine portion of the pancreas, which regulates basic metabolic functions such as sugar and salt levels in the body. Most pancreatic neuroendocrine tumors produce an excessive amount of hormones. For example, insulinomas produce excessive amounts of insulin, and gastrinomas produce excessive amounts of the peptide gastrin. Glucagonomas are associated with skin lesions and irritation around the eyes and somatostatinomas are associated with gallstones, slight diabetes, diarrhea or constipation.

Pheochromocytoma is a neuroendocrine tumor of the adrenal gland that causes excess release of epinephrine and norepinephrine, which affects heart rate and blood pressure. Pheochromocytomas may occur as a single tumor or as multiple growths. The tumors may occur at any age, but they are most common from early to mid-adulthood. Definitive treatment is removal of the tumor by surgery. For patients who have cancerous tumors that cannot be removed with surgery, less than 50% of patients are alive after five years from the time when surgery is no longer an option.

Neuroblastoma is a tumor of the developing peripheral nervous system. Over 90% of neuroblastomas occur in children younger than five years of age. Approximately 1,000 to 2,000 children are diagnosed each year in the United States and Europe. Advanced neuroblastoma is associated with short life expectancy, as the five-year survival rate is less than 60%. There are no currently approved therapies for patients with advanced neuroblastoma. These patients often undergo multiple experimental treatments, including investigator-sponsored trials with MIBG therapy.

Azedra is one of our two lead radiotherapeutic product candidates under development for the treatment of cancer. Formerly known as Ultratrace MIBG, or I-131-metaiodobenzylguanidine, Azedra consists of the MIBG molecule chemically bound to a radioactive iodine isotope through our proprietary Ultratrace technology. Azedra has received Orphan Drug status and a Fast Track designation by the FDA. The iodine isotope, depending on the particular isotope selected, acts either diagnostically for imaging disease or therapeutically to deliver targeted radiation to the tumor site. Azedra incorporates an iodine isotope, targets specific tumor cells and does not contain unwanted carrier molecules, or cold contaminants. Our proprietary Ultratrace technology enables us to develop radiotherapeutics devoid of unnecessary cold contaminants. We believe cold contaminants provide no therapeutic benefits, may provide unwanted side effects, and compete with therapeutic MIBG for binding on target receptor sites, potentially affecting efficacy. I-123 MIBG containing cold contaminants is marketed in Europe and Japan for diagnostic imaging, but is not an FDA-approved product in the United States. I-131 MIBG containing cold contaminants is commercially available in the United States for diagnostic purposes only, but it is considered a poor isotope for diagnostic images since it results in a high radiation dose to the patients and inferior image quality as compared to the I-123 isotope. I-131 MIBG containing cold contaminants is commercially available for therapeutic use in Europe but is not approved in the United States. It has, however, been used in the United States through compassionate use protocols since the 1980s in its radiolabeled forms (usually with the isotopes I-131 or I-123) at centers that specialize in the treatment of neuroblastoma and at centers that evaluate patients with neuroendocrine tumors.

We believe that our Ultratrace technology provides Azedra with potential significant advantages over currently marketed I-131 MIBG containing cold contaminants. Ultratrace technology enables Azedra to be an ultrapure compound, or a compound that is devoid of unnecessary cold contaminants. Results of preliminary nonclinical research conducted at the University of Glasgow suggest a superior and sustained reduction in tumor growth in animal studies using high-specific activity MIBG that is enabled by our Ultratrace platform technology. We believe that these early but promising results suggest a potentially significant opportunity for us to apply our Ultratrace platform technology to develop iodine-containing targeted radiotherapeutics for additional types of cancer.

MIBG is a synthetic hormone analog of the biogenic amine norepinephrine, which was first described by researchers at the University of Michigan. Norepinephrine is a chemical made by nerve cells that is released from the adrenal gland in response to stress and low blood pressure. The mechanism by which MIBG molecules accumulate in tumors is very selective and controlled by the protein called the norepinephrine transporter, which is expressed on the cell surface. A norepinephrine transporter, or NET, enables the direct movement of norepinephrine into, out of, within or between cells. Like the hormone norepinephrine, MIBG is concentrated by NET and stored within specific types of neuronal tissue and tumor cells. The uptake and prolonged retention of MIBG within tumor cells potentially constitutes a superior molecular targeting mechanism. However, the number of MIBG molecules taken up by a tumor cell is limited. To maximize the accumulation of radioactive MIBG molecules in tumors so that they can be optimally treated by radiotherapy, the amount of non-radioactive MIBG molecules present in the drug must be minimized. By doing so we also minimize potential chemical toxicity associated with administration of MIBG containing cold contaminants. Our proprietary Ultratrace technology reduces the amount of cold contaminants by several orders of magnitude and thereby enhances accumulation of MIBG in the tumor.

We completed preclinical studies for Azedra in the second half of 2005. Preclinical data presented at the 2006 Society of Nuclear Medicine conference evaluated the pharmacokinetics, tissue distribution and efficacy of Azedra compared with currently available I-131 MIBG that contains cold contaminants. Pharmacokinetics is the process by which drugs are absorbed, distributed in the body, localized in the tissues, and excreted. In the preclinical studies, data suggested that Azedra shows enhanced activity as compared to currently available I-131-MIBG in inhibiting tumor growth in a preclinical model for neuroblastoma. Tissue distribution studies suggested that Azedra has increased uptake compared with currently used MIBG in tissues that express the norepinephrine transporter. Pharmacokinetic parameters of both preparations were comparable in normal tissues.