Amag Pharmaceuticals 10Q 2001 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

(Mark One)

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

For the Quarterly Period Ended June 30, 2001

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

For the transition period from to

Commission File #0-14732

ADVANCED MAGNETICS, INC.
(Exact name of registrant as specified in its charter)

Delaware	04-2742593

(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

61 Mooney Street
Cambridge, MA 02138
(Address of principal executive offices)

(617) 497-2070
Registrant's telephone number, including area code

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

At August 6, 2001, 6,636,095 shares of registrant's common stock (par value, $.01) were outstanding.

ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001

PART I. FINANCIAL INFORMATION

Item 1 — Financial Statements

ADVANCED MAGNETICS, INC.
BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)

ASSETS		June 30, 2001			September 30, 2000

Current assets:
Cash and cash equivalents		$	12,764,390		$	16,120,738
Marketable securities (Note C)		15,413,966			14,051,850
Accounts receivable		323,405			639,740
Inventories		82,116			91,456
Prepaid expenses		217,523			187,481

	Total current assets	28,801,400			31,091,265
Property, plant and equipment:
Land		360,000			360,000
Building		4,654,047			4,618,296
Laboratory equipment		8,046,193			8,013,973
Furniture and fixtures		786,181			782,525

		13,846,421			13,774,794
Less—accumulated depreciation and amortization		(9,981,842		)	(9,620,094		)

Net property, plant and equipment		3,864,579			4,154,700
Other assets		483,592			421,626

	Total assets	$	33,149,571		$	35,667,591

LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
Accounts payable		$	122,245		$	611,891
Accrued expenses		417,226			848,483
Deferred revenues		3,945,925			3,923,986

	Total current liabilities	4,485,396			5,384,360
Deferred revenues		12,892,312			15,977,599

	Total liabilities	17,377,708			21,361,959
Commitments and Contingencies (Note F)		---			---
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized 2,000,000 shares; none issued		---			---
Common stock, par value $.01 per share, authorized 15,000,000 shares; issued and outstanding 6,636,095 shares at June 30, 2001 and 6,773,932 shares at September 30, 2000		66,361			67,739
Additional paid-in capital		43,837,673			44,267,120
Retained earnings (deficit)		(27,391,131		)	(28,110,546		)
Accumulated other comprehensive income (loss)		(741,040		)	(1,918,681		)

	Total stockholders' equity	15,771,863			14,305,632

Total liabilities and stockholders' equity		$	33,149,571		$	35,667,591

The accompanying notes are an integral part of the financial statements.

ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 2001 AND 2000
(Unaudited)

			Three-Month Period Ended June 30,						Nine-Month Period Ended June 30,

			2001			2000*			2001			2000*

STATEMENT OF OPERATIONS
Revenues:
	License fees		$	1,143,902		$	183,894		$	3,192,269		$	551,682
	Royalties		200,000			200,000			600,000			623,246
	Product sales		127,002			616,911			441,961			778,441
	Contract research and development		---			---			---			106,003
	Interest, dividends and net gains and losses on sales of securities		333,306			197,122			119,932			601,555

		Total revenues	1,804,210			1,197,927			4,354,162			2,660,927
Cost and expenses:
	Cost of product sales		53,606			43,195			125,495			106,149
	Contract research and development expenses		---			---			---			3,195
	Company sponsored research and development expenses		840,896			1,033,624			2,426,069			3,453,262
	Selling, general and administrative expenses		380,365			519,864			1,257,821			1,603,462

		Total costs and expenses	1,274,867			1,596,683			3,809,385			5,166,068
Income (loss) before cumulative effect of accounting change, other
	Income and income tax provision		529,343			(398,756		)	544,777			(2,505,141		)
	Other income		200,000			---			200,000			---
	Provision for income taxes		(25,362		)	---			(25,362		)	---
	Cumulative effect of accounting change (Note B)		---			---			---			(7,457,717		)

Net income (loss)			$	703,981		$	(398,756	)	$	719,415		$	(9,962,858	)

Basic and diluted net income (loss) per share			$	0.11		$	(0.06	)	$	0.11		$	(1.48	)

Weighted average number of common shares			6,671,348			6,757,691			6,720,838			6,754,293
Weighted average number of common and common equivalent shares			6,706,546			6,757,691			6,735,486			6,754,293

*For comparison to quarterly results in prior periods reflecting the cumulative effect of accounting change, please refer to the Company's financial statements including the notes thereto filed with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

The accompanying notes are an integral part of the financial statements.

ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 2001 AND 2000
(Unaudited)

		Three-Month Period Ended June 30,						Nine-Month Period Ended June 30,

		2001			2000*			2001		2000*

COMPREHENSIVE INCOME
Net income (loss)		$	703,981		$	(398,756	)	$	719,415	$	(9,962,858	)

Other comprehensive income (loss):
	Unrealized gains (losses) on securities	3,365,966			36,752			726,156		(459,615
	Reclassification adjustment for (gains) losses included in net income	(187,767		)	---			451,485		---

Other comprehensive income (loss)		3,178,199			36,752			1,177,641		(459,615		)

Comprehensive income (loss)		$	3,882,180		$	(362,004	)	$	1,897,056	$	(10,422,473	)

The accompanying notes are an integral part of the financial statements.

ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED
JUNE 30, 2001 AND 2000
(Unaudited)

	Nine-Month Periods Ended June 30,

	2001			2000

Cash flows from operating activities:
Cash received from customers	$	1,060,936		$	982,594
Cash paid to suppliers and employees	(4,447,526		)	(4,899,133		)
Dividends and interest received	338,379			601,556
Royalties received	553,954			398,525
Other income	200,000			---
Income taxes paid	(94,752		)	---

Net cash provided by (used in) operating activities	(2,389,009		)	(2,916,458		)
Cash flows from investing activities:
Proceeds from sales of securities	12,304,829			---
Proceeds from U.S. Treasury Notes maturing	12,000,000			---
Purchase of securities	(24,707,750		)	(1,744,075		)
Capital expenditures	(71,627		)	(32,200		)
(Increase) in other assets	(61,966		)	(59,824		)

Net cash provided by (used in) investing activities	(536,514		)	(1,836,099		)
Cash flows from financing activities:
Proceeds from issuances of common stock	14,875			61,968
Purchase of treasury stock	(445,700		)	---

Net cash provided by (used in) financing activities	(430,825		)	61,968

Net increase (decrease) in cash and cash equivalents	(3,356,348		)	(4,690,589		)
Cash and cash equivalents at beginning of the period	16,120,738			17,052,636

Cash and cash equivalents at end of the period	$	12,764,390		$	12,362,047

The accompanying notes are an integral part of the financial statements.

ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE NINE-MONTH PERIODS ENDED
JUNE 30, 2001 AND 2000
(Unaudited)

	Nine-Month Periods Ended June 30,

	2001			2000*

Net income (loss)	$	719,415		$	(9,962,858	)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Cumulative effect of accounting change	---			7,457,717
Non-cash license fee revenue	(3,136,771		)	(541,297		)
Accretion of U.S. Treasury Notes discount	(233,039		)	---
Decrease (increase) in accounts receivable, net	316,335			(124,188		)
(Increase) decrease in inventories	9,340			45,184
(Increase) decrease in prepaid expenses	(30,042		)	(57,728		)
Depreciation and amortization	361,748			415,260
(Decrease) increase in accounts payable and accrued expenses	(920,903		)	(148,548		)
(Increase) decrease in deferred revenues	73,423			---
Net realized (gains) losses on sales of securities	451,485			---

Total adjustments	(3,108,424		)	7,046,400

Net cash provided by (used in) operating activities	$	(2,389,009	)	$	(2,916,458	)

The accompanying notes are an integral part of the financial statements.

ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001

A. Summary of Accounting Policies

Basis of Presentation

Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation (the “Company”), is a biopharmaceutical company engaged in the development and manufacture of compounds utilizing the Company’s core proprietary colloidal superparamagnetic particle technology and core polysaccharide technology for magnetic resonance imaging (“MRI”). The products developed by the Company are diagnostic imaging agents for use in conjunction with MRI to aid in the diagnosis of cancer and cardiovascular disease as well as therapeutic iron compounds for treating anemia.

These financial statements are unaudited and, in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been recorded. Such adjustments consisted only of normal recurring items. Certain amounts in the fiscal 2000 financial statements have been reclassified to conform with the fiscal 2001 presentation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The year-end balance sheet data were derived from audited financial statements, but do not include disclosures required by generally accepted accounting principles. These interim financial statements should be read in conjunction with the Company's most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

B. Cumulative Effect of Accounting Change

In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 (“SAB 101”). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. This cumulative change in accounting principle reflected the reversal of license fees and milestone payments that had been recognized in prior years. Previously, the Company had recognized license fee revenue when the fees were non-refundable, a technology transfer occurred, no explicit commitment or obligation for scientific achievement existed, and the other portions of the agreement, principally supply and royalty, were priced at fair value. Under the new accounting method applied retroactively to October 1, 1999, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreement. During the nine months ended June 30, 2001 and 2000, the Company recognized $551,077 and $551,682, respectively, in revenue that was included in the cumulative effect adjustment as of October 1, 1999.

C. Marketable Securities

The cost and market value of the Company’s marketable securities portfolio are as follows:

	June 30, 2001						September 30, 2000

	Cost			Fair Value			Cost			Fair Value

Common stock	$		16,155,006	$		15,413,966	$		15,970,531	$		14,051,850
U.S. Treasury notes	---			---			---			---

Total	$	16,155,006		$	15,413,966		$	15,970,531		$	14,051,850

D. Income Tax

The income tax provision for the three and nine-month periods ended June 30, 2001 reflects a change in estimate of fiscal 2000 alternative minimum tax. There were no income tax provisions for the three and nine-month periods ended June 30, 2000 due to net operating losses in those periods.

E. Earnings (Loss) Per Share

The weighted average common and common equivalent shares used in the computation of basic and diluted earnings per share is presented below. Aggregate options of 680,700 as of June 30, 2001 (weighted average exercise price of $6.61) and 483,256 as of June 30, 2000 (weighted average exercise price of $8.95) were outstanding as of June 30, 2001 and June 30, 2000, respectively. Options in the money as of June 30, 2001 have been included in the calculation of weighted average shares, as the Company made a profit during the three and nine-month periods ended June 30, 2001. Options outstanding during the quarter ended June 30, 2000 have not been included in the calculation of weighted average shares, since their effect would be anti-dilutive, given the net loss during the three and nine-month periods ended June 30, 2000.

	Three-Month Periods Ended June 30,		Nine-Month Periods Ended June 30,

	2001	2000	2001	2000

Weighted average number of shares issued and outstanding	6,671,348	6,757,691	6,720,838	6,754,293
Common stock equivalents	35,198	---	14,648	---

As adjusted	6,706,546	6,757,691	6,735,486	6,754,293

F. Legal Proceedings

The Company and certain of its officers were sued in an action entitled David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman, and Lee Josephson, Civil Action No. 92-12157-WGY, in the United States District Court for the District of Massachusetts on September 3, 1992. The plaintiff, a former consultant to the Company, claims that he was incorrectly omitted as an inventor or joint inventor on certain of the Company's patents and on pending applications, and seeks injunctive relief and unspecified damages. In addition, the complaint also alleges state law claims for breach of contract, breach of good faith and fair dealing, breach of implied contract, misappropriation of trade secrets, conversion, negligent misrepresentation, misrepresentation, unjust enrichment and unfair trade practices. The District Court has stayed this federal action pending resolution of an appeal in the state court of summary judgment in the Company’s favor as well as resolution of a jurisdictional issue. As noted below, the Massachusetts Appeals Court has decided the appeal, but the federal action remains stayed as of this date. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. The Company may not be able to successfully defend this action and the failure by the Company to prevail for any reason could have an adverse effect on its future business, financial condition and results of operations.

The Company and certain of its officers were sued in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of the Massachusetts Trial Court for Middlesex County. This case involves claims of breach of contract, breach of good faith and fair dealing, breach of implied contract, unjust enrichment and unfair trade practices that were originally dismissed by, but later remanded to, the Federal Court in the above-mentioned action, as well as a new count alleging tortious interference with contractual or advantageous relations. The Superior Court granted partial summary judgment in the Company's favor and dismissed the unfair trade practices and tort counts. The plaintiff’s contract claims have been dismissed with prejudice and final judgment was entered against the plaintiff. The plaintiff filed an appeal in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Appeal No. 98-P-1749 in the Massachusetts Appeals Court, on January 25, 1999. On October 13, 2000, the Massachusetts Appeals Court reversed the grant of partial summary judgment in the Company’s favor and ordered that the unfair trade practice and tort claims be reinstated. The Superior Court has redocketed the claims as directed by the Appeals Court, and it is anticipated that the litigation in state court will now move forward. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. The Company may not be able to successfully defend this action and the failure by the Company to prevail for any reason could have an adverse effect on its future business, financial condition and results of operations.

The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, “Defendants”) in the Superior Court of the Commonwealth of Massachusetts. The action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the “Agreement”), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company’s alleged breach of the Agreement. On November 13, 1998, the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, the Defendants answered the Company’s amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company’s alleged conduct. On June 15, 1999, the Court granted partial summary judgment in favor of the Company and against the Defendants, declared that the Company did not breach the Agreement, was not unjustly enriched, and did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.’s counterclaims for breach of contract, unjust enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch. 93A. On October 29, 1999, the Company served a second motion for partial summary judgment which, among other things, requests judgment in its favor on Sanofi Pharmaceuticals, Inc.’s remaining counterclaims against the Company and for judgment in its favor on the Company’s breach of contract claim against the Defendants. Also on October 29, 1999, the Defendants served a motion for partial summary judgment which, among other things, requests judgment in its favor on the Company’s remaining claims. On October 4, 2000, the Court granted the Company’s motion and entered judgment on all remaining claims brought by Sanofi Pharmaceuticals, Inc. In addition, the Court granted in part, and denied in part, Defendants’ motion for summary judgment. Only the Company’s breach of contract claim against Sanofi SA remains in the case. On December 26, 2000, the Court denied Sanofi SA and Sanofi Pharmaceuticals, Inc.’s Motion for Entry of Separate and Final Judgment, seeking to have the Court certify final judgment on all issues decided on summary judgment, except for the Company’s breach of contract claim against Sanofi SA. The parties are currently seeking a mediation hearing prior to setting a court date. While the final outcome of this litigation cannot be determined, the Company intends to pursue its remaining claim. In the event that the judgments in the Company’s favor are reversed on appeal, the Company intends to defend those claims vigorously. However, in such an event, the Company may not be able to successfully defend those claims and the failure of the Company to prevail for any reason could impair the Company’s financial resources and disrupt the Company’s future operating plans.

G. Derivative Financial Instruments

Beginning in the first quarter ended December 31, 2000, the Company has adopted the provisions of FASB Statement No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”. The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability, measured at its fair value. SFAS 133 also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company realized gains of $23,883 on the closing of derivative contracts in the quarter ended June 30, 2001 and had no gains in the quarter ended June 30, 2000. There were no derivative instruments held at the end of the quarters ended June 30, 2001 or June 30, 2000.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that do not describe historical facts are forward-looking statements. The forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. The factors that could cause actual results to differ materially from current expectations include the following: the ability to satisfy the conditions specified for final approval of Combidex® for imaging lymph nodes and to resolve the final labeling for Combidex with the FDA, the ability to successfully market Feridex I.V.®, GastroMARK® and any future products that receive FDA approval, the ability to successfully complete additional development efforts with respect to Combidex and Code 7228, the Company’s dependence on its corporate partners, delays in arrangements with clinical and pre-clinical investigations, uncertainties relating to results of the clinical trials of Code 7228 or any other of the Company’s future product candidates, the Company’s ability to obtain future financing, uncertainties relating to patents and proprietary rights, uncertainties relating to third-party reimbursements, the ability of the Company to compete successfully in the future, the ability to continue to operate at commercial scale in compliance with FDA regulations and other applicable manufacturing requirements and the risks identified in the Company’s Securities and Exchange Commission filings, including but not limited to its Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. The Company disclaims any obligation to publicly update or revise any such statements to reflect any change in Company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

Since its inception in November 1981, Advanced Magnetics, Inc. (“Advanced Magnetics” or the “Company”) has focused its efforts on developing applications of its core superparamagnetic particle technology. This focus has led to the Company’s development and commercialization of novel imaging agents to aid in the diagnosis of cancer and cardiovascular disease as well as therapeutic iron compounds for treating anemia. The Company has funded its operations with cash from license fees from corporate partners, royalties, sales of its products, fees from contract research performed for third parties, the proceeds of financings and income earned on invested cash. The Company’s success in the market for diagnostic products and iron therapeutics will depend, in part, on the Company’s ability to successfully develop, test, produce and market its products; obtain necessary governmental approvals in a timely manner; attract and maintain key employees; and successfully respond to technological changes in its marketplace.

The Company’s operating results may continue to vary significantly from quarter to quarter, or from year to year, depending on a number of factors, including: (i) the timing of payments from corporate partners and research grants; (ii) the introduction of new products; (iii) the timing and size of orders from customers; (iv) the general level of acceptance of the Company’s products; and (v) increases or decreases in, and timing of, research and development, clinical trials and other expenses. A substantial portion of the Company’s expenses consists of research and development costs. The Company’s current planned expense levels are based in part upon expectations as to future revenue. Consequently, profits and losses may vary significantly from quarter to quarter or year to year based on the timing of revenue. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods and there can be no assurance that the Company will be profitable or that revenue growth will be achieved in the future.

In December 1999, the Company submitted a New Drug Application (“NDA”) with the U.S. Food and Drug Administration (“FDA”) for Combidex® Magnetic Resonance Imaging (“MRI”) contrast agent. In June 2000, the Company received an “Approvable letter” from the FDA regarding Combidex. This letter indicated that the FDA considered Combidex approvable for its principal indication for the diagnosis of lymph node disease, including metastatic breast and prostate cancer, but the letter stipulated that approval was contingent upon the Company’s satisfactory completion of additional conditions.

In June 2001, the Company submitted an Investigational New Drug Exemption (“IND”) with the FDA for Code 7228 for use in iron replacement therapy. Code 7228 is scheduled to begin a Phase II clinical study in connection with this IND during the fourth quarter of this fiscal year. Code 7228 is currently in Phase II clinical studies for use in Magnetic Resonance Angiography.

A substantial portion of the Company’s expenses consists of research and development expenses. In an effort to reduce expenditures and improve efficiency, the Company closed its Princeton, New Jersey office in October 2000 and reduced the number of employees engaged in clinical development activities. All of the Company’s operating activities have been consolidated into the Cambridge office in order to improve managerial oversight and inter-departmental coordination and cooperation. The Company may rely to a greater degree on contract research and development providers in the future and expects that research and development expenses will continue to be a significant portion of the Company’s total expenses.

Results of Operations for the quarter ended June 30, 2001 as compared to the quarter ended June 30, 2000

Revenues

Total revenues for the third fiscal quarter ended June 30, 2001 were $1,804,210 compared to $1,197,927 for the third fiscal quarter ended June 30, 2000. The increase in revenues in the third quarter ended June 30, 2001 compared to the third quarter ended June 30, 2000 is primarily due to increases in license fees and gains on sales of securities, offset by reduced product sales.

License fee revenue increased to $1,143,902 in the third fiscal quarter ended June 30, 2001 from $183,984 in the third fiscal quarter ended June 30, 2000. The increase is primarily related to the recognition in the period of approximately $956,000 in deferred license fee revenue from a license and marketing arrangement signed with Cytogen Corporation in August 2000.

Product sales for the third fiscal quarter ended June 30, 2001 were $127,002 compared to $616,911 for the third fiscal quarter ended June 30, 2000. The decrease in sales of contrast agents is due primarily to the timing of orders from the Company’s marketing partners. A large portion of the reduced sales is due to Feridex I.V., which has a two-year shelf life and had substantial shipments in the last half of fiscal 2000.

Interest, dividends and gains on sales of securities resulted in revenues of $333,306 in the fiscal quarter ended June 30, 2001 compared to $197,122 for the fiscal quarter ended June 30, 2000. Interest, dividends and net gains on sales of securities consisted of the following:

	Third Quarter Ended June 30,

	2001		2000

Interest income	$	133,551	$	172,497
Dividend income	11,988		24,625
Net gains on sales of securities	187,767		---

Total	$	333,306	$	197,122

Costs and Expenses

The Company incurred costs of $53,606 for products sold in the third fiscal quarter ended June 30, 2001 compared to $43,195 for the third fiscal quarter ended June 30, 2000. The cost of product sales for the three-month period ended June 30, 2001 was 42% of product sales compared with 7% for the three-month period ended June 30, 2000. The higher cost of sales in 2001 is due to the product mix of the sales, with a higher percentage of the sales in fiscal 2001 being GastroMARK sales, which have a higher cost of sales than Feridex I.V.

Research and development expenses decreased to $840,896 from $1,033,624 for the third fiscal quarter ended June 30, 2001 as compared to the same period in the prior fiscal year. This decrease arises from reduced activity on clinical trials associated with Combidex, and from efficiencies achieved from the closing of the Company’s Princeton, New Jersey office. Selling, general and administrative expenses were $380,365 for the third fiscal quarter ended June 30, 2001 compared to $519,864 for the second fiscal quarter ended March 31, 2000. The reduced levels of expenditures for selling, general and administrative costs are a result of the closing of the Company’s Princeton, New Jersey office and the achievement of other cost efficiencies.

Income Taxes

The income tax provision for the three-month period ended June 30, 2001 reflects a change in estimate of the fiscal 2000 alternative minimum tax. There was no income tax provision for the three-month period ended June 30, 2000 due to net operating losses in that period.

Cumulative Effect of Accounting Change

In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 (“SAB 101”). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. This cumulative change in accounting principle reflected the reversal of license fees and milestone payments that had been recognized in prior years. Previously, the Company had recognized license fee revenue when the fees were non-refundable, a technology transfer occurred, no explicit commitment or obligation for scientific achievement existed, and the other portions of the agreement, principally supply and royalty, were priced at fair value. Under the new accounting method applied retroactively to October 1, 1999, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreement. During the fiscal quarters ended June 30, 2001 and 2000, the Company recognized $187,384 and $183,894, respectively, in revenue that was included in the cumulative effect adjustment as of October 1, 1999.

Earnings

For the reasons stated above, there was a net profit of $703,981 or $0.11 per share for the quarter ended June 30, 2001 compared to a net loss of $398,756 or $(0.06) per share for the fiscal quarter ended June 30, 2000.

Results of Operations for the Nine Months Ended June 30, 2001 as Compared to the Nine Months Ended June 30, 2000

Revenues

Total revenues for the nine-month period ended June 30, 2001 were $4,354,162 compared to $2,660,927 for the nine-month period ended June 30, 2000. The increase in revenues in the nine-month period ended June 30, 2001 compared to the nine-month period ended June 30, 2000 is due to an increase in license fee revenue, offset in part by decreases in product sales, contract research and development revenues and by losses on the sale of securities.

License fee revenue increased to $3,192,269 in the nine months ended June 30, 2001 from $551,682 in the nine months ended June 30 2000. The increase is primarily related to the recognition in the period of approximately $2,590,000 in deferred license fee revenue from a license and marketing arrangement signed with Cytogen Corporation in August 2000.

Royalties for the nine-month period ended June 30, 2001 were $600,000 compared with royalties of $623,246 for the nine-month period ended June 30, 2000.

Product sales for the nine-month period ended June 30, 2001 were $441,961 compared to $778,441 for the nine-month period ended June 30, 2000. The decrease in sales of contrast agents is due primarily to the timing of orders from the Company’s marketing partners. A large portion of the reduced sales is due to Feridex I.V., which has a two-year shelf life and had substantial shipments in the last half of fiscal 2000.

There were no contract research and development revenues for the nine-month period ended June 30, 2001 compared with $106,003 for the nine-month period ended June 30, 2000. Contract research and development revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion of certain clinical trials in early fiscal 2000.

Interest, dividends and gains and losses on sales of securities resulted in net revenues of $119,932 for the nine-month period ended June 30, 2001 compared to revenues of $601,555 for the nine-month period ended June 30, 2000. The decrease is due primarily to losses on the sale of securities during the nine -month period ended June 30, 2001 compared with no gains or losses on the sale of securities during the nine-month period ended June 30, 2000.

Costs and Expenses

The cost of product sales for the nine-month period ended June 30, 2001 was $125,495 compared to $106,149 for the nine-month period ended June 30, 2000. The cost of product sales for the nine-month period ended June 30, 2001 was 28% of product sales compared with 14% for the nine-month period ended June 30, 2000. The change is due to the product mix of the sales, with a high percentage of the sales in fiscal 2001 being GastroMARK sales, which have a higher cost of sales than Feridex I.V. sales. There were no direct costs for contract sponsored research and development in the nine months ended June 30, 2001, while there were $3,195 in direct costs for contract sponsored research and development in the nine months ended June 30, 2000. The reduction is due to the completion of contract research and development in early fiscal 2000.

Company sponsored research and development expenses for the nine-month period ended June 30, 2001 were $2,426,069 compared to $3,453,262 for the same period in 2000. The decrease reflected the completion of certain clinical trials for Combidex, and the achievement of efficiencies from the closing of the Company’s Princeton, New Jersey office. Selling, general and administrative expenses decreased to $1,257,821 for the nine-month period ended June 30, 2001 from $1,603,462 for the nine-month period ended June 30, 2000. The reduced levels of expenditures for selling, general and administrative costs, are a result of the closing of the Company’s Princeton, New Jersey office and the achievement of other cost efficiencies.

Income Taxes

The income tax provision for the nine-month period ended June 30, 2001 reflects a change in estimate of the fiscal 2000 alternative income tax. There was no income tax provision for the nine-month period ended June 30, 2000 due to net operating losses in that period.

Cumulative Effect of Accounting Change

In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 (“SAB 101”). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. During the nine months ended June 30, 2001 and 2000, the Company recognized $551,077 and $551,682, respectively, in revenue that was included in the cumulative effect adjustment as of October 1, 1999.

Earnings

For the reasons stated above, there was a net profit of $719,415 or $0.11 per share for the nine-month period ended June 30, 2001, compared to a net loss for the nine-month period ended June 30, 2000 of $9,962,858 or $(1.48) per share.

Liquidity and Capital Resources

At June 30, 2001, the Company’s cash and cash equivalents totaled $12,764,390 compared to $16,120,738 at September 30, 2000. In addition, the Company had marketable securities of $15,413,966 at June 30, 2001 compared to $14,051,850 at September 30, 2000. Net cash used in operating activities was $2,389,009 in the nine-month period ended June 30, 2001 compared to net cash used in operating activities of $2,916,458 in the nine-month period ended June 30, 2000. Cash used in investing activities was $536,514 for the nine-month period ended June 30, 2001 compared to $1,836,099 used in investing activities in the nine-month period ended June 30, 2000. The cash used in investing activities during the nine-month period ended June 30, 2001 consisted primarily of $24,707,750 for the purchase of securities. Proceeds from investing activities in the nine-month period ended June 30, 2001 included $12,304,829 from the sale of marketable securities and $12,000,000 from the maturing of a U.S. Treasury Notes. There was $430,825 in cash used in financing activities in the nine-month period ended June 30, 2001 compared with $61,968 provided by financing activities in the nine-month period ended June 30, 2000. A total of $445,700 was used to purchase the Company’s common stock during the nine-month period ended June 30, 2001. Cash provided by financing activities in each period consisted of proceeds from the exercise of stock options by Company employees.

Capital expenditures during the nine-month period ended June 30, 2001 were $71,627 compared to $32,200 in the nine-month period ended June 30, 2000. This reflects a slightly increased level of expenditures on upgrades to existing property, plant and equipment.

Management believes that existing cash balances, cash generated from investing activities and cash generated from operations will be sufficient to meet cash and working capital requirements for the foreseeable future. In addition, the Company will consider from time to time various financing alternatives and may seek to raise additional capital through equity or debt financing or to enter into corporate partnering arrangements. However, such funding may not be available on terms acceptable to the Company, if at all.

Derivative Financial Instruments

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change to the information concerning the Company’s market risk sensitive instruments as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

With the exception of the information set forth in the notes to the financial statements contained in Part I of this Form 10-Q, there have been no material changes to the information concerning the Company’s legal proceedings as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Description

3.1		Certificate of Incorporation of the Company, as amended, incorporated herein by reference to the exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
3.2		By-Laws of the Company, as amended, incorporated herein by reference to the exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

(b) Reports on Form 8-K

On April 30, 2001, the Company filed a current report on Form 8-K to report, under Item 9, its distribution of a letter to the Company’s shareholders.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			ADVANCED MAGNETICS, INC.


Date	August 13, 2001	By	/s/ Jerome Goldstein

			Jerome Goldstein, Treasurer and Chairman of the Board of Directors


Date	August 13, 2001	By	/s/ James A. Matheson

			James A. Matheson, Vice President and Principal Accounting Officer

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Amag Pharmaceuticals (AMAG) 10-Q2001 Q2 Quarterly report

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