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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

Commission file number 0-26866

Sonus Pharmaceuticals, Inc.

22026 20th Ave. SE, Bothell, Washington 98021
(Address of Principal Executive Offices)

(425) 487-9500
(Registrant’s Telephone Number, Including Area Code)

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

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date.

Page 1 of 13 Pages
Exhibit Index appears on Page 12

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Sonus Pharmaceuticals, Inc.
Index to Form 10-Q

						Page
						Number
Part I.  Financial Information
		Item 1.		Financial Statements
				Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001		3
				Statements of Operations (unaudited) for the three and six months ended   June 30, 2002 and June 30, 2001		4
				Statements of Cash Flows (unaudited) for the six months ended   June 30, 2002 and June 30, 2001		5
				Notes to Financial Statements		6
		Item 2.		Management’s Discussion and Analysis of Financial Condition   and Results of Operations		7
		Item 3.		Market Risk		12
Part II.  Other Information
		Item 4.		Submission of Matters to a Vote of Security Holders		12
		Item 6.		Exhibits and Reports on Form 8-K		12
		Items 1, 2, 3 and 5 are not applicable and therefore have been omitted
Signatures						13

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Part I. Financial Information

Item 1. Financial Statements

Sonus Pharmaceuticals, Inc.
Balance Sheets

					June 30,				December 31,
					2002				2001
					(unaudited)
Assets
Current assets:
	Cash, cash equivalents and marketable securities				$	22,107,593			$	15,123,914
	Other current assets					397,370				343,057
			Total current assets			22,504,963				15,466,971
Equipment, furniture and leasehold improvements, net of accumulated depreciation of $3,862,268 and $3,698,552						1,295,511				396,711
Total assets					$	23,800,474			$	15,863,682
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable and accrued expenses				$	2,083,756			$	1,198,552
	Current portion of lease obligations					74,758				—
			Total current liabilities			2,158,514				1,198,552
Lease obligations, less current portion						274,394				—
Commitments and contingencies
Stockholders’ equity:
	Preferred stock; $.001 par value; 5,000,000 authorized; no shares issued or outstanding					—				—
	Common stock; $.001 par value; 30,000,000 shares authorized; 13,658,283 and 11,650,797 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively					55,985,505				43,302,286
	Accumulated deficit					(34,634,139	)			(28,676,864	)
	Accumulated other comprehensive income (loss)					16,200				39,708
			Total stockholders’ equity			21,367,566				14,665,130
Total liabilities and stockholders’ equity					$	23,800,474			$	15,863,682

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Statements of Operations
(Unaudited)

				Three Months								Six Months
				Ended June 30,								Ended June 30,
				2002				2001				2002				2001
Revenues				$	—			$	91,188			$	25,000			$	1,186,716
Operating expenses:
	Research and development				2,832,678				1,325,132				4,514,021				2,493,193
	General and administrative				861,149				615,824				1,726,288				1,312,540
Total operating expenses					3,693,827				1,940,956				6,240,309				3,805,733
Operating loss					(3,693,827	)			(1,849,768	)			(6,215,309	)			(2,619,017	)
Interest income (expense):
	Interest income				157,072				110,197				265,914				252,081
	Interest expense				(6,836	)			(3,650	)			(7,880	)			(13,858	)
		Total interest income, net			150,236				106,547				258,034				238,223
Loss before taxes					(3,543,591	)			(1,743,221	)			(5,957,275	)			(2,380,794	)
Taxes					—				—				—				100,000
Net loss				$	(3,543,591	)		$	(1,743,221	)		$	(5,957,275	)		$	(2,480,794	)
Basic and diluted net loss per share				$	(0.26	)		$	(0.18	)		$	(0.44	)		$	(0.27	)
Shares used in computation of basic and diluted net loss per share					13,649,379				9,507,221				13,456,693				9,355,069

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Statements of Cash Flows
(Unaudited)

						Six Months Ended June 30,
						2002				2001
Operating activities:
Net loss						$	(5,957,275	)		$	(2,480,791	)
Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation					163,716				154,348
		Amortization of net premium (discount) on marketable securities					142,754				10,111
		Realized losses on marketable securities					676				—
		Noncash stock compensation expense					—				50,214
			Changes in operating assets and liabilities:
				Other current assets			(54,313	)			(69,990	)
				Accounts payable and accrued expenses			885,204				1,447,401
Net cash used in operating activities							(4,819,238	)			(888,707	)
Investing activities:
Purchases of capital equipment and leasehold improvements							(1,062,516	)			(24,507	)
Purchases of marketable securities							(18,491,874	)			(6,973,789	)
Proceeds from sales of marketable securities							3,831,968				1,735,320
Proceeds from maturities of marketable securities							7,372,000				4,700,681
Net cash used in investing activities							(8,350,422	)			(562,295	)
Financing activities:
Proceeds from lease obligations							366,885				—
Payments on lease obligations							(17,733	)			—
Proceeds from bank line of credit							—				5,000,000
Repayment of bank line of credit							—				(10,000,000	)
Proceeds from issuance of common stock							12,683,219				4,462,582
Net cash provided by (used in) investing activities							13,032,371				(537,418	)
Change in cash and cash equivalents for the period							(137,289	)			(1,988,420	)
Cash and cash equivalents at beginning of period							455,073				6,696,610
Cash and cash equivalents at end of period							317,784				4,708,190
Marketable securities at end of period							21,789,809				7,301,704
Total cash, cash equivalents and marketable securities						$	22,107,593			$	12,009,894
Supplemental cash flow information:
	Interest paid					$	7,880			$	18,958
	Income taxes paid					$	—			$	100,000

See accompanying notes.

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Sonus Pharmaceuticals, Inc.
Notes to Financial Statements
(Unaudited)

1. Basis of Presentation

     The unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

     The financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Form 10-K for the year ended December 31, 2001 and filed with the Securities and Exchange Commission on March 5, 2002.

2. Comprehensive Income (Loss)

3. Common Stock

     In January 2002, the Company sold 1.9 million shares of common stock in a private placement transaction for gross proceeds of $13.6 million ($12.5 million net of transaction costs). In connection with the placement, the Company issued warrants to purchase up to 385,800 shares of common stock. The warrants are exercisable at $9.40 per share and expire in January 2007.

4. Cash, Cash Equivalents and Marketable Securities

     Cash, cash equivalents and marketable securities consist of the following:

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

	•		Progress and results of clinical trials;
	•		Anticipated Investigational New Drug filings and future clinical trials;
	•		Market acceptance of our products and the potential size of these markets;
	•		Our anticipated future capital requirements and the terms of any capital financing;
	•		Timing and amount of future contractual payments, product revenues and operating expenses; and
	•		Anticipated outcome or financial impact of potential legal matters.

     While these forward-looking statements made by us are based on our current beliefs and judgement, they are subject to risks and uncertainties that could cause actual results to vary from the projections in the forward-looking statements. You should consider the risks below carefully in addition to other information contained in this report before purchasing shares of our common stock. If any of the risks listed below occur, they could seriously harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

     The discussion and analysis set forth in this document contains trend analysis, discussions of regulatory status and other forward-looking statements. Actual results could differ materially from those projected in the forward-looking statement as a result of the following factors, among others:

	•		Dependence on the development and commercialization of products;
	•		History of operating losses and uncertainty of future financial results;
	•		Uncertainty of governmental regulatory requirements and lengthy approval process;
	•		Dependence on third parties for funding, clinical development, manufacturing and distribution;
	•		Uncertainty of U.S. or international legislative or administrative actions;
	•		Future capital requirements and uncertainty of additional funding;
	•		Competition and risk of technological obsolescence;
	•		Limited manufacturing experience and dependence on a limited number of contract manufacturers and suppliers;
	•		Ability to obtain and defend patents and protect trade secrets;
	•		Limitations on third-party reimbursement for medical and pharmaceutical products;
	•		Dependence on key employees;
	•		Continued listing on the Nasdaq National Market; and
	•		Volatility in the value of our common stock.

     Certain of these risk factors are discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2001.

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MD&A Overview

     In Management’s Discussion and Analysis of Financial Condition and Results of Operations we explain the general financial condition and the results of operations for our Company, including:

	•		An overview of our business;
	•		Results of operations and why those results are different from the prior year; and
	•		The capital resources our Company currently has and possible sources of additional funding for future capital requirements.

Business Overview

     The Company is applying its expertise in drug delivery to make therapeutic drugs safer, easier to administer and more effective. The Company’s TOCOSOL™ drug delivery technology, a Vitamin E based oil-in-water emulsion, is broadly applicable to multiple drugs, diseases and dosage forms. We currently have a cancer therapy product, TOCOSOL Paclitaxel (formerly known as S-8184), in Phase 2 clinical trials, and we also have several active compounds under investigation in therapeutic areas that target cancer, cardiovascular disease, diabetes and infection. We plan to file an Investigational New Drug Application (IND) on one of these compounds in late 2002.

     The Company’s first application of its TOCOSOL drug delivery technology is an injectable paclitaxel emulsion formulation, TOCOSOL Paclitaxel. Paclitaxel is the active ingredient in the world’s leading cancer drug, Taxol® (the Bristol-Myers Squibb product), which is approved in the U.S. for the treatment of breast, ovarian and non-small cell lung tumors. We filed an Investigational New Drug Application, or IND, for TOCOSOL Paclitaxel with the U.S. Food and Drug Administration (FDA) in September 2000 and initiated a Phase 1 human clinical study in December 2000. The Company has completed the Phase 1 study and TOCOSOL Paclitaxel is currently being studied in four Phase 2 studies to evaluate efficacy in non-small cell lung, ovarian, bladder and colorectal cancers.

     The Company completed its Phase 1 study in May 2002 after enrolling a total of 37 patients. The objectives of the Phase 1 study were to determine the maximum tolerated dose of TOCOSOL Paclitaxel and to evaluate safety. Preliminary Phase 1 results suggest that TOCOSOL Paclitaxel may provide safety and convenience advantages for both patients and physicians including a reduction in side effects, steroid premedications and administration time using a ready-to-use formulation in a single, quick injection administered in less than 15 minutes compared to the three-hour infusion of existing formulations of paclitaxel. Based on preclinical and clinical studies, we also believe there may be potential efficacy benefits of TOCOSOL Paclitaxel that may result from higher concentrations of the drug delivered to the tumor and higher sustained dose density within the tumor. In Phase 1 tests measuring levels of paclitaxel in blood, a quick injection of TOCOSOL Paclitaxel resulted in higher peak drug concentrations, higher total drug exposure and slower clearance times compared with published literature for a three-hour infusion of Taxol.

     Anti-tumor activity observed in the Phase 1 study, defined as partial responses, minor responses and stable disease, was demonstrated in 15 out of 36 evaluable patients. The maximum tolerated dose (MTD) in the Phase 1 study was determined to be 200 mg/m² for administration once every three weeks, which compares to the standard dose of Taxol at 175 mg/m² once every three weeks. Dose limiting toxicities seen in the Phase 1 study include myalgia (muscle aches), fatigue, and neutropenia (low white cell count). No Grade 3 or 4 neuropathy was seen at doses up to 200 mg/m². All of the patients in the Phase 1 study had advanced cancers and no other therapeutic options.

     Phase 2 studies for TOCOSOL Paclitaxel were initiated in March of 2002. The Phase 2 program is designed to evaluate the efficacy of TOCOSOL Paclitaxel in specific tumor types. Our goal is to obtain

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a clear measure of efficacy with TOCOSOL Paclitaxel and to quickly determine the indications where the product shows the greatest efficacy. The first four Phase 2 studies will evaluate TOCOSOL Paclitaxel in non-small cell lung, ovarian, bladder and colorectal cancers using weekly dosing of TOCOSOL Paclitaxel. Each Phase 2 study will begin with a dose escalation phase to determine the MTD of TOCOSOL Paclitaxel. Weekly dose levels to be studied include 80, 100 and 120 mg/m². The MTD will be determined separately for each of the four studies. These will be single agent, second line studies enrolling patients that have not previously had taxane chemotherapy treatments. Initial efficacy data is expected in the third quarter of 2002 and patient enrollment is expected to continue through mid-2003.

     As of early July 2002, a total of 72 patients had been enrolled in the four Phase 2 studies (18 per study). MTD in the colorectal study has been determined at 120 mg/m² per week, which corresponds to 360 mg/m² over a three-week period. As a comparison, the standard dose of Taxol is 175 mg/m² once every three weeks. MTD data for the other three Phase 2 studies is expected by the end of the third quarter 2002. Based on Phase 2 data to date from 39 of the 72 patients enrolled, there has not been a single case of any grade of neuropathy reported at any dose. Neuropathy, which is a numbness or tingling in the hands and feet, is a side effect commonly seen with Taxol and often limits a patient’s ability to stay on therapy. Another side effect experienced with Taxol is neutropenia, a decrease in the white cell count. In the Phase 2 studies to date, results show that the rate of neutropenia for TOCOSOL Paclitaxel has been one third of that described in the Taxol package insert, which is based on once per three week dosing.

     In addition to TOCOSOL Paclitaxel, we are evaluating other products and additional therapeutic drug formulations to expand our TOCOSOL drug delivery technology platform. We currently have several active compounds under investigation in therapeutic areas that target cancer, cardiovascular disease, diabetes and infection. In addition to injectable dosage forms, we are also seeing preliminary evidence supporting oral administration using the TOCOSOL technology platform in certain of these compounds. Our near-term objective is to file one Investigational New Drug (IND) application with the FDA by the end of 2002. Our research and development efforts on potential new products are preliminary and we cannot give any assurance that our efforts will be successful or that any INDs will be filed.

     In June 2002, the Company entered into a manufacturing and supply agreement with Gensia Sicor Pharmaceuticals, Inc. for TOCOSOL Paclitaxel. The agreement provides the Company with a reliable manufacturer of the product for future clinical studies and commercialization requirements. Sonus and Gensia Sicor will collaborate to scale and validate the manufacturing process over the next 6 to 12 months.

Results of Operations

     Our results of operations have varied and will continue to vary significantly and depend on, among other factors:

	•		Entering into additional contractual agreements and timing of payments under contractual and license agreements with third-parties;
	•		Timing and costs of product development, clinical trials and patent prosecution; and
	•		Timing of regulatory approvals.

     Historically, our reported revenues have been derived from payments received under contractual and license agreements with third parties. The Company reported no revenue in the second quarter of 2002 compared to $91,000 for the second quarter of 2001. Revenues for the second quarter of the prior year represent royalty income under a prior agreement with Nycomed Amersham plc. For the six

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months ended June 30, 2002, revenue was $25,000 compared to $1.2 million for the prior year period. Included in 2001 is a $1.0 million non-refundable license fee payment received under an ultrasound contrast patent license agreement with Chugai Pharmaceutical Co. Ltd.

     Total operating expenses were $3.7 million for the second quarter of 2002 compared with $1.9 million for the prior year. The increase in operating expenses from the prior year was primarily due to higher research and development expenses ($2.8 million in the second quarter of 2002 compared to $1.3 million in the second quarter of 2001). This planned increase was largely due to increased activity related to the manufacture, development and clinical testing of our lead cancer therapy product, TOCOSOL Paclitaxel, as the drug advances through phase 2 clinical trials as well as increased costs to support new product development. General and administrative expenses were also higher ($861,000 in the second quarter of 2002 compared to $616,000 in the second quarter of 2001) primarily due to higher personnel and consulting costs. For the first six months of 2002, total operating expenses were $6.2 million compared to $3.8 million for the prior year period. The increase reflects the advancement of our lead product, TOCOSOL Paclitaxel, into phase 2 clinical trials, continued development of additional new drug compounds and higher personnel costs as we expand our operations.

     We anticipate that total operating expenses for the next several quarters will be consistent with or slightly higher than the second quarter of 2002 as we continue to invest in current and future product development activities. Net cash burn for the full year 2002 is expected to be approximately $13.0 to $14.0 million.

     Net interest income was $150,000 and $258,000 for the three and six months ended June 30, 2002 compared with $107,000 and $238,000 for the same periods in 2001. The increase in net interest income was primarily due to higher levels of invested cash in the current year, offset partially by lower interest rates.

     Net loss for the second quarter of 2002 was $3.5 million, compared with a net loss of $1.7 million for the same period of the prior year. Net loss for the six months ended June 30, 2002 was $6.0 million compared with a net loss of $2.5 million for the same period of the prior year.

Liquidity and Capital Resources

     We have historically financed operations with payments under contractual agreements with third parties and proceeds from equity financings. At June 30, 2002, we had cash, cash equivalents and marketable securities of $22.1 million compared to $15.1 million at December 31, 2001. The increase was primarily due to $12.5 million of net proceeds from a private placement of common stock in January 2002, offset in part by the year-to-date net loss of $6.0 million.

     In June 2002, the Company entered into a manufacturing and supply agreement with Gensia Sicor Pharmaceuticals, Inc. for TOCOSOL Paclitaxel. Sonus and Gensia Sicor will collaborate to scale and validate the manufacturing process, and Sonus expects to spend approximately $1.5 million over the next 6 to 12 months for the dedicated equipment and technology transfer to support these activities. Approximately $1.0 million is expected to be incurred during the second half of this year and is included in the Company’s previously disclosed projected 2002 net cash burn of $13.0 to $14.0 million.

     We expect that our cash requirements will increase in future periods due to development costs associated with our TOCOSOL drug delivery products. Based on our current operating plan, including planned clinical trials and other product development costs including technology transfer costs related to our manufacturing and supply agreement, we estimate that existing cash and marketable securities will be sufficient to meet our cash requirements through 2003. However, we will need additional funding to complete late stage clinical trials and regulatory approval of TOCOSOL Paclitaxel and to

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fund other product development activities beyond this timeframe. Accordingly, we intend to seek additional funding through available means, which may include debt and/or equity financing or funding under additional third party collaborative agreements. Our future capital requirements depend on many factors including:

	•		The progress of our research and development programs and clinical trials;
	•		The time and costs required to complete clinical trials and obtain regulatory approvals;
	•		The ability to raise additional funds through debt and/or equity financing;
	•		The ability to attract and retain collaborative agreement partners;
	•		The time and costs required to complete the technology transfer associated with manufacturing and supply agreements;
	•		The ability to obtain funding under contractual and licensing agreements; and
	•		The costs of filing, prosecuting, enforcing and defending patents, patent applications, patent claims and trademarks.

     We cannot give assurance that additional financing will be available on acceptable terms, if at all. Any equity financing would likely result in dilution to our existing stockholders and debt financing, if available, may include restrictive covenants. If we are unable to raise additional financing, we may be required to curtail or delay the development of our products and new product research and development, which could seriously harm our business.

Critical Accounting Policies and Estimates

     The preparation of the financial statements requires management to make estimates and assumptions. On an on-going basis, management evaluates its estimates and judgements including those related to revenue recognition and research and development costs. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following critical accounting policies, among others, affect its more significant judgements and estimates used in the preparation of its financial statements.

	•		Revenue Recognition. Since inception, the Company has generated revenues from collaborative agreements, licensing fees and from the assignment of developed and patented technology. Revenue is recorded as earned based on the performance requirements of the contract, generally as the services are performed. The Company recognizes revenue from non-refundable, up front license fees and proceeds from the assignment of technology when delivery has occurred and no future obligations exist. Royalties from licensees are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collection is reasonably assured. Payments received for which the earnings process is not complete are classified as deferred revenue.
	•		Research and Development Costs. These items including personnel costs, supplies, depreciation and other indirect research and development costs are expensed as incurred. In instances where the Company enters into agreements with third parties for research and/or clinical trial activities, costs are expensed the earlier of when amounts are due or when services are performed.

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Item 3. Market Risk

     The market risk inherent in our short-term investment portfolio represents the potential loss that could arise from adverse changes in interest rates. If market rates hypothetically increase immediately and uniformly by 100 basis points from levels at June 30, 2002, the decline in the fair value of the investment portfolio would not be material. Because we have the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.

Part II. Other Information

Item 4. Submission of Matters to a Vote of Security Holders

     Information regarding matters submitted to a vote of security holders at our annual meeting of stockholders held on April 23, 2002, is set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

     (b)  Reports on Form 8-K

           The Company filed no reports on Form 8-K during the quarter ended June 30, 2002.

Items 1, 2, 3 and 5 are not applicable and have been omitted.

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SIGNATURES

     In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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