SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period ended September 30, 2001

or

For the transition period from                to               

Commission File Number 0-16614

NeoRx Corporation
(Exact Name of Registrant as Specified in its Charter)

Registrant's telephone number, including area code:  (206) 281-7001

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

    Applicable only to corporate issuers:

    Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

    As of November 9, 2001 there were outstanding 26,551,411 shares of the Company's Common Stock, $.02 par value.

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

4

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEORX CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

    The accompanying unaudited condensed consolidated financial statements include the accounts of NeoRx Corporation and subsidiary (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.

    The interim financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2000.

    In the opinion of management, the interim financial statements reflect all adjustments, consisting only of normal recurring accruals necessary to present fairly the Company's financial position as of September 30, 2001 and the results of its operations and cash flows for the periods ended September 30, 2001 and 2000.

    The results of operations for the periods ended September 30, 2001 are not necessarily indicative of the expected operating results for the full year.

Note 2.  Shareholders' Equity

    Changes in shareholders' equity from December 31, 2000 to September 30, 2001 are as follows (in thousands):

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Note 3.  Loss per share

    The following is a reconciliation of the numerator and denominator of the basic and diluted loss per share computations for the three and nine months ended September 30, 2001 and 2000 (in thousands, except per share data):

    The denominator for diluted net loss per share calculations for the three and nine months ended September 30, 2001 and 2000 excludes the effect of options to purchase additional shares of common stock because the share increments would be antidilutive. Excluded for the three and nine months ended September 30, 2001 and 2000 were 4,414,789 and 3,249,061 shares of common stock issuable under stock options, respectively.

    In addition, 234,088 shares of common stock issuable upon conversion of Series 1 Preferred Stock were not included in the calculation of diluted loss per share for the three and nine months ended September 30, 2001 and 2000 because the effect of including such shares would have been antidilutive. For the same reason, outstanding warrants to purchase 1,070,000 and 305,000 shares of common stock at September 30, 2001 and 2000, respectively, were excluded from the calculation.

Note 4.  Comprehensive Loss

    The Company's comprehensive loss for the quarters ended September 30, 2001 and 2000 was $7,464,000 and $3,970,000, respectively. The comprehensive loss for the quarters ended September 30, 2001 and 2000 consisted of net loss of $7,478,000 and $3,450,000, respectively, and a net unrealized gain (loss) on investment securities of $14,000 and $(520,000), respectively. The Company's comprehensive loss for the nine months ended September 30, 2001 and 2000 was $16,283,000 and $10,602,000, respectively. The comprehensive loss for the nine months ended September 30, 2001 and 2000 consisted of net loss of $16,629,000 and $9,671,000, respectively, and a net unrealized gain (loss) on investment securities of $346,000 and $(931,000), respectively.

Note 5.  New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board (FASB or the Board) issued Statement of Financial Accounting Standards No. 133, also known as SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends existing accounting standards and was required to be adopted on January 1, 2001. SFAS 133 requires that all derivatives be recognized in the balance sheet at their fair market value, and the corresponding derivative gains or losses be either reported in the

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statement of operations or as a component of other comprehensive income depending on the type of hedge relationship that exists with respect to such derivative. The adoption of SFAS 133 on January 1, 2001 did not have an impact on the Company's financial statements.

    In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that all business combinations be accounted for under a single method—the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which will be adopted by the company on January 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial statements.

    In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company will adopt this Statement on January 1, 2003. Management has not yet determined the impact of adopting this statement on its financial statements.

    In October 2001, the FASB issued Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. The Company will adopt the provisions of Statement No. 144 on January 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial statements.

Note 6.  Asset Acquisition

    On April 19, 2001, the Company completed its purchase from International Isotopes Inc. of a radiopharmaceutical manufacturing facility and certain other related assets in Denton, Texas. The facility acquired has achieved cGMP status, or current Good Manufacturing Practices, and has qualified for issuance of appropriate radiation permits from the State of Texas. The Company has hired certain former employees of International Isotopes to serve on the Company's radiopharmaceutical

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manufacturing team at the facility. The Company intends to use the facility primarily to produce its Skeletal Targeted Radiation, also known as STR, and other products in development. Additionally, the Company intends to explore certain select opportunities to provide manufacturing contract services to third parties. Through September 30, 2001, the Company has not generated any revenue from manufacturing contract services. To acquire the facility and related assets, the Company paid $6,000,000 in cash and assumed $6,000,000 of restructured debt of International Isotopes. The terms of the note payable include interest at a variable interest rate (6.0% at September 30, 2001) due and payable on a quarterly basis until April 2002, at which time principal and interest will be due and payable on a monthly basis until the final note maturity in April 2009. The variable interest rate is equal to the Wall Street Journal prime rate. The assets acquired secure the note payable of $6,000,000. Commissions of $611,680 relating to this purchase were paid to a related party, Bay City Capital BD, LLC. In addition, the Company issued to International Isotopes a three-year warrant to purchase up to 800,000 shares of NeoRx common stock at a purchase price of $10 per share. The warrant is exercisable at any time during the term of the warrant. If at any time during the term of the warrant the closing price of the Company's common stock equals or exceeds $20 per share, the Company at any time thereafter will have the right to acquire all or any portion of the shares issuable under the warrant at a nominal amount. The Company must give at least 15 days' written notice of its election to purchase the shares issuable under the warrant and the purchase date on or after which it may consummate such purchase. The holder of the warrant may exercise the warrant through the payment of the exercise price prior to the purchase date set forth in the notice. The warrant was valued at $1.61 per share. In July 2001, International Isotopes transferred the warrant to certain of its preferred shareholders. On July 25, 2001, the Company filed with the Securities and Exchange Commission a registration statement to register the shares underlying the warrant.

    Summary of the purchase price for the radiopharmaceutical manufacturing plant is as follows:

The purchase price was allocated as follows:

    Licenses and processes are being amortized over a thirty-year period and workforce is being amortized over a five-year period using the straight-line method of amortization.

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

    This Form 10-Q contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "propose" or "continue," the negative of these terms or other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors described below in the section entitled "Additional factors that may affect results." These factors may cause our actual results to differ materially from any forward-looking statement. The September 11, 2001 terrorist attacks and related actions may increase the likelihood that one or more of these important factors may occur.

    Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on our forward-looking statements, which apply only as of the date of this report.

Quarter and nine months ended September 30, 2001 compared to quarter and nine months ended September 30, 2000.

    Revenue for the quarter ended September 30, 2001 was $263,000 compared to $684,000 for the quarter ended September 30, 2000. Revenue for the nine months ended September 30, 2001 was $1,437,000 compared to $1,588,000 for the nine months ended September 30, 2000. Revenue for the three and nine months ended September 30, 2001 was primarily from government grants. The Company recognizes revenue from government grants as the services are provided and the grant revenue earned. Revenue for the nine months ended September 30, 2000 consisted primarily of a $500,000 milestone payment received for the filing of regulatory documents to initiate studies of a paclitaxel-coated stent, $371,000 from federal government grants and licensing revenue from non-strategic patent technologies.

    Total operating expenses for the quarter ended September 30, 2001 increased 73% to $8,418,000 from $4,852,000 in the quarter ended September 30, 2000, and for the nine-month period ended September 30, 2001 increased 27% to $20,348,000 from $16,005,000 in the same period in the prior year. Research and development expenses for the quarter ended September 30, 2001 increased 60% to $5,663,000 from $3,550,000 for the same time period in 2000, and for the nine-month period ended September 30, 2001 increased 24% to $14,334,000 from $11,600,000 in the same period in the prior year. The increase in research and development expenses for the third quarter and the first nine months of 2001 was primarily the result of increased operating costs for the Company's radiopharmaceutical manufacturing facility in Denton, Texas, which was acquired on April 19, 2001. Third quarter research and development expenses also increased as the result of increased spending for salaries and licensing fees for the Company's Pretarget® technology platform.

    General and administrative expenses for the quarter ended September 30, 2001 increased 112% to $2,755,000 from $1,302,000 for the quarter ended September 30, 2000. General and administrative expenses for the nine months ended September 30, 2001 increased 37% to $6,014,000 from $4,405,000. The increase in general and administrative expenses during the three and nine month periods ended September 30, 2001 included $857,000 for severance and related benefits and $112,000 of stock compensation expense incurred in connection with the resignation of the former CEO. Costs for salaries and consulting services also increased for the third quarter of 2001. The increase in general and administrative costs for the first nine months of 2001 also included increased costs for salaries from the addition of new staff and consulting services.

    Other income for the third quarter of 2001 was $677,000 compared to $718,000 for the third quarter of 2000. Other income for the third quarters of 2001 and 2000 consisted primarily of interest income. The increase in interest income is due to a higher balance of investment securities compared

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to the same period in the prior year. Other income for the nine months ended September 30, 2001, which consisted primarily of interest income, was $2,282,000 compared to $4,746,000 for the nine months ended September 30, 2000. Other income for the nine months ended September 30, 2000 included interest income and a $3,310,000 realized gain on the sale of the Company's shares of Angiotech Pharmaceuticals, Inc.

Liquidity and capital resources.

    Cash and investment securities as of September 30, 2001 were $39,287,000 compared to $57,578,000 at December 31, 2000. Investing activities provided approximately $8,248,000 of cash during the nine months ended September 30, 2001, which included $15,598,000 of cash provided through net sales and maturities of investment securities and $7,350,000 of cash used for the acquisition of the radiopharmaceutical facility located in Denton, Texas and other capital assets. Operating activities used $11,619,000 of cash during the nine months ended September 30, 2001.

    The Company expects that its existing cash, investment securities and related earnings will be sufficient to finance currently anticipated working capital and capital asset requirements through at least the third quarter of 2002. The Company's actual cash requirements will depend on numerous factors, including results of research and development activities and clinical trials, the levels of resources that the Company devotes to establishing and expanding manufacturing capabilities, competitive and technological developments and the timing of revenues and expense reimbursements resulting from relationships with third parties or collaborative agreements. The Company's cash requirements have increased due to the acquisition of the radiopharmaceutical facility in Denton, Texas. The Company intends to seek additional funding through arrangements with corporate partners, public or private equity financing, or other sources. There can be no assurance that the Company will be able to obtain such additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, reduce or eliminate expenditures for certain of its programs or product candidates or enter into relationships with corporate partners to develop or commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself.

    The Company's liquidity, facilities and overall financial condition were not materially affected by the terrorist attacks against the United States on September 11, 2001. However, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs of transportation, insurance and security as a result of the terrorist activities and potential activities. The Company may experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact the Company's results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business.

New accounting pronouncements.

    In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that all business combinations be accounted for under a single method—the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon

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adoption of the Statement, which will be adopted by the company on January 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial statements.

    In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company will adopt this Statement on January 1, 2003. Management has not yet determined the impact of adopting this statement on its financial statements.

    In October 2001, the FASB issued Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. The Company will adopt the provisions of Statement No. 144 on January 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial statements.

Additional factors that may affect results.

    In addition to the other information contained in this report, the following factors could affect the Company's actual results and could cause our actual results to differ materially from those achieved in the past or expressed in our forward looking statements.

We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.

    We have not been profitable for any year since our formation in 1984. As of September 30, 2001, we had an accumulated deficit of $176 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative costs. To date, we have been engaged only in research and development activities and have not generated any significant revenues from product sales. We do not anticipate that any of our proposed products will be commercially available for several years. We expect to incur additional operating losses in the future. We expect the recent purchase of a radiopharmaceutical manufacturing facility and certain other assets located in Denton, Texas to increase our operating losses. These losses may increase significantly as we expand development and clinical trial efforts. Our ability to achieve long-term profitability is dependent upon obtaining regulatory approvals for our proposed products and successfully commercializing our products alone or with third parties. However, our operations may not be profitable even if we succeed in commercializing any of our products under development.

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We will need to raise additional capital, and our future access to capital is uncertain.

    It is expensive to develop cancer therapy products and conduct clinical trials for these products. We plan to continue to simultaneously conduct clinical trials and preclinical research for a number of different cancer therapy products, which is costly. Our future revenues may not be sufficient to support the expense of our operations and the conduct of our clinical trials and preclinical research. We will need to raise additional capital:

•

To fund operations;



•

To continue the research and development of our therapeutic products;



•

To maintain and develop our radiopharmaceutical manufacturing facility; and



•

To commercialize our proposed products.

    We believe that our existing funds will be sufficient to satisfy our financing requirements through at least the third quarter of 2002. However, we may need additional financing within this time frame depending on a number of factors, including the following:

•

The rate of progress and costs of our research and development and clinical trial activities;



•

The costs of developing manufacturing operations;



•

The costs of developing and expanding marketing operations, if we undertake those activities;



•

The amount of milestone payments we might receive from potential collaborators;



•

Our degree of success in commercializing our cancer therapy products;



•

The emergence of competing technologies and other adverse market developments;



•

Changes in or terminations of our existing collaborations and licensing arrangements; and



•

The costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

    We may not be able to obtain additional financing on favorable terms or at all. If we are unable to raise additional funds when we need them, we may be required to delay, reduce or eliminate some or all of our development programs and some or all of our clinical trials. We also may be forced to partner with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently. If we raise additional funds by issuing equity securities, further dilution to shareholders may result, and new investors could have rights superior to current security holders.

Our potential products must undergo rigorous clinical testing and regulatory approvals, which could be costly, time consuming, subject us to unanticipated delays or prevent us from marketing any products.

    The manufacture and marketing of our proposed products and our research and development activities are subject to regulation for safety, efficacy and quality by the U.S. Food and Drug Administration in the United States and comparable authorities in other countries.

    The process of obtaining FDA and other required regulatory approvals, including foreign approvals, is expensive and often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Our Skeletal Targeted Radiation, which we call STR, and Pretarget® products are novel; therefore, regulatory agencies lack experience with them. This may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our STR and Pretarget® products. Our current STR studies were placed on

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clinical hold after some phase I/II patients in our STR multiple myeloma trials developed a serious delayed side effect. This side effect, initially identified as TTP/HUS (thrombotic thrombocytopenic purpua/hemolytic uremic syndrome), has been redefined as thrombotic microangiopathy with renal impairment and is believed to be associated with radiation dose to the kidney.

    The FDA has requested that we collect additional dosimetry data from patients to demonstrate the accuracy of the method we propose to use to calculate dose in our phase III trial. NeoRx has maintained a constructive dialogue with the FDA and plans to submit its revised Phase III program for STR in multiple myeloma to the FDA in the fourth quarter of 2001. The revised program will include validation of dosimetry methods in a small group of patients, as previously requested by the FDA.

    Our current STR phase III protocol could be modified based on this analysis. Our phase III trials cannot begin until we receive authorization from the FDA, and there is no guarantee when, if, or under what conditions that will occur.

    NeoRx is conducting a phase I clinical trial of PRETARGET® technology for the treatment of non-Hodgkin's lymphoma. This study employs a novel antibody-streptavidin fusion protein (B9E9) that targets B-cell tumors. The clinical trial is being conducted at four sites currently. The Company presently expects to begin accepting patients in a phase I trial of PRETARGET® in gastrointestinal cancer later this year.

    No cancer products using our STR or Pretarget® technologies have been approved for marketing. Consequently, there is no precedent for the successful commercialization of products based on our technologies. In addition, we have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. This may impede our ability to obtain timely FDA approvals, if at all. We will not be able to commercialize any of our potential products until we obtain FDA approval, and consequently any delay in obtaining, or inability to obtain, FDA approval could harm our business.

    If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined, forced to remove a product from the market and experience other adverse consequences, including delay, which could materially harm our financial results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for the promotion of our proposed products. We may also be required to undertake post-marketing trials. In addition, if others or we identify side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products, and additional marketing applications may be required.

    The requirements governing the conduct of clinical trials, manufacturing and marketing of our proposed products outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can involve additional testing. Foreign regulatory approval processes include all of the risks associated with the FDA approval processes. Also, approval of a product by the FDA does not ensure approval of the same product by the health authorities of other countries.

We may take longer to complete our clinical trials than we project, or we may be unable to complete them at all.

    Although for planning purposes we project the commencement, continuation and completion of our clinical trials, a number of factors may cause significant delays, including scheduling conflicts with participating clinicians and clinical institutions and difficulties in identifying and enrolling patients who meet trial eligibility criteria. We may not commence or complete clinical trials involving any of our products as projected or may not conduct them successfully.

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    We rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our proposed products. We will have less control over the timing and other aspects of those clinical trials than if we conducted them entirely on our own. If we fail to commence or complete, or experience delays in, any of our planned clinical trials, our stock price and our ability to conduct our business as currently planned could be harmed.

If testing of a particular product does not yield successful results, we will be unable to commercialize that product.

    Our research and development programs are designed to test the safety and efficacy of our proposed products in humans through extensive preclinical and clinical testing. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our proposed products, including the following:

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Safety and efficacy results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;



•

The results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;



•

After reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising;



•

Our potential collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and



•

The effects our potential products have may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

    Clinical testing is very expensive, can take many years, and the outcome is uncertain. We cannot at this time predict if, when or under what conditions we will be permitted to restart our proposed STR phase III trial or our other STR clinical trials. The data collected from our clinical trials may not be sufficient to support approval by the FDA of our proposed STR multiple myeloma product, or any of our other proposed products. The clinical trials of our proposed STR multiple myeloma product and our other products under development may not be completed on schedule, and the FDA may not ultimately approve any of our product candidates for commercial sale. Our failure to adequately demonstrate the safety and efficacy of a cancer therapy product under development would delay or prevent regulatory approval of the product, which could prevent us from achieving profitability.

We are dependent on suppliers for the timely delivery of materials and services and may experience interruptions in supply in the future.

    To be successful, we need to develop and maintain reliable and affordable third party suppliers of:

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Commercial quantities of holmium-166, the form of radiation used in our STR product, and yttrium-90, the form of radiation used in our PRETARGET® program;



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The chemical agent used in our STR product to deliver holmium-166 to the bone; and



•

The antibodies and proteins used in our PRETARGET® program.

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    Sources of some of these materials are limited, and we may be unable to obtain these materials in amounts and at prices necessary to successfully commercialize our proposed products. Timely delivery of materials is critical to our success. For example, holmium-166, the form of radiation used in our STR product, loses its effectiveness for treating patients within a short period of time. As a result, our suppliers must ship the STR product to the patient within 24 hours after it is manufactured. Failures or delays in the manufacturing and shipping processes could compromise the quality and effectiveness of our products. We currently depend on a single source vendor for the holmium-166 component of our STR product. We plan to establish an additional supplier for this material, but this may take several years. There are, in general, relatively few alternative sources of holmium-166. While the current vendor generally has provided us these materials with acceptable quality, quantity and cost in the past, it may be unable or unwilling to meet our future demands. If we have to switch to a replacement vendor, the manufacture and delivery of our products could be interrupted for an extended period.

    We have entered into an arrangement with the University of Missouri research reactor facility group, also known as MURR, to produce holmium-166. MURR currently is responsible for the manufacture of holmium-166, including process qualification, quality control, packaging and shipping, from its Columbia, Missouri reactor facility. Our business and operations could be materially adversely affected if MURR does not perform satisfactorily under this arrangement. If we are unable to negotiate a long-term contract in a timely fashion upon favorable terms, or if MURR is unable or unwilling to provide supplies of holmium-166 under such contract in a satisfactory manner, we may suffer delays in, or be prevented from, initiating or completing clinical trials of our STR product.

If we fail to negotiate and maintain collaborative arrangements with third parties, our manufacturing, clinical testing, sales and marketing activities may be delayed or reduced.

    We rely in part on collaborators and other third parties to perform for us or assist us with a variety of important functions, including research and development, manufacturing and clinical trials management. We also license technology from others to enhance or supplement our technologies. We may not be able to locate suppliers to manufacture our products at a cost or in quantities necessary to make them commercially viable. We intend to rely on third party contract manufacturers to produce large quantities of materials needed for clinical trials and product commercialization. Third party manufacturers may not be able to meet our needs with respect to timing, quantity or quality. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our clinical testing may be delayed, thereby delaying the submission of products for regulatory approval or the market introduction and subsequent sales of our products. Any such delay may lower our revenues and potential profitability.

    Moreover, we and any of our third-party manufacturers must continually adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If our facilities, or the facilities of these manufacturers, cannot pass a pre-approval plant inspection, the FDA will not grant pre-market approval of our cancer therapy products. In complying with cGMP and foreign regulatory requirements, we and any of our third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our products meet applicable specifications and other requirements. If we or any of our third-party manufacturers fail to comply with these requirements, we may be subject to regulatory action.

    ABC Laboratories, Inc., which we call ABC Labs, has been our contract manufacturer for STR for our pending multiple myeloma clinical trials. As such, ABC Labs has been responsible for all aspects of the manufacture of STR, including process qualification, quality control, packaging and shipping. We believe that ABC's manufacturing facilities will be sufficient to meet our initial needs for the planned STR multiple myeloma and other STR clinical trials. In the past, we have experienced interruptions in ABC Labs' STR manufacturing processes, which if they occur in the future, could result in material

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delays in, or prevent us from completing, our clinical trials and otherwise commercializing our STR product. To help protect against such future interruptions or delays in supply, NeoRx is currently in the process of internally qualifying its radiopharmaceutical plant in Denton, Texas to also manufacture STR.

    If we lose or are unable to secure collaborators, or if we are not successful in initiating manufacturing operations at the Denton, Texas facility, or if our current collaborators, including ABC Labs, do not apply adequate resources to their collaboration with us, our product development and potential for profitability may suffer. We intend to enter into collaborations for one or more of the research, development, manufacturing, marketing and other commercialization activities relating to some of our products under development. If any collaborator breaches or terminates its agreement with us, or fails to conduct its collaborative activities in a timely manner, the commercialization of our products under development could be slowed down or blocked completely. Disputes may arise between us and ABC Labs or other collaborators on a variety of matters, including financial or other obligations under our agreements. These disputes may be both expensive and time consuming and may result in delays in the development and commercialization of our proposed products.

We face substantial competition in the development of cancer therapies and may not be able to successfully compete, and our potential products may be rendered obsolete by rapid technological change.

    The competition for development of cancer therapies is intense. There are numerous competitors developing products to treat the diseases for which we are seeking to develop products. We are initially focusing our STR product on the treatment of multiple myeloma. Celgene Corporation's thalidomide product is being sold for multiple myeloma, and Cell Therapeutics, Inc.'s arsenic trioxide also is being tested in that disease. Some competitors have adopted product development strategies targeting cancer cells with antibodies. Many emerging companies, including IDEC Pharmaceuticals, Cytogen Corporation and Corixa Corporation, have corporate partnership arrangements with large, established companies to support the research, development and commercialization of products that may be competitive with ours. In addition, a number of established pharmaceutical companies, including SmithKline Beecham, Nycomed Amersham, Mallinkrodt, Inc. and Bristol-Myers Squibb, are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with proprietary antibody-based technology or other technologies applicable to the treatment of cancer. Many of our existing or potential competitors have, or have access to, substantially greater financial, research and development, marketing and production resources than we do and may be better equipped than us to develop, manufacture and market competing products. Our competitors may have, or may develop and introduce, new products that would render our technology and products under development less competitive, uneconomical or obsolete.

    We also expect to face increasing competition from universities and other non-profit research organizations. These institutions carry out a significant amount of cancer research and development. These institutions are becoming increasingly aware of the commercial value of their findings and more active in seeking patent and other proprietary rights, as well as licensing revenues.

If we are unable to protect our proprietary rights, we may not be able to compete effectively, or operate profitably.

    Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights and our ability to avoid infringing the proprietary rights of others. Patent law relating to the scope of claims in the biotechnology field in which we operate is still evolving and, consequently, patent positions in our industry may not be as strong as in other better-established fields. Accordingly, the United States Patent and Trademark Office may not issue patents from the patent applications

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owned by or licensed to us. If issued, the patents may not give us an advantage over competitors with similar technology.

    We own more than 100 issued United States patents and have licenses to additional patents. However, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings, such as oppositions, which may be brought in foreign jurisdictions to challenge the validity of a patent. A third party may challenge the validity or enforceability of a patent after its issuance by the Patent and Technology Office. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting their coverage. Moreover, the cost of litigation to uphold the validity of patents and to prevent infringement can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without payment to us. It also is possible that competitors may infringe our patents or successfully avoid them through design innovation. To stop these activities we may need to file a lawsuit. These lawsuits are expensive and would consume time and other resources, even if we were successful in stopping the violation of our patent rights. In addition, there is a risk that a court would decide that our patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of our patents was upheld, a court would refuse to stop the other party on the ground that its activities do not infringe our patents.

    In addition to the intellectual property rights described above, we rely on unpatented technology, trade secrets and confidential information. Therefore, others may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We may not be able to effectively protect our rights in unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. However, these agreements may not provide effective protection of our information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

The use of our technologies could potentially conflict with the rights of others.

    Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our products, pay licensing fees or cease activities. If our products conflict with patent rights of others, third parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any legal action and a required license under the patent may not be available on acceptable terms or at all.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

    The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. If there is litigation against us, we may not be able to continue our operations. If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the Patent and Trademark Office to determine priority of invention. We may be required to participate in interference proceedings involving our issued patents and pending applications. We may be required to cease using the technology or to license rights from prevailing third parties as a result of an unfavorable outcome in an interference proceeding. A prevailing party in that case may not offer us a license on commercially acceptable terms.

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Product liability claims in excess of the amount of our insurance would adversely affect our financial condition.

    The testing, manufacturing, marketing and sale of the cancer therapy products that we have under development may subject us to product liability claims. We are insured against such risks up to a $10 million annual aggregate limit in connection with clinical trials of our products under development and intend to obtain product liability coverage in the future. However, insurance coverage may not be available to us at an acceptable cost, if at all. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material.

Our use of radioactive and other hazardous materials exposes us to the risk of material environmental liabilities, and we may incur significant additional costs to comply with environmental laws in the future.

    Our research and development and clinical manufacturing processes, as well as the manufacturing processes used by our collaborators, involve the controlled use of hazardous and radioactive materials. As a result, we are subject to foreign, federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes in connection with our use of these materials. Although we believe that our safety procedures and the safety procedures utilized by our collaborative partners for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. In addition, the risk of accidental contamination or injury from hazardous and radioactive materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources.

Even if we bring products to market, changes in healthcare reimbursement could adversely affect our ability to effectively price our products or obtain adequate reimbursement for sales of our products.

    The levels of revenues and profitability of biotechnology companies may be affected by the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation. Even in the absence of statutory change, market forces are changing the healthcare sector. We cannot predict the effect healthcare reforms may have on the development, testing, commercialization and marketability of our cancer therapy products. Further, our ability to commercialize our products under development may be adversely affected to the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of other companies that are prospective collaborators for certain of our potential products. In addition, both in the United States and elsewhere, sales of prescription pharmaceuticals depend in part on the availability of reimbursement to the consumer from third-party payors, such as governmental and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. If we succeed in bringing one or more products to market, we cannot be certain that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive or profitable basis.

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The loss of key employees could adversely affect our operations.

    We are a small company with 118 employees as of September 30, 2001. Our success depends, to a significant extent, on the continued contributions of our principal management and scientific personnel. The loss of the services of one or more of our executive officers, including Douglass B. Given, President and Chief Executive Officer, and Wolfgang Oster, Chief Operating Officer, or other principal members of our scientific and management staff, could delay our product development programs and our research and development efforts. We do not maintain key person life insurance on any of our officers, employees or consultants.

    Competition for qualified employees among companies in the biotechnology and biopharmaceutical industry is intense. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our proposed products successfully, we may be required to expand substantially our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel.

Our stock price is volatile and, as a result, you could lose some or all of your investment.

    There has been a history of significant volatility in the market prices of securities of biotechnology companies, including our common stock, and it is likely that the market price of our common stock will continue to be highly volatile. Our business and the relative prices of our common stock may be influenced by a large variety of industry factors, including:

•

Announcements by us or our competitors concerning acquisitions, strategic alliances, technological innovations and new commercial products;



•

The availability of critical materials used in developing our products;



•

The results of clinical trials;



•

Developments concerning patents, proprietary rights and potential infringement; and



•

The expense and time associated with and the extent of our ultimate success in securing government approvals.

    In addition, public concern about the safety of the products we develop, comments by securities analysts, and general market conditions may have a significant effect on the market price of our common stock. Moreover, the terrorist attacks of September 11 and related events may continue to negatively affect the business and economic environment. The realization of any of the risks described in this report, as well as other factors, could have a material adverse impact on the market price of our common stock and may result in a loss of some or all of your investment.

    In the past, securities class action litigation has often been brought against companies following periods of volatility in their stock prices. We may in the future be the targets of similar litigation. Securities litigation could result in substantial costs and divert our management's time and resources, which could cause our business to suffer.

Certain provisions in our articles of incorporation and Washington state law could discourage a change of control of NeoRx.

    Our articles of incorporation authorize our board of directors to issue up to 3,000,000 shares of preferred stock and to determine the price, rights, preference, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of

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NeoRx, even if this change would benefit our shareholders. In addition, the issuance of preferred stock may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

    We have adopted a shareholders' rights plan, which is intended to protect the rights of shareholders by deterring coercive or unfair takeover tactics. The board of directors declared a dividend to holders of our common stock of one preferred share purchase right for each outstanding share of the common stock. The right is exercisable ten days following the offer to purchase or acquisition of beneficial ownership of 20% of the outstanding common stock by a person or group of affiliated persons. Each right entitles the registered holder, other than the acquiring person or group, to purchase from NeoRx one-hundredth of one share of Series A Junior Participating Preferred Stock at the price of $40, subject to adjustment. The rights expire April 10, 2006. In lieu of exercising the right by purchasing one one-hundredth of one share of Series A Preferred Stock, the holder of the right, other than the acquiring person or group, may purchase for $40 that number of shares of our common stock having a market value of twice that price.

    Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the acquisition. Prohibited transactions include:

•

A merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person;



•

Termination of 5% or more of the employees of the target corporation; and



•

Receipt by the acquiring person of any disproportionate benefit as a shareholder.

    A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of NeoRx.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

    The Company is exposed to the impact of interest rate changes and changes in the market values of its investments.

Interest Rate Risk

    The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's debt securities included in its investment portfolio. The Company does not have any derivative financial instruments. The Company invests in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. At September 30, 2001, the Company owned government debt instruments in the amount of $2.7 million and corporate debt securities in the amount of $31.3 million. The Company's exposure to losses as a result of interest rate changes is managed through investing primarily in securities with relatively short maturities of up to three years and securities with variable interest rates.

Investment Risk

    The Company has received equity instruments under licensing agreements. These instruments are included in investment securities and are accounted for at fair value with unrealized gains and losses reported as a component of comprehensive loss and classified as accumulated other comprehensive income—unrealized gain on investment securities in shareholders' equity. Such investments are subject to significant fluctuations in fair market value due to the volatility of the stock market. At September 30, 2001, the Company owned such corporate equity securities valued at $0.2 million.

PART II.  OTHER INFORMATION

Item 5.  Other Information

    On November 7, 2001, the Company announced that it had met with FDA officials and plans before the end of 2001 to submit to the FDA for approval a protocol for a new radiation dosimetry study for STR in patients with multiple myeloma. This study will be aligned with the revised clinical development proposal the Company has presented to the FDA. Beginning with the new dosimetry study, the Company plans to resume the STR clinical development programs.

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Item 6.  Exhibits and Reports on Form 8-K

(a)

Exhibits

EXHIBIT INDEX

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(b)

Current Reports on Form 8-K.

Form 8-K dated July 31, 2001, relating to the naming of Douglass B. Given as President and Chief Executive Officer and the resignation of Paul G. Abrams as President and Chief Executive Officer.

Form 8-K dated September 13, 2001, relating to the designation of new Company officers.

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SIGNATURE

    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.

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