Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended September 30,2009.**

** **
| **o** | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

** **

**For thetransition period from                  to                  .**

 

**CommissionFile Number 000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **54-1655029**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado 80020**

**(303)426-6262**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

As of October 30,2009, there were 103,941,015 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

 

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**ALLOSTHERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLE OF CONTENTS**

 
| PART I.   Financial Information | 3                                                                                                                                                                                                                 |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   | Financial Statements (unaudited)                                                                                                                                                                                  | 3 |
|                                      | Balance Sheets — as of September 30, 2009  and December 31, 2008                                                                                                                                   | 3 |
|                                      | Statements of Operations — for the  three and nine months ended September 30, 2009 and 2008 and the  cumulative period from September 1, 1992 (date of inception) through  September 30, 2009 | 4 |
|                                      | Statements of Cash Flows — for the nine  months ended September 30, 2009 and 2008 and the cumulative period from  September 1, 1992 (date of inception) through September 30, 2009            | 5 |
|                                      | Notes to Financial  Statements                                                                                                                                                                                    | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                       | 15 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                       | 26 |
| ITEM 4.                                   | Controls and  Procedures                                                                                                                                                                                          | 27 |
| PART II.   Other Information    | 28                                                                                                                                                                                                                |
| ITEM 1.                                   | Legal Proceedings                                                                                                                                                                                                 | 28 |
| ITEM 1A.                                  | Risk Factors                                                                                                                                                                                                      | 28 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                      | 44 |
| ITEM 3.                                   | Defaults Upon  Senior Securities                                                                                                                                                                                  | 44 |
| ITEM 4.                                   | Submission  of Matters to a Vote of Security Holders                                                                                                                                                              | 44 |
| ITEM 5.                                   | Other Information                                                                                                                                                                                                 | 44 |
| ITEM 6.                                   | Exhibits                                                                                                                                                                                                          | 44 |
| SIGNATURES                                |                                                                                                                                                                                                              | 45 |

 

NOTE:

 

*AllosTherapeutics, Inc., the Allos Therapeutics, Inc. logo,  FOLOTYN, the FOLOTYN logo and all other Allosnames are trademarks of Allos Therapeutics, Inc. in the United States andin other selected countries. All other brand names or trademarks appearing inthis report are the property of their respective holders. Unless the contextrequires otherwise, references in this report to “Allos,” the “Company,” “we,” “us,”and “our” refer to Allos Therapeutics, Inc.*

 

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

** **

**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                               |       | $                      | 62,377,663 |                  | $          | 30,458,424 |   |
| Restricted cash                                                                                                                                                                                                                                          |       | 237,632                |       | 237,632               |       |
| Investments in  marketable securities                                                                                                                                                                                                                    |       | 21,392,678             |       | 53,468,942            |       |
| Prepaid research  and development expenses                                                                                                                                                                                                               |       | 854,491                |       | 919,384               |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                       |       | 3,259,917              |       | 2,772,235             |       |
| Total current  assets                                                                                                                                                                                                                                    |       | 88,122,381             |       | 87,856,617            |       |
| Property and  equipment, net                                                                                                                                                                                                                             |       | 1,990,365              |       | 1,307,084             |       |
| Investments in  marketable securities                                                                                                                                                                                                                    |       | 344,443                |       | 38,480                |       |
| Intangible  asset, net                                                                                                                                                                                                                                   |       | 5,792,561              |       | —                |       |
| Other assets                                                                                                                                                                                                                                             |       | 99,242                 |       | 137,423               |       |
| Total assets                                                                                                                                                                                                                                             |       | $                      | 96,348,992 |                  | $          | 89,339,604 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Trade accounts  payable                                                                                                                                                                                                                                  |       | $                      | 3,019,048  |                  | $          | 280,526 |   |
| Accrued  liabilities                                                                                                                                                                                                                                     |       | 7,924,617              |       | 9,594,712             |       |
| Total current  liabilities                                                                                                                                                                                                                               |       | 10,943,665             |       | 9,875,238             |       |
| Commitments and  contingencies (See Note 9)                                                                                                                                                                                                              |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                     |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at September 30, 2009 and  December 31, 2008; no shares issued or outstanding                                                                                                 |       | —                 |       | —                |       |
| Series A  Junior Participating Preferred Stock, $0.001 par value; 1,500,000 and  1,000,000 shares designated from authorized preferred stock at  September 30, 2009 and December 31, 2008, respectively; no shares  issued or outstanding |       | —                 |       | —                |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at September 30, 2009  and December 31, 2008; 89,901,688 and 81,238,812 shares issued and  outstanding at September 30, 2009 and December 31, 2008,  respectively     |       | 89,902                 |       | 81,239                |       |
| Additional  paid-in capital                                                                                                                                                                                                                              |       | 435,601,429            |       | 379,042,015           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                        |       | (350,286,004           | )          | (299,658,888          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                         |       | 85,405,327             |       | 79,464,366            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                         |       | $                      | 96,348,992 |                  | $          | 89,339,604 |   |

 

***The accompanying notes are an integral part of thesefinancial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** | **Cumulative  Period from  September 1, 1992  (date of inception)  through  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                             | ** **  | **2008**                                            | ** ** | **2009**                                                                                                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Research  and development                                             |       | $                                                    | 6,025,486   |                                                | $          | 6,360,950                                                                                                                 |       | $ | 18,900,803 |   | $ | 17,738,486 |   | $ | 168,048,727 |   |
| Clinical  manufacturing                                               |       | 1,512,341                                            |        | 1,727,630                                           |       | 5,773,776                                                                                                                 |       | 4,799,240 |   | 47,133,028 |   |
| Marketing,  general and administrative                                |       | 11,327,073                                           |        | 5,326,357                                           |       | 26,326,317                                                                                                                |       | 15,776,485 |   | 152,200,286 |   |
| Amortization  of intangible asset                                     |       | 7,439                                                |        | —                                              |       | 7,439                                                                                                                     |       | — |   | 7,439 |   |
| Restructuring  and separation costs                                   |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | 1,663,821 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Total  operating expenses                                             |       | 18,872,339                                           |        | 13,414,937                                          |       | 51,008,335                                                                                                                |       | 38,314,211 |   | 369,053,301 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Loss  from operations                                                 |       | (18,872,339                                          | )           | (13,414,937                                         | )          | (51,008,335                                                                                                               | )          | (38,314,211 | ) | (369,053,301 | ) |
| Gain  on settlement claims                                            |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | 5,110,083 |   |
| Interest  and other income, net                                       |       | 125,752                                              |        | 254,416                                             |       | 304,402                                                                                                                   |       | 1,323,376 |   | 23,816,861 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Loss  before income taxes                                             |       | (18,746,587                                          | )           | (13,160,521                                         | )          | (50,703,933                                                                                                               | )          | (36,990,835 | ) | (340,126,357 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Income  tax benefit                                                   |       | 76,817                                               |        | —                                              |       | 76,817                                                                                                                    |       | — |   | 76,817 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net  loss                                                             |       | (18,669,770                                          | )           | (13,160,521                                         | )          | (50,627,116                                                                                                               | )          | (36,990,835 | ) | (340,049,540 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Dividend  related to beneficial conversion feature of preferred stock |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net  loss attributable to common stockholders                         |       | $                                                    | (18,669,770 | )                                                   | $          | (13,160,521                                                                                                               | )          | $ | (50,627,116 | ) | $ | (36,990,835 | ) | $ | (350,286,004 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net  loss per share: basic and diluted                                |       | $                                                    | (0.21       | )                                                   | $          | (0.16                                                                                                                     | )          | $ | (0.58 | ) | $ | (0.50 | ) |   |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Weighted  average shares outstanding:  basic and diluted         |       | 89,543,949                                           |        | 80,752,024                                          |       | 86,581,372                                                                                                                |       | 73,554,904 |   |   |   |

 

***The accompanying notes are an integral part of thesefinancial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTSOF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** **  | **Cumulative  Period From  September 1, 1992  (date of inception)  through** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2009**                                            | ** **  | **2008**                                                                                              | ** ** | **September 30,  2009** | ** ** |
| Cash  Flows From Operating Activities:                                                                                  |       |                                                |        |                                                                                                  |       |   |   |
| Net  loss                                                                                                               |       | $                                                   | (50,627,116 | )                                                                                                     | $          | (36,990,835 | ) | $ | (340,049,540 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                       |       |                                                |        |                                                                                                  |       |   |   |
| Depreciation  and amortization                                                                                          |       | 314,290                                             |        | 304,322                                                                                               |       | 4,155,335 |   |
| Stock-based  compensation expense                                                                                       |       | 6,602,733                                           |        | 5,936,499                                                                                             |       | 46,904,901 |   |
| Amortization  of intangible asset                                                                                       |       | 7,439                                               |        | —                                                                                                |       | 7,439 |   |
| Write-off  of long-term investment                                                                                      |       | —                                              |        | —                                                                                                |       | 1,000,000 |   |
| Realized  loss on sale of marketable securities                                                                         |       | 157,141                                             |        | 551,698                                                                                               |       | 708,839 |   |
| Other                                                                                                                   |       | 149,040                                             |        | —                                                                                                |       | 266,849 |   |
| Changes  in operating assets and liabilities:                                                                           |       |                                                |        |                                                                                                  |       |   |   |
| Prepaid  expenses and other assets                                                                                      |       | (384,606                                            | )           | (987,188                                                                                              | )          | (4,203,648 | ) |
| Interest  receivable on investments                                                                                     |       | 686,062                                             |        | (539,283                                                                                              | )          | (147,098 | ) |
| Trade  accounts payable                                                                                                 |       | 2,738,522                                           |        | 961,838                                                                                               |       | 3,019,048 |   |
| Accrued  liabilities                                                                                                    |       | (1,670,095                                          | )           | 55,884                                                                                                |       | 7,924,617 |   |
| Net  cash used in operating activities                                                                                  |       | (42,026,590                                         | )           | (30,707,065                                                                                           | )          | (280,413,258 | ) |
| Cash  Flows From Investing Activities:                                                                                  |       |                                                |        |                                                                                                  |       |   |   |
| Acquisition  of property and equipment                                                                                  |       | (1,146,612                                          | )           | (530,067                                                                                              | )          | (6,059,423 | ) |
| Pledge  of restricted cash                                                                                              |       | —                                              |        | (237,632                                                                                              | )          | (237,632 | ) |
| Cash  paid for license                                                                                                  |       | (5,800,000                                          | )           | —                                                                                                |       | (5,800,000 | ) |
| Purchases  of marketable securities                                                                                     |       | (18,216,703                                         | )           | (94,048,013                                                                                           | )          | (627,812,960 | ) |
| Proceeds  from maturities of marketable securities                                                                      |       | 45,250,000                                          |        | 54,140,827                                                                                            |       | 594,872,797 |   |
| Proceeds  from sales of marketable securities                                                                           |       | 3,893,800                                           |        | 6,747,500                                                                                             |       | 10,641,300 |   |
| Purchase  of long-term investment                                                                                       |       | —                                              |        | —                                                                                                |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                              |        | —                                                                                                |       | 49,687 |   |
| Net  cash provided by (used in) investing activities                                                                    |       | 23,980,485                                          |        | (33,927,385                                                                                           | )          | (35,346,231 | ) |
| Cash  Flows From Financing Activities:                                                                                  |       |                                                |        |                                                                                                  |       |   |   |
| Principal  payments under capital leases                                                                                |       | —                                              |        | —                                                                                                |       | (422,088 | ) |
| Proceeds  from sales leaseback                                                                                          |       | —                                              |        | —                                                                                                |       | 120,492 |   |
| Proceeds  from issuance of convertible preferred stock, net of issuance costs                                           |       | —                                              |        | —                                                                                                |       | 89,125,640 |   |
| Proceeds  from issuance of common stock associated with stock options, stock warrants  and employee stock purchase plan |       | 3,008,555                                           |        | 4,905,755                                                                                             |       | 18,019,372 |   |
| Proceeds  from issuance of common stock, net of issuance costs                                                          |       | 46,956,789                                          |        | 65,185,128                                                                                            |       | 271,293,736 |   |
| Net  cash provided by financing activities                                                                              |       | 49,965,344                                          |        | 70,090,883                                                                                            |       | 378,137,152 |   |
| Net  increase in cash and cash equivalents                                                                              |       | 31,919,239                                          |        | 5,456,433                                                                                             |       | 62,377,663 |   |
| Cash  and cash equivalents, beginning of period                                                                         |       | 30,458,424                                          |        | 15,919,664                                                                                            |       | — |   |
| Cash  and cash equivalents, end of period                                                                               |       | $                                                   | 62,377,663  |                                                                                                  | $          | 21,376,097 |   | $ | 62,377,663 |   |
| Supplemental  Schedule of Cash and Non-cash Operating and Financing Activities:                                    |       |                                                |        |                                                                                                  |       |   |   |
| Cash  paid for interest                                                                                                 |       | $                                                   | —      |                                                                                                  | $          | — |   | $ | 1,033,375 |   |
| Issuance  of stock in exchange for license agreement                                                                    |       | —                                              |        | —                                                                                                |       | 40,000 |   |
| Capital  lease obligations incurred for acquisition of property and equipment                                           |       | —                                              |        | —                                                                                                |       | 422,088 |   |
| Issuance  of stock in exchange for notes receivable                                                                     |       | —                                              |        | —                                                                                                |       | 139,687 |   |
| Conversion  of preferred stock to common stock                                                                          |       | —                                              |        | —                                                                                                |       | 89,125,640 |   |

 

***The accompanyingnotes are an integral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**(A DevelopmentStage Enterprise)

**NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

** **

**1.**                 Basis of Presentation

** **

The unaudited financialstatements of Allos Therapeutics, Inc. (referred to herein as the “Company,”“we,” “us” or “our”) included herein reflect all adjustments, consisting onlyof normal recurring adjustments, which in the opinion of management arenecessary to fairly state our financial position, results of operations andcash flows for the periods presented. Certain information and footnote disclosures normally included inaudited financial information prepared in accordance with accounting principlesgenerally accepted in the United States of America, or U.S. GAAP, have beencondensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission, or SEC. Operating results for the three and nine months ended September 30,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009. These financial statements should be read in conjunction with theaudited financial statements and notes thereto which are included in our AnnualReport on Form 10-K for the year ended December 31, 2008, as amended,for a broader discussion of our business and the opportunities and risksinherent in such business.

 

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations.  Ouractivities have consisted primarily of developing product candidates, raisingcapital and recruiting personnel.  We arecurrently focused on the development and commercialization of FOLOTYNTM (pralatrexateinjection), a selective antifolate designed to accumulate preferentially incancer cells. On September 24, 2009, the U.S. Food and DrugAdministration, or FDA, granted accelerated approval of FOLOTYN for use as asingle agent for the treatment of patients with relapsed or refractoryperipheral T-cell lymphoma, or PTCL. FOLOTYN represents our first drug approvedfor marketing in the United States. FOLOTYN is the first and only drug approvedby the FDA for its indication and represents a new treatment option forpatients with relapsed or refractory PTCL. We began making FOLOTYN availablefor commercial sale in the United States on October 5, 2009, with ananticipated commercial launch in January 2010.  Accordingly, while we are considered to be inthe development stage as of September 30, 2009, we have since commencedour planned principal operations and will no longer be considered to be in thedevelopment stage as of October 2009.

 

*Liquidity*

 

We are a biopharmaceutical company committed to thedevelopment and commercialization of innovative anti-cancer therapeutics. Ourgoal is to build a profitable company by generating income from products wedevelop and commercialize, either alone or with one or more potential strategicpartners.  Our ability to generaterevenue and achieve profitability is dependent on our ability, alone or withpartners, to successfully commercialize FOLOTYN for the treatment of patientswith relapsed or refractory PTCL.  We maycontinue incurring net losses for the foreseeable future. We may never generatesignificant revenue from product sales or become profitable. We expect tocontinue to spend substantial amounts on research and development, includingamounts spent on conducting clinical trials and seeking additional regulatoryapprovals for FOLOTYN, and commercializing FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL. Clinical development timelines, likelihood of success and total costsvary widely and are impacted by a variety of risks and uncertainties.

 

As of September 30, 2009, we had $84.1 million incash, cash equivalents and investments in marketable securities.  Based upon the current status of our productdevelopment and commercialization plans, we believe that our cash, cashequivalents, and investments in marketable securities as of September 30,2009, together with the net proceeds of approximately $93.0 million from the October 2009Financing discussed in Note 11, Subsequent Events, should be adequate tosupport our operations through at least the next 12 months, although there canbe no assurance that this can, in fact, be accomplished.  Our forecast of the period of time throughwhich our financial resources will be adequate to support our operationsinvolves risks and uncertainties, and actual results could vary materially.

 

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We anticipate continuingour current development programs and beginning other long-term developmentprojects involving FOLOTYN, including the post-approval clinical studiesrequired for FOLOTYN. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition,we expect to incur significant costs relating to the commercialization ofFOLOTYN, including costs related to our sales and marketing, medical affairsand manufacturing operations.  Therefore, we may need to raise additionalcapital to support our future operations.  Our actual capital requirementswill depend on many factors, including:

 

·                  the timing and amount of revenuesgenerated from the sale of FOLOTYN;

 

·                  the timing and costs associated withdeveloping our sales and marketing, medical affairs and manufacturingoperations for the commercialization of FOLOTYN;

 

·                  the timing and costs associated withmanufacturing clinical and commercial supplies of FOLOTYN;

 

·                  the timing and costs associated withconducting preclinical and clinical development of FOLOTYN, as well as ourevaluation of, and decisions with respect to, additional therapeuticindications for which we may develop FOLOTYN;

 

·                  the timing and costs associated withcompleting the post-approval clinical studies required by the FDA;

 

·                  the timing, costs and potential revenueassociated with any co-promotion or other partnering arrangements entered intoto commercialize FOLOTYN; and

 

·                  our evaluation of, and decisions withrespect to, potential in-licensing or product acquisition opportunities orother strategic alternatives.

 

We may seek to obtain this additional capital throughequity or debt financings, arrangements with corporate partners, or from othersources. Such financings or arrangements, if successfully consummated, may bedilutive to our existing stockholders. However, there is no assurance thatadditional financing will be available when needed, or that, if available, wewill obtain such financing on terms that are favorable to our stockholders orus. In the event that additional funds are obtained through arrangements withcollaborative partners or other sources, such arrangements may require us torelinquish rights to some of our technologies, product candidates or productsunder development, which we might otherwise seek to develop or commercializeourselves, on terms that are less favorable than might otherwise be available. If we are unable to generate meaningful amounts of revenue from future productsales or cannot otherwise raise sufficient additional funds to support ouroperations, we may be required to delay, reduce the scope of or eliminate oneor more of our development programs and our business and future prospects forrevenue and profitability may be harmed.

 

**2.  **        Fair Value of FinancialInstruments

** **

*Cash, Cash Equivalents and Investments in MarketableSecurities*

* *

**Allhighly liquid investments with original maturities of three months or less areconsidered to be cash equivalents. The carrying values of our cash equivalentsand investments in marketable securities approximate their market values basedon quoted market prices. Investments in marketable securities are classified asheld to maturity and are carried at cost plus accrued interest. Our cash andcash equivalents are maintained in a financial institution in amounts that, attimes, may exceed federally insured limits. We realized a loss of approximately$0 and $157,000 on the sale of certain of our investments in marketablesecurities during the three and nine months ended September 30, 2009,respectively.  We realized a loss ofapproximately $552,000 on the sale of certain of our investments in marketablesecurities during the three and nine months ended September 30, 2008.  In response to the instability in the globalfinancial markets during these periods, we reviewed our investments inmarketable securities and sold certain investments prior to their maturity inorder to preserve our principal, as the issuers of those securities experiencedsignificant deteriorations in their creditworthiness as evidenced by investmentrating downgrades.  We have the abilityand intent to hold our remaining investments in marketable securities as of September 30,2009 to their scheduled maturity, although we monitor our investment portfoliowith the primary objectives of preserving principal and maintaining properliquidity to meet our operating needs. The weighted average duration of theremaining time to maturity for our portfolio of investments in marketablesecurities as of September 30, 2009 was approximately five months.  As of September 30, 2009, ourinvestments in marketable securities were held in a variety of**

 

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**interest-bearinginstruments, consisting mainly of U.S. Treasury bills, certificates of depositand high-grade corporate notes. We did not hold any derivative instruments,foreign exchange contracts, asset backed securities, mortgage backedsecurities, auction rate securities, or securities of issuers in bankruptcy inour investment portfolio as of September 30, 2009.**

** **

*Fair Value of Financial Instruments*

* *

Fair value is defined as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The followingfair value hierarchy prioritizes the inputs into valuation techniques used tomeasure fair value. Accordingly, we use valuation techniques that maximize theuse of observable inputs and minimize the use of unobservable inputs whendetermining fair value. The three levels of the hierarchy are as follows:

 

Level 1: Inputs thatreflect unadjusted quoted prices in active markets that are accessible to usfor identical assets or liabilities;

 

Level 2: Inputs includequoted prices for similar assets and liabilities in active and inactive marketsor that are observable for the asset or liability either directly orindirectly; and

 

Level 3: Unobservableinputs that are supported by little or no market activity.

 

**Wehave no assets or liabilities that were measured using quoted prices forsimilar assets and liabilities or significant unobservable inputs (Level 2 andLevel 3 assets and liabilities, respectively) as of September 30,2009.  Our financial instruments includecash and cash equivalents, investments in marketable securities, prepaidexpenses, accounts payable and accrued liabilities. The carrying amounts offinancial instruments approximate their fair value due to their shortmaturities. The carrying value of our cash held in money market funds totaling$52.6 million as of September 30, 2009 is included in cash and cashequivalents on our Balance Sheet and approximates market values based on quotedmarket prices, or Level 1 inputs.**

** **

**3.**                 Prepaid Expenses and Other Assets

** **

Prepaid expenses and other assets are comprised of thefollowing:

 
| ** **                                                                        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Prepaid  sales, marketing and medical affairs expenses                            |       | $                            | 1,988,788  |                        | $          | 174,800 |   |
| Prepaid  expenses and other assets                                                |       | 1,271,129                    |       | 597,435                     |       |
| Receivable  and cash in escrow related to litigation settlement (see Note 9) |       | —                       |       | 2,000,000                   |       |
|                                                                              |       | $                            | 3,259,917  |                        | $          | 2,772,235 |   |

 

**4.**                 Intangible asset, net

 

Costs incurred forproducts or product candidates not yet approved by the FDA and for which noalternative future use exists are recorded as expense. In the event a productor product candidate has been approved by the FDA or an alternative future useexists for a product or product candidate, patent and license costs arecapitalized and amortized over the shorter of the expected patent life and theexpected life cycle of the related product or product candidate.

 

As a result of the FDA’sapproval to market FOLOTYNon September 24, 2009, we met a milestone underour license agreement with Memorial Sloan-Kettering Cancer Center, SRIInternational and Southern Research Institute, discussed in Note 9, whichrequired us to make a milestone payment of $5.8 million. We capitalizedthe $5.8 million payment as an intangible asset and began amortizing the assetimmediately following the FDA approval to market FOLOTYN. Amortization expense willbe recorded on a straight line basis over the remaining expected life of thepatent for FOLOTYN, which we expect to last until July 16, 2022. Thisincludes the anticipated Hatch-Waxman extension that provides patent protectionfor drug compounds for a period of up to five years to compensate for timespent in development. This term is our best estimate of the life of the patent.If, however, the Hatch-Waxman extension is not granted, the intangible assetwill be amortized over a shorter period. The amortization expense for the threeand nine months ended September 30, 2009 totaling $7,439 is recorded asamortization of intangible assets in the statement of operations.  The estimated annual amortization expense forthe intangible asset is approximately $121,000 in 2009, $454,000 peryear during 2010 through 2021 and $234,000 in 2022.

 

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The carrying values ofintangible assets are periodically reviewed to determine if the facts andcircumstances suggest that a potential impairment may have occurred. Noimpairment occurred for the three and nine months ended September 30, 2009on the intangible asset, net of $5,792,561.

 

**5.**                 Accrued Liabilities

** **

Accrued liabilities arecomprised of the following:

 
| ** **                                        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued  personnel costs                          |       | $                            | 3,488,483  |                        | $          | 2,816,404 |   |
| Accrued  sales and marketing expenses             |       | 1,403,790                    |       | 695,255                     |       |
| Accrued  research and development expenses        |       | 1,365,022                    |       | 2,272,219                   |       |
| Accrued  clinical manufacturing expenses          |       | 726,902                      |       | 1,153,028                   |       |
| Accrued  litigation settlement costs (see Note 9) |       | —                       |       | 2,000,000                   |       |
| Accrued  expenses—other                      |       | 940,420                      |       | 657,806                     |       |
|                                              |       | $                            | 7,924,617  |                        | $          | 9,594,712 |   |

 

**6.**                 Stockholders’ Equity

** **

On April 3, 2009, wecompleted an underwritten public offering of 7,750,000 shares of our commonstock at the public offering price of $6.30 per share. We received net proceedsfrom the offering of $47.0 million, after deducting $1.4 million ofunderwriting discounts and commissions and approximately $473,000 of offeringexpenses.

 

At our Annual Meeting ofStockholders held on June 23, 2009, our stockholders approved an amendmentto the Allos Therapeutics, Inc. 2008 Equity Incentive Plan, or the Plan,to increase the aggregate number of shares of common stock authorized forissuance under the Plan by 5,750,000 shares. Our board of directors hadpreviously approved the amendment and recommended its approval to ourstockholders.

 

OnJuly 17, 2009, we filed with the Delaware Secretary of State a Certificateof Amendment to our Certificateof Designation of Series A Junior Participating Preferred Stock to increase thenumber of shares designated as Series A Junior Participating PreferredStock thereunder from 1,000,000 shares to 1,500,000 shares. In accordance withthe terms of our Amended and Restated Certificate of Incorporation, as amended,our board of directors has the authority to increase the number of shares ofany series of preferred stock.  TheCertificate of Amendment was approved by our board of directors on July 16,2009.

 

On July 20, 2009, we filed a Shelf RegistrationStatement on Form S-3 with the SEC providing for the registration for saleby us of an aggregate of up to $150 million of shares of our common stock andpreferred stock, depositary shares, various series of debt securities andwarrants to purchase any of such securities, either individually or in units,and also providing for the registration for resale by Warburg Pincus PrivateEquity VIII, L.P., or Warburg, of up to 26,124,430 shares of our commonstock.  We will not receive any proceedsfrom sales of common stock by Warburg, if any. The SEC declared the registration statement effective on August 28,2009.  In October 2009, we completedan underwritten public offering of 14,000,000 shares of our common stock, whichresulted in net proceeds to us of approximately $93.0 million as discussed inNote 11, Subsequent Events.

 

**7.**                 Stock-Based Compensation

** **

Stock-based compensation expense for the three andnine months ended September 30, 2009 and 2008 has been recognized in theaccompanying Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                    |       | **2009**                                             |       | **2008**                                            |       | **2009** |   | **2008** |   |
| Research  and development               |       | $                                                    | (68,784    | )                                                   | $          | 609,767 |   | $ | 1,642,659 |   | $ | 1,947,384 |   |
| Clinical  manufacturing                 |       | 113,207                                              |       | 98,744                                              |       | 321,533 |   | 305,756 |   |
| Marketing,  general and administrative  |       | 1,710,574                                            |       | 1,124,329                                           |       | 4,638,541 |   | 3,683,359 |   |
| Total  stock-based compensation expense |       | $                                                    | 1,754,997  |                                                | $          | 1,832,840 |   | $ | 6,602,733 |   | $ | 5,936,499 |   |

 

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Effective September 30, 2009, Pablo J. Cagnoni,M.D., our Senior Vice President and Chief Medical Officer (CMO), resigned.  As a result of his resignation, we adjustedthe forfeiture rate applied to his equity compensation, which resulted in aone-time $906,000 reversal of research and development stock-based compensationexpense during the three and nine months ended September 30, 2009, ofwhich $699,000 related to stock option awards, $166,000 related to restrictedstock awards and $41,000 related to restricted stock unit awards.

 

We did not recognize a related tax benefit during thethree or nine months ended September 30, 2009 and 2008 as we maintain netoperating loss carryforwards and we have established a valuation allowanceagainst the entire tax benefit as of September 30, 2009.  No stock-based compensation expense wascapitalized on our Balance Sheets as of September 30, 2009 and December 31,2008.

 

The following table summarizes activity and relatedinformation for our stock option awards:

 
| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                | ** ** |
|--------------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**   | ** ** | **Weighted   Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Exercise Price** | ** ** |
| **Outstanding at December 31, 2008**  |       | 7,236,512                    |       | $                                           | 5.14       |   | 3,122,681 |   | $ | 4.15 |   |
| Granted                                    |       | 2,570,812                    |       | 6.80                                        |       |   |   |   |   |
| Exercised                                  |       | (935,899                     | )          | 3.13                                        |       |   |   |   |   |
| Forfeited                                  |       | (401,615                     | )          | 6.27                                        |       |   |   |   |   |
| **Outstanding at September 30, 2009** |       | 8,469,810                    |       | $                                           | 5.81       |   | 3,694,435 |   | $ | 5.04 |   |

 

During the nine months ended September 30, 2009,we granted 2,570,812 stock options with a weighted-average grant-date fair value of $4.21 per share.  During the three months ended September 30,2009 and 2008, we recorded stock-based compensation related to our stock optionplans of $1,754,077 and $1,732,134, respectively.  Duringthe nine months ended September 30, 2009 and 2008, we recorded stock-basedcompensation related to our stock option plans of $6,251,721 and $5,569,655,respectively. The stock-based compensation expense amounts for the three andnine months ended September 30, 2009 include the $699,000 one-timereversal related to the resignation of our former CMO discussed above. As of September 30,2009, the unrecorded stock-based compensation balance related to stock optionawards was $9,314,161 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

The following table summarizes information aboutoutstanding stock options that are fully vested and currently exercisable, andoutstanding stock options that are expected to vest in the future:

 
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of September 30, 2009:**                                        | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options  fully vested and exercisable                                     |       | 3,694,435               |       | 5.9                                                         |       | $                                          | 5.04       |                                | $          | 8,438,284 |   |
| Options  expected to vest, including effects of expected forfeitures |       | 4,029,799               |       | 8.9                                                         |       | $                                          | 6.39       |                                | 3,998,120  |   |
| Options  fully vested and expected to vest                                |       | 7,724,234               |       | 7.4                                                         |       | $                                          | 5.74       |                                | $          | 12,436,404 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on our closing stock priceof $7.25 as of September 30, 2009, which would have been received by theoption holders had all option holders with in-the-money options exercised theiroptions as of that date.  The totalnumber of in-the-money options exercisable as of September 30, 2009 was3,083,118.

 

The total intrinsic value of options exercised duringthe three months ended September 30, 2009 and 2008 was $2,775,020 and$1,522,485, respectively, determined as of the date of option exercise.  The total intrinsic value of optionsexercised during the nine months ended September 30, 2009 and 2008 was$4,369,503 and $2,966,342, respectively, determined as of the date of optionexercise. We settle employee stock option exercises with newly issued commonshares.  No tax benefits were realized byus in connection with these exercises during the three or nine months ended September 30,2009 and 2008 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit.

 

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The following table summarizes activity and relatedinformation for restricted stock, or RS, awards:

 
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested RS at December 31, 2008**  |       | 293,750                    |       | $                                                  | 4.07       |   |
| Granted                                     |       | —                     |       | —                                             |       |
| Vested                                      |       | (131,250                   | )          | 3.81                                               |       |
| Forfeited                                   |       | (37,500                    | )          | 6.17                                               |       |
| **Nonvested RS at September 30, 2009** |       | 125,000                    |       | $                                                  | 3.72       |   |

 

The shares of restrictedstock vest in four equal annual installments from the date of grant.  During the three months ended September 30,2009 and 2008, we recorded stock-based compensation related to restricted stockawards of $(118,862) and $85,691, respectively. During the nine monthsended September 30, 2009 and 2008, we recorded stock-based compensationrelated to restricted stock awards of $21,212 and $326,670, respectively.  The stock-based compensation expense amountsfor the three and nine months ended September 30, 2009 include the$166,000 one-time reversal related to the resignation of our former CMOdiscussed above.  As of September 30,2009, the unrecorded stock-based compensation balance related to restrictedstock awards was $83,259 and will be recognized over an estimatedweighted-average amortization period of 1.2 years.

 

The following table summarizes activity and relatedinformation for restricted stock unit, or RSU, awards:

 
| ** **                                   | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested RSU at December 31, 2008**  |       | —                     |       | $                                                  | —     |   |
| Granted                                      |       | 173,981                    |       | 6.51                                               |       |
| Vested                                       |       | —                     |       | —                                             |       |
| Forfeited                                    |       | (23,873                    | )          | 6.40                                               |       |
| **Nonvested RSU at September 30, 2009** |       | 150,108                    |       | $                                                  | 6.52       |   |

 

The shares of restrictedstock unit awards vest in four equal annual installments from the date ofgrant.  Upon vesting of the restrictedstock unit awards, we issue unrestricted shares of our common stock.  During the three months ended September 30,2009 and 2008, we recorded stock-based compensation related to restricted stockunit awards of $87,054 and $0, respectively. During the nine monthsended September 30, 2009 and 2008, we recorded stock-based compensationrelated to restricted stock unit awards of $254,644 and $0, respectively.  The stock-based compensation expense amountsfor the three and nine months ended September 30, 2009 include the $41,000one-time reversal related to the resignation of our former CMO discussedabove.  As of September 30, 2009,the unrecorded stock-based compensation balance related to restricted stockunit awards was $621,672 and will be recognized over an estimatedweighted-average amortization period of 1.7 years.

 

**8.**                 Net Loss Per Share

** **

Basic net loss per share is computed by dividing thenet loss attributable to common stockholders for the period by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share is computed bygiving effect to all dilutive potential common stock outstanding during theperiod, including stock options, restricted stock, restricted stock unit awardsand shares to be issued under our employee stock purchase plan.

 

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Diluted net loss per share is the same as basic netloss per share for all periods presented because any potential dilutive commonshares were anti-dilutive due to our net loss (as including such shares woulddecrease our basic net loss per share). Such potentially dilutive shares areexcluded when the effect would be to reduce net loss per share. Because wereported a net loss for the three and nine months ended September 30, 2009and 2008, all potentially dilutive common shares have been excluded from thecomputation of the dilutive net loss per share for all periods presented. Such potentiallydilutive common shares consist of the following:

 
| ** **                       | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Common  stock options            |       | 8,469,810              |       | 7,003,180 |   |
| Unvested  restricted stock       |       | 125,000                |       | 293,750 |   |
| Unvested  restricted stock units |       | 150,108                |       | — |   |
|                             |       | 8,744,918              |       | 7,296,930 |   |

 

**9.**                 Commitments and Contingencies

** **

*Royalty and License Fee Commitments for FOLOTYN*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related toFOLOTYN and its uses. Under the terms of the agreement, we paid an up-frontlicense fee of $2.0 million upon execution of the agreement. To date, we havemade aggregate milestone payments of $2.5 million based on the passage of time.Additionally, in May and September 2009, we made milestone paymentsof $1.5 million based on the FDA accepting our New Drug Application for reviewand $5.8 million based on the FDA approval to market FOLOTYN,respectively.  We are also required tomake an additional milestone payment of $3.5 million upon regulatory approvalto market FOLOTYN in Europe. The up-front license fee and all milestonepayments under the agreement prior to FDA approval to market FOLOTYN wererecorded to research and development expense as incurred. All milestonepayments under the agreement subsequent to FDA approval to market FOLOTYN wereor will be capitalized and amortized over the expected useful life. Under theterms of the agreement, we are required to fund all development programs andwill have sole responsibility for all commercialization activities. Inaddition, we will pay the licensors a royalty based on a percentage of netsales of the product, which may be different than our net product revenuerecognized in accordance with U.S. GAAP, or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.

 

*Contingencies*

* *

We were named as a defendant in a purported securitiesclass action lawsuit filed in May 2004 seeking unspecified damagesrelating to the issuance of allegedly false and misleading statements regardingEFAPROXYN during the period from May 29, 2003 to April 29, 2004 andsubsequent declines in our stock price. In an opinion dated October 20,2005, the U.S. District Court for the District of Colorado concluded that theplaintiffs’ complaint failed to meet the legal requirements applicable to itsalleged claims and dismissed the lawsuit. On November 20, 2005, theplaintiffs appealed the District Court’s decision to the U.S. Court of Appealsfor the Tenth Circuit. On February 6, 2008, the parties signed astipulation of settlement, settling the case for $2,000,000. The settlement wassubject to various conditions, including, without limitation, approval of theDistrict Court.  On January 29,2009, the District Court issued its Order and Final Judgment approving thesettlement, including the releases of the defendants for which the settlementprovided.  Neither we nor our formerofficer, who was also named as a defendant, admitted any liability inconnection with the settlement.  Theamount of the settlement in excess of our deductible was covered by ourinsurance carrier.  The period to appealthe District Court’s approval of the settlement lapsed during the three monthsended March 31, 2009 without any further appeals being filed and thesettlement is final. We have no further obligations related to this lawsuit andhave no accrual remaining related to the settlement.

 

**10.**          Recent Accounting Pronouncements

** **

On January 1, 2009,we adopted new accounting guidance for business combinations issued by theFinancial Accounting Standards Board, or the FASB, that generally requires anacquirer (1) to recognize the assets acquired, the liabilities assumed,including those arising from contractual contingencies, any contingentconsideration, and any noncontrolling interest in the acquiree at theacquisition date, measured at their fair values as of that date, with limitedexceptions, (2) in a business combination achieved in stages (sometimesreferred to as a step acquisition) to recognize the identifiable assets andliabilities, as well as the noncontrolling interest in the acquiree, at thefull amounts of their fair values, (3) to measure the noncontrolling 

 

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interest in the acquireeat fair value will result in recognizing the goodwill attributable to thenoncontrolling interest in addition to that attributable to the acquirer, (4) torecognize changes in the amount of its deferred tax benefits that arerecognizable because of a business combination either in income from continuingoperations in the period of the combination or directly in contributed capital,depending on the circumstances. We have not entered into any businesscombinations and will apply this new guidance to any business combinations inthe future.

 

On January 1, 2009,we adopted new accounting guidance for noncontrolling interests in a subsidiaryissued by the FASB.  This guidanceestablishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. It also clarifiesthat a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements and changes the way the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the noncontrollinginterest. It also requires disclosure, on the face of the consolidatedstatement of income, of the amounts of consolidated net income attributable tothe parent and to the noncontrolling interest. The guidance also requires thata parent recognize a gain or loss in net income when a subsidiary isdeconsolidated and requires expanded disclosures in the consolidated financialstatements that clearly identify and distinguish between the interests of theparent owners and the interests of the noncontrolling owners of asubsidiary.  We currently do not have anysubsidiaries.

 

On January 1, 2009,we adopted new accounting guidance issued by the FASB to improve financialreporting about derivative instruments and hedging activities by requiringcompanies to enhance disclosure about how these instruments and activitiesaffect their financial position, performance and cash flows. We currently do not have any derivativeinstruments.

 

On January 1, 2009,we adopted new accounting guidance issued by the FASB to address whetherinstruments granted in share-based payment transactions are participatingsecurities prior to their vesting and therefore need to be included in theearnings per share calculation under the two-class method. This guidancerequires companies to treat unvested share-based payment awards that havenon-forfeitable rights to dividends or dividend equivalents as participatingsecurities and thus, include them in calculations of basic earnings per share.There was no impact to our financial statements.

 

InApril 2009, the FASB issued new accounting guidance that requiresdisclosures about fair value of financial instruments for interim reportingperiods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financialinformation at interim reporting periods.  We adopted this guidance on April 1,2009.  The required disclosures are included in Note 2, Fair Value ofFinancial Instruments.

 

InApril 2009, the FASB issued new accounting guidance that amends theexisting other-than-temporary impairment guidance for debt securities to makeit more operational and to improve the presentation and disclosure of suchimpairments on debt and equity securities in the financial statements. It doesnot amend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities.  We adopted this guidanceon April 1, 2009 and it did not materially impact our financialstatements.

 

In May 2009, theFASB issued new accounting guidance that establishes general standards ofaccounting for and disclosures of events that occur after the balance sheetdate but before financial statements are issued or are available to be issued.In particular, this statement sets forth (1) the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition or disclosure in thefinancial statements; (2) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements; and (3) the disclosures that an entity should makeabout events or transactions that occurred after the balance sheetdate.  We adopted this guidance on April 1, 2009, andthe required disclosures are included in Note 11, Subsequent Events.

 

In June 2009, theFASB issued accounting guidance that eliminates the exemption fromconsolidation for qualifying special-purpose entities, effective for financialasset transfers occurring after the beginning of an entity’s first fiscal yearthat begins after November 15, 2009. We are currently evaluating thepotential impact of this guidance.

 

In June 2009, theFASB issued accounting guidance that assists**in determining whether an enterprise has a controlling financialinterest in a variable interest entity. This guidance is effective as of thebeginning of the first fiscal year that begins after November 15, 2009. Weare currently evaluating the potential impact of this guidance on our financialstatements.

 

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In June 2009, the FASB approved its AccountingStandards Codification, or Codification, as the single source of authoritativeU.S. accounting and reporting standards applicable for all non-governmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative U.S. GAAP for SECregistrants. We adopted this Codification during the third quarter of2009.  As the Codification does notchange or alter existing U.S. GAAP, it did not have any impact on our financialposition or results of operations.

 

In October 2009, theFASB issued new accounting guidance related to revenue arrangements withmultiple deliverables that provides principles for allocation of considerationamong an arrangement’s multiple-elements, allowing more flexibility inidentifying and accounting for separate deliverables. The guidance introducesan estimated selling price method for valuing the elements of a bundledarrangement if vendor-specific objective evidence or third-party evidence ofselling price is not available, and significantly expands related disclosurerequirements. This guidance is effective on a prospective basis for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010. Alternatively, adoption may be on a retrospectivebasis, and early application is permitted. We are currently evaluating theimpact of adopting this guidance on our financial statements.

 

**11. ****Subsequent Events**

 

Wehave evaluated all subsequent events through November 3, 2009,the date which these financial statements were issued.

 

On October 13, 2009,we completed an underwritten public offering of 14,000,000 shares of our commonstock at the public offering price of $7.10 per share (the October 2009Financing). We received net proceeds from the offering of approximately $93.0million, after deducting underwriting discounts and commissions and estimatedoffering expenses. We have also granted the underwriters an option through November 6,2009 to purchase up to an aggregate of 2,100,000 additional shares of commonstock to cover over-allotments, if any. We currently anticipate using the net proceeds of the offering primarilyfor activities relating to the commercialization of FOLOTYN, preclinicalresearch and clinical development of FOLOTYN, and for general corporatepurposes.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following Management’s Discussion and Analysis of Financial Conditionand Results of Operations, as well as information contained elsewhere in thisreport,*contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements regarding ourcommercialization of FOLOTYN for patients with relapsed or refractoryperipheral T-cell lymphoma; our projected timeline to present top line resultsfrom our Phase 2b trial comparing FOLOTYN and Tarceva (erlotinib) in patientswith advanced non-small cell lung cancer; our projected net cash use inoperating activities for fiscal year 2009; other statements regarding ourfuture product development and regulatory strategies, including our intent todevelop or seek regulatory approval for FOLOTYN in specific indications; theability of our third-party manufacturers to support our requirements for drugsupply; any statements regarding our future financial performance, results ofoperations or sufficiency of capital resources to fund our operatingrequirements; and any other statements that are other than statements ofhistorical fact. In some cases, these statements may be identified byterminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negativeof such terms and other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These statements involve known and unknown risks anduncertainties that may cause our, or our industry’s results, levels ofactivity, performance or achievements to be materially different from thoseexpressed or implied by the forward-looking statements. Factors that may causeor contribute to such differences include, among other things, those discussedin Part II, Item 1A of this report under the caption “Risk Factors.” Allforward-looking statements included in this report are based on informationavailable to us as of the date hereof and we undertake no obligation to reviseany forward-looking statements in order to reflect any subsequent events orcircumstances. Forward-looking statements not specifically described above alsomay be found in these and other sections of this report.

* *

**Overview**

 

We are a biopharmaceutical company committed to thedevelopment and commercialization of innovative anti-cancer therapeutics. Ourgoal is to build a profitable company by generating income from products wedevelop and commercialize, either alone or with one or more potential strategicpartners. We strive to develop proprietary products that have the potential toimprove the standard of care in cancer therapy. Our focus is on productopportunities for oncology that leverage our internal clinical development andregulatory expertise and address important markets with unmet medical needs. Wemay also seek to grow our product portfolio through product acquisition andin-licensing efforts.

 

We are currently focused on the development andcommercialization of FOLOTYNTM (pralatrexate injection), a selectiveantifolate designed to accumulate preferentially in cancer cells. On September 24,2009, the U.S. Food and Drug Administration, or FDA, granted acceleratedapproval of FOLOTYN for use as a single agent for the treatment of patientswith relapsed or refractory peripheral T-cell lymphoma, or PTCL. Thisindication is based on overall response rate. Clinical benefit such asimprovement in progression free survival, or PFS, or overall survival has notbeen demonstrated. FOLOTYN represents our first drug approved for marketing inthe United States. FOLOTYN is the first and only drug approved by the FDA forthis indication and represents a new treatment option for patients withrelapsed or refractory PTCL. In connection with the approval, we are requiredto conduct several post-approval studies. We began making FOLOTYN available forcommercial sale in the United States on October 5, 2009, with ananticipated commercial launch in January 2010. We are also developingFOLOTYN for use as a single agent and in combination therapy regimens in arange of hematologic malignancies and solid tumors.

 

**FOLOTYN**TM** (pralatrexate injection)**

 

FOLOTYN is a selective antifolate designed toaccumulate preferentially in cancer cells. Acting on the folate pathway,FOLOTYN interferes with DNA synthesis and triggers cancer cell death.  FOLOTYN can be delivered as a single agent,for which we currently have approval, and has the potential to be used incombination therapy regimens. We believe that FOLOTYN’s unique mechanism ofaction offers us the ability to target the drug for development in a variety ofsolid tumors and hematological malignancies. We currently retain exclusiveworldwide commercial rights to FOLOTYN for all indications. We have receivedaccelerated approval from the FDA for the use of FOLOTYN for 

 

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the treatment of patients with relapsed or refractoryPTCL on September 24, 2009. We began making FOLOTYN available forcommercial sale in the United States on October 5, 2009, with ananticipated commercial launch in January 2010.

 

We are currently evaluating FOLOTYN in a Phase 2btrial for non-small cell lung cancer, or NSCLC, and in a Phase 2 trial foradvanced or metastatic relapsed transitional cell carcinoma, or TCC, of theurinary bladder, as well as in several clinical trials for hematologicmalignancies. Our Phase 2b trial in NSCLC is fully enrolled and we anticipatereporting data from this trial in the first half of 2010.

 

 

***FOLOTYN approved for the treatment of relapsed or refractory peripheralT-cell lymphoma***

 

T-cell lymphoma comprises a biologically diverse groupof blood cancers that account for approximately 10 to 15 percent of all casesof non-Hodgkin’s lymphoma, or NHL, in the United States. According to theAmerican Cancer Society, an estimated 66,000 new cases of NHL were expected tobe diagnosed in the United States in 2008. We estimate the incidence of newlydiagnosed PTCL in the United States to be approximately 5,600 patients. Inaddition, we estimate the overall prevalence of PTCL in the United States to beapproximately 19,900 patients, including approximately 9,850 patients withrelapsed or refractory PTCL. There are currently no pharmaceutical agentsapproved for use in the treatment of first-line PTCL and, prior to the recentapproval of FOLOTYN, there were no pharmaceutical agents approved for use inthe treatment of patients with relapsed or refractory PTCL. In addition tothose PTCL patients who do not respond to first-line treatment, a significantnumber of first-line multi-agent chemotherapy responders relapse or becomerefractory after treatment. According to the clinical literature, patients withPTCL have an overall five-year survival rate of approximately 25% to 40%depending on sub-type, and a median overall survival of 1 to 3 years.

 

We intend to commercialize FOLOTYN through anoncology-focused U.S. sales and marketing organization. We have been activelypreparing for the commercial launch of FOLOTYN in the United States, includingthe ongoing development of our sales and marketing, medical affairs andmanufacturing operations.  We believethat the market for relapsed or refractory PTCL is addressable with a targetedU.S. sales and marketing organization. We plan to market and sell FOLOTYN in the United States through ourcommercial organization, which includes 25 sales specialists that we currentlyexpect will increase 

 

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to approximately 50 specialists in advance of ourplanned commercial launch of FOLOTYN in January 2010.  We have initially established the wholesaleacquisition cost for FOLOTYN at $3,125 per 20 mg vial and $6,250 per 40 mgvial. We have no experience selling FOLOTYN at these prices and we cannotassure you that we will not be required to offer discounts or allowances towholesalers or otherwise change our prices to effectively commercializeFOLOTYN. As a result, our net revenue may not be directly associated with ourproposed wholesale acquisition cost.

 

In February 2009, wecompleted two market research studies designed to evaluate the U.S. market forPTCL and the potential trial, use and adoption of FOLOTYN as a commerciallyavailable product.  Both studies were conducted by an independent marketresearch firm and the physician respondents were blinded to the name of ourcompany and the product being evaluated.

 

In the quantitative market research survey of 143community and institution-based hematologists and oncologists who treatpatients with PTCL, physicians were asked questions regarding their currentPTCL treatment patterns, perception of a product, which we refer to as ProductX, described having a product profile similar to that of FOLOTYN as establishedin the PROPEL trial described below, and potential change in treatment patternsfollowing the commercial availability of Product X. In general, physiciansrated their satisfaction with current therapies for treating patients withrelapsed or refractory PTCL as low.  Whenasked to rate the value of various combination therapy regimens and singleagents typically prescribed as off-label treatments for patients with relapsedor refractory PTCL, physicians rated autologous/allogeneic stem cell transplantthe highest, with an average value rating of 6.7 on a scale of 1 (not valuableat all) to 10 (very valuable). The combination therapy regimens averaged arating of 5.7 out of 10, while the single agents averaged a rating of 5.2 outof 10. When asked to assess the value of the Product X product profile,physicians rated Product X more favorably than current PTCL treatments with anaverage value rating of 7.7 out of 10. Participating physicians were also askedto identify the key product attributes they consider when selecting a treatmentfor patients with relapsed or refractory PTCL. Overall survival was rated asthe most important product attribute, followed by overall response rate,disease control rate, PFS, complete response rate and duration of response.

 

Separately, in the qualitative market research surveyof 45 community and institution-based hematologists and oncologists who treatpatients with PTCL, physicians were asked questions regarding their currentPTCL treatment approaches and impressions of the Product X product profiledemonstrated in the PROPEL trial. Among the key findings, 98% of respondentsindicated that they believed Product X would be an improvement over existingtherapies, and 93% indicated that they would use Product X in the second-linesetting for patients with relapsed or refractory PTCL who were not candidatesfor bone marrow transplant. Based on the results of our market research, webelieve the FOLOTYN package insert aligns with physicians’ treatment prioritiesand is likely to support the trial, use and adoption of FOLOTYN for thetreatment of patients with relapsed or refractory PTCL.

 

***FOLOTYN clinical development in T-cell lymphoma***

 

TheFOLOTYN approval was based on the results from PROPEL, an open-label,single-arm, multi-center, international clinical trial that enrolled 115patients with relapsed or refractory PTCL, 109 of whom were consideredevaluable for efficacy according to the trial protocol. Patients wereconsidered evaluable if they received at least one dose of FOLOTYN, theirdiagnosis of PTCL was confirmed by independent pathology review, and they hadrelapsed or refractory disease after at least one prior treatment. Patientswere treated with FOLOTYN at 30 mg/m2 once weekly by intravenous push over 3-5minutes for 6 weeks in 7-week cycles until disease progression or unacceptabletoxicity.  In addition, patients received1 mg of vitamin B12intramuscularly every8-10 weeks and 1.0-1.25 mg of folic acid orally on a daily basis.  We believe PROPEL was the largestprospectively designed single agent trial ever conducted in patients withrelapsed or refractory PTCL.

 

The primary efficacy endpoint of the trial wasoverall response rate (complete response, complete response unconfirmed andpartial response) as assessed by International Workshop Criteria, or IWC. Thekey secondary efficacy endpoint was duration of response.  Response assessments were scheduled at theend of cycle 1 and then every other cycle (every 14 weeks).  Duration of response was measured from thefirst day of documented response to disease progression or death.  Response and disease progression wereevaluated by independent central review using the IWC.  The results of the trial demonstrated that 29of 109 evaluable patients, or 27%, responded to FOLOTYN. The median duration ofresponse was 287 days, or 9.4 months (range 1-503 days). Thirteen of 109evaluable patients had a duration of response greater-than or equal to 14 weeks

 

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(range 98-503 days). The most common grade 3/4adverse events were thrombocytopenia, which was observed in 33% of patients;mucositis in 21% of patients; neutropenia in 20% of patients; and anemia in 17%of patients.

 

FOLOTYN was approved for the treatment of patientswith relapsed or refractory PTCL under the FDA’s accelerated approval program,which allows the FDA to approve products for cancer or other life-threateningdiseases based on initial positive clinical data.  As a condition ofapproval, we are required to conduct the following post-approval studies thatare intended to verify and describe FOLOTYN’s clinical benefit in patients withT-cell lymphoma and assess whether FOLOTYN poses a serious risk of altered druglevels resulting from organ impairment:

 

·                  a Phase 3, multi-center, randomized clinical study ofsequential FOLOTYN versus observation in patients with newly diagnosedaggressive PTCL who have responded following initial treatment withchemotherapy based on CHOP (cyclophosphamide, doxorubicin, vincristine andprednisone).  The primary endpoint will be PFS.  Patients will beenrolled prior to initiation of the CHOP-based regimen.  Patients responding (either a completeresponse or a partial response) after CHOP-based treatment will be randomized2:1 to FOLOTYN versus observation.  Weplan to initiate this study in 2010 and have agreed to submit the results ofthis study to the FDA by June 30, 2017.

 

·                  a Phase 3, multi-center, randomized clinical studycomparing FOLOTYN in combination with systemic Targretin (bexarotene) versussystemic bexarotene alone in patients with cutaneous T-cell lymphoma who arerefractory to at least one prior systemic therapy.  The primary endpointwill be PFS and response rate will be a secondary endpoint.  Prior toinitiation of the Phase 3 study, we will conduct a Phase 1 study to determinethe maximum tolerated dose of the combination.  We plan to initiate thePhase 1 study in 2010 and have agreed to complete the Phase 1 study by August 31,2011.  We have also agreed to submit theresults of the Phase 3 study to the FDA by September 30, 2015.

 

·                  a Phase 1 clinical study to evaluate thepharmacokinetics of FOLOTYN in relapsed or refractory lymphoma patients(B-cell, T-cell and Hodgkin’s lymphoma) with mild to severe renalimpairment.  The trial will have three cohorts of six patients for a totalof 18 patients.  Cohorts will be based on the severity of renalimpairment: severely impaired, moderately impaired and mildly impaired. The FOLOTYN dose for the first two cohorts will be determined based on thepharmacokinetics experience from the PROPEL study and the third cohort will bedosed at the recommended dose (30 mg/m2).  We have agreed to submit theresults of this study to the FDA by January 31, 2013.

 

·                  completion of an ongoing Phase 1 mass balance clinicalstudy to evaluate the excretion and metabolic profile of FOLOTYN.  We haveagreed to submit the results of this study to the FDA by December 31,2010.

 

Failureto complete the studies or adhere to the timelines set by the FDA could resultin penalties, including fines or withdrawal of FOLOTYN from the market, unless we are able to demonstrate good cause for notcompleting the studies or adhering to thetimelines.  The FDA may also initiate proceedings to withdraw approval ifour Phase 3 post-approval studies fail to verify the clinical benefit of FOLOTYN.  Further, the FDA may requireus to strengthen the warnings and precautions section of the FOLOTYN packageinsert based on the results of the Phase 1 studies.

 

TheFDA has awarded orphan drug status to FOLOTYN for the treatment of patientswith T-cell lymphoma. Under the U.S. Orphan Drug Act, the first company toreceive FDA approval for pralatrexate for the designated orphan drug indicationobtains seven years of marketing exclusivity during which the FDA may notapprove another company’s application for pralatrexate for the same orphanindication.  Because the FDA approvedFOLOTYN for the treatment of patients with relapsed or refractory PTCL, asubset of T-cell lymphoma, we expect to receive seven years of marketingexclusivity for that indication.  Orphandrug exclusivity would not prevent FDA approval of a different drug for theorphan indication or the same drug for a different indication.

 

The European MedicinesAgency, or EMEA, has granted Orphan Medicinal Product Designation to FOLOTYNfor the treatment of PTCL. The EMEA Orphan Medicinal Product Designation isintended to promote the development of drugs that may provide significantbenefit to patients suffering from rare diseases identified as life-threateningor very serious. Under EMEA guidelines, Orphan Medicinal Product Designationprovides ten years of potential market exclusivity once the product candidateis approved for marketing for the designated indication in the European Union.

 

Basedon the results of the PROPEL trial, we intend to seek regulatory approval tomarket FOLOTYN in Europe and other countries for the treatment of patients withrelapsed or refractory PTCL.  Our currentintention is to submit a Marketing Authorization Application in Europe in 2010.  We intend to enter into co-promotion or out-licensingarrangements with other 

 

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pharmaceuticalor biotechnology partners where necessary to reach foreign market segments thatare not reachable by a U.S.-based sales force or when deemed strategically andeconomically advisable.

 

***FOLOTYN clinical development beyond PTCL***

 

BeyondPTCL, we are committed to developing FOLOTYN both as a single agent and incombination therapy regimens in a variety of hematologic malignancies and solidtumor indications.  The followingclinical trials involving FOLOTYN are currently ongoing:

 

·                  a Phase 2b, randomized, international, multi-center trial comparingFOLOTYN and Tarceva (erlotinib) in patients with Stage IIIB/IV NSCLC who are,or have been, cigarette smokers who have failed treatment with at least oneprior platinum-based chemotherapy regimen.  We initiated patientenrollment in this trial in January 2008 and completed patient enrollmentwith 201 patients in July 2009.  We currently expect to report topline results of the trial in the first half of 2010, although the actual timingmay vary based upon a number of factors.

 

·            aPhase 2, open-label, single-arm, multi-center trial of FOLOTYN in patients withadvanced or metastatic relapsed TCC of the urinary bladder.  We initiatedpatient enrollment in this trial in July 2008.  The trial will seekto enroll up to 41 patients in up to 20 investigative sites worldwide.

 

·            aPhase 1/2a, open-label, multi-center trial of FOLOTYN and Gemzar (gemcitabine)in patients with relapsed or refractory NHL and Hodgkin’s disease.  Weinitiated patient enrollment in this trial in May 2007.  In July 2009,we completed patient enrollment in the Phase 1 portion of this trial andinitiated enrollment in the Phase 2a portion of the trial to assess theefficacy and safety of two different schedules of this combination in patientswith NHL, both B-cell and T-cell, as well as in patients with Hodgkin’s lymphoma.

 

·            aPhase 1, open-label, multi-center trial of FOLOTYN in patients with relapsed orrefractory cutaneous T-cell lymphoma.  We initiated patient enrollment inthis trial in August 2007.  We plan to enroll up to 56 evaluablepatients in the trial with the objective of determining the optimal dose andsafety profile, including at least 20 patients at what we believe to be theoptimal dose and schedule.

 

·               a Phase 2, single-arm, open-label, multi-center trial of FOLOTYN inpatients with aggressive relapsed or refractory B-cell non-Hodgkin’slymphoma.  This trial will seek to enrollapproximately 27 evaluable patients in up to 10 investigative sitesworldwide.  The primary endpoint of thestudy is objective response rate (complete and partial response) per IWC.  Secondary endpoints include duration ofresponse, PFS, overall survival, and the safety and tolerability of FOLOTYN.

 

In addition to the treatment of T-cell lymphoma, theFDA has awarded orphan drug status to FOLOTYN for the treatment of patientswith follicular lymphoma and diffuse large B-cell lymphoma.  In addition to the treatment of PTCL, theEMEA has granted Orphan Medicinal Product Designation to FOLOTYN for thetreatment of non-papillary TCC of the urinary bladder.

 

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute. Under the agreement, as amended, we obtainedexclusive worldwide rights to a portfolio of patents and patent applicationsrelated to FOLOTYN and its uses. The portfolio currently consists of two issuedpatents in the United States, two issued patents in Europe, an issued patent inSingapore, an allowed patent application in New Zealand, and pending patentapplications in the United States, Canada, Europe, Australia, Japan, China,Brazil, Indonesia, South Korea, Mexico, Norway, New Zealand, the Philippines,and South Africa.

 

**RH1**

 

**RH1 isa small molecule chemotherapeutic agent that we believe is bioactivated by theenzyme DT-diaphorase, also known as NAD(P)H quinone oxidoreductase.  In June 2009,we discontinued the RH1 development program.  In August 2009, weprovided notice of termination of our license agreement for RH1 to thelicensors, which termination was effective September 6, 2009.**

 

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**Resultsof Operations**

 

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations. We haveincurred these losses principally from costs incurred in our research anddevelopment programs, clinical manufacturing and from our marketing, generaland administrative expenses. On September 24, 2009, we obtainedaccelerated approval from the FDA for FOLOTYN for use as a single agent for thetreatment of patients with relapsed or refractory PTCL.  We began making FOLOTYN available forcommercial sale in the United States on October 5, 2009, with ananticipated commercial launch in January 2010.  Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully commercialize FOLOTYN for the treatment of patients with relapsedor refractory PTCL.  We are alsodeveloping FOLOTYN for use as a single agent and in combination therapyregimens in a range of hematologic malignancies and solid tumor indications,which may or may not lead to obtaining the necessary regulatory approvals tomarket FOLOTYN for additional indications. Clinical development timelines,likelihood of success and total costs vary widely and are impacted by a varietyof risks and uncertainties, including those discussed in the “Risk Factors”section of Part II, Item 1A below. We may continue incurring net losses for the foreseeable future. We maynever generate significant revenue from product sales or become profitable. Weexpect to continue to spend substantial amounts on research and development,including amounts spent on conducting clinical trials and seeking additionalregulatory approvals for FOLOTYN, and commercializing FOLOTYN for the treatmentof patients with relapsed or refractory PTCL.

 

We anticipate continuingour current development programs and/or beginning other long-term developmentprojects involving FOLOTYN. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful.  In addition, we expect to incur significantcosts relating to commercialization of FOLOTYN for the treatment of patientswith relapsed or refractory PTCL, including costs related to our sales andmarketing, medical affairs and manufacturing operations.  Therefore, we may need to raise additionalcapital to support our future operations. Our actual capital requirements will depend on many factors, includingthose discussed under the “Liquidity and Capital Resources” section below.

 

***Comparisonof three and nine months ended September 30, 2009 and 2008***

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:                   |       |                                                 |       |                                                |       |   |   |   |   |
| Research  and development              |       | $                                                    | 6,025,486  |                                                | $          | 6,360,950 |   | $ | 18,900,803 |   | $ | 17,738,486 |   |
| Clinical  manufacturing                |       | 1,512,341                                            |       | 1,727,630                                           |       | 5,773,776 |   | 4,799,240 |   |
| Marketing,  general and administrative |       | 11,327,073                                           |       | 5,326,357                                           |       | 26,326,317 |   | 15,776,485 |   |
| Amortization  of intangible asset      |       | 7,439                                                |       | —                                              |       | 7,439 |   | — |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total  operating expenses              |       | $                                                    | 18,872,339 |                                                | $          | 13,414,937 |   | $ | 51,008,335 |   | $ | 38,314,211 |   |

 

*Researchand Development.* Researchand development expenses include the costs of certain personnel, basicresearch, preclinical studies, clinical trials, regulatory affairs,biostatistical data analysis and licensing fees for our product candidatesincurred prior to receiving regulatory approval.

 

Research and developmentexpenses for the three months ended September 30, 2009 and 2008 were $6.0million and $6.4 million, respectively. The $335,000 decrease in research and development expenses in the threemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily due to the following:

 

·                a $512,000 decrease in clinical trial costs involvingFOLOTYN, including decreased costs for PROPEL, which completed patientenrollment in April 2008; and

 

·                  a $679,000 decrease in stock-based compensation,primarily related to the resignation of our former Chief Medical Officer (CMO),as discussed in more detail in the *Stock-based CompensationExpense* section below.

 

Thisdecrease was partially offset by:

 

·                  a $585,000 increase in consulting and professionalfees, primarily related to regulatory affairs and preparations for 

 

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the FDA’s Oncologic Drugs Advisory Committee, or ODAC,meeting for FOLOTYN in September 2009; and

 

·                a $351,000 increase related to key personnel changesand related travel costs, mainly attributable to additional headcount and increasesin compensation costs year over year.

 

Research and developmentexpenses for the nine months ended September 30, 2009 and 2008 were $18.9million and $17.7 million, respectively. The $1.2 million increase in research and development expenses in thenine months ended September 30, 2009 as compared to the same period in2008 was primarily due to the following:

 

·                  a $1.5 million increase in licensing costs forpralatrexate, as $1.5 million of milestone payments under the license agreementfor FOLOTYN became due upon FDA acceptance of our New Drug Application, or NDA,for review in May 2009, with no corresponding amount in the same period in2008;

 

·                  a $1.5 million increase related to key personnelchanges and related travel costs, mainly attributable to additional headcountand increases in compensation costs year over year; and

 

·               a $1.5 million increase in consulting, professional fees and grants,primarily related to regulatory affairs, including preparations related tofiling of our NDA for FOLOTYN and the ODAC meeting.

 

Thisincrease was partially offset by:

 

·               a $2.3 million decrease in clinical trial costsinvolving FOLOTYN, including decreased costs for PROPEL, which completedpatient enrollment in April 2008;

 

·               a $600,000 decrease in preclinical studies, primarilyrelated to FOLOTYN; and

 

·               a $305,000 decrease in stock-based compensation,primarily related to the resignation of our former CMO, as discussed in moredetail in the *Stock-based Compensation Expense*section below.

 

For the fourth quarter of2009, we expect our research and development expenses to increase compared tothe quarterly average for the nine months ended September 30, 2009 due tothe following:

 

·               an increase in clinical trial costsinvolving FOLOTYN, including study start-up costs for the post-approvalclinical studies required by the FDA; and

 

·               an increase in personnel and relatedtravel costs primarily resulting from additional headcount; offset by

 

·               a decrease in licensing costs forFOLOTYN, as upon FDA approval to market FOLOTYN, any additional milestonepayments would be capitalized as an intangible asset. No additional milestonepayments are expected to become due under the license agreement for FOLOTYNduring the fourth quarter.

 

*ClinicalManufacturing.* Clinicalmanufacturing expenses include the costs of certain personnel, third-partymanufacturing costs for development of drug materials for use in clinicaltrials and preclinical studies, and costs associated with pre-commercialscale-up of manufacturing to support anticipated regulatory and potentialcommercial requirements. Prior to the September 24, 2009 regulatoryapproval of FOLOTYN, costsassociated with manufacturing process development and the manufacture of drugproduct were recorded as clinical manufacturing expenses. Subsequent toapproval, costs associated with the manufacture of FOLOTYN to be sold in the United States will be capitalized intoinventory.

 

Clinical manufacturingexpenses for the three months ended September 30, 2009 and 2008 were $1.5million and $1.7 million, respectively. The $215,000 decrease in clinical manufacturing expenses in the threemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily due to a decrease in consulting expenses, primarily related to theuse of consultants in connection with the preparation and filing of our NDA forFOLOTYN that was completed in March 2009.

 

Clinical manufacturingexpenses for the nine months ended September 30, 2009 and 2008 were $5.8million and $4.8 million, respectively. The $1.0 million increase in clinical manufacturing expenses in the ninemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily due to an increase in third-party manufacturing costs for clinical 

 

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trial material andpre-commercial scale-up activities for FOLOTYN.

 

For the fourth quarter of2009, we expect our clinical manufacturing expenses to increase relative to thequarterly average for the nine months ended September 30, 2009 due to thefollowing:

 

·               an increase in third-party manufacturingcosts for FOLOTYN to support ongoing and planned clinical trials and theaddition of secondary third-party manufacturing suppliers;

 

·               anincrease in personnel and related travel costs primarily resulting fromadditional headcount; and

 

·               anincrease in non-cash stock-based compensation expense related to grants for newemployees.

 

*Marketing,General and Administrative.*  Marketing, general andadministrative expenses include costs for pre-marketing activities, corporatedevelopment, executive administration, corporate offices and relatedinfrastructure.

 

Marketing, general andadministrative expenses for the three months ended September 30, 2009 and2008 were $11.3 million and $5.3 million, respectively.  The $6.0 million increase in marketing,general and administrative expenses in the three months ended September 30,2009 as compared to the same period in 2008 was primarily due to the following:

 

·                  a $3.3 millionincrease related to key personnel changes and related travel and facilitiescosts, mainly attributable to additional headcount, including approximately 25sales specialists, and increases in compensation costs year over year;

 

·                  a $2.2 millionincrease related to pre-commercial planning activities for FOLOTYN; and

 

·                  a $586,000increase in non-cash stock-based compensation expense, as discussed in moredetail in the *Stock-based Compensation Expense*section below.

 

Marketing, general andadministrative expenses for the nine months ended September 30, 2009 and2008 were $26.3 million and $15.8 million, respectively.  The $10.5 million increase in marketing,general and administrative expenses in the nine months ended September 30,2009 as compared to the same period in 2008 was primarily due to the following:

 

·                  a $5.4 millionincrease related to key personnel changes and related travel and facilitiescosts, mainly attributable to additional headcount, including approximately 25sales specialists, and increases in compensation costs year over year;

 

·                  a $4.2 millionincrease related to pre-commercial planning activities for FOLOTYN; and

 

·                  a $955,000increase in non-cash stock-based compensation expense, as discussed in moredetail in the *Stock-based Compensation Expense*section below.

 

For the fourth quarter of2009, we expect our marketing, general and administrative expenses to increaserelative to the quarterly average for the nine months ended September 30,2009 due to the following:

 

·                  an increase in sales and marketingcosts associated with executing our post-approval FOLOTYN marketing andpromotional programs for the anticipated commercial launch FOLOTYN in January 2010;

 

·               an increase ingeneral and administrative expenses associated with building and maintainingour administrative infrastructure to support the commercialization of FOLOTYN;

 

·                  an increase inpersonnel costs, primarily resulting from additional headcount, including a fullquarter of costs for the 25 sales specialists hired in the third quarter andadditional sales specialists hired in the fourth quarter to bring the total upto approximately 50 sales specialists in preparation for the anticipatedcommercial launch of FOLOTYN in January 2010; and

 

·                  an increase in non-cash stock-basedcompensation expense related to grants for new employees.

 

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*Amortizationof intangible asset.*  Amortization of intangible assetincludes amortization of capitalized license costs over the expected patentlife of the related product.

 

Amortization ofintangible asset expenses for the three and nine months ended September 30,2009 and 2008 were $7,000 and $0, respectively. The $7,000 increase in amortization of intangible asset expenses in thethree months ended September 30, 2009 as compared to the same period in2008 was due to the amortization of the $5.8 million intangible asset resultingfrom the milestone payment in September 2009, with no corresponding amountin the same period in 2008.  Amortizationexpense will be recorded on a straight line basis over the estimated remaininglife of the patent for FOLOTYN, which we expect to last until July 16,2022. This includes the anticipated Hatch-Waxman extension that provides patentprotection for drug compounds for a period of up to five years to compensatefor time spent in development. This term is our best estimate of the life ofthe patent.  If, however, theHatch-Waxman extension is not granted, the intangible asset will be amortizedover a shorter period.

 

*Stock-basedCompensation Expense. *Stock-basedcompensation expense for the three and nine months ended September 30,2009 and 2008 has been recognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research  and development               |       | $                                                    | (68,784    | )                                                   | $          | 609,767 |   | $ | 1,642,659 |   | $ | 1,947,384 |   |
| Clinical  manufacturing                 |       | 113,207                                              |       | 98,744                                              |       | 321,533 |   | 305,756 |   |
| Marketing,  general and administrative  |       | 1,710,574                                            |       | 1,124,329                                           |       | 4,638,541 |   | 3,683,359 |   |
| Total  stock-based compensation expense |       | $                                                    | 1,754,997  |                                                | $          | 1,832,840 |   | $ | 6,602,733 |   | $ | 5,936,499 |   |

 

Effective September 30,2009, Pablo J. Cagnoni, M.D., our Senior Vice President and Chief MedicalOfficer (CMO), resigned.  As a result ofhis resignation, we adjusted the forfeiture rate applied to his equitycompensation, which resulted in a one-time $906,000 reversal of research anddevelopment stock-based compensation expense during the three and nine monthsended September 30, 2009, of which $699,000 related to stock optionawards, $166,000 related to restricted stock awards and $41,000 related to restrictedstock unit awards.

 

The $1.8 million ofstock-based compensation recognized in the three months ended September 30,2009 and 2008 was primarily related to our stock option plans. The $78,000decrease in stock-based compensation expense in the three months ended September 30,2009 as compared to the same period in 2008 was primarily due to the reversalrelated to the resignation of our former CMO discussed above, offset by anincrease in the number of options granted to new employees and to existingemployees pursuant to our annual grants that occurred in February 2009.

 

Of the $6.6 million ofstock-based compensation recognized in the nine months ended September 30,2009, $6.3 million was related to our stock option plans, $275,000 relatedto restricted stock and restricted stock units and $75,000 was related to ouremployee stock purchase plan.  Of the$5.9 million of stock-based compensation recognized in the nine months ended September 30,2008, $5.6 million was related to our stock option plans, $327,000 relatedto restricted stock and $40,000 was related to our employee stock purchaseplan. The $666,000 increase in stock-based compensation expense in the ninemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily due to an increase in the number of options granted to new employeesand to existing employees pursuant to our annual grants that occurred in February 2009,offset by the reversal related to the resignation of our former CMO discussedabove.

 

As of September 30,2009, the unrecorded stock-based compensation balance related to stock optionawards was $9.3 million and will be recognized over an estimatedweighted-average amortization period of 1.4 years. As of September 30,2009, the unrecorded stock-based compensation balance related to restrictedstock unit awards was $622,000 and will be recognized over an estimatedweighted-average amortization period of 1.7 years. As of September 30,2009, the unrecorded stock-based compensation balance related to restrictedstock awards was $83,000 and will be recognized over an estimatedweighted-average amortization period of 1.2 years.

 

*Interestand Other Income, Net*.  Interest and other income, netfor the three months ended September 30, 2009 and 2008, was $126,000 and $254,000,respectively.  The $129,000 decrease ininterest and other income, net in the three months ended September 30,2009 as compared to the same period in 2008, was primarily due to lower yieldson our cash, cash equivalents and investments in marketable securities; offsetby a realized loss of approximately $552,000 on the sale of certain of ourinvestments in marketable securities during the three months ended September 30,2008, with no corresponding amount for the same period of 2009. Interest and otherincome, net for the nine months ended September 30, 2009 and 2008, was 

 

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$304,000 and $1.3million, respectively.  The $1.0 milliondecrease in interest and other income, net in the nine months ended September 30,2009 as compared to the same period in 2008, was primarily due to lower yieldson our cash, cash equivalents and investments in marketable securities and a$149,000 loss on the disposal of certain software that was no longer in useduring the three months ended June 30, 2009, offset by a $395,000 decreasein realized losses on the sale of certain of our investments in marketablesecurities.

 

*IncomeTax Benefit*.  Income tax benefit for the three and ninemonths ended September 30, 2009 and 2008 was $77,000 and $0,respectively.  The $77,000 increase inincome tax benefit in the three and nine months ended September 30, 2009as compared to the same period in 2008 was related to a research andexperimentation income tax credit received during the three and nine monthsended September 30, 2009, with no corresponding amount in the same periodfor 2008.  We do not expect an income taxbenefit during the fourth quarter of 2009. We performed an evaluation of tax periods which remain subject toexamination by major tax jurisdictions as of September 30, 2009 and wehave concluded that there are no significant uncertain tax positions requiringrecognition in our financial statements. A full valuation allowance has been established for the entire taxbenefit as we believe that it is more likely than not that such assets will notbe realized.

 

**Liquidityand Capital Resources**

 

As of September 30,2009, we had $84.1 million in cash, cash equivalents, and investments inmarketable securities.  Of this amount,$52.6 million was held in money market funds and $31.5 million was held in U.S.Treasury bills, certificates of deposit and high-grade corporate notes with aweighted average duration of the remaining time to maturity of approximatelyfive months. Until required for use in our business, we invest our cashreserves in bank deposits, money market funds, certificates of deposit,high-grade corporate notes and U.S. government instruments in accordance withour investment policy.

 

On October 13, 2009,we completed an underwritten public offering of 14,000,000 shares of our commonstock at the public offering price of $7.10 per share (the October 2009Financing). We received net proceeds from the offering of approximately $93.0million, after deducting underwriting discounts and commissions and estimatedoffering expenses. We also granted the underwriters an option through November 6,2009 to purchase up to an aggregate of 2,100,000 additional shares of commonstock to cover over-allotments, if any. We currently anticipate using the net proceeds of the offering primarilyfor activities relating to the commercialization of FOLOTYN, preclinicalresearch and clinical development of FOLOTYN, and for general corporatepurposes.

 

Since our inception, wehave financed our operations primarily through public and private sales of ourequity securities, which have resulted in net proceeds to us of$378.4 million through September 30, 2009.  We have also generated approximately$23.8 million of net interest income since our inception from investingthe net proceeds of these public and private sales of our equity securities.

 

We have used $280.4million of cash for operating activities from our inception through September 30,2009.  Net cash used in operatingactivities for the nine months ended September 30, 2009 and 2008 was $42.0million and $30.7 million, respectively. For fiscal year 2009, we currently anticipate that net cash use inoperating activities, together with the $5.8 million milestone payment underour license agreement for FOLOTYN as discussed in the net cash provided frominvesting activities section below, will approximate $65 million to $70million.  Our 2009 financial guidanceincludes the phase-in of key investments associated with our commercial,medical affairs and manufacturing operations in preparation for the anticipatedcommercial launch of FOLOTYN in January 2010, and the $1.5 million and$5.8 million milestone payments under our license agreement for FOLOTYN paidupon FDA acceptance and approval of our NDA, respectively, during the ninemonths ended September 30, 2009.

 

Net cash provided frominvesting activities for the nine months ended September 30, 2009 was$24.0 million and consisted of the net proceeds from maturities, sales andpurchases of investments in marketable securities, partially offset by $5.8million of cash paid for license related to the milestone payment made underour license agreement upon FDA approval of our NDA in September 2009 and$1.1 million for the acquisition of property and equipment.  Net cash used in investing activities for thenine months ended September 30, 2008 was $33.9 million and consistedprimarily of the purchase of investments in marketable securities of $94.0million, $530,000 for the acquisition of property and equipment and $238,000related to the pledging of collateral for a letter of credit related to afacility lease, partially offset by the proceeds from maturities and sales ofinvestments in marketable securities.

 

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Net cash provided byfinancing activities for the nine months ended September 30, 2009 was$50.0 million and consisted of the $47.0 million of net proceeds from the saleof 7,750,000 shares of common stock at the public offering price of $6.30 in April 2009and $3.0 million of proceeds from the issuance of common stock associated withstock options exercised by our employees and sales of stock under our employeestock purchase plan.  Net cash providedby financing activities for the nine months ended September 30, 2008 was$70.1 million and consisted of the $65.2 million of net proceeds from the saleof 12,420,000 shares of common stock at the public offering price of $5.64 pershare in May 2008 and $4.9 million of proceeds from the issuance of commonstock associated with stock options exercised by our employees and sales ofstock under our employee stock purchase plan.

 

Based upon the currentstatus of our product development and commercialization plans, we believe thatour cash, cash equivalents, and investments in marketable securities as of September 30,2009, together with the net proceeds of approximately $93.0 million from the October 2009Financing, should be adequate to support our operations through at least thenext 12 months, although there can be no assurance that this can, in fact, beaccomplished. Our forecast of the period of time through which our financialresources will be adequate to support our operations is a forward-lookingstatement that involves risks and uncertainties, and actual results could varymaterially.

 

Weanticipate continuing our current development programs and beginning otherlong-term development projects involving FOLOTYN, including the post-approvalclinical studies required for FOLOTYN. These projects may require many yearsand substantial expenditures to complete and may ultimately beunsuccessful.  In addition, we expect to incur significant costs relatingto the commercialization of FOLOTYN, including costs related to our sales andmarketing, medical affairs and manufacturing operations.  Therefore, wemay need to raise additional capital to support our future operations. Our actual capital requirements will depend on many factors, including:

 

·                  the timing and amount of revenues generated from thesale of FOLOTYN;

 

·                  the timing and costs associated with developing oursales and marketing, medical affairs and manufacturing operations for thecommercialization of FOLOTYN;

 

·                  the timing and costs associated with manufacturingclinical and commercial supplies of FOLOTYN;

 

·                  the timing and costs associated with conductingpreclinical and clinical development of FOLOTYN, as well as our evaluation of,and decisions with respect to, additional therapeutic indications for which wemay develop FOLOTYN;

 

·                  the timing and costs associated with completing thepost-approval clinical studies required by the FDA;

 

·                  the timing, costs and potential revenue associatedwith any co-promotion or other partnering arrangements entered into tocommercialize FOLOTYN; and

 

·                  our evaluation of, and decisions with respect to,potential in-licensing or product acquisition opportunities or other strategicalternatives.

 

We may seek to obtainthis additional capital through equity or debt financings, arrangements withcorporate partners, or from other sources. Such financings or arrangements, ifsuccessfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that additional financing will be available whenneeded, or that, if available, we will obtain such financing on terms that arefavorable to our stockholders or us. In the event that additional funds areobtained through arrangements with collaborative partners or other sources,such arrangements may require us to relinquish rights to some of ourtechnologies, product candidates or products under development, which we mightotherwise seek to develop or commercialize ourselves, on terms that are lessfavorable than might otherwise be available.  If we are unable to generatemeaningful amounts of revenue from future product sales or cannot otherwiseraise sufficient additional funds to support our operations, we may be requiredto delay, reduce the scope of or eliminate one or more of our developmentprograms and our business and future prospects for revenue and profitabilitymay be harmed.

 

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**Obligationsand Commitments**

 

*Royalty andLicense Fee Commitments for FOLOTYN*

* *

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and Southern Research Institute, as amended, under which weobtained exclusive worldwide rights to a portfolio of patents and patentapplications related to FOLOTYN and its uses. Under the terms of the agreement,we paid an up-front license fee of $2.0 million upon execution of theagreement. To date, we have made aggregate milestone payments of $2.5 millionbased on the passage of time. Additionally, in May and September 2009,we made milestone payments of $1.5 million based on the FDA accepting our NDAfor review and $5.8 million based on the FDA approval to market FOLOTYN,respectively.  We are also required tomake an additional milestone payment of $3.5 million upon regulatory approvalto market FOLOTYN in Europe. The up-front license fee and all milestonepayments under the agreement prior to FDA approval to market FOLOTYN wererecorded to research and development expense as incurred. All milestonepayments under the agreement subsequent to FDA approval to market FOLOTYN, wereor will be capitalized and amortized over the expected useful life. Under theterms of the agreement, we are required to fund all development programs andwill have sole responsibility for all commercialization activities. Inaddition, we will pay the licensors a royalty based on a percentage of netsales of the product, which may be different than our net product revenuerecognized in accordance with U.S. GAAP, or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, and expenses.  Webase our estimates on historical experience, available information andassumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  For a description of our critical accountingpolicies, please see our Annual Report on Form 10-K for the fiscal yearended December 31, 2008, as amended.

 

**RecentAccounting Pronouncements**

 

For a description ofrecent accounting pronouncements, please see Note 10 of the unaudited September 30,2009 financial statements included herein.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Our financial instrumentsas of September 30, 2009 consisted of cash, cash equivalents, investmentsin marketable securities, prepaid expenses, accounts payable and accruedliabilities.  All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.  We invest inmarketable securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal and maintain proper liquidity to meetoperating needs.  Our investment policyspecifies credit quality standards for our investments and limits the amount ofcredit exposure to any single issue, issuer or type of investment.  The weighted average duration of theremaining time to maturity for our portfolio of investments in marketablesecurities as of September 30, 2009 was approximately five months.  As of September 30, 2009, ourinvestments in marketable securities of $21.7 million were all classifiedas held-to-maturity and were held in a variety of interest-bearing instruments,consisting mainly of U.S. Treasury bills, certificates of deposit andhigh-grade corporate notes. We did not hold any derivative instruments, foreignexchange contracts, asset backed securities, mortgage backed securities,auction rate securities, or securities of issuers in bankruptcy in ourinvestment portfolio as of September 30, 2009.  The value of our investments in marketablesecurities may be adversely affected by rating downgrades or bankruptciesaffecting the issuers of such securities, whether caused by instability in theglobal financial markets, lack of liquidity in the credit and capital markets,or other factors.  In response to therecent instability in the global financial markets, we reviewed our investmentsin marketable securities and sold certain investments that we deemed to haveincreased risk during the three months ended March 31, 2009.  We have the ability and intent to hold ourremaining investments in marketable securities as of September 30, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

Investments in fixed-rateinterest-earning instruments carry varying degrees of interest rate risk.  The fair market value of our fixed-ratesecurities may be adversely impacted due to a rise in interest rates.  In general, securities with longer maturitiesare subject to greater interest-rate risk than those with shorter maturities.  Due in part to this factor, our interestincome may fall short of expectations or we may suffer losses in principal ifsecurities are sold that have declined in market value due to changes ininterest rates.  Due to the shortduration of our investment portfolio, we believe an immediate 10% change ininterest rates would not be material to our financial condition or results ofoperations.

 

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**ITEM 4.  CONTROLSAND PROCEDURES**

 

**DisclosureControls and Procedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act.  Based on that evaluation, our management,including our principal executive officer and principal financial officer,concluded that our disclosure controls and procedures were effective as of September 30,2009 to ensure that information required to be disclosed by us in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**NoChanges in Internal Control over Financial Reporting**

 

There were no changes inour internal controls over financial reporting during the three months ended September 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

**Asreported in our Quarterly Report on Form 10-Q for the period ended March 31,2009, the period to appeal the approval by the U.S. District Court for theDistrict of Colorado of the settlement of the securities class action lawsuitto which we were a party lapsed during the three months ended March 31,2009 without any further appeals being filed and the settlement is final.**

** **

**ITEM 1A.  RISKFACTORS**

** **

*Ourbusiness faces significant risks. These risks include those described below andmay include additional risks of which we are not currently aware or which wecurrently do not believe are material. If any of the events or circumstancesdescribed in the following risk factors actually occurs, they may materiallyharm our business, financial condition, operating results and cash flow. As aresult, the market price of our common stock could decline. Additional risksand uncertainties that are not yet identified or that we think are immaterialmay also materially harm our business, operating results and financialcondition. **Stockholders andpotential investors in shares of our common stock should carefully consider thefollowing risk factors, which hereby update those risks contained in the “RiskFactors” section of our Annual Report on Form 10-K for the year ended December 31,2008, as amended, in addition to other information and risk factors in thisreport.  We are identifying these riskfactors as important factors that could cause our actual results to differmaterially from those contained in any written or oral forward-lookingstatements made by or on behalf of the Company. We are relying upon the safe harbor for all forward-looking statementsin this report, and any such statements made by or on behalf of the Company arequalified by reference to the following cautionary statements, as well as tothose set forth elsewhere in this report. We consistently update and includeour risk factors in our Quarterly Reports on Form 10-Q. Risk factors thathave been substantively changed from those set forth in our Annual Report on Form 10-Kfor the period ended December 31, 2008, as amended, have been marked withan asterisk immediately following the heading of such risk factor.*

 

**We have a historyof net losses and an accumulated deficit, and we may never generate revenue orachieve or maintain profitability in the future. ***

** **

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations. To date, wehave financed our operations primarily through the public and private sale ofsecurities.  For the nine months ended September 30,2009, we had a net loss of $50.6 million. As of September 30, 2009, we had accumulated a deficit during ourdevelopment stage of $350.3 million. We have incurred these losses principally from costs incurred in ourresearch and development programs, clinical manufacturing and from our marketing,general and administrative expenses. On September 24, 2009, we obtainedaccelerated approval from the FDA for FOLOTYN for use as a single agent for thetreatment of patients with relapsed or refractory PTCL. We began making FOLOTYNavailable for commercial sale in the United States on October 5, 2009,with an anticipated commercial launch in January 2010.  Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully commercialize FOLOTYN for the treatment of patients with relapsedor refractory PTCL.  We are alsodeveloping FOLOTYN for use as a single agent and in combination therapyregimens in a range of hematologic malignancies and solid tumor indications,which may or may not lead to obtaining the necessary regulatory approvals tomarket FOLOTYN for additional indications. We may never generate significantrevenue from product sales or become profitable. We expect to continue to spendsubstantial amounts on research and development, including amounts spent onconducting clinical trials and seeking additional regulatory approvals forFOLOTYN, and commercializing FOLOTYN for the treatment of patients withrelapsed or refractory PTCL.

 

**Our near-term prospects are dependenton FOLOTYN.  If we are unable to successfully commercialize FOLOTYN forthe treatment of patients with relapsed or refractory PTCL, our ability togenerate significant revenue or achieve profitability will be adverselyaffected****.** *

 

On September 24,2009, the FDA granted accelerated approval of FOLOTYN for use as a single agentfor the treatment of patients with relapsed or refractory PTCL.  This indication is based on overall responserate.  Clinical benefit such asimprovement in PFS or overall survival has not been demonstrated.  As a condition of approval, the FDA isrequiring us to conduct several post-approval clinical studies. FOLOTYN is ouronly product approved for marketing by the FDA and our ability to generaterevenue in the near term is entirely dependent upon sales of FOLOTYN, which wemade available for commercial sale in the United States commencing in October 2009.

 

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We may not be able to successfully commercializeFOLOTYN for a number of reasons, including:

 

·                  we may not be able to establish or demonstrate in the medical communitythe safety and efficacy of FOLOTYN and its potential advantages over existingand newly developed therapeutic products;

 

·                  doctors may be hesitant to prescribe FOLOTYN until results from ourpost-approval studies are available or other long term data regarding efficacyand safety exists;

 

·                  results from our Phase 3post-approval studies may fail to verify the clinical benefit of FOLOTYN forthe treatment of T-cell lymphoma;

 

·                  our limited experience in marketing, selling and distributing products;

 

·                  reimbursement and coverage policies of government and private payerssuch as Medicare, Medicaid, insurance companies, health maintenanceorganizations and other plan administrators;

 

·                  the relative price of FOLOTYN as compared to alternative treatmentoptions;

 

·                  we may not have adequate financial or other resources to successfullycommercialize FOLOTYN;

 

·                  we may not be able to manufacture FOLOTYN incommercial quantities or at acceptable costs; and

 

·                  the receipt of timely regulatory approval, if at all,for additional indications that we are studying.

 

**Ifwe are unable to develop adequate sales, marketing or distribution capabilitiesor enter into agreements with third parties to perform some of these functions,we will not be able to commercialize FOLOTYN effectively**. *

** **

Theapproval of FOLOTYN for the treatment of patients with relapsed or refractoryPTCL is our first U.S. indication. Accordingly, we have limited experience in sales, marketing anddistribution of pharmaceutical products. Although we are currently in the process of developing our sales,marketing and distribution capabilities, we may not be able to establish thesecapabilities on our own or enter into necessary or desirable arrangements withthird parties in a timely manner or on acceptable terms.  Additionally,building sales, marketing and distribution capabilities may be more expensivethan we anticipate, requiring us to divert capital from other intended purposesor preventing us from building our sales, marketing and distributioncapabilities to the desired levels. To be successful we must:

 

·                  recruit and retain adequatenumbers of effective sales personnel;

 

·                  effectively train our salespersonnel in the benefits of FOLOTYN;

 

·                  establish and maintainsuccessful sales and marketing and education programs that encourage physiciansto recommend FOLOTYN to their patients; and

 

·                  manage geographicallydispersed sales and marketing operations.

 

We intend to enter intoco-promotion or out-licensing arrangements with other pharmaceutical orbiotechnology partners where necessary to reach foreign market segments thatare not reachable by a U.S.-based direct sales organization or when deemedstrategically and economically advisable. To the extent that we enter intoco-promotion or other licensing arrangements, our product revenues are likelyto be lower than if we directly marketed and sold FOLOTYN, and some or all ofthe revenues we receive will depend upon the efforts of third parties, whichmay not be successful. If we are unable to develop and maintain adequate sales,marketing and distribution capabilities, independently or with others, we maynot be able to generate significant product revenue or become profitable.

 

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**Eventhough we have obtained accelerated approval to market FOLOTYN for thetreatment of patients with relapsed or refractory PTCL, we are subject toongoing regulatory obligations and review, including post-approval requirements**.*

 

FOLOTYN was approved for the treatment of patientswith relapsed or refractory PTCL under the FDA’s accelerated approval program,which allows the FDA to approve products for cancer or other life threateningdiseases based on initial positive clinical data.  Under these provisions, we are subject tocertain post-approval requirements pursuant to which we have agreed to conducttwo randomized Phase 3 trials to verify and describe FOLOTYN’s clinical benefitin patients with T-cell lymphoma.  TheFDA has also required that we conduct two Phase 1 trials to assess whetherFOLOTYN poses a serious risk of altered drug levels resulting from organimpairment.  Failure to complete thestudies or adhere to the timelines established by the FDA could result inpenalties, including fines or withdrawal of FOLOTYN from the market.  The FDA may also initiate proceedings towithdraw approval if our Phase 3 studies fail to verify clinical benefit.  Further, the FDA may require us to strengthenthe warnings and precautions section of the FOLOTYN package insert based on theresults of the Phase 1 studies.  We arealso subject toadditional, continuing post-approval regulatory obligations, including thepossibility of additional clinical studies required by the FDA, safetyreporting requirements and regulatory oversight of the promotion and marketingof FOLOTYN.

 

In addition, we or ourthird-party manufacturers are required to adhere to regulations setting forththe FDA’s current Good Manufacturing Practices, or cGMP. These regulationscover all aspects of the manufacturing, storage, testing, quality control andrecord keeping relating to FOLOTYN. Furthermore, we or our third-partymanufacturers are subject to periodic inspection by the FDA and foreignregulatory authorities to ensure strict compliance with cGMP or otherapplicable government regulations and corresponding foreign standards. We donot have control over a third-party manufacturer’s compliance with theseregulations and standards.  If we or ourthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to fines, suspension, modification orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

 

**The status of coverage and reimbursement from third-partypayers for newly approved health care drugs is uncertain and failure to obtainadequate coverage and reimbursement could limit our ability to generaterevenue. ***

 

Our ability tosuccessfully commercialize FOLOTYN for the treatment of patients with relapsedor refractory PTCL or for other future indications will depend, in part, on theextent to which coverage and reimbursement for FOLOTYN is available fromgovernment and health administration authorities, private health insurers, managedcare programs and other third-party payers.  Significant uncertaintyexists as to the coverage and reimbursement of newly approved health careproducts.

 

Healthcare providers andthird-party payers use coding systems to identify diagnoses, procedures,services, drugs, pharmaceutical devices, equipment and other health-relateditems and services.  Proper coding is anintegral component to receiving appropriate reimbursement for theadministration of FOLOTYN and related services. The majority of payers usenationally recognized code sets to report medical conditions, services anddrugs. Although we are in the process of applying for permanent reimbursementcodes for FOLOTYN, healthcare providers prescribing FOLOTYN will initially berequired to submit claims for reimbursement using temporary miscellaneouscodes, which may result in payment delays or incorrect payment levels.  Weare also in the process of applying for transitional pass-through status whichwould enable FOLOTYN to be reimbursed under the hospital outpatient prospectivepayment system. We cannot predict at this time whether our customers willreceive adequate reimbursement for FOLOTYN, nor can we predict whether FOLOTYNwill receive permanent reimbursement codes or transitional pass-through statusin the future.

 

Third-party payers,including Medicare, are challenging the prices charged for medical products andservices. Government and other third-party payers increasingly are attemptingto contain health care costs by limiting both coverage and the level ofreimbursement for new drugs and by refusing, in some cases, to provide coveragefor uses of approved products for disease conditions for which the FDA has notgranted labeling approval. Third-party insurance coverage may not be availableto patients for FOLOTYN. If government and other third-party payers do notprovide adequate coverage and reimbursement levels for FOLOTYN, FOLOTYN’smarket acceptance may be adversely affected.

 

***We have limitedmarket research upon which to evaluate the potential commercial acceptance ofFOLOTYN.********

 

Based on the results of our market research, webelieve the FOLOTYN package insert aligns with physicians’ treatment prioritiesand is likely to support the trial, use and adoption of FOLOTYN for thetreatment of patients with relapsed or refractory PCTL. The market research wehave performed is limited in scope and represents 

 

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physicians’ impressions of a product profile similarto that of FOLOTYN. However, physicians responding to the survey were not awarethat the product in question was FOLOTYN. We cannot assure you that the resultsof this market research are indicative of the response we might receive from abroader selection of physicians, or that these same physicians, when providedwith the name of the actual product, would respond in a similar manner.Moreover, these results are based on physicians’ impressions formed from adescription of the product, and not actual results from prescription of theproduct, which could result in different responses from those same or otherphysicians.

 

**If we fail to comply with healthcare fraud and abuse laws, wecould face substantial penalties and our business, operations and financialcondition could be adversely affected*.***

 

As abiopharmaceutical company, even though we do not and will not control referralsof health care services or bill directly to Medicare, Medicaid or otherthird-party payers, certain federal and state healthcare laws and regulationspertaining to fraud and abuse will be applicable to our business. These lawsand regulations, include, among others:

 

·                  the federal Anti-Kickback statute, which prohibits,among other things, persons from soliciting, receiving or providingremuneration, directly or indirectly, to induce either the referral of anindividual for an item or service or the purchasing or ordering of a good orservice, for which payment may be made under federal health care programs suchas the Medicare and Medicaid programs;

 

·                  federal false claims laws that prohibit, among otherthings, individuals or entities from knowingly presenting, or causing to bepresented, claims for payment from Medicare, Medicaid, or other third-partypayers that are false or fraudulent;

 

·                  the federal Health Insurance Portability andAccountability Act of 1996, or HIPAA, which prohibits executing a scheme todefraud any healthcare benefit program or making false statements relating tohealthcare matters and which also imposes certain requirements relating to theprivacy, security and transmission of individually identifiable healthinformation;

 

·                  federal self-referral laws, such as STARK, whichprohibit a physician from making a referral to a provider of certain healthservices with which the physician or the physician’s family member has afinancial interest; and

 

·                  state law equivalents of each of the above federal laws,such as anti-kickback and false claims laws that may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and statelaws governing the privacy of health information in certain circumstances, manyof which differ from each other in significant ways and often are not preemptedby HIPAA.

 

Althoughthere are a number of statutory exemptions and regulatory safe harborsprotecting certain common activities from prosecution under the federalAnti-Kickback statute, the exemptions and safe harbors are drawn narrowly, andpractices that involve remuneration intended to induce prescriptions, purchasesor recommendations may be subject to scrutiny if they do not qualify for anexemption or safe harbor. Our practices may not in all cases meet all of thecriteria for safe harbor protection from anti-kickback liability.

 

If ouroperations are found to be in violation of any of the healthcare fraud andabuse laws described above or any other governmental regulations that apply tous, we may be subject to penalties, including civil and criminal penalties,damages, fines and the curtailment or restructuring of our operations. Anypenalties, damages, fines, curtailment or restructuring of our operations couldadversely affect our ability to operate our business and our financial results.Although compliance programs can mitigate the risk of investigation andprosecution for violations of these laws, the risks cannot be entirelyeliminated. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legalexpenses and divert our management’s attention from the operation of ourbusiness. Moreover, achieving and sustaining compliance with all applicablefederal and state fraud and abuse laws may be costly.

 

**If our competitors develop and market products that are moreeffective than FOLOTYN, our commercial opportunity will be reduced oreliminated. ***

 

Eventhough we have obtained approval to market FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL, our commercial opportunity will bereduced or eliminated if our competitors develop and market products that aremore effective, have fewer side effects or are less expensive than FOLOTYN forthis or any other potential indication. Our 

 

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potentialcompetitors include large, fully-integrated pharmaceutical companies and moreestablished biotechnology companies, both of which have significant resourcesand expertise in research and development, manufacturing, testing, obtainingregulatory approvals and marketing. Academic institutions, government agencies,and other public and private research organizations conduct research, seekpatent protection and establish collaborative arrangements for research,development, manufacturing and marketing. It is possible that competitors willsucceed in developing technologies that are more effective than those beingdeveloped by us or that would render our technology obsolete or noncompetitive.

 

**We cannot predict when or if we will obtain regulatoryapproval to market FOLOTYN in the United States for any additional indicationsor in any other countries. ***

 

We are subject to stringent regulations with respectto product safety and efficacy by various international, federal, state andlocal authorities. FOLOTYN has not been approved for marketing in the UnitedStates for any indication other than the treatment of patients with relapsed orrefractory PTCL. In addition, FOLOTYN has not been approved for marketing forthis or any other indication in any other country. A pharmaceutical productcannot be marketed in the United States or most other countries until it hascompleted a rigorous and extensive regulatory review and approval process.Satisfaction of regulatory requirements typically takes many years, isdependent upon the type, complexity and novelty of the product and requires theexpenditure of substantial resources. Of particular significance are therequirements covering research and development, preclinical and clinicaltesting, manufacturing, quality control, labeling and promotion of drugs forhuman use. We may not obtain the necessary regulatory approvals to marketFOLOTYN in the United States for any additional indications or in any othercountries. If we fail to obtain or maintain regulatory approvals to marketFOLOTYN in the United States for any additional indications or in any othercountries, our ability to generate significant revenue or achieve profitabilitymay be adversely affected.

 

**Reports of adverse events or safety concerns involvingFOLOTYN or in related technology fields or other companies’ clinical trials ofsimilar small molecule chemotherapeutic agents could delay or prevent us fromobtaining or maintaining regulatory approval or negatively impact publicperception of FOLOTYN. ***

 

FOLOTYNmay produce serious adverse events. These adverse events could interrupt, delayor halt clinical trials of FOLOTYN, including the FDA-required post-approvalstudies, and could result in the FDA or other regulatory authorities denying orwithdrawing approval of FOLOTYN for any or all indications, including for thetreatment of patients with relapsed or refractory PTCL. An independent datasafety monitoring board, the FDA, other regulatory authorities or we maysuspend or terminate clinical trials at any time. We cannot assure you thatFOLOTYN will be safe for human use.

 

Atpresent, there are a number of clinical trials being conducted by otherpharmaceutical companies involving small molecule chemotherapeutic agents. Ifother pharmaceutical companies announce that they observed frequent adverseevents or unknown safety issues in their trials involving compounds similar to,or competitive with, FOLOTYN, we could encounter delays in the timing of ourclinical trials or difficulties in obtaining or maintaining the necessaryregulatory approvals for FOLOTYN. In addition, the public perception of FOLOTYNmight be adversely affected, which could harm our business and results ofoperations and cause the market price of our common stock to decline, even ifthe concern relates to another company’s product or product candidate.

 

**If FOLOTYN fails to meet safety or efficacy endpoints inclinical trials for additional indications, it will not receive regulatoryapproval and we will be unable to market FOLOTYN for those indications studied.***

 

Wehave ongoing clinical trials involving FOLOTYN and plan to initiate additionaltrials to evaluate FOLOTYN’s potential clinical utility in other hematologicmalignancies and solid tumor indications. FOLOTYN may not prove to be safe and efficacious in clinical trials forother indications and may not meet all of the applicable regulatoryrequirements needed to receive regulatory approval for those indications. Theclinical development and regulatory approval process is expensive and takesmany years. Failure can occur at any stage of development, and the timing ofany regulatory approval cannot be accurately predicted. In addition, failure tocomply with the FDA and other applicable U.S. and foreign regulatoryrequirements applicable to clinical trials may subject us to administrative orjudicially imposed sanctions.

 

Aspart of the regulatory approval process, we must conduct clinical trials forFOLOTYN and any other product candidate to demonstrate safety and efficacy tothe satisfaction of the FDA and other regulatory authorities abroad. The numberand design of clinical trials that will be required varies depending on theproduct candidate, the condition being evaluated, the trial results andregulations applicable to any particular product candidate. The designs of ourclinical trials for FOLOTYN are based on many assumptions about the expectedeffect of FOLOTYN, and if those assumptions prove incorrect, the 

 

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clinicaltrials may not demonstrate the safety or efficacy of FOLOTYN. Preliminaryresults may not be confirmed upon full analysis of the detailed results of atrial, and prior clinical trial program designs and results may not bepredictive of future clinical trial designs or results. Product candidates inlater stage clinical trials may fail to show the desired safety and efficacydespite having progressed through initial clinical trials with acceptableendpoints. For example, we terminated the development of EFAPROXYN, one of ourformer product candidates, when it failed to demonstrate statisticallysignificant improvement in overall survival in the targeted patients in aPhase 3 clinical trial. If FOLOTYN fails to show clinically significantbenefits in any clinical trial or for any particular indication, it may not beapproved for marketing for such indication. Additionally, if FOLOTYN isdemonstrated to be unsafe in clinical trials for other indications, suchdemonstration could negatively impact FOLOTYN’s existing approval for thetreatment of patients with relapsed or refractory PTCL.

 

Evenif we achieve positive interim results in clinical trials, these results do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. Data obtained from preclinical and clinicalactivities are susceptible to varying interpretations that could delay, limitor prevent regulatory clearances, and the FDA can request that we conductadditional clinical trials.  A number ofcompanies in the pharmaceutical industry have suffered significant setbacks inadvanced clinical trials, even after promising results in earlier trials. Inaddition, negative or inconclusive results or adverse safety events during aclinical trial could cause a clinical trial to be repeated or terminated. Also,failure to construct clinical trial protocols to screen patients for riskprofile factors relevant to the trial for purposes of segregating patients intothe patient populations treated with the drug being tested and the controlgroup could result in either group experiencing a disproportionate number ofadverse events and could cause a clinical trial to be repeated or terminated.If we have to conduct additional clinical trials for FOLOTYN for any particularindication, it will significantly increase our expenses and may delay marketingof FOLOTYN for such indication.

 

**Even if FOLOTYN meets safety and efficacy endpoints inclinical trials for additional indications, regulatory authorities may notapprove FOLOTYN, or we may face post-approval problems that require withdrawalof FOLOTYN from the market. ***

 

We will not be able to market FOLOTYN in the UnitedStates for any additional indications or in any other countries for anyindications until we have obtained the necessary regulatory approvals. Ourreceipt of approval of FOLOTYN in the United States for the treatment ofpatients with relapsed or refractory PTCL does not guarantee that we willobtain regulatory approval to market FOLOTYN in the United States for anyadditional indications or in any other countries. We have limited experience infiling and pursuing applications necessary to gain regulatory approvals, whichmay place us at risk of delays, overspending and human resources inefficiencies.

 

FOLOTYNmay not be approved for any additional indications even if it achieves itsendpoints in clinical trials. Regulatory agencies, including the FDA, or theiradvisors, may disagree with our interpretations of data from preclinicalstudies and clinical trials. The FDA has substantial discretion in the approvalprocess, and when or whether regulatory approval will be obtained for any drugwe develop.  Regulatory agencies also mayapprove a product candidate for fewer conditions than requested or may grantapproval subject to the performance of post-approval studies or risk evaluationand mitigation strategies for a product candidate. In addition, regulatoryagencies may not approve the labeling claims that are necessary or desirablefor the successful commercialization of FOLOTYN.

 

Followingregulatory approval for any additional indication, FOLOTYN may later produceadverse events that limit or prevent its widespread use or that force us towithdraw FOLOTYN from the market for that indication or other indications. Inaddition, a marketed product continues to be subject to strict regulation afterapproval and may be required to undergo post-approval studies. For example, we are requiredto conduct two randomized Phase 3 trials to verify and describe FOLOTYN’sclinical benefit in patients with T-cell lymphoma as well as two Phase 1 trialsto assess whether FOLOTYN poses a serious risk of altered drug levels resultingfrom organ impairment.  Any unforeseen problems with an approvedproduct, any failure to meet the post-approval study requirements or anyviolation of regulations could result in restrictions on the product, includingits withdrawal from the market. Any delay in or failure to obtain or maintainregulatory approvals for FOLOTYN in the United States for any additionalindication or in any other countries could harm our business and prevent usfrom ever generating significant revenues or achieving profitability.

 

**We may experience delays in our clinical trials that couldadversely affect our financial position and our commercial prospects. ***

 

We donot know when our current clinical trials will be completed, if at all. We alsocannot accurately predict when other planned clinical trials will begin or becompleted. Many factors affect patient enrollment, including the size of thepatient 

 

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population,the proximity of patients to clinical sites, the eligibility criteria for thetrial, competing clinical trials and new drugs approved for the conditions weare investigating. Other companies are conducting clinical trials and haveannounced plans for future trials that are seeking or likely to seek patientswith the same diseases as those we are studying. Competition for patients insome cancer trials is particularly intense because of the limited number ofleading specialist physicians and the geographic concentration of majorclinical centers.

 

As aresult of the numerous factors that can affect the pace of progress of clinicaltrials, our trials may take longer to enroll patients than we anticipate, ifthey can be completed at all. Delays in patient enrollment in the trials mayincrease our costs and slow our product development and approval process. Ourproduct development costs will also increase if we need to perform more orlarger clinical trials than planned. If other companies’ product candidatesshow favorable results, we may be required to conduct additional clinicaltrials to address changes in treatment regimens or for our products to becommercially competitive. Any delays in completing our clinical trials willdelay our ability to obtain regulatory approval to market FOLOTYN in the UnitedStates for any additional indications or in any other countries, which mayadversely affect our ability to generate significant revenues or achieveprofitability.

 

**We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in accordance with regulatoryrequirements, the results are negative or inconclusive or the trials are notwell designed. ***

 

Clinicaltrials must be conducted in accordance with the FDA’s current Good ClinicalPractices or other applicable foreign government guidelines and are subject tooversight by the FDA, other foreign governmental agencies and InstitutionalReview Boards at the medical institutions where the clinical trials areconducted. In addition, clinical trials must be conducted with productcandidates produced under cGMP and may require large numbers of test subjects.Clinical trials may be suspended by the FDA, other foreign governmentalagencies, or us for various reasons, including:

 

·                  deficiencies in the conduct of the clinical trials,including failure to conduct the clinical trial in accordance with regulatoryrequirements or clinical protocols;

 

·                  deficiencies in the clinical trial operations or trialsites;

 

·                  the product candidate may have unforeseen adverse sideeffects;

 

·                  the time required to determine whether the productcandidate is effective may be longer than expected;

 

·                  fatalities or other adverse events arising during aclinical trial due to medical problems that may not be related to clinicaltrial treatments;

 

·                  the product candidate may not appear to be moreeffective than current therapies;

 

·                  the quality or stability of the product candidate mayfall below acceptable standards; or

 

·                  insufficient quantities of the product candidate tocomplete the trials.

 

Inaddition, changes in regulatory requirements and guidance may occur and we mayneed to amend clinical trial protocols to reflect these changes. Amendments mayrequire us to resubmit our clinical trial protocols to Institutional ReviewBoards for reexamination, which may impact the costs, timing or successfulcompletion of a clinical trial. Due to these and other factors, FOLOTYN couldtake a significantly longer time to gain regulatory approval for any additionalindications than we expect or we may never gain approval for additionalindications, which could reduce our revenue by delaying or terminating thecommercialization of FOLOTYN for additional indications.

 

**Due to our reliance on contract research organizations andother third parties to conduct our clinical trials, we are unable to directlycontrol the timing, conduct and expense of our clinical trials.**

 

Werely primarily on third parties to conduct our clinical trials. As a result, wehave had and will continue to have less control over the conduct of ourclinical trials, the timing and completion of the trials, the requiredreporting of adverse events and the management of data developed through thetrial than would be the case if we were relying entirely upon our own staff.Communicating with outside parties can also be challenging, potentially leadingto mistakes as well as difficulties in coordinating activities. Outside partiesmay have staffing difficulties, may undergo changes in priorities or may become

 

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financiallydistressed, any of which may adversely affect their willingness or ability toconduct our trials. We may experience unexpected cost increases that are beyondour control. Problems with the timeliness or quality of the work of a contractresearch organization may lead us to seek to terminate the relationship and usean alternative service provider. However, making this change may be costly andmay delay our trials, and contractual restrictions may make such a changedifficult or impossible. Additionally, it may be impossible to find areplacement organization that can conduct our trials in an acceptable mannerand at an acceptable cost.

 

**We may need to raise additional capital to support our futureoperations.  If we fail to obtain the capital necessary to fund ouroperations, we will be unable to successfully develop or commercialize FOLOTYN.***

 

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of September 30, 2009, together with the netproceeds of approximately $93.0 million from the October 2009 Financing, should be adequate to support ouroperations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished.  We anticipatecontinuing our current development programs and beginning other long-termdevelopment projects involving FOLOTYN, including the post-approval clinicalstudies required for FOLOTYN. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful. In addition, we expect to incur significant costs relating to thecommercialization of FOLOTYN, including costs related to our sales andmarketing, medical affairs and manufacturing operations.  Therefore, wemay need to raise additional capital to support our future operations. Our actual capital requirements will depend on many factors, including:

 

·                  the timing and amount of revenues generated from thesale of FOLOTYN;

 

·                  the timing and costs associated with developing oursales and marketing, medical affairs and manufacturing operations for thecommercialization of FOLOTYN;

 

·                  the timing and costs associated with manufacturingclinical and commercial supplies of FOLOTYN;

 

·                  the timing and costs associated with conductingpreclinical and clinical development of FOLOTYN, as well as our evaluation of,and decisions with respect to, additional therapeutic indications for which wemay develop FOLOTYN;

 

·                  the timing and costs associated with completing thepost-approval clinical studies required by the FDA;

 

·                  the timing, costs and potential revenue associatedwith any co-promotion or other partnering arrangements entered into tocommercialize FOLOTYN; and

 

·                  our evaluation of, and decisions with respect to,potential in-licensing or product acquisition opportunities or other strategicalternatives.

 

We mayseek to obtain this additional capital through equity or debt financings,arrangements with corporate partners, or from other sources. Such financings orarrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wemight otherwise seek to develop or commercialize ourselves, on terms that areless favorable than might otherwise be available.  If we are unable togenerate meaningful amounts of revenue from future product sales or cannototherwise raise sufficient additional funds to support our operations, we maybe required to delay, reduce the scope of or eliminate one or more of ourdevelopment programs and our business and future prospects for revenue andprofitability may be harmed.

 

**Budget constraints may force us to delay our efforts todevelop FOLOTYN for additional indications while we complete the post-approvalclinical studies required by the FDA, which may prevent us from commercializingFOLOTYN for all desired********indications as quicklyas possible. ***

 

Becausewe have limited resources, and because research and development is an expensiveprocess, we must regularly assess the most efficient allocation of our researchand development budget.  In particular,our approval of FOLOTYN in patients 

 

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withrelapsed or refractory PTCL is conditioned upon us undertaking two additionalPhase 3 studies and two additional Phase 1 studies which will result insignificant additional expense.  As aresult of our limited resources, we may have to prioritize the development ofFOLOTYN for additional indications and may not be able to fully realize thevalue of FOLOTYN for other indications in a timely manner, if at all.

 

**We do not have manufacturing facilities or capabilities andare dependent on third parties to fulfill our manufacturing needs, which couldresult in the delay of clinical trials, regulatory approvals, productintroductions and commercial sales. ***

 

We aredependent on third parties for the manufacture and storage of FOLOTYN forclinical trials and for commercial sale. If we are unable to contract for asufficient supply of FOLOTYN on acceptable terms, or if we encounter delays ordifficulties in the manufacturing process or our relationships with ourmanufacturers, we may not have sufficient product to conduct or complete ourclinical trials or support commercial requirements for FOLOTYN.

 

FOLOTYNis cytotoxic, which requires the manufacturers of FOLOTYN to have specializedequipment and safety systems to handle such a substance. In addition, thestarting materials for FOLOTYN require custom preparations, which require us tomanage an additional set of suppliers to obtain the needed supplies of FOLOTYN.

 

Wehave entered into arrangements with one third-party manufacturer to produceFOLOTYN bulk drug substance and two third-party manufacturers to produceFOLOTYN formulated drug product. We believe these third-party manufacturershave the capability to meet our clinical trial and commercial requirements withrespect to FOLOTYN’s current approval for marketing in the United States. However, these contract manufacturers have not supplied us with commercialquantities in the past and we cannot assure you that they will be able to meetour commercial requirements in the future. In addition, we are in theprocess of establishing additional supply agreements for the commercialproduction of FOLOTYN bulk drug substance and formulated drug product. However, given our current lack of formal supply agreements and the fact thatin many cases our components are supplied by a single source, our third partymanufacturers may not be able to fulfill our potential commercial needs or meetour deadlines, or the components they supply to us may not meet ourspecifications and quality policies and procedures. If we need to find analternative supplier of FOLOTYN or its components, we may not be able tocontract for those components on acceptable terms, if at all. Any such failureto supply or delay caused by such suppliers would have an adverse effect on ourability to continue clinical development of FOLOTYN or commercialize FOLOTYN.

 

Ourcurrent or future manufacturers may be unable to accurately and reliablymanufacture commercial quantities of FOLOTYN at reasonable costs, on a timelybasis and in compliance with the FDA’s cGMP. If our current or future contractmanufacturers fail in any of these respects, our ability to timely complete ourclinical trials, obtain or maintain required regulatory approvals andsuccessfully commercialize FOLOTYN may be materially and adversely affected.This risk may be heightened with respect to FOLOTYN as there are a limitednumber of manufacturers with the ability to handle cytotoxic products such as FOLOTYN.Our reliance on contract manufacturers exposes us to additional risks,including:

 

·                  our current and future manufacturers are subject to ongoing, periodic,unannounced inspections by the FDA and corresponding state and internationalregulatory authorities for compliance with strictly enforced cGMP regulationsand similar state and foreign standards, and we do not have control over ourcontract manufacturers’ compliance with these regulations and standards;

 

·                  our manufacturers may not be able to comply with applicable regulatoryrequirements, which would prohibit them from manufacturing products for us;

 

·                  our manufacturers may have staffing difficulties, may undergo changesin control or may become financially distressed, adversely affecting theirwillingness or ability to manufacture products for us;

 

·                  our manufacturers might not be able to fulfill our commercial needs,which would require us to seek new manufacturing arrangements and may result insubstantial delays in meeting market demands;

 

·                  if we need to change to other commercial manufacturing contractors, theFDA and comparable foreign regulators must approve our use of any newmanufacturer, which would require additional testing, regulatory filings andcompliance inspections, and the new manufacturers would have to be educated in,or themselves develop substantially equivalent processes necessary for, theproduction of our products; and

 

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·                  we may not have intellectual property rights, or may have to shareintellectual property rights, to any improvements in the manufacturingprocesses or new manufacturing processes for our products.

 

Any ofthese factors could result in the delay of clinical trials, regulatorysubmissions, required approvals or commercialization of FOLOTYN. They couldalso entail higher costs and result in our being unable to effectivelycommercialize FOLOTYN.

 

**If we are unable to effectively protect our intellectualproperty, we will be unable to prevent third parties from using our technology,which would impair our competitiveness and ability to commercialize FOLOTYN. Inaddition, enforcing our proprietary rights may be expensive and result inincreased losses.**

 

Oursuccess will depend in part on our ability to obtain and maintain meaningfulpatent protection for FOLOTYN, both in the United States and in othercountries. We rely on patents to protect a large part of our intellectualproperty and our competitive position. Any patents issued to or licensed by uscould be challenged, invalidated, infringed, circumvented or heldunenforceable, based on, among other things, obviousness, inequitable conduct,anticipation or enablement. In addition, it is possible that no patents willissue on any of our licensed patent applications. It is possible that theclaims in patents that have been issued or licensed to us or that may be issuedor licensed to us in the future will not be sufficiently broad to protect ourintellectual property or that the patents will not provide protection againstcompetitive products or otherwise be commercially valuable. Failure to obtainand maintain adequate patent protection for our intellectual property wouldimpair our ability to be commercially competitive.

 

Ourcommercial success will also depend in part on our ability to commercializeFOLOTYN without infringing patents or other proprietary rights of others orbreaching the licenses granted to us. We may not be able to obtain a license tothird-party technology that we may require to conduct our business or, ifobtainable, we may not be able to license such technology at a reasonable cost.If we fail to obtain a license to any technology that we may require tocommercialize FOLOTYN, or fail to obtain a license at a reasonable cost, wewill be unable to commercialize FOLOTYN or to commercialize it at a price thatwill allow us to become profitable.

 

Inaddition to patent protection, we also rely upon trade secrets, proprietaryknow-how and technological advances that we seek to protect throughconfidentiality agreements with our collaborators, employees, advisors andconsultants. Our employees and consultants are required to enter intoconfidentiality agreements with us. We also enter into non-disclosureagreements with our collaborators and vendors, which agreements are intended toprotect our confidential information delivered to third parties for researchand other purposes. However, these agreements could be breached and we may nothave adequate remedies for any breach, or our trade secrets and proprietaryknow-how could otherwise become known or be independently discovered by others.

 

Furthermore,as with any pharmaceutical company, our patent and other proprietary rights aresubject to uncertainty. Our patent rights related to FOLOTYN might conflictwith current or future patents and other proprietary rights of others. For thesame reasons, the products of others could infringe our patents or otherproprietary rights. Litigation or patent interference proceedings, either ofwhich could result in substantial costs to us, may be necessary to enforce anyof our patents or other proprietary rights, or to determine the scope andvalidity or enforceability of other parties’ proprietary rights. We may bedependent on third parties, including our licensors, for cooperation andinformation that may be required in connection with the defense and prosecutionof our patents and other proprietary rights. The defense and prosecution ofpatent and intellectual property infringement claims are both costly and timeconsuming, even if the outcome is favorable to us. Any adverse outcome couldsubject us to significant liabilities to third parties, require disputed rightsto be licensed from third parties, or require us to cease selling our futureproducts. We are not currently a party to any patent or other intellectualproperty infringement claims.

 

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**We may explore strategic partnershipsthat may never materialize or may fail.**

 

We may, in the future, periodically explore a varietyof possible strategic partnerships in an effort to gain access to additionalproduct candidates or resources. At the current time, we cannot predict whatform such a strategic partnership might take. We are likely to face significantcompetition in seeking appropriate strategic partners, and these strategicpartnerships can be complicated and time consuming to negotiate and document.We may not be able to negotiate strategic partnerships on acceptable terms, orat all. We are unable to predict when, if ever, we will enter into any additionalstrategic partnerships because of the numerous risks and uncertaintiesassociated with establishing strategic partnerships.

 

**If we enter into one or morestrategic partnerships, we may be required to relinquish important rights toand control over the development of FOLOTYN or otherwise be subject tounfavorable terms.**

 

Any future strategic partnerships we enter into couldsubject us to a number of risks, including:

 

·                  we may be required to undertake the expenditure ofsubstantial operational, financial and management resources in integrating newbusinesses, technologies and products;

 

·                  we may be required to issue equity securities thatwould dilute our existing stockholders’ percentage ownership;

 

·                  we may be required to assume substantial actual orcontingent liabilities;

 

·                  we may not be able to control the amount and timing ofresources that our strategic partners devote to the development orcommercialization of FOLOTYN;

 

·                  strategic partners may delay clinical trials, provideinsufficient funding, terminate a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new version of aproduct candidate for clinical testing;

 

·                  strategic partners may not pursue further developmentand commercialization of products resulting from the strategic partneringarrangement or may elect to discontinue research and development programs;

 

·                  strategic partners may not commit adequate resourcesto the marketing and distribution of FOLOTYN or any other products, limitingour potential revenues from these products;

 

·                  disputes may arise between us and our strategicpartners that result in the delay or termination of the research, developmentor commercialization of FOLOTYN or any other product candidate or that resultin costly litigation or arbitration that diverts management’s attention andconsumes resources;

 

·                  strategic partners may experience financialdifficulties;

 

·                  strategic partners may not properly maintain or defendour intellectual property rights or may use our proprietary information in amanner that could jeopardize or invalidate our proprietary information orexpose us to potential litigation;

 

·                  business combinations or significant changes in astrategic partner’s business strategy may also adversely affect a strategicpartner’s willingness or ability to complete its obligations under anyarrangement;

 

·                  strategic partners could independently move forwardwith a competing product candidate developed either independently or incollaboration with others, including our competitors; and

 

·                  strategic partners could terminate the arrangement orallow it to expire, which would delay the development and may increase the costof developing FOLOTYN or any other product candidate.

 

**Health care reform measures could adversely affect ourbusiness. ***

 

Thebusiness and financial condition of pharmaceutical and biotechnology companiesare affected by the efforts of governmental and third-party payers to containor reduce the costs of health care. In the United States and in foreign 

 

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jurisdictionsthere have been, and we expect that there will continue to be, a number oflegislative and regulatory proposals aimed at changing the health care system.For example, in some countries other than the United States, pricing ofprescription drugs is subject to government control, and we expect proposals toimplement similar controls in the United States to continue. Further, broadhealth care reform proposals are currently being considered by the U.S.Congress. We are unable to predict what additional legislation or regulation,if any, relating to the health care industry or third-party coverage andreimbursement may be enacted in the future or what effect such legislation orregulation would have on our business. The pendency or approval of suchproposals or reforms could result in a decrease in our stock price or limit ourability to raise capital or to obtain strategic partnerships or licenses.

 

**We may not obtain orphan drug exclusivity or we may notreceive the full benefit of orphan drug exclusivity even if we obtain suchexclusivity. ***

 

TheFDA has awarded orphan drug status to FOLOTYN for the treatment of patientswith T-cell lymphoma, follicular lymphoma and diffuse large B-cell lymphoma.Under the Orphan Drug Act, the first company to receive FDA approval forpralatrexate for the designated orphan drug indication will obtain seven years ofmarketing exclusivity during which the FDA may not approve another company’sapplication for pralatrexate for the same orphan indication.  Because the FDA approved FOLOTYN for thetreatment of patients with relapsed or refractory PTCL, we expect to receiveseven years of marketing exclusivity for that indication.  Orphan drug exclusivity would not prevent FDAapproval of a different drug for the orphan indication or the same drug for adifferent indication.  In addition, theFDA may void orphan drug exclusivity under certain circumstances.

 

**If product liability lawsuits are successfully broughtagainst us, we may incur substantial liabilities and may be required to limitcommercialization of FOLOTYN. ***

 

Thetesting and marketing of pharmaceutical products entail an inherent risk ofproduct liability. Product liability claims might be brought against us byconsumers or health care providers or by pharmaceutical companies or othersselling FOLOTYN or any future products. If we cannot successfully defend ourselvesagainst such claims, we may incur substantial liabilities or be required tolimit the commercialization of FOLOTYN. We have obtained limited productliability insurance coverage for our human clinical trials and commercial salesof FOLOTYN. However, product liability insurance coverage is becomingincreasingly expensive, and we may be unable to maintain such insurancecoverage at a reasonable cost or in sufficient amounts to protect us againstlosses due to product liability. A successful product liability claim in excessof our insurance coverage could have a material adverse effect on our business,financial condition and results of operations.

 

**Our success depends on the retention of our President andChief Executive****Officer and other key personnel. ***

 

We arehighly dependent on our President and Chief Executive Officer, Paul L. Berns,and other members of our management team. We are named as the beneficiary on aterm life insurance policy covering Mr. Berns in the amount of$10.0 million. We also depend on key employees and academic collaboratorsfor each of our research and development programs. The loss of any of our keyemployees or academic collaborators could delay the development andcommercialization of FOLOTYN or result in the termination of our FOLOTYNdevelopment program in its entirety. Mr. Berns and others on our executivemanagement team have employment agreements with us, but the agreements providefor “at-will” employment with no specified term. Our future success also willdepend in large part on our continued ability to attract and retain otherhighly qualified scientific, technical and management personnel, as well aspersonnel with expertise in clinical testing, governmental regulation andcommercialization of pharmaceutical products. We face competition for personnelfrom other companies, universities, public and private research institutions,government entities and other organizations. If we are unsuccessful in ourrecruitment and retention efforts, our business will be harmed.

 

Wealso rely on consultants, collaborators and advisors to assist us informulating and conducting our research and development programs. All of ourconsultants, collaborators and advisors are employed by other employers or areself-employed and may have commitments to or consulting contracts with otherentities that may limit their ability to contribute to our company.

 

**We cannot guarantee that we will be in compliance with allpotentially applicable regulations.**

 

Thedevelopment, manufacturing, pricing, marketing, sale and reimbursement ofFOLOTYN, together with our general operations, are subject to extensiveregulation by federal, state and other authorities within the United States andnumerous 

 

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entitiesoutside of the United States. We have fewer employees than many other companiesthat have one or more product candidates that are approved for marketing and werely heavily on third parties to conduct many important functions.

 

As apublicly-traded company, we are subject to significant regulations includingthe Sarbanes Oxley Act of 2002. We cannot assure you that we are or will be incompliance with all potentially applicable regulations. If we fail to complywith the Sarbanes Oxley Act of 2002 or any other regulations, we could besubject to a range of consequences, including restrictions on our ability tosell equity securities or otherwise raise capital funds, the de-listing of ourcommon stock from The NASDAQ Global Market, suspension or termination of ourclinical trials, failure to obtain approval to market FOLOTYN, restrictions onfuture products or our manufacturing processes, significant fines, or other sanctionsor litigation.

 

**If our internal controls over financial reporting are notconsidered effective, our business and stock price could be adversely affected.**

 

Section 404of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness ofour internal controls over financial reporting as of the end of each fiscalyear, and to include a management report assessing the effectiveness of ourinternal controls over financial reporting in our annual report on Form 10-Kfor that fiscal year. Section 404 also requires our independent registeredpublic accounting firm to attest to, and report on, management’s assessment ofour internal controls over financial reporting.

 

Ourmanagement, including our chief executive officer and principal financial officer,does not expect that our internal controls over financial reporting willprevent all error and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraudinvolving a company have been, or will be, detected. The design of any systemof controls is based in part on certain assumptions about the likelihood of futureevents, and we cannot assure you that any design will succeed in achieving itsstated goals under all potential future conditions. Over time, controls maybecome ineffective because of changes in conditions or deterioration in thedegree of compliance with policies or procedures. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected. We cannot assure you that we or ourindependent registered public accounting firm will not identify a materialweakness in our internal controls in the future. A material weakness in ourinternal controls over financial reporting would require management and ourindependent registered public accounting firm to consider our internal controlsas ineffective. If our internal controls over financial reporting are notconsidered effective, we may experience a loss of public confidence, whichcould have an adverse effect on our business and on the market price of ourcommon stock.

 

**If we do not progress in our programs as anticipated, ourstock price could decrease.**

 

Forplanning purposes, we estimate the timing of a variety of clinical, regulatoryand other milestones, such as when a certain product candidate will enterclinical development, when a clinical trial will be initiated or completed, orwhen an application for regulatory approval will be filed. Some of ourestimates are included in this report. Our estimates are based on informationavailable to us as of the date of this report and a variety of assumptions.Many of the underlying assumptions are outside of our control. If milestonesare not achieved when we estimated that they would be, investors could bedisappointed and our stock price may decrease.

 

**Warburg Pincus Private Equity VIII, L.P. controls asubstantial percentage of the voting power of our outstanding common stock. ***

 

On March 2,2005, we entered into a Securities Purchase Agreement with Warburg PincusPrivate Equity VIII, L.P., or Warburg, and certain other investors pursuant towhich we issued and sold shares of our Series A Exchangeable PreferredStock, or the Exchangeable Preferred, for gross proceeds of approximately $52.0million, which were then exchanged for common stock in the second quarter of2005. In connection with this financing, Warburg and certain of its affiliatesentered into a standstill agreement pursuant to which they agreed not topursue, for so long as they continue to own a specified number of shares of ourcommon stock, certain activities the purpose or effect of which may be tochange or influence the control of our company.

 

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As of October 30,2009, we had 103,941,015 shares of common stock outstanding, of which Warburgowned 26,124,430 shares, or approximately 25% of the voting power of ouroutstanding common stock.  Although Warburg has entered into a standstillagreement with us, Warburg is, and will continue to be, able to exercisesubstantial influence over any actions requiring stockholder approval.

 

**Anti-takeover provisions in our charter documents and underDelaware law could discourage, delay or prevent an acquisition of us, even ifan acquisition would be beneficial to our stockholders, and may preventattempts by our stockholders to replace or remove our current management. ***

 

Provisionsof our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. In addition, theseprovisions may make it more difficult for stockholders to replace members ofour board of directors. Because our board of directors is responsible forappointing the members of our management team, these provisions could in turnaffect any attempt by our stockholders to replace current members of ourmanagement team. These provisions include:

 

·                  authorizing the issuance of “blank check” preferredstock that could be issued by our board of directors to increase the number ofoutstanding shares or change the balance of voting control and thwart atakeover attempt;

 

·                  prohibiting cumulative voting in the election ofdirectors, which would otherwise allow for less than a majority of stockholdersto elect director candidates;

 

·                  prohibiting stockholder action by written consent,thereby requiring all stockholder actions to be taken at a meeting of ourstockholders;

 

·                  eliminating the ability of stockholders to call aspecial meeting of stockholders; and

 

·                  establishing advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings.

 

Inaddition, we are subject to Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engagingin any of a broad range of business combinations with an interested stockholderfor a period of three years following the date on which the stockholder becamean interested stockholder. This provision could have the effect of delaying orpreventing a change of control, whether or not it is desired by or beneficialto our stockholders. Notwithstanding the foregoing, the three-year moratoriumimposed on business combinations by Section 203 will not apply to Warburgbecause, prior to the date on which Warburg became an interested stockholder,our board of directors approved the transactions that resulted in Warburgbecoming an interested stockholder. However, in connection with its purchase ofExchangeable Preferred in March 2005, Warburg and certain of itsaffiliates entered into a standstill agreement pursuant to which they agreednot to pursue, for so long as they continue to own a specified number of sharesof our common stock, certain activities the purpose or effect of which may beto change or influence the control of our company.

 

**We have adopted a stockholder rights plan that may discourage,delay or prevent a merger or acquisition that is beneficial to ourstockholders. ***

 

In May 2003,our board of directors adopted a stockholder rights plan that may have theeffect of discouraging, delaying or preventing a merger or acquisition of usthat our stockholders may consider beneficial by diluting the ability of apotential acquirer to acquire us. Pursuant to the terms of the stockholderrights plan, when a person or group, except under certain circumstances,acquires 15% or more of our outstanding common stock or 10 business days afterannouncement of a tender or exchange offer for 15% or more of our outstandingcommon stock, the rights (except those rights held by the person or group whohas acquired or announced an offer to acquire 15% or more of our outstandingcommon stock) would generally become exercisable for shares of our common stockat a discount. Because the potential acquirer’s rights would not becomeexercisable for our shares of common stock at a discount, the potentialacquirer would suffer substantial dilution and may lose its ability to acquireus. In addition, the existence of the plan itself may deter a potentialacquirer from acquiring or making an offer to acquire us.  As a result,either by operation of the plan or by its potential deterrent effect, mergersand acquisitions of our company that our stockholders may consider in theirbest interests may not occur.

 

BecauseWarburg owns a substantial percentage of our outstanding common stock, weamended the stockholder rights plan in connection with Warburg’s purchase ofExchangeable Preferred in March 2005 to provide that Warburg and itsaffiliates 

 

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willbe exempt from the stockholder rights plan, unless Warburg and its affiliatesbecome, without the prior consent of our board of directors, the beneficialowner of more than 44% of our common stock. Likewise, in connection with ourcompletion of an underwritten offering of 9,000,000 shares of common stock in February 2007,we amended the stockholder rights plan to provide that Baker Brothers LifeSciences, L.P. and certain other affiliated funds, which are collectivelyreferred to herein as “Baker,” will be exempt from the stockholder rights plan,unless Baker becomes, without the prior consent of our board of directors, thebeneficial owner of more than 20% of our common stock.  According tofilings with the Securities and Exchange Commission, or SEC, Baker owned lessthan 10% of our outstanding common stock as of February 2009. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

 

**Unstable market conditions may have serious adverseconsequences on our business.**

 

Therecent economic downturn and market instability has made the business climatemore volatile and more costly. Our general business strategy may be adverselyaffected by unpredictable and unstable market conditions. If the current equityand credit markets deteriorate further, or do not improve, it may make anynecessary equity or debt financing more difficult, more costly, and moredilutive. While we believe we have adequate capital resources to meet ourexpected working capital and capital expenditure requirements for at least thenext 12 months, a radical economic downturn or increase in our expenses couldrequire additional financing on less than attractive rates or on terms that areexcessively dilutive to existing stockholders. Failure to secure any necessaryfinancing in a timely manner and on favorable terms could have a materialadverse effect on our growth strategy, financial performance and stock priceand could require us to delay or abandon clinical development plans. There is arisk that one or more of our current service providers, manufacturers or otherpartners may encounter difficulties during challenging economic times, whichcould have an adverse effect on our business, results of operations andfinancial condition.

 

**Our liquidity, capital resources and results of operationsmay be adversely affected by declines in the value of our investments inmarketable securities. ***

 

As of September 30,2009, we had $84.1 million in cash, cash equivalents, and investments inmarketable securities.  Until required for use in our business, we investour cash reserves in bank deposits, money market funds, high-grade corporatenotes and U.S. government instruments in accordance with our investment policy. Our investments in marketable securities as of September 30, 2009,totaling $21.7 million, were held in a variety of interest-bearinginstruments, consisting mainly of high-grade corporate notes, U.S. Treasurybills and certificates of deposit.  The weighted average duration of the remainingtime to maturity for our portfolio of investments in marketable securities asof September 30, 2009 was approximately five months.  We did not holdany derivative instruments, foreign exchange contracts, asset backedsecurities, mortgage backed securities, auction rate securities, or securitiesof issuers in bankruptcy in our investment portfolio as of September 30,2009.

 

Based upon the current status of our productdevelopment and commercialization plans, we believe that our cash, cashequivalents, and investments in marketable securities as of September 30,2009, together with the net proceeds of approximately $93.0 million fromthe October 2009 Financing, should be adequate to support our operations throughat least the next 12 months, although there can be no assurance that this can,in fact, be accomplished.  In particular, our liquidity, capital resourcesand results of operations may be adversely affected by declines in the value ofour investments in marketable securities.  The value of our investments inmarketable securities may be adversely affected by rating downgrades orbankruptcies affecting the issuers of such securities, whether caused byinstability in the global financial markets, lack of liquidity in the creditand capital markets, or other factors.  For example, during the threemonths ended March 31, 2009, we realized a loss of approximately $157,000on the sale of certain of our investments in marketable securities, which weresold in order to preserve our principal as the issuers of those securitiesexperienced significant deteriorations in their creditworthiness as evidencedby investment rating downgrades.  We have the ability and intent to holdour remaining investments in marketable securities as of September 30,2009 to their scheduled maturity, although we monitor our investment portfoliowith the primary objectives of preserving principal and maintaining properliquidity to meet our operating needs.

 

**The market price for our common stock has been and maycontinue to be highly volatile, and an active trading market for our commonstock may never exist. ***

 

Wecannot assure you that an active trading market for our common stock will existat any time. Holders of our common stock may not be able to sell shares quicklyor at the market price if trading in our common stock is not active. Thetrading 

 

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priceof our common stock has been and is likely to continue to be highly volatileand could be subject to wide fluctuations in price in response to variousfactors, many of which are beyond our control, including:

 

·                  the timing and amount ofrevenues generated from the sale of FOLOTYN;

 

·                  actual or anticipated variations in quarterlyoperating results;

 

·                   actual or anticipated regulatory approvals ornon-approvals of FOLOTYN or of competing product candidates;

 

·                  the loss of regulatoryapproval for FOLOTYN in patients with relapsed or refractory PTCL;

 

·                  actual or anticipated results of our clinical trialsinvolving FOLOTYN;

 

·                  changes in laws or regulations applicable to FOLOTYN;

 

·                  changes in the expected or actual timing of ourdevelopment programs;

 

·                  announcements of technological innovations by us orour competitors;

 

·                  changes in financial estimates or recommendations bysecurities analysts;

 

·                  conditions or trends in the biotechnology andpharmaceutical industries;

 

·                  changes in the market valuations of similar companies;

 

·                  announcements by us of significant acquisitions,strategic partnerships, joint ventures or capital commitments;

 

·                  additions or departures of key personnel;

 

·                  disputes or other developments relating to proprietaryrights, including patents, litigation matters and our ability to obtain patentprotection for our technologies;

 

·                  developments concerning any of our research anddevelopment, manufacturing and marketing collaborations;

 

·                  sales of large blocks of our common stock;

 

·                  sales of our common stock by our executive officers,directors and five percent stockholders; and

 

·                  economic and other external factors, includingdisasters or crises.

 

Publiccompanies in general and companies included on The NASDAQ Global Market inparticular have experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. There has been particular volatility in the market prices ofsecurities of biotechnology and other life sciences companies, and the marketprices of these companies have often fluctuated because of problems orsuccesses in a given market segment or because investor interest has shifted toother segments. These broad market and industry factors may cause the marketprice of our common stock to decline, regardless of our operating performance.We have no control over this volatility and can only focus our efforts on ourown operations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities class action litigation has often beeninitiated against that company, including in 2004 against us. Litigation ofthis type could result in substantial costs and diversion of management’sattention and resources, which would hurt our business. Any adversedetermination in litigation could also subject us to significant liabilities.

 

**Substantial sales of shares mayimpact the market price of our common stock. ***

 

If our stockholders sellsubstantial amounts of our common stock, the market price of our common stockmay decline. These sales also might make it more difficult for us to sellequity or equity-related securities in the future at a time and price that we 

 

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consider appropriate. Weare unable to predict the effect that sales may have on the then prevailingmarket price of our common stock.  We have entered into a RegistrationRights Agreement with Warburg pursuant to which Warburg is entitled to certainregistration rights with respect to shares of our common stock.  On July 20,2009, we filed a Registration Statement on Form S-3 with the SEC providingfor the registration for resale by Warburg of up to 26,124,430 shares of ourcommon stock, which registration statement was declared effective on August 28,2009.

 
| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS** | ** ** | **None**   |
|-------------|------------|------------------------------------------------------------------|------------|------------|
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                              | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**         | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 5.** | ** ** | **OTHER INFORMATION**                                            | ** ** | **None**   |
| ** **  | ** ** | ** **                                                       | ** ** | ** ** |
| **ITEM 6.** | ** ** | **EXHIBITS**                                                     | ** ** | ** ** |

 
| ** **       | ** ** | ** **                                                                                                             | ** ** | **Incorporated by Reference** | ** ** | ** **       |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------|
| **Exhibit  No.** | ** ** | **Description**                                                                                                        | ** ** | **Form**                                | ** ** | **Filing  Date** | ** ** | **Number** | ** ** | **Filed  Herewith** |
| 3.1              |       | Amended and Restated  Certificate of Incorporation.                                                                    |       | 8-K                                     |       | 7/20/2009        |   | 3.1 |   |   |
| 3.2              |       | Certificate of  Designation of Series A Junior Participating Preferred Stock.                                     |       | 8-K                                     |       | 7/20/2009        |   | 3.2 |   |   |
| 3.3              |       | Certificate of  Amendment to Restated Certificate of Incorporation.                                                    |       | 8-K                                     |       | 7/20/2009        |   | 3.3 |   |   |
| 3.4              |       | Certificate of  Amendment to the Certificate of Designations of Series A Junior  Participating Preferred Stock.   |       | 8-K                                     |       | 7/20/2009        |   | 3.4 |   |   |
| 4.1              |       | Amendment to Rights  Agreement, dated as of July 17, 2009, between the Company and Mellon  Investor Services LLC. |       | 8-K                                     |       | 7/20/2009        |   | 4.1 |   |   |
| 31.1             |       | Certification of  principal executive officer required by Rule 13a-14(a) / 15d-14(a).                        |       |                                    |       |             |   |   |   | X |
| 31.2             |       | Certification of principal  financial officer required by Rule 13a-14(a) / 15d-14(a).                        |       |                                    |       |             |   |   |   | X |
| 32.1#            |       | Section 1350  Certification.                                                                                      |       |                                    |       |             |   |   |   | X |

 

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#                                                Thecertifications attached as Exhibit 32.1 that accompany this QuarterlyReport on Form 10-Q are not deemed filed with the Securities and ExchangeCommission and are not to be incorporated by reference into any filing of AllosTherapeutics, Inc. under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporation languagecontained in such filing.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Date: November 3,  2009 | **ALLOS THERAPEUTICS, INC.**                  |
|-----------------------------------|-----------------------------------------------|
|                              |                                          |
|                              | /s/ Paul L. Berns                             |
|                              | Paul L. Berns                                 |
|                              | President and Chief  Executive Officer        |
|                              | (Principal Executive  Officer)                |
|                              |                                          |
|                              |                                          |
|                              | /s/ David C. Clark                            |
|                              | David C. Clark                                |
|                              | Vice President, Finance  and Treasurer        |
|                              | (Principal Financial  and Accounting Officer) |

 

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