Table of Contents

 

 

 

**UNITED STATES SECURITIES 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 March 31, 2011.**

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

** **

**For the transition period from                       to                     .**

 

**Commission File Number 000-29815**

 

**Allos Therapeutics, Inc.**(Exact name of Registrant as specified in its charter)

 

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

 

**11080 CirclePoint 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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the  preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of 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 mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

 

As of May 6, 2011, there were 105,613,843 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

----

Table of Contents

 

**ALLOS THERAPEUTICS, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I.    Financial Information | 3                                                                                            |
|--------------------------------------------|----------------------------------------------------------------------------------------------|
| ITEM 1.                                    | Financial Statements (unaudited)                                                             | 3 |
|                                       | Balance Sheets — as of   March 31, 2011 and December 31, 2010                 | 3 |
|                                       | Statements of Operations — for the   three months ended March 31, 2011 and 2010    | 4 |
|                                       | Statements of Cash Flows — for the three   months ended March 31, 2011 and 2010    | 5 |
|                                       | Notes to Financial   Statements                                                              | 6 |
| ITEM 2.                                    | Management’s   Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| ITEM 3.                                    | Quantitative   and Qualitative Disclosures About Market Risk                                 | 28 |
| ITEM 4.                                    | Controls and   Procedures                                                                    | 29 |
| PART II.    Other Information    | 29                                                                                           |
| ITEM 1.                                    | Legal Proceedings                                                                            | 29 |
| ITEM 1A.                                   | Risk   Factors                                                                               | 30 |
| ITEM 2.                                    | Unregistered Sales of Equity Securities   and Use of Proceeds                                | 48 |
| ITEM 3.                                    | Defaults Upon Senior Securities                                                              | 48 |
| ITEM 4.                                    | Removed and Reserved                                                                         | 48 |
| ITEM 5.                                    | Other Information                                                                            | 48 |
| ITEM   6.                                  | Exhibits                                                                                     | 48 |
| SIGNATURES                                 | 49                                                                                           |

 

NOTE:

 

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

 

2

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**ALLOS THERAPEUTICS, INC.**

**BALANCE SHEETS**

**(Dollars in thousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                                                                                                                                                                                        | ** ** | **March 31,********2011** | ** ** | **December 31,   2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                                        | ** ** | ** **                     | ** ** | ** **                   | ** ** |
| Current assets:                                                                                                                                                                                   |       |                           |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                              | 49,085     |                         | $          | 48,164 |   |
| Short-term investments                                                                                                                                                                            |       | 30,332                         |       | 50,334                       |       |
| Restricted cash                                                                                                                                                                                   |       | 238                            |       | 238                          |       |
| Accounts receivable                                                                                                                                                                               |       | 12,970                         |       | 12,076                       |       |
| Inventory                                                                                                                                                                                         |       | 178                            |       | 178                          |       |
| Prepaid expenses and other assets                                                                                                                                                                 |       | 3,354                          |       | 2,180                        |       |
| Total current assets                                                                                                                                                                              |       | 96,157                         |       | 113,170                      |       |
| Property and equipment, net                                                                                                                                                                       |       | 2,091                          |       | 2,245                        |       |
| Long-term investments                                                                                                                                                                             |       | —                         |       | 67                           |       |
| Intangible asset, net                                                                                                                                                                             |       | 5,112                          |       | 5,225                        |       |
| Other assets                                                                                                                                                                                      |       | —                         |       | 49                           |       |
| Total assets                                                                                                                                                                                      |       | $                              | 103,360    |                         | $          | 120,756 |   |
| **LIABILITIES AND   STOCKHOLDERS’ EQUITY**                                                                                                                                                   |       |                           |       |                         |       |
| Current liabilities:                                                                                                                                                                              |       |                           |       |                         |       |
| Trade accounts payable                                                                                                                                                                            |       | $                              | 2,553      |                         | $          | 4,931 |   |
| Accrued liabilities                                                                                                                                                                               |       | 14,132                         |       | 17,627                       |       |
| Total current liabilities                                                                                                                                                                         |       | 16,685                         |       | 22,558                       |       |
| Commitments and contingencies (Note 10)                                                                                                                                                      |       |                           |       |                         |       |
| Stockholders’ equity:                                                                                                                                                                        |       |                           |       |                         |       |
| Preferred stock, $0.001 par value; 10,000,000   shares authorized; no shares issued or outstanding                                                                                                |       | —                         |       | —                       |       |
| Series A Junior Participating Preferred   Stock, $0.001 par value; 1,500,000 shares designated from authorized   preferred stock; no shares issued or outstanding                            |       | —                         |       | —                       |       |
| Common stock, $0.001 par value; 200,000,000 shares   authorized; 105,582,700 and 105,493,546 shares issued and outstanding at   March 31, 2011 and December 31, 2010, respectively |       | 106                            |       | 105                          |       |
| Additional paid-in capital                                                                                                                                                                        |       | 552,402                        |       | 548,722                      |       |
| Accumulated deficit                                                                                                                                                                               |       | (465,833                       | )          | (450,629                     | )          |
| Total stockholders’ equity                                                                                                                                                                   |       | 86,675                         |       | 98,198                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                   |       | $                              | 103,360    |                         | $          | 120,756 |   |

 

***The accompanying notes are an integral part of these financial statements.***

 

3

----

Table of Contents

 

**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF OPERATIONS**

**(Dollars in thousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
|                                          |       |                                              |       |   |   |
| Net product sales                             |       | $                                                 | 10,864     |   | $ | 7,407 |   |
|                                          |       |                                              |       |   |   |
| Operating costs and expenses:                 |       |                                              |       |   |   |
| Cost of sales, excluding amortization expense |       | 943                                               |       | 689 |   |
| Research and development                      |       | 7,497                                             |       | 9,285 |   |
| Selling, general and administrative           |       | 17,552                                            |       | 17,932 |   |
| Amortization of intangible asset              |       | 113                                               |       | 113 |   |
| Total operating costs and expenses            |       | 26,105                                            |       | 28,019 |   |
| Operating loss                                |       | (15,241                                           | )          | (20,612 | ) |
| Interest and other income, net                |       | 38                                                |       | 65 |   |
| Net loss                                      |       | $                                                 | (15,203    | ) | $ | (20,547 | ) |
| Net loss per share: basic and diluted         |       | $                                                 | (0.14      | ) | $ | (0.20 | ) |
| Weighted average shares: basic and diluted    |       | 105,527,387                                       |       | 104,602,134 |   |

 

***The accompanying notes are an integral part of these financial statements.***

 

4

----

Table of Contents

 

**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Cash Flows From Operating Activities:                                         |       |                                              |       |   |   |
| Net loss                                                                      |       | $                                                 | (15,203    | ) | $ | (20,547 | ) |
| Adjustments to reconcile net loss to net cash used   in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                 |       | 198                                               |       | 215 |   |
| Stock-based compensation expense                                              |       | 3,672                                             |       | 2,907 |   |
| Amortization of intangible asset                                              |       | 113                                               |       | 113 |   |
| Changes in operating assets and liabilities:                                  |       |                                              |       |   |   |
| Accounts receivable                                                           |       | (894                                              | )          | (3,410 | ) |
| Prepaid expenses and other assets                                             |       | (1,125                                            | )          | (378 | ) |
| Interest receivable on investments                                            |       | 50                                                |       | (75 | ) |
| Inventory                                                                     |       | —                                            |       | (217 | ) |
| Trade accounts payable                                                        |       | (2,379                                            | )          | 742 |   |
| Accrued liabilities                                                           |       | (3,500                                            | )          | (2,658 | ) |
| Net cash used in operating activities                                         |       | (19,068                                           | )          | (23,308 | ) |
| Cash Flows From Investing Activities:                                         |       |                                              |       |   |   |
| Acquisition of property and equipment                                         |       | (39                                               | )          | (191 | ) |
| Purchases of investments                                                      |       | —                                            |       | (45,197 | ) |
| Proceeds from maturities of investments                                       |       | 20,020                                            |       | 9,496 |   |
| Net cash provided by (used in) investing   activities                         |       | 19,981                                            |       | (35,892 | ) |
| Cash Flows From Financing Activities:                                         |       |                                              |       |   |   |
| Proceeds from issuance of common stock associated   with stock options        |       | 8                                                 |       | 2,359 |   |
| Proceeds from issuance of common stock, net of   issuance costs               |       | —                                            |       | 32 |   |
| Net cash provided by financing activities                                     |       | 8                                                 |       | 2,391 |   |
| Net increase (decrease) in cash and cash   equivalents                        |       | 921                                               |       | (56,809 | ) |
| Cash and cash equivalents, beginning of period                                |       | 48,164                                            |       | 141,185 |   |
| Cash and cash equivalents, end of period                                      |       | $                                                 | 49,085     |   | $ | 84,376 |   |
| Supplemental Schedule of Cash and Non-cash   Activities:                 |       |                                              |       |   |   |
| Deferred revenue in accounts receivable                                       |       | $                                                 | —     |   | $ | 481 |   |
| Assets recorded for which payment has not yet   occurred                      |       | 6                                                 |       | 104 |   |

 

***The accompanying notes are an integral part of these financial statements.***

 

5

----

Table of Contents

 

**ALLOS THERAPEUTICS, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(Dollars shown in tables are in thousands, except per share amounts)**

**(unaudited)**

 

**1.****                ****Basis of Presentation**

 

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  These financial statements should be read in conjunction with the audited financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a broader discussion of our business and the opportunities and risks inherent in such business.

 

*Liquidity*

 

As of March 31, 2011, we had $79.4 million in cash, cash equivalents, and investments. Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of March 31, 2011, together with the upfront payment associated with our strategic collaboration with Mundipharma International Corporation Limited, as discussed in Note 12 “Subsequent Events”, will be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished.

 

Our ability to achieve profitability is dependent on our ability, alone or with partners, to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, in the United States.  The amount of our future product sales are subject to significant uncertainty.  We may never generate sufficient revenue from product sales to become profitable.

 

We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spend substantial amounts on selling, general and administrative expenses to promote FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  Therefore, we may 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 revenue generated from sales of FOLOTYN;

 

·                    the timing and costs associated with our sales and marketing activities for promoting FOLOTYN;

 

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

 

·                  the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the U.S. Food and Drug Administration, or FDA;

 

·                  the timing and costs associated with our evaluation of, and decisions with respect to, the potential development of FOLOTYN for additional therapeutic indications;

 

·                  the timing, costs and revenue associated with our strategic collaboration with Mundipharma for the co-development of FOLOTYN globally and commercialization outside the United States and Canada; and

 

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

 

6

----

Table of Contents

 

We may seek to obtain this additional capital through equity or debt financings, arrangements with corporate partners, or from other sources. Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us. In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to significantly increase sales of FOLOTYN or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our future prospects for profitability may be harmed.

 

**2.****                ****Fair Value of Financial Instruments**

 

*Cash, Cash Equivalents and Investments*

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The carrying values of our cash equivalents and investments approximate their market values based on quoted market prices. Investments are classified as held to maturity and are carried at cost plus accrued interest. Our cash and cash equivalents are maintained in a financial institution in amounts that, at times, may exceed federally insured limits. The weighted average duration of the remaining time to maturity for our portfolio of investments as of March 31, 2011 was approximately two months.  As of March 31, 2011, our investments were held in a variety of interest-bearing instruments, consisting mainly of U.S. Treasury bills. We did not hold any derivative instruments, foreign exchange contracts, asset backed securities, mortgage backed securities, auction rate securities, or securities of issuers in bankruptcy in our investment portfolio as of March 31, 2011.

 

*Fair Value of Financial Instruments*

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:

 

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to us for identical assets or liabilities;

 

Level 2: Inputs include quoted prices for similar assets and liabilities in active and inactive markets or that are observable for the asset or liability either directly or indirectly; and

 

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

 

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of March 31, 2011.  Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities. The carrying value of our cash held in money market funds totaling $47.7 million as of March 31, 2011 is included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs.

 

7

----

Table of Contents

 

The carrying value of investments consisted of the following as of March 31, 2011:

 
| ** **                                  | ** ** | **Amortized   cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair   Value** | ** ** |
|---------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Short-term held-to-maturity   securities:   |       |                 |       |                           |       |                            |       |             |       |
| U.S. Treasury bills                         |       | $                    | 29,991     |                           | $          | 23                              |       | $                | —     |   | $ | 30,014 |   |
| Corporate notes                             |       | 306                  |       | 11                             |       | —                          |       | 317              |       |
| U. S. Government agency securities          |       | 273                  |       | 5                              |       | —                          |       | 278              |       |
| Sub-total                                   |       | $                    | 30,570     |                           | $          | 39                              |       | $                | —     |   | $ | 30,609 |   |
| Less: Amounts classified as restricted cash |       | (238                 | )          | —                         |       | —                          |       | (238             | )          |
| Total due in one year or less               |       | $                    | 30,332     |                           | $          | 39                              |       | $                | —     |   | $ | 30,371 |   |

 

The carrying value of investments consisted of the following as of December 31, 2010:

 
| ** **                                  | ** ** | **Amortized   cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair   Value** | ** ** |
|---------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Short-term   held-to-maturity securities:   |       |                 |       |                           |       |                            |       |             |       |
| U.S. Treasury bills and notes               |       | $                    | 50,063     |                           | $          | 11                              |       | $                | 1          |   | $ | 50,073 |   |
| U. S. Government agency securities          |       | 271                  |       | 6                              |       | —                          |       | 277              |       |
| Total due in one year or less               |       | $                    | 50,334     |                           | $          | 17                              |       | $                | 1          |   | $ | 50,350 |   |
|                                        |       |                 |       |                           |       |                            |       |             |       |
| Long-term held-to-maturity securities:      |       |                 |       |                           |       |                            |       |             |       |
| Corporate notes                             |       | $                    | 305        |                           | $          | 11                              |       | $                | —     |   | $ | 316 |   |
| Less: Amounts classified as restricted cash |       | (238                 | )          | —                         |       | —                          |       | (238             | )          |
| Total due in one to three years             |       | $                    | 67         |                           | $          | 11                              |       | $                | —     |   | $ | 78 |   |

 

We had no realized losses on our investments during the three months ended March 31, 2011 or 2010.  Market values were determined for each individual security in the investment portfolio.  If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. Additionally, management assesses whether it intends to sell or would more-likely-than-not not be required to sell the investment before the expected recovery of the amortized cost basis. We do not intend to sell and believe it is more-likely-than-not that we will not be required to sell the investment before recovery of its amortized cost basis.  There were no investments in an unrealized loss position as of March 31, 2011.   All of the investments as of December 31, 2010 that were in a loss position, have been in a continuous unrealized loss position for less than 12 months.  As of December 31, 2010, we have an unrealized loss of $1,000 on one of our U.S. Treasury bill investments with an aggregate fair value of $10.0 million.  As of December 31, 2010, no other than temporary impairment has been recorded on any of our investments since these unrealized losses are on U.S. government issued securities maturing within one year. The decline in value of the investments as of December 31, 2010 was caused by primarily by changes in interest rates.  We do not intend to sell and we do not believe that it is more likely than not that we will be required to sell our investments before recovering the cost of securities, nor do we expect not to recover the entire amortized cost basis of our investments as of March 31, 2011.  We have the ability and intent to hold our remaining investments to recover the entire amortized cost basis of the investments as of March 31, 2011.

 

**3.****                ****Inventory**

 

*Inventory*

 

Costs associated with the production of FOLOTYN bulk drug substance and formulated drug product by our third party manufacturers are recorded as either research and development expense or inventory.

 

Costs associated with the production of FOLOTYN by our third party manufacturers are expensed to research and development expense at the time of production when the formulated drug product is packaged for clinical trial use.

 

We capitalize the costs for our marketed products at the lower of cost (first-in, first-out method) or market (current replacement cost) with cost determined on the first-in, first-out basis and then expense the sold inventory as a component of cost of goods sold.

 

8

----

Table of Contents

 

Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  We have remaining supplies of FOLOTYN drug substance and drug product that are not recorded as inventory on our Balance Sheet as of March 31, 2011 because they were purchased prior to FDA approval.   Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.

 

Inventory consisted of:

 
| ** **      | ** ** | **March 31,   2011** | ** ** | **December 31,   2010** | ** ** |
|-----------------|------------|---------------------------|------------|------------------------------|------------|
| Work in process |       | $                         | 252        |                         | $          | 254 |   |
| Finished goods  |       | 37                        |       | 38                           |       |
|            |       | 289                       |       | 292                          |       |
| Less reserve    |       | (111                      | )          | (114                         | )          |
| Total inventory |       | $                         | 178        |                         | $          | 178 |   |

 

**4.****                ****Prepaid Expenses and Other Assets**

 

Prepaid expenses and other assets are comprised of the following:

 
| ** **                                              | ** ** | **March 31,   2011** | ** ** | **December 31,   2010** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Prepaid sales, marketing and medical affairs   expenses |       | $                         | 2,186      |                         | $          | 1,308 |   |
| Prepaid expenses and other assets                       |       | 939                       |       | 650                          |       |
| Prepaid research and development expenses               |       | 229                       |       | 222                          |       |
|                                                    |       | $                         | 3,354      |                         | $          | 2,180 |   |

 

**5.****                ****Intangible asset, net**

 

Costs incurred for products or product candidates not yet approved by the FDA and for which no alternative future use exists are recorded as expense. In the event a product or product candidate has been approved by the FDA or an alternative future use exists for a product or product candidate, patent and license costs are capitalized and amortized over the shorter of the expected patent life and the expected life cycle of the related product or product candidate.

 

As a result of the FDA’s approval to market FOLOTYN on September 24, 2009, we met a milestone under our license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, discussed in Note 10, which required us to make a milestone payment of $5.8 million. We capitalized the $5.8 million payment as an intangible asset and began amortizing the asset immediately following the FDA approval of FOLOTYN. Amortization expense is being recorded on a straight line basis over the remaining expected life of the patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent 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 asset will be amortized over a shorter period. Amortization expense of $113,000 for both the three months ended March 31, 2011 and 2010 was recorded as amortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense for the intangible asset is approximately $454,000 per year during 2011 through 2021 and $234,000 in 2022.

 

The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred.  No trigger events occurred for the three months ended March 31, 2011 on the $5,112,000 of intangible asset, net.

 

9

----

Table of Contents

 

**6.****                ****Accrued Liabilities**

 

Accrued liabilities are comprised of the following:

 
| ** **                                                                          | ** ** | **March 31,   2011** | ** ** | **December 31,   2010** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Accrued royalties, government rebates,   chargebacks, returns and distribution fees |       | $                         | 3,674      |                         | $          | 3,849 |   |
| Accrued sales and marketing expenses                                                |       | 3,419                     |       | 3,536                        |       |
| Accrued personnel costs                                                             |       | 3,285                     |       | 6,103                        |       |
| Accrued research and development expenses                                           |       | 2,151                     |       | 2,762                        |       |
| Accrued expenses—other                                                         |       | 1,603                     |       | 1,377                        |       |
|                                                                                |       | $                         | 14,132     |                         | $          | 17,627 |   |

 

In January 2011, we implemented a strategic reduction of our workforce by approximately 13%, or 25 employees.  Personnel reductions were primarily focused in research and development and general and administrative functions.  The restructuring was a result of our decision to prioritize our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies, and to manage our operating costs and expenses.  During the first quarter of 2011, we incurred total restructuring charges of approximately $570,000, of which $304,000 and $266,000 were recorded in research and development and sales, general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits.  As of March 31, 2011, approximately $5,000 remains accrued for termination benefits to be paid within three months and is included in the accrued personnel costs above.

 

**7.****                ****Product Sales**

 

*Product Sales*

 

We generate revenue from product sales.  We recognize product revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) our price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by us, (5) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated.

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to health care providers because we did not have sufficient history to be able to reasonably estimate returns.  Beginning in the fourth quarter of 2010, we began recognizing revenue as product is sold to distributors as we established a sufficient history in order to reasonably estimate returns from our distributors.  We monitor inventory levels within our distribution channel and sales to end users, or health care providers, to determine whether deferral of sales is required.  No such deferrals were recorded at March 31, 2011.

 

*Net Product Sales*

 

We estimate gross to net sales adjustments based upon analysis of third-party information, including information obtained from our primary distributors with respect to their inventory levels and sell-through to the distributors’ customers.

 

Our net product sales represent total product sales less distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales. In addition, we incur distributor fees related to the management of our product by distributors. These distributor fees are

 

10

----

Table of Contents

 

recorded within net product sales and are based on definitive contractual agreements. Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.  Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities.  Allowances and accruals are recorded in the same period that the related revenue is recognized.

 

*Product Returns*

 

Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not allowed for expired product.  Given these limited contractual return rights, the price of FOLOTYN and the limited number of patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.  We estimated product returns for FOLOTYN of 1% of gross product sales based upon actual returns history within our distribution channel, which were consistent with historical trends of product returns for similar companies in the pharmaceutical industry.  The actual returns history within our distribution channel is derived from third-party information obtained from certain distributors with respect to their inventory levels and sell-through to the distributors’ customers.  We will continue to monitor the historical trend of returns, including the impacts on this trend of product expiry dates and may be required to make future adjustments to our estimates.  Through March 31, 2011, product returns have been negligible.  See activity for the three month periods ended March 31, 2011 and 2010 in the tables below.

 

*Medicaid Rebates*

 

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  Our estimate of utilization is based on market research and information about our expected patient population.  Through March 31, 2011, we have not had sufficient claims from states for rebates with which to update our estimate.  However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to early adopt portions of PPACA, and any implementing regulations, could impact future estimates related to our Medicaid rebate allowances. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% to 20% increase in the Medicaid utilization percentage within our patient population as of March 31, 2011, would result in an approximate $896,000 to $1,791,000 reduction in cumulative net product sales.

 

*Government Chargebacks*

 

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.   We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through March 31, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.

 

11

----

Table of Contents

 

As a result of this evaluation, during the three months ended March 31, 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $301,000.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly*.*

 

A reconciliation of gross to net product sales for the three months ended March 31, 2011 and 2010 and balances and activity in the deferred revenue account for the three months ended March 31, 2010 are as follows:

 
| ** **                                | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| ** **                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Gross product sales                       |       | $                                                 | 12,072     |   | $ | 8,220 |   |
| *Gross to Net Sales Adjustments*          |       |                                              |       |   |   |
| Government rebates and chargebacks        |       | (742                                              | )          | (574 | ) |
| Distribution fees                         |       | (345                                              | )          | (239 | ) |
| Product returns allowance                 |       | (121                                              | )          | — |   |
| Net product sales                         |       | $                                                 | 10,864     |   | $ | 7,407 |   |
|                                      |       |                                              |       |   |   |
| Deferred revenue, beginning of the period |       |                                              |       | $ | 669 |   |
| Gross product sales to distributors       |       |                                              |       | 8,701 |   |
| Less: Gross product sales recognized      |       |                                              |       | (8,220 | ) |
| Deferred revenue, end of the period       |       |                                              |       | $ | 1,150 |   |

 

Balances and activity in the government rebates and chargebacks and distribution fees payable accounts for the three months ended March 31, 2011 and 2010 are as follows:

 
| ** **                                     | ** ** | **Product   Returns** | ** ** | **Government   Rebates and   Chargebacks** | ** ** | **Distribution********Fees** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------------------------------------------|------------|------------------------------|------------|
| **Balance at December 31,   2009**        |       | $                     | —     |                                            | $          | 487                          |       | $ | 86 |   |
| Reserve for current period sales               |       | —                |       | 782                                             |       | 239                          |       |
| Change in estimate for prior period sales      |       | —                |       | (208                                            | )          | —                       |       |
| Credits/payments made for prior period sales   |       | —                |       | (249                                            | )          | (77                          | )          |
| Credits/payments made for current period sales |       | —                |       | (99                                             | )          | (100                         | )          |
| **Balance at March 31, 2010**             |       | $                     | —     |                                            | $          | 713                          |       | $ | 148 |   |
|                                           |       |                  |       |                                            |       |                         |       |
| **Balance at December 31,   2010**        |       | $                     | 428        |                                            | $          | 2,224                        |       | $ | 263 |   |
| Reserve for current period sales               |       | 121                   |       | 1,043                                           |       | 345                          |       |
| Change in estimate for prior period sales      |       | —                |       | (301                                            | )          | —                       |       |
| Credits/payments made for prior period sales   |       | —                |       | (374                                            | )          | (197                         | )          |
| Credits/payments made for current period sales |       | —                |       | (591                                            | )          | (178                         | )          |
| **Balance at March 31, 2011**             |       | $                     | 549        |                                            | $          | 2,001                        |       | $ | 233 |   |

 

*Major Customers and Concentration of Credit Risk*

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary.  Substantially all of our sales for the three months ended March 31, 2011 and 2010 were made in the United States.

 

12

----

Table of Contents

 
| ** ** | ** ** | **% of total trade accounts   receivable at** | ** ** | **% of total gross product sales   for the three months ended   March 31,** | ** ** |
|------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **March 31,   2011**                                              | ** ** | **December 31,   2010**                                                                                                  | ** ** | **2011** | ** ** | **2010** | ** ** |
| Customer A |       | 49.6                                                                   | %          | 53.8                                                                                                                          | %          | 49.7 | % | 51.6 | % |
| Customer B |       | 22.3                                                                   | %          | 23.1                                                                                                                          | %          | 24.3 | % | 22.9 | % |
| Customer C |       | 27.5                                                                   | %          | 22.3                                                                                                                          | %          | 25.4 | % | 25.3 | % |

 

*Cost of sales*

 

Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 10 regarding the 8% current royalty rates under our license agreement for FOLOTYN.  Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.

 

**8.****                ****Stock-Based Compensation**

 

Stock-based compensation expense for the three months ended March 31, 2011 and 2010 has been recognized in the accompanying Statements of Operations as follows:

 
| ** **                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Research and development               |       | $                                                 | 1,158      |   | $ | 682 |   |
| Selling, general and administrative    |       | 2,514                                             |       | 2,225 |   |
| Total stock-based compensation expense |       | $                                                 | 3,672      |   | $ | 2,907 |   |

 

We did not recognize a related tax benefit during the three months ended March 31, 2011 and 2010, as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of March 31, 2011.  No stock-based compensation expense was capitalized on our Balance Sheet as of March 31, 2011 and December 31, 2010.

 

Stock-based compensation expense by equity award type for the three months ended March 31, 2011 and 2010 was as follows:

 
| ** **                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Stock options                          |       | $                                                 | 1,784      |   | $ | 2,605 |   |
| Restricted stock units                 |       | 1,857                                             |       | 225 |   |
| Restricted stock                       |       | 2                                                 |       | 26 |   |
| Employee stock purchase plan           |       | 29                                                |       | 51 |   |
| Total stock-based compensation expense |       | $                                                 | 3,672      |   | $ | 2,907 |   |

 

13

----

Table of Contents

 

As of March 31, 2011, the unrecorded stock-based compensation balance and estimated weighted-average amortization period by equity award type was as follows:

 
| ** **                   | ** ** | **Unrecorded   stock-based   compensation   balance** | ** ** | **Weighted-   average   amortization   period** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| Stock options                |       | $                                                     | 5,630      |                                            | 1.6        |   |
| Restricted stock units       |       | 13,001                                                |       | 1.9                                             |       |
| Restricted stock             |       | 8                                                     |       | 1.2                                             |       |
| Employee stock purchase plan |       | 20                                                    |       | 0.3                                             |       |
|                              |            |                                                       |            |                                                 |            |  |

 

**Stock Options**

 

The following table summarizes activity and related information for stock option awards granted under our equity incentive plans:

 
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                 | ** ** |
|---------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | **Number of   Shares**  | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Grant-date   Fair Value** | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| **Outstanding at   December 31, 2010** |       | 8,716,829                    |       | $                                            | 6.36       |   |   |   | 4,539,454 |   | $ | 5.89 |   |
| Granted                                     |       | 105,000                      |       | 2.81                                         |       | $ | 1.57 |   |   |   |   |   |
| Exercised                                   |       | (2,500                       | )          | 3.14                                         |       |   |   |   |   |   |   |
| Forfeited/Canceled                          |       | (627,001                     | )          | 6.66                                         |       |   |   |   |   |   |   |
| **Outstanding at March 31,   2011**    |       | 8,192,328                    |       | $                                            | 6.30       |   |   |   | 5,056,654 |   | $ | 6.03 |   |
|                                             |            |                              |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information about outstanding stock options that are fully vested and currently exercisable, and outstanding 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 March 31, 2011:**                                             | ** ** | ** **               | ** ** | ** **                                                    | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Options fully vested and exercisable                                       |       | 5,056,654                |       | 5.8                                                           |       | $                                            | 6.03       |                                 | $          | 261,000 |   |
| Options expected to vest, including effects   of expected forfeitures |       | 2,584,545                |       | 8.5                                                           |       | $                                            | 6.75       |                                 | 31,000     |   |
| Options fully vested and expected to vest                                  |       | 7,641,199                |       | 6.7                                                           |       | $                                            | 6.27       |                                 | $          | 292,000 |   |

 

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $3.16 as of March 31, 2011, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.  The total number of in-the-money options exercisable as of March 31, 2011 was 802,705.

 

The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $0 and $2,318,000, respectively, determined as of the date of option exercise.  We settle employee stock option exercises with newly issued common shares.  No tax benefits were realized by us in connection with these exercises during the three months ended March 31, 2011 and 2010 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of March 31, 2011.

 

14

----

Table of Contents

 

**Restricted Stock Awards**

 

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

 
| ** **                                    | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Grant-Date   Fair Value** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|
| **Nonvested RSU at   December 31, 2010** |       | 2,492,078                   |       | $                                                     | 4.97       |   |
| Granted                                       |       | 2,319,824                   |       | 3.34                                                  |       |
| Vested                                        |       | (91,654                     | )          | 7.25                                                  |       |
| Forfeited                                     |       | (159,807                    | )          | 4.27                                                  |       |
| **Nonvested RSU at March 31,   2011**    |       | 4,560,441                   |       | $                                                     | 4.12       |   |

 

The shares of RSUs vest in three or four equal annual installments from the date of grant. Upon vesting of the restricted stock unit awards, we issue unrestricted shares of our common stock.  The total fair value of shares vested during the three months ended March 31, 2011 and 2010 was $298,000 and $230,000, respectively.

 

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

 
| ** **                                   | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Grant-Date   Fair Value** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|
| **Nonvested RS at   December 31, 2010** |       | 12,500                      |       | $                                                     | 6.51       |   |
| Granted                                      |       | —                      |       | —                                                |       |
| Vested                                       |       | (7,500                      | )          | 5.85                                                  |       |
| Forfeited                                    |       | (5,000                      | )          | 7.49                                                  |       |
| **Nonvested RS at March 31,   2011**    |       | —                      |       | $                                                     | —     |   |

 

The shares of RS vest in four equal annual installments from the date of grant.  The total fair value of shares vested during the three months ended March 31, 2011 and 2010 was $35,000 and $598,000, respectively.

 

**9.****                ****N****et Loss Per Share**

 

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

 

Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential dilutive common shares were anti-dilutive due to our net loss (as including such shares would decrease our basic net loss per share). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for the three months ended March 31, 2011 and 2010, all potentially dilutive common shares have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive common shares consist of the following:

 
| ** **                      | ** ** | **March 31,** | ** ** |
|---------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2011**           | ** ** | **2010** | ** ** |
| Common stock options            |       | 8,192,328          |       | 9,373,841 |   |
| Unvested restricted stock units |       | 4,560,441          |       | 454,026 |   |
| Unvested restricted stock       |       | —             |       | 42,500 |   |
|                            |       | 12,752,769         |       | 9,870,367 |   |

 

15

----

Table of Contents

 

**10.****         ****Commitments and Contingencies**

 

*Royalty and License Fee Commitments*

 

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, as amended, under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications 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 the agreement and have made aggregate milestone payments of $2.5 million based 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 New Drug Application for review and $5.8 million based on the FDA approval to market FOLOTYN, respectively.  The up-front license fee and all milestone payments under the agreement prior to FDA approval to market FOLOTYN were recorded to research and development expense as incurred.  As discussed in Note 5, the $5.8 million milestone payment based on the FDA approval was capitalized as an intangible asset and is being amortized over the expected useful life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. The only remaining potential milestone payment under the license agreement is for $3.5 million upon regulatory approval to market FOLOTYN in Europe, which, if made would be capitalized and amortized over the expected useful life of the licensed patents. Under the terms of the agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we will pay the licensors royalties based on graduated annual levels of net sales of FOLOTYN to our distributors, net of actual rebates and chargebacks, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur.  Royalties are 8% of annual distributor sales up to $150.0 million; 9% of annual distributor sales of $150.0 million through $300.0 million; and 11% of annual distributor sales in excess of $300.0 million.  For the three months ended March 31, 2011 and 2010, our royalties were 8% of our net distributor sales.  As of March 31, 2011, accrued royalties were $890,000 and are included in accrued liabilities on the Balance Sheet.

 

**11.   Recent Accounting Pronouncements**

 

In March 2010, the Financial Accounting Standards Board, or FASB, completed an accounting standards update entitled “Milestone Method of Revenue Recognition.” This standard allows the milestone method to be used in the application of the proportional performance model when applied to revenue arrangements. Under this pronouncement an accounting policy election can be made to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This standard is effective for us beginning January 1, 2011, and may be applied either prospectively to milestones achieved after the adoption date or retrospectively for all periods presented. We do not believe that this standard will have a significant effect on our financial statements.

 

In October 2009, the FASB issued an accounting standards update entitled “Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.” This standard prescribes the accounting treatment for arrangements that contain multiple-deliverable elements and may enable us to account for products or services, or deliverables, separately rather than as a single unit in certain circumstances.  Prior to this standard, only certain types of evidence were acceptable for determining the relative selling price of the deliverables under an arrangement. If that evidence was not available, the deliverables were treated as a single unit of accounting. This updated standard expands the nature of evidence which may be used to determine the relative selling price of separate deliverables to include estimation. This standard is applicable to our arrangements entered into or materially modified after December 31, 2010. This standard did not have a significant effect on our March 31, 2011 financial statements.  We are currently evaluating the impact of this standard with respect to the strategic collaboration discussed in Note 12 below.

 

**12.    Subsequent Event**

 

In May 2011, we entered into a strategic collaboration agreement to co-develop FOLOTYN with Mundipharma International Corporation Limited.  Under the agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world.  Under the agreement, we will receive an upfront payment of $50 million and potential regulatory and commercial progress- and sales-dependent milestone payments of up to $310.5 million.  Of the $50 million upfront payment, 20%, or $10 million, will be payable by Allos to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories.  Allos and Mundipharma will jointly fund worldwide development costs, initially on a 60:40 basis, respectively; which will change to a 50:50 basis if certain pre-defined milestones are achieved, including approval to market FOLOTYN for relapsed or refractory PTCL by the European Union.  The parties’ development funding will support jointly agreed-upon clinical development activities, including, but not limited to, the planned Phase 3 studies of FOLOTYN in previously undiagnosed PTCL and in relapsed or refractory cutaneous T-cell lymphoma. Pursuant to a separate supply agreement with Mundipharma Medical Company, an affiliate of Mundipharma, we will supply FOLOTYN for Mundipharma’s clinical and commercial uses.

 

16

----

Table of Contents

 

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

 

*The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report,**contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements regarding the status and prospects of our commercialization of FOLOTYN for patients with relapsed or refractory peripheral T-cell lymphoma; our Marketing Authorisation Application, or MAA, for FOLOTYN in Europe; our future product development and regulatory strategies, including our intent to develop or seek regulatory approval for FOLOTYN for additional indications; the status of reimbursement from third party payers; our strategic collaboration wth Mundipharma, including the parties’ intent to co-develop FOLOTYN in additional indications and Mundipharma’s; potential commercialization of FOLOTYN outside the United States and Canada; the ability of our third-party manufacturers to support our requirements for drug supply; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements that are other than statements of historical fact. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our, or our industry’s results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among other things, those discussed in Part II, Item 1A of this report under the caption “Risk Factors.” All forward-looking statements included in this report are based on information available to us as of the date hereof and we undertake no obligation to revise any forward-looking statements in order to reflect any subsequent events or circumstances. Forward-looking statements not specifically described above also may be found in these and other sections of this report.*

 

**Overview**

 

We are a biopharmaceutical company committed to the development and commercialization of innovative anti-cancer therapeutics.  Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with one or more strategic partners.  We strive to develop proprietary products that have the potential to improve the standard of care in cancer therapy.

 

We are currently focused on the development and commercialization of FOLOTYN® (pralatrexate injection).  FOLOTYN is a targeted folate inhibitor designed to accumulate preferentially in cancer cells.  FOLOTYN targets the inhibition of dihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway, thereby interfering with DNA and RNA synthesis and triggering cancer cell death.  FOLOTYN can be delivered as a single agent, for which we currently have approval for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, and has the potential to be used in combination therapy regimens.  We believe that FOLOTYN’s unique mechanism of action offers us the ability to target the drug for development in a variety of hematological malignancies and solid tumor indications.  We currently retain exclusive worldwide commercial rights to FOLOTYN for all indications.  We may also seek to grow our product portfolio through product acquisition and in-licensing efforts.

 

On September 24, 2009, the U.S. Food and Drug Administration, or FDA, granted accelerated approval of FOLOTYN for use as a single agent for the treatment of patients with relapsed or refractory PTCL. This approval was based on overall response rate from our pivotal Phase 2 trial known as PROPEL (Pralatrexate in patients with Relapsed Or refractory PEripheral T-cell Lymphoma). Clinical benefit such as improvement in progression-free survival or overall survival has not been demonstrated.  FOLOTYN represents our first drug approved for marketing in the United States.  FOLOTYN is the first and only drug approved by the FDA for this indication.  In connection with the accelerated approval, we are required to conduct post-approval studies that are intended to confirm FOLOTYN’s clinical benefit in patients with T-cell lymphoma and to determine whether FOLOTYN poses a serious risk of altered drug levels resulting from organ impairment.

 

We began making FOLOTYN available for commercial sale in the United States in October 2009 and commenced our commercial launch of FOLOTYN in January 2010.  We have established a commercial organization, including sales, marketing, supply chain management and reimbursement capabilities, to commercialize FOLOTYN in the United States.  We believe the market for relapsed or refractory PTCL is addressable with a targeted U.S. sales and marketing organization, and we intend to continue promoting FOLOTYN ourselves in the United States.

 

17

----

Table of Contents

 

We are also seeking regulatory approval to market FOLOTYN in Europe for the treatment of patients with relapsed or refractory PTCL.  In December 2010, our Marketing Authorisation Application, or MAA, was accepted by the European Medicines Agency, or EMA.   Acceptance of the MAA by the EMA indicates that the application is complete and initiates the EMA’s regulatory review process.  The MAA is based on clinical data from our pivotal PROPEL trial.

 

**Recent Developments**

 

In May 2011, we entered into a strategic collaboration agreement to co-develop FOLOTYN with Mundipharma International Corporation Limited.  Under the agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world.  Under the agreement, we will receive an upfront payment of $50 million and potential regulatory and commercial progress- and sales-dependent milestone payments of up to $310.5 million.  Of the $50 million upfront payment, 20%, or $10 million, will be payable by Allos to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories.  Allos and Mundipharma will jointly fund worldwide development costs, initially on a 60:40 basis, respectively; which will change to a 50:50 basis if certain pre-defined milestones are achieved, including approval to market FOLOTYN for relapsed or refractory PTCL by the European Union.  The parties’ development funding will support jointly agreed-upon clinical development activities, including, but not limited to, the planned Phase 3 studies of FOLOTYN in previously undiagnosed PTCL and in relapsed or refractory cutaneous T-cell lymphoma. Pursuant to a separate supply agreement with Mundipharma Medical Company, an affiliate of Mundipharma, we will supply FOLOTYN for Mundipharma’s clinical and commercial uses.

 

The financial guidance provided in this Quarterly Report on Form 10-Q does not account for the financial impact of the strategic collaboration with Mundipharma.

 

**Development Program**

 

We are currently prioritizing our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies.  We also intend to complete our ongoing Phase 2 studies in bladder and breast cancer, and investigators are evaluating FOLOTYN in multiple myeloma and solid tumor indications through our collaboration with the National Comprehensive Cancer Network, or NCCN, Oncology Research Program.

 

The following table summarizes the target indications and clinical development status of the FOLOTYN development program, including our planned post-approval studies:

 
| **Company Sponsored Studies**                                       | ** ** | **Phase**  | ** ** | **Status**                                                   |
|-------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------|
| **HEMATOLOGIC   MALIGNANCIES**                                                | ** ** | ** ** | ** ** | ** **                                                   |
| **Peripheral   T-cell Lymphoma**                                              | ** ** | ** ** | ** ** | ** **                                                   |
| 1st Line: CHOP Sequential Study*                                         |       | 3          |       | Planned   initiation in 2011                                 |
| **Cutaneous   T-cell Lymphoma**                                               | ** ** | ** ** | ** ** | ** **                                                   |
| 2nd Line+: Single Agent Study                                            |       | 1          |       | Enrollment   completed; results reported Q4 2010             |
| 2nd Line+: Bexarotene Combination*                                       |       | 1/3        |       | Enrollment   ongoing in Phase 1 study                        |
| **Lymphoma**                                                                  | ** ** | ** ** | ** ** | ** **                                                   |
| 2nd line+: Non-Hodgkin Lymphoma combination   Pralatrexate + Gemcitabine |       | 1/2a       |       | Enrollment   completed; data expected 1H 2012                |
| 2nd Line+: B-cell Non-Hodgkin Lymphoma                                   |       | 2          |       | Enrollment   ongoing                                         |
| **SOLID   TUMORS**                                                            | ** ** | ** ** | ** ** | ** **                                                   |
| **Bladder   Cancer**                                                          | ** ** | ** ** | ** ** | ** **                                                   |
| 2nd Line: Single Agent Study                                             |       | 2          |       | Study   ongoing; data expected 2H 2011                       |
| **Breast   Cancer**                                                           |       |       |       |                                                         |
| 2nd Line+: Single Agent Study                                            |       | 2          |       | Enrollment   ongoing; interim analysis data expected 2H 2011 |

 
| **NCCN Studies****                                              | ** ** | **Phase** | ** ** | **Status** |
|----------------------------------------------------------------------|------------|-----------|------------|------------|
| Upper   GI 1st Line: Pralatrexate + Oxaliplatin                 |       | 2         |       | Ongoing    |
| Upper   GI 2nd Line: Pralatrexate + Docetaxel                   |       | 2         |       | Ongoing    |
| Ovarian   Recurrent Platinum Sensitive: Carboplatin + Pralatrexate   |       | 2         |       | Ongoing    |
| Head &   Neck: Single Agent Pralatrexate                    |       | 2         |       | Ongoing    |
| Solid   Tumors (GI enriched): Sequential Pralatrexate/5-Fluorouracil |       | 1         |       | Ongoing    |
| Multiple   Myeloma: Bortezomib + Pralatrexate                        |       | 1         |       | Ongoing    |

 

----

*   These studies are required by the FDA as a condition of the accelerated approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL and must verify the clinical benefit of FOLOTYN.

** These are investigator-sponsored studies being conducted under a collaboration with the NCCN Oncology Research Program.

 

**Results of Operations**

 

We have incurred significant net losses and negative cash flows from operations. We have incurred these losses principally from costs incurred in our research and development programs and from our selling, general and administrative expenses.  Our primary business activities are focused on the development of FOLOTYN.

 

Our ability to achieve profitability is dependent on our ability, alone or with partners, to significantly increase sales of 

 

18

----

Table of Contents

 

FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  The amount of our future product sales are subject to significant uncertainty.  We may never generate sufficient revenue from product sales to become profitable.

 

We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spend substantial amounts on selling, general and administrative expenses to promote FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  Therefore, we may need to raise additional capital to support our future operations.  Our actual capital requirements will depend on many factors, including those discussed under the “Liquidity and Capital Resources” section below.

 

If we are unable to significantly increase sales of FOLOTYN or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our future prospects for profitability may be harmed.

 

In January 2011, we implemented a strategic reduction of our workforce by approximately 13%, or 25 employees.  Personnel reductions were primarily focused in research and development and general and administrative functions.  We plan to maintain our current level of personnel in sales and marketing.  The restructuring was a result of our decision to prioritize our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies, and to manage our operating costs and expenses.  During the first quarter of 2011, we incurred total restructuring charges of approximately $570,000 in connection with the restructuring, all in the form of one-time termination benefits.

 

***Comparison of three months ended March 31, 2011 and 2010***

 

*Net product sales.*** Net product sales represent total revenue less distributor fees and estimated allowances for product returns, government rebates and chargebacks, as further described in the “Critical Accounting Policies” section below.  We began making FOLOTYN available for commercial sale in the United States in October 2009 and commenced our commercial launch of FOLOTYN in January 2010.

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to health care providers because we did not have sufficient history to be able to reasonably estimate returns.  Beginning in the fourth quarter of 2010, we began recognizing revenue as product is sold to distributors as we established a sufficient history in order to reasonably estimate returns from our distributors.  Through March 31, 2011, product returns have been negligible.  Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not allowed for expired product.  Given these limited contractual return rights, the price of FOLOTYN and the limited number of patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.

 

19

----

Table of Contents

 

A reconciliation of gross to net product sales for the three months ended March 31, 2011 and 2010 and balances and activity in the deferred revenue account for the three months ended March 31, 2010 are as follows:

 
| ** **                            | ** ** | **Three   Month Ended   March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2011**                                      | ** ** | **2010** | ** ** |
| ** **                            | ** ** | **(in millions)**                        | ** ** |
|                                  |       |                                          |       |   |   |
| Gross product sales                   |       | $                                             | 12.1       |   | $ | 8.2 |   |
| *Gross to Net Sales Adjustments*      |       |                                          |       |   |   |
| Government rebates and chargebacks    |       | (0.7                                          | )          | (0.6 | ) |
| Distribution fees                     |       | (0.4                                          | )          | (0.2 | ) |
| Product returns allowance             |       | (0.1                                          | )          | — |   |
| Net product sales                     |       | $                                             | 10.9       |   | $ | 7.4 |   |
|                                  |       |                                          |       |   |   |
| Deferred revenue, beginning of period |       |                                          |       | $ | 0.7 |   |
| Gross product sales to distributors   |       |                                          |       | 8.7 |   |
| Less: Gross product sales recognized  |       |                                          |       | (8.2 | ) |
| Deferred revenue, end of period       |       |                                          |       | $ | 1.2 |   |

 

The gross product sales to distributors for the three months ended March 31, 2011 were $12.1 million, a $3.4 million increase from the comparable amount of $8.7 million for the three months ended March 31, 2010.  This increase relates to an increase in the number of units sold, as there have been no price increases to date.

 

Gross to net sales adjustments as a percent of gross sales were 10% for both the three months ended March 31, 2011 and 2010.

 

Balances and activity in the government rebates and chargebacks and distribution fees payable accounts for the three months ended March 31, 2011 and 2010 are as follows:

 
| ** **                                     | ** ** | **Product   Returns** | ** ** | **Government   Rebates and   Chargebacks** | ** ** | **Distribution********Fees** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | **(in millions)**                          | ** ** | ** **                   | ** ** |
| **Balance at December 31,   2009**        |       | $                     | —     |                                            | $          | 0.5                          |       | $ | 0.1 |   |
| Reserve for current period sales               |       | —                |       | 0.8                                             |       | 0.2                          |       |
| Change in estimate for prior period sales      |       | —                |       | (0.2                                            | )          | —                       |       |
| Credits/payments made for prior period sales   |       | —                |       | (0.3                                            | )          | (0.1                         | )          |
| Credits/payments made for current period sales |       | —                |       | (0.1                                            | )          | (0.1                         | )          |
| **Balance at March 31, 2010**             |       | $                     | —     |                                            | $          | 0.7                          |       | $ | 0.1 |   |
|                                           |       |                  |       |                                            |       |                         |       |
| **Balance at December 31,   2010**        |       | $                     | 0.4        |                                            | $          | 2.2                          |       | $ | 0.3 |   |
| Reserve for current period sales               |       | 0.1                   |       | 1.1                                             |       | 0.3                          |       |
| Change in estimate for prior period sales      |       | —                |       | (0.3                                            | )          | —                       |       |
| Credits/payments made for prior period sales   |       | —                |       | (0.4                                            | )          | (0.2                         | )          |
| Credits/payments made for current period sales |       | —                |       | (0.6                                            | )          | (0.2                         | )          |
| **Balance at March 31, 2011**             |       | $                     | 0.5        |                                            | $          | 2.0                          |       | $ | 0.2 |   |

 

During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.

 

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the 

 

20

----

Table of Contents

 

discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.   We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through March 31, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.  As a result of this evaluation, during the three months ended March 31, 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $301,000.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

 

Product returns, government rebates and chargebacks reflect management estimates which are further discussed in the “Critical Accounting Policies” section below.

 

For fiscal 2011, net product sales are expected to approximate $48 to $55 million.  Gross to net sales adjustment are expected to approximate 12% for 2011.

 

*Cost of sales, excluding amortization expense.***Cost of sales, excluding amortization expense, includes royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product revenue.

 
| ** **                                    | ** ** | **Three   Months Ended   March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **2011**                                       | ** ** | **2010** | ** ** |
| ** **                                    | ** ** | **(in millions)**                         | ** ** |
| Cost of sales, excluding amortization expense |       | $                                              | 0.9        |   | $ | 0.7 |   |
|                                               |            |                                                |            |  |  |  |  |

 

Prior to receiving FDA approval of FOLOTYN on September 24, 2009, all costs related to purchases of the active pharmaceutical ingredient and manufacturing of the product were recorded as research and development expense.  Until we sell the inventory for which the costs were previously expensed, our cost of sales will reflect only royalties and other incremental costs incurred subsequent to the FDA approval date.  Accordingly, our cost of sales of FOLOTYN will be lower with respect to product that was manufactured prior to FDA approval.  This occurred with respect to the majority of sales of FOLOTYN in the first quarter of 2011 and 2010 and is expected to continue to occur for a significant amount of sales of FOLOTYN in the remainder of 2011.

 

The $943,000 and $689,000 of cost of sales, excluding amortization expense for the three months ended March 31, 2011 and 2010, respectively, was primarily attributable to an 8% royalty on gross product sales payable to the licensors of FOLOTYN under the terms of our license agreement.

 

Cost of sales for 2011 is expected to approximate $5 to $6 million, or 10% of net product sales to distributors, which includes the current 8% royalty on FOLOTYN sales.

 

*Research and Development.* Research and development expenses include the costs of certain personnel, preclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, third-party manufacturing costs for development of drug materials for use in preclinical studies and clinical trials and, manufacturing costs and licensing fees incurred for FOLOTYN prior to receipt of FDA approval.

 
| ** **               | ** ** | **Three   Months Ended   March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|
| ** **               | ** ** | **2011**                                       | ** ** | **2010** | ** ** |
| ** **               | ** ** | **(in millions)**                         | ** ** |
| Research and development |       | $                                              | 7.5        |   | $ | 9.3 |   |
|                          |            |                                                |            |  |  |  |  |

 

21

----

Table of Contents

 

The $1.8 million decrease in research and development expenses in the three months ended March 31, 2011 as compared to the same period in 2010 was primarily due to:

 

·          a $1.5 million decrease in third-party manufacturing costs for clinical trial material and other manufacturing costs; and

 

·          a $1.2 million decrease in costs related to clinical trials involving FOLOTYN that have closed enrollment, including decreased costs for our Phase 2b study in non-small cell lung cancer, or NSCLC, which completed patient enrollment in July 2009.

 

This decrease was partially offset by:

 

·          a $313,000 increase in personnel costs, mainly attributable to the reduction in force in January 2011, all in the form of one-time termination benefits, as discussed above; and

 

·          a $476,000 increase in stock-based compensation, as discussed in more detail in the *Stock-based Compensation Expense* section below.

 

We expect research and development expenses for the full year 2011, excluding non-cash stock-based compensation expense, to be fairly consistent with the full year 2010 amount of $28.0 million.  Our guidance for 2011 research and development expenses includes our ongoing and planned studies, including the planned initiation in 2011 of our post-marketing Phase 3 study in PTCL.

 

We expect the non-cash stock-based compensation portion of research and development expense to increase in 2011 as compared to 2010, as discussed in more detail in the *Stock-based Compensation Expense* section below.

 

*Selling, General and Administrative.*  Selling, general and administrative expenses include costs for sales and marketing activities, corporate development, medical affairs, executive administration, corporate offices and related infrastructure.

 
| ** **                          | ** ** | **Three   Months Ended   March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **2011**                                       | ** ** | **2010** | ** ** |
| ** **                          | ** ** | **(in millions)**                         | ** ** |
| Selling, general and administrative |       | $                                              |  17.6 |   | $ |  17.9 |   |
|                                     |            |                                                |            |  |  |  |  |

 

The $0.4 million decrease in selling, general and administrative expenses in the three months ended March 31, 2011 as compared to the same period in 2010 was primarily due to the following:

 

·            a $620,000 decrease in travel and administrative costs, mainly attributable to reduced headcount; and

 

·            a $410,000 decrease in sales and marketing costs associated with the commercial launch of FOLOTYN that commenced in January 2010, including promotional expenses, advisory boards, market research and costs related to trade shows.

 

This decrease was partially offset by:

 

·            a $300,000 increase in personnel costs, mainly attributable to the reduction in force in January 2011, all in the form of one-time termination benefits, as discussed above; and

 

·            a $289,000 increase in non-cash stock-based compensation expense, as discussed in more detail in the *Stock-based Compensation Expense* section below.

 

We expect selling, general and administrative expenses for the full year 2011, excluding non-cash stock-based compensation expense, to slightly decrease compared to the full year 2010 amount of $70.7 million.

 

22

----

Table of Contents

 

We expect the non-cash stock-based compensation portion of selling, general and administrative expense to increase in 2011 as compared to 2010, as discussed in more detail in the *Stock-based Compensation Expense* section below.

 

*Amortization of intangible asset.***Amortization of intangible asset represents amortization expense of capitalized license costs over the expected patent life of the related product.

 

Amortization expense of our intangible asset for the three months ended March 31, 2011 and 2010 was $113,000. The expense was due to the amortization of the $5.8 million intangible asset resulting from a milestone payment under our license agreement for FOLOTYN in September 2009 discussed further in the “Obligations and Commitments” section below. Amortization expense is being recorded on a straight line basis over the estimated remaining life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent 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 asset will be amortized over a shorter period.

 

The estimated annual amortization expense for the intangible asset for 2011 is approximately $454,000.

 

*Stock-based Compensation Expense.*Stock-based compensation expense for the three months ended March 31, 2011 and 2010 has been recognized in our Statements of Operations as follows:

 
| ** **                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| ** **                             | ** ** | **(in millions)**                            | ** ** |
| Research and development               |       | $                                                 | 1.2        |   | $ | 0.7 |   |
| Selling, general and administrative    |       | 2.5                                               |       | 2.2 |   |
| Total stock-based compensation expense |       | $                                                 | 3.7        |   | $ | 2.9 |   |

 

Stock-based compensation expense, by equity award type for the three months ended March 31, 2011 and 2010, was as follows:

 
| ** **                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| ** **                             | ** ** | **(in millions)**                            | ** ** |
| Stock options                          |       | $                                                 | 1.8        |   | $ | 2.6 |   |
| Restricted stock units                 |       | 1.9                                               |       | 0.2 |   |
| Restricted stock                       |       | 0.0                                               |       | 0.0 |   |
| Employee stock purchase plan           |       | 0.0                                               |       | 0.1 |   |
| Total stock-based compensation expense |       | $                                                 | 3.7        |   | $ | 2.9 |   |

 

The $0.8 million increase in stock-based compensation expense in the three months ended March 31, 2011 as compared to the same period in 2010 was primarily due to an increase in the number of RSUs granted to existing employees pursuant to the grant of additional RSUs to existing employees that occurred in October 2010 and our annual grants that occurred in February 2011.

 

As of March 31, 2011, the unrecorded stock-based compensation balance and estimated weighted-average amortization period by equity award type was as follows:

 
| ** **                   | ** ** | **Unrecorded   stock-based   compensation   balance** | ** ** | **Weighted-   average   amortization   period** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **(in millions)**                                | ** ** | ** **                                      | ** ** |
| Stock options                |       | $                                                     | 5.6        |                                            | 1.6        |   |
| Restricted stock units       |       | 13.0                                                  |       | 1.9                                             |       |
| Restricted stock             |       | 0.0                                                   |       | 1.2                                             |       |
| Employee stock purchase plan |       | 0.0                                                   |       | 0.3                                             |       |
|                              |            |                                                       |            |                                                 |            |  |

 

23

----

Table of Contents

 

Stock-based compensation expense in fiscal year 2011 is expected to approximate $13 to $15 million.

 

*Interest and Other Income, Net*.  Interest income, net of interest expense, for the three months ended March 31, 2011 and 2010 was $38,000 and $65,000, respectively.  The $27,000 decrease in net interest income in the three months ended March 31, 2011 as compared to the same period in 2010 was primarily due to lower yields on our cash, cash equivalents and investments.

 

**Liquidity and Capital Resources**

 

As of March 31, 2011, we had $79.4 million in cash, cash equivalents, and investments.  Of this amount, $49.1 million was held in money market funds and cash accounts and $30.3 million was held in U.S. Treasury bills and notes and high-grade corporate notes with a weighted average duration of the remaining time to maturity of approximately two months.  Until required for use in our business, we invest our cash reserves in bank deposits, money market funds, high-grade corporate notes and U.S. government instruments in accordance with our investment policy.

 

We have financed our operations primarily through public sales of our equity securities.  In addition, we began generating sales of FOLOTYN in the fourth quarter of 2009.  Net product sales were $10.9 million and $7.4 million for the three months ended March 31, 2011 and 2010, respectively,  which partially offset our operating costs and expenses for the respective periods.

 

Net cash used to fund our operating activities for the three months ended March 31, 2011 and 2010 was $19.1 million and $23.3 million, respectively.

 

For fiscal 2011, net product sales are expected to approximate $48 to $55 million and cost of sales are expected to approximate $5 to $6 million.  Total operating costs and expenses for 2011, excluding cost of sales and non-cash stock-based compensation expense, are expected to approximate $95 to $98 million.  Stock-based compensation expense is expected to approximate $13 to $15 million for 2011.

 

The foregoing guidance does not account for the financial impact of the strategic collaboration with Mundipharma.  We plan to update our 2011 income statement guidance for the impact of the strategic collaboration in connection with the reporting of our second quarter 2011 financial results.

 

We expect to end 2011 with approximately $88 to 96 million of cash, cash equivalents and investments.  This guidance includes:

 

·                  the $50 million upfront payment to be received in May 2011 under the strategic collaboration with Mundipharma, net of the 20%, or $10 million sublicense fee payment to be made by Allos to the licensors of FOLOTYN; and

 

·                  the expected funding of FOLOTYN development costs for the remainder of 2011 from Mundipharma.

 

Our year-end 2011 cash guidance does not include potential regulatory and commercial-progress milestone payments under the strategic collaboration with Mundipharma associated with the potential regulatory approval and first commercial sale of FOLOTYN in Europe.

 

Actual financial results for 2011 will vary based upon many factors, including the amount of FOLOTYN sales and rate of patient enrollment in FOLOTYN clinical trials that are ongoing and planned for initiation in 2011.

 

Net cash provided by investing activities for the three months ended March 31, 2011 was $20.0 million and consisted primarily of proceeds from maturities of investments.  Net cash used in investing activities for the three months ended March 31, 2010 was $35.9 million and consisted primarily of purchases of investments offset by proceeds from maturities of investments.

 

Net cash provided by financing activities for the three months ended March 31, 2011 and 2010 was $8,000 and $2.4 million, respectively, and consisted primarily of proceeds from the issuance of common stock associated with stock options exercised by our employees.

 

Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of March 31, 2011, together with the upfront payment associated with our strategic collaboration with Mundipharma, will be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

We anticipate continuing our current development programs and beginning other long-term development projects involving FOLOTYN, including the post-approval clinical studies required for FOLOTYN.  These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful.  In addition, we expect to incur significant costs relating to the commercialization of FOLOTYN, including costs related to our sales and marketing, medical affairs and manufacturing operations.  Therefore, we may 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 sales of FOLOTYN;

 

·                  the timing and costs associated with our sales and marketing activities for promoting FOLOTYN;

 

24

----

Table of Contents

 

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

 

·                  the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the FDA;

 

·                  the timing and costs associated with our evaluation of, and decisions with respect to, the potential development of FOLOTYN for additional therapeutic indications;

 

·                  the timing, costs and revenue associated with a our strategic collaboration with Mundipharma for the co-development of FOLOTYN globally and commercialization outside the United States and Canada; and

 

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

 

We may seek to obtain this additional capital through equity or debt financings, arrangements with corporate partners, or from other sources.  Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us. In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to generate meaningful amounts of revenue from future product sales or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our business and future prospects for revenue and profitability may be harmed.

 

**Obligations and Commitments**

 

*Royalty and License Fee Commitments*

 

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, as amended, under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications 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 the agreement and have made aggregate milestone payments of $2.5 million based 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 New Drug Application for review and $5.8 million based on the FDA approval to market FOLOTYN, respectively.  The up-front license fee and all milestone payments under the agreement prior to FDA approval to market FOLOTYN were recorded to research and development expense as incurred.  The $5.8 million milestone payment based on the FDA approval was capitalized as an intangible asset and is being amortized over the expected useful life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. The only remaining potential milestone payment under the license agreement is for $3.5 million upon regulatory approval to market FOLOTYN in Europe, which, if made would be capitalized and amortized over the expected useful life of the licensed patents. Under the terms of the agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we will pay the licensors royalties based on graduated annual levels of net sales of FOLOTYN to our distributors, net of actual rebates and chargebacks, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur.  Royalties are 8% of annual distributor sales up to $150.0 million; 9% of annual distributor sales of $150.0 million through $300.0 million; and 11% of annual distributor sales in excess of $300.0 million.  For the three months ended March 31, 2011 and 2010, our royalties were 8% of our net distributor sales.

 

**Critical Accounting Policies**

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses.  We base our estimates on historical experience, available information and assumptions that we believe to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions 

 

25

----

Table of Contents

 

or conditions.  We have reviewed our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and informed management judgments about matters that are inherently uncertain:

 

·       revenue recognition;

 

·          accounting for research and development expenses;

 

·          accounting for inventory; and

 

·       accounting for stock-based compensation expense.

 

***Revenue Recognition***

 

We generate revenue from product sales.  We recognize product revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) our price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by us, (5) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated.

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to health care providers because we did not have sufficient history to be able to reasonably estimate returns.  Beginning in the fourth quarter of 2010, we began recognizing revenue as product is sold to distributors as we established a sufficient history in order to reasonably estimate returns from our distributors.  We monitor inventory levels within our distribution channel and sales to end users, or health care providers, to determine whether deferral of sales is required.  No such deferrals were recorded at March 31, 2011.

 

*Net Product Sales*

 

We estimate gross to net sales adjustments based upon analysis of third-party information, including information obtained from our primary distributors with respect to their inventory levels and sell-through to the distributors’ customers.

 

Our net product sales represent total product sales less distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales. In addition, we incur distributor fees related to the management of our product by distributors. These distributor fees are recorded within net product sales and are based on definitive contractual agreements. Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.  Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities.  Allowances and accruals are recorded in the same period that the related revenue is recognized.

 

*Product Returns*

 

Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not allowed for expired product.  Given these limited contractual return rights, the price of FOLOTYN and the limited number of patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.  We estimated product returns for FOLOTYN of 1% of gross product sales based upon actual returns history within our distribution channel, which were consistent with historical trends of product returns for similar companies in the pharmaceutical industry.  The actual returns history within our distribution channel is derived from third-party information 

 

26

----

Table of Contents

 

obtained from certain distributors with respect to their inventory levels and sell-through to the distributors’ customers.  We will continue to monitor the historical trend of returns, including the impacts on this trend of product expiry dates and may be required to make future adjustments to our estimates.    Through March 31, 2011, product returns have been negligible.

 

*Medicaid Rebates*

 

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  Our estimate of utilization is based on market research and information about our expected patient population.  Through March 31, 2011, we have not had sufficient claims from states for rebates with which to update our estimate.  However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to early adopt portions of PPACA, and any implementing regulations, could impact future estimates related to our Medicaid rebate allowances. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% to 20% increase in the Medicaid utilization percentage within our patient population as of March 31, 2011, would result in an approximate $896,000 to $1,791,000 reduction in cumulative net product sales.

 

*Government Chargebacks*

 

* *Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.   We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through March 31, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.  As a result of this evaluation, during the three months ended March 31, 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $301,000.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

 

***Research and Development***

 

Research and development expenditures are charged to expense as incurred. Research and development expenses include the costs of certain personnel, preclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, third party manufacturing costs for development of drug materials for use in clinical trials and preclinical studies and licensing fees for our product candidates prior to FDA approval.  All finished drug inventory costs associated with production activities in our third party manufacturing facilities prior to receiving FDA approval for such facilities and prior to receiving regulatory approval to market our product are expensed to research and development expenses.  We accrue research and development expenses for activity as incurred during the fiscal year and prior to receiving invoices from clinical sites and third party clinical and preclinical research organizations.  We accrue external costs for clinical and preclinical studies based on an 

 

27

----

Table of Contents

 

evaluation of the following: the progress of the studies, including patient enrollment, dosing levels of patients enrolled, estimated costs to dose patients, invoices received, and contracted costs with clinical sites and third party clinical and preclinical research organizations.  Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period.  Actual results could differ from those estimates.  During the quarters ended March 31, 2011 and 2010, we did not have any changes in estimates that would have resulted in material adjustments to research and development expenses accrued in the prior period.

 

In accordance with certain research and development agreements, we are obligated to make certain upfront payments upon execution of the agreement.  We record these upfront payments as prepaid research and development expenses.  Such payments are recorded to research and development expense as services are performed.  We evaluate on a quarterly basis whether events and circumstances have occurred that may indicate impairment of remaining prepaid research and development expenses.

 

***Inventory***

 

Costs associated with the production of FOLOTYN bulk drug substance and formulated drug product by our third party manufacturers are recorded as either research and development expense or inventory.

 

Costs associated with the production of FOLOTYN by our third party manufacturers are expensed to research and development expense at the time of production when the formulated drug product is packaged for clinical trial use.

 

We capitalize the costs for our marketed products at the lower of cost (first-in, first-out method) or market (current replacement cost) with cost determined on the first-in, first-out basis and then expense the sold inventory as a component of cost of goods sold.

 

Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  We have remaining supplies of FOLOTYN drug substance and drug product that are not recorded as inventory on our balance sheet as of March 31, 2011 because they were purchased prior to FDA approval.   Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.

 

***Stock-based Compensation Expense***

 

We have several stock-based compensation plans under which incentive and non-qualified stock options, restricted stock units and restricted shares may be granted, and an employee stock purchase plan.  We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.  That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period).  We provide an estimate of forfeitures at initial grant date.

 

During the three months ended March 31, 2011 and 2010, we recorded stock-based compensation expense of approximately $3.7 million and $2.9 million, respectively, related to stock-based awards, including stock options, restricted stock units, restricted stock and our employee stock purchase plan. As of March 31, 2011, the unrecorded deferred stock-based compensation balance related to these stock-based awards was approximately $18.7 million and will be recognized over the remaining vesting periods of the awards. Judgments and estimates must be made and used in determining the factors used in calculating the fair value of stock-based awards, including the expected forfeiture rate of our stock-based awards, the expected life of our stock-based awards, and the expected volatility of our stock price. For more information on stock-based compensation expense during the three months ended March 31, 2011, refer to Note 8 “Stock-Based Compensation” of the unaudited March 31, 2011 financial statements included herein.

 

***Recent******Accounting Pronouncements***

 

In March 2010, the Financial Accounting Standards Board (FASB) completed an accounting standards update entitled “Milestone Method of Revenue Recognition.” This standard allows the milestone method to be used in the application of the proportional performance model when applied to revenue arrangements. Under this pronouncement an accounting policy election can be made to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This standard is effective for us beginning January 1, 2011, and may be applied either prospectively to milestones achieved after the adoption date or retrospectively for all periods presented. We do not believe that this standard will have a significant effect on our financial statements.

 

In October 2009, the FASB issued an accounting standards update entitled “Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.” This standard prescribes the accounting treatment for arrangements that contain multiple-deliverable elements and may enable us to account for products or services (deliverables) separately rather than as a single unit in certain circumstances.  Prior to this standard, only certain types of evidence were acceptable for determining the relative selling price of the deliverables under an arrangement. If that evidence was not available, the deliverables were treated as a single unit of accounting. This updated standard expands the nature of evidence which may be used to determine the relative selling price of separate deliverables to include estimation. This standard is applicable to our arrangements entered into or materially modified after December 31, 2010.  This standard did not have a significant effect on our March 31, 2011 financial statements.  We are currently evaluating the impact of this standard with respect to the strategic collaboration with Mundipharma.

 

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

 

Our financial instruments as of March 31, 2011 consisted of cash, cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.  All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  We invest in marketable securities in accordance with our investment policy.  The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs.  Our investment policy specifies credit quality standards for our investments and limits the amount of credit 

 

28

----

Table of Contents

 

exposure to any single issue, issuer or type of investment.  The weighted average duration of the remaining time to maturity for our portfolio of investments in marketable securities as of March 31, 2011 was approximately two months.  As of March 31, 2011, our investments of $30.3 million were all classified as held-to-maturity and were held in a variety of interest-bearing instruments, consisting mainly of U.S. Treasury bills. We did not hold any derivative instruments, foreign exchange contracts, asset backed securities, mortgage backed securities, auction rate securities, or securities of issuers in bankruptcy in our investment portfolio as of March 31, 2011.  We have the ability and intent to hold our remaining investments to recover the entire amortized cost basis of the investments as of March 31, 2011, although we monitor our investment portfolio with the primary objectives of preserving principal and maintaining proper liquidity to meet our operating needs.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 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 March 31, 2011 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

**No Changes in Internal Control over Financial Reporting**

 

There were no changes in our internal controls over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

None.

 

29

----

Table of Contents

 

**ITEM 1A.  RISK FACTORS**

 

*Our business faces significant risks. These risks include those described below and may include additional risks of which we are not currently aware or that we currently do not believe are material. If any of the events or circumstances described in the following risk factors actually occurs, they may materially harm our business, financial condition, operating results and cash flow. As a result, the market price of our common stock could decline. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, operating results and financial condition. **Stockholders and potential investors in shares of our common stock should carefully consider the following risk factors, which hereby update those risks contained in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010, in addition to other information and risk factors in this report.  We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of the Company.  We are relying upon the safe harbor for all forward-looking statements in this report, and any such statements made by or on behalf of the Company are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this report. We consistently update and include our risk factors in our Quarterly Reports on Form 10-Q. Risk factors that have been substantively changed from those set forth in our Annual Report on Form 10-K for the period ended December 31, 2010 have been marked with an asterisk immediately following the heading of such risk factor.*

 

***We have a history of net losses and an accumulated deficit, and we may never generate sufficient revenue to achieve or maintain profitability in the future.********

 

We have incurred significant net losses and negative cash flows from operations.  To date, we have financed our operations primarily through the public and private sale of securities and net product sales.  For the three months ended March 31, 2011, we had a net loss of $15.2 million.  As of March 31, 2011, we had accumulated a deficit of $465.8 million.  We have incurred these losses principally from costs incurred in our research and development programs and from our selling, general and administrative expenses.

 

On September 24, 2009, we obtained accelerated approval from the FDA for FOLOTYN for use as a single agent for the treatment of patients with relapsed or refractory PTCL.  Our ability to achieve profitability is dependent on our ability, alone or with partners, to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL.  We are also developing FOLOTYN for use as a single agent and in combination therapy regimens in a range of hematologic malignancies and solid tumor indications, which may or may not lead to obtaining the necessary regulatory approvals to market FOLOTYN for additional indications.  We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for FOLOTYN, and commercializing FOLOTYN for the treatment of patients with relapsed or refractory PTCL.  As a result, we may never generate sufficient revenue from product sales to become profitable or generate positive cash flows.

 

***Our near-term prospects are dependent on FOLOTYN.  If we are unable to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL our ability to achieve profitability will be adversely affected.***

 

FOLOTYN is our only product approved for marketing by the FDA and our ability to generate revenue in the near term is entirely dependent upon sales of FOLOTYN.  We may not be able to significantly increase sales of FOLOTYN for a number of reasons, including:

 

·                  we may not be able to establish or demonstrate in the medical community the safety and efficacy of FOLOTYN and any potential advantages over existing therapeutics and products currently in clinical development;

 

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

 

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

 

·                  we may not be able to establish FOLOTYN as the second-line standard of care for PTCL;

 

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

 

30

----

Table of Contents

 

·                  reimbursement and coverage policies of government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;

 

·                  the relative price of FOLOTYN as compared to alternative treatment options;

 

·                  the relatively low incidence and prevalence rates of relapsed or refractory PTCL, including the reliability of our estimates;

 

·                  we may not have adequate financial or other resources to significantly increase sales of FOLOTYN; and

 

·                  we may not be able to continue to manufacture FOLOTYN in commercial quantities or at acceptable costs.

 

If we are unable to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL, our ability to achieve profitability will be adversely affected and our stock price would likely decline.

 

***Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.***

 

Our operating results to date have fluctuated from quarter to quarter and year to year.  We believe that our quarterly and annual results of operations may continue to fluctuate and will be difficult to predict due to a variety of factors, including:

 

·                  the timing and amount of revenue generated from sales of FOLOTYN;

 

·                  the timing and costs associated with our sales and marketing activities for promoting FOLOTYN;

 

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

 

·                  the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the FDA;

 

·                  the timing and costs associated with our evaluation of, and decisions with respect to, the potential development of FOLOTYN for additional therapeutic indications;

 

·                  the timing, costs and revenue associated with our strategic collaboration with Mundipharma for the co-development of FOLOTYN globally and commercialization outside the United States and Canada; and

 

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

 

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period.  As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the expense that we must recognize may vary significantly.  Any such variance from one period to the next could cause a significant fluctuation in our operating results.

 

For these reasons, it is difficult for us to accurately forecast future profits or losses.  As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.

 

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

 

The approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL is our first U.S. approval.  Accordingly, we have limited experience in sales, marketing and distribution of pharmaceutical products.  We may not be able to adequately maintain the necessary sales, marketing, supply chain management and reimbursement capabilities on our own or enter into arrangements with third parties to perform these functions in a timely manner or on acceptable terms.  Additionally, maintaining sales, marketing and distribution capabilities may be more expensive than we anticipate, requiring 

 

31

----

Table of Contents

 

us to divert capital from other intended purposes or preventing us from building our sales, marketing and distribution capabilities to the desired levels. To be successful we must:

 

·                  recruit and retain adequate numbers of effective sales personnel;

 

·                  effectively train our sales personnel in the benefits of FOLOTYN;

 

·                  establish and maintain successful sales and marketing and education programs that encourage physicians to recommend FOLOTYN to their patients; and

 

·                  manage geographically dispersed sales and marketing operations.

 

The commercialization of FOLOTYN requires us to manage relationships with an increasing number of collaborative partners, suppliers and third-party contractors.  If we are unable to successfully establish and maintain the required infrastructure, either internally or through third parties, and successfully manage an increasing number of relationships, we will have difficulty growing our business.  In addition, we intend to enter into co-promotion or out-licensing arrangements with other pharmaceutical or biotechnology partners where necessary to reach foreign market segments and when deemed strategically and economically advisable.  To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold FOLOTYN, and some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful.  If we are unable to develop and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to significantly increase sales of FOLOTYN or become profitable.

 

***If we enter into additional strategic partnerships, we may be required to relinquish important rights to and control over the development of FOLOTYN or otherwise be subject to unfavorable terms.******

 

Our relationship with Mudipharma is, and any other strategic partnerships or collaborations with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks, including:

 

·      we may be required to undertake the expenditure of substantial operational, financial and management resources in integrating new businesses, technologies and products;

 

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

 

·      we may be required to assume substantial actual or contingent liabilities;

 

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

 

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

 

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

 

·      strategic partners may not commit adequate resources to the marketing and distribution of FOLOTYN or any other products, limiting our potential revenues from these products;

 

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

 

·      strategic partners may experience financial difficulties;

 

·      strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

 

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

 

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

 

·      strategic partners could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing FOLOTYN or any other product candidate; and

 

·      we may have obligations to our strategic partners that we prioritize over internal company matters/goals in order to maintain good relationships with our strategic partners and to avoid liabilities that may be associated with breach of such obligations.

 

***Even though we have obtained accelerated approval to market FOLOTYN for the treatment of patients with relapsed or refractory PTCL, we are subject to ongoing regulatory obligations and review, including post-approval requirements.***

 

FOLOTYN was approved for the treatment of patients with relapsed or refractory PTCL under the FDA’s accelerated approval regulations, which allow the FDA to approve products for cancer or other serious or life threatening diseases based on initial positive data from clinical trials.  Under these provisions, we are subject to certain post-approval requirements pursuant to which we are required to conduct two randomized Phase 3 trials to confirm FOLOTYN’s clinical benefit in patients with T-cell lymphoma.  The FDA has also required that we conduct two Phase 1 trials to assess whether FOLOTYN poses a serious risk of altered drug levels resulting from organ impairment.  Failure to complete the studies or adhere to the timelines established by the FDA could result in penalties, including fines or withdrawal of FOLOTYN from the market.  The FDA may also initiate proceedings to withdraw approval or request that we voluntarily withdraw FOLOTYN from the market if our Phase 3 studies fail to confirm clinical benefit.  Further, the FDA may require us to amend the FOLOTYN package insert, including by strengthening the warnings and precautions section or institute a Risk Evaluation and Mitigation Strategy based on the results of these studies or clinical experience.  We are also subject to additional, continuing post-approval regulatory obligations, including the possibility of additional clinical studies required by the FDA, safety reporting requirements and regulatory oversight of the promotion and marketing of FOLOTYN.

 

In addition, we or our third-party manufacturers are required to adhere to FDA’s current Good Manufacturing Practices, or cGMP. The cGMP regulations cover all aspects of the manufacturing, storage, testing, quality control and record keeping relating to FOLOTYN. Furthermore, we or our third-party manufacturers are subject to periodic inspection by the FDA and foreign regulatory authorities to ensure compliance with cGMP or other applicable government regulations and corresponding foreign standards. We have limited control over a third-party manufacturer’s compliance with these regulations and standards.  If we or our third-party manufacturers fail to comply with applicable regulatory requirements, we may be subject to fines, suspension, modification or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

 

***The status of coverage and reimbursement from third-party payers for newly approved health care drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to generate revenue.***

 

Our ability to successfully commercialize FOLOTYN for the treatment of patients with relapsed or refractory PTCL or for other future indications will depend, in part, on the extent to which coverage and reimbursement for FOLOTYN is available from government and health administration authorities, private health insurers, managed care programs and other third-party payers.  Significant uncertainty exists as to the coverage and reimbursement of newly approved health care products.  In addition, in March 2010, the U.S. Congress enacted legislation to reform the health care system that includes 

 

32

----

Table of Contents

 

cost containment measures that may adversely affect the amount of reimbursement for pharmaceutical products, including FOLOTYN.  These measures include increasing the minimum rebates for products covered by Medicaid programs and extending such rebates to drugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed care organizations as well as expansion of the 340B Public Health Services drug discount program.

 

Healthcare providers and third-party payers use coding systems to identify diagnoses, procedures, services, drugs, pharmaceutical devices, equipment and other health-related items and services.  Proper coding is an integral component to receiving appropriate reimbursement for the administration of FOLOTYN and related services. The majority of payers use nationally recognized code sets to report medical conditions, services and drugs.  We obtained transitional pass-through status that enables FOLOTYN to be reimbursed under the hospital outpatient prospective payment system.  In addition, in January 2011 we received a permanent reimbursement J-Code for FOLOTYN, although healthcare providers prescribing FOLOTYN were recently required to submit claims for reimbursement using a temporary J-Code, which may result in payment delays or incorrect payment levels.  We cannot predict at this time whether our customers will receive adequate reimbursement for FOLOTYN.

 

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

 

***We are dependent upon a small number of customers for a significant portion of our revenue, and the loss of, or significant reduction or cancellation in sales to, any one of these customers could adversely affect our operations and financial condition.***

 

In the United States, we sell FOLOTYN to a small number of distributors who in turn sell-through to patient health care providers.  These distributors also provide multiple logistics services relating to the distribution of FOLOTYN, including transportation, warehousing, cross-docking, inventory management, packaging and freight-forwarding.  We do not promote FOLOTYN to these distributors and they do not set or determine demand for FOLOTYN.  For the three months ended March 31, 2011 and 2010, three companies affiliated with AmerisourceBergen Corporation accounted for substantially all of our FOLOTYN sales.  We expect significant customer concentration to continue for the foreseeable future.  Our ability to generate sales of FOLOTYN will depend, in part, on the extent to which these distributors are able to provide adequate distribution of FOLOTYN to patient health care providers.  Although we believe we can find alternative distributors on a relatively short notice, our revenue during that period of time may suffer and we may incur additional costs to replace a distributor.  The loss of any large customer, a significant reduction in sales we make to them, any cancellation of orders they have made with us or any failure to pay for the products we have shipped to them could materially and adversely affect our results of operations and financial condition.

 

***If the distributors that we rely upon to sell FOLOTYN fail to perform, our business may be adversely affected.***

 

Our success depends on the continued customer support efforts of our network of distributors.  The use of distributors involves certain risks, including, but not limited to, risks that these distributors will:

 

·                  not provide us with accurate or timely information regarding their inventories, the number of patients who are using FOLOTYN or complaints about FOLOTYN;

 

·                  not effectively distribute or support FOLOTYN;

 

·                  reduce or discontinue their efforts to sell or support FOLOTYN;

 

·                  be unable to satisfy financial obligations to us or others; and

 

·                  cease operations.

 

Any such failure may result in decreased sales of FOLOTYN, which would harm our business.

 

33

----

Table of Contents

 

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

 

As a biopharmaceutical company, even though we do not and will not control referrals of health care services or bill directly to Medicare, Medicaid or other third-party payers, certain federal and state healthcare laws and regulations pertaining to fraud and abuse are applicable to our business. These laws and regulations, include, among others:

 

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

 

·                  federal false claims laws that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;

 

·                  the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;

 

·                  federal self-referral laws, such as STARK, which prohibit a physician from making a referral to a provider of certain health services with which the physician or the physician’s family member has a financial 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 services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA.

 

Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution under the federal Anti-Kickback statute, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescriptions, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.  Further, the recently enacted health care reform law known as the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes.  A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims laws.  Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

 

Although physicians are permitted to, based on their medical judgment, prescribe products for indications other than those cleared or approved by the FDA, manufacturers are prohibited from promoting their products for such off-label uses.  We market FOLOTYN for the treatment of patients with relapsed or refractory PTCL and provide promotional materials and training programs to physicians regarding the use of FOLOTYN for the treatment of patients with relapsed or refractory PTCL.  Although we believe our marketing, promotional materials and training programs for physicians do not constitute off-label promotion of FOLOTYN, the FDA may disagree.  If the FDA determines that our promotional materials, training or other activities constitute off-label promotion of FOLOTYN, the FDA could request that we modify our training or promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.  It is also possible that other federal, state or foreign enforcement authorities might take action if they believe that the alleged improper promotion led to the submission and payment of claims for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.  Even if it is later determined we are not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our position and have to divert significant management resources from other matters.

 

The PPACA imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to physicians and teaching hospitals, effective March 30, 2013.  Such 

 

34

----

Table of Contents

 

information will be made publicly available in a searchable format beginning September 30, 2013.  In addition, pharmaceutical and device manufacturers will also be required to report and disclose investment interests held by physicians and their immediate family members during the preceding calendar year.  Failure to submit required information may result in civil monetary penalties of up to $150,000 per year (and up to $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission.

 

In recent years, several states and localities, including California, the District of Columbia, Maine, Massachusetts, Minnesota, Nevada, Vermont, and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, and file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and the penalties for failure to comply with these requirements are unclear. Nonetheless, if we are found not to be in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity.

 

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

 

***If our competitors develop and market products that are more effective than FOLOTYN, our commercial opportunity will be reduced or eliminated.***

 

Even though we have obtained approval to market FOLOTYN for the treatment of patients with relapsed or refractory PTCL, our commercial opportunity will be reduced or eliminated if our competitors develop and market products that are more effective, have fewer side effects or are less expensive than FOLOTYN for this or any other potential indication.  Our potential competitors include large, fully-integrated pharmaceutical companies and more established biotechnology companies, each of which have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Academic institutions, government agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing.  It is possible that competitors will succeed in developing technologies that are more effective than those being developed by us or that would render our technologies obsolete or noncompetitive.

 

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

 

We are subject to stringent regulations with respect to product safety and efficacy by various international, federal, state and local authorities. FOLOTYN has not been approved for marketing in the United States for any indication other than the treatment of patients with relapsed or refractory PTCL.  In addition, FOLOTYN has not been approved for marketing for this or any other indication in any other country.  A pharmaceutical product cannot be marketed for a particular indication in the United States or most other countries until it has completed a rigorous and extensive regulatory review and approval process for that indication.  Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources.  Of particular significance are the requirements covering research and development, preclinical and clinical testing, manufacturing, quality control, labeling and promotion of drugs for human use.  We may not obtain the necessary regulatory approvals to market FOLOTYN in the United States for any additional indications or in any other countries.  If we fail to obtain or maintain regulatory approvals to market FOLOTYN in the United States for any additional indications or in any other countries, our ability to generate significant revenue or achieve profitability may be adversely affected.

 

***Reports of adverse events or safety concerns involving FOLOTYN or similar small molecule chemotherapeutic agents could delay or prevent us from obtaining or maintaining regulatory approval or negatively impact sales of FOLOTYN.***

 

FOLOTYN may cause serious adverse events.  These adverse events could interrupt, delay or halt clinical trials of FOLOTYN, including the FDA-required post-approval studies, and could result in the FDA or other regulatory authorities 

 

35

----

Table of Contents

 

denying or withdrawing approval of FOLOTYN for any or all indications, including for the treatment of patients with relapsed or refractory PTCL.  Adverse events may also negatively impact the sales of FOLOTYN.  The FDA, other regulatory authorities or we may suspend or terminate clinical trials at any time. We may also be required to update the FOLOTYN package insert based on reports of adverse events or safety concerns or implement a Risk Evaluation and Mitigation Strategy, which could adversely affect FOLOTYN’s acceptance in the market.  We cannot assure you that FOLOTYN will be safe for human use.

 

At present, there are a number of clinical trials being conducted by other pharmaceutical companies involving small molecule chemotherapeutic agents.  If other pharmaceutical companies announce that they observed frequent adverse events or unknown safety issues in their trials involving compounds similar to, or competitive with, FOLOTYN, we could encounter delays in the timing of our clinical trials or difficulties in obtaining or maintaining the necessary regulatory approvals for FOLOTYN.  In addition, the public perception of FOLOTYN might be adversely affected, which could harm our business and results of operations and cause the market price of our common stock to decline, even if the concern relates to another company’s product or product candidate.

 

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

 

We have ongoing clinical trials involving FOLOTYN and plan to initiate additional trials to evaluate FOLOTYN’s potential clinical utility in other hematologic malignancies.  FOLOTYN may not prove to be safe and efficacious in clinical trials for other indications and may not meet all of the applicable regulatory requirements needed to receive regulatory approval for those indications.  The clinical development and regulatory approval process is expensive and takes many years.  Failure can occur at any stage of development, and the timing of any regulatory approval cannot be accurately predicted. In addition, failure to comply with the FDA and other applicable U.S. and foreign regulatory requirements applicable to clinical trials may subject us to administrative or judicially imposed sanctions.

 

As part of the regulatory approval process, we must conduct clinical trials for FOLOTYN and any other product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities abroad.  The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate.  The designs of our clinical trials for FOLOTYN are based on many assumptions about the expected effect of FOLOTYN, and if those assumptions prove incorrect, the clinical trials may not demonstrate the safety or efficacy of FOLOTYN.  Preliminary results may not be confirmed upon full analysis of the detailed results of a trial, and prior clinical trial program designs and results may not be predictive of future clinical trial designs or results.  Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable results.  For example, we terminated the development of EFAPROXYN, one of our former product candidates, when it failed to demonstrate statistically significant improvement in overall survival in the targeted patients in a Phase 3 clinical trial.  If FOLOTYN fails to show clinically significant benefits in any clinical trial or for any particular indication, it may not be approved for marketing for such indication.  Additionally, if FOLOTYN is demonstrated to be unsafe in clinical trials for other indications, such demonstration could negatively impact FOLOTYN’s existing approval for the treatment of patients with relapsed or refractory PTCL.

 

Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials.  Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances, and the FDA can request that we conduct additional clinical trials.  A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. In addition, negative or inconclusive results or adverse safety events during a clinical trial could cause a clinical trial to be repeated or terminated.  Also, failure to design clinical trial protocols to enroll appropriate patients could result in excessive adverse events or failure to meet efficacy objectives and could cause a clinical trial to be repeated or terminated.  If we have to conduct additional clinical trials for FOLOTYN for any particular indication, it will significantly increase our expenses and may delay marketing of FOLOTYN for such indication.

 

36

----

Table of Contents

 

***Even if FOLOTYN meets safety and efficacy endpoints in clinical trials for additional indications, regulatory authorities may not approve FOLOTYN, or we may face post-approval problems that require withdrawal of FOLOTYN from the market.***

 

We will not be able to market FOLOTYN in the United States for any additional indications or in any other countries for any indications until we have obtained the necessary regulatory approvals.  Our receipt of approval of FOLOTYN in the United States for the treatment of patients with relapsed or refractory PTCL does not guarantee that we will obtain regulatory approval to market FOLOTYN in the United States for any additional indications or in any other countries.  We have limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may place us at risk of delays, overspending and human resources inefficiencies.

 

FOLOTYN may not be approved for any additional indications even if it achieves its endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors, may disagree with our interpretations of data from preclinical studies and clinical trials.  The FDA has substantial discretion in the approval process, and when or whether regulatory approval will be obtained for any drug we develop.  Regulatory agencies also may approve a product candidate for fewer conditions than requested or may grant approval subject to the performance of post-approval studies or Risk Evaluation and Mitigation Strategies for a product candidate.  In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of FOLOTYN.

 

Following regulatory approval for any additional indication, FOLOTYN may later produce adverse events that limit or prevent its widespread use or that force us to withdraw FOLOTYN from the market for that indication or other indications. In addition, a marketed product continues to be subject to strict regulation after approval and may be required to undergo post-approval studies.  For example, we are required to conduct two randomized Phase 3 trials to confirm FOLOTYN’s clinical benefit in patients with T-cell lymphoma as well as two Phase 1 trials to assess whether FOLOTYN poses a serious risk of altered drug levels resulting from organ impairment.  Any unforeseen problems with an approved product, any failure to meet the post-approval study requirements or any violation of regulations could result in restrictions on the product, including its withdrawal from the market.  Any delay in or failure to obtain or maintain regulatory approvals for FOLOTYN in the United States for any additional indication or in any other countries could harm our business and prevent us from ever generating significant revenues or achieving profitability.

 

***When we seek approval for FOLOTYN in other countries, we are subject to numerous complex regulatory requirements and if approval is denied or limited in another country, or if another country imposes post-marketing requirements, that decision could affect our ability to market FOLOTYN in other countries.****

 

We have filed an MAA with the EMA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL, using the centralized procedure. If major objections are raised during the review procedure, we may not receive marketing approval and would be unable to commercialize FOLOTYN in the European Union. Alternatively, the marketing authorization may be subject to conditions for approval or post authorization obligations. Such conditions or obligations may be costly and time consuming to fulfill and may affect our operations. For example, additional clinical data may be required to confirm the safety or efficacy profile of FOLOTYN in the target patient population. In addition, marketing authorizations are subject to periodic reviews, which, if negative, could affect our ability to commercialize FOLOTYN in the European Union.

 

Additionally, failure to comply with, or changes to, the regulatory requirements that are applicable to FOLOTYN may result in a variety of consequences, including the following:

 

·                  restrictions on FOLOTYN or our manufacturing processes;

 

·                  warning letters;

 

·                  withdrawal of FOLOTYN from the market;

 

·                  voluntary or mandatory recall of FOLOTYN;

 

·                  fines against us;

 

·                  suspension or withdrawal of regulatory approvals for FOLOTYN;

 

37

----

Table of Contents

 

·                  suspension or termination of any of our ongoing clinical trials of FOLOTYN;

 

·                  refusal to permit import or export of FOLOTYN;

 

·                  refusal to approve pending applications or supplements to approved applications that we submit;

 

·                  denial of permission to file an application or supplement in a jurisdiction;

 

·                  product seizure;

 

·      our strategic collaborator, Mundipharma, could terminate our arrangement to co-develop FOLOTYN globally and commercialize FOLOTYN outside the United States and Canada, which would delay the development and may increase the cost of developing and commercializing FOLOTYN; and

 

·                  injunctions, consent decrees, or the imposition of civil or criminal penalties against us.

 

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

 

We do not know when our current clinical trials will be completed, if at all.  We also cannot accurately predict when other planned clinical trials will begin or be completed.  Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating.  Other companies are conducting clinical trials and have announced plans for future trials that are seeking or likely to seek patients with the same diseases as those we are studying.  Competition for patients in some cancer trials is particularly intense because of the limited number of leading specialist physicians and the geographic concentration of major clinical centers.

 

As a result of the numerous factors that can affect the pace of progress of clinical trials, our trials may take longer to enroll patients than we anticipate, if they can be completed at all.  Delays in patient enrollment in the trials may increase our costs and slow our product development and approval process.  Our product development costs will also increase if we need to perform more or larger clinical trials than planned.  If other companies’ product candidates show favorable results, we may be required to conduct additional clinical trials to address changes in treatment regimens or for our products to be commercially competitive.  Any delays in completing our clinical trials will delay our ability to obtain regulatory approval to market FOLOTYN in the United States for any additional indications or in any other countries, which may adversely affect our ability to generate significant revenues or achieve profitability.

 

***We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.***

 

Clinical trials must be conducted in accordance with Good Clinical Practices, or GCP, or other applicable foreign government guidelines and are subject to oversight by the FDA, foreign governmental agencies and Institutional Review Boards at the medical institutions where the clinical trials are conducted.  In addition, clinical trials must be conducted with product candidates produced under cGMP and may require large numbers of test subjects.  Clinical trials may be suspended by the FDA, foreign governmental agencies, or us for various reasons, including:

 

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

 

·                  deficiencies in the clinical trial operations or trial sites;

 

·                  the product candidate may have unforeseen adverse side effects;

 

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

 

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

 

·                  the product candidate may appear to be less effective than current therapies;

 

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

 

38

----

Table of Contents

 

·                  insufficient quantities of the product candidate to complete the trials.

 

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes.  Amendments may require us to resubmit our clinical trial protocols to Institutional Review Boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial.  Due to these and other factors, FOLOTYN could take a significantly longer time to gain regulatory approval for any additional indications than we expect or we may never gain approval for additional indications, which could reduce our revenue by delaying or terminating the commercialization of FOLOTYN for additional indications.

 

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

 

We rely primarily on third parties to conduct our clinical trials.  As a result, we have had and will continue to have less control over the conduct of our clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff.  Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities.  Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, any of which may adversely affect their willingness or ability to conduct our trials.  We may experience unexpected cost increases that are beyond our control.  Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider.  However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible.  Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

 

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

 

Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of March 31, 2011, together with the upfront payment associated with our strategic collaboration with Mundipharma, should be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished.  We anticipate continuing our current development programs and beginning other long-term development projects involving FOLOTYN, including the post-approval clinical studies required for FOLOTYN.  These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful.  In addition, we expect to incur significant costs relating to the commercialization of FOLOTYN, including costs related to our sales and marketing, medical affairs and manufacturing operations.  Therefore, we may 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 revenue generated from sales of FOLOTYN;

 

·                  the timing and costs associated with our sales and marketing activities for promoting FOLOTYN;

 

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

 

·                  the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the FDA;

 

·                  the timing and costs associated with our evaluation of, and decisions with respect to, the potential development of FOLOTYN for additional therapeutic indications;

 

·                  the timing, costs and revenue associated with our strategic collaboration with Mundipharma for the co-development of FOLOTYN globally and commercialization outside the United States and Canada; and

 

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

 

39

----

 

Table of Contents

 

We may seek to obtain this additional capital through equity or debt financings, arrangements with corporate partners, or from other sources.  Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders.  However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us. In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to significantly increase sales of FOLOTYN or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our business and future prospects for profitability may be harmed.

 

***Budget constraints may force us to delay our efforts to develop FOLOTYN for additional indications while we complete the post-approval clinical studies required by the FDA, which may prevent us from commercializing FOLOTYN for all desired indications as quickly as possible.***

 

Because we have limited resources, and because research and development is an expensive process, we must regularly assess the most efficient allocation of our research and development budget.  In particular, our approval of FOLOTYN in patients with relapsed or refractory PTCL is conditioned upon us undertaking two additional Phase 3 studies and two additional Phase 1 studies which will result in significant additional expense.  As a result of our limited resources, we may have to prioritize the development of FOLOTYN for additional indications and may not be able to fully realize the value of FOLOTYN for other indications in a timely manner, if at all.

 

For example, in January 2011, we announced that we will not pursue Phase 3 studies for NSCLC at this time in order to prioritize our resources on the development and commercialization of FOLOTYN for the treatment of hematologic malignancies, and to manage our operating costs and expenses.

 

***We do not have manufacturing facilities or capabilities and are dependent on third parties to fulfill our manufacturing needs and supply obligations, which could result in the delay of clinical trials, regulatory approvals, product introductions and commercial sales.****

 

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

 

FOLOTYN is cytotoxic, which requires the manufacturers of FOLOTYN to have specialized equipment and safety systems to handle such a substance. In addition, the starting materials for FOLOTYN require custom preparations, which require us to manage an additional set of suppliers to obtain the needed supplies of FOLOTYN.

 

We have arrangements with two third-party manufacturers to produce FOLOTYN bulk drug substance and two third-party manufacturers to produce FOLOTYN formulated drug product. We believe these third-party manufacturers have the capability to meet our projected worldwide clinical trial and commercial requirements for FOLOTYN although we cannot assure you of this.  In particular, our third party manufacturers may not be able to fulfill our potential commercial needs or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find additional alternative suppliers of FOLOTYN or its components, we may not be able to contract for those components on acceptable terms, if at all. Any such failure to supply or delay caused by such suppliers would have an adverse effect on our ability to continue clinical development of FOLOTYN or commercialize FOLOTYN.

 

Our current or future manufacturers may be unable to accurately and reliably manufacture commercial quantities of FOLOTYN at reasonable costs, on a timely basis and in compliance with the FDA’s cGMP. If our current or future contract manufacturers fail in any of these respects, our ability to timely complete our clinical trials, obtain or maintain required regulatory approvals and successfully commercialize FOLOTYN may be materially and adversely affected. This risk may be heightened with respect to FOLOTYN as there are a limited number of manufacturers with the ability to handle cytotoxic products such as FOLOTYN. In addition, we currently have obligations to supply Mundipharma Medical Company, an affiliate of Mundipharma, with FOLOTYN pursuant to a supply agreement.  If our current or future manufacturers fail to accurately and reliably manufacture commercial quantities of FOLOTYN, we could default on these supply obligations.  

 

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 international regulatory authorities for compliance with strictly enforced cGMP regulations 

 

40

----

Table of Contents

 

and similar state and foreign standards, and we do not have control over our contract manufacturers’ compliance with these regulations and standards;

 

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

 

·                  our manufacturers may have staffing difficulties, may undergo changes in control or may become financially distressed, adversely affecting their willingness 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 in substantial delays in meeting market demands;

 

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

 

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

 

Any of these factors could result in the delay of clinical trials, regulatory submissions, required approvals or commercialization of FOLOTYN. They could also entail higher costs and result in our being unable to effectively commercialize FOLOTYN.

 

***If we are unable to effectively protect our intellectual property, we will be unable to prevent third parties from using our technology, which would impair our competitiveness and ability to commercialize FOLOTYN. In addition, enforcing our proprietary rights may be expensive and result in increased losses.***

 

Our success will depend in part on our ability to obtain and maintain meaningful patent protection for FOLOTYN, both in the United States and in other countries.  We rely on patents to protect a large part of our intellectual property and our competitive position.  Any patents issued to or licensed by us could be challenged, invalidated, infringed, circumvented or held unenforceable, based on, among other things, obviousness, inequitable conduct, anticipation or enablement.  In addition, it is possible that no patents will issue on any of our owned or licensed patent applications.  It is possible that the claims in patents that have been issued or licensed to us or that may be issued or licensed to us in the future will not be sufficiently broad to protect our intellectual property or that the patents will not provide protection against competitive products or otherwise be commercially valuable. Failure to obtain and maintain adequate patent protection for our intellectual property would impair our ability to be commercially competitive.

 

Our commercial success will also depend in part on our ability to commercialize FOLOTYN without infringing patents or other proprietary rights of others or breaching the licenses granted to us.  We may not be able to obtain a license to third-party technology that we may require to conduct our business or, if obtainable, 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 to commercialize FOLOTYN, or fail to obtain a license at a reasonable cost, we will be unable to commercialize FOLOTYN or to commercialize at a price that will allow us to become profitable.

 

In addition to patent protection, we also rely upon trade secrets, proprietary know-how and technological advances that we seek to protect through confidentiality agreements with our collaborators, employees, advisors and consultants.  Our employees and consultants are required to enter into confidentiality agreements with us. We also enter into non-disclosure agreements with our collaborators and vendors, which agreements are intended to protect our confidential information delivered to third parties for research and other purposes.  However, these agreements could be breached and we may not have adequate remedies for any breach, or our trade secrets and proprietary know-how could otherwise become known or be independently discovered by others.

 

Furthermore, as with any pharmaceutical company, our patent and other proprietary rights are subject to uncertainty.  Our patent rights related to FOLOTYN might conflict with current or future patents and other proprietary rights of others.  For the same reasons, the products of others could infringe our patents or other proprietary rights.  Litigation or patent interference proceedings, either of which could result in substantial costs to us, may be necessary to enforce any of our 

 

41

----

Table of Contents

 

patents or other proprietary rights, or to determine the scope and validity or enforceability of other parties’ proprietary rights.  We may be dependent on third parties, including our licensors, for cooperation and information that may be required in connection with the defense and prosecution of our patents and other proprietary rights.  The defense and prosecution of patent and intellectual property infringement claims are both costly and time consuming, even if the outcome is favorable to us.  Any adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease selling our future products.  We are not currently a party to any patent or other intellectual property infringement claims.

 

***We may explore strategic partnerships or collaborations that may never materialize or may fail.****

 

We may, in the future, periodically explore a variety of possible strategic partnerships or collaborations in an effort to gain access to additional product candidates or resources.  For example, in May 2011, we entered into a  strategic collaboration with Mundipharma for the co-development of FOLOTYN globally and commercialization outside the United States and Canada.  At the current time, we cannot predict what form such a strategic partnership or collaboration might take.  We are likely to face significant competition in seeking appropriate strategic partners, and these strategic partnerships or collaboration can be complicated and time consuming to negotiate and document. We may not be able to negotiate strategic partnerships or collaborations on acceptable terms, or at all.  We are unable to predict when, if ever, we will enter into any additional strategic partnerships or collaborations because of the numerous risks and uncertainties associated with establishing strategic partnerships or collaborations.

 

42

----

Table of Contents

 

***Health care reform measures could adversely affect our business.***

 

The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payers to contain or reduce the costs of health care.  The U.S. Congress recently enacted legislation to reform the health care system.  While we anticipate that this legislation may, over time, increase the number of patients who have insurance coverage for pharmaceutical products, it also imposes cost containment measures that may adversely affect the amount of reimbursement for pharmaceutical products, including FOLOTYN.  These measures include increasing the minimum rebates for products covered by Medicaid programs and extending such rebates to drugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed care organizations as well as expansion of the 340B Public Health Services drug discount program.  In foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system.  For example, in some countries other than the United States, pricing of prescription drugs is subject to government control and we expect to see continued efforts to reduce healthcare costs in international markets.

 

Some states are also considering legislation that would control the prices of drugs, and state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug for which supplemental rebates are not being paid.  Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs.  Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs.  This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for drugs, including FOLOTYN.  It is likely that federal and state legislatures and health agencies will continue to focus on additional health care reform in the future although we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. The pendency or approval of such proposals or reforms could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships, collaborations or licenses.

 

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

 

The FDA has awarded orphan drug status to pralatrexate, which we market under the tradename FOLOTYN, for the treatment of patients with relapsed or refractory PTCL.  In addition, the FDA has awarded orphan drug designation to pralatrexate for the treatment of patients with follicular lymphoma and diffuse large B-cell lymphoma and advanced or metastatic TCC of the urinary bladder, for which we do not have approval. Under the Orphan Drug Act, the first company to receive FDA approval for pralatrexate for a designated orphan drug indication will obtain seven years of marketing exclusivity during which the FDA may not approve another company’s application for pralatrexate for the same orphan indication.  Because the FDA approved FOLOTYN for the treatment of patients with relapsed or refractory PTCL, we have received seven years of marketing exclusivity for that indication.  Orphan drug exclusivity does not prevent FDA approval of a different drug for the orphan indication or the same drug for a different indication.  In addition, the FDA may void orphan drug exclusivity under certain circumstances.

 

***If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of FOLOTYN.***

 

The testing and marketing of pharmaceutical products entail an inherent risk of product liability.  Product liability claims might be brought against us by consumers or health care providers or by pharmaceutical companies or others selling FOLOTYN or any future products.  If we cannot successfully defend ourselves against such claims, we may incur substantial liabilities or be required to limit the commercialization of FOLOTYN.  We have obtained limited product liability insurance coverage for our human clinical trials and commercial sales of FOLOTYN. However, product liability insurance coverage is becoming increasingly expensive, and we may be unable to maintain such insurance coverage at a reasonable cost or in 

 

43

----

Table of Contents

 

sufficient amounts to protect us against losses due to product liability.  A successful product liability claim in excess of 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 and Chief Executive******Officer and other key personnel.***

 

We are highly 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 a term life insurance policy covering Mr. Berns in the amount of $10.0 million.  We also depend on key employees and academic collaborators for each of our research and development programs.  The loss of any of our key employees or academic collaborators could delay the development and commercialization of FOLOTYN or result in the termination of our FOLOTYN development program in its entirety.  Mr. Berns and others on our executive management team have employment agreements with us, but the agreements provide for “at-will” employment with no specified term.  Our future success also will depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, governmental regulation and commercialization of pharmaceutical products.  We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.  Additionally, we have recently implemented a strategic reduction in workforce and we may have a more difficult time in attracting and retaining the employees we need as a result of a perceived risk of future workforce and expense reductions.  If we are unsuccessful in our recruitment and retention efforts, our business will be harmed.

 

We also rely on consultants, collaborators and advisors to assist us in formulating and conducting our research and development programs.  All of our consultants, collaborators and advisors are employed by other employers or are self-employed and may have commitments to or consulting contracts with other entities that may limit their ability to contribute to our company.

 

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

 

The development, manufacturing, pricing, marketing, sale and reimbursement of FOLOTYN, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States.  We have fewer employees than many other companies that have one or more product candidates that are approved for marketing and we rely heavily on third parties to conduct many important functions.

 

As a publicly-traded company, we are subject to significant regulations including the Sarbanes Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act.  The Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions, some of which the Securities and Exchange Commission, or SEC, has recently implemented by adopting additional rules and regulations in areas such as the compensation of executives (“say-on-pay”).  We cannot assure you that we are or will be in compliance with all potentially applicable regulations.  If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from The NASDAQ Global Market, or NASDAQ, suspension or termination of our clinical trials, failure to obtain approval to market FOLOTYN, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation.  Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

 

***If our internal controls over financial reporting are not considered effective, our business and stock price could be adversely affected.***

 

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

 

Our management, including our chief executive officer and principal financial officer, does not expect that our internal controls over financial reporting will prevent all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be 

 

44

----

Table of Contents

 

considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become ineffective because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future.  A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to consider our internal controls as ineffective.  If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.

 

***Our reserves and estimates depend upon the accuracy and consistency of third party data as well as dependence upon key finance and accounting personnel to maintain and implement the surrounding controls.***

 

We have reserves and estimates that incorporate a significant amount of third party data from our wholesalers.  To effectively maintain the reserves and estimates, we depend to a considerable degree upon the timely and accurate reporting to us of such data from these third parties and our key accounting and finance personnel to accurately interpolate such data into the reserves and estimates.  If the third party data is not calculated on a consistent basis and reported to us on an accurate or timely basis or we lose any of our key accounting and finance personnel, the accuracy of our consolidated financial statements could be materially affected.  This could cause future delays in our earnings announcements, regulatory filings with the SEC and delisting with NASDAQ.

 

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

 

For planning purposes, we estimate the timing of a variety of clinical, regulatory and other milestones, such as when a certain product candidate will enter clinical development, when a clinical trial will be initiated or completed, or when an application for regulatory approval will be filed.  Some of our estimates are included in this report.  Our estimates are based on information available 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 milestones are not achieved when we estimated that they would be, investors could be disappointed and our stock price may decrease.

 

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

 

On March 2, 2005, we entered into a Securities Purchase Agreement with Warburg Pincus Private Equity VIII, L.P., or Warburg, and certain other investors in connection with an equity financing.  In connection with this financing, Warburg and certain of its affiliates entered into a standstill agreement pursuant to which they agreed not to pursue, for so long as they continue to own a specified number of shares of our common stock, certain activities the purpose or effect of which may be to change or influence the control of our company.

 

As of May 6, 2011, we had 105,613,843 shares of common stock outstanding, of which Warburg owned 26,124,430 shares, or approximately 25% of the voting power of our outstanding common stock.  Although Warburg has entered into a standstill agreement with us, Warburg is, and will continue to be, able to exercise substantial influence over any actions requiring stockholder approval.

 

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

 

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

 

45

----

Table of Contents

 

·                  authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt;

 

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

 

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

 

·                  eliminating the ability of stockholders to call a special meeting of stockholders; and

 

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

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.  This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.  Notwithstanding the foregoing, the three-year moratorium imposed on business combinations by Section 203 will not apply to Warburg because, prior to the date on which Warburg became an interested stockholder, our board of directors approved the transactions that resulted in Warburg becoming an interested stockholder.  However, in connection with Warburg’s participation in an equity financing we completed in March 2005, Warburg and certain of its affiliates entered into a standstill agreement pursuant to which they agreed not to pursue, for so long as they continue to own a specified number of shares of our common stock, certain activities the purpose or effect of which may be to 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 our stockholders.***

 

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

 

Because Warburg owns a substantial percentage of our outstanding common stock, we amended the stockholder rights plan in connection with Warburg’s participation in an equity financing we completed in March 2005 to provide that Warburg and its affiliates will be exempt from the stockholder rights plan, unless Warburg and its affiliates become, without the prior consent of our board of directors, the beneficial owner of more than 44% of our common stock.

 

***Unstable market conditions may have serious adverse consequences on our business.***

 

Market instability has made the business climate more volatile and more costly.  Our general business strategy may be adversely affected by unpredictable and unstable market conditions.  If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary equity or debt financing more difficult, more costly, and more dilutive.  While we believe we have adequate capital resources to meet our expected working capital and capital expenditure requirements for at least the next 12 months, a radical economic downturn or increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders.  Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans.  There is a risk that one or more of our current service providers, manufacturers or other partners may encounter difficulties during 

 

46

----

Table of Contents

 

challenging economic times, which could have an adverse effect on our business, results of operations and financial condition.

 

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

 

We cannot assure you that an active trading market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active.  The trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

 

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

 

·                  actual or anticipated variations in quarterly operating results;

 

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

 

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

 

·                  actual or anticipated results of our clinical trials involving FOLOTYN;

 

·                  changes in laws or regulations applicable to FOLOTYN;

 

·                  changes in the expected or actual timing of our development programs;

 

·                  announcements of technological innovations by us or our competitors;

 

·                  changes in financial estimates or recommendations by securities analysts;

 

·                  conditions or trends in the biotechnology and pharmaceutical industries;

 

·                  changes in the market valuations of similar companies;

 

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

 

·                  additions or departures of key personnel;

 

·                  disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

·                  developments concerning any of our research and development, 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, including disasters or crises.

 

Public companies in general and companies included on NASDAQ in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.  There has been particular volatility in the market prices of securities of biotechnology and other life sciences companies, and the market prices of these companies have often fluctuated because of problems or successes in a given market segment or because investor interest has shifted to other segments.  These broad market and industry factors may cause the market price 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 our own operations, and even these may be affected due to the state of the capital markets.  In the past, following large price declines in the public market price of a company’s securities, securities class action litigation has 

 

47

----

Table of Contents

 

often been initiated against that company, including in 2004 against us.  Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which would hurt our business.  Any adverse determination in litigation could also subject us to significant liabilities.

 

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

 

If our stockholders sell substantial amounts of our common stock, the market price of our common stock may decline.  These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we consider appropriate.  We are unable to predict the effect that sales may have on the then prevailing market price of our common stock.  We have entered into a Registration Rights Agreement with Warburg pursuant to which Warburg is entitled to certain registration 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 providing for the registration for resale by Warburg of up to 26,124,430 shares of our common 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.** | **RESERVED**                                                      | **None**   |
| ** **  | ** **                                                        | ** ** |
| **ITEM 5.** | **OTHER   INFORMATION**                                           | **None**   |
| ** **  | ** **                                                        | ** ** |
| **ITEM 6.** | **EXHIBITS**                                                      | ** ** |

 

The exhibits listed in the Index to Exhibits (following the signatures page of this Report) are filed with, or incorporated by reference in, this Report.

 

48

----

Table of Contents

 

**SIGNATURES**

 

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

 
| Date: May 10,   2011 | **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) |

 

49

----

Table of Contents

 

**Allos Therapeutics, Inc.**

 

**Index to Exhibits**

 
| ** **        | ** ** | ** **                                                                                                                                       | ** ** | **Incorporated by Reference** | ** ** | ** **        | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------|------------|
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                  | ** ** | **Form**                                | ** ** | **Filing   Date** | ** ** | **Number** | ** ** | **Filed   Herewith** | ** ** |
| 10.1†        |       | Second   Amendment to Second Amended and Restated Employment Agreement, effective as   of March 2, 2011, between Allos and Paul L. Berns.   |       | 10-K                                    |       | 3/03/2011         |       | 10.14.2 |   |   |   |
| 10.2†        |       | First   Amendment to Second Amended and Restated Employment Agreement, effective as   of March 2, 2011, between Allos and Marc H. Graboyes. |       | 10-K                                    |       | 3/03/2011         |       | 10.16.1 |   |   |   |
| 10.3†        |       | First   Amendment to Employment Agreement, effective as of March 2, 2011,   between Allos and David C. Clark.                               |       | 10-K                                    |       | 3/03/2011         |       | 10.20.1 |   |   |   |
| 10.4†        |       | First   Amendment to Employment Agreement, effective as of March 2, 2011,   between Allos and Bruce K. Bennett, Jr.                    |       | 10-K                                    |       | 3/03/2011         |       | 10.22.1 |   |   |   |
| 10.5†        |       | First   Amendment to Employment Agreement, effective as of March 2, 2011,   between Allos and Michael E. Schick.                            |       | 10-K                                    |       | 3/03/2011         |       | 10.23.1 |   |   |   |
| 10.6†        |       | Second   Amendment to Employment Agreement, effective as of March 2, 2011,   between Allos and Bruce A. Goldsmith                           |       | 10-K                                    |       | 3/03/2011         |       | 10.24.2 |   |   |   |
| 10.7†        |       | Executive   Compensation and Equity Awards.                                                                                                      |       | 8-K                                     |       | 2/26/2011         |       | 10.1 |   |   |   |
| 31.1              |       | Certification   of principal executive officer required by Rule 13a-14(a) / 15d-14(a).                                                           |       |                                    |       |              |       |   |   |   |   |
| 31.2              |       | Certification   of principal financial officer required by Rule 13a-14(a) /   15d-14(a).                                               |       |                                    |       |              |       |   |   | X |   |
| 32.1#             |       | Section 1350   Certification.                                                                                                               |       |                                    |       |              |       |   |   | X |   |

 

----

|   |   | † | Indicates   management contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | #      | The   certifications attached as Exhibit 32.1 that accompany this Quarterly   Report on Form 10-Q are not deemed filed with the Securities and   Exchange Commission and are not to be incorporated by reference into any   filing of Allos Therapeutics, Inc. under the Securities Act of 1933, as   amended, or the Securities Exchange Act of 1934, as amended, whether made   before or after the date of this Form 10-Q, irrespective of any general   incorporation language contained in such filing. |

 

----