Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                                                                                                              | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                         | ** ** | ** **                                                                                               |
| **For the  quarterly period ended June 30, 2009.**                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                         | ** ** | ** **                                                                                               |
| **o**                                                                                                                                                                                                                                                              | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
| ** **                                                                                                                                                                                                                                                         | ** ** | ** **                                                                                               |
| **For the  transition period from                    to                    .** |

 

**CommissionFile Number000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado  80020**

**(303)426-6262**

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

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe  preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes o  No o

 

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

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

 

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

 

As of July 31, 2009,there were 89,389,188 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

** **

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**Table of Contents**

** **

**ALLOSTHERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLE OF CONTENTS**

 
| PART I.   Financial Information |   | 3                                                                                                                                                                                                      |
|-------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   |   | Financial Statements  (unaudited)                                                                                                                                                                      |   | 3 |
|                                      |   | Balance Sheets — as of  June 30, 2009 and December 31, 2008                                                                                                                             |   | 3 |
|                                      |   | Statements of Operations  — for the three and six months ended June 30, 2009 and 2008 and the  cumulative period from September 1, 1992 (date of inception) through  June 30, 2009 |   | 4 |
|                                      |   | Statements of Cash Flows —  for the six months ended June 30, 2009 and 2008 and the cumulative  period from September 1, 1992 (date of inception) through June 30,  2009           |   | 5 |
|                                      |   | Notes to Financial  Statements                                                                                                                                                                         |   | 6 |
| ITEM 2.                                   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                            |   | 14 |
| ITEM 3.                                   |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                            |   | 22 |
| ITEM 4.                                   |   | Controls and  Procedures                                                                                                                                                                               |   | 23 |
| PART II.   Other Information    |   | 24                                                                                                                                                                                                     |
| ITEM 1.                                   |   | Legal Proceedings                                                                                                                                                                                      |   | 24 |
| ITEM 1A.                                  |   | Risk Factors                                                                                                                                                                                           |   | 24 |
| ITEM 2.                                   |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                           |   | 39 |
| ITEM 3.                                   |   | Defaults Upon  Senior Securities                                                                                                                                                                       |   | 39 |
| ITEM 4.                                   |   | Submission of  Matters to a Vote of Security Holders                                                                                                                                                   |   | 39 |
| ITEM 5.                                   |   | Other Information                                                                                                                                                                                      |   | 39 |
| ITEM 6.                                   |   | Exhibits                                                                                                                                                                                               |   | 40 |
| SIGNATURES                                |   | 41                                                                                                                                                                                                     |

 

NOTE:

 

*AllosTherapeutics, Inc., the Allos Therapeutics, Inc. logo,  and all other Allos names are trademarks ofAllos Therapeutics, Inc. in the United States and in other selectedcountries. All other brand names or trademarks appearing in this report are theproperty 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.*

 

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

** **

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

**BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2009**          | ** **  | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                                                          |       |              |        |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                 | 95,621,117  |                  | $          | 30,458,424 |   |
| Restricted cash                                                                                                                                                                                                                           |       | 237,632           |        | 237,632               |       |
| Investments in  marketable securities                                                                                                                                                                                                     |       | 9,242,900         |        | 53,468,942            |       |
| Prepaid research  and development expenses                                                                                                                                                                                                |       | 964,251           |        | 919,384               |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                        |       | 1,972,422         |        | 2,772,235             |       |
| Total current  assets                                                                                                                                                                                                                     |       | 108,038,322       |        | 87,856,617            |       |
| Property and  equipment, net                                                                                                                                                                                                              |       | 1,521,889         |        | 1,307,084             |       |
| Investments in  marketable securities                                                                                                                                                                                                     |       | 346,396           |        | 38,480                |       |
| Other assets                                                                                                                                                                                                                              |       | 92,979            |        | 137,423               |       |
| Total assets                                                                                                                                                                                                                              |       | $                 | 109,999,586 |                  | $          | 89,339,604 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                             | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                     |       |              |        |                  |       |
| Trade accounts  payable                                                                                                                                                                                                                   |       | $                 | 1,676,979   |                  | $          | 280,526 |   |
| Accrued  liabilities                                                                                                                                                                                                                      |       | 7,713,207         |        | 9,594,712             |       |
| Total current  liabilities                                                                                                                                                                                                                |       | 9,390,186         |        | 9,875,238             |       |
| Commitments and  contingencies (See Note 8)                                                                                                                                                                                               |       |              |        |                  |       |
|                                                                                                                                                                                                                                      |       |              |        |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                               |       |              |        |                  |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at June 30, 2009 and  December 31, 2008; no shares issued or outstanding                                                                                       |       | —            |        | —                |       |
| Series A  Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares  designated from authorized preferred stock at June 30, 2009 and  December 31, 2008; no shares issued or outstanding                    |       | —            |        | —                |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at June 30, 2009 and  December 31, 2008; 89,389,188 and 81,238,812 shares issued and  outstanding at June 30, 2009 and December 31, 2008, respectively |       | 89,389            |        | 81,239                |       |
| Additional  paid-in capital                                                                                                                                                                                                               |       | 432,136,245       |        | 379,042,015           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                         |       | (331,616,234      | )           | (299,658,888          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 100,609,400       |        | 79,464,366            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                 | 109,999,586 |                  | $          | 89,339,604 |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** | **Cumulative  Period from  September 1, 1992  (date of inception)  through  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                        | ** **  | **2008**                                      | ** ** | **2009**                                                                                                             | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Research  and development                                             |       | $                                               | 7,170,215   |                                          | $          | 5,403,924                                                                                                            |       | $ | 12,875,317 |   | $ | 11,377,536 |   | $ | 162,023,241 |   |
| Clinical  manufacturing                                               |       | 1,606,163                                       |        | 1,485,052                                     |       | 4,261,435                                                                                                            |       | 3,071,610 |   | 45,620,687 |   |
| Marketing,  general and administrative                                |       | 8,036,594                                       |        | 5,438,764                                     |       | 14,999,244                                                                                                           |       | 10,450,128 |   | 140,873,213 |   |
| Restructuring  and separation costs                                   |       | —                                          |        | —                                        |       | —                                                                                                               |       | — |   | 1,663,821 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Total  operating expenses                                             |       | 16,812,972                                      |        | 12,327,740                                    |       | 32,135,996                                                                                                           |       | 24,899,274 |   | 350,180,962 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Loss  from operations                                                 |       | (16,812,972                                     | )           | (12,327,740                                   | )          | (32,135,996                                                                                                          | )          | (24,899,274 | ) | (350,180,962 | ) |
| Gain  on settlement claims                                            |       | —                                          |        | —                                        |       | —                                                                                                               |       | — |   | 5,110,083 |   |
| Interest  and other income, net                                       |       | 6,050                                           |        | 504,025                                       |       | 178,650                                                                                                              |       | 1,068,960 |   | 23,691,109 |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Net  loss                                                             |       | (16,806,922                                     | )           | (11,823,715                                   | )          | (31,957,346                                                                                                          | )          | (23,830,314 | ) | (321,379,770 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Dividend  related to beneficial conversion feature of preferred stock |       | —                                          |        | —                                        |       | —                                                                                                               |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Net  loss attributable to common stockholders                         |       | $                                               | (16,806,922 | )                                             | $          | (11,823,715                                                                                                          | )          | $ | (31,957,346 | ) | $ | (23,830,314 | ) | $ | (331,616,234 | ) |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Net  loss per share: basic and diluted                                |       | $                                               | (0.19       | )                                             | $          | (0.16                                                                                                                | )          | $ | (0.38 | ) | $ | (0.34 | ) |   |   |
|                                                                  |       |                                            |        |                                          |       |                                                                                                                 |       |   |   |   |   |
| Weighted  average shares outstanding:  basic and diluted         |       | 89,011,044                                      |        | 72,382,487                                    |       | 85,075,532                                                                                                           |       | 69,916,800 |   |   |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTSOF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Six Months Ended  June 30,** | ** **  | **Cumulative  Period From  September 1, 1992  (date of inception)  through  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2009**                                      | ** **  | **2008**                                                                                                             | ** ** | **2009** | ** ** |
| Cash  Flows From Operating Activities:                                                                                  |       |                                          |        |                                                                                                                 |       |   |   |
| Net  loss                                                                                                               |       | $                                             | (31,957,346 | )                                                                                                                    | $          | (23,830,314 | ) | $ | (321,379,770 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                       |       |                                          |        |                                                                                                                 |       |   |   |
| Depreciation  and amortization                                                                                          |       | 190,235                                       |        | 207,088                                                                                                              |       | 4,031,280 |   |
| Stock-based  compensation expense                                                                                       |       | 4,847,736                                     |        | 4,103,659                                                                                                            |       | 45,149,904 |   |
| Write-off  of long-term investment                                                                                      |       | —                                        |        | —                                                                                                               |       | 1,000,000 |   |
| Realized  loss on sale of marketable securities                                                                         |       | 157,141                                       |        | —                                                                                                               |       | 708,839 |   |
| Other                                                                                                                   |       | 149,040                                       |        | —                                                                                                               |       | 266,849 |   |
| Changes  in operating assets and liabilities:                                                                           |       |                                          |        |                                                                                                                 |       |   |   |
| Prepaid  expenses and other assets                                                                                      |       | 799,391                                       |        | (666,973                                                                                                             | )          | (3,019,651 | ) |
| Interest  receivable on investments                                                                                     |       | 653,240                                       |        | (106,730                                                                                                             | )          | (179,920 | ) |
| Accounts  payable                                                                                                       |       | 1,396,453                                     |        | 495,759                                                                                                              |       | 1,676,979 |   |
| Accrued  liabilities                                                                                                    |       | (1,881,505                                    | )           | 265,267                                                                                                              |       | 7,713,207 |   |
| Net  cash used in operating activities                                                                                  |       | (25,645,615                                   | )           | (19,532,244                                                                                                          | )          | (264,032,283 | ) |
| Cash  Flows From Investing Activities:                                                                                  |       |                                          |        |                                                                                                                 |       |   |   |
| Acquisition  of property and equipment                                                                                  |       | (554,081                                      | )           | (235,269                                                                                                             | )          | (5,466,892 | ) |
| Pledge  of restricted cash                                                                                              |       | —                                        |        | —                                                                                                               |       | (237,632 | ) |
| Purchases  of marketable securities                                                                                     |       | (36,055                                       | )           | (59,112,151                                                                                                          | )          | (609,632,312 | ) |
| Proceeds  from maturities of marketable securities                                                                      |       | 39,250,000                                    |        | 41,200,000                                                                                                           |       | 588,872,797 |   |
| Proceeds  from sales of marketable securities                                                                           |       | 3,893,800                                     |        | —                                                                                                               |       | 10,641,300 |   |
| Purchase  of long-term investment                                                                                       |       | —                                        |        | —                                                                                                               |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                        |        | —                                                                                                               |       | 49,687 |   |
| Net  cash provided by (used in) investing activities                                                                    |       | 42,553,664                                    |        | (18,147,420                                                                                                          | )          | (16,773,052 | ) |
| Cash  Flows From Financing Activities:                                                                                  |       |                                          |        |                                                                                                                 |       |   |   |
| Principal  payments under capital leases                                                                                |       | —                                        |        | —                                                                                                               |       | (422,088 | ) |
| Proceeds  from sales leaseback                                                                                          |       | —                                        |        | —                                                                                                               |       | 120,492 |   |
| Proceeds  from issuance of convertible preferred stock, net of issuance costs                                           |       | —                                        |        | —                                                                                                               |       | 89,125,640 |   |
| Proceeds  from issuance of common stock associated with stock options, stock warrants  and employee stock purchase plan |       | 1,313,355                                     |        | 3,215,274                                                                                                            |       | 16,324,172 |   |
| Proceeds  from issuance of common stock, net of issuance costs                                                          |       | 46,941,289                                    |        | 65,155,259                                                                                                           |       | 271,278,236 |   |
| Net  cash provided by financing activities                                                                              |       | 48,254,644                                    |        | 68,370,533                                                                                                           |       | 376,426,452 |   |
| Net  increase in cash and cash equivalents                                                                              |       | 65,162,693                                    |        | 30,690,869                                                                                                           |       | 95,621,117 |   |
| Cash  and cash equivalents, beginning of period                                                                         |       | 30,458,424                                    |        | 15,919,664                                                                                                           |       | — |   |
| Cash  and cash equivalents, end of period                                                                               |       | $                                             | 95,621,117  |                                                                                                                 | $          | 46,610,533 |   | $ | 95,621,117 |   |
| Supplemental  Schedule of Cash and Non-cash Operating and Financing Activities:                                    |       |                                          |        |                                                                                                                 |       |   |   |
| Cash  paid for interest                                                                                                 |       | $                                             | —      |                                                                                                                 | $          | — |   | $ | 1,033,375 |   |
| Issuance  of stock in exchange for license agreement                                                                    |       | —                                        |        | —                                                                                                               |       | 40,000 |   |
| Capital  lease obligations incurred for acquisition of property and equipment                                           |       | —                                        |        | —                                                                                                               |       | 422,088 |   |
| Issuance  of stock in exchange for notes receivable                                                                     |       | —                                        |        | —                                                                                                               |       | 139,687 |   |
| Conversion  of preferred stock to common stock                                                                          |       | —                                        |        | —                                                                                                               |       | 89,125,640 |   |

 

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

 

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

**NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

** **

**1.**                 Basis ofPresentation

** **

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

 

Sinceour inception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations.  Our activities haveconsisted primarily of developing product candidates, raising capital andrecruiting personnel.  Accordingly, we areconsidered to be in the development stage as of June 30, 2009, as definedin Statement of Financial Accounting Standards, or SFAS, No. 7, *Accounting and Reporting by Development StageEnterprises.*

 

*Liquidity*

 

We are abiopharmaceutical company committed to the development and commercialization ofinnovative anti-cancer therapeutics. We are currently focused on thedevelopment and commercialization of pralatrexate, a selective antifolatedesigned to accumulate preferentially in cancer cells. Accordingly, our abilityto generate revenue and achieve profitability is dependent on our ability,alone or with partners, to successfully complete the development ofpralatrexate, conduct clinical trials, obtain the necessary regulatoryapprovals, and manufacture and market pralatrexate. The timing and costs tocomplete the successful development of pralatrexate is highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for pralatrexate, and the subsequent compliance with applicableregulations, require the expenditure of substantial resources. Clinicaldevelopment timelines, likelihood of success and total costs vary widely andare impacted by a variety of risks and uncertainties. Because of these risksand uncertainties, we cannot predict when or whether we will successfullycomplete the development of pralatrexate or the ultimate costs of such efforts.Due to these same factors, we cannot be certain when, or if, we will generateany revenue or net cash inflow from pralatrexate.  We expect to continue incurring net lossesand negative cash flows for the foreseeable future.  Although the size and timing of our futurenet losses are subject to significant uncertainty, we expect them to increaseover the next several years as we continue to fund our research and developmentprograms and prepare for the potential commercialization of pralatrexate forthe treatment of patients with relapsed or refractory peripheral T-celllymphoma, or PTCL, if it is approved for marketing.

 

As of June 30, 2009,we had $105.2 million in cash, cash equivalents and investments in marketablesecurities.  Based upon the currentstatus of our product development and commercialization plans, we believe thatour cash, cash equivalents, and investments in marketable securities as of June 30,2009 should be adequate to support our operations through at least the next 12months, although there can be no assurance that this can, in fact, beaccomplished.  Our forecast of the periodof time through which our financial resources will be adequate to support ouroperations involves risks and uncertainties, and actual results could varymaterially.

 

We anticipate continuingour current development programs and/or beginning other long-term developmentprojects involving pralatrexate. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful.  In addition, we submitted a New DrugApplication, or NDA, to the U.S. Food and Drug Administration, or FDA, forpralatrexate for the treatment of patients with relapsed or refractory PTCL in March 2009.  In May 2009, the FDA accepted the NDAfor priority review and established a Prescription Drug User Fee Act date of September 24,2009 for a decision regarding approval of the NDA. If the FDA approves our NDA,we expect to incur significant costs relating to the potentialcommercialization of pralatrexate, including costs related to the developmentof our sales and marketing, medical affairs and manufacturing operations.  Therefore, we will need to raise additionalcapital to support our future operations. Our actual capital requirements will depend on many factors, including:

 
| · |   | the timing and  outcome of our NDA for pralatrexate for the treatment of patients with  relapsed or refractory PTCL; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|

 

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| · |   | the timing and  costs associated with developing our sales and marketing, medical affairs and  manufacturing operations for the potential commercialization of pralatrexate,  if it is approved for marketing;                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  costs associated with manufacturing clinical and commercial supplies of  pralatrexate;                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  amount of revenues generated by our business activities, if any;                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  costs associated with conducting preclinical and clinical development of pralatrexate,  as well as our evaluation of, and decisions with respect to, additional  therapeutic indications for which we may develop pralatrexate; |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing,  costs and potential revenue associated with any co-promotion or other  partnering arrangements entered into to commercialize pralatrexate, if it is  approved for marketing; and                                                   |
|   |   |                                                                                                                                                                                                                                            |
| · |   | our evaluation of, and  decisions with respect to, potential in-licensing or product acquisition  opportunities or other strategic alternatives.                                                                                                |

 

We may seek to obtainthis additional capital through equity or debt financings, arrangements withcorporate partners, or from other sources. Such financings or arrangements, ifsuccessfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that additional financing will be available whenneeded, or that, if available, we will obtain such financing on terms that arefavorable to our stockholders or us. In particular, the current instability inthe global financial markets and lack of liquidity in the credit and capitalmarkets may adversely affect our ability to secure adequate capital to supportour future operations.  In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wewould otherwise seek to develop or commercialize ourselves on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

 

**2.**                 Fair Value ofFinancial Instruments

** **

*Cash, CashEquivalents and Investments in Marketable Securities*

* *

**All highly liquid investments withoriginal maturities of three months or less are considered to be cashequivalents. The carrying values of our cash equivalents and investments inmarketable securities approximate their market values based on quoted marketprices. We account for investments in marketable securities in accordance withSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Investments in marketablesecurities are classified as held to maturity and are carried at cost plusaccrued interest. Our cash and cash equivalents are maintained in a financialinstitution in amounts that, at times, may exceed federally insured limits. Werealized a loss of approximately $0 and $157,000 on the sale of certain of ourinvestments in marketable securities during the three and six months ended June 30,2009, with no such losses in the three or six months ended June 30,2008.  In response to the recentinstability in the global financial markets, we reviewed our investments inmarketable securities and sold certain investments prior to their maturity inorder to preserve our principal, as the issuers of those securities experiencedsignificant deteriorations in their creditworthiness as evidenced by investmentrating downgrades.  We have the abilityand intent to hold our remaining investments in marketable securities as of June 30,2009 to their scheduled maturity, although we monitor our investment portfoliowith the primary objectives of preserving principal and maintaining properliquidity to meet our operating needs. The weighted average duration of theremaining time to maturity for our portfolio of investments in marketablesecurities as of June 30, 2009 was approximately three months.  As of June 30, 2009, our investments inmarketable securities were held in a variety of interest-bearing instruments,consisting mainly of high-grade corporate notes. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of June 30, 2009.**

** **

*Fair Value ofFinancial Instruments*

* *

Statement of Financial Accounting Standards No. 157,*Fair Value Measurements*, or SFAS 157,provides a framework for measuring fair value, expands the disclosures requiredfor fair value measurements and establishes a common definition of fair valueapplicable to all assets and liabilities measured at fair value. SFAS 157defines fair value as the price that would be

 

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received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date. The fair value hierarchy established by SFAS 157 prioritizesthe inputs into valuation techniques used to measure fair value. Accordingly,we use valuation techniques that maximize the use of observable inputs andminimize the use of unobservable inputs when determining fair value. The threelevels of the hierarchy are as follows:

 

Level 1: Inputsthat reflect unadjusted quoted prices in active markets that are accessible tous for identical assets or liabilities;

 

Level 2: Inputsinclude quoted prices for similar assets and liabilities in active and inactivemarkets or that are observable for the asset or liability either directly orindirectly; and

 

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

 

**We have no assets or liabilities thatwere measured using quoted prices for similar assets and liabilities orsignificant unobservable inputs (Level 2 and Level 3 assets and liabilities,respectively) as of June 30, 2009. Our financial instruments include cash and cash equivalents, investmentsin marketable securities, prepaid expenses, accounts payable and accruedliabilities. The carrying amounts of financial instruments approximate theirfair value due to their short maturities. The carrying value of our cash heldin money market funds totaling $95.5 million as of June 30, 2009 isincluded in cash and cash equivalents on our Balance Sheet and approximatestheir market values based on quoted market prices, or Level 1 inputs.**

** **

**3.**                 Prepaid Expensesand Other Assets

** **

Prepaid expenses andother assets are comprised of the following:

 
| ** **                                                                        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Prepaid  expenses and other assets                                                |       | $                       | 1,972,422  |                        | $          | 772,235 |   |
| Receivable  and cash in escrow related to litigation settlement (see Note 8) |       | —                  |       | 2,000,000                   |       |
|                                                                              |       | $                       | 1,972,422  |                        | $          | 2,772,235 |   |

 

**4.**                 AccruedLiabilities

** **

Accrued liabilities arecomprised of the following:

 
| ** **                                        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued  personnel costs                          |       | $                       | 2,461,421  |                        | $          | 2,816,404 |   |
| Accrued  clinical manufacturing expenses          |       | 1,943,674               |       | 1,153,028                   |       |
| Accrued  research and development expenses        |       | 1,650,779               |       | 2,272,219                   |       |
| Accrued  litigation settlement costs (see Note 8) |       | —                  |       | 2,000,000                   |       |
| Accrued  expenses—other                      |       | 1,657,333               |       | 1,353,061                   |       |
|                                              |       | $                       | 7,713,207  |                        | $          | 9,594,712 |   |

 

**5.**                 Stockholders’Equity

 

On April 3, 2009, wecompleted an underwritten public offering of 7,750,000 shares of our commonstock at the public offering price of $6.30 per share. We received net proceedsfrom the offering of $46.9 million, after deducting $1.4 million ofunderwriting commissions and $489,000 of estimated offering expenses.

 

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

 

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** **

**6.**                 Stock-BasedCompensation

** **

In accordance with themodified prospective transition method of SFAS No. 123 (Revised 2004), *Share-Based Payment*, stock-based compensation expense forthe three and six months ended June 30, 2009 and 2008 has been recognizedin the accompanying Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research  and development               |       | $                                               | 847,029    |                                          | $          | 661,830 |   | $ | 1,711,443 |   | $ | 1,337,617 |   |
| Clinical  manufacturing                 |       | 100,028                                         |       | 103,782                                       |       | 208,326 |   | 207,012 |   |
| Marketing,  general and administrative  |       | 1,522,524                                       |       | 1,223,536                                     |       | 2,927,967 |   | 2,559,030 |   |
| Total  stock-based compensation expense |       | $                                               | 2,469,581  |                                          | $          | 1,989,148 |   | $ | 4,847,736 |   | $ | 4,103,659 |   |

 

We did not recognize arelated tax benefit during the three or six months ended June 30, 2009 and2008 as we maintain net operating loss carryforwards and we have established avaluation allowance against the entire tax benefit as of June 30,2009.   No stock-based compensationexpense was capitalized on our Balance Sheets as of June 30, 2009 and December 31,2008.

 

The following tablesummarizes activity and related information for our stock option awards:

 
| ** **                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|-------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding at December 31, 2008** |       | 7,236,512                    |       | $                                          | 5.14       |   | 3,122,681 |   | $ | 4.15 |   |
| Granted                                   |       | 2,158,632                    |       | 6.60                                       |       |   |   |   |   |
| Exercised                                 |       | (385,899                     | )          | 3.21                                       |       |   |   |   |   |
| Canceled                                  |       | (13,334                      | )          | 9.37                                       |       |   |   |   |   |
| **Outstanding at June 30, 2009**     |       | 8,995,911                    |       | $                                          | 5.57       |   | 3,881,455 |   | $ | 4.70 |   |

 

During the six monthsended June 30, 2009, we granted 2,158,632 stock options with a weighted-average grant-date fair value of$4.06 per share.  During the threemonths ended June 30, 2009 and 2008, we recorded stock-based compensationrelated to our stock option plans of $2,272,914 and $1,890,921,respectively.  During the six months ended June 30, 2009 and 2008, werecorded stock-based compensation related to our stock option plans of$4,497,644 and $3,837,521, respectively. As of June 30, 2009, theunrecorded stock-based compensation balance related to stock option awards was$10,497,396 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

The following tablesummarizes information about outstanding stock options that are fully vestedand currently exercisable, and outstanding stock options that are expected tovest in the future:

 
| ** **                                                           | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of June 30, 2009:**                                        | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options  fully vested and exercisable                                |       | 3,881,455               |       | 6.6                                                         |       | $                                          | 4.70       |                                | $          | 13,985,093 |   |
| Options  expected to vest, including effects of expected forfeitures |       | 4,357,607               |       | 8.9                                                         |       | $                                          | 6.21       |                                | 9,137,859  |   |
| Options  fully vested and expected to vest                           |       | 8,239,062               |       | 7.8                                                         |       | $                                          | 5.50       |                                | $          | 23,122,952 |   |

 

The aggregate intrinsicvalue in the table above represents the total pretax intrinsic value, based onour closing stock price of $8.29 as of June 30, 2009, which would havebeen received by the option holders had all option holders with in-the-moneyoptions exercised their options as of that date.  The total number of in-the-money optionsexercisable as of June 30, 2009 was 3,845,155.

 

The total intrinsic valueof options exercised during the three months ended June 30, 2009 and 2008was $50,311 and $715,597, respectively, determined as of the date of optionexercise.  The total intrinsic value ofoptions exercised during the six months ended June 30, 2009 and 2008 was$1,594,467 and $1,443,857, respectively, determined as of the date of optionexercise. We settle employee stock option exercises with newly issued commonshares.  No tax benefits were realized byus in connection with these exercises during the three or six months ended June 30,2009 and 2008 as we maintain net operating 

 

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loss carryforwards and wehave established a valuation allowance against the entire tax benefit.

 

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

 
| ** **                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested RS at December 31, 2008** |       | 293,750                    |       | $                                                  | 4.07       |   |
| Granted                                    |       | —                     |       | —                                             |       |
| Vested                                     |       | (128,750                   | )          | 3.74                                               |       |
| **Nonvested RS at June 30, 2009**     |       | 165,000                    |       | $                                                  | 4.34       |   |

 

Theshares of restricted stock vest in four equal annual installments from the dateof grant.  During the three monthsended June 30, 2009 and 2008, we recorded stock-based compensation relatedto restricted stock awards of $54,760 and $93,480, respectively.  Duringthe six months ended June 30, 2009 and 2008, we recorded stock-basedcompensation related to restricted stock awards of $140,073 and $240,979,respectively.  As of June 30, 2009,the unrecorded stock-based compensation balance related to restricted stockawards was $193,018 and will be recognized over an estimated weighted-averageamortization period of 1.3 years.

 

The following tablesummarizes 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, 2008** |       | —                     |       | $                                                  | —     |   |
| Granted                                     |       | 164,981                    |       | 6.45                                               |       |
| Vested                                      |       | —                     |       | —                                             |       |
| **Nonvested RSU at June 30, 2009**     |       | 164,981                    |       | $                                                  | 6.45       |   |

 

Theshares of restricted stock unit awards vest in four equal annual installmentsfrom the date of grant.  Upon vesting ofthe restricted stock unit awards, we issue unrestricted shares of our commonstock.  During the three monthsended June 30, 2009 and 2008, we recorded stock-based compensation relatedto restricted stock unit awards of $120,358 and $0, respectively.  Duringthe six months ended June 30, 2009 and 2008, we recorded stock-basedcompensation related to restricted stock unit awards of $167,590 and $0,respectively.  As of June 30, 2009,the unrecorded stock-based compensation balance related to restricted stockunit awards was $801,419 and will be recognized over an estimatedweighted-average amortization period of 1.7 years.

 

**7.**                 Net Loss PerShare

** **

Net loss per share iscalculated in accordance with SFAS No. 128, *Earnings Per Share*, or SFAS 128. Under the provisionsof SFAS 128, basic net loss per share is computed by dividing the net lossattributable to common stockholders for the period by the weighted averagenumber of common shares outstanding during the period.  Diluted earnings per share is computed bygiving effect to all dilutive potential common stock outstanding during theperiod, including stock options, restricted stock, restricted stock unit awardsand shares to be issued under our employee stock purchase plan.

 

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Diluted net loss pershare is the same as basic net loss per share for all periods presented becauseany potential dilutive common shares were anti-dilutive due to our net loss (asincluding such shares would decrease our basic net loss per share). Potentialdilutive common shares that would have been included in the calculation ofdiluted earnings per share if we had net income are as follows:

 
| ** **              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Common  stock options   |       | 1,766,976                                       |       | 1,665,841                                     |       | 1,874,406 |   | 1,727,920 |   |
| Restricted  stock       |       | 184,945                                         |       | 303,695                                       |       | 224,845 |   | 344,087 |   |
| Restricted  stock units |       | 158,159                                         |       | —                                        |       | 110,576 |   | — |   |
|                    |       | 2,110,080                                       |       | 1,969,536                                     |       | 2,209,827 |   | 2,072,007 |   |

 

**8.**                 Commitments andContingencies

** **

*Royalty and LicenseFee Commitments for Pralatrexate*

* *

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and Southern Research Institute, as amended, under which weobtained exclusive worldwide rights to a portfolio of patents and patentapplications related to pralatrexate and its uses. Under the terms of theagreement, we paid an up-front license fee of $2.0 million upon execution ofthe agreement and are also required to make certain additional cash paymentsbased upon the achievement of certain clinical development or regulatorymilestones or the passage of certain time periods. To date, we have madeaggregate milestone payments of $2.5 million based on the passage of time.Additionally, in May 2009, we made a milestone payment of $1.5 millionbased on the FDA accepting our NDA for review. In the future, we could make amilestone payment of $500,000 upon the earlier of achievement of a clinicaldevelopment milestone or the passage of certain time periods, or the ClinicalMilestone, and up to $8.8 million upon achievement of certain regulatorymilestones, or the Regulatory Milestones, including regulatory approval tomarket pralatrexate in the United States or Europe. The last scheduled paymenttowards the Clinical Milestone of $500,000 is currently due on the earlier ofFDA approval to market pralatrexate or December 23, 2009.  If we obtain FDA approval to marketpralatrexate, we will also be obligated to make an additional milestone paymentof $5.3 million, which represents a portion of the Regulatory Milestones. Theup-front license fee and all milestone payments under the agreement have beenor will be recorded to research and development expense when incurred. Underthe terms of the agreement, we are required to fund all development programsand will have sole responsibility for all commercialization activities. Inaddition, we will pay the licensors a royalty based on a percentage of netrevenues arising from sales of the product or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.

 

*Contingencies*

* *

We were named as adefendant in a purported securities class action lawsuit filed in May 2004seeking unspecified damages relating to the issuance of allegedly false andmisleading statements regarding EFAPROXYN during the period from May 29,2003 to April 29, 2004 and subsequent declines in our stock price. In anopinion dated October 20, 2005, the U.S. District Court for the Districtof Colorado concluded that the plaintiffs’ complaint failed to meet the legalrequirements applicable to its alleged claims and dismissed the lawsuit. On November 20,2005, the plaintiffs appealed the District Court’s decision to the U.S. Courtof Appeals for the Tenth Circuit. On February 6, 2008, the parties signeda stipulation of settlement, settling the case for $2,000,000. The settlementwas subject to various conditions, including without limitation approval of theDistrict Court.  On January 29,2009, the District Court issued its Order and Final Judgment approving thesettlement, including the releases of the defendants for which the settlementprovided.  Neither we nor our formerofficer, who was also named as a defendant, admitted any liability inconnection with the settlement.  Theamount of the settlement in excess of our deductible was covered by ourinsurance carrier.  The period to appealthe District Court’s approval of the settlement lapsed during the three monthsended March 31, 2009 without any further appeals being filed and thesettlement is final. We have no further obligations related to this lawsuit andhave no accrual remaining related to the settlement.

 

**9.**                 Recent AccountingPronouncements

** **

In November 2007,the Emerging Issues Task Force, or EITF, issued a consensus, EITF 07-1, *Accounting for Collaboration Arrangements Related tothe Development and Commercialization of Intellectual Property*,which is focused on how the parties to a collaborative agreement should accountfor costs incurred and revenue generated on sales to third parties, how sharingpayments pursuant to a collaboration agreement should be presented in theincome statement and certain related 

 

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disclosure questions.EITF 07-1 is to be applied retrospectively for collaboration arrangements infiscal years beginning after December 15, 2008 and we adopted it January 1,2009.  We currently do not have any sucharrangements.

 

In December 2007,the Financial Accounting Standards Board, or the FASB, issued SFAS No. 141(R),*Business Combinations,* or SFAS141(R). SFAS 141(R) replaces SFAS No. 141, *Business Combinations*and requires an acquirer to recognize theassets acquired, the liabilities assumed, including those arising fromcontractual contingencies, any contingent consideration, and any noncontrollinginterest in the acquiree at the acquisition date, measured at their fair valuesas of that date, with limited exceptions specified in the statement. SFAS 141(R) alsorequires the acquirer in a business combination achieved in stages (sometimesreferred to as a step acquisition) to recognize the identifiable assets andliabilities, as well as the noncontrolling interest in the acquiree, at thefull amounts of their fair values (or other amounts determined in accordancewith SFAS 141(R)). In addition, SFAS 141(R)’s requirement to measure thenoncontrolling interest in the acquiree at fair value will result inrecognizing the goodwill attributable to the noncontrolling interest inaddition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109,*Accounting for Income Taxes*, torequire the acquirer to recognize changes in the amount of its deferred taxbenefits that are recognizable because of a business combination either inincome from continuing operations in the period of the combination or directlyin contributed capital, depending on the circumstances. It also amends SFAS No. 142,*Goodwill and Other Intangible Assets*,to, among other things, provide guidance on the impairment testing of acquiredresearch and development intangible assets and assets that the acquirer intendsnot to use. SFAS 141(R) applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008 and we adopted itJanuary 1, 2009. We have not entered into any business combinations andwill apply it to any business combinations in the future.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements,* or SFAS 160.  SFAS 160 amends Accounting Research Bulletin51, *Consolidated Financial Statements*,to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. It also clarifiesthat a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS 160 also changes the way the consolidated incomestatement is presented by requiring consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest. It also requires disclosure, on the face of theconsolidated statement of income, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160requires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated and requires expanded disclosures in the consolidatedfinancial statements that clearly identify and distinguish between theinterests of the parent owners and the interests of the noncontrolling ownersof a subsidiary. SFAS 160 is effective for fiscal periods, and interim periodswithin those fiscal years, beginning on or after December 15, 2008 and weadopted it January 1, 2009. We currently do not have any subsidiaries.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, or SFAS 161. SFAS 161is intended to improve financial reporting about derivative instruments andhedging activities by requiring companies to enhance disclosure about how theseinstruments and activities affect their financial position, performance andcash flows. SFAS 161 also improves the transparency about the location andamounts of derivative instruments in a company’s financial statements and howthey are accounted for under SFAS No. 133. SFAS 161 is effective forfinancial statements issued for fiscal years beginning after November 15,2008, and interim periods beginning after that date and we adopted it January 1,2009. We currentlydo not have any derivative instruments.

 

In June 2008, theFASB issued FASB Staff Position, or FSP, EITF 03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities*, or**FSPEITF 03-6-1, to address whether instruments granted in share-basedpayment transactions are participating securities prior to their vesting andtherefore need to be included in the earnings per share calculation under thetwo-class method described in SFAS No. 128, *Earnings perShare*. This FSP requires companies to treat unvested share-basedpayment awards that have non-forfeitable rights to dividends or dividendequivalents as participating securities and thus, include them in calculationsof basic earnings per share. FSP EITF 03-6-1 is effective for fiscal yearsbeginning after December 15, 2008 and we adopted it January 1,2009.  There was no impact to ourfinancial statements.

 

In April 2009, the FASB issued FSP FAS 107-1and APB 28-1, *Interim Disclosures about FairValue of Financial Instruments*. This FSP amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, torequire those disclosures in summarized financial information at interimreporting periods.  We adopted this FSP on April 1, 2009.  The 

 

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required disclosures are included in Note 2, FairValue of Financial Instruments.

 

In April 2009, the FASB issued FSP FAS 115-2and FAS 124-2, *Recognition and Presentationof Other-Than-Temporary Impairments*. This FSP amends theother-than-temporary impairment guidance in U.S. GAAP for debt securities tomake the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements. This FSP does not amend existing recognition andmeasurement guidance related to other-than-temporary impairments of equitysecurities.  We adopted this FSP on April 1, 2009.  The adoptionof this FSP did not materially impact our financial statements.

 

In May 2009,the FASB issued SFAS No. 165, *SubsequentEvents*.  This statement establishes general standards ofaccounting for and disclosures of events that occur after the balance sheetdate but before financial statements are issued or are available to be issued.In particular, this statement sets forth (1) the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition or disclosure in thefinancial statements; (2) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements; and (3) the disclosures that an entity should makeabout events or transactions that occurred after the balance sheetdate.  This statement is effective for interim orannual periods ending after June 15, 2009 and we adopted it on April 1,2009.  The required disclosures are includedin Note 10, Subsequent Events.

 

In June 2009,the FASB issued SFAS No. 166, *Accounting for Transfersof Financial Assets an amendment of FASB Statement No. 140*,which amends the derecognition guidance in SFAS No. 140 and eliminates theexemption from consolidation for qualifying special-purpose entities. Thisstatement is effective for financial asset transfers occurring after thebeginning of an entity’s first fiscal year that begins after November 15,2009. We are currently evaluating the potential impact of this statement.

 

In June 2009,the FASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R),* which amends the consolidationguidance applicable to variable interest entities. The amendments willsignificantly affect the overall consolidation analysis under FASBInterpretation No. 46(R). This statement is effective as of the beginningof the first fiscal year that begins after November 15, 2009. We arecurrently evaluating the potential impact of this statement.

 

In June 2009, the FASB approved its AccountingStandards Codification, or Codification, as the single source of authoritativeUnited States accounting and reporting standards applicable for allnon-governmental entities. Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative U.S. GAAP for SEC registrants. The Codification, which changes the referencing offinancial standards, is effective for interim or annual financial periodsending after September 15, 2009. Therefore, in the third quarter of 2009,all references made to U.S. GAAP will use the new Codification numbering systemprescribed by the FASB. As the Codification is not intended to change or alterexisting U.S. GAAP, it is not expected to have any impact on our financialposition or results of operations.

 

**10. ****Subsequent Events**

 

In accordance with SFAS No. 165, *SubsequentEvents,*subsequent eventshave been evaluated through August 4, 2009, the date which these financialstatements were issued.

 

On July 17, 2009, we filed with the DelawareSecretary of State a Certificate of Amendment to our Certificate of Designation of Series AJunior Participating Preferred Stock to increase the number ofshares designated as Series A Junior Participating Preferred Stockthereunder from 1,000,000 shares to 1,500,000 shares. In accordance with theterms of our Amended and Restated Certificate of Incorporation, as amended, ourboard of directors has the authority to increase the number of shares of anyseries of preferred stock.  TheCertificate of Amendment was approved by our board of directors on July 16,2009.

 

On July 20, 2009, we filed a Shelf RegistrationStatement on Form S-3 with the SEC providing for the registration for saleby us of an aggregate of up to $150 million of shares of our common stock andpreferred stock, depositary shares, various series of debt securities andwarrants to purchase any of such securities, either individually or in units,and also providing for the registration for resale by Warburg Pincus PrivateEquity VIII, L.P., or Warburg, of up to 26,124,430 shares of our commonstock.  In the event that there is anoffering by us under this registration statement, we currently intend to useany proceeds therefrom primarily for activities relating to the potentialcommercialization of pralatrexate, clinical and preclinical research anddevelopment of pralatrexate, working capital and general corporatepurposes.  We will not receive anyproceeds from sales of common stock by Warburg, if any. To date, the SEC hasnot declared the registration statement effective.

 

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

 

*The following Management’s Discussion and Analysis of Financial Conditionand Results of Operations, as well as information contained elsewhere in thisreport,*contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements regarding our New DrugApplication for pralatrexate as a treatment for patients with relapsed orrefractory peripheral T-cell lymphoma; our projected timeline to present topline results from our Phase 2b trial comparing pralatrexate and Tarceva (erlotinib)in patients with advanced non-small cell lung cancer; our projected net cashuse in operating activities for fiscal year 2009; other statements regardingour future product development and regulatory strategies, including our intentto develop or seek regulatory approval for our product candidates in specificindications; the ability of our third-party manufacturers to support ourrequirements for drug supply; any statements regarding our future financialperformance, results of operations or sufficiency of capital resources to fundour operating requirements; and any other statements that are other thanstatements of historical fact. In some cases, these statements may beidentified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negativeof such terms and other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These statements involve known and unknown risks anduncertainties that may cause our, or our industry’s results, levels ofactivity, performance or achievements to be materially different from thoseexpressed or implied by the forward-looking statements. Factors that may causeor contribute to such differences include, among other things, those discussedin Part II, Item 1A of this report under the caption “Risk Factors.” Allforward-looking statements included in this report are based on informationavailable to us as of the date hereof and we undertake no obligation to revise anyforward-looking statements in order to reflect any subsequent events orcircumstances. Forward-looking statements not specifically described above alsomay be found in these and other sections of this report.

* *

**Overview**

 

We are abiopharmaceutical company committed to the development and commercialization ofinnovative anti-cancer therapeutics. Our goal is to build a profitable companyby generating income from products we develop and commercialize, either aloneor with one or more potential strategic partners.  We strive to develop proprietary productsthat have the potential to improve the standard of care in cancer therapy.  Our focus is on product opportunities foroncology that leverage our internal clinical development and regulatoryexpertise and address important markets with unmet medical needs. We may alsoseek to grow our existing portfolio of product candidates through productacquisition and in-licensing efforts.

 

**Pralatrexate**

 

Pralatrexate is aselective antifolate designed to accumulate preferentially in cancer cells.Based on preclinical studies, we believe that pralatrexate selectively enterscells expressing RFC-1, a protein that is over expressed on certain cancercells compared to normal cells. Once inside cancer cells, pralatrexate is efficientlypolyglutamylated, which leads to high intracellular drug retention.Polyglutamylated pralatrexate essentially becomes “trapped” inside cancercells, making it less susceptible to efflux-based drug resistance. Acting onthe folate pathway, pralatrexate interferes with DNA synthesis and triggerscancer cell death. We believe pralatrexate has the potential to bedelivered as a single agent or in combination therapy regimens.

 

In March 2009, we submitted a New DrugApplication, or NDA, to the U.S. Food and Drug Administration, or FDA, forapproval to market pralatrexate for the treatment of patients with relapsed orrefractory peripheral T-cell lymphoma, or PTCL. In May 2009, the FDAaccepted the NDA for priority review and established a Prescription Drug UserFee Act, or PDUFA, date of September 24, 2009 for a decision regardingapproval of the NDA. If pralatrexate is approved for marketing, we intend tocommercialize pralatrexate by building an oncology focused U.S. sales andmarketing organization.  We are activelypreparing for the potential commercial launch of pralatrexate in the U.S.,including the phase-in of key investments and personnel associated with thedevelopment of our sales and marketing, medical affairs and manufacturingoperations.  We intend to enter intoco-promotion or out-licensing arrangements with other pharmaceutical orbiotechnology partners, where necessary to reach foreign market segments that

 

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are not reachable by a U.S.-based sales force or whendeemed strategically and economically advisable. We currently retain exclusiveworldwide commercial rights to pralatrexate for all indications.

 

The NDA is based on the results from PROPEL, ourpivotal Phase 2 trial of pralatrexate in patients with relapsed or refractoryPTCL, that were announced in February 2009.  The trial enrolled a total of 115 patients,109 of whom were considered evaluable for response according to the trialprotocol.  The results of the trial demonstrated that 29 of 109 evaluablepatients, or 27%, achieved a response as assessed by central independentoncology review, which is the primary endpoint of the trial.  TheKaplan-Meier estimate for the median duration of response was 287 days, or 9.4months.  Duration of response is the key secondary endpoint of thetrial.  The most common grade 3/4 adverse events were thrombocytopenia,which was observed in 32% of patients; mucosal inflammation in 21% of patients;neutropenia in 20% of patients; and anemia in 17% of patients.  In May 2009, updated results of thetrial were presented at the 45th Annual Meeting of the American Society ofClinical Oncology, which demonstrated an increase in overall response rate from27% to 28%, or 30 of 109 evaluable patients.  Of these patients, 10achieved a complete response and 20 achieved a partial response. In addition,23 patients had stable disease. Of the 30 patients who responded to pralatrexate,21 patients, or 70%, did so by the end of cycle one of therapy.  Medianoverall survival was 14.7 months, with 57% of patients surviving 12 months ormore.

 

The PROPEL trial was conducted under an agreementreached with the FDA under its special protocol assessment, or SPA, process.The SPA process allows for FDA evaluation of a clinical trial protocol intendedto form the primary basis of an efficacy claim in support of an NDA, andprovides an agreement that the trial design, including trial size, clinicalendpoints and data analyses are acceptable to the FDA. However, the SPAagreement is not a guarantee of approval, and we cannot assure you that thedesign of, or data collected from, the PROPEL trial will be adequate todemonstrate the safety and efficacy of pralatrexate for the treatment ofpatients with relapsed or refractory PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. For example, the response rate, duration of response and safety profilerequired to support FDA approval are not specified in the PROPEL trial protocoland will be subject to FDA review.  Inaddition, the median duration of response reported above is a Kaplan-Meierestimate based on the length of follow up for all responders at the time thePROPEL trial database was locked. As a result, the median duration of responsemay change based on continued patient follow up.

 

In addition to the PROPEL trial, we are committed toevaluating pralatrexate for oncology use as a single agent and in combinationwith other therapies.  We currently havesix ongoing clinical trials involving pralatrexate, including the PROPEL trial,and plan to initiate additional trials to evaluate pralatrexate’s potentialclinical utility in other hematologic malignancies and solid tumorindications.  The following clinicaltrials involving pralatrexate are currently ongoing:

 

·            a Phase 2b,randomized, international, multi-center study comparing pralatrexate andTarceva (erlotinib), both with vitamin B12 and folic acidsupplementation, in patients with Stage IIIB/IV non-small cell lung cancer, orNSCLC, who are, or have been, cigarette smokers who have failed treatment withat least one prior platinum-based chemotherapy regimen.  We initiated patient enrollment in this studyin January 2008 and completed patient enrollment with 201 patients in July 2009.  We currently expect to report top lineresults of the trial in the first half of 2010, although the actual timing mayvary based upon a number of factors.

 

·            a Phase 2, open-label,single-arm, multi-center study of pralatrexate with vitamin B12 and folic acid supplementation in patientswith advanced or metastatic relapsed transitional cell carcinoma, or TCC, ofthe urinary bladder.  We initiatedpatient enrollment in this study in July 2008.  The study will seek to enroll approximately41 patients in up to 20 investigative sites worldwide.

 

·            a Phase 1/2a, open-label, multi-centerstudy of pralatrexate and gemcitabine with vitamin B12 and folic acid supplementation inpatients with relapsed or refractory non-Hodgkin’s lymphoma, or NHL, andHodgkin’s disease.  We initiated patientenrollment in this study in May 2007. In July 2009, we completed patient enrollment in the Phase 1 portion ofthis study and initiated enrollment in the Phase 2a portion of the trial to assessthe efficacy and safety of two different schedules of this combination inpatients with NHL, both B- and T-cell, as well as in patients with Hodgkin’slymphoma.

 

·            a Phase 1, open-label,multi-center study of pralatrexate with vitamin B12 and folic acid supplementation in patientswith relapsed or refractory cutaneous T-cell lymphoma.  We initiated patient enrollment in this studyin August 2007.  We plan to enrollup to 56 evaluable patients in the study with the objective of determining theoptimal dose and safety profile, including at least 20 patients at what webelieve to be the optimal dose and schedule.

 

·               a Phase 1/2,open-label, single-center study of pralatrexate with vitamin B12 and folic acid supplementation in patientswith relapsed or refractory NHL and Hodgkin’s disease.  This study is currently focused on exploringalternate dosing and administration schedules in patients with B-cell lymphomato further evaluate pralatrexate’s

 

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potential clinicalutility in this setting.

 

In addition to our ongoing NSCLC and bladder cancerstudies, we are evaluating the potential future development of pralatrexate forother solid tumor indications, including Stage IV breast cancer and StageIII/IV head and neck cancer, among others. There can be no assurances that we will pursue the development ofpralatrexate for one or more of these indications or that such developmentefforts will be ultimately successful.

 

The FDA has awarded orphan drug status to pralatrexatefor the treatment of patients with T-cell lymphoma, follicular lymphoma anddiffuse large B-cell lymphoma. Under the U.S. Orphan Drug Act, if we are thefirst company to receive FDA approval for pralatrexate for the designatedorphan drug indication, we will obtain seven years of marketing exclusivityduring which the FDA may not approve another company’s application forpralatrexate for the same orphan indication. Orphan drug exclusivity would notprevent FDA approval of a different drug for the orphan indication or the same drugfor a different indication. The FDA has also awarded fast track designation topralatrexate for the treatment of patients with T-cell lymphoma. The FDA’s fasttrack program is designed to facilitate the development and expedite the reviewof new drugs that are intended to treat serious or life-threatening conditionsand that demonstrate the potential to address unmet medical needs.

 

The European Medicines Agency, or EMEA, has grantedOrphan Medicinal Product Designation to pralatrexate for the treatment of PTCLand non-papillary TCC of the urinary bladder. The EMEA Orphan Medicinal ProductDesignation is intended to promote the development of drugs that may providesignificant benefit to patients suffering from rare diseases identified as life-threateningor very serious. Under EMEA guidelines, Orphan Medicinal Product Designationprovides ten years of potential market exclusivity once the product candidateis approved for marketing for the designated indication in the European Union.

 

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

 

**RH1**

 

**RH1** is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, also known as NAD(P)Hquinone oxidoreductase.  In June 2009,we discontinued the RH1 development program. We are currently seeking to sell or license our rights to RH1, althoughthere can be no assurance that we will successfully complete a transaction orreceive any material consideration in connection therewith.

** **

**Resultsof Operations**

 

We are a developmentstage company. Since our inception in 1992, we have not generated any revenuefrom product sales and have experienced significant net losses and negativecash flows from operations. We have incurred these losses principally fromcosts incurred in our research and development programs, clinical manufacturingand from our marketing, general and administrative expenses. Our ability togenerate revenue and achieve profitability is dependent on our ability, aloneor with partners, to successfully complete the development of pralatrexate,conduct clinical trials, obtain the necessary regulatory approvals, andmanufacture and market pralatrexate. The timing and costs to complete thesuccessful development of pralatrexate is highly uncertain, and thereforedifficult to estimate. The lengthy process of seeking regulatory approvals forpralatrexate, and the subsequent compliance with applicable regulations,require the expenditure of substantial resources. Clinical developmenttimelines, likelihood of success and total costs vary widely and are impactedby a variety of risks and uncertainties, including those discussed in the “RiskFactors” section of Part II, Item 1A below. Because of these risksand uncertainties, we cannot predict when or whether we will successfullycomplete the development of pralatrexate or the ultimate costs of such efforts.Due to these same factors, we cannot be certain when, or if, we will generateany revenue or net cash inflow from pralatrexate.  We expect to continue incurring net lossesand negative cash flows for the foreseeable future.  Although the size and timing of our futurenet losses are subject to significant uncertainty, we expect them to increaseover the next several years as we continue to fund our research and developmentprograms and prepare for the potential commercialization of pralatrexate forthe treatment of patients with relapsed or refractory PTCL, if it is approvedfor

 

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marketing.

 

We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involvingpralatrexate. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, if the FDA approves our NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL, weexpect to incur significant costs relating to the potential commercializationof pralatrexate, including costs related to the development of our sales andmarketing, medical affairs and manufacturing operations.  Therefore, we will need to raise additionalcapital to support our future operations, including the potentialcommercialization of pralatrexate if approved for marketing.  Our actual capital requirements will dependon many factors, including those discussed under the “Liquidity andCapital Resources” section below.

 

***Comparisonof three and six months ended June 30, 2009 and 2008***

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                   |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development              |       | $                                               | 7,170,215  |                                          | $          | 5,403,924 |   | $ | 12,875,317 |   | $ | 11,377,536 |   |
| Clinical  manufacturing                |       | 1,606,163                                       |       | 1,485,052                                     |       | 4,261,435 |   | 3,071,610 |   |
| Marketing,  general and administrative |       | 8,036,594                                       |       | 5,438,764                                     |       | 14,999,244 |   | 10,450,128 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Total operating  expenses              |       | $                                               | 16,812,972 |                                          | $          | 12,327,740 |   | $ | 32,135,996 |   | $ | 24,899,274 |   |

 

*Researchand Development.* Researchand development expenses include the costs of certain personnel, basicresearch, preclinical studies, clinical trials, regulatory affairs, medicalaffairs, biostatistical data analysis and licensing fees for our productcandidates.

 

Research and developmentexpenses for the three months ended June 30, 2009 and 2008 were $7.2million and $5.4 million, respectively. The $1.8 million increase in research and development expenses in thethree months ended June 30, 2009 as compared to the same period in 2008was primarily due to the following:

 

·                  a $1.5 million increase in licensing costs for pralatrexate, as $1.5million of milestone payments under the license agreement for pralatrexatebecame due upon FDA acceptance of our NDA for review in May 2009, with nocorresponding amount in the same period in 2008;

 

·                  a $675,000 increase in consulting and professional fees, primarilyrelated to the preparation and filing of our NDA for pralatrexate; and

 

·                  a $617,000 increase related to key personnel changes and related travelcosts, mainly attributable to additional headcount and increases incompensation costs year over year.

 

Thisincrease was partially offset by a $1.1 million decrease in clinical trialcosts involving pralatrexate, including decreased costs for PROPEL, whichcompleted patient enrollment in April 2008, and a $284,000 decrease inpreclinical studies, primarily related to pralatrexate.

 

Research and developmentexpenses for the six months ended June 30, 2009 and 2008 were $12.9million and $11.4 million, respectively. The $1.5 million increase in research and development expenses in thesix months ended June 30, 2009 as compared to the same period in 2008 wasprimarily due to the following:

 

·                  a $1.5 million increase in licensing costs for pralatrexate, as $1.5million of milestone payments under the license agreement for pralatrexatebecame due upon FDA acceptance of our NDA for review in May 2009, with nocorresponding amount in the same period in 2008;

 

·                  a $1.1 million increase related to key personnel changes and relatedtravel costs, mainly attributable to additional headcount and increases incompensation costs year over year;

 

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·                  a $515,000 increase in consulting and professionalfees, primarily related to the preparation and filing of our NDA forpralatrexate; and

 

·      a$373,000 increase in non-cash stock-based compensation expense, as discussed inmore detail below.

 

Thisincrease was partially offset by a $1.8 million decrease in clinical trialcosts involving pralatrexate, including decreased costs for PROPEL, whichcompleted patient enrollment in April 2008, and a $416,000 decrease inpreclinical studies, primarily related to pralatrexate.

 

For the second half of 2009, we expect our researchand development expenses to increase relative to the amount recorded for thesix months ended June 30, 2009 due to the following:

 

·      $5.8million of potential milestone payments under the license agreement forpralatrexate that will become due if the FDA approves pralatrexate formarketing in the United States in 2009;

 

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

 

·      an increasein non-cash stock-based compensation expense related to grants for newemployees and two full quarters of expense related to our annual grants toexisting employees that occurred at the end of February 2009, as discussedin more detail below.

 

*ClinicalManufacturing.* Clinicalmanufacturing expenses include the costs of certain personnel, third-partymanufacturing costs for development of drug materials for use in clinicaltrials and preclinical studies, and costs associated with pre-commercialscale-up of manufacturing to support anticipated regulatory and potentialcommercial requirements.

 

Clinical manufacturingexpenses for the three months ended June 30, 2009 and 2008 were $1.6million and $1.5 million, respectively. The $121,000 increase in clinical manufacturing expenses in the threemonths ended June 30, 2009 as compared to the same period in 2008 wasprimarily due to third-party manufacturing costs for clinical trial materialand pre-commercial scale-up activities for pralatrexate.

 

Clinical manufacturingexpenses for the six months ended June 30, 2009 and 2008 were $4.3 millionand $3.1 million, respectively.  The $1.2million increase in clinical manufacturing expenses in the six months ended June 30,2009 as compared to the same period in 2008 was primarily due to the following:

 

·      an $784,000 increase in third-partymanufacturing costs for clinical trial material and pre-commercial scale-upactivities for pralatrexate; and

 

·      a $342,000increase in consulting expenses, primarily related to the preparation andfiling of our NDA for pralatrexate.

 

For the second half of2009, we expect our clinical manufacturing expenses to increase relative to theamount recorded for the six months ended June 30, 2009 due to thefollowing:

 

·      anincrease in third-party manufacturing costs for pralatrexate to support ongoingand planned clinical trials and pre-commercial scale-up;

 

·      anincrease in personnel costs primarily resulting from additional headcount; and

 

·      an increasein non-cash stock-based compensation expense related to grants for newemployees and two full quarters of expense related to our annual grants toexisting employees which occurred at the end of February 2009.

 

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

 

Marketing, general andadministrative expenses for the three months ended June 30, 2009 and 2008were $8.0 million and $5.4 million, respectively.  The $2.6 million increase in marketing,general and administrative expenses in the three months ended June 30,2009 as compared to the same period in 2008 was primarily due to the following:

 

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·                  a $1.5 million increase related tokey personnel changes and related travel and facilities costs, mainlyattributable to additional headcount and increases in compensation costs yearover year;

 

·                  a $930,000 increase related topre-commercial planning activities for pralatrexate; and

 

·                  a $300,000 increase in non-cashstock-based compensation expense, as discussed in more detail below.

 

Marketing, general andadministrative expenses for the six months ended June 30, 2009 and 2008were $15.0 million and $10.5 million, respectively.  The $4.5 million increase in marketing,general and administrative expenses in the six months ended June 30, 2009as compared to the same period in 2008 was primarily due to the following:

 

·                  a $2.2 million increase related tokey personnel changes and related travel and facilities costs, mainlyattributable to additional headcount and increases in compensation costs yearover year;

 

·                  a $2.0 million increase related topre-commercial planning activities for pralatrexate; and

 

·                  a $370,000 increase in non-cashstock-based compensation expense, as discussed in more detail below.

 

For the second half of 2009, we expect our marketing,general and administrative expenses to increase relative to the amount recordedfor the six months ended June 30, 2009 due to the following:

 

·                  an increase in costs relating topre-commercial planning activities for pralatrexate;

 

·                  an increase in personnel costs,primarily resulting from additional headcount related to preparation for thepotential commercial launch of pralatrexate, if it is approved for marketing;and

 

·                  an increase in non-cash stock-basedcompensation expense related to grants for new employees and two full quartersof expense related to our annual equity grants to existing employees thatoccurred at the end of February 2009, as discussed in more detail below.

 

*Stock-basedCompensation Expense. *Stock-basedcompensation expense for the three and six months ended June 30, 2009 and2008 has been recognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                              | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Research and  development               |       | $                                                     | 847,029    |                                          | $          | 661,830 |   | $ | 1,711,443 |   | $ | 1,337,617 |   |
| Clinical  manufacturing                 |       | 100,028                                               |       | 103,782                                       |       | 208,326 |   | 207,012 |   |
| Marketing,  general and administrative  |       | 1,522,524                                             |       | 1,223,536                                     |       | 2,927,967 |   | 2,559,030 |   |
| Total  stock-based compensation expense |       | $                                                     | 2,469,581  |                                          | $          | 1,989,148 |   | $ | 4,847,736 |   | $ | 4,103,659 |   |

 

Of the $2.5 million ofstock-based compensation recognized in the three months ended June 30,2009, $2.3 million was related to our stock option plans, $175,000 related torestricted stock and restricted stock units and $22,000 was related to ouremployee stock purchase plan.  The $2.0million of stock-based compensation recognized in the three months ended June 30,2008 was primarily related to our stock option plans. The $480,000 increase instock-based compensation expense in the three months ended June 30, 2009as compared to the same period in 2008 was primarily due to an increase in thenumber of options granted to new employees and to existing employees pursuantto our annual grants that occurred in February 2009.

 

Of the $4.8 million ofstock-based compensation recognized in the six months ended June 30, 2009,$4.5 million was related to our stock option plans, $308,000 related torestricted stock and restricted stock units and $42,000 was related to ouremployee stock purchase plan.  Of the$4.1 million of stock-based compensation recognized in the six months ended June 30,2008, $3.8 million was related to our stock option plans, $241,000 relatedto restricted stock and $25,000 was related to our employee stock purchaseplan. The $744,000 increase in stock-based compensation expense in the sixmonths ended June 30, 2009 as compared to the same period in 2008 wasprimarily due to an increase in the number of options granted to new employeesand to existing employees pursuant to our annual grants that occurred in February 2009.

 

As of June 30, 2009,the unrecorded stock-based compensation balance related to stock option awardswas $10.5 million and will be recognized over an estimated weighted-averageamortization period of 1.4 years. As of June 30, 2009, the unrecorded

 

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stock-based compensationbalance related to restricted stock unit awards was $801,000 and will berecognized over an estimated weighted-average amortization period of 1.7 years.As of June 30, 2009, the unrecorded stock-based compensation balancerelated to restricted stock awards was $193,000 and will be recognized over anestimated weighted-average amortization period of 1.3 years.

 

*Interestand Other Income, Net*.  Interest and other income, netfor the three months ended June 30, 2009 and 2008 was $6,000 and $504,000,respectively.  The $498,000 decrease ininterest and other income, net in the three months ended June 30, 2009 ascompared to the same period in 2008 was primarily due to lower yields on ourcash, cash equivalents and investments in marketable securities; in addition toa $149,000 loss during the three months ended June 30, 2009 on thedisposal of certain software that was no longer in use. Interest and otherincome, net for the six months ended June 30, 2009 and 2008 was $179,000and $1.1 million, respectively.  The$890,000 decrease in interest and other income, net in the six months ended June 30,2009 as compared to the same period in 2008 was primarily due to lower yieldson our cash, cash equivalents and investments in marketable securities, arealized loss of approximately $157,000 on the sale of certain of ourinvestments in marketable securities during the three months ended March 31,2009 and a $149,000 loss on the disposal of certain software that was no longerin use during the three months ended June 30, 2009.

 

**Liquidityand Capital Resources**

 

As of June 30, 2009,we had $105.2 million in cash, cash equivalents, and investments in marketablesecurities. Of this amount, $95.5 million was held in money market funds and$9.6 million was primarily held in high-grade corporate notes with a weightedaverage duration of the remaining time to maturity of three months.  Until required for use in our business, weinvest our cash reserves in bank deposits, money market funds, high-gradecorporate notes and U.S. government instruments in accordance with ourinvestment policy.  We did not hold anyderivative instruments, foreign exchange contracts, asset backed securities,mortgage backed securities, auction rate securities, or securities of issuersin bankruptcy in our investment portfolio as of June 30, 2009.  We have the ability and intent to hold ourremaining investments in marketable securities as of June 30, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

Since our inception, we have financed our operationsprimarily through public and private sales of our equity securities, which haveresulted in net proceeds to us of $376.7 million through June 30,2009.  On April 3, 2009, wecompleted an underwritten public offering of 7,750,000 shares of our commonstock at the public offering price of $6.30 per share, or the April 2009Financing. We received net proceeds from the April 2009 Financing of $46.9million, after deducting underwriting commissions and estimated offeringexpenses.  We have also generated approximately $23.7 million of netinterest income since our inception from investing the net proceeds of thesepublic and private sales of our equity securities.

 

We have used $264.0million of cash for operating activities from our inception through June 30,2009.  Net cash used to fund ouroperating activities for the six months ended June 30, 2009 and 2008 was$25.6 million and $19.5 million, respectively.

 

For fiscal year 2009, wecurrently anticipate that net cash use in operating activities will approximate$65 million to $70 million.  Our 2009financial guidance includes the phase-in of key investments associated with thedevelopment of our sales and marketing, medical affairs and manufacturingoperations in preparation for the potential commercialization of pralatrexate,as well as $5.8 million of milestone payments under our license agreement forpralatrexate payable upon FDA approval of our NDA.

 

Net cash provided frominvesting activities for the six months ended June 30, 2009 was $42.6million and consisted primarily of the proceeds from maturities and sales ofinvestments in marketable securities, partially offset by $554,000 for theacquisition of property and equipment. Net cash used in investing activities for the six months ended June 30,2008 was $18.1 million and consisted primarily of the purchase of investmentsin marketable securities, partially offset by the proceeds from maturities ofinvestments in marketable securities.

 

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Net cash provided byfinancing activities for the six months ended June 30, 2009 was $48.3million and consisted primarily of the $46.9 million of net proceeds from the April 2009Financing and $1.3 million of proceeds from the issuance of common stockassociated with stock options exercised by our employees and sales of stockunder our employee stock purchase plan. Net cash provided by financing activities for the six months ended June 30,2008 was $68.4 million and consisted primarily of the $65.2 million of netproceeds from the sale of 12,420,000 shares of our common stock in May 2008in an underwritten public offering at a price of $5.64 per share and $3.2million of proceeds from the issuance of common stock associated with stockoptions exercised by our employees and sales of stock under our employee stockpurchase plan.

 

Based upon the current status of our productdevelopment and commercialization plans, we believe that our cash, cashequivalents, and investments in marketable securities as of June 30, 2009should be adequate to support our operations through at least the next 12months, although there can be no assurance that this can, in fact, beaccomplished. Our forecast of the period of time through which our financialresources will be adequate to support our operations is a forward-lookingstatement that involves risks and uncertainties, and actual results could varymaterially.

 

We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involvingpralatrexate. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, if the FDA approves our NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL, weexpect to incur significant costs relating to the potential commercializationof pralatrexate, including costs related to the development of our sales andmarketing, medical affairs and manufacturing operations.  Therefore, we will need to raise additionalcapital to support our future operations. Our actual capital requirements will depend on many factors, including:

 

·       the timing and outcome ofour NDA for pralatrexate for the treatment of patients with relapsed orrefractory PTCL;

 

·       the timing and costsassociated with developing our sales and marketing, medical affairs andmanufacturing operations for the potential commercialization of pralatrexate,if it is approved for marketing;

 

·       the timing and costsassociated with manufacturing clinical and commercial supplies of pralatrexate;

 

·       the timing and amount ofrevenues generated by our business activities, if any;

 

·       the timing and costsassociated with conducting preclinical and clinical development ofpralatrexate, as well as our evaluation of, and decisions with respect to,additional therapeutic indications for which we may develop pralatrexate;

 

·       the timing, costs andpotential revenue associated with any co-promotion or other partneringarrangements entered into to commercialize pralatrexate, if it is approved formarketing; and

 

·       our evaluation of, anddecisions with respect to, potential in-licensing or product acquisitionopportunities or other strategic alternatives.

 

We may seek to obtainthis additional capital through equity or debt financings, arrangements withcorporate partners, or from other sources. Such financings or arrangements, ifsuccessfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that additional financing will be available whenneeded, or that, if available, we will obtain such financing on terms that arefavorable to our stockholders or us. In particular, the current instability inthe global financial markets and lack of liquidity in the credit and capitalmarkets may adversely affect our ability to secure adequate capital to supportour future operations.  In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wewould otherwise seek to develop or commercialize ourselves on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

 

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**Obligationsand Commitments**

 

*Royaltyand License Fee Commitments for Pralatrexate*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related topralatrexate and its uses. Under the terms of the agreement, we paid anup-front license fee of $2.0 million upon execution of the agreement and arealso required to make certain additional cash payments based upon theachievement of certain clinical development or regulatory milestones or thepassage of certain time periods. To date, we have made aggregate milestonepayments of $2.5 million based on the passage of time. Additionally, in May 2009,we made a milestone payment of $1.5 million based on the FDA accepting our NDAfor review. In the future, we could make a milestone payment of $500,000 uponthe earlier of achievement of a clinical development milestone or the passageof certain time periods, or the Clinical Milestone, and up to $8.8 million uponachievement of certain regulatory milestones, or the Regulatory Milestones,including regulatory approval to market pralatrexate in the United States orEurope. The last scheduled payment towards the Clinical Milestone of $500,000is currently due on the earlier of FDA approval to market pralatrexate or December 23,2009.  If we obtain FDA approval tomarket pralatrexate, we will also be obligated to make an additional milestonepayment of $5.3 million, which represents a portion of the RegulatoryMilestones. The up-front license fee and all milestone payments under the agreementhave been or will be recorded to research and development expense whenincurred. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors a royaltybased on a percentage of net revenues arising from sales of the product orsublicense revenues arising from sublicensing the product, if and when suchsales or sublicenses occur.

 

**CriticalAccounting Policies**

 

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

 

**RecentAccounting Pronouncements**

 

For a description ofrecent accounting pronouncements, please see Note 9 of the unaudited June 30,2009 financial statements included herein.

 

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

** **

Our financial instruments as of June 30, 2009consisted of cash, cash equivalents, investments in marketable securities, andaccounts payable.  All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.  We invest inmarketable securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal, maintain proper liquidity to meet operatingneeds and maximize yields.  Ourinvestment policy specifies credit quality standards for our investments andlimits the amount of credit exposure to any single issue, issuer or type ofinvestment.  The weighted averageduration of the remaining time to maturity for our portfolio of investments inmarketable securities as of June 30, 2009 was approximately threemonths.  As of June 30, 2009, ourinvestments in marketable securities of $9.6 million were all classifiedas held-to-maturity and were held in a variety of interest-bearing instruments,consisting mainly of high-grade corporate notes. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of June 30, 2009.  The value of our investments in marketablesecurities may be adversely affected by rating downgrades or bankruptciesaffecting the issuers of such securities, whether caused by instability in theglobal financial markets, lack of liquidity in the credit and capital markets,or other factors.  In response to therecent instability in the global financial markets, we reviewed our investmentsin marketable securities and sold certain investments that we deemed to haveincreased risk during the three months ended March 31, 2009.  We have the ability and intent to hold ourremaining investments in marketable securities as of June 30, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

** **

**Disclosure Controls and Procedures**

 

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

 

**NoChanges in Internal Control over Financial Reporting**

 

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

 

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**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

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

** **

**ITEM 1A.  RISKFACTORS**

** **

*Ourbusiness faces significant risks. These risks include those described below andmay include additional risks of which we are not currently aware or which wecurrently do not believe are material. If any of the events or circumstancesdescribed in the following risk factors actually occurs, they may materiallyharm our business, financial condition, operating results and cash flow. As aresult, the market price of our common stock could decline. Additional risksand uncertainties that are not yet identified or that we think are immaterialmay also materially harm our business, operating results and financialcondition. **Stockholders andpotential investors in shares of our common stock should carefully consider thefollowing risk factors, which hereby update those risks contained in the “RiskFactors” section of our Annual Report on Form 10-K  for the year ended December 31, 2008, asamended, in addition to other information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of the Company.  We are relyingupon the safe harbor for all forward-looking statements in this report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this report. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors that have been substantivelychanged from those set forth in our Annual Report on Form 10-K for theperiod ended December 31, 2008, as amended, have been marked with an asteriskimmediately following the heading of such risk factor.*

 

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

** **

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations. To date, wehave financed our operations primarily through the public and private sale ofsecurities.  For the six months ended June 30,2009, we had a net loss of $32.0 million. As of June 30, 2009, we had accumulated a deficit during ourdevelopment stage of $331.6 million. We have incurred these losses principally from costs incurred in ourresearch and development programs, clinical manufacturing and from ourmarketing, general and administrative expenses. We expect to continue incurringnet losses for the foreseeable future. Our ability to generate revenue andachieve profitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of pralatrexate, conduct clinical trials,obtain the necessary regulatory approvals, and manufacture and marketpralatrexate. We may never generate revenue from product sales or becomeprofitable. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials forpralatrexate, and in preparing for the potential commercial launch ofpralatrexate. We may not be able to continue as a going concern if we areunable to generate meaningful amounts of revenue to support our operations orcannot otherwise raise the necessary funds to support our operations.

 

**Our near-term prospects are dependent onpralatrexate, our lead product candidate.  If we are unable tosuccessfully develop and obtain regulatory approval for pralatrexate for thetreatment of patients with relapsed or refractory PTCL, our ability to generaterevenue will be significantly delayed.** *

 

In February 2009, weannounced the results of our pivotal Phase 2 PROPEL trial of pralatrexate in patientswith relapsed or refractory peripheral T-cell lymphoma, or PTCL. Based on theresults of the trial, we submitted a New Drug Application, or NDA, to the U.S.Food and Drug Administration, or FDA, for pralatrexate for the treatment ofpatients with relapsed or refractory PTCL in March 2009.  In May 2009, the FDA accepted the NDAfor priority review and established a Prescription Drug User Fee Act date of September 24,2009 for a decision regarding approval of the NDA. We cannot assure you thatthe design of, or data collected from, the PROPEL trial will be adequate todemonstrate the safety and efficacy of pralatrexate for the treatment ofpatients with relapsed or refractory PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. The FDA may disagree with ourinterpretation of the results of the trial and determine that the data are notsufficient to support approval. If we fail to obtain

 

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regulatory approval forpralatrexate, we will be unable to market and sell pralatrexate and thereforemay never generate meaningful amounts of revenue or become profitable.

 

**Substantially all of our effortsand expenditures over the next few years will be devoted to pralatrexate as wediscontinued the RH1 development program in June 2009.  Accordingly, our future prospects aredependent on the successful development, regulatory approval andcommercialization of pralatrexate for the treatment of patients with relapsedor refractory PTCL. Even if we receive regulatory approval, pralatrexate is notexpected to be commercially available for this or any other indication until atleast September 2009. Further, certain of the indications that we arepursuing for pralatrexate have relatively low incidence rates, which may makeit difficult for us to enroll a sufficient number of patients in our clinicaltrials on a timely basis, or at all, and may limit the revenue potential ofpralatrexate. If we are unable to successfully develop, obtain regulatoryapproval for and commercialize pralatrexate for the treatment of patients withrelapsed or refractory PTCL, our ability to generate revenue from product saleswill be significantly delayed and our stock price will likely decline.**

** **

**We cannot predictwhen or if we will obtain regulatory approval to commercialize pralatrexate.**

** **

Pralatrexate is in theclinical stage of development and has not been approved for marketing in theUnited States or any other country. A pharmaceutical product cannot be marketedin the United States or most other countries until it has completed a rigorousand extensive regulatory review and approval process. If we fail to obtainregulatory approval to market pralatrexate, we will be unable to sellpralatrexate and generate revenue, which would jeopardize our ability tocontinue operating our business. Satisfaction of regulatory requirements typicallytakes many years, is dependent upon the type, complexity and novelty of theproduct and requires the expenditure of substantial resources. Of particularsignificance are the requirements covering research and development, testing,manufacturing, quality control, labeling and promotion of drugs for human use.We may not obtain regulatory approval for pralatrexate, or we may not obtainregulatory review of pralatrexate in a timely manner.

 

**While we havenegotiated a special protocol assessment with the FDA relating to our PROPELtrial, this agreement does not guarantee any particular outcome from regulatoryreview of the trial or the product, including any regulatory approval.**

** **

The protocol for thePROPEL trial was reviewed by the FDA under its special protocol assessment, orSPA process, which allows for FDA evaluation of a clinical trial protocolintended to form the primary basis of an efficacy claim in support of a newdrug application, and provides an agreement that the study design, including trialsize, clinical endpoints and/or data analyses are acceptable to the FDA.However, the SPA agreement is not a guarantee of approval, and we cannot becertain that the design of, or data collected from, the PROPEL trial will beadequate to demonstrate the safety and efficacy of pralatrexate for thetreatment of patients with relapsed or refractory PTCL, or otherwise besufficient to support FDA or any foreign regulatory approval.  In addition, the response rate, duration ofresponse and safety profile required to support FDA approval are not specifiedin the PROPEL trial protocol and will be subject to FDA review. Further, theSPA agreement is not binding on the FDA if public health concerns unrecognizedat the time the SPA agreement was entered into become evident, other newscientific concerns regarding product safety or efficacy arise, or if we failto comply with the agreed upon trial protocols. In addition, the SPA agreementmay be changed by us or the FDA on written agreement of both parties, and the FDAretains significant latitude and discretion in interpreting the terms of theSPA agreement and the data and results from the PROPEL trial. As a result, wedo not know how the FDA will interpret the parties’ respective commitmentsunder the SPA agreement, how it will interpret the data and results from thePROPEL trial, or whether pralatrexate will receive any regulatory approvals asa result of the SPA agreement or the PROPEL trial. Therefore, despite thepotential benefits of the SPA agreement, significant uncertainty remainsregarding the clinical development and regulatory approval process forpralatrexate for the treatment of patients with relapsed or refractory PTCL.

 

**Even ifpralatrexate meets safety and efficacy endpoints in clinical trials, regulatoryauthorities may not approve pralatrexate, or we may face post-approval problemsthat require withdrawal of pralatrexate from the market.**

** **

The research, testing,manufacturing, labeling, approval, selling, marketing and distribution of drugproducts are subject to extensive regulation by the FDA and other regulatoryauthorities in the United States and other countries, which regulations differfrom country to country.  We will not beable to commercialize pralatrexate until we have obtained regulatory approval.We have limited experience in filing and pursuing applications necessary togain regulatory approvals, which may place us at risk of delays, overspendingand human resources inefficiencies.

 

Pralatrexate may not beapproved even if it achieves its endpoints in clinical trials. Regulatoryagencies, including the FDA, or their advisors, may disagree with ourinterpretations of data from preclinical studies and clinical trials. The FDAhas

 

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substantial discretion inthe approval process, and when or whether regulatory approval will be obtainedfor any drug we develop. For example, even though we established an SPAagreement with the FDA for our PROPEL trial, there is no guarantee that thedata generated from the PROPEL trial will be adequate to support FDA approval.Regulatory agencies also may approve a product candidate for fewer conditionsthan requested or may grant approval subject to the performance ofpost-marketing studies or risk evaluation and mitigation strategies for aproduct candidate. In addition, regulatory agencies may not approve thelabeling claims that are necessary or desirable for the successfulcommercialization of pralatrexate.

 

Even if we receiveregulatory approval, pralatrexate may later produce adverse events that limitsor prevents its widespread use or that force us to withdraw pralatrexate fromthe market. In addition, a marketed product continues to be subject to strictregulation after approval and may be required to undergo post-approval studies.Any unforeseen problems with an approved product or any violation ofregulations could result in restrictions on the product, including itswithdrawal from the market. Any delay in or failure to receive or maintainregulatory approval for pralatrexate could harm our business and prevent usfrom ever generating meaningful revenues or achieving profitability.

 

**If pralatrexatefails to meet safety and efficacy endpoints in clinical trials, it will notreceive regulatory approval and we will be unable to market pralatrexate. ***

** **

Pralatrexate may notprove to be safe and efficacious in clinical trials and may not meet all of theapplicable regulatory requirements needed to receive regulatory approval. Theclinical development and regulatory approval process is expensive and takesmany years. Failure can occur at any stage of development, and the timing ofany regulatory approval cannot be accurately predicted. In addition, failure tocomply with the FDA and other applicable U.S. and foreign regulatoryrequirements applicable to clinical trials may subject us to administrative orjudicially imposed sanctions.

 

As part of the regulatoryprocess, we must conduct clinical trials for pralatrexate and any other productcandidate to demonstrate safety and efficacy to the satisfaction of the FDA andother regulatory authorities abroad. The number and design of clinical trialsthat will be required varies depending on the product candidate, the conditionbeing evaluated, the trial results and regulations applicable to any particularproduct candidate. The design of our pralatrexate clinical trials is based onmany assumptions about the expected effect of pralatrexate, and if thoseassumptions prove incorrect, the clinical trials may not demonstrate the safetyor efficacy of pralatrexate. Preliminary results may not be confirmed upon fullanalysis of the detailed results of a trial, and prior clinical trial programdesigns and results may not be predictive of future clinical trial designs orresults. Product candidates in later stage clinical trials may fail to show thedesired safety and efficacy despite having progressed through initial clinicaltrials with acceptable endpoints. For example, we terminated the development ofEFAPROXYN, one of our former product candidates, when it failed to demonstratestatistically significant improvement in overall survival in the targetedpatients in a Phase 3 clinical trial. If pralatrexate fails to showclinically significant benefits, it will not be approved for marketing.

 

Even if we achievepositive interim results in clinical trials, these results do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. Data obtained from preclinical and clinicalactivities are susceptible to varying interpretations that could delay, limitor prevent regulatory clearances, and the FDA can request that we conductadditional clinical trials. A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter promising results in earlier trials. In addition, negative orinconclusive results or adverse medical events during a clinical trial couldcause a clinical trial to be repeated or terminated. Also, failure to constructclinical trial protocols to screen patients for risk profile factors relevantto the trial for purposes of segregating patients into the patient populationstreated with the drug being tested and the control group could result in eithergroup experiencing a disproportionate number of adverse events and could causea clinical trial to be repeated or terminated. If we have to conduct additionalclinical trials for pralatrexate, it would significantly increase our expensesand delay potential marketing of pralatrexate.

 

**Even if we receiveregulatory approval for pralatrexate, we will be subject to ongoing regulatoryobligations and review.**

** **

Following any regulatoryapproval of pralatrexate, we will be subject to continuing regulatoryobligations such as safety reporting requirements and additional post-marketingobligations, including regulatory oversight of the promotion and marketing ofpralatrexate. In addition, we or our third-party manufacturers will be requiredto adhere to regulations setting forth the FDA’s current Good ManufacturingPractices, or cGMP. These regulations cover all aspects of the manufacturing,storage, testing, quality control and record keeping relating to pralatrexate.Furthermore, we or our third-party manufacturers must pass a pre-approvalinspection of manufacturing facilities by the FDA and foreign authoritiesbefore obtaining marketing approval and will be subject to periodic inspectionby these regulatory authorities to ensure strict compliance with

 

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cGMP or other applicablegovernment regulations and corresponding foreign standards. We do not havecontrol over a third-party manufacturer’s compliance with these regulations andstandards. Such inspections may result in compliance issues that could preventor delay marketing approval, or require the expenditure of substantialfinancial or other resources to address. If we or our third-party manufacturersfail to comply with applicable regulatory requirements, we may be subject tofines, suspension or withdrawal of regulatory approvals, product recalls,seizure of products, operating restrictions and criminal prosecution.

 

**We will need toraise additional capital to support our future operations.  If we fail to obtain the capital necessary tofund our operations, we will be unable to successfully develop or commercializepralatrexate. ***

** **

Based upon the currentstatus of our product development plans, we believe that our cash, cashequivalents, and investments in marketable securities as of June 30, 2009,should be adequate to support our operations through at least the next 12months, although there can be no assurance that this can, in fact, beaccomplished.  We anticipate continuingour current development programs and/or beginning other long-term developmentprojects involving pralatrexate. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful.  In addition, if the FDA approves our NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL, weexpect to incur significant costs relating to the potential commercializationof pralatrexate, including costs related to the development of our sales andmarketing, medical affairs and manufacturing operations.  Therefore, we will need to raise additionalcapital to support our future operations. Our actual capital requirements will depend on many factors, including:

 
| · |   | the timing and  outcome of our NDA for pralatrexate for the treatment of patients with  relapsed or refractory PTCL;                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  costs associated with developing our sales and marketing, medical affairs and  manufacturing operations for the potential commercialization of pralatrexate,  if it is approved for marketing;                                  |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  costs associated with manufacturing clinical and commercial supplies of  pralatrexate;                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  amount of revenues generated by our business activities, if any;                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing and  costs associated with conducting preclinical and clinical development of  pralatrexate, as well as our evaluation of, and decisions with respect to,  additional therapeutic indications for which we may develop pralatrexate; |
|   |   |                                                                                                                                                                                                                                            |
| · |   | the timing,  costs and potential revenue associated with any co-promotion or other  partnering arrangements entered into to commercialize pralatrexate, if it is  approved for marketing; and                                                   |
|   |   |                                                                                                                                                                                                                                            |
| · |   | our evaluation of, and  decisions with respect to, potential in-licensing or product acquisition  opportunities or other strategic alternatives.                                                                                                |

 

We may seek to obtainthis additional capital through equity or debt financings, arrangements withcorporate partners, or from other sources. Such financings or arrangements, ifsuccessfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that additional financing will be available whenneeded, or that, if available, we will obtain such financing on terms that arefavorable to our stockholders or us. In particular, the current instability inthe global financial markets and lack of liquidity in the credit and capitalmarkets may adversely affect our ability to secure adequate capital to supportour future operations.  In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wemight otherwise seek to develop or commercialize ourselves on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

** **

**If we are unableto develop adequate sales, marketing or distribution capabilities or enter intoagreements with third parties to perform some of these functions, we will notbe able to commercialize pralatrexate effectively. ***

 

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We have limitedexperience in sales, marketing and distribution.  If pralatrexate is approved for marketing, weintend to commercialize pralatrexate by building an oncology-focused U.S. salesand marketing organization.  To directlymarket and distribute pralatrexate, we must build a commercial organizationwith appropriate technical expertise and distribution capabilities. Although weare currently in the process of developing our sales, marketing anddistribution capabilities, we may not be able to establish these capabilitieson our own or enter into necessary or desirable arrangements with third partiesin a timely manner or on acceptable terms. Additionally, building sales, marketing and distribution capabilitiesmay be more expensive than we anticipate, requiring us to divert capital fromother intended purposes or preventing us from building our sales, marketing anddistribution capabilities to the desired levels.

 

We intend to enter intoco-promotion or out-licensing arrangements with other pharmaceutical orbiotechnology partners where necessary to reach foreign market segments thatare not reachable by a U.S.-based sales force or when deemed strategically andeconomically advisable. To the extent that we enter into co-promotion or otherlicensing arrangements, our product revenues are likely to be lower than if wedirectly marketed and sold pralatrexate, and some or all of the revenues wereceive will depend upon the efforts of third parties, which may not besuccessful.

 

**Acceptance ofpralatrexate in the marketplace is uncertain, and failure to achieve marketacceptance will limit our ability to generate revenue and become profitable. ***

** **

Even if pralatrexate isapproved for marketing, pralatrexate may not achieve market acceptance. Thedegree of market acceptance will depend upon a number of factors, including:

 
| · |   | the receipt of  timely regulatory approval for the uses that we are studying;                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                            |
| · |   | the establishment  and demonstration in the medical community of the safety and efficacy of  pralatrexate and its potential advantages over existing and newly developed  therapeutic products; |
|   |   |                                                                                                                                                                                            |
| · |   | ease of use of  pralatrexate;                                                                                                                                                                   |
|   |   |                                                                                                                                                                                            |
| · |   | reimbursement  and coverage policies of government and private payors such as Medicare,  Medicaid, insurance companies, health maintenance organizations and other  plan administrators; and    |
|   |   |                                                                                                                                                                                            |
| · |   | the scope and  effectiveness of our sales and marketing efforts.                                                                                                                                |

 

Physicians, patients,payors or the medical community in general may be unwilling to accept, utilizeor recommend the use of pralatrexate.  Ifpralatrexate fails to achieve market acceptance, we may be unable to generatemeaningful amounts of revenue or become profitable.

 

**The status ofreimbursement from third-party payors for newly approved health care drugs isuncertain and failure to obtain adequate coverage and reimbursement could limitour ability to generate revenue.**

** **

Our ability tosuccessfully commercialize pralatrexate will depend, in part, on the extent towhich coverage and reimbursement for pralatrexate will be available fromgovernment and health administration authorities, private health insurers,managed care programs, and other third-party payors.

 

Significant uncertaintyexists as to the reimbursement status of newly approved health care products.Third-party payors, including Medicare, are challenging the prices charged formedical products and services. Government and other third-party payorsincreasingly are attempting to contain health care costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing, in somecases, to provide coverage for uses of approved products for disease conditionsfor which the FDA has not granted labeling approval. Third-party insurancecoverage may not be available to patients for pralatrexate. If government andother third-party payors do not provide adequate coverage and reimbursementlevels for pralatrexate, pralatrexate’s market acceptance may be reduced.

 

**If we fail tocomply with healthcare fraud and abuse laws, we could face substantialpenalties and our business, operations and financial condition could beadversely affected*.***

 

As a biopharmaceuticalcompany, even though we do not and will not control referrals of health careservices or bill directly to Medicare, Medicaid or other third-party payors,certain federal and state healthcare laws and regulations pertaining to

 

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fraud and abuse will beapplicable 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 payors 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 prohibits 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 payor,  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 anumber of statutory exemptions and regulatory safe harbors protecting certaincommon activities from prosecution under the federal Anti-Kickback statute, theexemptions and safe harbors are drawn narrowly, and practices that involveremuneration intended to induce prescribing, purchases or recommendations maybe subject to scrutiny if they do not qualify for an exemption or safe harbor.Our practices may not in all cases meet all of the criteria for safe harborprotection from anti-kickback liability.

 

If our operations arefound to be in violation of any of the laws described above or any othergovernmental regulations that apply to us, we may be subject to penalties,including civil and criminal penalties, damages, fines and the curtailment orrestructuring of our operations. Any penalties, damages, fines, curtailment orrestructuring of our operations could adversely affect our ability to operateour business and our financial results. Although compliance programs canmitigate the risk of investigation and prosecution for violations of theselaws, the risks cannot be entirely eliminated. Any action against us forviolation of these laws, even if we successfully defend against it, could causeus to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustainingcompliance with all applicable federal and state fraud and abuse laws may becostly.

 

**If our competitorsdevelop and market products that are more effective than pralatrexate, ourcommercial opportunity will be reduced or eliminated.**

** **

Even if we obtain thenecessary regulatory approvals to market pralatrexate, our commercialopportunity will be reduced or eliminated if our competitors develop and marketproducts that are more effective, have fewer side effects or are less expensivethan pralatrexate. Our potential competitors include large, fully-integratedpharmaceutical companies and more established biotechnology companies, both ofwhich have significant resources and expertise in research and development,manufacturing, testing, obtaining regulatory approvals and marketing. Academicinstitutions, government agencies, and other public and private researchorganizations conduct research, seek patent protection and establishcollaborative arrangements for research, development, manufacturing andmarketing. It is possible that competitors will succeed in developingtechnologies that are more effective than those being developed by us or thatwould render our technology obsolete or noncompetitive.

 

**We do not havemanufacturing facilities or capabilities and are dependent on third parties tofulfill our manufacturing needs, which could result in the delay of clinicaltrials, regulatory approvals, product introductions and commercial sales. ***

 

We are dependent on thirdparties for the manufacture and storage of pralatrexate for clinical trialsand, if approved, for

 

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commercial sale. If weare unable to contract for a sufficient supply of pralatrexate on acceptable terms,or if we encounter delays or difficulties in the manufacturing process or ourrelationships with our manufacturers, we may not have sufficient product toconduct or complete our clinical trials or support commercial requirements forpralatrexate, if it is approved for marketing.

 

Pralatrexate iscytotoxic, which requires the manufacturers of pralatrexate to have specializedequipment and safety systems to handle such a substance. In addition, thestarting materials for pralatrexate require custom preparations, which requireus to manage an additional set of suppliers to obtain the needed supplies ofpralatrexate.

 

We have entered intoarrangements with one third-party manufacturer to produce pralatrexate bulkdrug substance and two third-party manufacturers to produce pralatrexateformulated drug product.  We believethese third-party manufacturers have the capability to meet our clinical trialand commercial requirements, if pralatrexate is approved for marketing in theUnited States.  In addition,  we are in the process of establishing supplyagreements for the commercial production of pralatrexate bulk drug substanceand formulated drug product.  However,given our current lack of formal supply agreements and the fact that in manycases our components are supplied by a single source, our third partymanufacturers may not be able to fulfill our potential commercial needs or meetour deadlines, or the components they supply to us may not meet ourspecifications and quality policies and procedures. If we need to find analternative supplier of pralatrexate or its components, we may not be able tocontract for those components on acceptable terms, if at all. Any such failureto supply or delay caused by such suppliers would have an adverse effect on ourability to continue clinical development of pralatrexate or commercializepralatrexate, if it is approved for marketing.

 

Even if we obtainapproval to market pralatrexate in one or more indications, our current orfuture manufacturers may be unable to accurately and reliably manufacturecommercial quantities of pralatrexate at reasonable costs, on a timely basisand in compliance with the FDA’s cGMP. If our current or future contractmanufacturers fail in any of these respects, our ability to timely complete ourclinical trials, obtain required regulatory approvals and successfullycommercialize pralatrexate may be materially and adversely affected. This riskmay be heightened with respect to pralatrexate as there are a limited number offill/finish manufacturers with the ability to handle cytotoxic products such aspralatrexate. Our reliance on contract manufacturers exposes us to additionalrisks, 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 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 factorscould result in the delay of clinical trials, regulatory submissions, requiredapprovals or commercialization of pralatrexate. They could also entail highercosts and result in our being unable to effectively commercialize pralatrexate.

 

**Budget constraintsmay force us to delay our efforts to develop pralatrexate for certain indicationsin favor of developing it for other indications, which may prevent us fromcommercializing pralatrexate for all desired**

 

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**indications asquickly as possible.**

** **

Because we have limitedresources, and because research and development is an expensive process, wemust regularly assess the most efficient allocation of our research anddevelopment budget. As a result, we may have to prioritize development ofpralatrexate for certain indications and may not be able to fully realize thevalue of pralatrexate for other indications in a timely manner, if at all.

 

**We may experiencedelays in our clinical trials that could adversely affect our financialposition and our commercial prospects.**

** **

We do not know when ourcurrent clinical trials will be completed, if at all. We also cannot accuratelypredict when other planned clinical trials will begin or be completed. Manyfactors affect patient enrollment, including the size of the patientpopulation, the proximity of patients to clinical sites, the eligibilitycriteria for the trial, competing clinical trials and new drugs approved forthe conditions we are investigating. Other companies are conducting clinicaltrials and have announced plans for future trials that are seeking or likely toseek patients with the same diseases as those we are studying. Competition forpatients in some cancer trials is particularly intense because of the limitednumber of leading specialist physicians and the geographic concentration ofmajor clinical centers.

 

As a result of thenumerous factors that can affect the pace of progress of clinical trials, ourtrials may take longer to enroll patients than we anticipate, if they can becompleted at all. Delays in patient enrollment in the trials may increase ourcosts and slow our product development and approval process. Our productdevelopment costs will also increase if we need to perform more or largerclinical trials than planned. If other companies’ product candidates showfavorable results, we may be required to conduct additional clinical trials toaddress changes in treatment regimens or for our products to be commerciallycompetitive. Any delays in completing our clinical trials will delay ourability to generate revenue from product sales, and we may have insufficientcapital resources to support our operations. Even if we do have sufficientcapital resources, our ability to become profitable will be delayed.

 

**We may be requiredto suspend, repeat or terminate our clinical trials if they are not conductedin accordance with regulatory requirements, the results are negative orinconclusive or the trials are not well designed.**

** **

Clinical trials must beconducted in accordance with the FDA’s current Good Clinical Practices or otherapplicable foreign government guidelines and are subject to oversight by theFDA, other foreign governmental agencies and Institutional Review Boards at themedical institutions where the clinical trials are conducted. In addition,clinical trials must be conducted with product candidates produced under cGMPand may require large numbers of test subjects. Clinical trials may besuspended by the FDA, other foreign governmental agencies, or us for variousreasons, 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 not appear to be more effective than current therapies;                                                                                      |
|   |   |                                                                                                                                                                    |
| · |   | the quality or  stability of the product candidate may fall below acceptable standards; or                                                                              |
|   |   |                                                                                                                                                                    |
| · |   | insufficient  quantities of the product candidate to complete the trials.                                                                                               |

 

In addition, changes inregulatory requirements and guidance may occur and we may need to amendclinical trial protocols to reflect these changes. Amendments may require us toresubmit our clinical trial protocols to Institutional Review Boards forreexamination, which may impact the costs, timing or successful completion of aclinical trial. Due to these and other factors, pralatrexate could take asignificantly longer time to gain regulatory approval than we expect or maynever gain approval, which could reduce or eliminate our revenue by delaying orterminating the potential commercialization of pralatrexate.

 

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**Reports of adverseevents or safety concerns involving pralatrexate or in related technologyfields or other companies’ clinical trials could delay or prevent us fromobtaining regulatory approval or negatively impact public perception ofpralatrexate.**

** **

Pralatrexate may produceserious adverse events. These adverse events could interrupt, delay or haltclinical trials of pralatrexate and could result in the FDA or other regulatoryauthorities denying approval of pralatrexate for any or all targetedindications. An independent data safety monitoring board, the FDA, otherregulatory authorities or we may suspend or terminate clinical trials at anytime. We cannot assure you that pralatrexate will be safe for human use.

 

At present, there are anumber of clinical trials being conducted by other pharmaceutical companiesinvolving small molecule chemotherapeutic agents. If other pharmaceuticalcompanies announce that they observed frequent adverse events or unknown safetyissues in their trials involving compounds similar to, or competitive with,pralatrexate, we could encounter delays in the timing of our clinical trials ordifficulties in obtaining the approval of pralatrexate. In addition, the publicperception of pralatrexate might be adversely affected, which could harm ourbusiness and results of operations and cause the market price of our commonstock to decline, even if the concern relates to another company’s product orproduct candidate.

 

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

** **

We rely primarily onthird parties to conduct our clinical trials, including the PROPEL trial. As aresult, we have had and will continue to have less control over the conduct ofour clinical trials, the timing and completion of the trials, the requiredreporting of adverse events and the management of data developed through thetrial than would be the case if we were relying entirely upon our own staff.Communicating with outside parties can also be challenging, potentially leadingto mistakes as well as difficulties in coordinating activities. Outside partiesmay have staffing difficulties, may undergo changes in priorities or may becomefinancially distressed, any of which may adversely affect their willingness orability to conduct our trials. We may experience unexpected cost increases thatare beyond our control. Problems with the timeliness or quality of the work ofa contract research organization may lead us to seek to terminate therelationship and use an alternative service provider. However, making thischange may be costly and may delay our trials, and contractual restrictions maymake such a change difficult or impossible. Additionally, it may be impossibleto find a replacement organization that can conduct our trials in an acceptablemanner and at an acceptable cost.

 

**If we are unableto effectively protect our intellectual property, we will be unable to preventthird parties from using our technology, which would impair our competitivenessand ability to commercialize pralatrexate. In addition, enforcing ourproprietary rights may be expensive and result in increased losses.**

** **

Our success will dependin part on our ability to obtain and maintain meaningful patent protection forpralatrexate, both in the United States and in other countries. We rely onpatents to protect a large part of our intellectual property and ourcompetitive position. Any patents issued to or licensed by us could bechallenged, invalidated, infringed, circumvented or held unenforceable, basedon, among other things, obviousness, inequitable conduct, anticipation orenablement. In addition, it is possible that no patents will issue on any ofour licensed patent applications. It is possible that the claims in patentsthat have been issued or licensed to us or that may be issued or licensed to usin the future will not be sufficiently broad to protect our intellectualproperty or that the patents will not provide protection against competitiveproducts or otherwise be commercially valuable. Failure to obtain and maintainadequate patent protection for our intellectual property would impair ourability to be commercially competitive.

 

Our commercial successwill also depend in part on our ability to commercialize pralatrexate withoutinfringing patents or other proprietary rights of others or breaching the licensesgranted to us. We may not be able to obtain a license to third-party technologythat we may require to conduct our business or, if obtainable, we may not beable to license such technology at a reasonable cost. If we fail to obtain alicense to any technology that we may require to commercialize pralatrexate, orfail to obtain a license at a reasonable cost, we will be unable tocommercialize pralatrexate or to commercialize it at a price that will allow usto become profitable.

 

In addition to patentprotection, we also rely upon trade secrets, proprietary know-how andtechnological advances that we seek to protect through confidentialityagreements with our collaborators, employees, advisors and consultants. Ouremployees and consultants are required to enter into confidentiality agreementswith us. We also enter into non-disclosure agreements with our collaboratorsand vendors, which agreements are intended to protect our confidentialinformation delivered to third parties for research and other purposes.However, these agreements could be breached and we may not have

 

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adequate remedies for anybreach, or our trade secrets and proprietary know-how could otherwise becomeknown or be independently discovered by others.

 

Furthermore, as with anypharmaceutical company, our patent and other proprietary rights are subject touncertainty. Our patent rights related to pralatrexate might conflict withcurrent or future patents and other proprietary rights of others. For the samereasons, the products of others could infringe our patents or other proprietaryrights. Litigation or patent interference proceedings, either of which couldresult in substantial costs to us, may be necessary to enforce any of ourpatents or other proprietary rights, or to determine the scope and validity orenforceability of other parties’ proprietary rights. We may be dependent onthird parties, including our licensors, for cooperation and information thatmay be required in connection with the defense and prosecution of our patentsand other proprietary rights. The defense and prosecution of patent andintellectual property infringement claims are both costly and time consuming,even if the outcome is favorable to us. Any adverse outcome could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from third parties, or require us to cease selling our futureproducts. We are not currently a party to any patent or other intellectualproperty infringement claims.

 

**We may explore strategicpartnerships that may never materialize or may fail.**

 

Wemay, in the future, periodically explore a variety of possible strategicpartnerships in an effort to gain access to additional product candidates orresources. At the current time, we cannot predict what form such a strategicpartnership might take. We are likely to face significant competition inseeking appropriate strategic partners, and these strategic partnerships can becomplicated and time consuming to negotiate and document. We may not be able tonegotiate strategic partnerships on acceptable terms, or at all. We are unableto predict when, if ever, we will enter into any additional strategicpartnerships because of the numerous risks and uncertainties associated withestablishing strategic partnerships.

 

**If we enter into one or more strategicpartnerships, we may be required to relinquish important rights to and controlover the development of pralatrexate or otherwise be subject to unfavorableterms****.**

 

Anyfuture strategic partnerships we enter into could subject us to a number ofrisks, 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 pralatrexate;                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| · |   | 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 pralatrexate 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 pralatrexate  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;                                                                                            |

 

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| · |   | 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 pralatrexate or  any other product candidate. |

 

**Healthcare reform measures could adversely affect our business. ***

** **

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

 

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

** **

The FDA has awardedorphan drug status to pralatrexate for the treatment of patients with T-celllymphoma, follicular lymphoma and diffuse large B-cell lymphoma. Under theOrphan Drug Act, if we are the first company to receive FDA approval forpralatrexate for the designated orphan drug indication, we will obtain sevenyears of marketing exclusivity during which the FDA may not approve anothercompany’s application for pralatrexate for the same orphan indication. Orphandrug exclusivity would not prevent FDA approval of a different drug for theorphan indication or the same drug for a different indication.

 

**If productliability lawsuits are successfully brought against us, we may incursubstantial liabilities and may be required to limit commercialization ofpralatrexate.**

** **

The testing and marketingof pharmaceutical products entail an inherent risk of product liability.Product liability claims might be brought against us by consumers or healthcare providers or by pharmaceutical companies or others selling our futureproducts. If we cannot successfully defend ourselves against such claims, wemay incur substantial liabilities or be required to limit the commercializationof pralatrexate. We have obtained limited product liability insurance coveragefor our human clinical trials. However, product liability insurance coverage isbecoming increasingly expensive, and we may be unable to maintain suchinsurance coverage at a reasonable cost or in sufficient amounts to protect usagainst losses due to product liability. A successful product liability claimin excess of our insurance coverage could have a material adverse effect on ourbusiness, financial condition and results of operations. We may not be able toobtain commercially reasonable product liability insurance for pralatrexate, ifit is approved for marketing.

 

**Our success depends on retention of our Presidentand Chief Executive****Officer, ChiefMedical Officer and other key personnel.**

 

We are highly dependent on our President and ChiefExecutive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,M.D., and other members of our management team. We are named as the beneficiaryon a term life insurance policy covering Mr. Berns in the amount of$10.0 million. We also depend on academic collaborators for each of ourresearch and development programs. The loss of any of our key employees oracademic collaborators could delay the development and commercialization ofpralatrexate or result in termination of our pralatrexate development programin its entirety. Mr. Berns and Dr. Cagnoni, as well as others on ourexecutive management team, have employment agreements with us, but theagreements provide for “at-will” employment with no specified term. Our futuresuccess also will depend in large part on our continued ability to attract andretain other highly qualified scientific, technical and management personnel,as well as personnel with expertise in clinical testing, governmentalregulation and commercialization of pharmaceutical products. We facecompetition for personnel from other companies, universities, public andprivate research institutions, government entities and other organizations. Ifwe are unsuccessful in our recruitment and retention efforts, our business willbe harmed.

 

We also rely onconsultants, collaborators and advisors to assist us in formulating andconducting our research. All of our 

 

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consultants,collaborators and advisors are employed by other employers or are self-employedand may have commitments to or consulting contracts with other entities thatmay limit their ability to contribute to the Company.

 

**Wecannot guarantee that we will be in compliance with all potentially applicableregulations.**

** **

The development,manufacturing, and, if approved, pricing, marketing, sale and reimbursement ofpralatrexate, together with our general operations, are subject to extensiveregulation by federal, state and other authorities within the United States andnumerous entities outside of the United States. We have fewer employees thanmany other companies that have one or more product candidates in late stageclinical development and we rely heavily on third parties to conduct many importantfunctions.

 

As a publicly-tradedcompany, we are subject to significant regulations including the Sarbanes OxleyAct of 2002. We cannot assure you that we are or will be in compliance with allpotentially applicable regulations. If we fail to comply with the SarbanesOxley Act of 2002 or any other regulations we could be subject to a range ofconsequences, including restrictions on our ability to sell equity securitiesor otherwise raise capital funds, the de-listing of our common stock from the NasdaqGlobal Market, suspension or termination of our clinical trials, failure toobtain approval to market pralatrexate, restrictions on future products or ourmanufacturing processes, significant fines, or other sanctions or litigation.

 

**If our internal controlsover financial reporting are not considered effective, our business and stockprice could be adversely affected.**

** **

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

 

Our management, includingour chief executive officer and principal financial officer, does not expectthat our internal controls over financial reporting will prevent all error andall fraud. A control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that the control system’sobjectives will be met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat 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 oncertain assumptions about the likelihood of future events, and we cannot assureyou that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become ineffective becauseof changes in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected. We cannot assure you that we or our independent registered publicaccounting firm will not identify a material weakness in our internal controlsin the future. A material weakness in our internal controls over financialreporting would require management and our independent registered publicaccounting firm to consider our internal controls as ineffective. If ourinternal controls over financial reporting are not considered effective, we mayexperience a loss of public confidence, which could have an adverse effect onour business and on the market price of our common stock.

 

**Ifwe do not progress in our programs as anticipated, our stock price coulddecrease.**

** **

For planning purposes, weestimate the timing of a variety of clinical, regulatory and other milestones,such as when a certain product candidate will enter clinical development, whena clinical trial will be initiated or completed, or when an application forregulatory approval will be filed. Some of our estimates are included in thisreport. Our estimates are based on information available to us as of the dateof this report and a variety of assumptions. Many of the underlying assumptionsare outside of our control. If milestones are not achieved when we estimatedthat they would be, investors could be disappointed and our stock price maydecrease.

 

**Warburg PincusPrivate Equity VIII, L.P. controls a substantial percentage of the voting powerof our outstanding common stock.***

** **

On March 2, 2005, weentered into a Securities Purchase Agreement with Warburg Pincus Private EquityVIII, L.P., or Warburg, and certain other investors pursuant to which we issuedand sold an aggregate of 2,352,443 shares of our Series A 

 

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Exchangeable PreferredStock, or the Exchangeable Preferred, at a price per share of $22.10, foraggregate gross proceeds of approximately $52.0 million. On May 18,2005, at our Annual Meeting of Stockholders, our stockholders voted to approvethe issuance of shares of our common stock upon exchange of shares of theExchangeable Preferred. As a result of such approval, we issued a total of23,524,430 shares of common stock upon exchange of 2,352,443 shares ofExchangeable Preferred. In connection with its purchase of the ExchangeablePreferred, Warburg and certain of its affiliates entered into a standstillagreement pursuant to which they agreed not to pursue, for so long as theycontinue to own a specified number of shares of our common stock, certainactivities the purpose or effect of which may be to change or influence the controlof the Company.

 

On May 29, 2008, wesold 12,420,000 shares of our common stock in an underwritten public offeringat a price of $5.64 per share, for aggregate net proceeds of $65.2million.  Warburg purchased 3,500,000 shares of the 12,420,000 shares soldin such public offering.

 

As of June 30, 2009,we had 89,389,188 shares of common stock outstanding, of which Warburg owned26,124,430 shares, or approximately 29.2% of the voting power of ouroutstanding common stock.  AlthoughWarburg has entered into a standstill agreement with us, Warburg is, and willcontinue to be, able to exercise substantial influence over any actionsrequiring stockholder approval.

 

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

** **

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

 
| · |   | 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, weare subject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with an interested stockholder for a period ofthree years following the date on which the stockholder became an interestedstockholder. This provision could have the effect of delaying or preventing achange of control, whether or not it is desired by or beneficial to ourstockholders. Notwithstanding the foregoing, the three-year moratorium imposedon business combinations by Section 203 will not apply to Warburg because,prior to the date on which Warburg became an interested stockholder, our boardof directors approved the transactions that resulted in Warburg becoming aninterested stockholder. However, in connection with its purchase ofExchangeable Preferred in March 2005, Warburg and certain of itsaffiliates entered into a standstill agreement pursuant to which they agreednot to pursue, for so long as they continue to own a specified number of sharesof our common stock, certain activities the purpose or effect of which may beto change or influence the control of the Company.

 

**We have adopted a stockholderrights plan that may discourage, delay or prevent a merger or acquisition thatis beneficial to our stockholders.***

** **

In May 2003,our board of directors adopted a stockholder rights plan that may have theeffect of discouraging, delaying or 

 

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preventing amerger or acquisition of us that our stockholders may consider beneficial bydiluting the ability of a potential acquirer to acquire us. Pursuant to theterms of the stockholder rights plan, when a person or group, except undercertain circumstances, acquires 15% or more of our outstanding common stock or10 business days after announcement of a tender or exchange offer for 15% ormore of our outstanding common stock, the rights (except those rights held bythe person or group who has acquired or announced an offer to acquire 15% ormore of our outstanding common stock) would generally become exercisable forshares of our common stock at a discount. Because the potential acquirer’srights would not become exercisable for our shares of common stock at adiscount, the potential acquirer would suffer substantial dilution and may loseits ability to acquire us. In addition, the existence of the plan itself maydeter a potential acquirer from acquiring or making an offer to acquireus.  As a result, either by operation ofthe plan or by its potential deterrent effect, mergers and acquisitions of theCompany that our stockholders may consider in their best interests may notoccur.

 

Because Warburg owns asubstantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with Warburg’s purchase of ExchangeablePreferred in March 2005 to provide that Warburg and its affiliates will beexempt from the stockholder rights plan, unless Warburg and its affiliatesbecome, without the prior consent of our board of directors, the beneficialowner of more than 44% of our common stock. Likewise, in connection with ourcompletion of an underwritten offering of 9,000,000 shares of common stock in February 2007,we amended the stockholder rights plan to provide that Baker Brothers LifeSciences, L.P. and certain other affiliated funds, which are collectivelyreferred to herein as “Baker,” will be exempt from the stockholder rights plan,unless Baker becomes, without the prior consent of our board of directors, thebeneficial owner of more than 20% of our common stock.  According tofilings with the Securities and Exchange Commission, or SEC, Baker owned lessthan 10% of our outstanding common stock as of February 2009. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

 

**Unstable market conditions may have seriousadverse consequences on our business.**

 

The recent economicdownturn and market instability has made the business climate more volatile andmore costly. Our general business strategy may be adversely affected byunpredictable and unstable market conditions. If the current equity and creditmarkets deteriorate further, or do not improve, it may make any necessaryequity or debt financing more difficult, more costly, and more dilutive. Whilewe believe we have adequate capital resources to meet our expected workingcapital and capital expenditure requirements for at least the next 12 months, aradical economic downturn or increase in our expenses could require additionalfinancing on less than attractive rates or on terms that are excessivelydilutive to existing stockholders. Failure to secure any necessary financing ina timely manner and on favorable terms could have a material adverse effect onour growth strategy, financial performance and stock price and could require usto delay or abandon clinical development plans. There is a risk that one ormore of our current service providers, manufacturers or other partners mayencounter difficulties during challenging economic times, which could have anadverse effect on our business, results of operations and financial condition.

 

**Our liquidity, capital resources and results ofoperations may be adversely affected by declines in the value of ourinvestments in marketable securities.***

 

As of June 30, 2009,we had $105.2 million in cash, cash equivalents, and investments in marketablesecurities.  Until required for use inour business, we invest our cash reserves in bank deposits, money market funds,high-grade corporate notes and U.S. government instruments in accordance withour investment policy.  Our investmentsin marketable securities as of June 30, 2009, totaling $9.6 million,primarily consisted of high-grade corporate notes.  The weighted average duration of theremaining time to maturity for our portfolio of investments in marketablesecurities as of June 30, 2009 was approximately three months.  We did not hold any derivative instruments,foreign exchange contracts, asset backed securities, mortgage backedsecurities, auction rate securities, or securities of issuers in bankruptcy inour investment portfolio as of June 30, 2009.

 

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments in marketablesecurities as of June 30, 2009 should be adequate to support ouroperations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished.  In particular, our liquidity, capitalresources and results of operations may be adversely affected by declines inthe value of our investments in marketable securities.  The value of our investments in marketablesecurities may be adversely affected by rating downgrades or bankruptciesaffecting the issuers of such securities, whether caused by instability in theglobal financial markets, lack of liquidity in the credit and capital markets,or other factors.  For example, duringthe three months ended March 31, 2009, we realized a loss of approximately$157,000 on the sale of certain of our investments in marketable securities,which were sold in order to preserve our principal as the issuers of thosesecurities experienced significant 

 

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deteriorationsin their creditworthiness as evidenced by investment rating downgrades.  We have the ability and intent to hold ourremaining investments in marketable securities as of June 30, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

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

** **

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

 
| · |   | actual or  anticipated regulatory approvals or non-approvals of pralatrexate or of  competing product candidates;                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
| · |   | actual or  anticipated results of our clinical trials involving pralatrexate;                                                                                             |
|   |   |                                                                                                                                                                      |
| · |   | changes in laws  or regulations applicable to pralatrexate;                                                                                                               |
|   |   |                                                                                                                                                                      |
| · |   | changes in the  expected or actual timing of our development programs;                                                                                                    |
|   |   |                                                                                                                                                                      |
| · |   | actual or  anticipated variations in quarterly operating results;                                                                                                         |
|   |   |                                                                                                                                                                      |
| · |   | 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, 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 ingeneral and companies included on the Nasdaq Global Market in particular haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.There has been particular volatility in the market prices of securities ofbiotechnology and other life sciences companies, and the market prices of thesecompanies have often fluctuated because of problems or successes in a givenmarket segment or because investor interest has shifted to other segments.These broad market and industry factors may cause the market price of ourcommon stock to decline, regardless of our operating performance. We have nocontrol over this volatility and can only focus our efforts on our ownoperations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities class action litigation has often beeninitiated against that company, including in 2004 against us. Litigation ofthis type could result in substantial costs and diversion of management’sattention and resources, which would hurt our business. Any 

 

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adverse determination inlitigation could also subject us to significant liabilities.

 

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

** **

If our stockholders sellsubstantial amounts of our common stock, the market price of our common stockmay decline. These sales also might make it more difficult for us to sellequity or equity-related securities in the future at a time and price that weconsider appropriate. We are unable to predict the effect that sales may haveon the then prevailing market price of our common stock.  We have enteredinto a Registration Rights Agreement with Warburg pursuant to which Warburg isentitled to certain registration rights with respect to shares of our commonstock.  On July 20, 2009, we filed aRegistration Statement on Form S-3 with the SEC providing for theregistration for resale by Warburg of up to 26,124,430 shares of our commonstock.  To date, the SEC has not declaredthe registration statement effective.

 

In addition, we will needto raise substantial additional capital in the future to fund ouroperations.  If we raise additional funds by issuing equity securities,the market price of our common stock may decline and our existing stockholdersmay experience significant dilution.

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

 

We held our 2009 Annual Meeting of Stockholders on June 23,2009.  At such meeting, the followingactions were voted upon:

 

a.         Electionof Directors

 
| ** **                      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------------------|------------|------------|------------|--------------|------------|
| Stephen J. Hoffman, Ph.D., M.D. |       | 50,625,541 |       | 23,304,071   |       |
| Paul L. Berns                   |       | 72,689,616 |       | 1,239,996    |       |
| Michael D. Casey                |       | 72,636,428 |       | 1,293,184    |       |
| Stewart Hen                     |       | 72,124,477 |       | 1,805,135    |       |
| Jeffrey R. Latts, M.D.          |       | 72,691,273 |       | 1,238,339    |       |
| Jonathan S. Leff                |       | 72,058,848 |       | 1,870,764    |       |
| Timothy P. Lynch                |       | 72,640,208 |       | 1,289,404    |       |
| David M. Stout                  |       | 72,852,909 |       | 1,076,703    |       |

 

b.           Approval of anamendment to the Company’s 2008 Equity Incentive Plan to increase the aggregatenumber of shares of common stock authorized for issuance under the plan by5,750,000 shares.

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 58,953,764 |       | 5,086,675   |       | 259,438         |       |

 

c.            Ratificationof the selection by the audit committee of the board of directors of theCompany of PricewaterhouseCoopers LLP as the Company’s independent registeredpublic accounting firm for the fiscal year ending December 31, 2009.

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 73,728,816 |       | 110,158     |       | 90,638          |       |

 
| **ITEM 5.** | ** ** | **OTHER INFORMATION** | ** ** | **None** |
|-------------|------------|-----------------------|------------|----------|

 

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| **ITEM 6.** | ** ** | **EXHIBITS** | ** ** | ** ** |
|-------------|------------|--------------|------------|------------|

 
| ** **       | ** ** | ** **                                                                                                                                   | ** ** | **Incorporated by Reference** | ** ** | ** **       |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------|
| **Exhibit  No.** | ** ** | **Description**                                                                                                                              | ** ** | **Form**                      | ** ** | **Filing  Date** | ** ** | **Number** | ** ** | **Filed  Herewith** |
| 3.1              |       | Amended and Restated  Certificate of Incorporation.                                                                                          |       | 8-K                           |       | 7/20/2009        |   | 3.1 |   |   |
| 3.2              |       | Certificate of  Designation of Series A Junior Participating Preferred Stock.                                                           |       | 8-K                           |       | 7/20/2009        |   | 3.2 |   |   |
| 3.3              |       | Certificate of  Amendment to Restated Certificate of Incorporation.                                                                          |       | 8-K                           |       | 7/20/2009        |   | 3.3 |   |   |
| 3.4              |       | Certificate of  Amendment to the Certificate of Designations of Series A Junior  Participating Preferred Stock.                         |       | 8-K                           |       | 7/20/2009        |   | 3.4 |   |   |
| 4.1              |       | Amendment to Rights  Agreement, dated as of July 17, 2009, between the Company and Mellon  Investor Services LLC.                       |       | 8-K                           |       | 7/20/2009        |   | 4.1 |   |   |
| 10.1†       |       | Summary of Compensation  Arrangements for Non-Employee Directors.                                                                            |       |                          |       |             |   |   |   | X |
| 10.2†       |       | First Amendment to  Second Amended and Restated Employment Agreement, dated as of May 20, 2009,  between the Company and Paul L. Berns. |       | 8-K                           |       | 5/22/2009        |   | 10.1 |   |   |
| 10.3†       |       | First Amendment to  Amended and Restated Employment Agreement, dated as of May 20, 2009,  between the Company and Pablo J. Cagnoni, MD. |       | 8-K                           |       | 5/22/2009        |   | 10.2 |   |   |
| 10.4†       |       | First Amendment to  Amended and Restated Employment Agreement, dated as of May 20, 2009,  between the Company and James V. Caruso.      |       | 8-K                           |       | 5/22/2009        |   | 10.3 |   |   |
| 10.5†       |       | First Amendment to  Amended and Restated Employment Agreement, dated as of May 20, 2009,  between the Company and Marc H. Graboyes.     |       | 8-K                           |       | 5/22/2009        |   | 10.4 |   |   |
| 10.6†       |       | Allos  Therapeutics, Inc. Amendment No. 1 to Change in Control Severance  Benefit Schedule, adopted May 19, 2009.             |       | 8-K                           |       | 5/22/2009        |   | 10.5 |   |   |
| 10.7†       |       | Employment Agreement,  effective June 25, 2009, between the Company and David C. Clark.                                                 |       | 8-K                           |       | 6/26/2009        |   | 10.1 |   |   |
| 10.8†       |       | Allos  Therapeutics, Inc. 2008 Equity Incentive Plan, as amended.                                                                       |       | 8-K                           |       | 6/26/2009        |   | 10.2 |   |   |
| 31.1             |       | Certification of  principal executive officer required by Rule 13a-14(a) / 15d-14(a).                                              |       |                          |       |             |   |   |   | X |
| 31.2             |       | Certification of  principal financial officer required by Rule 13a-14(a) / 15d-14(a).                                              |       |                          |       |             |   |   |   | X |
| 32.1#            |       | Section 1350  Certification.                                                                                                            |       |                          |       |             |   |   |   | X |

 

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| † |   | 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. |

** **

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** **

**SIGNATURES**

** **

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

 
| Date: August 4,  2009 |   | **ALLOS THERAPEUTICS, INC.**                  |
|---------------------------------|--------|-----------------------------------------------|
|                            |   |                                          |
|                            |   | /s/ Paul L. Berns                             |
|                            |   | Paul L. Berns                                 |
|                            |   | President and Chief  Executive Officer        |
|                            |   | (Principal Executive  Officer)                |
|                            |   |                                          |
|                            |   |                                          |
|                            |   | /s/ David C. Clark                            |
|                            |   | David C. Clark                                |
|                            |   | Vice President, Finance  and Treasurer        |
|                            |   | (Principal Financial  and Accounting Officer) |

** **

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