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

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                                                                                                                                                 | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                            | ** **                                                                                               |
| **For the quarterly period ended  September 30, 2010.**                                                                                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                                                                                            | ** **                                                                                               |
| **o**                                                                                                                                                                                                                                                                                                 | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
| ** **                                                                                                                                                                                                                                                                                            | ** **                                                                                               |
| **For the transition period from                        to                      .** |

 

**Commission File Number000-29815**

 

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

 

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

 

**11080 CirclePoint Road, Suite 200Westminster, Colorado  80020(303) 426-6262**(Address, including zip code, and telephone number,including area code, of principal executive offices)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for 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 (§232.405 ofthis chapter) during the  preceding 12months (or for such shorter period that the registrant was required to submitand post such files). Yes o    No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o    No x

 

Asof November 2, 2010, there were 105,352,676 shares of the registrant’sCommon Stock, par value $0.001 per share, outstanding.

 

 

 

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**ALLOS THERAPEUTICS, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I.   Financial Information | 3                                                                                                      |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ITEM  1.                                  | Financial Statements (unaudited)                                                                       | 3 |
|                                      | Balance  Sheets — as of September 30, 2010 and December 31, 2009                        | 3 |
|                                      | Statements  of Operations — for the three and nine months ended September 30, 2010  and 2009 | 4 |
|                                      | Statements  of Cash Flows — for the nine months ended September 30, 2010 and 2009            | 5 |
|                                      | Notes to Financial  Statements                                                                         | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 17 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                            | 30 |
| ITEM 4.                                   | Controls and  Procedures                                                                               | 30 |
| PART II.   Other Information    | 30                                                                                                     |
| ITEM 1.                                   | Legal Proceedings                                                                                      | 30 |
| ITEM 1A.                                  | Risk Factors                                                                                           | 31 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                           | 48 |
| ITEM 3.                                   | Defaults Upon  Senior Securities                                                                       | 48 |
| ITEM  4.                                  | Removed and Reserved                                                                                   | 48 |
| ITEM  5.                                  | Other Information                                                                                      | 48 |
| ITEM  6.                                  | Exhibits                                                                                               | 48 |
| SIGNATURES                                |                                                                                                   | 49 |

 

NOTE:

 

*Allos Therapeutics, Inc., the Allos Therapeutics, Inc.logo,  FOLOTYN, the FOLOTYN logo and allother Allos names are trademarks of Allos Therapeutics, Inc. in the UnitedStates and in other selected countries. All other brand names or trademarksappearing in this report are the property of their respective holders. Unlessthe 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.  FINANCIALSTATEMENTS**

 

**ALLOS THERAPEUTICS, INC.BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                | ** ** | **September 30,********2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                | ** ** | ** **                         | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                                                           |       |                               |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                 |       | $                                  | 63,432     |                        | $          | 141,185 |   |
| Short-term investments                                                                                                                                                                                                                                                                    |       | 45,151                             |       | 17,016                      |       |
| Restricted cash                                                                                                                                                                                                                                                                           |       | 238                                |       | 238                         |       |
| Accounts receivable                                                                                                                                                                                                                                                                       |       | 9,633                              |       | 4,862                       |       |
| Inventory                                                                                                                                                                                                                                                                                 |       | 151                                |       | 36                          |       |
| Prepaid expenses and other assets                                                                                                                                                                                                                                                         |       | 3,907                              |       | 3,808                       |       |
| Total current assets                                                                                                                                                                                                                                                                      |       | 122,512                            |       | 167,145                     |       |
| Property and equipment, net                                                                                                                                                                                                                                                               |       | 2,237                              |       | 2,169                       |       |
| Long-term investments                                                                                                                                                                                                                                                                     |       | 337                                |       | 343                         |       |
| Intangible asset, net                                                                                                                                                                                                                                                                     |       | 5,339                              |       | 5,679                       |       |
| Other assets                                                                                                                                                                                                                                                                              |       | 48                                 |       | 48                          |       |
| Total assets                                                                                                                                                                                                                                                                              |       | $                                  | 130,473    |                        | $          | 175,384 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                            |       |                               |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                      |       |                               |       |                        |       |
| Trade accounts payable                                                                                                                                                                                                                                                                    |       | $                                  | 2,515      |                        | $          | 2,035 |   |
| Deferred revenue                                                                                                                                                                                                                                                                          |       | 1,587                              |       | 669                         |       |
| Accrued liabilities                                                                                                                                                                                                                                                                       |       | 14,040                             |       | 13,136                      |       |
| Total current liabilities                                                                                                                                                                                                                                                                 |       | 18,142                             |       | 15,840                      |       |
| Commitments and contingencies (Note 10)                                                                                                                                                                                                                                              |       |                               |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                |       |                               |       |                        |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; no shares issued or outstanding                                                                                                                                                                                         |       | —                             |       | —                      |       |
| Series A Junior Participating Preferred  Stock, $0.001 par value; 1,500,000 shares designated from authorized  preferred stock at September 30, 2010 and December 31, 2009; no  shares issued or outstanding                                                               |       | —                             |       | —                      |       |
| Common stock, $0.001 par value; 200,000,000 and  150,000,000 shares authorized at September 30, 2010 and December 31,  2009, respectively; 105,352,676 and 104,234,409 shares issued and  outstanding at September 30, 2010 and December 31, 2009,  respectively |       | 105                                |       | 104                         |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                |       | 544,713                            |       | 532,652                     |       |
| Accumulated deficit                                                                                                                                                                                                                                                                       |       | (432,487                           | )          | (373,212                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                           |       | 112,331                            |       | 159,544                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                           |       | $                                  | 130,473    |                        | $          | 175,384 |   |

 

***The accompanying notes are anintegral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net product sales                             |       | $                                                    | 8,230      |                                                | $          | — |   | $ | 23,522 |   | $ | — |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Operating costs and expenses:                 |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of sales, excluding amortization expense |       | 889                                                  |       | —                                              |       | 2,330 |   | — |   |
| Research and development                      |       | 7,249                                                |       | 7,538                                               |       | 23,056 |   | 24,675 |   |
| Selling, general and administrative           |       | 18,702                                               |       | 11,327                                              |       | 57,151 |   | 26,326 |   |
| Amortization of intangible asset              |       | 113                                                  |       | 7                                                   |       | 340 |   | 7 |   |
| Total operating costs and expenses            |       | 26,953                                               |       | 18,872                                              |       | 82,877 |   | 51,008 |   |
| Operating loss                                |       | (18,723                                              | )          | (18,872                                             | )          | (59,355 | ) | (51,008 | ) |
| Interest and other income, net                |       | (129                                                 | )          | 125                                                 |       | 2 |   | 304 |   |
| Loss before income taxes                      |       | (18,852                                              | )          | (18,747                                             | )          | (59,353 | ) | (50,704 | ) |
| Income tax benefit                            |       | 78                                                   |       | 77                                                  |       | 78 |   | 77 |   |
| Net loss                                      |       | $                                                    | (18,774    | )                                                   | $          | (18,670 | ) | $ | (59,275 | ) | $ | (50,627 | ) |
| Net loss per share: basic and diluted         |       | $                                                    | (0.18      | )                                                   | $          | (0.21 | ) | $ | (0.56 | ) | $ | (0.58 | ) |
| Weighted average shares: basic and diluted    |       | 105,320,554                                          |       | 89,543,949                                          |       | 105,039,263 |   | 86,581,372 |   |

 

***The accompanying notes are anintegral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTSOF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

 
| ** **                                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Cash Flows From Operating Activities:                                                                  |       |                                                |       |   |   |
| Net loss                                                                                               |       | $                                                   | (59,275    | ) | $ | (50,627 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                           |       |                                                |       |   |   |
| Depreciation and amortization                                                                          |       | 668                                                 |       | 314 |   |
| Stock-based compensation expense                                                                       |       | 7,892                                               |       | 6,603 |   |
| Amortization of intangible asset                                                                       |       | 340                                                 |       | 7 |   |
| Realized loss on sale of marketable securities                                                         |       | —                                              |       | 157 |   |
| Other                                                                                                  |       | 226                                                 |       | 149 |   |
| Changes in operating assets and liabilities:                                                           |       |                                                |       |   |   |
| Accounts receivable                                                                                    |       | (3,852                                              | )          | — |   |
| Prepaid expenses and other assets                                                                      |       | 40                                                  |       | (385 | ) |
| Interest receivable on investments                                                                     |       | (60                                                 | )          | 686 |   |
| Inventory                                                                                              |       | (136                                                | )          | — |   |
| Trade accounts payable                                                                                 |       | 480                                                 |       | 2,739 |   |
| Accrued liabilities                                                                                    |       | 761                                                 |       | (1,670 | ) |
| Net cash used in operating activities                                                                  |       | (52,916                                             | )          | (42,027 | ) |
| Cash Flows From Investing Activities:                                                                  |       |                                                |       |   |   |
| Acquisition of property and equipment                                                                  |       | (937                                                | )          | (1,147 | ) |
| Cash paid for license                                                                                  |       | —                                              |       | (5,800 | ) |
| Purchases of investments                                                                               |       | (55,050                                             | )          | (18,217 | ) |
| Proceeds from maturities of investments                                                                |       | 26,980                                              |       | 45,250 |   |
| Proceeds from sales of marketable securities                                                           |       | —                                              |       | 3,894 |   |
| Net cash (used in) provided by investing activities                                                    |       | (29,007                                             | )          | 23,980 |   |
| Cash Flows From Financing Activities:                                                                  |       |                                                |       |   |   |
| Proceeds from issuance of common stock associated  with stock options and employee stock purchase plan |       | 4,138                                               |       | 3,009 |   |
| Proceeds from issuance of common stock, net of  issuance costs                                         |       | 32                                                  |       | 46,957 |   |
| Net cash provided by financing activities                                                              |       | 4,170                                               |       | 49,966 |   |
| Net (decrease) increase in cash and cash  equivalents                                                  |       | (77,753                                             | )          | 31,919 |   |
| Cash and cash equivalents, beginning of period                                                         |       | 141,185                                             |       | 30,458 |   |
| Cash and cash equivalents, end of period                                                               |       | $                                                   | 63,432     |   | $ | 62,377 |   |
| Supplemental Schedule of Cash and Non-cash  Activities:                                           |       |                                                |       |   |   |
| Deferred revenue in accounts receivable                                                                |       | $                                                   | 918        |   | $ | — |   |
| Assets recorded for which payment has not yet  occurred                                                |       | 142                                                 |       | — |   |

 

***The accompanying notes are anintegral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**NOTES TOFINANCIAL STATEMENTS**

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

**(unaudited)**

 

**1.****                ****Basisof Presentation**

 

Theunaudited financial statements of Allos Therapeutics, Inc. (referred to hereinas the “Company,” “we,” “us” or “our”) included herein reflect all adjustments,consisting only of normal recurring adjustments, which in the opinion ofmanagement are necessary to fairly state our financial position, results ofoperations and cash flows for the periods presented.  Certain information and footnote disclosuresnormally included in audited financial information prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission, or SEC. Operating results for the nine months ended September 30, 2010, are notnecessarily indicative of the results that may be expected for the year ending December31, 2010.  These financial statementsshould be read in conjunction with the audited financial statements and notesthereto which are included in our Annual Report on Form 10-K for the year endedDecember 31, 2009 for a broader discussion of our business and theopportunities and risks inherent in such business.

 

*Liquidity*

 

Asof September 30, 2010, we had $108.9 million in cash, cash equivalents, andinvestments. Based upon the current status of our product development andcommercialization plans, we believe that our cash, cash equivalents, andinvestments as of September 30, 2010, will be adequate to support ouroperations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished.

 

Ourability to achieve profitability is dependent on our ability to grow productsales of FOLOTYN® (pralatrexate injection) for the treatment of patients withrelapsed or refractory peripheral T-cell lymphoma, or PTCL, in the UnitedStates.  The amount of our future productsales are subject to significant uncertainty. We may never generate sufficient revenue from product sales to becomeprofitable.

 

Weexpect to continue to spend substantial amounts on research and development,including amounts spent on conducting clinical trials and seeking additionalregulatory approvals for FOLOTYN.  Wealso expect to continue to spend substantial amounts on selling, general andadministrative expenses in connection with our commercialization of FOLOTYN forthe treatment of patients with relapsed or refractory PTCL.  Therefore, we may need to raise additionalcapital to support our future operations.  Our actual capital requirements will depend onmany factors, including:

 

·      the timing andamount of revenues generated from sales of FOLOTYN;

 

·      the timing andcosts associated with our sales and marketing activities for thecommercialization of FOLOTYN;

 

·      the timing andcosts associated with manufacturing clinical and commercial supplies ofFOLOTYN;

 

·      the timing andcosts associated with conducting preclinical and clinical development ofFOLOTYN, including the post-approval clinical studies required by the U.S. Foodand Drug Administration, or FDA, as well as our evaluation of, and decisionswith respect to, additional therapeutic indications for which we may developFOLOTYN;

 

·      the timing,costs and potential revenue associated with any co-promotion or otherpartnering arrangements entered into to commercialize FOLOTYN; and

 

·      our evaluationof, and decisions with respect to, potential in-licensing or productacquisition opportunities or other strategic alternatives.

 

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Wemay seek to obtain this additional capital through equity or debt financings,arrangements with corporate partners, or from other sources. Such financings orarrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In the event that additionalfunds are obtained through arrangements with collaborative partners or othersources, such arrangements may require us to relinquish rights to some of ourtechnologies, product candidates or products under development, which we mightotherwise seek to develop or commercialize ourselves, on terms that are lessfavorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales 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.****                ****FairValue of Financial Instruments**

 

*Cash, Cash Equivalents and Investments*

 

Allhighly liquid investments with original maturities of three months or less areconsidered to be cash equivalents. The carrying values of our cash equivalentsand investments approximate their market values based on quoted market prices.Investments 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. Theweighted average duration of the remaining time to maturity for our portfolioof investments as of September 30, 2010, was approximately four months.  As of September 30, 2010, our investmentswere held in a variety of interest-bearing instruments, consisting mainly of U.S.Treasury notes. We did not hold any derivative instruments, foreign exchangecontracts, asset backed securities, mortgage backed securities, auction ratesecurities, or securities of issuers in bankruptcy in our investment portfolioas of September 30, 2010.

 

*Fair Value of Financial Instruments*

 

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

 

Level1: Inputs that reflect unadjusted quoted prices in active markets that areaccessible to us for identical assets or liabilities;

 

Level2: Inputs include quoted prices for similar assets and liabilities in activeand inactive markets or that are observable for the asset or liability eitherdirectly or indirectly; and

 

Level3: Unobservable inputs that are supported by little or no market activity.

 

Wehave no assets or liabilities that were measured using quoted prices forsimilar assets and liabilities or significant unobservable inputs (Level 2 andLevel 3 assets and liabilities, respectively) as of September 30, 2010.  Our financial instruments include cash andcash equivalents, investments, accounts receivable, prepaid expenses, accountspayable and accrued liabilities. The carrying amounts of financial instrumentsapproximate their fair value due to their short maturities. The carrying valueof our cash held in money market funds totaling $62.8 million as of September 30,2010, is included in cash and cash equivalents on our Balance Sheet andapproximates market values based on quoted market prices, or Level 1 inputs.

 

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Thecarrying value of investments consisted of the following as of September 30,2010:

 
| ** **                                  | ** ** | **Amortized  cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Short-term  held-to-maturity securities:    | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| U.S. Treasury notes                         |       | $                   | 45,151     |                         | $          | 9                             |       | $               | —     |   | $ | 45,160 |   |
| Total due in one year or less               |       | $                   | 45,151     |                         | $          | 9                             |       | $               | —     |   | $ | 45,160 |   |
|                                        |       |                |       |                         |       |                          |       |            |       |
| Long-term held-to-maturity securities:      |       |                |       |                         |       |                          |       |            |       |
| U. S. Government agency securities          |       | $                   | 269        |                         | $          | 9                             |       | $               | —     |   | $ | 278 |   |
| Corporate notes                             |       | 306                 |       | 14                           |       | —                        |       | 320             |       |
| Sub-total                                   |       | $                   | 575        |                         | $          | 23                            |       | $               | —     |   | $ | 598 |   |
| Less: Amounts classified as restricted cash |       | (238                | )          | —                       |       | —                        |       | (238            | )          |
| Total due in one to three years             |       | $                   | 337        |                         | $          | 23                            |       | $               | —     |   | $ | 360 |   |

 

Thecarrying value of investments consisted of the following as of December 31,2009:

 
| ** **                                  | ** ** | **Amortized  cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Short-term  held-to-maturity securities:    |       |                |       |                         |       |                          |       |            |       |
| U.S. Treasury bills                         |       | $                   | 8,006      |                         | $          | 11                            |       | $               | —     |   | $ | 8,017 |   |
| Certificates of deposit                     |       | 9,010               |       | 5                            |       | —                        |       | 9,015           |       |
| Total due in one year or less               |       | $                   | 17,016     |                         | $          | 16                            |       | $               | —     |   | $ | 17,032 |   |
|                                        |       |                |       |                         |       |                          |       |            |       |
| Long-term held-to-maturity securities:      |       |                |       |                         |       |                          |       |            |       |
| U. S. Government agency securities          |       | $                   | 273        |                         | $          | 11                            |       | $               | —     |   | $ | 284 |   |
| Corporate notes                             |       | 308                 |       | 13                           |       | —                        |       | 321             |       |
| Sub-total                                   |       | $                   | 581        |                         | $          | 24                            |       | $               | —     |   | $ | 605 |   |
| Less: Amounts classified as restricted cash |       | (238                | )          | —                       |       | —                        |       | (238            | )          |
| Total due in one to three years             |       | $                   | 343        |                         | $          | 24                            |       | $               | —     |   | $ | 367 |   |

 

Werealized a loss of approximately $0 and $157,000 on the sale of certain of ourinvestments during the nine months ended September 30, 2010 and 2009,respectively, which were sold in order to preserve our principal as the issuersof these securities experienced significant deteriorations in theircreditworthiness as evidenced by investment rating downgrades.  Market values were determined for eachindividual security in the investment portfolio.  If a decline in fair value below theamortized cost basis of an investment is judged to be other-than-temporary, thecost basis of the investment is written down to fair value. Additionally,management assesses whether it intends to sell or would more-likely-than-notnot be required to sell the investment before the expected recovery of theamortized cost basis. Management has asserted that it has no intent to sell andthat it believes it is more-likely-than-not that it will not be required tosell the investment before recovery of its amortized cost basis.  There were no investments in an unrealizedloss position as of September 30, 2010 or December 31, 2009.   We do not intend to sell and we do notbelieve that it is more likely than not that we will be required to sell ourinvestments before recovering the cost of securities, nor do we expect not torecover the entire amortized cost basis of our investments as of September 30,2010.  We have the ability and intent tohold our remaining investments to recover the entire amortized cost basis ofthe investments as of September 30, 2010.

 

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

 

*Inventory*

 

Costs associated with theproduction of FOLOTYN bulk drug substance and formulated drug product by ourthird party manufacturers are recorded as either research and developmentexpense or inventory.

 

Costs associated with theproduction of FOLOTYN by our third party manufacturers are expensed to researchand development expense at the time of production when:

 

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·    the formulated drug product ispackaged for clinical trial use;

 

·            the bulk drugsubstance and formulated drug product is produced prior to receiving regulatoryapproval to market the product candidate; and

 

·            the bulk drugsubstance and formulated drug product is produced prior to receiving FDAapproval for the respective third party manufacturing facilities.

 

If and when we receive therelated regulatory approval, we capitalize those manufacturing costs for ourmarketed products at the lower of cost (first-in, first-out method) or market(current replacement cost) with cost determined on the first-in, first-outbasis and then expense the sold inventory as a component of cost of goods sold.

 

Priorto receiving FDA approval of FOLOTYN, all costs related to purchases of theactive pharmaceutical ingredient and the manufacturing of the product wererecorded as research and development expense. We have remaining supplies of FOLOTYN drug substance and drug productthat are not recorded as inventory on our Balance Sheet as of September 30,2010 because they were purchased prior to FDA approval.   Accordingly, our cost of sales will be lowerwith respect to product manufactured prior to FDA approval.  Until we sell these supplies for which thecosts were previously expensed, our cost of sales will reflect only incrementalcosts incurred subsequent to the FDA approval date.  We sold a portion of our finished goods thatwere manufactured subsequent to the FDA approval date totaling $67,000 and$82,000 during the three and nine months ended September 30, 2010,respectively, which were recorded in cost of sales, excluding amortizationexpense in the Statement of Operations. See further discussion in Note 7 below. We continue to expense costs associated with clinical trial material asresearch and development expense. Inventory as of September 30, 2010, consists of work in process of$83,000 and finished goods of $68,000.

 

**4.****                ****PrepaidExpenses and Other Assets**

 

Prepaidexpenses and other assets are comprised of the following:

 
| ** **                                             | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Prepaid sales, marketing and medical affairs  expenses |       | $                       | 2,119      |                   | $          | 1,839 |   |
| Prepaid expenses and other assets                      |       | 1,216                   |       | 1,251                  |       |
| Prepaid research and development expenses              |       | 572                     |       | 718                    |       |
|                                                   |       | $                       | 3,907      |                   | $          | 3,808 |   |

 

**5.****                ****Intangibleasset, net**

 

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

 

Asa result of the FDA’s approval to market FOLOTYN on September 24, 2009, we meta milestone under our license agreement with Memorial Sloan-Kettering CancerCenter, SRI International and Southern Research Institute, discussed in Note10, which required us to make a milestone payment of $5.8 million. Wecapitalized the $5.8 million payment as an intangible asset and beganamortizing the asset immediately following the FDA approval of FOLOTYN.Amortization expense is being recorded on a straight line basis over theremaining expected life of the patent for FOLOTYN, which we expect to lastuntil July 16, 2022. This includes the anticipated Hatch-Waxman extension thatprovides patent protection for drug compounds for a period of up to five yearsto compensate for time spent in development. This term is our best estimate ofthe life of the patent. If, however, the Hatch-Waxman extension is not granted,the intangible asset will be amortized over a shorter period. Amortizationexpense of $113,000 and $340,000 for the three and nine months ended September 30,2010 was recorded as amortization of intangible asset in the Statement ofOperations.  Amortization expense of$7,000 for the three and nine months ended September 30, 2009, was recorded asamortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense forthe intangible asset is approximately $454,000 per year during 2010 through2021 and $234,000 in 2022.

 

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Thecarrying values of intangible assets are periodically reviewed to determine ifthe facts and circumstances suggest that a potential impairment may haveoccurred.  No trigger events occurred forthe three months ended September 30, 2010, on the $5,339,000 of intangibleasset, net.

 

**6.****                ****AccruedLiabilities**

 

Accruedliabilities are comprised of the following:

 
| ** **                                                                | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Accrued personnel costs                                                   |       | $                       | 5,042      |                   | $          | 5,133 |   |
| Accrued sales and marketing expenses                                      |       | 3,224                   |       | 2,407                  |       |
| Accrued royalties, government rebates, chargebacks  and distribution fees |       | 2,338                   |       | 963                    |       |
| Accrued research and development expenses                                 |       | 2,184                   |       | 3,363                  |       |
| Accrued expenses—other                                               |       | 1,252                   |       | 1,270                  |       |
|                                                                      |       | $                       | 14,040     |                   | $          | 13,136 |   |

 

**7.****                ****ProductSales**

 

*Product Sales*

 

Wegenerate revenue from product sales.  Werecognize product revenue when it is realized or realizable and earned. Revenueis realized or realizable and earned when all of the following criteria aremet: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services have been rendered; (3) our price to the buyer is fixedand determinable; and (4) collectability is reasonably assured. Revenue fromsales transactions where the buyer has the right to return the product isrecognized at the time of sale only if (1) our price to the buyer issubstantially fixed or determinable at the date of sale, (2) the buyer has paidus, or the buyer is obligated to pay us and the obligation is not contingent onresale of the product, (3) the buyer’s obligation to us would not be changed inthe event of theft or physical destruction or damage of the product, (4) thebuyer acquiring the product for resale has economic substance apart from thatprovided by us, (5) we do not have significant obligations for futureperformance to directly bring about resale of the product by the buyer, and (6)the amount of future returns can be reasonably estimated.

 

Wesell FOLOTYN to a limited number of pharmaceutical wholesale distributors, ordistributors, the three largest of which are affiliates under common control ofan unrelated party.  These distributorsthen resell FOLOTYN to the patients’ respective health care providers.  Given our limited sales history, we arecurrently unable to reasonably estimate returns. Therefore, we have determinedthat domestic shipments of FOLOTYN made to distributors do not meet thecriteria for revenue recognition at the time of shipment, and therefore suchshipments are accounted for using the sell-through method. Under thesell-through method, we do not recognize revenue upon shipment of FOLOTYN tothe distributor. For these product sales, we invoice the distributor and recorddeferred revenue equal to the gross invoice sales price. We then recognizerevenue when the product is sold through, or upon shipment of the product fromthe distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limitednumber of patients, the short period from sale of product to patient infusionand limited contractual return rights, FOLOTYN distributors and their customersgenerally carry limited inventory. Through September 30, 2010, product returns have been negligible.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1,587,000 as of September30, 2010.

 

Weestimate sell-through revenue and certain gross to net sales adjustments basedupon analysis of third-party information, including information obtained fromcertain distributors with respect to their inventory levels and sell-through tothe distributors’ customers. Our estimates are subject to the inherentlimitations of estimates that rely on third-party data. The informationreceived from distributors is a product of their record-keeping process andtheir internal controls surrounding such processes.  Our sales and revenue recognition under thesell-through method reflect our estimate of actual product sold through thedistribution channel.

 

*Net Product Sales*

 

Our net product salesrepresent total sell-through revenue less estimated allowances for rebates andchargebacks to be incurred on the selling price of FOLOTYN related to therespective revenue. In addition, we incur certain distributor fees related tothe management of our product by distributors. These distributor fees arerecorded within net revenues and are 

 

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known at the time of sale.Due to estimates and assumptions inherent in determining the amount of rebatesand chargebacks, the actual amount of claims for rebates and chargebacks may bedifferent from our estimates, at which time we would adjust our reservesaccordingly.  Product sales allowancesand accruals are based on definitive contractual agreements or legalrequirements (such as Medicaid laws and regulations) related to the purchaseand/or utilization of the product by these entities.  Allowances and accruals are generallyrecorded in the same period that the related revenue is recognized.

 

*Classificationof Product Sales Allowances and Accruals*

 

Accruals related to Medicaidrebates, government chargebacks and distributor fees are recognized at the timesell-through revenue is recorded, resulting in a reduction in product salesrevenue and the recording of an increase in accrued expenses.

 

*Medicaid Rebates*

 

Our product is subject tostate government-managed Medicaid programs whereby discounts and rebates areprovided to participating state governments. We record estimated rebatespayable under governmental programs, including Medicaid, as a reduction ofrevenue at the time sell-through revenues are recorded. Our calculationsrelated to these rebate accruals require estimates, including estimates ofcustomer mix primarily based on a combination of market and clinical research,to determine which sales will be subject to rebates and the amount of suchrebates. During the first quarter of 2010, we obtained additional marketresearch and were able to refine our estimated Medicaid utilization, whichresulted in a reversal of Medicaid rebate allowances related to 2009 salestotaling $208,000.  We also consider anylegal interpretations of the applicable laws related to Medicaid and qualifyingfederal and state government programs and any new information regarding changesin the Medicaid programs’ regulations and guidelines that would impact theamount of the rebates.  In March 2010,the Patient Protection and Affordable Care Act, as modified by the Health Careand Education Affordability Reconciliation Act of 2010, or PPACA, was enacted,which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactiveto January 1, 2010.  In addition, thestates’ ability to early adopt portions of PPACA, and any implementingregulations, could impact future estimates related to our Medicaid rebateallowances. We update our estimates and assumptions each period and record anynecessary adjustments to our reserves. Although allowances and accruals arerecorded at the time of product sale, certain rebates are typically paid out,on average, up to six months or longer after the sale. We account for Medicaidrebates by establishing an accrual in an amount equal to our estimate ofMedicaid rebate claims attributable to sales recognized in that period.  If actual future results vary from ourestimates, we may need to adjust our previous estimates, which would affect ourearnings in the period of the adjustment. For reference purposes, a 10% to 20% variance in Medicaid utilizationestimates for state Medicaid rebates as of September 30, 2010, would result inan approximate $449,000 to $898,000 adjustment to cumulative net product sales.

 

*Government Chargebacks*

 

Ourproducts are subject to certain programs with federal government qualifiedentities whereby pricing on products is discounted below distributor list priceto participating entities. These entities purchase products throughdistributors at the discounted price, and the distributors charge the differencebetween their acquisition cost and the discounted price back to us. We accountfor chargebacks by establishing an accrual in an amount equal to our estimateof maximum chargeback claims. We determine our chargeback estimates based onactual FOLOTYN sell-through salesdata from third-party information. Chargeback amounts are determined at thetime of resale to the federal government qualified entities, and we generallyissue credits for such amounts within several weeks of receiving claims fromthe distributor. We do not expect the impact of the 340B program expansionincluded in the PPACA to significantly change our estimated governmentchargeback accruals because drugs approved under an Orphan Drug designationwere specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status toFOLOTYN for the treatment of patients with T-cell lymphoma, which includespatients with relapsed or refractory PTCL.**Estimatedchargeback amounts are recorded at the time the sell-through sale occurs and weadjust the accrual quarterly to reflect actual experience. Due to estimates andassumptions inherent in determining the amount of government chargebacks, theactual amount of claims for chargebacks may be different from our estimates, atwhich time we would adjust our reserves accordingly*.*

 

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Balancesand activity in the deferred revenue account and a reconciliation of gross tonet product sales for the three and nine months ended September 30, 2010 and2009 are as follows:

 
| ** **                                | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2010**                                    | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred revenue, beginning of the period |       | $                                           | 1,153      |                                 | $          | — |   | $ | 669 |   | $ | — |   |
| Gross product sales to distributors       |       | 9,708                                       |       | —                               |       | 27,430 |   | — |   |
| Less: Gross product sales recognized      |       | (9,274                                      | )          | —                               |       | (26,512 | ) | — |   |
| Deferred revenue as of September 30, 2010 |       | $                                           | 1,587      |                                 | $          | — |   | $ | 1,587 |   | $ | — |   |
|                                      |       |                                        |       |                                 |       |   |   |   |   |
| Gross product sales                       |       | $                                           | 9,274      |                                 | $          | — |   | $ | 26,512 |   | $ | — |   |
| *Less: Gross to Net Sales  Adjustments*   |       |                                        |       |                                 |       |   |   |   |   |
| Government rebates and chargebacks        |       | (778                                        | )          | —                               |       | (2,212 | ) | — |   |
| Distribution fees                         |       | (266                                        | )          | —                               |       | (762 | ) | — |   |
| Returns                                   |       | —                                      |       | —                               |       | (16 | ) | — |   |
| Net product sales                         |       | $                                           | 8,230      |                                 | $          | — |   | $ | 23,522 |   | $ | — |   |

 

Balances and activity in thegovernment rebates and chargebacks and distribution fees payable accounts forthe nine months ended September 30, 2010, are as follows:

 
| ** **                                               | ** ** | **Government  Rebates and  Chargebacks** | ** ** | **Distribution********Fees** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| **Balance at December 31, 2009**                         |       | $                                        | 487        |                         | $          | 86 |   |
| Reserve for current period sales                         |       | 2,420                                    |       | 762                          |       |
| Change in estimated Medicaid utilization for 2009  sales |       | (208                                     | )          | —                       |       |
| Credits/payments made for current period sales           |       | (1,054                                   | )          | (615                         | )          |
| Credits/payments made for prior period sales             |       | (126                                     | )          | (84                          | )          |
| **Balance at September 30, 2010**                        |       | $                                        | 1,519      |                         | $          | 149 |   |

 

*Major Customers and Concentration of Credit Risk*

 

Wesell FOLOTYN to a limited number of pharmaceutical wholesale distributors, ordistributors, the three largest of which are affiliates under common control ofan unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strengthof these customers and establish allowances for anticipated losses, ifnecessary.  Substantially all of our 2010sales were made in the United States.

 
| ** ** | ** ** | **% of Total  Trade  Accounts  Receivable at** | ** ** | **% of Total  Gross Product  Sales for the  Nine Months  Ended** | ** ** |
|------------|------------|------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** ** | ** ** | **September 30,  2010**                        | ** ** | **September 30,  2010**                                          | ** ** |
| Customer A |       | 52.6                                           | %          | 49.7                                                             | %          |
| Customer B |       | 20.6                                           | %          | 22.4                                                             | %          |
| Customer C |       | 26.6                                           | %          | 27.0                                                             | %          |

 

*Cost ofsales*

 

Costof sales, excluding amortization expense, includes cost of product sold,royalties, inventory packaging and labeling, warehousing and shipping costsassociated with FOLOTYN product sales. See discussion in Note 10 regarding the royalty rates under our licenseagreement for FOLOTYN.  Prior toreceiving FDA approval of FOLOTYN, all costs related to purchases of the activepharmaceutical ingredient and the manufacturing of the product were recorded asresearch and

 

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developmentexpense.  Accordingly, our cost of saleswill be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which thecosts were previously expensed, our cost of sales will reflect only incrementalcosts incurred subsequent to the FDA approval date.  Cost of sales, excluding amortization expensewere $889,000 and $2,330,000 for the three and nine months ended September 30,2010, respectively.  Cost of sales,excluding amortization expense primarily relates to an 8% royalty on grossproduct sales payable to the licensors of FOLOTYN under the terms of ourlicense agreement.  We sold a portion ofour finished goods that were manufactured subsequent to the FDA approval datetotaling $67,000 and $82,000 during the three and nine months ended September 30,2010, respectively, which w**ere** recorded incost of sales, excluding amortization expense in the Statement of Operations.

 

Underthe sell-through method, royalties paid to our licensors of FOLOTYN based onthe unit shipments to distributors are deferred and recognized as royaltyexpense when those units are sold through and recognized as revenue. Royaltiespaid are deferred as we have the right to offset royalties paid for productthat are later returned against subsequent royalty obligations.

 

**8.****                ****Stock-BasedCompensation**

 

Stock-basedcompensation expense for the three and nine months ended September 30, 2010 and2009 has been recognized in the accompanying Statements of Operations asfollows:

 
| ** **                             | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2010**                                    | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development               |       | $                                           | 873        |                                       | $          | 44 |   | $ | 2,236 |   | $ | 1,964 |   |
| Selling, general and administrative    |       | 1,304                                       |       | 1,711                                      |       | 5,656 |   | 4,639 |   |
| Total stock-based compensation expense |       | $                                           | 2,177      |                                       | $          | 1,755 |   | $ | 7,892 |   | $ | 6,603 |   |

 

EffectiveAugust 24, 2010, James V. Caruso, our former Executive Vice President and ChiefCommercial Officer (CCO), departed the Company.  As a result of Mr. Caruso’s departure, weadjusted the forfeiture rate applied to his equity compensation, which resultedin a one-time $787,000 reversal of selling, general and administrativestock-based compensation expense during the three and nine months ended September30, 2010, of which $605,000 related to stock option awards and $182,000 relatedto restricted stock unit awards. Effective September 30, 2009, Pablo J. Cagnoni, M.D., our former SeniorVice President and Chief Medical Officer (CMO), resigned.  As a result of Dr. Cagnoni’s resignation, weadjusted the forfeiture rate applied to his equity compensation, which resultedin a one-time $906,000 reversal of research and development stock-basedcompensation expense during the three and nine months ended September 30, 2009,of which $699,000 related to stock option awards, $166,000 related torestricted stock awards and $41,000 related to restricted stock unit awards.

 

Wedid not recognize a related tax benefit during the nine months ended September 30,2010 and 2009, as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit as of September30, 2010.  No stock-based compensationexpense was capitalized on our Balance Sheet as of September 30, 2010 and December31, 2009.

 

Thefollowing table summarizes activity and related information for stock optionawards granted under our equity incentive plans:

 
| ** **                             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding at December 31,  2009**  |       | 8,292,496               |       | $                                     | 5.83       |   | 3,823,683 |   | $ | 5.02 |   |
| Granted                                |       | 2,628,251               |       | 7.32                                  |       |   |   |   |   |
| Exercised                              |       | (1,024,474              | )          | 3.75                                  |       |   |   |   |   |
| Forfeited/Expired                      |       | (1,008,300              | )          | 7.07                                  |       |   |   |   |   |
| **Outstanding at September 30,  2010** |       | 8,887,973               |       | $                                     | 6.37       |   | 4,279,015 |   | $ | 5.80 |   |

 

Duringthe nine months ended September 30, 2010, we granted 2,628,251 stock optionswith a weighted-average grant-date fairvalue of $4.14 per share.  Duringthe three months ended September 30, 2010 and 2009, we recorded stock-basedcompensation related to our stock option plans of $1,840,000 and $1,754,000,respectively.  During the nine months ended 

 

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September30, 2010 and 2009, we recorded stock-based compensation related to our stockoption plans of $6,754,000 and $6,252,000, respectively.  The stock-based compensation expense amountsfor the three and nine months ended September 30, 2010 include the $605,000one-time reversal related to the departure of our former CCO discussedabove.  The stock-based compensationexpense amounts for the three and nine months ended September 30, 2009 includethe $699,000 one-time reversal related to the resignation of our former CMOdiscussed above. As of September 30, 2010, the unrecorded stock-basedcompensation balance related to stock option awards was $9,265,000 and will berecognized over an estimated weighted-average amortization period of 1.7 years.

 

Thefollowing table summarizes information about outstanding stock options that arefully vested and currently exercisable, and outstanding stock options that areexpected to vest in the future:

 
| ** **                                                           | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| **As of September 30, 2010:**                                        | ** ** | ** **              | ** ** | ** **                                        | ** ** | ** **                            | ** ** | ** **                     | ** ** |
| Options fully vested and exercisable                                 |       | 4,279,015               |       | 6.1                                               |       | $                                     | 5.80       |                           | $          | 1,746,000 |   |
| Options expected to vest, including effects of expected  forfeitures |       | 3,778,708               |       | 8.9                                               |       | $                                     | 6.92       |                           | 36,000     |   |
| Options fully vested and expected to vest                            |       | 8,057,723               |       | 7.4                                               |       | $                                     | 6.32       |                           | $          | 1,782,000 |   |

 

Theaggregate intrinsic value in the tables above represents the total pretaxintrinsic value, based on our closing stock price of $4.72 as of September 30,2010, which would have been received by the option holders had all optionholders with in-the-money options exercised their options as of that date.  The total number of in-the-money options exercisableas of September 30, 2010, was 1,047,425.

 

Thetotal intrinsic value of options exercised during the three months ended September30, 2010 and 2009 was $36,000 and $2,775,000, respectively, determined as ofthe date of option exercise.  The totalintrinsic value of options exercised during the nine months ended September 30,2010 and 2009 was $3,984,000 and $4,370,000, respectively, determined as of thedate of option exercise.  We settleemployee stock option exercises with newly issued common shares.  No tax benefits were realized by us inconnection with these exercises during the nine months ended September 30, 2010and 2009 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit as of September30, 2010.

 

Thefollowing table summarizes activity and related information for restrictedstock, or RS, awards:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| **Nonvested RS at December 31,  2009**  |       | 125,000               |       | $                                             | 3.72       |   |
| Granted                                 |       | —                |       | —                                        |       |
| Vested                                  |       | (112,500              | )          | 3.41                                          |       |
| **Nonvested RS at September 30,  2010** |       | 12,500                |       | $                                             | 6.51       |   |

 

The shares of restricted stock vest in four equalannual installments from the date of grant. During the three months ended September 30, 2010 and 2009, we recordedstock-based compensation related to restricted stock awards of $6,000 and$(119,000), respectively.  During the nine months ended September30, 2010 and 2009, we recorded stock-based compensation related to restrictedstock awards of $38,000 and $21,000, respectively.  The stock-based compensation expense amountsfor the three and nine months ended September 30, 2009 include the $166,000one-time reversal related to the resignation of our former CMO discussedabove.  As of September 30, 2010, theunrecorded stock-based compensation balance related to restricted stock awardswas $15,000 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

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Thefollowing table summarizes activity and related information for restrictedstock unit, or RSU, awards:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| **Nonvested RSU at December 31, 2009**   |       | 155,479               |       | $                                             | 6.48       |   |
| Granted                                  |       | 454,403               |       | 7.61                                          |       |
| Vested                                   |       | (36,366               | )          | 6.53                                          |       |
| Forfeited                                |       | (85,519               | )          | 7.33                                          |       |
| **Nonvested RSU at September 30,  2010** |       | 487,997               |       | $                                             | 7.38       |   |

 

The shares of restricted stock unit awards vest infour equal annual installments from the date of grant.  During the three months endedSeptember 30, 2010 and 2009, we recorded stock-based compensation related torestricted stock unit awards of $273,000 and $87,000, respectively.  Duringthe nine months ended September 30, 2010 and 2009, we recorded stock-basedcompensation related to restricted stock unit awards of $934,000 and $255,000,respectively.  The stock-basedcompensation expense amounts for the three and nine months ended September 30,2010 include the $182,000 one-time reversal related to the departure of ourformer CCO discussed above.  Thestock-based compensation expense amounts for the three and nine months ended September30, 2009 include the $41,000 one-time reversal related to the resignation ofour former CMO discussed above.  As of September30, 2010, the unrecorded stock-based compensation balance related to restrictedstock unit awards was $2,231,000 and will be recognized over an estimatedweighted-average amortization period of 2.2 years.

 

**9.****                ****NetLoss Per Share**

 

Basicnet loss per share is computed by dividing the net loss attributable to commonstockholders for the period by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share is computed by giving effect to all dilutive potentialcommon stock outstanding during the period, including stock options, restrictedstock, restricted stock unit awards and shares to be issued under our employeestock purchase plan.

 

Dilutednet loss per share is the same as basic net loss per share for all periodspresented because any potential dilutive common shares were anti-dilutive dueto our net loss (as including such shares would decrease our basic net loss pershare). Such potentially dilutive shares are excluded when the effect would beto reduce net loss per share. Because we reported a net loss for the ninemonths ended September 30, 2010 and 2009, all potentially dilutive commonshares have been excluded from the computation of the dilutive net loss pershare for all periods presented. Such potentially dilutive common sharesconsist of the following:

 
| ** **                      | ** ** | **September 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Common stock options            |       | 8,887,973         |       | 8,469,810 |   |
| Unvested restricted stock       |       | 12,500            |       | 125,000 |   |
| Unvested restricted stock units |       | 487,997           |       | 150,108 |   |
|                            |       | 9,388,470         |       | 8,744,918 |   |

 

**10.****         ****Commitmentsand Contingencies**

 

*Royalty and License Fee Commitments*

 

InDecember 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, as amended, under which we obtained exclusive worldwide rights to aportfolio of patents and patent applications related to FOLOTYN and its uses.Under the terms of the agreement, we paid an up-front license fee of $2.0million upon execution of the agreement and have made aggregate milestonepayments of $2.5 million based on the passage of time. Additionally, in May andSeptember 2009, we made milestone payments of $1.5 million based on the FDAaccepting our New Drug Application for review and $5.8 million based on the FDAapproval to market FOLOTYN, respectively. The up-front license fee and all milestone payments under the agreementprior to FDA approval to market FOLOTYN were recorded to research anddevelopment expense as incurred.  Asdiscussed in Note 5, the $5.8 million milestone payment based on the FDAapproval was capitalized as an intangible asset and is being amortized over theexpected useful life of the composition of matter patent for FOLOTYN, which weexpect to last until July 16, 2022. The only 

 

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remainingpotential milestone payment under the license agreement is for $3.5 millionupon regulatory approval to market FOLOTYN in Europe, which, if made would becapitalized and amortized over the expected useful life of the licensedpatents. 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 royaltiesbased on graduated annual levels of net sales of FOLOTYN to our distributors,net of actual rebates and chargebacks, or distributor sales, which may bedifferent than our net product revenue recognized in accordance with U.S.generally accepted accounting principles, or GAAP, or sublicense revenuesarising from sublicensing the product, if and when such sales or sublicensesoccur.  Royalties are 8% of annual distributorsales up to $150.0 million; 9% of annual distributor sales of $150.0 millionthrough $300.0 million; and 11% of annual distributor sales in excess of $300.0million.  In 2010 and 2009, our royaltieswere 8% of our net distributor sales.  Asof September 30, 2010, accrued royalties were $669,000 and are included inaccrued liabilities on the Balance Sheet.

 

**11.  SubsequentEvent**

 

InOctober 2010, we issued an aggregate of 2,016,315 RSUs to our employees underthe Company’s 2008 Equity Incentive Plan, as amended.  The RSU awards vest in three equal annualinstallments from the date of grant, subject to the employees’ continuedservice with the Company through such vesting dates.

 

In October 2010, we received notice that we wereapproved for the Therapeutic Discovery Tax Credit, which we elected to receivein the form of a cash payment, or grant totaling approximately $1,467,000 andwhich will be recorded in Other Income in the fourth quarter.

 

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

 

*The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, as well as information containedelsewhere in this report,**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-looking statementsinclude, but are not limited to, statements regarding our commercialization ofFOLOTYN for patients with relapsed or refractory peripheral T-cell lymphoma;our intent and projected timeline to submit a Marketing AuthorisationApplication, or MAA, in Europe for FOLOTYN; our projected operating costs andexpenses for fiscal year 2010; other statements regarding our future productdevelopment and regulatory strategies, including our intent to develop or seekregulatory approval for FOLOTYN for additional indications; the ability of ourthird-party manufacturers to support our requirements for drug supply; anystatements regarding our future financial performance, results of operations orsufficiency of capital resources to fund our operating requirements; and anyother statements that are other than statements of historical fact. In somecases, these statements may be identified by terminology such as “may,” “will,”“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential” or “continue,” or the negative of such terms and other comparableterminology. Although we believe that the expectations reflected in theforward-looking statements contained herein are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Thesestatements involve known and unknown risks and uncertainties that may causeour, or our industry’s results, levels of activity, performance or achievementsto be materially different from those expressed or implied by theforward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed in Part II, Item 1A ofthis report under the caption “Risk Factors.” All forward-looking statementsincluded in this report are based on information available to us as of the datehereof and we undertake no obligation to revise any forward-looking statementsin order to reflect any subsequent events or circumstances. Forward-lookingstatements not specifically described above also may be found in these andother sections of this report.*

 

**Overview**

 

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

 

Weare currently focused on the development and commercialization of FOLOTYN®(pralatrexate injection).  FOLOTYN is atargeted folate inhibitor designed to accumulate preferentially in cancercells.  FOLOTYN targets the inhibition ofdihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway,thereby interfering with DNA and RNA synthesis and triggering cancer celldeath.  FOLOTYN can be delivered as asingle agent, for which we currently have approval for the treatment ofpatients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, andhas the potential to be used in combination therapy regimens.  We believe that FOLOTYN’s unique mechanism ofaction offers us the ability to target the drug for development in a variety ofhematological malignancies and solid tumor indications.  We currently retain exclusive worldwidecommercial rights to FOLOTYN for all indications.  We may also seek to grow our productportfolio through product acquisition and in-licensing efforts.

 

OnSeptember 24, 2009, the U.S. Food and Drug Administration, or FDA, grantedaccelerated approval of FOLOTYN for use as a single agent for the treatment ofpatients with relapsed or refractory PTCL. This approval was based on overallresponse rate from our pivotal PROPEL trial. Clinical benefit such asimprovement in progression-free survival or overall survival has not beendemonstrated.  FOLOTYN represents ourfirst drug approved for marketing in the United States.  FOLOTYN is the first and only drug approvedby the FDA for this indication.  Inconnection with the accelerated approval, we are required to conductpost-approval studies that are intended to verify and describe FOLOTYN’sclinical benefit in patients with T-cell lymphoma.  Additional post-approval studies are requiredto assess whether FOLOTYN poses a serious risk of altered drug levels resultingfrom organ impairment.

 

Webegan making FOLOTYN available for commercial sale in the United States inOctober 2009 and commenced our commercial launch of FOLOTYN in January 2010.  We have established a commercialorganization, including sales, marketing, supply chain management andreimbursement capabilities, for sales of FOLOTYN in the United States.  We believe the market for relapsed orrefractory PTCL is addressable with a targeted U.S. sales and marketingorganization, and we intend to promote FOLOTYN ourselves in the United States.

 

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Basedon the results of the PROPEL trial, we intend to seek regulatory approval tomarket FOLOTYN in Europe for the treatment of patients with relapsed orrefractory PTCL.  Our current intentionis to submit a Marketing Authorisation Application, or MAA, in Europe in thefourth quarter of 2010.   We may alsoseek regulatory approval to market FOLOTYN for the treatment of patients withrelapsed or refractory PTCL in Japan and other countries.  We intend to enter into co-promotion orout-licensing arrangements with other pharmaceutical or biotechnology partnerswhere necessary to reach foreign market segments and when deemed strategicallyand economically advisable.

 

Weare committed to evaluating FOLOTYN for oncology use as a single agent and incombination with other therapies.  Wecurrently are conducting clinical trials involving FOLOTYN in multipleindications and plan to initiate additional trials in the future to evaluateFOLOTYN’s potential utility in other hematologic malignancies and solid tumorindications.  The following tablesummarizes the target indications and clinical development status of theFOLOTYN development program, including our planned post-approval studies:

 
| **Line of  Therapy / Indication**                                                               | ** ** | **Phase**  | ** ** | **Status**                                             |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|
| **HEMATOLOGIC  MALIGNANCIES**                                                                   | ** ** | ** ** | ** ** | ** **                                             |
| **Peripheral  T-cell Lymphoma**                                                                 | ** ** | ** ** | ** ** | ** **                                             |
| 2nd line+: PROPEL Pivotal Study                                                            |       | 2          |       | FDA  accelerated approval on 9/24/09; Marketed in U.S. |
| 1st Line: CHOP sequential study*                                                           |       | 3          |       | Planned  initiation in 4Q 2010                         |
| **Cutaneous  T-cell Lymphoma**                                                                  | ** ** | ** ** | ** ** | ** **                                             |
| 2nd Line+: Single agent study in relapsed or refractory  CTCL                              |       | 1          |       | Patient  enrollment completed                          |
| 2nd Line: Bexarotene combination**bexarotene +/- FOLOTYN*                                  |       | 1/3        |       | Patient  enrollment ongoing in Phase 1 study           |
| **Non-Hodgkin  Lymphoma**                                                                       | ** ** | ** ** | ** ** | ** **                                             |
| 2nd Line+: non-Hodgkin lymphoma combination *FOLOTYN + gemcitabine*                        |       | 1/2a       |       | Patient  enrollment completed                          |
| 2nd Line+: B-cell non-Hodgkin lymphoma                                                     |       | 2          |       | Patient  enrollment ongoing                            |
| **SOLID  TUMORS**                                                                               | ** ** | ** ** | ** ** | ** **                                             |
| **Non-Small  Cell Lung Cancer**                                                                 | ** ** | ** ** | ** ** | ** **                                             |
| 2nd & 3rd Line: Current or former smokers, Stage  IIIB/IV *FOLOTYN vs. erlotinib* |       | 2b         |       | Enrollment  complete; results reported October 2010    |
| **Bladder  Cancer**                                                                             | ** ** | ** ** | ** ** | ** **                                             |
| 2nd Line: Metastatic relapsed transitional cell  carcinoma (TCC) of the urinary bladder    |       | 2          |       | Patient  enrollment ongoing                            |
| **Breast  Cancer**                                                                              |       |       |       |                                                   |
| 2nd Line+: Previously treated advanced or  metastatic breast cancer                        |       | 2          |       | Patient  enrollment ongoing                            |

 

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*           These studiesare required by the FDA as a condition of the accelerated approval of FOLOTYNfor the treatment of patients with relapsed or refractory PTCL and must verifythe clinical benefit of FOLOTYN.

 

**Recent Developments**

 

On October 11, 2010, weannounced the presentation of favorable survival data from our international,randomized, multi-center Phase 2b investigational trial of FOLOTYN relative toerlotinib in patients with Stage IIIB/IV (advanced) non-small cell lung cancer,or NSCLC, who had received one or two prior systemic treatments including atleast one prior platinum-based regimen. We previously announced the top line results from this trial in July 2010.  The objective of this Phase 2b study was toestimate the efficacy of FOLOTYN relative to that of erlotinib as assessed byoverall survival, or OS, the primary endpoint of the trial.  The results demonstrated that patientsreceiving FOLOTYN had a 16% reduction in the risk of death compared toerlotinib in the overall (intent-to-treat) population (n=201; hazard ratio(HR)=0.84) and a 13% reduction in the risk of death in the primary efficacyanalysis population (n=166; HR=0.87).  Atsix months, 56% of patients treated with FOLOTYN were alive and 51% of patientstreated with erlotinib were alive; at one year, 28 % of patients treated withFOLOTYN were alive and 18% of patients treated with erlotinib were alive. Themedian OS time was 6.7 months for patients who received FOLOTYN and 7.0 monthsfor patients who received erlotinib.

 

Secondary endpoints includedprogression-free survival (PFS) (HR=0.91; median PFS=3.4 months and 2.8 monthsfor FOLOTYN and erlotinib, respectively) and objective response rate (2% and7%, respectively). Disease control rate, which includes patients with completeresponses, partial responses or stable disease, was 36% for FOLOTYN and 43% forerlotinib.

 

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Analyses were also performedaccording to the statistical analysis plan to assess the activity of FOLOTYNand erlotinib in predefined patient cohorts. Most notably, patients withnon-squamous cell carcinoma (n=107) who received FOLOTYN experienced a 35%reduction in the risk of death (OS HR=0.65) and 42% reduction in the risk ofdisease progression (PFS HR=0.58) relative to erlotinib. In patients withsquamous cell carcinoma, a hazard ratio for OS of 1.06 was observed, whichsuggests activity of FOLOTYN given that erlotinib has historically shown asurvival benefit in these patients. In the small subset of patients whoreceived prior pemetrexed (n=30), a hazard ratio for OS of 1.15 was observed.

 

The safety profile ofFOLOTYN was consistent with that observed and reported in previous FOLOTYNsolid tumor studies. The most common Grade 3-4 adverse event observed inpatients treated with FOLOTYN was mucositis (23%). Other Grade 3-4 adverseevents occurring in more than 5% of patients were fatigue (9%), dyspnea (6%),neutropenia (6%), thrombocytopenia (5%) and anemia (5%) in patients treatedwith FOLOTYN, and rash (8%), dyspnea (8%), anemia (8%) and fatigue (5%) inpatients treated with erlotinib.

 

Webelieve these data warrant further analysis to determine the future developmentstrategy based on our assessment of the potential clinical, regulatory andcommercial opportunities for FOLOTYN in this indication.  We are in the process of exploring potentialPhase 3 development options for FOLOTYN in this indication.

 

**Results of Operations**

 

We have incurred significant net losses and negative cash flows fromoperations. We have incurred these losses principally from costs incurred inour research and development programs and from our selling, general andadministrative expenses.  Our primarybusiness activities have been focused on the development of FOLOTYN and otherprograms that we discontinued in previous years.  Our ability to achieve profitability isdependent on our ability to grow product sales of FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL in the United States.  The amount of our future product sales aresubject to significant uncertainty.  Wemay never generate sufficient revenue from product sales to become profitable.

 

Weexpect to continue to spend substantial amounts on research and development,including amounts spent on conducting clinical trials and seeking additionalregulatory approvals for FOLOTYN.  Wealso expect to continue to spend substantial amounts on selling, general andadministrative expenses in connection with our commercialization of FOLOTYN forthe treatment of patients with relapsed or refractory PTCL.  Therefore, we may need to raise additionalcapital to support our future operations. Our actual capital requirements will depend on many factors, includingthose discussed under the “Liquidity and Capital Resources” section below.  If we are unable to generate meaningfulamounts of revenue from future product sales 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.

 

***Comparison of the three and nine months ended September 30, 2010 and2009***

 

*Netproduct sales.***Net product sales representtotal sales of FOLOTYN less distributor fees and estimated allowances for salesreturns, government rebates and chargebacks, as further described in the “CriticalAccounting Policies” section below. We began making FOLOTYN available forcommercial sale in the United States in October 2009.

 

Wesell FOLOTYN to a limited number of pharmaceutical wholesale distributors, ordistributors, the three largest of which are affiliates under common control ofan unrelated party.  These distributorsthen resell FOLOTYN to the patients’ respective health care providers.  Given our limited sales history, we arecurrently unable to reasonably estimate returns.  Therefore, we have determined that domesticshipments of FOLOTYN made to distributors do not meet the criteria for revenuerecognition at the time of shipment, and therefore such shipments are accountedfor using the sell-through method. Under the sell-through method, we do notrecognize revenue upon shipment of FOLOTYN to the distributor. For theseproduct sales, we invoice the distributor and record deferred revenue equal tothe gross invoice sales price. We then recognize revenue when the product issold through, or upon shipment of the product from the distributors to thedistributors’ customers.  Because of theprice of FOLOTYN, the limited number of patients, the short period from sale ofproduct to patient infusion and limited contractual return rights, FOLOTYNdistributors and their customers generally carry limited inventory.  Through September 30, 2010, product returnshave been negligible.  Deferred revenueresults from amounts receivable in advance of revenue recognition and totaled$1.6 million as of September 30, 2010.

 

Balancesand activity in the deferred revenue account and a reconciliation of gross tonet product sales for the three and 

 

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ninemonths ended September 30, 2010 and 2009 are as follows:

 
| ** **                                | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2010**                                    | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in millions)**                           | ** ** |
|                                      |       |                                        |       |                                 |       |   |   |   |   |
| Deferred revenue, beginning of the period |       | $                                           | 1.2        |                                 | $          | — |   | $ | 0.7 |   | $ | — |   |
| Gross product sales to distributors       |       | 9.7                                         |       | —                               |       | 27.4 |   | — |   |
| Less: Gross product sales recognized      |       | (9.3                                        | )          | —                               |       | (26.5 | ) | — |   |
| Deferred revenue as of September 30, 2010 |       | $                                           | 1.6        |                                 | $          | — |   | $ | 1.6 |   | $ | — |   |
|                                      |       |                                        |       |                                 |       |   |   |   |   |
| Gross product sales                       |       | $                                           | 9.3        |                                 | $          | — |   | $ | 26.5 |   | $ | — |   |
| *Less: Gross to Net Sales  Adjustments*   |       |                                        |       |                                 |       |   |   |   |   |
| Government rebates and chargebacks        |       | (0.8                                        | )          | —                               |       | (2.2 | ) | — |   |
| Distribution fees                         |       | (0.3                                        | )          | —                               |       | (0.8 | ) | — |   |
| Returns                                   |       | —                                      |       | —                               |       | — |   | — |   |
| Net product sales                         |       | $                                           | 8.2        |                                 | $          | — |   | $ | 23.5 |   | $ | — |   |

 

Netproduct sales for the three months ended September 30, 2010 of $8.2 millionrepresented an increase of 4.4% compared to the $7.9 million of net productsales for the three months ended June 30, 2010. There were no corresponding net product sales in the three and ninemonths ended September 30, 2009, as sales of FOLOTYN commenced in the fourthquarter of 2009.

 

Balances and activity in thegovernment rebates and chargebacks and distribution fees payable accounts forthe nine months ended September 30, 2010 are as follows:

 
| ** **                                               | ** ** | **Government  Rebates and  Chargebacks** | ** ** | **Distribution********Fees** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **(in millions)**                        | ** ** |
| **Balance at December 31, 2009**                         |       | $                                        | 0.5        |                         | $          | 0.1 |   |
| Reserve for current period sales                         |       | 2.4                                      |       | 0.8                          |       |
| Change in estimated Medicaid utilization for 2009  sales |       | (0.2                                     | )          | —                       |       |
| Credits/payments made for current period sales           |       | (1.1                                     | )          | (0.6                         | )          |
| Credits/payments made for prior period sales             |       | (0.1                                     | )          | (0.1                         | )          |
| **Balance at September 30, 2010**                        |       | $                                        | 1.5        |                         | $          | 0.2 |   |

 

Governmentrebates and chargebacks reflect management estimates which are furtherdiscussed in the “Critical Accounting Policies” section below*.*

 

*Cost ofsales, excluding amortization expense.***Cost of sales,excluding amortization expense, includes cost of product sold, royalties,inventory packaging and labeling, warehousing and shipping costs associatedwith FOLOTYN product revenue.

 
| ** **                                    | ** ** | **Three********Months Ended********September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                           | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(in millions)**                                  | ** ** |
| Cost of sales, excluding amortization expense |       | $                                                  | 0.9        |                                  | $          | — |   | $ | 2.3 |   | $ | — |   |
|                                               |            |                                                    |            |                                       |            |  |  |  |  |  |  |  |  |

 

Priorto receiving FDA approval of FOLOTYN, all costs related to purchases of theactive pharmaceutical ingredient and manufacturing of the product were recordedas research and development expense.  Wehave remaining supplies of drug substance and drug product that are notrecorded as inventory on our Balance Sheet as of September 30, 2010 becausethey were purchased prior to FDA approval.  Accordingly, our cost of sales will be lower with respect to productmanufactured 

 

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priorto FDA approval.  Until we sell thesesupplies for which the costs were previously expensed, our cost of sales willreflect only incremental costs incurred subsequent to the FDA approvaldate.  This occurred with respect to amajority of our sales of FOLOTYN in the nine months ended September 30,2010.  After the inventory has been soldthat was already expensed to research and development prior to FDA approval, weexpect cost of sales, excluding amortization expense to approximate 10% of netproduct sales, which includes our current 8% royalty.

 

The$0.9 million and $2.3 million of cost of sales, excluding amortization expensefor the three and nine months ended September 30, 2010, respectively, wasprimarily due to an 8% royalty on gross product sales payable to the licensorsof FOLOTYN under the terms of our license agreement.  We sold a portion of our finished goods thatwere manufactured subsequent to the FDA approval date totaling $67,000 and$82,000 during the three and nine months ended September 30, 2010,respectively, which were recorded in cost of sales, excluding amortizationexpense.  There were no correspondingcost of sales for the three and nine months ended September 30, 2009.

 

*Research and Development.* Research and development expenses include thecosts of certain personnel, preclinical studies, clinical trials, regulatoryaffairs, biostatistical data analysis, third-party manufacturing costs fordevelopment of drug materials for use in preclinical studies and clinicaltrials, and manufacturing costs and licensing fees incurred for FOLOTYN priorto receipt of FDA approval.

 
| ** **               | ** ** | **Three********Months Ended********September 30,** | ** ** | **Nine********Months Ended  September 30,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2010**                                           | ** ** | **2009**                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(in millions)**                                  | ** ** |
| Research and development |       | $                                                  | 7.2        |                                        | $          | 7.5 |   | $ | 23.1 |   | $ | 24.7 |   |
|                          |            |                                                    |            |                                             |            |  |  |  |  |  |  |  |  |

 

The$0.3 million decrease in research and development expenses in the three monthsended September 30, 2010, as compared to the same period in 2009 was primarilydue to:

 

·          a $1.2 million decrease in costs related to clinicaltrials involving FOLOTYN that have closed enrollment, including decreased costsfor our Phase 2b NSCLC study, which completed patient enrollment in July 2009;

 

·          a $539,000 decrease in consulting, professional feesand grants, primarily resulting from regulatory affairs and preparations forthe FDA’s Oncologic Drugs Advisory Committee, or ODAC, meeting for FOLOTYN in September2009, with no corresponding amounts in 2010; and

 

·          a $522,000 decrease in third-party manufacturingcosts for clinical trial material and manufacturing pre-commercial product inpreparation for approval.

 

Thisdecrease was partially offset by:

 

·          a $1.1 million increase in costs related to clinicaltrials involving FOLOTYN, including start-up costs for the post-approvalstudies required by the FDA and other trials with ongoing enrollment; and

 

·          an $828,000 increase in non-cash stock-basedcompensation expense, primarily resulting from the one-time $0.9 million reversal of stock-based compensation expensein connection with the resignation of our former Chief Medical Officer in September2009, as discussed in more detail in the *Stock-based CompensationExpense* section below.

 

The$1.6 million decrease in research and development expenses in the nine monthsended September 30, 2010, as compared to the same period in 2009 was primarilydue to:

 

·          a $1.6 million decrease in costs related to clinicaltrials involving FOLOTYN that have closed enrollment, including decreased costsfor our Phase 2b NSCLC study, which completed patient enrollment in July 2009;

 

·          a $1.5 million decrease in licensing costs resultingfrom the milestone payment made under the license agreement for FOLOTYN uponFDA acceptance of our NDA for review in the three months ended June 30, 2009,with no corresponding amount in the same period in 2010;

 

·          a $1.1 million decrease in third-party manufacturingcosts for clinical trial material and manufacturing pre-commercial product inpreparation for approval; and

 

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·          a $581,000 decrease in consulting, professional feesand grants, primarily resulting from regulatory affairs and preparationsrelated to the filing of our NDA and the FDA’s ODAC meeting for FOLOTYN in September2009, with no corresponding amounts in 2010.

 

Thisdecrease was partially offset by:

 

·          a $2.3 million increase in costs related to clinicaltrials involving FOLOTYN, including start-up costs for the post-approvalstudies required by the FDA and other trials with ongoing enrollment;

 

·          a $610,000 increase in personnel and related travelcosts, mainly attributable to additional headcount and increases incompensation costs year over year; and

 

·          a $271,000 increase in non-cash stock-basedcompensation expense, primarily resulting from the one-time $0.9 million reversal of stock-based compensation expensein connection with the resignation of our former Chief Medical Officer in September2009, as discussed in more detail in the *Stock-based CompensationExpense* section below.

 

Forthe fourth quarter of 2010, we expect our research and development expenses toincrease compared to the quarterly average for the nine months ended September 30,2010, due to the following:

 

·                  an increase in costs related to clinicaltrials involving FOLOTYN, including start-up costs for the post-approvalstudies required by the FDA; and

 

·                  an increase in non-cash stock-basedcompensation expense related to the broad-based RSU awards to existingemployees in October 2010 and grants to new employees.

 

*Selling, General and Administrative.*  Selling, general and administrative expensesinclude costs for sales and marketing activities, corporate development,medical affairs, executive administration, corporate offices and relatedinfrastructure.

 
| ** **                          | ** ** | **Three********Months Ended********September 30,** | ** ** | **Nine********Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                           | ** ** | **2009**                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **(in millions)**                                  | ** ** |
| Selling, general and administrative |       | $                                                  | 18.7       |                                        | $          | 11.3 |   | $ | 57.2 |   | $ | 26.3 |   |
|                                     |            |                                                    |            |                                             |            |  |  |  |  |  |  |  |  |

 

The$7.4 million increase in selling, general and administrative expenses in thethree months ended September 30, 2010, as compared to the same period in 2009was primarily due to the following:

 

·            a $3.7 millionincrease in personnel and related travel and facilities costs, mainlyattributable to additional headcount to support the commercialization ofFOLOTYN, including our sales and marketing organization, and increases incompensation costs year over year;

 

·            a $2.8 millionincrease in sales and marketing costs associated with the commercialization ofFOLOTYN, including promotional expenses, advisory boards, market research andcosts related to trade shows;

 

·            a $924,000increase in grants and sponsored medical education programs; and

 

·            a $330,000increase in professional fees primarily related to increased portfolio andintellectual property development activities and administrative complianceassociated with commercialization and additional headcount.

 

Theseincreases were partially offset by a decrease of $405,000 in stock-basedcompensation, primarily resulting from the one-time $0.8 million reversalrelated to the departure of our former Chief Commercial Officer in August 2010,as discussed in more detail in the *Stock-based CompensationExpense* section below.

 

The$30.8 million increase in selling, general and administrative expenses in thenine months ended September 30, 2010, as compared to the same period in 2009was primarily due to the following:

 

·            a $17.0 millionincrease in personnel and related travel and facilities costs, mainlyattributable to additional headcount to support the commercialization ofFOLOTYN, including our sales and marketing organization, and 

 

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increasesin compensation costs year over year;

 

·            a $9.6 millionincrease in sales and marketing costs associated with the commercialization ofFOLOTYN, including promotional expenses, advisory boards, market research andcosts related to trade shows;

 

·            a $2.8 millionincrease in grants and sponsored medical education programs;

 

·            a $1.0 millionincrease in stock-based compensation, net of the one-time $0.8 million reversalresulting from the departure of our former Chief Commercial Officer in August 2010,as discussed in more detail in the *Stock-based CompensationExpense* section below; and

 

·            a $304,000increase in professional fees primarily related to increased portfolio andintellectual property development activities and administrative complianceassociated with commercialization and additional headcount.

 

Forthe fourth quarter of 2010, we expect our selling, general and administrativeexpenses to increase compared to the quarterly average for the nine monthsended September 30, 2010, due to the following:

 

·       an increase in sales and marketing costs associatedwith executing our marketing and promotional programs for the commercializationof FOLOTYN;

 

·       an increase in costs associated with medical affairsand medical education expenses to educate the medical community; and

 

·       an increase in non-cash stock-based compensationexpense related to the broad-based RSU awards to existing employees in October 2010and grants to new employees.

 

*Amortizationof intangible asset.*** Amortization of intangible asset representsamortization expense of capitalized license costs over the expected patent lifeof the related product.

 

Amortizationexpense of our intangible asset for the three and nine months ended September 30,2010, was $113,000 and $340,000, respectively. Amortization expense of our intangible asset for the three and ninemonths ended September 30, 2009, was $7,000. The expense in the three and nine months ended September 30, 2010 wasdue to the amortization of the $5.8 million intangible asset resulting from amilestone payment under our license agreement for FOLOTYN in September 2009discussed further in the “Obligations and Commitments” section below.  Amortization expense is being recorded on astraight line basis over the estimated remaining life of the composition ofmatter patent for FOLOTYN, which we expect to last until July 16, 2022. Thisincludes the anticipated Hatch-Waxman extension that provides patent protectionfor drug compounds for a period of up to five years to compensate for timespent in development. This term is our best estimate of the life of thepatent.  If, however, the Hatch-Waxmanextension is not granted, the intangible asset will be amortized over a shorterperiod.

 

*Stock-basedCompensation Expense. *Stock-basedcompensation expense for the three and nine months ended September 30, 2010 and2009 has been recognized in our Statements of Operations as follows:

 
| ** **                             | ** ** | **Three********Months Ended********September 30,** | ** ** | **Nine********Months Ended********September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                             | ** ** | **(in millions)**                                  | ** ** |
| Research and development               |       | $                                                  | 0.9        |                                              | $          | 0.1 |   | $ | 2.2 |   | $ | 2.0 |   |
| Selling, general and administrative    |       | 1.3                                                |       | 1.7                                               |       | 5.7 |   | 4.6 |   |
| Total stock-based compensation expense |       | $                                                  | 2.2        |                                              | $          | 1.8 |   | $ | 7.9 |   | $ | 6.6 |   |

 

EffectiveAugust 24, 2010, James V. Caruso, our former Executive Vice President and ChiefCommercial Officer (CCO), departed the Company. As a result of Mr. Caruso’s departure, we adjusted the forfeiture rateapplied to his equity compensation, which resulted in a one-time $0.8 millionreversal of selling, general and administrative stock-based compensationexpense during the three and nine months ended September 30, 2010, of which$0.6 million related to stock option awards and $0.2 million related torestricted stock unit awards.  Effective September30, 2009, Pablo J. Cagnoni, 

 

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M.D.,our former Senior Vice President and Chief Medical Officer (CMO),resigned.  As a result of Dr. Cagnoni’sresignation, we adjusted the forfeiture rate applied to his equitycompensation, which resulted in a one-time $0.9 million reversal of researchand development stock-based compensation expense during the three and ninemonths ended September 30, 2009, of which $0.7 million related to stock optionawards, $0.2 million related to restricted stock and restricted stock unitawards.

 

Ofthe $2.2 million of stock-based compensation recognized in the three monthsended September 30, 2010, $1.8 million was related to our stock option plans,$279,000 related to restricted stock and restricted stock units and $59,000related to our employee stock purchase plan. The $1.8 million of stock-based compensation recognized in the threemonths ended September 30, 2009 primarily related to our stock optionplans.  The $0.4 million increase instock-based compensation expense in the three months ended September 30, 2010,as compared to the same period in 2009 was primarily related to an increase inthe number of options granted to new employees and to existing employees pursuantto our annual grants in February 2010.

 

Ofthe $7.9 million of stock-based compensation recognized in the nine monthsended September 30, 2010, $6.8 million was related to our stock option plans,$972,000 related to restricted stock and restricted stock units and $165,000related to our employee stock purchase plan. Of the $6.6 million of stock-based compensation recognized in the ninemonths ended September 30, 2009, $6.3 million was related to our stock optionplans, $275,000 was related to restricted stock and restricted stock units and$75,000 was related to our employee stock purchase plan.  The $1.3 million increase in stock-basedcompensation expense in the nine months ended September 30, 2010, as comparedto the same period in 2009 was primarily related to an increase in the numberof options granted to new employees and to existing employees pursuant to ourannual grants in February 2010.

 

Asof September 30, 2010, the unrecorded stock-based compensation balance relatedto stock option awards was $9.3 million and will be recognized over anestimated weighted-average amortization period of 1.7 years. As of September 30,2010, the unrecorded stock-based compensation balance related to restrictedstock unit awards was $2.2 million and will be recognized over an estimatedweighted-average amortization period of 2.2 years.  As of September 30, 2010, the unrecordedstock-based compensation balance related to restricted stock awards was $15,000and will be recognized over an estimated weighted-average amortization periodof 1.4 years.

 

Stock-basedcompensation expense in fiscal year 2010 is expected to be approximately $12million.

 

*Interest and Other Income, Net*.  Interest and other income, net for the threemonths ended September 30, 2010 and 2009 was $(129,000) and $125,000,respectively.  Interest income, net ofinterest expense, for the nine months ended September 30, 2010 and 2009 was$2,000 and $304,000, respectively.  The$254,000 decrease in net interest income in the three months ended September 30,2010, as compared to the same period in 2009 was primarily due to a $199,000loss on the disposal of certain software that was no longer in use andpartially due to lower yields on our cash, cash equivalents and investments.  The $302,000 decrease in net interest incomein the nine months ended September 30, 2010, as compared to the same period in2009 was primarily due to lower yields on our cash, cash equivalents andinvestments, offset by a realized loss of approximately $157,000 on the sale ofcertain of our investments during the nine months ended September 30, 2009,with no corresponding amount for the same period in 2010.  We recognized a loss on the disposal ofcertain software that was no longer in use totaling $199,000 and $149,000 forthe nine months ended September 30, 2010 and 2009, respectively.

 

*Income Tax Benefit*.  Income tax benefit for the three and ninemonths ended September 30, 2010 and 2009 was $78,000 and $77,000,respectively.  The income tax benefit inboth the three and nine months ended September 30, 2010 and 2009 was related toa refundable research and experimentation income tax credit received during therespective periods.  We do not expect asignificant income tax benefit during the fourth quarter of 2010.  We performed an evaluation of tax periodsthat remain subject to examination by major tax jurisdictions as of September 30,2010 and we have concluded based on that evaluation that there are nosignificant uncertain tax positions requiring recognition in our financial statements.  A full valuation allowance has beenestablished for the entire tax benefit as we believe that it is more likelythan not that such assets will not be realized.

 

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**Liquidity and Capital Resources**

 

Asof September 30, 2010, we had $108.9 million in cash, cash equivalents, andinvestments.  Until required for use inour business, we invest our cash reserves in bank deposits, money market fundsand U.S. government instruments in accordance with our investment policy.  The weighted average duration of theremaining time to maturity for our portfolio of investments as of September 30,2010 was approximately four months.   Ourinvestments as of September 30, 2010, primarily consisted of U.S. Treasurynotes. We did not hold any derivative instruments, foreign exchange contracts,asset backed securities, mortgage backed securities, auction rate securities,or securities of issuers in bankruptcy in our investment portfolio as of September30, 2010.  We have the ability and intentto hold our remaining investments to recover the entire amortized cost basis ofthe investments as of September 30, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

Sinceour inception, we have financed our operations primarily through public and privatesales of our equity securities, which have resulted in net proceeds to us of$477.7 million through September 30, 2010.

 

Netcash used to fund our operating activities for the nine months ended September 30,2010 and 2009 was $52.9 million and $42.0 million, respectively.  The $10.9 million increase in net cash usedto fund our operating activities in the nine months ended September 30, 2010,as compared to the same period in 2009 was primarily due to the increase in ournet loss and the $3.9 million increase in accounts receivable, as we had noaccounts receivable in the corresponding period in 2009.

 

Forfiscal year 2010, total operating costs and expenses are expected to beapproximately $105 to $110 million, excluding non-cash stock-based compensationexpense.  Stock-based compensationexpense is expected to be approximately $12 million.  Actual financial results for 2010 will varybased upon many factors, including FOLOTYN sales and rate of patient enrollmentin clinical trials that are ongoing and planned for initiation in the fourthquarter of 2010.

 

Netcash used in investing activities for the nine months ended September 30, 2010,was $29.0 million and consisted primarily of purchases of investments offset byproceeds from maturities of investments. Net cash provided by investing activities for the nine months ended September30, 2009 was $24.0 million and consisted of the net proceeds from maturities,sales and purchases of investments in marketable securities, partially offsetby the $5.8 million of cash paid for license related to the milestone paymentmade under our license agreement for FOLOTYN upon FDA approval of our NDA in September2009 and $1.1 million of cash paid for the acquisition of property andequipment.

 

Netcash provided by financing activities for the nine months ended September 30,2010, was $4.2 million and consisted primarily of proceeds from the issuance ofcommon stock associated with stock options exercised by our employees and salesof stock under our employee stock purchase plan.  Net cash provided by financing activities forthe nine months ended September 30, 2009 was $50.0 million and consistedprimarily of the $47.0 million of net proceeds from our financing in April 2009and $3.0 million of proceeds from the issuance of common stock associated withstock options exercised by our employees and sales of stock under our employeestock purchase plan.

 

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments as of September 30,2010, will 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.

 

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

 

·      the timing and amount of revenues generatedfrom sales of FOLOTYN;

 

·      the timing and costs associated with our salesand marketing activities for the commercialization of FOLOTYN;

 

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

 

·      the timing and costs associated withconducting preclinical and clinical development of FOLOTYN, including thepost-approval clinical studies required by the FDA, as well as our evaluationof, and decisions with respect to, additional therapeutic indications for whichwe may develop FOLOTYN;

 

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

 

·      our evaluation of, and decisions with respectto, potential in-licensing or product acquisition opportunities or otherstrategic alternatives.

 

Wemay seek to obtain this additional capital through equity or debt financings,arrangements with corporate partners, or from other sources. Such financings orarrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wemight otherwise seek to develop or commercialize ourselves, on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales 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.

 

**Obligationsand Commitments**

 

*Royalty and License Fee Commitments*

 

InDecember 2002, we entered into a license agreement with MemorialSloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, as amended, under which we obtained exclusive worldwide rights to aportfolio of patents and patent applications related to FOLOTYN and its uses.Under the terms of the agreement, we paid an up-front license fee of $2.0million upon execution of the agreement and have made aggregate milestonepayments of $2.5 million based on the passage of time. Additionally, in May andSeptember 2009, we made milestone payments of $1.5 million based on the FDAaccepting our New Drug Application for review and $5.8 million based on the FDAapproval to market FOLOTYN, respectively. The up-front license fee and all milestone payments under the agreementprior to FDA approval to market FOLOTYN were recorded to research anddevelopment expense as incurred.  The$5.8 million milestone payment based on the FDA approval was capitalized as anintangible asset and is being amortized over the expected useful life of thecomposition of matter patent for FOLOTYN, which we expect to last until July 16,2022. The only remaining potential milestone payment under the licenseagreement is for $3.5 million upon regulatory approval to market FOLOTYN inEurope, which, if made would be capitalized and amortized over the expecteduseful life of the licensed patents. Under the terms of the agreement, we arerequired to fund all development programs and will have sole responsibility forall commercialization activities. In addition, we will pay the licensorsroyalties based on graduated annual levels of net sales of FOLOTYN to ourdistributors, net of actual rebates and chargebacks, or distributor sales,which may be different than our net product revenue recognized in accordancewith U.S. generally accepted accounting principles, or GAAP, or sublicenserevenues arising from sublicensing the product, if and when such sales orsublicenses occur.  Royalties are 8% ofannual distributor sales up to $150.0 million; 9% of annual distributor salesof $150.0 million through $300.0 million; and 11% of annual distributor salesin excess of $300.0 million.  In 2010 and2009, our royalties were 8% of our net distributor sales.

 

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**Critical Accounting Policies**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, andexpenses. We base our estimates on historical experience, available informationand assumptions that we believe to be reasonable under the circumstances.Actual results may differ from these estimates under different assumptions orconditions. We believe the following policies to be the most critical to anunderstanding of our financial condition and results of operations because theyrequire us to make estimates, assumptions and informed management judgmentsabout matters that are inherently uncertain:

 

·       revenue recognition;

 

·          accounting for research and development expenses;

 

·          accounting for inventory; and

 

·       accounting for stock-based compensation expense.

 

*Revenue Recognition.*   We generate revenue from product sales.  We recognize product revenue when it isrealized or realizable and earned. Revenue is realized or realizable and earnedwhen all of the following criteria are met: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have been rendered;(3) our price to the buyer is fixed and determinable; and (4) collectability isreasonably assured. Revenue from sales transactions where the buyer has theright to return the product is recognized at the time of sale only if (1) ourprice to the buyer is substantially fixed or determinable at the date of sale,(2) the buyer has paid us, or the buyer is obligated to pay us and theobligation is not contingent on resale of the product, (3) the buyer’sobligation to us would not be changed in the event of theft or physicaldestruction or damage of the product, (4) the buyer acquiring the product forresale has economic substance apart from that provided by us, (5) we do nothave significant obligations for future performance to directly bring aboutresale of the product by the buyer, and (6) the amount of future returns can bereasonably estimated.

 

Wesell FOLOTYN to a limited number of pharmaceutical wholesale distributors, ordistributors, the three largest of which are affiliates under common control ofan unrelated party.  These distributorsthen resell FOLOTYN to the patients’ respective health care providers.  Given our limited sales history, we arecurrently unable to reasonably estimate returns. Therefore, we have determinedthat domestic shipments of FOLOTYN made to distributors do not meet thecriteria for revenue recognition at the time of shipment, and therefore suchshipments are accounted for using the sell-through method. Under thesell-through method, we do not recognize revenue upon shipment of FOLOTYN tothe distributor. For these product sales, we invoice the distributor and recorddeferred revenue equal to the gross invoice sales price. We then recognizerevenue when the product is sold through, or upon shipment of the product fromthe distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limitednumber of patients, the short period from sale of product to patient infusionand limited contractual return rights, FOLOTYN distributors and their customersgenerally carry limited inventory. Through September 30, 2010, product returns have been negligible.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1.6 million as of September30, 2010.

 

Weestimate sell-through revenue and certain gross to net sales adjustments basedupon analysis of third-party information, including information obtained fromcertain distributors with respect to their inventory levels and sell-through tothe distributors’ customers. Our estimates are subject to the inherentlimitations of estimates that rely on third-party data. The informationreceived from distributors is a product of their record-keeping process andtheir internal controls surrounding such processes.  Our sales and revenue recognition under thesell-through method reflect our estimate of actual product sold through thedistribution channel.

 

Additionallyunder the sell-through method, royalties paid based on unit shipments todistributors are deferred and recognized as royalty expense when those unitsare sold through and recognized as revenue. Royalties paid are deferred as wehave the right to offset royalties paid for product that are later returnedagainst subsequent royalty obligations.

 

*Net Product Sales*

 

Our net product salesrepresent total sell-through revenue less estimated allowances for rebates andchargebacks to be incurred on the selling price of FOLOTYN related to therespective revenue. In addition, we incur certain distributor fees related tothe management of our product by distributors. These distributor fees arerecorded within net revenues and are 

 

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known at the time of sale.Due to estimates and assumptions inherent in determining the amount of rebatesand chargebacks, the actual amount of claims for rebates and chargebacks may bedifferent from our estimates, at which time we would adjust our reservesaccordingly.  Product sales allowancesand accruals are based on definitive contractual agreements or legalrequirements (such as Medicaid laws and regulations) related to the purchaseand/or utilization of the product by these entities.  Allowances and accruals are generallyrecorded in the same period that the related revenue is recognized.

 

*Classificationof Product Sales Allowances and Accruals*

 

Accruals related to Medicaidrebates, government chargebacks and distributor fees are recognized at the timesell-through revenue is recorded, resulting in a reduction in product salesrevenue and the recording of an increase in accrued expenses.

 

*Medicaid Rebates*

 

Our product is subject tostate government-managed Medicaid programs whereby discounts and rebates areprovided to participating state governments. We record estimated rebatespayable under governmental programs, including Medicaid, as a reduction ofrevenue at the time sell-through revenues are recorded. Our calculationsrelated to these rebate accruals require estimates, including estimates ofcustomer mix primarily based on a combination of market and clinical research,to determine which sales will be subject to rebates and the amount of suchrebates. During the first quarter of 2010, we obtained additional marketresearch and were able to refine our estimated Medicaid utilization, whichresulted in a reversal of Medicaid rebate allowances related to 2009 salestotaling $208,000.  We also consider anylegal interpretations of the applicable laws related to Medicaid and qualifyingfederal and state government programs and any new information regarding changesin the Medicaid programs’ regulations and guidelines that would impact theamount of the rebates.  In March 2010,the Patient Protection and Affordable Care Act, as modified by the Health Careand Education Affordability Reconciliation Act of 2010, or PPACA, was enacted,which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactiveto January 1, 2010.  In addition, thestates’ ability to early adopt portions of PPACA, and any implementingregulations, could impact future estimates related to our Medicaid rebateallowances. We update our estimates and assumptions each period and record anynecessary adjustments to our reserves. Although allowances and accruals are recordedat the time of product sale, certain rebates are typically paid out, onaverage, up to six months or longer after the sale. We account for Medicaidrebates by establishing an accrual in an amount equal to our estimate ofMedicaid rebate claims attributable to sales recognized in that period.  If actual future results vary from ourestimates, we may need to adjust our previous estimates, which would affect ourearnings in the period of the adjustment. For reference purposes, a 10% to 20% variance in Medicaid utilizationestimates for state Medicaid rebates as of September 30, 2010, would result inan approximate $0.4 million to $0.9 million adjustment to cumulative netproduct sales.

 

*Government Chargebacks*

 

Ourproducts are subject to certain programs with federal government qualifiedentities whereby pricing on products is discounted below distributor list priceto participating entities. These entities purchase products throughdistributors at the discounted price, and the distributors charge the differencebetween their acquisition cost and the discounted price back to us. We accountfor chargebacks by establishing an accrual in an amount equal to our estimateof maximum chargeback claims. We determine our chargeback estimates based onactual FOLOTYN sell-through salesdata from third-party information. Chargeback amounts are determined at thetime of resale to the federal government qualified entities, and we generallyissue credits for such amounts within several weeks of receiving claims from thedistributor. We do not expect the impact of the 340B program expansion includedin the PPACA to significantly change our estimated government chargebackaccruals because drugs approved under an Orphan Drug designation werespecifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status toFOLOTYN for the treatment of patients with T-cell lymphoma, which includespatients with relapsed or refractory PTCL.**Estimatedchargeback amounts are recorded at the time the sell-through sale occurs and weadjust the accrual quarterly to reflect actual experience. Due to estimates andassumptions inherent in determining the amount of government chargebacks, theactual amount of claims for chargebacks may be different from our estimates, atwhich time we would adjust our reserves accordingly.

 

*Research and Development.* Research and development expenditures arecharged to expense as incurred. Research and development expenses include thecosts of certain personnel, preclinical studies, clinical trials, regulatoryaffairs, biostatistical data analysis, third party manufacturing costs fordevelopment of drug materials for use in clinical trials and preclinicalstudies and licensing fees for our product candidates prior to FDA approval.  All finished drug inventory costs 

 

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associatedwith production activities in our third party manufacturing facilities prior toreceiving FDA approval for such facilities and prior to receiving regulatoryapproval to market our product are expensed to research and developmentexpenses. Upon receipt of the related regulatory approval, we capitalize thosemanufacturing costs for our marketed products at the lower of cost or marketand then expense the sold inventory as a component of cost of sales. We accrueresearch and development expenses for activity as incurred during the fiscalyear and prior to receiving invoices from clinical sites and third partyclinical and preclinical research organizations. We accrue external costs forclinical and preclinical studies based on an evaluation of the following: theprogress of the studies, including patient enrollment, dosing levels ofpatients enrolled, estimated costs to dose patients, invoices received, andcontracted costs with clinical sites and third party clinical and preclinicalresearch organizations. Significant judgments and estimates must be made andused in determining the accrued balance in any accounting period. Actualresults could differ from those estimates. During the quarters ended September 30,2010 and 2009, we did not have any changes in estimates that would haveresulted in material adjustments to research and development expenses accruedin the prior period.

 

Inaccordance with certain research and development agreements, we are obligatedto make certain upfront payments upon execution of the agreement. We recordthese upfront payments as prepaid research and development expenses. Suchpayments are recorded to research and development expense as services areperformed. We evaluate on a quarterly basis whether events and circumstanceshave occurred that may indicate impairment of remaining prepaid research and developmentexpenses.

 

*Inventory****. ***Costsassociated with the production of FOLOTYN bulk drug substance and formulateddrug product by our third party manufacturers are recorded as either researchand development expense or inventory.

 

Costs associated with theproduction of FOLOTYN by our third party manufacturers are expensed to researchand development expense at the time of production when:

 

·                  the formulateddrug product is packaged for clinical trial use;

 

·                  the bulk drugsubstance and formulated drug product is produced prior to receiving regulatoryapproval to market the product candidate; and

 

·                  the bulk drugsubstance and formulated drug product is produced prior to receiving FDAapproval for the respective third party manufacturing facilities.

 

If and when we receive therelated regulatory approval, we capitalize those manufacturing costs for ourmarketed products at the lower of cost (first-in, first-out method) or market(current replacement cost) with cost determined on the first-in, first-out basisand then expense the sold inventory as a component of cost of goods sold.

 

Prior to receiving FDAapproval of FOLOTYN, all costs related to purchases of the activepharmaceutical ingredient and the manufacturing of the product were recorded asresearch and development expense.  Wehave remaining supplies of FOLOTYN drug substance and drug product that are notrecorded as inventory on our Balance Sheet as of September 30, 2010 becausethey were purchased prior to FDA approval. Accordingly, our cost of sales will be lower with respect to productmanufactured prior to FDA approval. Until we sell these supplies for which the costs were previouslyexpensed, our cost of sales will reflect only incremental costs incurred subsequentto the FDA approval date.  We sold aportion of our finished goods that were manufactured subsequent to the FDAapproval date totaling $67,000 and $82,000 during the three and nine monthsended September 30, 2010, respectively, which were recorded in cost of sales,excluding amortization expense in the Statement of Operations.  We continue to expense costs associated withclinical trial material as research and development expense.  Inventory as of September 30, 2010, consistsof work in process of $83,000 and finished goods of $68,000.

 

*Stock-based Compensation Expense.* We have several stock-based compensation plansunder which incentive and non-qualified stock options, restricted stock unitsand restricted shares may be granted, and an employee stock purchase plan.  We measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant datefair value of the award. That cost is recognized over the period during whichan employee is required to provide services in exchange for the award, the requisiteservice period (usually the vesting period). We provide an estimate offorfeitures at initial grant date.

 

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Duringthe nine months ended September 30, 2010 and 2009, we recorded stock-basedcompensation expense of approximately $7.9 million and $6.6 million,respectively, related to stock-based awards, including stock options,restricted stock units, restricted stock and our employee stock purchase plan.As of September 30, 2010, the unrecorded deferred stock-based compensationbalance related to these stock-based awards was approximately $11.5 million andwill be recognized over the remaining vesting periods of the awards. Judgmentsand estimates must be made and used in determining the factors used incalculating the fair value of stock-based awards, including the expectedforfeiture rate of our stock-based awards, the expected life of our stock-basedawards, and the expected volatility of our stock price. For more information onstock-based compensation expense during the nine months ended September 30,2010, refer to Note 8 “Stock-Based Compensation” of the unaudited September 30,2010, financial statements included herein.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Ourfinancial instruments as of September 30, 2010, consisted of cash, cashequivalents, investments, accounts receivable and accounts payable.  All highly liquid investments with originalmaturities of three months or less are considered to be cash equivalents.  We invest in securities in accordance withour investment policy.  The primary objectivesof our investment policy are to preserve principal and maintain properliquidity to meet our operating needs. Our investment policy specifies credit quality standards for ourinvestments and limits the amount of credit exposure to any single issue,issuer or type of investment.  Theweighted average duration of the remaining time to maturity for our portfolioof investments as of September 30, 2010, was approximately four months.  As of September 30, 2010, our investments of$45.5 million were all classified as held-to-maturity and were held in avariety of interest-bearing instruments, consisting primarily of U.S. Treasurynotes. We did not hold any derivative instruments, foreign exchange contracts,asset backed securities, mortgage backed securities, auction rate securities,or securities of issuers in bankruptcy in our investment portfolio as of September30, 2010.  We have the ability and intentto hold our remaining investments to recover the entire amortized cost basis ofthe investments as of September 30, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

Investmentsin fixed-rate interest-bearing instruments carry varying degrees of interestrate risk.  The fair market value of ourfixed-rate securities may be adversely impacted due to a rise in interestrates.  In general, securities withlonger maturities are subject to greater interest-rate risk than those withshorter maturities.  Due in part to thisfactor, our interest income may fall short of expectations or we may sufferlosses in principal if securities are sold that have declined in market valuedue to changes in interest rates.  Due tothe short duration of our investment portfolio, we believe an immediate 10%change in interest rates would not be material to our financial condition orresults of operations.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, of theeffectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e)of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”.  Based on that evaluation, our management,including our principal executive officer and principal financial officer,concluded that our disclosure controls and procedures were effective as of September30, 2010, to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission’s rules and forms, and that such information is accumulatedand communicated to our management, including our principal executive officerand principal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

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

 

Therewere no changes in our internal controls over financial reporting during thethree months ended September 30, 2010, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

None.

 

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**ITEM 1A.  RISK FACTORS**

 

*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. **Stockholdersand potential investors in shares of our common stock should carefully considerthe following 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, 2009 inaddition 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 the periodended December 31, 2009 have been marked with an asterisk immediately followingthe heading of such risk factor.*

 

***We have a history of net losses and an accumulated deficit, and we maynever generate sufficient revenue to achieve or maintain profitability in thefuture.********

 

Wehave experienced significant net losses and negative cash flows fromoperations. To date, we have financed our operations primarily through thepublic and private sale of securities. For the nine months ended September 30, 2010, we had a net loss of $59.3million.  As of September 30, 2010, wehad accumulated a deficit of $432.5 million. We have incurred these losses principally from costs incurred in ourresearch and development programs and from our selling, general andadministrative expenses.

 

OnSeptember 24, 2009, we obtained accelerated approval from the FDA for FOLOTYNfor use as a single agent for the treatment of patients with relapsed orrefractory PTCL.  Our ability to generaterevenue and achieve profitability is dependent on our ability, alone or withpartners, to successfully commercialize FOLOTYN for the treatment of patientswith relapsed or refractory PTCL.  We arealso developing FOLOTYN for use as a single agent and in combination therapyregimens in a range of hematologic malignancies and solid tumor indications,which may or may not lead to obtaining the necessary regulatory approvals tomarket FOLOTYN for additional indications. We expect to continue to spendsubstantial amounts on research and development, including amounts spent onconducting clinical trials and seeking additional regulatory approvals forFOLOTYN, and commercializing FOLOTYN for the treatment of patients withrelapsed or refractory PTCL. As a result, we may never generate sufficientrevenue from product sales to become profitable or generate positive cashflows.

 

***Our near-term prospects are dependent on FOLOTYN.  If we are unable to successfully commercializeFOLOTYN for the treatment of patients with relapsed or refractory PTCL, ourability to generate significant revenue or achieve profitability will beadversely affected.*** *

 

FOLOTYNis our only product approved for marketing by the FDA and our ability togenerate revenue in the near term is entirely dependent upon sales ofFOLOTYN.  We may not be able tosuccessfully commercialize FOLOTYN for a number of reasons, including:

 

·      wemay not be able to establish or demonstrate in the medical community the safetyand efficacy of FOLOTYN and any potential advantages over existing therapeuticsand products currently in clinical development;

 

·     doctorsmay be hesitant to prescribe FOLOTYN until results from our post-approvalstudies are available or other long term data regarding efficacy and safetyexists;

 

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

 

·     ourlimited experience in marketing, selling and distributing FOLOTYN;

 

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

 

·      therelative price of FOLOTYN as compared to alternative treatment options;

 

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

 

·      wemay not have adequate financial or other resources to successfullycommercialize FOLOTYN; and

 

·      wemay not be able to manufacture FOLOTYN in commercial quantities or at acceptablecosts.

 

Ifwe are unable to successfully commercialize FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL, our ability to generate revenue fromproduct sales and achieve profitability will be adversely affected and ourstock price would likely decline.

 

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

 

Ouroperating results are difficult to predict and will likely fluctuate fromquarter to quarter and year to year.  Dueto the recent approval of FOLOTYN for the treatment of patients for relapsed orrefractory PTCL in the United States and the lack of historical sales data,FOLOTYN sales will be difficult to predict from period to period.  We believe that our quarterly and annualresults of operations may be negatively affected by a variety of factors,including:

 

·      the level of patient demand for FOLOTYN;

 

·                  the timing andlevel of investment in our sales and marketing efforts to support FOLOTYNsales;

 

·                  the timing andlevel of investment in our research and development activities involvingFOLOTYN; and

 

·                  expenditures wemay incur to acquire or develop additional products.

 

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

 

Forthese reasons, it is difficult for us to accurately forecast future profits orlosses. As a result, it is possible that in some quarters our operating resultscould be below the expectations of securities analysts or investors, whichcould cause the trading price of our common stock to decline, perhapssubstantially.

 

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

 

Theapproval of FOLOTYN for the treatment of patients with relapsed or refractoryPTCL is our first U.S. approval.  Accordingly,we have limited experience in sales, marketing and distribution ofpharmaceutical products. We may not be able to adequately maintain thenecessary sales, marketing, supply chain management and reimbursementcapabilities on our own or enter into arrangements with third parties toperform these functions in a timely manner or on acceptable terms.  Additionally, maintaining sales, marketing anddistribution capabilities may be more expensive than we anticipate, requiringus to divert capital from other intended purposes or preventing us frombuilding our sales, marketing and distribution capabilities to the desiredlevels. To be successful we must:

 

·     recruit and retain adequate numbers ofeffective sales personnel;

 

·     effectivelytrain our sales personnel in the benefits of FOLOTYN;

 

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·      establishand maintain successful sales and marketing and education programs thatencourage physicians to recommend FOLOTYN to their patients; and

 

·       managegeographically dispersed sales and marketing operations.

 

Thecommercialization of FOLOTYN requires us to manage relationships with anincreasing number of collaborative partners, suppliers and third-partycontractors. If we are unable to successfully establish and maintain therequired infrastructure, either internally or through third parties, andsuccessfully manage an increasing number of relationships, we will havedifficulty growing our business. In addition, we intend to enter intoco-promotion or out-licensing arrangements with other pharmaceutical orbiotechnology partners where necessary to reach foreign market segments andwhen deemed strategically and economically advisable. To the extent that weenter into co-promotion or other licensing arrangements, our product revenuesare likely to be lower than if we directly marketed and sold FOLOTYN, and someor all of the revenues we receive will depend upon the efforts of thirdparties, which may not be successful. If we are unable to develop and maintainadequate sales, marketing and distribution capabilities, independently or withothers, we may not be able to generate significant product revenue or becomeprofitable.

 

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

 

FOLOTYNwas approved for the treatment of patients with relapsed or refractory PTCLunder the FDA’s accelerated approval regulations, which allow the FDA to approveproducts for cancer or other life threatening diseases based on initialpositive data from clinical trials.  Under these provisions, we are subject tocertain post-approval requirements pursuant to which we are required to conducttwo randomized Phase 3 trials to verify and describe FOLOTYN’s clinical benefitin patients with T-cell lymphoma.  TheFDA has also required that we conduct two Phase 1 trials to assess whetherFOLOTYN poses a serious risk of altered drug levels resulting from organimpairment.  Failure to complete thestudies or adhere to the timelines established by the FDA could result inpenalties, including fines or withdrawal of FOLOTYN from the market.  The FDA may also initiate proceedings towithdraw approval if our Phase 3 studies fail to verify clinical benefit.  Further, the FDA may require us to strengthenthe warnings and precautions section of the FOLOTYN package insert or institutea Risk Evaluation and Mitigation Strategy based on the results of these studiesor clinical experience.  We are alsosubject to additional, continuing post-approval regulatory obligations,including the possibility of additional clinical studies required by the FDA,safety reporting requirements and regulatory oversight of the promotion andmarketing of FOLOTYN.

 

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

 

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

 

Ourability to successfully commercialize FOLOTYN for the treatment of patientswith relapsed or refractory PTCL or for other future indications will depend,in part, on the extent to which coverage and reimbursement for FOLOTYN isavailable from government and health administration authorities, private healthinsurers, managed care programs and other third-party payers.  Significant uncertainty exists as to thecoverage and reimbursement of newly approved health care products.  In addition, the U.S. Congress recentlyenacted legislation to reform the health care system that includes costcontainment measures that may adversely affect the amount of reimbursement forpharmaceutical products, including FOLOTYN. These measures include increasing the minimum rebates for productscovered by Medicaid programs and extending such rebates to drugs dispensed toMedicaid beneficiaries enrolled in Medicaid managed care organizations as wellas expansion of the 340(B) Public Health Services drug discount program.

 

Healthcareproviders and third-party payers use coding systems to identify diagnoses,procedures, services, drugs, pharmaceutical devices, equipment and otherhealth-related items and services.  Proper coding is an integral component toreceiving appropriate reimbursement for the administration of FOLOTYN andrelated services. The majority of payers use 

 

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nationallyrecognized code sets to report medical conditions, services and drugs.  We recently obtained transitional pass-throughstatus which enables FOLOTYN to be reimbursed under the hospital outpatientprospective payment system.  In addition,we have applied for a permanent reimbursement J-code for FOLOTYN, althoughhealthcare providers prescribing FOLOTYN are currently required to submitclaims for reimbursement using a temporary J-code, which may result in paymentdelays or incorrect payment levels. We cannot predict at this time whether ourcustomers will receive adequate reimbursement for FOLOTYN, nor can we predict whetherFOLOTYN will receive a permanent J-code in the future.

 

Third-partypayers, including Medicare, are challenging the prices charged for medicalproducts and services. Government and other third-party payers increasingly areattempting to contain health care costs by limiting both coverage and the levelof reimbursement for new drugs and by refusing, in some cases, to providecoverage for uses of approved products for disease conditions for which the FDAhas not granted labeling approval. Third-party insurance coverage may not beavailable to patients for FOLOTYN. If government and other third-party payersdo not provide adequate coverage and reimbursement levels for FOLOTYN, FOLOTYN’smarket acceptance may be adversely affected.

 

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

 

Inthe United States, we sell FOLOTYN to a small number of distributors who inturn sell-through to patient health care providers. These distributors alsoprovide multiple logistics services relating to the distribution of FOLOTYN,including transportation, warehousing, cross-docking, inventory management,packaging and freight-forwarding.  We donot promote FOLOTYN to these distributors and they do not set or determinedemand for FOLOTYN.  For the nine monthsended September 30, 2010, three companies affiliated with AmerisourceBergenCorporation accounted for substantially all of our FOLOTYN sales.  We expect significant customer concentrationto continue for the foreseeable future. Our ability to successfully commercialize FOLOTYN will depend, in part,on the extent to which these distributors are able to provide adequatedistribution of FOLOTYN to patient health care providers.  Although we believe we can find alternativedistributors on a relatively short notice, our revenue during that period oftime may suffer and we may incur additional costs to replace adistributor.  The loss of any largecustomer, a significant reduction in sales we make to them, any cancellation oforders they have made with us or any failure to pay for the products we haveshipped to them could materially and adversely affect our results of operationsand financial condition.

 

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

 

Oursuccess depends on the continued customer support efforts of our network ofdistributors.  The use of distributorsinvolves certain risks, including, but not limited to, risks that thesedistributors will:

 

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

 

·                  not effectively distribute or supportFOLOTYN;

 

·                  reduce or discontinue their efforts to sellor support FOLOTYN;

 

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

 

·                  cease operations.

 

Anysuch failure may result in decreased sales of FOLOTYN, which would harm ourbusiness.

 

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

 

Asa biopharmaceutical company, even though we do not and will not controlreferrals of health care services or bill directly to Medicare, Medicaid orother third-party payers, certain federal and state healthcare laws andregulations pertaining to fraud and abuse will be applicable to our business.These laws and regulations, include, among others:

 

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

 

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

 

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

 

·      federalself-referral laws, such as STARK, which prohibit a physician from making areferral to a provider of certain health services with which the physician orthe physician’s family member has a financial interest; and

 

·      state law equivalents of each of the abovefederal laws, such as anti-kickback and false claims laws that may apply toitems or services reimbursed by any third-party payer, including commercialinsurers, and state laws governing the privacy of health information in certaincircumstances, many of which differ from each other in significant ways andoften are not preempted by HIPAA.

 

Althoughthere are a number of statutory exemptions and regulatory safe harborsprotecting certain common activities from prosecution under the federalAnti-Kickback statute, the exemptions and safe harbors are drawn narrowly, andpractices that involve remuneration intended to induce prescriptions, purchasesor recommendations may be subject to scrutiny if they do not qualify for anexemption or safe harbor. Further, the recently enacted health care reform lawknown as the Patient Protection and Affordable Care Act (PPACA), enacted in2010, amends the intent requirement of the federal anti-kickback and criminalhealth care fraud statutes. A person or entity no longer needs to have actualknowledge of this statute or specific intent to violate it. In addition, thegovernment may assert that a claim including items or services resulting from aviolation of the federal anti-kickback statute constitutes a false orfraudulent claim for purposes of the false claims laws. Our practices may notin all cases meet all of the criteria for safe harbor protection fromanti-kickback liability.

 

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

 

ThePPACA, enacted in 2010, imposes new reporting and disclosure requirements forpharmaceutical and device manufacturers with regard to payments or othertransfers of value made to physicians and teaching hospitals, effective March 30,2013.  Such information will be madepublicly available in a searchable format beginning September 30, 2013.  In addition, pharmaceutical and devicemanufacturers will also be required to report and disclose investment interestsheld by physicians and their immediate family members during the precedingcalendar year.  Failure to submitrequired information may result in civil monetary penalties of up to $150,000per year (and up to $1 million per year for “knowing failures”), for allpayments, transfers of value or ownership or investment interests not reportedin an annual submission.

 

Inrecent years, several states and localities, including California, the Districtof Columbia, Maine, Massachusetts, Minnesota, Nevada, Vermont, and WestVirginia, have enacted legislation requiring pharmaceutical companies toestablish 

 

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marketingcompliance programs, and file periodic reports with the state or make periodicpublic disclosures on sales, marketing, pricing, clinical trials, and otheractivities. Similar legislation is being considered in other states. Many ofthese requirements are new and uncertain, and the penalties for failure tocomply with these requirements are unclear. Nonetheless, if we are found not tobe in full compliance with these laws, we could face enforcement action andfines and other penalties, and could receive adverse publicity.

 

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

 

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

 

Eventhough we have obtained approval to market FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL, our commercial opportunity will bereduced or eliminated if our competitors develop and market products that aremore effective, have fewer side effects or are less expensive than FOLOTYN forthis or any other potential indication. Our potential competitors includelarge, fully-integrated pharmaceutical companies and more establishedbiotechnology companies, both of which have significant resources and expertisein research and development, manufacturing, testing, obtaining regulatoryapprovals and marketing. Academic institutions, government agencies, and otherpublic and private research organizations conduct research, seek patentprotection and establish collaborative arrangements for research, development,manufacturing and marketing. It is possible that competitors will succeed indeveloping technologies that are more effective than those being developed byus or that would render our technology obsolete or noncompetitive.

 

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

 

Weare subject to stringent regulations with respect to product safety andefficacy by various international, federal, state and local authorities.FOLOTYN has not been approved for marketing in the United States for anyindication other than the treatment of patients with relapsed or refractoryPTCL. In addition, FOLOTYN has not been approved for marketing for this or anyother indication in any other country. A pharmaceutical product cannot bemarketed in the United States or most other countries until it has completed arigorous and extensive regulatory review and approval process. Satisfaction ofregulatory requirements typically takes many years, is dependent upon the type,complexity and novelty of the product and requires the expenditure of substantialresources. Of particular significance are the requirements covering researchand development, preclinical and clinical testing, manufacturing, qualitycontrol, labeling and promotion of drugs for human use. We may not obtain thenecessary regulatory approvals to market FOLOTYN in the United States for anyadditional indications or in any other countries. If we fail to obtain ormaintain regulatory approvals to market FOLOTYN in the United States for anyadditional indications or in any other countries, our ability to generatesignificant revenue or achieve profitability may be adversely affected.

 

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

 

FOLOTYNmay cause serious adverse events. These adverse events could interrupt, delayor halt clinical trials of FOLOTYN, including the FDA-required post-approvalstudies, and could result in the FDA or other regulatory authorities denying orwithdrawing approval of FOLOTYN for any or all indications, including for thetreatment of patients with relapsed or refractory PTCL. Adverse events may alsonegatively impact the sales of FOLOTYN. The FDA, other regulatory authorities or we may suspend or terminateclinical trials at any time. We may also be required to update the warnings andprecautions section of the FOLOTYN package insert based on reports of adverseevents or safety concerns or implement a Risk Evaluation and MitigationStrategy, which could adversely affect FOLOTYN’s acceptance in the market.  We cannot assure you that FOLOTYN will besafe for human use.

 

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

 

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

 

Wehave ongoing clinical trials involving FOLOTYN and plan to initiate additionaltrials to evaluate FOLOTYN’s potential clinical utility in other hematologicmalignancies and solid tumor indications.  FOLOTYN may not prove to be safe andefficacious in clinical trials for other indications and may not meet all ofthe applicable regulatory requirements needed to receive regulatory approvalfor those indications. The clinical development and regulatory approval processis expensive and takes many years. Failure can occur at any stage ofdevelopment, and the timing of any regulatory approval cannot be accuratelypredicted. In addition, failure to comply with the FDA and other applicableU.S. and foreign regulatory requirements applicable to clinical trials maysubject us to administrative or judicially imposed sanctions.

 

Aspart of the regulatory approval process, we must conduct clinical trials forFOLOTYN and any other product candidate to demonstrate safety and efficacy tothe satisfaction of the FDA and other regulatory authorities abroad. The numberand design of clinical trials that will be required varies depending on theproduct candidate, the condition being evaluated, the trial results andregulations applicable to any particular product candidate. The designs of ourclinical trials for FOLOTYN are based on many assumptions about the expectedeffect of FOLOTYN, and if those assumptions prove incorrect, the clinicaltrials may not demonstrate the safety or efficacy of FOLOTYN. Preliminaryresults may not be confirmed upon full analysis of the detailed results of atrial, and prior clinical trial program designs and results may not bepredictive of future clinical trial designs or results. Product candidates inlater stage clinical trials may fail to show the desired safety and efficacydespite having progressed through initial clinical trials with acceptableendpoints. For example, we terminated the development of EFAPROXYN, one of ourformer product candidates, when it failed to demonstrate statisticallysignificant improvement in overall survival in the targeted patients in a Phase3 clinical trial. If FOLOTYN fails to show clinically significant benefits inany clinical trial or for any particular indication, it may not be approved formarketing for such indication. Additionally, if FOLOTYN is demonstrated to beunsafe in clinical trials for other indications, such demonstration couldnegatively impact FOLOTYN’s existing approval for the treatment of patientswith relapsed or refractory PTCL.

 

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

 

***Even if FOLOTYN meets safety and efficacy endpoints in clinical trialsfor additional indications, regulatory authorities may not approve FOLOTYN, orwe may face post-approval problems that require withdrawal of FOLOTYN from themarket.****

 

Wewill not be able to market FOLOTYN in the United States for any additionalindications or in any other countries for any indications until we haveobtained the necessary regulatory approvals. Our receipt of approval of FOLOTYNin the United States for the treatment of patients with relapsed or refractoryPTCL does not guarantee that we will obtain regulatory approval to marketFOLOTYN in the United States for any additional indications or in any other countries.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.

 

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

 

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

 

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

 

Wedo not know when our current clinical trials will be completed, if at all. Wealso cannot accurately predict when other planned clinical trials will begin orbe completed. Many factors affect patient enrollment, including the size of thepatient population, the proximity of patients to clinical sites, theeligibility criteria for the trial, competing clinical trials and new drugsapproved for the conditions we are investigating. Other companies areconducting clinical trials and have announced plans for future trials that areseeking or likely to seek patients with the same diseases as those we arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

 

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

 

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

 

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

 

·     deficienciesin the conduct of the clinical trials, including failure to conduct theclinical trial in accordance with regulatory requirements or clinicalprotocols;

 

·     deficienciesin the clinical trial operations or trial sites;

 

·      the product candidate may have unforeseenadverse side effects;

 

·     thetime required to determine whether the product candidate is effective may belonger than expected;

 

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·     fatalitiesor other adverse events arising during a clinical trial due to medical problemsthat may not be related to clinical trial treatments;

 

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

 

·     thequality or stability of the product candidate may fall below acceptablestandards; or

 

·     insufficientquantities of the product candidate to complete the trials.

 

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

 

***Due to our reliance on contract research organizations and other thirdparties to conduct our clinical trials, we are unable to directly control thetiming, conduct and expense of our clinical trials.*** *

 

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

 

***We may need to raise additional capital to support our futureoperations.  If we fail to obtain thecapital necessary to fund our operations, we will be unable to successfullydevelop or commercialize FOLOTYN.****

 

Basedupon the current status of our product development and commercialization plans,we believe that our cash, cash equivalents, and investments as of September 30,2010, 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 beginning other long-term developmentprojects involving FOLOTYN, including the post-approval clinical studiesrequired for FOLOTYN. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, we expect to incur significantcosts relating to the commercialization of FOLOTYN, including costs related toour sales and marketing, medical affairs and manufacturing operations.  Therefore, we may need to raise additionalcapital to support our future operations.  Our actual capital requirements will depend onmany factors, including:

 

·     the timing and amount of revenues generatedfrom sales of FOLOTYN;

 

·     thetiming and costs associated with our sales and marketing and medical affairsactivities involving FOLOTYN;

 

·     thetiming and costs associated with manufacturing clinical and commercial suppliesof FOLOTYN;

 

·     thetiming and costs associated with conducting preclinical and clinicaldevelopment of FOLOTYN, including the post-approval studies required by theFDA, as well as our evaluation of, and decisions with respect to, additionaltherapeutic indications for which we may develop FOLOTYN;

 

·      thetiming, costs and potential revenue associated with any co-promotion or otherpartnering arrangements entered into to commercialize FOLOTYN; and

 

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·     ourevaluation of, and decisions with respect to, potential in-licensing or productacquisition opportunities or other strategic alternatives.

 

Wemay seek to obtain this additional capital through equity or debt financings,arrangements with corporate partners, or from other sources. Such financings orarrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development, which wemight otherwise seek to develop or commercialize ourselves, on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·     ourcurrent and future manufacturers are subject to ongoing, periodic, unannouncedinspections by the FDA and corresponding state and international regulatoryauthorities for compliance with strictly enforced cGMP regulations 

 

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andsimilar state and foreign standards, and we do not have control over ourcontract manufacturers’ compliance with these regulations and standards;

 

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

 

·     ourmanufacturers may have staffing difficulties, may undergo changes in control ormay become financially distressed, adversely affecting their willingness orability to manufacture products for us;

 

·     ourmanufacturers might not be able to fulfill our commercial needs, which wouldrequire us to seek new manufacturing arrangements and may result in substantialdelays in meeting market demands;

 

·     ifwe need to change to other commercial manufacturing contractors, the FDA andcomparable foreign regulators must approve our use of any new manufacturer,which would require additional testing, regulatory filings and complianceinspections, and the new manufacturers would have to be educated in, orthemselves develop substantially equivalent processes necessary for, theproduction of our products; and

 

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

 

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

 

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

 

Oursuccess will depend in part on our ability to obtain and maintain meaningfulpatent protection for FOLOTYN, both in the United States and in othercountries. We rely on patents to protect a large part of our intellectualproperty and our competitive position. Any patents issued to or licensed by us couldbe challenged, invalidated, infringed, circumvented or held unenforceable,based on, 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.

 

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

 

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

 

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

 

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proprietaryrights, or to determine the scope and validity or enforceability of otherparties’ proprietary rights. We may be dependent on third parties, includingour licensors, for cooperation and information that may be required inconnection with the defense and prosecution of our patents and otherproprietary rights. The defense and prosecution of patent and intellectualproperty infringement claims are both costly and time consuming, even if theoutcome is favorable to us. Any adverse outcome could subject us to significantliabilities to third parties, require disputed rights to be licensed from thirdparties, or require us to cease selling our future products. We are notcurrently a party to any patent or other intellectual property infringementclaims.

 

***We may explore strategic partnerships that may never materialize or mayfail.*** *

 

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 strategic partnerships, we may be requiredto relinquish important rights to and control over the development of FOLOTYNor otherwise be subject to unfavorable terms.*** *

 

Anyfuture strategic partnerships we enter into could subject us to a number ofrisks, including:

 

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

 

·     wemay be required to issue equity securities that would dilute our existingstockholders’ percentage ownership;

 

·     wemay be required to assume substantial actual or contingent liabilities;

 

·     wemay not be able to control the amount and timing of resources that ourstrategic partners devote to the development or commercialization of FOLOTYN;

 

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

 

·     strategicpartners may not pursue further development and commercialization of productsresulting from the strategic partnering arrangement or may elect to discontinueresearch and development programs;

 

·     strategicpartners may not commit adequate resources to the marketing and distribution ofFOLOTYN or any other products, limiting our potential revenues from theseproducts;

 

·     disputesmay arise between us and our strategic partners that result in the delay ortermination of the research, development or commercialization of FOLOTYN or anyother product candidate or that result in costly litigation or arbitration thatdiverts management’s attention and consumes resources;

 

·     strategicpartners may experience financial difficulties;

 

·     strategicpartners may not properly maintain or defend our intellectual property rightsor may use our proprietary information in a manner that could jeopardize orinvalidate our proprietary information or expose us to potential litigation;

 

·     businesscombinations or significant changes in a strategic partner’s business strategymay also adversely affect a strategic partner’s willingness or ability tocomplete its obligations under any arrangement;

 

·     strategicpartners could independently move forward with a competing product candidatedeveloped either independently or in collaboration with others, including ourcompetitors; and

 

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·     strategicpartners could terminate the arrangement or allow it to expire, which woulddelay the development and may increase the cost of developing FOLOTYN or anyother product candidate.

 

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

 

Thebusiness and financial condition of pharmaceutical and biotechnology companiesare affected by the efforts of governmental and third-party payers to containor reduce the costs of health care.  TheU.S. Congress recently enacted legislation to reform the health caresystem.  While we anticipate that thislegislation may, over time, increase the number of patients who have insurancecoverage for pharmaceutical products, it also imposes cost containment measuresthat may adversely affect the amount of reimbursement for pharmaceuticalproducts, including FOLOTYN.  Thesemeasures include increasing the minimum rebates for products covered byMedicaid programs and extending such rebates to drugs dispensed to Medicaidbeneficiaries enrolled in Medicaid managed care organizations as well asexpansion of the 340(B) Public Health Services drug discount program.  In foreign jurisdictions there have been, andwe expect that there will continue to be, a number of legislative andregulatory proposals aimed at changing the health care system. For example, insome countries other than the United States, pricing of prescription drugs issubject to government control and we expect to see continued efforts to reducehealthcare costs in international markets.

 

Somestates are also considering legislation that would control the prices of drugs,and state Medicaid programs are increasingly requesting manufacturers to paysupplemental rebates and requiring prior authorization by the state program foruse of any drug for which supplemental rebates are not being paid.  Managed care organizations continue to seekprice discounts and, in some cases, to impose restrictions on the coverage ofparticular drugs.  Government efforts toreduce Medicaid expenses may lead to increased use of managed careorganizations by Medicaid programs.  Thismay result in managed care organizations influencing prescription decisions fora larger segment of the population and a corresponding constraint on prices andreimbursement for drugs, including FOLOTYN. It is likely that federal and state legislatures and health agencieswill continue to focus on additional health care reform in the future althoughwe are unable to predict what additional legislation or regulation, if any,relating to the health care industry or third-party coverage and reimbursementmay be enacted in the future or what effect such legislation or regulationwould have on our business. The pendency or approval of such proposals orreforms could result in a decrease in our stock price or limit our ability toraise capital or to obtain strategic partnerships or licenses.

 

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

 

TheFDA has awarded orphan drug status to pralatrexate, which we market under thetradename FOLOTYN, for the treatment of patients with relapsed or refractoryPTCL.  In addition, the FDA has awardedorphan drug designation to pralatrexate for the treatment of patients withfollicular lymphoma and diffuse large B-cell lymphoma, for which we do not haveapproval. Under the Orphan Drug Act, the first company to receive FDA approvalfor pralatrexate for a designated orphan drug indication will obtain sevenyears of marketing exclusivity during which the FDA may not approve anothercompany’s application for pralatrexate for the same orphan indication.  Because the FDA approved FOLOTYN for thetreatment of patients with relapsed or refractory PTCL, we have received sevenyears of marketing exclusivity for that indication.  Orphan drug exclusivity does not prevent FDAapproval of a different drug for the orphan indication or the same drug for adifferent indication.  In addition, theFDA may void orphan drug exclusivity under certain circumstances.

 

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

 

Thetesting and marketing of pharmaceutical products entail an inherent risk ofproduct liability. Product liability claims might be brought against us byconsumers or health care providers or by pharmaceutical companies or othersselling FOLOTYN or any future products. If we cannot successfully defendourselves against such claims, we may incur substantial liabilities or berequired to limit the commercialization of FOLOTYN. We have obtained limitedproduct liability insurance coverage for our human clinical trials andcommercial sales of FOLOTYN. 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.

 

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***Our success depends on the retention of our President and ChiefExecutive******Officer andother key personnel.****

 

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

 

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

 

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

 

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

 

Asa publicly-traded company, we are subject to significant regulations includingthe Sarbanes Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act.There are significant corporategovernance and executive compensation-related provisions in the Dodd-Frank Actthat require the SEC to adopt additional rules and regulations in these areassuch as “say on pay” and proxy access. We cannot assure you that we areor will be in compliance with all potentially applicable regulations. If wefail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act or any other regulations, we could be subject to arange of consequences, including restrictions on our ability to sell equitysecurities or otherwise raise capital funds, the de-listing of our common stockfrom The NASDAQ Global Market, suspension or termination of our clinicaltrials, failure to obtain approval to market FOLOTYN, restrictions on futureproducts or our manufacturing processes, significant fines, or other sanctionsor litigation. Our efforts to comply with these requirements have resulted in,and are likely to continue to result in, an increase in expenses and adiversion of management’s time from other business activities.

 

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

 

Section404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectivenessof our internal controls over financial reporting as of the end of each fiscalyear, and to include a management report assessing the effectiveness of ourinternal controls over financial reporting in our annual report on Form 10-Kfor that fiscal year. Section 404 also requires our independent registeredpublic accounting firm to attest to, and report on, management’s assessment ofour internal controls over financial reporting.

 

Ourmanagement, including our chief executive officer and principal financialofficer, does not expect that our internal controls over financial reportingwill prevent all error and all fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objectives will be met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraudinvolving a company have been, or will be, detected. The design of any systemof controls is based in part on certain assumptions about the likelihood offuture events, and we cannot assure you that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become ineffective because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected. We cannot assure you thatwe or our independent registered public accounting firm will not

 

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identifya material weakness in our internal controls in the future. A material weaknessin our internal controls over financial reporting would require management andour independent registered public accounting firm to consider our internalcontrols as ineffective. If our internal controls over financial reporting arenot considered effective, we may experience a loss of public confidence, whichcould have an adverse effect on our business and on the market price of ourcommon stock.

 

***Our revenue recognition model under thesell-through method is complex and depends upon the accuracy and consistency ofthird party data as well as dependence upon key finance and accountingpersonnel to maintain and implement the surrounding controls. ****

 

Wehave developed a revenue recognition model under the sell-through method thatis complex and incorporates a significant amount of third party data from ourwholesalers. To effectively maintain the revenue recognition model, we dependto a considerable degree upon the timely and accurate reporting to us of suchdata from these third parties and our key accounting and finance personnel toaccurately interpolate such data into the model.  If the third party data is not calculated ona consistent basis and reported to us on an accurate or timely basis or we loseany of our key accounting and finance personnel, the accuracy of ourconsolidated financial statements could be materially affected. This couldcause future delays in our earnings announcements, regulatory filings with theSecurities and Exchange Commission, or SEC, and delisting with the NASDAQ.

 

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

 

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

 

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

 

OnMarch 2, 2005, we entered into a Securities Purchase Agreement with WarburgPincus Private Equity VIII, L.P., or Warburg, and certain other investors inconnection with an equity financing.  Inconnection with this financing, Warburg and certain of its affiliates enteredinto a standstill agreement pursuant to which they agreed not to pursue, for solong as they continue to own a specified number of shares of our common stock,certain activities the purpose or effect of which may be to change or influencethe control of our company.

 

Asof November 2, 2010, we had 105,352,676 shares of common stock outstanding, ofwhich Warburg owned 26,124,430 shares, or approximately 25% of the voting powerof our outstanding common stock.  Although Warburg has entered into a standstillagreement with us, Warburg is, and will continue to be, able to exercisesubstantial influence over any actions requiring stockholder approval.

 

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

 

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

 

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

 

·     prohibitingcumulative voting in the election of directors, which would otherwise allow forless than a majority of stockholders to elect director candidates;

 

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·      prohibiting stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders;

 

·     eliminatingthe ability of stockholders to call a special meeting of stockholders; and

 

·     establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted upon at stockholdermeetings.

 

Inaddition, we are subject to Section 203 of the Delaware General CorporationLaw, which generally prohibits a Delaware corporation from engaging in any of abroad range of business combinations with an interested stockholder for aperiod of three years following the date on which the stockholder became aninterested stockholder. This provision could have the effect of delaying orpreventing a change of control, whether or not it is desired by or beneficialto our stockholders. Notwithstanding the foregoing, the three-year moratoriumimposed on business combinations by Section 203 will not apply to Warburgbecause, prior to the date on which Warburg became an interested stockholder,our board of directors approved the transactions that resulted in Warburgbecoming an interested stockholder. However, in connection with Warburg’sparticipation in an equity financing we completed in March 2005, Warburg andcertain of its affiliates entered into a standstill agreement pursuant to whichthey agreed not to pursue, for so long as they continue to own a specifiednumber of shares of our common stock, certain activities the purpose or effectof which may be to change or influence the control of our company.

 

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

 

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

 

BecauseWarburg owns a substantial percentage of our outstanding common stock, weamended the stockholder rights plan in connection with Warburg’s participationin an equity financing we completed in March 2005 to provide that Warburg andits affiliates will be exempt from the stockholder rights plan, unless Warburgand its affiliates become, without the prior consent of our board of directors,the beneficial owner of more than 44% of our common stock. Likewise, inconnection with our completion of an underwritten offering of 9,000,000 sharesof common stock in February 2007, we amended the stockholder rights plan toprovide that Baker Brothers Life Sciences, L.P. and certain other affiliatedfunds, which are collectively referred to herein as “Baker,” will be exemptfrom the stockholder rights plan, unless Baker becomes, without the priorconsent of our board of directors, the beneficial owner of more than 20% of ourcommon stock.  According to filings withthe SEC, Baker owned less than 5% of our outstanding common stock as ofFebruary 2010. Under the stockholder rights plan, our board of directors hasexpress authority to amend the rights plan without stockholder approval.

 

***Unstable market conditions may have serious adverse consequences on ourbusiness.*** *

 

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

 

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encounterdifficulties during challenging economic times, which could have an adverseeffect on our business, results of operations and financial condition.

 

***The market price for our common stock has been and may continue to behighly volatile, and an active trading market for our common stock may neverexist.****

 

Wecannot assure you that an active trading market for our common stock will existat any time. Holders of our common stock may not be able to sell shares quicklyor at the market price if trading in our common stock is not active. Thetrading price of our common stock has been and is likely to continue to behighly volatile and could be subject to wide fluctuations in price in responseto various factors, many of which are beyond our control, including:

 

·     thetiming and amount of revenues generated from sales of FOLOTYN;

 

·     actualor anticipated variations in quarterly operating results;

 

·     actualor anticipated regulatory approvals or non-approvals of FOLOTYN or of competingproduct candidates;

 

·     theloss of regulatory approval for FOLOTYN in patients with relapsed or refractoryPTCL;

 

·     actualor anticipated results of our clinical trials involving FOLOTYN;

 

·     changesin laws or regulations applicable to FOLOTYN;

 

·     changesin the expected or actual timing of our development programs;

 

·     announcementsof technological innovations by us or our competitors;

 

·     changesin financial estimates or recommendations by securities analysts;

 

·     conditionsor trends in the biotechnology and pharmaceutical industries;

 

·     changesin the market valuations of similar companies;

 

·     announcementsby us of significant acquisitions, strategic partnerships, joint ventures orcapital commitments;

 

·     additionsor departures of key personnel;

 

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

 

·     developmentsconcerning any of our research and development, manufacturing and marketingcollaborations;

 

·     salesof large blocks of our common stock;

 

·     salesof our common stock by our executive officers, directors and five percentstockholders; and

 

·     economicand other external factors, including disasters or crises.

 

Publiccompanies in general and companies included on The NASDAQ Global Market inparticular have experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. There has been particular volatility in the market prices ofsecurities of biotechnology and other life sciences companies, and the marketprices of these companies have often fluctuated because of problems orsuccesses in a given market segment or because investor interest has shifted toother segments. These broad market and industry factors may cause the marketprice of our common stock to decline, regardless of our operating performance.We have no control over this volatility and can only focus our efforts on ourown operations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities 

 

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classaction litigation has often been initiated against that company, including in2004 against us. Litigation of this type could result in substantial costs anddiversion of management’s attention and resources, which would hurt ourbusiness. Any adverse determination in litigation could also subject us tosignificant liabilities.

 

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

 

Ifour stockholders sell substantial amounts of our common stock, the market priceof our common stock may decline. These sales also might make it more difficultfor us to sell equity or equity-related securities in the future at a time andprice that we consider appropriate. We are unable to predict the effect thatsales may have on the then prevailing market price of our common stock.  We have entered into a Registration RightsAgreement with Warburg pursuant to which Warburg is entitled to certainregistration rights with respect to shares of our common stock.  On July 20, 2009, we filed a RegistrationStatement on Form S-3 with the SEC providing for the registration for resale byWarburg of up to 26,124,430 shares of our common stock, which registrationstatement was declared effective on August 28, 2009.

 
| **ITEM 2.** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS** | ** ** | **None**   |
|-------------|------------------------------------------------------------------|------------|------------|
| ** **  | ** **                                                       | ** ** | ** ** |
| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES**                              | ** ** | **None**   |
| ** **  | ** **                                                       | ** ** | ** ** |
| **ITEM 4.** | **RESERVED**                                                     | ** ** | **None**   |
| ** **  | ** **                                                       | ** ** | ** ** |
| **ITEM 5.** | **OTHER INFORMATION**                                            | ** ** | **None**   |
|        |                                                             |       |       |
| **ITEM 6.** | **EXHIBITS**                                                     | ** ** | ** ** |

 
| ** **       | ** ** | ** **                                                                                                                  | ** ** | **Incorporated by Reference** | ** ** | ** **       |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------|
| **Exhibit  No.** | ** ** | **Description**                                                                                                             | ** ** | **Form**                      | ** ** | **Filing  Date** | ** ** | **Number** | ** ** | **Filed  Herewith** |
| 10.18.1†    |       | Employment  Agreement, effective September 16, 2010, between Allos Therapeutics, Inc. and  Bruce K. Bennett, Jr.            |       | 8-K                           |       | 9/17/2010        |   | 10.1 |   |   |
| 10.20.4†    |       | Form  of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award  Agreement.                                     |       | 8-K                           |       | 10/22/2010       |   | 10.2 |   |   |
| 10.23†      |       | Employment  Agreement, effective September 16, 2010, between Allos Therapeutics, Inc. and  Michael E. Schick.               |       | 8-K/A                         |       | 9/17/2010        |   | 10.1 |   |   |
| 10.24†      |       | Employment  Agreement, effective April 29, 2009, between Allos Therapeutics, Inc. and  Bruce A. Goldsmith.                  |       | 8-K/A                         |       | 9/17/2010        |   | 10.2 |   |   |
| 10.24.1†    |       | First  Amendment to Employment Agreement, effective May 22, 2009, between Allos  Therapeutics, Inc. and Bruce A. Goldsmith. |       | 8-K/A                         |       | 9/17/2010        |   | 10.3 |   |   |
| 10.25†      |       | Release  Agreement, dated as of October 22, 2010, between Allos and James V. Caruso.                                        |       | 8-K                           |       | 10/22/2010       |   | 10.3 |   |   |
| 10.26†      |       | Executive  Equity Awards.                                                                                                   |       | 8-K                           |       | 10/22/2010       |   | 10.1 |   |   |
| 31.1             |       | Certification  of principal executive officer required by Rule 13a-14(a) / 15d-14(a).                                       |       |                          |       |             |   |   |   | X |
| 31.2             |       | Certification  of principal financial officer required by Rule 13a-14(a) / 15d-14(a).                                       |       |                          |       |             |   |   |   | X |
| 32.1#            |       | Section  1350 Certification.                                                                                                |       |                          |       |             |   |   |   | X |

 

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†            Indicates management contract or compensatory planor arrangement.

 

#           The certifications attached as Exhibit 32.1 thataccompany this Quarterly Report on Form 10-Q are not deemed filed with theSecurities and Exchange Commission and are not to be incorporated by referenceinto any filing of Allos Therapeutics, Inc. under the Securities Act of 1933,as amended, or the Securities Exchange Act of 1934, as amended, whether madebefore or after the date of this Form 10-Q, irrespective of any generalincorporation language contained in such filing.

 

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Table ofContents

 

**SIGNATURES**

 

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

 
| Date:  November 4, 2010 | **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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