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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 March 31,  2010.**                                                                                                                                                                                                                                              |
| ** **                                                                                                                                                                                                                                                                                            | ** **                                                                                               |
| **o**                                                                                                                                                                                                                                                                                                 | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
| ** **                                                                                                                                                                                                                                                                                            | ** **                                                                                               |
| **For the transition period from                        to                      .** |

 

**CommissionFile Number 000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

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

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§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

 

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

 

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

 

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

 

As of April 30,2010, there were 105,229,081 shares of the registrant’s Common 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 March 31, 2010 and December 31, 2009                 | 3 |
|                                      | Statements of  Operations — for the three months ended March 31, 2010 and 2009    | 4 |
|                                      | Statements of Cash Flows  — for the three months ended March 31, 2010 and 2009    | 5 |
|                                      | Notes to Financial  Statements                                                              | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                 | 26 |
| ITEM 4.                                   | Controls  and Procedures                                                                    | 27 |
| PART II.   Other Information    | 27                                                                                          |
| ITEM 1.                                   | Legal Proceedings                                                                           | 27 |
| ITEM  1A.                                 | Risk  Factors                                                                               | 28 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 45 |
| ITEM 3.                                   | Defaults  Upon Senior Securities                                                            | 45 |
| ITEM 4.                                   | Removed and Reserved                                                                        | 45 |
| ITEM 5.                                   | Other Information                                                                           | 45 |
| ITEM 6.                                   | Exhibits                                                                                    | 45 |
| SIGNATURES                                |                                                                                        | 46 |

 

NOTE:

 

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

 

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**PART I. FINANCIALINFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**ALLOS THERAPEUTICS, INC.**

**BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                                                                                              | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                         |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                              |       | $                        | 84,376     |                        | $          | 141,185 |   |
| Short-term  investments                                                                                                                                                                                                 |       | 52,794                   |       | 17,016                      |       |
| Restricted cash                                                                                                                                                                                                         |       | 238                      |       | 238                         |       |
| Accounts  receivable                                                                                                                                                                                                    |       | 8,753                    |       | 4,862                       |       |
| Inventory                                                                                                                                                                                                               |       | 258                      |       | 36                          |       |
| Prepaid expenses  and other assets                                                                                                                                                                                      |       | 4,278                    |       | 3,808                       |       |
| Total current  assets                                                                                                                                                                                                   |       | 150,697                  |       | 167,145                     |       |
| Property and  equipment, net                                                                                                                                                                                            |       | 2,152                    |       | 2,169                       |       |
| Long-term  investments                                                                                                                                                                                                  |       | 341                      |       | 343                         |       |
| Intangible  asset, net                                                                                                                                                                                                  |       | 5,566                    |       | 5,679                       |       |
| Other assets                                                                                                                                                                                                            |       | 48                       |       | 48                          |       |
| Total assets                                                                                                                                                                                                            |       | $                        | 158,804    |                        | $          | 175,384 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                           |       |                     |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                   |       |                     |       |                        |       |
| Trade accounts  payable                                                                                                                                                                                                 |       | $                        | 2,783      |                        | $          | 2,035 |   |
| Deferred revenue                                                                                                                                                                                                        |       | 1,150                    |       | 669                         |       |
| Accrued  liabilities                                                                                                                                                                                                    |       | 10,576                   |       | 13,136                      |       |
| Total current  liabilities                                                                                                                                                                                              |       | 14,509                   |       | 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 March 31, 2010 and  December 31, 2009; no shares issued or outstanding |       | —                   |       | —                      |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized; 104,904,837 and 104,234,409  shares issued and outstanding at March 31, 2010 and  December 31, 2009, respectively                        |       | 105                      |       | 104                         |       |
| Additional  paid-in capital                                                                                                                                                                                             |       | 537,949                  |       | 532,652                     |       |
| Accumulated  deficit                                                                                                                                                                                                    |       | (393,759                 | )          | (373,212                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                        |       | 144,295                  |       | 159,544                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                        |       | $                        | 158,804    |                        | $          | 175,384 |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                           |       |                                             |       |   |   |
| Net product  sales                             |       | $                                                | 7,407      |   | $ | — |   |
|                                           |       |                                             |       |   |   |
| Operating costs  and expenses:                 |       |                                             |       |   |   |
| Cost of sales,  excluding amortization expense |       | 689                                              |       | — |   |
| Research and  development                      |       | 9,285                                            |       | 8,360 |   |
| Selling, general  and administrative           |       | 17,932                                           |       | 6,963 |   |
| Amortization of  intangible asset              |       | 113                                              |       | — |   |
| Total operating  costs and expenses            |       | 28,019                                           |       | 15,323 |   |
| Operating loss                                 |       | (20,612                                          | )          | (15,323 | ) |
| Interest and  other income, net                |       | 65                                               |       | 173 |   |
| Net loss                                       |       | $                                                | (20,547    | ) | $ | (15,150 | ) |
| Net loss per  share: basic and diluted         |       | $                                                | (0.20      | ) | $ | (0.19 | ) |
| Weighted average  shares: basic and diluted    |       | 104,602,134                                      |       | 81,096,293 |   |

 

***The accompanying notes are an integral part of these financialstatements.***

 

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**ALLOSTHERAPEUTICS, INC.**

**STATEMENTS OF CASH FLOWS**

**(Dollars inthousands)**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Cash  Flows From Operating Activities:                                                                                  |       |                                             |       |   |   |
| Net  loss                                                                                                               |       | $                                                | (20,547    | ) | $ | (15,150 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                            |       |                                             |       |   |   |
| Depreciation  and amortization                                                                                          |       | 215                                              |       | 93 |   |
| Stock-based  compensation expense                                                                                       |       | 2,907                                            |       | 2,378 |   |
| Amortization  of intangible asset                                                                                       |       | 113                                              |       | — |   |
| Realized  loss on sale of marketable securities                                                                         |       | —                                           |       | 157 |   |
| Changes  in operating assets and liabilities:                                                                           |       |                                             |       |   |   |
| Accounts  receivable                                                                                                    |       | (3,410                                           | )          | — |   |
| Prepaid  expenses and other assets                                                                                      |       | (378                                             | )          | 1,538 |   |
| Interest  receivable on investments                                                                                     |       | (75                                              | )          | 363 |   |
| Inventory                                                                                                               |       | (217                                             | )          | — |   |
| Trade  accounts payable                                                                                                 |       | 742                                              |       | 1,719 |   |
| Accrued  liabilities                                                                                                    |       | (2,658                                           | )          | (2,987 | ) |
| Net  cash used in operating activities                                                                                  |       | (23,308                                          | )          | (11,889 | ) |
| Cash  Flows From Investing Activities:                                                                                  |       |                                             |       |   |   |
| Acquisition  of property and equipment                                                                                  |       | (191                                             | )          | (207 | ) |
| Purchases  of investments                                                                                               |       | (45,197                                          | )          | (134 | ) |
| Proceeds  from maturities of investments                                                                                |       | 9,496                                            |       | 23,720 |   |
| Proceeds  from sales of marketable securities                                                                           |       | —                                           |       | 3,894 |   |
| Net  cash (used in) provided by investing activities                                                                    |       | (35,892                                          | )          | 27,273 |   |
| Cash  Flows From Financing Activities:                                                                                  |       |                                             |       |   |   |
| Proceeds  from issuance of common stock associated with stock options, stock warrants  and employee stock purchase plan |       | 2,359                                            |       | 1,190 |   |
| Proceeds  from issuance of common stock, net of issuance costs                                                          |       | 32                                               |       | — |   |
| Net  cash provided by financing activities                                                                              |       | 2,391                                            |       | 1,190 |   |
| Net  (decrease) increase in cash and cash equivalents                                                                   |       | (56,809                                          | )          | 16,574 |   |
| Cash  and cash equivalents, beginning of period                                                                         |       | 141,185                                          |       | 30,458 |   |
| Cash  and cash equivalents, end of period                                                                               |       | $                                                | 84,376     |   | $ | 47,032 |   |
| Supplemental  Schedule of Cash and Non-cash Activities:                                                            |       |                                             |       |   |   |
| Deferred  revenue in accounts receivable                                                                                |       | $                                                | 481        |   | $ | — |   |
| Assets  recorded for which payment has not yet occurred                                                                 |       | 104                                              |       | — |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**NOTES TO FINANCIALSTATEMENTS**

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

**(unaudited)**

 

**1.**                 Basis of Presentation

 

The unaudited financialstatements of Allos Therapeutics, Inc. (referred to herein as the “Company,”“we,” “us” or “our”) included herein reflect all adjustments, consisting onlyof normal recurring adjustments, which in the opinion of management arenecessary to fairly state our financial position, results of operations andcash flows for the periods presented. Certain information and footnote disclosures normally included inaudited financial information prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to the rules and regulations of the Securities andExchange Commission, or SEC.  Operatingresults for the three months ended March 31, 2010 are not necessarilyindicative of the results that may be expected for the year ending December 31,2010.  These financial statements shouldbe read in conjunction with the audited financial statements and notes theretowhich are included in our Annual Report on Form 10-K for the year ended December 31,2009 for a broader discussion of our business and the opportunities and risksinherent in such business.

* *

*Liquidity*

 

As of March 31, 2010, we had $137.5 millionin cash, cash equivalents, and investments. Based upon the current status ofour product development and commercialization plans, we believe that our cash,cash equivalents, and investments as of March 31, 2010 will be adequate tosupport our operations through at least the next 12 months, although there canbe no assurance that this can, in fact, be accomplished.

 

Our ability to generate revenue and achieveprofitability is dependent on our ability to successfully commercialize FOLOTYN®(pralatrexate injection) for the treatment of patients with relapsed orrefractory peripheral T-cell lymphoma, or 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.

 

We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsand seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spendsubstantial amounts on selling, general and administrative expenses in order tocommercialize FOLOTYN for the treatment of patients with relapsed or refractoryPTCL.  Therefore, we may need to raiseadditional capital to support our future operations.  Our actual capitalrequirements will depend on many factors, including:

 

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

 

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

 

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

 

·             the timing and costs associated withconducting preclinical and clinical development of FOLOTYN, including thepost-approval clinical studies required by the U.S. Food and DrugAdministration, or FDA, as well as our evaluation of, and decisions withrespect to, additional therapeutic indications for which we may developFOLOTYN;

 

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

 

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

 

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

 

**2.**                 Fair Value ofFinancial Instruments

 

*Cash, Cash Equivalents and Investments*

** **

**All highly liquid investments withoriginal maturities of three months or less are considered to be cashequivalents. The carrying values of our cash equivalents and investmentsapproximate their market values based on quoted market prices. Investments areclassified as held to maturity and are carried at cost plus accrued interest.Our cash and cash equivalents are maintained in a financial institution inamounts that, at times, may exceed federally insured limits. The weightedaverage duration of the remaining time to maturity for our portfolio ofinvestments as of March 31, 2010 was approximately eight months.  As of March 31, 2010, our investmentswere held in a variety of interest-bearing instruments, consisting mainly ofU.S. Treasury bills and certificates of deposit. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of March 31, 2010.**

 

*Fair Value of Financial Instruments*

 

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

 

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

 

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

 

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

 

**Wehave no assets or liabilities that were measured using quoted prices forsimilar assets and liabilities or significant unobservable inputs (Level 2 andLevel 3 assets and liabilities, respectively) as of March 31, 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 $83.4 million as of March 31,2010 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 March 31,2010:*

 
| ** **                                   | ** ** | **Amortized  cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Short-term  held-to-maturity securities:     | ** ** |                | ** ** |                         | ** ** |                          | ** ** |            | ** ** |
| U.S. Treasury bills                          |       | $                   | 49,286     |                         | $          | 8                             |       | $               | (33        | ) | $ | 49,261 |   |
| Certificates of deposit                      |       | 3,508               |       | 1                            |       | —                        |       | 3,509           |       |
| Total due in one year  or less               |       | $                   | 52,794     |                         | $          | 9                             |       | $               | (33        | ) | $ | 52,770 |   |
|                                         |       |                |       |                         |       |                          |       |            |       |
| Long-term  held-to-maturity securities:      |       |                |       |                         |       |                          |       |            |       |
| U. S. Government agency  securities          |       | $                   | 272        |                         | $          | 10                            |       | $               | —     |   | $ | 282 |   |
| Corporate notes                              |       | 307                 |       | 15                           |       | —                        |       | 322             |       |
| Sub-total                                    |       | $                   | 579        |                         | $          | 25                            |       | $               | —     |   | $ | 604 |   |
| Less: Amounts  classified as restricted cash |       | (238                | )          | —                       |       | —                        |       | (238            | )          |
| Total due in one to  three years             |       | $                   | 341        |                         | $          | 25                            |       | $               | —     |   | $ | 366 |   |

 

*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 three months ended March 31, 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.  All of the investments as of March 31,2010 that were in a loss position, have been in a continuous unrealized lossposition for less than 12 months.  Therewere no investments in an unrealized loss position as of December 31,2009.   As of March 31, 2010, wehave an unrealized loss of $33,000 on two of our U.S. Treasury bill investmentswith an aggregate fair value of $35.3 million. As of March 31, 2010, no other than temporary impairment has beenrecorded on any of our investments since these unrealized losses are on U.S.government issued securities maturing within one year. The decline in value ofthe investments as of March 31, 2010 was caused by primarily by changes ininterest rates.  We do not intend to selland we do not believe that it is more likely than not that we will be requiredto sell our investments before recovering the cost of securities, nor do weexpect not to recover the entire amortized cost basis of our investments as of March 31,2010.  We have the ability and intent tohold our remaining investments to recover the entire amortized cost basis ofthe investments as of March 31, 2010.**

 

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**3.**                 Inventory

 

*Inventory*

 

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

 

Costs associated with the production of FOLOTYN by ourthird party manufacturers are expensed to research and development expense atthe time of production when:

 

·                  the formulated drug product is packagedfor clinical trial use;

 

·                  the bulk drug substance and formulateddrug product is produced prior to receiving regulatory approval to market theproduct candidate; and

 

·                  the bulk drug substance and formulateddrug product is produced prior to receiving FDA approval for the respectivethird party manufacturing facilities.

 

If and when we receive the related regulatoryapproval, we capitalize those manufacturing costs for our marketed products atthe lower of cost (first-in, first-out method) or market (current replacementcost) with cost determined on the first-in, first-out basis and then expensethe sold inventory as a component of cost of goods sold.

 

**Prior to receiving FDA approval of FOLOTYN, all costsrelated to purchases of the active pharmaceutical ingredient and themanufacturing of the product were recorded as research and development expense.  As such, we have remaining supplies of drugsubstance and drug product that are not recorded on our Balance Sheet asinventory as of March 31, 2010.  Until we sell the inventory for which the costs were previouslyexpensed, our cost of product sales will reflect only incremental costsincurred subsequent to FDA approval.  Wecontinue to expense costs associated with clinical trial material as researchand development expense.  Inventory as ofMarch 31, 2010 consists of work in process of $120,000 and finished goodsof $138,000.**

 

**4.**                 Prepaid Expenses and Other Assets

 

Prepaid expensesand other assets are comprised of the following:

 
| ** **                                             | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Prepaid sales,  marketing and medical affairs expenses |       | $                        | 2,285      |                        | $          | 1,839 |   |
| Prepaid expenses  and other assets                     |       | 1,167                    |       | 1,251                       |       |
| Prepaid research  and development expenses             |       | 826                      |       | 718                         |       |
|                                                   |       | $                        | 4,278      |                        | $          | 3,808 |   |

 

**5.**                  Intangible asset, net

 

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

 

As a result of the FDA’sapproval to market FOLOTYNon September 24, 2009, we met a milestone underour license agreement with Memorial Sloan-Kettering Cancer Center, SRIInternational and Southern Research Institute, discussed in Note 10, whichrequired us to make a milestone payment of $5.8 million. We capitalizedthe $5.8 million payment as an intangible asset and began amortizing the assetimmediately following the FDA approval of FOLOTYN. Amortization expense isbeing recorded on a straight line basis over the remaining expected life of thepatent for FOLOTYN, which we expect to last until July 16, 2022. Thisincludes the anticipated Hatch-Waxman extension that provides patent protectionfor drug compounds for a period of up to five years to compensate for timespent in development. This term is our best estimate of the life of the patent.If, however, the Hatch-Waxman extension is not granted, the intangible assetwill be amortized over a shorter period. Amortization expense of $113,000 forthe three months ended March 31, 2010 was recorded as amortization 

 

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of intangible asset inthe Statement of Operations.  Theestimated annual amortization expense for the intangible asset is approximately$454,000 per year during 2010 through 2021 and $234,000 in 2022.

 

**The carrying values of intangible assets are periodicallyreviewed to determine if the facts and circumstances suggest that a potentialimpairment may have occurred.  No triggerevents occurred for the three months ended March 31, 2010 on the$5,566,000 of intangible asset, net.**

 

**6.**                 Accrued Liabilities

 

Accrued liabilities arecomprised of the following:

 
| ** **                                                                | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued research  and development expenses                                |       | $                        | 3,590      |                        | $          | 3,363 |   |
| Accrued  personnel costs                                                  |       | 3,405                    |       | 5,133                       |       |
| Accrued  royalties, government rebates, chargebacks and distribution fees |       | 1,529                    |       | 963                         |       |
| Accrued sales  and marketing expenses                                     |       | 1,131                    |       | 2,407                       |       |
| Accrued  expenses—other                                              |       | 921                      |       | 1,270                       |       |
|                                                                      |       | $                        | 10,576     |                        | $          | 13,136 |   |

 

**7. **           Product Sales

 

*Product Sales*

 

We generate revenue fromproduct sales.  We recognize product revenue when it is realized orrealizable and earned. Revenue is realized or realizable and earned when all ofthe following criteria are met: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services have been rendered; (3) ourprice 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) thebuyer has paid us, or the buyer is obligated to pay us and the obligation isnot contingent on resale of the product, (3) the buyer’s obligation to uswould not be changed in the event of theft or physical destruction or damage ofthe product, (4) the buyer acquiring the product for resale has economicsubstance apart from that provided by us, (5) we do not have significantobligations for future performance to directly bring about resale of theproduct by the buyer, and (6) the amount of future returns can bereasonably estimated.

 

We sell FOLOTYN to alimited number of pharmaceutical wholesale distributors, or distributors, threeof which are affiliates under common control of an unrelated party.  These distributors then resell FOLOTYN to thepatients’ respective health care providers. Given our limited sales history, we are unable to estimate returns.Therefore, we have determined that domestic shipments of FOLOTYN made to distributorsdo not meet the criteria for revenue recognition at the time of shipment, andtherefore such shipments are accounted for using the sell-through method. Underthe sell-through method, we do not recognize revenue upon shipment of FOLOTYNto the distributor. For these product sales, we invoice the distributor andrecord deferred revenue equal to the gross invoice sales price. We thenrecognize revenue when the product is sold through, or upon shipment of theproduct from the 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 March 31, 2010, we have had no refunds or returns.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1,150,000 as of March 31,2010.

 

We estimate sell-throughrevenue and certain gross to net sales adjustments based upon analysis ofthird-party information, including information obtained from certaindistributors with respect to their inventory levels and sell-through to thedistributors’ customers. Our estimates are subject to the inherent limitationsof estimates that rely on third-party data. The information received fromdistributors is a product of their record-keeping process and their internalcontrols surrounding such processes.  Oursales and revenue recognition under the sell-through method reflect ourestimate of actual product sold through the distribution channel.

 

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*NetProduct Sales*

 

Our net product sales represent total sell-throughrevenue less estimated allowances for rebates and chargebacks to be incurred onthe selling price of FOLOTYN related to the respective revenue. In addition, weincur certain distributor fees related to the management of our product bydistributors. These distributor fees are recorded within net revenues and areknown at the time of sale. Due to estimates and assumptions inherent indetermining the amount of rebates and chargebacks, the actual amount of claimsfor rebates and chargebacks may be different from our estimates, at which timewe would adjust our reserves accordingly. Product sales allowances and accruals are based on definitivecontractual agreements or legal requirements (such as Medicaid laws andregulations) related to the purchase and/or utilization of the product by theseentities.  Allowances and accruals aregenerally recorded in the same period that the related revenue is recognized.

 

*Classification of Product SalesAllowances and Accruals*

 

Accruals related to Medicaid rebates, governmentchargebacks and distributor fees are recognized at the time sell-throughrevenue is recorded, resulting in a reduction in product sales revenue and therecording of an increase in accrued expenses.

 

*MedicaidRebates*

 

Our product is subject to state government-managedMedicaid programs whereby discounts and rebates are provided to participatingstate governments. We record estimated rebates payable under governmentalprograms, including Medicaid, as a reduction of revenue at the timesell-through revenues are recorded. Our calculations related to these rebateaccruals require estimates, including estimates of customer mix primarily basedon a combination of market and clinical research, to determine which sales willbe subject to rebates and the amount of such rebates. During the first quarterof 2010, we obtained additional market research and were able to refine ourestimated Medicaid utilization, which resulted in a reversal of Medicaid rebateallowances related to 2009 sales totaling $208,000.  We also consider any legal interpretations ofthe applicable laws related to Medicaid and qualifying federal and stategovernment programs and any new information regarding changes in the Medicaidprograms’ regulations and guidelines that would impact the amount of therebates.  In March 2010, the PatientProtection and Affordable Care Act, as modified by the Health Care andEducation 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,the states’ 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 March 31, 2010 would result inan approximate $164,000 to $327,000 adjustment to cumulative net product sales.

 

*GovernmentChargebacks*

 

*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 thedifference between their acquisition cost and the discounted price back to us.We account for chargebacks by establishing an accrual in an amount equal to ourestimate of maximum chargeback claims. We determine our chargeback estimatesbased on actual*FOLOTYN sell-through sales datafrom third-party information. Chargeback amounts are determined at the time ofresale to the federal government qualified entities, and we generally issuecredits 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.

 

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*Balancesand activity in the deferred revenue account and a reconciliation of gross tonet product sales for the three months ended March 31, 2010 and 2009 areas follows:*

 
| ** **                                     | ** ** | **Three Months  Ended  March 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                | ** ** | **2009** | ** ** |
|                                           |       |                                    |       |   |   |
| Deferred revenue  as of December 31, 2009 |       | $                                       | 669        |   | $ | — |   |
| Gross product  sales to distributors           |       | 8,701                                   |       | — |   |
| Less: Gross  product sales recognized          |       | (8,220                                  | )          | — |   |
| Deferred revenue  as of March 31, 2010    |       | $                                       | 1,150      |   | $ | — |   |
|                                           |       |                                    |       |   |   |
|                                           |       |                                    |       |   |   |
| Gross product  sales                           |       | $                                       | 8,220      |   | $ | — |   |
| *Less:  Gross to Net Sales Adjustments*        |       |                                    |       |   |   |
| Government  rebates and chargebacks            |       | (574                                    | )          | — |   |
| Distribution  fees                             |       | (239                                    | )          | — |   |
| Net product  sales                             |       | $                                       | 7,407      |   | $ | — |   |

 

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

 
| ** **                                               | ** ** | **Government  Rebates and  Chargebacks** | ** ** | **Distribution  Fees** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------------------|------------|
| **Balance at December 31, 2009**                    |       | $                                        | 487        |                   | $          | 86 |   |
| Reserve for current period sales                         |       | 782                                      |       | 239                    |       |
| Change in estimated Medicaid utilization for 2009  sales |       | (208                                     | )          | —                 |       |
| Credits/payments made for current period sales           |       | (99                                      | )          | (100                   | )          |
| Credits/payments made for prior period sales             |       | (249                                     | )          | (77                    | )          |
| **Balance at March 31, 2010**                       |       | $                                        | 713        |                   | $          | 148 |   |

 

*Major Customers and Concentration of Credit Risk*

 

We sell FOLOTYN to a limited number of pharmaceuticalwholesale distributors, or distributors, three of which are affiliates undercommon control of an unrelated party, 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  three months ended** | ** ** |
|-------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **  | ** ** | **March 31,  2010**                      | ** ** | **March 31,  2010**                                        | ** ** |
| Customer  A |       | 51.4                                          | %          | 51.6                                                            | %          |
| Customer  B |       | 22.0                                          | %          | 22.9                                                            | %          |
| Customer  C |       | 26.4                                          | %          | 25.3                                                            | %          |

 

*Cost of sales*

 

Cost of sales, excludingamortization expense, includes royalties, inventory packaging and labeling,warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 10 regarding the royaltyrates under our license agreement for FOLOTYN. Prior to receiving FDA approval of FOLOTYN, all costs related topurchases of the active pharmaceutical ingredient and the manufacturing of theproduct were recorded as research and development expense.  

 

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Until we sell theinventory for which the costs were previously expensed, our cost of sales willreflect only incremental costs incurred subsequent to FDA approval.

 

Under the sell-throughmethod, royalties paid to our licensors of FOLOTYN based on the unit shipmentsto distributors 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.

 

**8.**      Stock-BasedCompensation

 

Stock-based compensation expense for the three monthsended March 31, 2010 and 2009 has been recognized in the accompanyingStatements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Research and  development               |       | $                                                | 682        |   | $ | 973 |   |
| Selling, general  and administrative    |       | 2,225                                            |       | 1,405 |   |
| Total  stock-based compensation expense |       | $                                                | 2,907      |   | $ | 2,378 |   |

 

We did not recognize a related tax benefit during thethree months ended March 31, 2010 and 2009, as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2010. No stock-based compensation expense was capitalized on our Balance Sheetas of March 31, 2010 and December 31, 2009.

 

The followingtable summarizes activity and related information for stock option awardsgranted 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                                    |       | 1,840,631                    |       | 7.53                                       |       |   |   |   |   |
| Exercised                                  |       | (633,947                     | )          | 3.66                                       |       |   |   |   |   |
| Forfeited                                  |       | (125,339                     | )          | 7.47                                       |       |   |   |   |   |
| **Outstanding  at March 31, 2010**    |       | 9,373,841                    |       | $                                          | 6.29       |   | 3,875,452 |   | $ | 5.43 |   |

 

During the three months ended March 31, 2010, wegranted 1,840,631 stock options with a weighted-averagegrant-date fair value of $4.27 per share. During the three months ended March 31, 2010 and 2009, werecorded stock-based compensation related to our stock option plans of$2,605,000 and $2,225,000, respectively. As of March 31, 2010, the unrecorded stock-based compensationbalance related to stock option awards was $12,509,000 and will be recognizedover an estimated weighted-average amortization period of 1.9 years.

 

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

 
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  March 31, 2010:**                                           | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully  vested and exercisable                                     |       | 3,875,452               |       | 6.7                                                         |       | $                                          | 5.43       |                                | $          | 7,975,000 |   |
| Options expected  to vest, including effects of expected forfeitures |       | 4,608,789               |       | 9.0                                                         |       | $                                          | 6.89       |                                | 2,958,000  |   |
| Options fully  vested and expected to vest                                |       | 8,484,241               |       | 8.0                                                         |       | $                                          | 6.22       |                                | $          | 10,933,000 |   |

 

The aggregate intrinsic value in the tables aboverepresents the total pretax intrinsic value, based on our closing stock priceof $7.43 as of March 31, 2010, which would have been received by theoption holders had all option holders with in-the-money 

 

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options exercised their options as of that date.  The total number of in-the-money optionsexercisable as of March 31, 2010 was 3,084,816.

 

The total intrinsic value of options exercised duringthe three months ended March 31, 2010 and 2009 was $2,318,000 and$1,544,000, respectively, determined as of the date of option exercise.  We settle employee stock option exerciseswith newly issued common shares.  No taxbenefits were realized by us in connection with these exercises during thethree months ended March 31, 2010 and 2009 as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2010.

 

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

 
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RS at December 31, 2009** |       | 125,000                    |       | $                                                  | 3.72       |   |
| Granted                                     |       | —                     |       | —                                             |       |
| Vested                                      |       | (82,500                    | )          | 3.39                                               |       |
| **Nonvested  RS at March 31, 2010**    |       | 42,500                     |       | $                                                  | 4.38       |   |

 

The shares of restrictedstock vest in four equal annual installments from the date of grant.  During the three months ended March 31,2010 and 2009, we recorded stock-based compensation related to restricted stockawards of $26,000 and $85,000, respectively. As of March 31, 2010, the unrecorded stock-based compensationbalance related to restricted stock awards was $31,000 and will be recognizedover an estimated weighted-average amortization period of 1.4 years.

 

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

 
| ** **                                   | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RSU at December 31, 2009** |       | 155,479                    |       | $                                                  | 6.48       |   |
| Granted                                      |       | 329,403                    |       | 7.56                                               |       |
| Vested                                       |       | (30,856                    | )          | 6.40                                               |       |
| **Nonvested  RSU at March 31, 2010**    |       | 454,026                    |       | $                                                  | 7.27       |   |

 

The shares of restrictedstock unit awards vest in four equal annual installments from the date of grant.  During the three months ended March 31,2010 and 2009, we recorded stock-based compensation related to restricted stockunit awards of $225,000 and $47,000, respectively.  As of March 31, 2010, the unrecordedstock-based compensation balance related to restricted stock unit awards was$2,572,000 and will be recognized over an estimated weighted-averageamortization period of 2.4 years.

 

**9.**      NetLoss Per Share

 

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

 

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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 threemonths ended March 31, 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:

 
| ** **                      | ** ** | **March 31,** | ** ** |
|---------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Common stock options            |       | 9,373,841          |       | 8,484,730 |   |
| Unvested restricted stock       |       | 42,500             |       | 192,500 |   |
| Unvested restricted stock units |       | 454,026            |       | 151,941 |   |
|                            |       | 9,870,367          |       | 8,829,171 |   |

 

**10.**   Commitmentsand Contingencies

 

*Royalty and License Fee Commitments*

 

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International and SouthernResearch Institute, as amended, under which we obtained exclusive worldwiderights to a portfolio of patents and patent applications related to FOLOTYN andits uses. Under the terms of the agreement, we paid an up-front license fee of$2.0 million upon execution of the agreement and have made aggregate 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 theFDA accepting our New Drug Application for review and $5.8 million based on theFDA approval 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 remaining potential milestonepayment under the license agreement is for $3.5 million upon regulatoryapproval to market FOLOTYN in Europe, which, if made would be capitalized andamortized over the expected useful life of the licensed patents. Under theterms of the agreement, we are required to fund all development programs andwill have sole responsibility for all commercialization activities. Inaddition, we will pay the licensors royalties based on graduated annual levelsof net sales of FOLOTYN to our distributors, net of actual rebates andchargebacks, or distributor sales, which may be different than our net productrevenue recognized in accordance with U.S. generally accepted accountingprinciples, or GAAP, or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur.  Royalties are 8% of annual distributor salesup to $150.0 million; 9% of annual distributor sales of $150.0 million through$300.0 million; and 11% of annual distributor sales in excess of $300.0million.  In 2010 and 2009, our royaltieswere 8% of our net distributor sales.  Asof March 31, 2010, accrued royalties were $668,000 and are included inaccrued liabilities on the Balance Sheet.

 

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained elsewhere in thisreport,*contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements regarding ourcommercialization of FOLOTYN for patients with relapsed or refractoryperipheral T-cell lymphoma; our projected timeline to present and the potentialimplications of the top line results from our Phase 2b trial comparing FOLOTYNand erlotinib in patients with advanced non-small cell lung cancer, our intentand projected timeline to submit a Marketing Authorization Application, or MAA,in Europe for FOLOTYN; our projected operating costs and expenses for fiscalyear 2010; other statements regarding our future product development andregulatory strategies, including our intent to develop or seek regulatoryapproval for FOLOTYN for additional indications; the ability of our third-partymanufacturers to support our requirements for drug supply; any statementsregarding 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 thatmay cause our, or our industry’s results, levels of activity, performanceor achievements to be materially different from those expressed or implied bythe forward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed in Part II, Item1A of this report under the caption “Risk Factors.” All forward-lookingstatements included in this report are based on information available to us asof the date hereof and we undertake no obligation to revise any forward-lookingstatements in order to reflect any subsequent events or circumstances.Forward-looking statements not specifically described above also may be foundin these and other sections of this report.

 

**Overview**

 

We are abiopharmaceutical company committed to the development and commercialization ofinnovative anti-cancer therapeutics.  Ourgoal is to build a profitable company by generating income from products wedevelop and commercialize, either alone or with one or more potential strategicpartners.  We strive to developproprietary products that have the potential to improve the standard of care incancer therapy.

 

We are currently focusedon the development and commercialization of FOLOTYN® (pralatrexateinjection).  FOLOTYN is a targetedantifolate inhibitor designed to accumulate preferentially in cancer cells.  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 a single agent, for which we currentlyhave approval for the treatment of patients with relapsed or refractoryperipheral T-cell lymphoma, or PTCL, and has the potential to be used incombination therapy regimens.  We believethat FOLOTYN’s unique mechanism of action offers us the ability to target thedrug for development in a variety of hematological malignancies and solid tumorindications.  We currently retainexclusive worldwide commercial rights to FOLOTYN for all indications.  We may also seek to grow our productportfolio through product acquisition and in-licensing efforts.

 

On September 24, 2009, the U.S. Food and DrugAdministration, or FDA, granted accelerated approval of FOLOTYN for use as asingle agent for the treatment of patients with relapsed or refractory PTCL.This approval was based on overall response rate from our pivotal PROPEL trial.Clinical benefit such as improvement in progression-free survival or overallsurvival has not been demonstrated. FOLOTYN represents our first drug approved for marketing in the UnitedStates.  FOLOTYN is the first and onlydrug approved by the FDA for this indication. In connection with the accelerated approval, we are required to conductseveral post-approval studies that are intended to verify and describe FOLOTYN’s clinical benefit inpatients with T-cell lymphoma and assess whether FOLOTYN poses a serious riskof altered drug levels resulting from organ impairment.

 

We began making FOLOTYNavailable for commercial sale in the United States in October 2009 andcommenced 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 

 

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believe the market forrelapsed or refractory PTCL is addressable with a targeted U.S. sales andmarketing organization, and we intend to promote FOLOTYN ourselves in theUnited States.

 

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 MAA in Europe in the fourth quarter of 2010.   We may also seek regulatory approval tomarket FOLOTYN for the treatment of patients with relapsed or refractory PTCLin Japan and other countries.  We intendto enter into co-promotion or out-licensing arrangements with other pharmaceuticalor biotechnology partners where necessary to reach foreign market segments andwhen deemed strategically and economically advisable.

 

We are committedto evaluating FOLOTYN for oncology use as a single agent and in combinationwith other therapies.  We currently areconducting clinical trials involving FOLOTYN in multiple indications and planto initiate additional trials in the future to evaluate FOLOTYN’s potentialutility in other hematologic malignancies and solid tumor indications.  The following table summarizes the targetindications and clinical development status of the FOLOTYN 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  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        |       | Phase 1 MTD study to  begin in 2010                       |
| **Lymphoma**                                                                                    | ** ** | ** ** | ** ** | ** **                                                |
| 2nd Line+:  non-Hodgkin’s lymphoma combination*FOLOTYN + gemcitabine*                 |       | 1/2a       |       | Phase 2a patient  enrollment ongoing                      |
| 2nd Line+: B-cell  non-Hodgkin’s 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;  top line results expected 3Q 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                               |

 

----

*      These studies are required by the FDA asa condition of the accelerated approval of FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL and must verify the clinical benefitof FOLOTYN.

**   Our Phase 2b trial in non-small cell lungcancer is fully enrolled and we currently expect to announce top line resultsof this in the third quarter of 2010, although the actual timing may vary basedupon a number of factors.

 

**Resultsof Operations**

 

We have incurredsignificant net losses and negative cash flows from operations. We haveincurred these losses principally from costs incurred in our research anddevelopment programs and from our selling, general and administrativeexpenses.  Our primary businessactivities have been focused on the development of FOLOTYN and other programsthat we discontinued in previous years. Our ability to generate significant revenue and achieve profitability isdependent on our ability to successfully commercialize FOLOTYN for thetreatment of patients with relapsed or refractory 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.

 

We expect to continue tospend substantial amounts on research and development, including amounts spenton conducting clinical trials and seeking additional regulatory approvals forFOLOTYN.  We also expect to continue tospend 

 

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substantial amounts on selling, general andadministrative expenses in order to commercialize FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL. Therefore, we may need to raise additional capital to support our futureoperations.  Our actual capitalrequirements will depend on many factors, including those discussed under the “Liquidityand Capital Resources” section below.  Ifwe are unable to generate meaningful amounts of revenue from future productsales or cannot otherwise raise sufficient additional funds to support ouroperations, we may be required to delay, reduce the scope of or eliminate oneor more of our development programs and our business and future prospects forrevenue and profitability may be harmed.

 

***Comparisonof three months ended March 31, 2010 and 2009***

* *

*Net product sales.**  *Net product sales represent totalsell-through revenue less distributor fees and estimated allowances for rebatesand chargebacks to be incurred on the selling price of FOLOTYN related to therespective revenue, as further described in the “Critical Accounting Policies”section below. We began making FOLOTYN available for commercial sale in theUnited States in October 2009.

 

We sell FOLOTYN to alimited number of pharmaceutical wholesale distributors, or distributors, threeof which are affiliates under common control of an unrelated party.  These distributors then resell FOLOTYN to thepatients’ respective health care providers. We have determined that domestic shipments of FOLOTYN made todistributors do not meet the criteria for revenue recognition at the time ofshipment, and therefore such shipments are accounted for using the sell-throughmethod. Under the sell-through method, we do not recognize revenue uponshipment of FOLOTYN to the distributor. For these product sales, we invoice thedistributor and record deferred revenue equal to the gross invoice sales price.We then recognize revenue when the product is sold through, or upon shipment ofthe product from the 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 March 31, 2010, we have had no refunds or returns.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1.2 million as of March 31,2010.

* *

*Balances and activity in the deferred revenue account and areconciliation of gross to net product sales for the three months ended March 31,2010 and 2009 are as follows:*

 
| ** **                                     | ** ** | **Three  Month Ended  March 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                    | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in millions)**                      | ** ** |
|                                           |       |                                        |       |   |   |
| Deferred revenue  as of December 31, 2009 |       | $                                           | 0.7        |   | $ | — |   |
| Gross product  sales to distributors           |       | 8.7                                         |       |   |   |
| Less: Gross  product sales recognized          |       | (8.2                                        | )          | — |   |
| Deferred revenue  as of March 31, 2010    |       | $                                           | 1.2        |   | $ | — |   |
|                                           |       |                                        |       |   |   |
| Gross product  sales                           |       | $                                           | 8.2        |   | $ | — |   |
| *Less:  Gross to Net Sales Adjustments*        |       |                                        |       |   |   |
| Government  rebates and chargebacks            |       | (0.6                                        | )          | — |   |
| Distribution  fees                             |       | (0.2                                        | )          | — |   |
| Net product  sales                             |       | $                                           | 7.4        |   | $ | — |   |

 

There were nocorresponding net product sales in the three months ended March 31, 2009,as sales of FOLOTYN commenced in the fourth quarter of 2009.  We expect sales of FOLOTYN to increase overthe next several years as we increase our penetration of the market forrelapsed or refractory PTCL.

 

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Balances andactivity in the government rebates and chargebacks and distribution feespayable accounts for the three months ended March 31, 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                        |       | 0.8                                      |       | 0.2                    |       |
| Change in estimated Medicaid utilization for 2009 sales |       | (0.2                                     | )          | —                 |       |
| Credits/payments made for current period sales          |       | (0.1                                     | )          | (0.1                   | )          |
| Credits/payments made for prior period sales            |       | (0.3                                     | )          | (0.1                   | )          |
| **Balance at March 31, 2010**                      |       | $                                        | 0.7        |                   | $          | 0.1 |   |

 

*Government rebates and chargebacks reflect managementestimates which are further discussed in the “Critical Accounting Policies”section below*.

 

*Cost of sales, excludingamortization expense.**  *Costof sales, excluding amortization expense, includes royalties, inventorypackaging and labeling, warehousing and shipping costs associated with FOLOTYNproduct revenue.

 
| ** **                                     | ** ** | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in millions)**                       | ** ** |
| Cost of sales, excluding  amortization expense |       | $                                            | 0.7        |   | $ | — |   |
|                                                |            |                                              |            |  |  |  |  |

 

Prior to receiving FDAapproval of FOLOTYN on September 24, 2009, all costs related to purchasesof the active pharmaceutical ingredient and manufacturing of the product wererecorded as research and development expense. Until we sell the inventory for which the costs were previouslyexpensed, our cost of sales will reflect only royalties and other incrementalcosts incurred subsequent to the FDA approval date.  Accordingly, our cost of sales of FOLOTYNwill be lower with respect to product that was manufactured prior to FDAapproval.  This occurred with respect toall sales of FOLOTYN in the first quarter of 2010 and is expected to occur fora significant amount of sales of FOLOTYN in 2010.  After the inventory has been sold that wasalready expensed to research and development prior to FDA approval, we expectcost of sales, excluding amortization expense to approximate 10% of net productsales, which includes our current 8% royalty.

 

The $689,000 of cost ofsales, excluding amortization expense for the three months ended March 31,2010 was primarily due to an 8% royalty on gross product sales payable to thelicensors of FOLOTYN under the terms of our license agreement.  There were no corresponding cost of sales forthe three months ended March 31, 2009.

 

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

 
| ** **                | ** ** | **Three  Months Ended  March 31,** | ** ** |
|---------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                | ** ** | **(in millions)**             | ** ** |
| Research  and development |       | $                                  | 9.3        |   | $ | 8.4 |   |
|                           |            |                                    |            |  |  |  |  |

 

The $925,000 increase inresearch and development expenses in the three months ended March 31, 2010as compared to the same period in 2009 was primarily due to:

 

·      a$1.6 million increase in costs related to clinical trials involving FOLOTYN,including start-up costs for the post-approval studies required by the FDA andother trials with ongoing enrollment; and

 

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·      a$415,000 increase in personnel and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year.

 

This increase waspartially offset by:

 

·      a$696,000 decrease in costs related to clinical trials involving FOLOTYN whichhave closed enrollment, including decreased costs for our Phase 2b NSCLC study,which completed patient enrollment in July 2009; and

 

·      a$290,000 decrease in stock-based compensation, primarily related to theresignation of our former Chief Medical Officer in September 2009,resulting in no corresponding stock-based compensation expense in the firstquarter of 2010, as compared to first quarter of 2009.

 

For the remainderof 2010, we expect our average quarterly research and development expenses toincrease relative to the amount recorded for the three months ended March 31,2010 due to the following:

 

·      anincrease in clinical trial costs involving FOLOTYN, including start-up costsfor the post-approval studies required by the FDA;

 

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

 

·      anincrease in non-cash stock-based compensation expense related to our annualequity grants to existing employees and grants to new employees.

 

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

 
| ** **                           | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(in millions)**             | ** ** |
| Selling,  general and administrative |       | $                                  | 17.9       |   | $ | 7.0 |   |
|                                      |            |                                    |            |  |  |  |  |

 

The $11.0 millionincrease in selling, general and administrative expenses in the three monthsended March 31, 2010 as compared to the same period in 2009 was primarilydue to the following:

 

·     a$6.8 million increase 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$2.4 million increase in sales and marketing costs associated with thecommercial launch, including promotional expenses, advisory boards, marketresearch and costs related to trade shows;

 

·     a$913,000 increase in grants and sponsored medical education programs; and

 

·     an$820,000 increase in non-cash stock-based compensation expense, as discussed inmore detail below.

 

For the remainderof 2010, we expect our average quarterly selling, general and administrativeexpenses to increase relative to the amount recorded for the three months endedMarch 31, 2010 due to the following:

 

·    an increase in sales and marketing costsassociated with executing our marketing and promotional programs for thecommercialization of FOLOTYN;

 

·    an increase in costs associated withmedical affairs and medical education expenses to educate the medical community;

 

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·    an increase in general and administrativeexpenses associated with building and maintaining our administrativeinfrastructure to support the commercialization of FOLOTYN;

 

·    an increase in personnel costs, primarilyresulting from additional headcount, including a full quarter of costs foremployees hired in the first quarter of 2010; and

 

·    an increase in non-cash stock-basedcompensation expense related to grants for new employees and our annual equitygrants to existing employees.

 

*Amortization of intangible asset.**  * Amortization of intangible assetrepresents amortization expense of capitalized license costs over the expectedpatent life of the related product.

 

Amortization expense of our intangible asset for thethree months ended March 31, 2010 was $113,000.  There was no expense for the three monthsended March 31, 2009.  The $113,000expense in the three months ended March 31, 2010 was due to theamortization of the $5.8 million intangible asset resulting from a milestonepayment 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.This includes the anticipated Hatch-Waxman extension that provides patentprotection for drug compounds for a period of up to five years to compensatefor time spent in development. This term is our best estimate of the life ofthe patent.  If, however, the Hatch-Waxmanextension is not granted, the intangible asset will be amortized over a shorterperiod.

 

*Stock-based Compensation Expense. *Stock-based compensationexpense for the three months ended March 31, 2010 and 2009 has beenrecognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in millions)**                                | ** ** |
| Research and  development               |       | $                                                | 0.7        |   | $ | 1.0 |   |
| Selling, general  and administrative    |       | 2.2                                              |       | 1.4 |   |
| Total  stock-based compensation expense |       | $                                                | 2.9        |   | $ | 2.4 |   |

 

Of the $2.9 millionof stock-based compensation recognized in the three months ended March 31,2010, $2.6 million was related to our stock option plans, $251,000 relatedto restricted stock and restricted stock units and $52,000 related to ouremployee stock purchase plan.  Of the$2.4 million of stock-based compensation recognized in the three monthsended March 31, 2009, $2.2 million was related to our stock optionplans, $133,000 related to restricted stock and restricted stock units and$21,000 related to our employee stock purchase plan.  The $0.5 million increase in stock-basedcompensation expense in the three months ended March 31, 2010 as comparedto the same period in 2009 was primarily due to an increase in the number ofoptions granted to new employees and to existing employees pursuant to ourannual grants in February 2010.

 

As of March 31,2010, the unrecorded stock-based compensation balance related to stock optionawards was $12.5 million and will be recognized over an estimatedweighted-average amortization period of 1.9 years. As of March 31, 2010,the unrecorded stock-based compensation balance related to restricted stockunit awards was $2.6 million and will be recognized over an estimatedweighted-average amortization period of 2.4 years.  As of March 31, 2010, the unrecordedstock-based compensation balance related to restricted stock awards was $31,000and will be recognized over an estimated weighted-average amortization periodof 1.4 years.

 

Stock-based compensationexpense in fiscal year 2010 is expected to be approximately $13 to $15 million.

 

*Interestand Other Income, Net*.  Interest income, net ofinterest expense, for the three months ended March 31, 2010 and 2009 was$65,000 and $173,000, respectively.  The$108,000 decrease in net interest income in the three months ended March 31,2010 as compared to the same period in 2009 was primarily due to lower yieldson our cash, cash equivalents and investments.

 

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**Liquidityand Capital Resources**

 

As of March 31, 2010, we had $137.5 million incash, cash equivalents, and investments. Until required for use in our business, we invest our cash reserves inbank deposits, money market funds, U.S. government instruments and certificatesof deposit in accordance with our investment policy.  The weighted average duration of theremaining time to maturity for our portfolio of investments as of March 31,2010 was approximately eight months.  Our investments as of March 31, 2010 primarily consisted of U.S.Treasury bills and certificates of deposit. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers in bankruptcyin our investment portfolio as of March 31, 2010.  We have the ability and intent to hold ourremaining investments to recover the entire amortized cost basis of theinvestments as of March 31, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

Since our inception, wehave financed our operations primarily through public and private sales of ourequity securities, which have resulted in net proceeds to us of$475.9 million through March 31, 2010.

 

Net cash used to fund ouroperating activities for the three months ended March 31, 2010 and 2009was $23.3 million and $11.9 million, respectively.

 

For fiscal year 2010,total operating costs and expenses are expected to be approximately $120 to$130 million, excluding non-cash stock-based compensation expense.  Stock-based compensation expense is expectedto be approximately $13 to $15 million. Actual financial results for 2010 will vary based upon many factors,including FOLOTYN sales and rate of patient enrollment in clinical trials thatare ongoing and planned for initiation in 2010.

 

Net cash used ininvesting activities for the three months ended March 31, 2010 was $35.9million and consisted primarily of purchases of investments offset by proceedsfrom maturities of investments.  Net cashprovided by investing activities for the three months ended March 31, 2009was $27.3 million and consisted primarily of proceeds from maturities and salesof investments.

 

Net cash provided byfinancing activities for the three months ended March 31, 2010 was $2.4million and consisted primarily of proceeds from the issuance of common stockassociated with stock options exercised by our employees.  Net cash provided by financing activities forthe three months ended March 31, 2009 was $1.2 million and consistedprimarily of proceeds the issuance of common stock associated with stockoptions exercised by our employees.

 

Based upon the currentstatus of our product development and commercialization plans, we believe thatour cash, cash equivalents, and investments as of March 31, 2010 will beadequate to support our operations through at least the next 12 months,although there can be no assurance that this can, in fact, be accomplished. Ourforecast of the period of time through which our financial resources will beadequate to support our operations is a forward-looking statement that involvesrisks and uncertainties, and actual results could vary materially.

 

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

 

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

 

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

 

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

 

·      the timing and costs associated withconducting preclinical and clinical development of FOLOTYN, 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;

 

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

 

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

 

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

 

**Obligations and Commitments**

 

*Royalty and License Fee Commitments*

 

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and Southern Research Institute, as amended, under which weobtained exclusive worldwide rights to a portfolio of patents and patentapplications related to FOLOTYN and its uses. Under the terms of the agreement,we paid an up-front license fee of $2.0 million upon execution of the agreementand have made aggregate milestone payments of $2.5 million based on the passageof time. Additionally, in May and September 2009, we made milestonepayments of $1.5 million based on the FDA accepting our New Drug Applicationfor review and $5.8 million based on the FDA approval to market FOLOTYN,respectively.  The up-front license feeand all milestone payments under the agreement prior to FDA approval to marketFOLOTYN were recorded to research and development expense as incurred.  The $5.8 million milestone payment based onthe FDA approval was capitalized as an intangible asset and is being amortizedover the expected useful life of the composition of matter patent for FOLOTYN,which we expect to last until July 16, 2022. The only remaining potentialmilestone payment under the license agreement is for $3.5 million uponregulatory 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 annualdistributor sales up to $150.0 million; 9% of annual distributor sales of$150.0 million through $300.0 million; and 11% of annual distributor sales inexcess of $300.0 million.  In 2010 and2009, our royalties were 8% of our net distributor sales.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, and expenses. We base ourestimates on historical experience, available information and assumptions thatwe believe to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. We believe thefollowing policies to be the most critical to an understanding of our financialcondition and results of operations because they require us to make estimates,assumptions and informed management judgments about matters that are inherentlyuncertain:

 

·    revenue recognition;

 

·    accounting for research and developmentexpenses;

 

·    accounting for inventory; and

 

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·    accounting for stock-based compensationexpense.

 

*RevenueRecognition.*   We generate revenue from product sales. We recognize product revenue when it is realized or realizable andearned. Revenue is realized or realizable and earned when all of the followingcriteria are met: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services have been rendered; (3) our price to the buyer isfixed and determinable; and (4) collectability is reasonably assured.Revenue from sales transactions where the buyer has the right to return theproduct is recognized at the time of sale only if (1) our price to thebuyer is substantially fixed or determinable at the date of sale, (2) thebuyer has paid us, or the buyer is obligated to pay us and the obligation isnot contingent on resale of the product, (3) the buyer’s obligation to uswould not be changed in the event of theft or physical destruction or damage ofthe product, (4) the buyer acquiring the product for resale has economicsubstance apart from that provided by us, (5) we do not have significantobligations for future performance to directly bring about resale of theproduct by the buyer, and (6) the amount of future returns can bereasonably estimated.

 

We sell FOLOTYN to alimited number of pharmaceutical wholesale distributors, or distributors, threeof which are affiliates under common control of an unrelated party.  These distributors then resell FOLOTYN to thepatients’ respective health care providers. Given our limited sales history, we are unable to estimate returns.Therefore, we have determined that domestic shipments of FOLOTYN made todistributors do not meet the criteria for revenue recognition at the time ofshipment, and therefore such shipments are accounted for using the sell-throughmethod. Under the sell-through method, we do not recognize revenue uponshipment of FOLOTYN to the distributor. For these product sales, we invoice thedistributor and record deferred revenue equal to the gross invoice sales price.We then recognize revenue when the product is sold through, or upon shipment ofthe product from the 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 March 31, 2010, we have had no refunds or returns.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1,150,000 as of March 31,2010.

 

We estimate sell-throughrevenue and certain gross to net sales adjustments based upon analysis ofthird-party information, including information obtained from certaindistributors with respect to their inventory levels and sell-through to thedistributors’ customers. Our estimates are subject to the inherent limitationsof estimates that rely on third-party data. The information received fromdistributors is a product of their record-keeping process and their internalcontrols surrounding such processes.  Oursales and revenue recognition under the sell-through method reflect ourestimate of actual product sold through the distribution channel.

 

Additionally under thesell-through method, royalties paid based on unit shipments to distributors aredeferred and recognized as royalty expense when those units are sold throughand recognized as revenue. Royalties paid are deferred as we have the right tooffset royalties paid for product that are later returned against subsequentroyalty obligations.

 

*NetProduct Sales*

 

Our net product sales represent total sell-throughrevenue less estimated allowances for rebates and chargebacks to be incurred onthe selling price of FOLOTYN related to the respective revenue. In addition, weincur certain distributor fees related to the management of our product bydistributors. These distributor fees are recorded within net revenues and areknown at the time of sale. Due to estimates and assumptions inherent indetermining the amount of rebates and chargebacks, the actual amount of claimsfor rebates and chargebacks may be different from our estimates, at which timewe would adjust our reserves accordingly. Product sales allowances and accruals are based on definitive contractualagreements or legal requirements (such as Medicaid laws and regulations)related to the purchase and/or utilization of the product by theseentities.  Allowances and accruals aregenerally recorded in the same period that the related revenue is recognized.

 

*Classification of Product SalesAllowances and Accruals*

 

Accruals related to Medicaid rebates, governmentchargebacks and distributor fees are recognized at the time sell-throughrevenue is recorded, resulting in a reduction in product sales revenue and therecording of an increase in accrued expenses.

 

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*MedicaidRebates*

 

Our product is subject to state government-managedMedicaid programs whereby discounts and rebates are provided to participatingstate governments. We record estimated rebates payable under governmentalprograms, including Medicaid, as a reduction of revenue at the timesell-through revenues are recorded. Our calculations related to these rebateaccruals require estimates, including estimates of customer mix primarily basedon a combination of market and clinical research, to determine which sales willbe subject to rebates and the amount of such rebates. During the first quarterof 2010, we obtained additional market research and were able to refine ourestimated Medicaid utilization, which resulted in a reversal of Medicaid rebateallowances related to 2009 sales totaling $208,000.  We also consider any legal interpretations ofthe applicable laws related to Medicaid and qualifying federal and stategovernment programs and any new information regarding changes in the Medicaidprograms’ regulations and guidelines that would impact the amount of therebates.  In March 2010, the PatientProtection and Affordable Care Act, as modified by the Health Care andEducation 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,the states’ 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 March 31, 2010 would result inan approximate $164,000 to $327,000 adjustment to cumulative net product sales.

 

*GovernmentChargebacks*

 

*Our products are subject to certain programs with federalgovernment qualified entities whereby pricing on products is discounted belowdistributor list price to participating entities. These entities purchaseproducts through distributors at the discounted price, and the distributorscharge the difference between their acquisition cost and the discounted priceback to us. We account for chargebacks by establishing an accrual in an amountequal to our estimate of maximum chargeback claims. We determine our chargebackestimates based on actual*FOLOTYN sell-through sales data from third-party information. Chargeback amounts aredetermined at the time of resale to the federal government qualified entities,and we generally issue credits for such amounts within several weeks ofreceiving claims from the distributor. We do not expect the impact of the 340Bprogram expansion included in the PPACA to significantly change our estimatedgovernment chargeback accruals because drugs approved under an Orphan Drugdesignation were 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.

 

*Researchand Development.**  *Research and development expenditures are charged to expense as incurred.Research and development expenses include the costs of certain personnel,preclinical studies, clinical trials, regulatory affairs, biostatistical dataanalysis, third party manufacturing costs for development of drug materials foruse in clinical trials and preclinical studies and licensing fees for ourproduct candidates prior to FDA approval. All finished drug inventory costs associated with production activitiesin our third party manufacturing facilities prior to receiving FDA approval forsuch facilities and prior to receiving regulatory approval to market ourproduct are expensed to research and development expenses. Upon receipt of therelated regulatory approval, we capitalize those manufacturing costs for ourmarketed products at the lower of cost or market and then expense the soldinventory as a component of cost of sales. We accrue research and developmentexpenses for activity as incurred during the fiscal year and prior to receivinginvoices from clinical sites and third party clinical and preclinical researchorganizations. We accrue external costs for clinical and preclinical studiesbased on an evaluation of the following: the progress of the studies, includingpatient enrollment, dosing levels of patients enrolled, estimated costs to dosepatients, invoices received, and contracted costs with clinical sites and thirdparty clinical and preclinical research organizations. Significant judgmentsand estimates must be made and used in determining the accrued balance in anyaccounting period. Actual results could differ from those estimates. During thequarters ended March 31, 2010 and 2009, we did not have any changes inestimates that would have resulted in material adjustments to research anddevelopment expenses accrued in the prior period.

 

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In accordance with certain research and developmentagreements, we are obligated to make certain upfront payments upon execution ofthe agreement. We record these upfront payments as prepaid research anddevelopment expenses. Such payments are recorded to research and developmentexpense as services are performed. We evaluate on a quarterly basis whetherevents and circumstances have occurred that may indicate impairment ofremaining prepaid research and development expenses.

 

*Inventory****. ***Costs associated with the production of FOLOTYN bulk drugsubstance and formulated drug product by our third party manufacturers arerecorded as either research and development expense or inventory.

 

Costs associated with the production of FOLOTYN by ourthird party manufacturers are expensed to research and development expense atthe time of production when:

 

·      the formulated drug product is packaged for clinicaltrial use;

 

·      the bulk drug substance and formulated drug product isproduced prior to receiving regulatory approval to market the product candidate;and

 

·      the bulk drug substance and formulated drug product isproduced prior to receiving FDA approval for the respective third partymanufacturing facilities.

 

If and when we receive the related regulatoryapproval, we capitalize those manufacturing costs for our marketed products atthe lower of cost (first-in, first-out method) or market (current replacementcost) with cost determined on the first-in, first-out basis and then expensethe sold inventory as a component of cost of goods sold.

 

Prior to receiving FDA approval of FOLOTYN, all costsrelated to purchases of the active pharmaceutical ingredient and themanufacturing of the product were recorded as research and developmentexpense.  Until we sell the inventory forwhich the costs were previously expensed, our cost of product sales willreflect only incremental costs incurred subsequent to FDA approval. We continueto expense costs associated with clinical trial material as research anddevelopment expense. Inventory as of March 31, 2010 consists of work inprocess of $120,000 and finished goods of $138,000.

 

*Stock-basedCompensation Expense.**  *We have several stock-based compensation plans under which incentive andnon-qualified stock options, restricted stock units and restricted shares maybe granted, and an employee stock purchase plan.  We measure the costof employee services received in exchange for an award of equity instrumentsbased on the grant date fair value of the award. That cost is recognized overthe period during which an employee is required to provide services in exchangefor the award, the requisite service period (usually the vesting period). Weprovide an estimate of forfeitures at initial grant date.

 

During the three monthsended March 31, 2010 and 2009, we recorded stock-based compensationexpense of approximately $2.9 million and $2.4 million, respectively, relatedto stock-based awards, including stock options, restricted stock units,restricted stock and our employee stock purchase plan. As of March 31,2010, the unrecorded deferred stock-based compensation balance related to thesestock-based awards was approximately $15.1 million and will be recognized overthe remaining vesting periods of the awards. Judgments and estimates must bemade and used in determining the factors used in calculating the fair value ofstock-based awards, including the expected forfeiture rate of our stock-basedawards, the expected life of our stock-based awards, and the expectedvolatility of our stock price. For more information on stock-based compensationexpense during the three months ended March 31, 2010, refer to Note 8 “Stock-BasedCompensation” of the unaudited March 31, 2010 financial statementsincluded herein.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our financial instrumentsas of March 31, 2010 consisted of cash, cash equivalents, investments,accounts receivable and accounts payable. All highly liquid investments with original maturities of three monthsor less are considered to be cash equivalents. We invest in securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal and maintain proper liquidity to meet ouroperating needs.  Our investment policyspecifies credit quality standards for our investments and limits the amount ofcredit exposure to any single issue, issuer or type of investment.  The weighted average duration of theremaining time to maturity for our portfolio of investments as of March 31,2010 was approximately eight months.  Asof March 31, 2010, our investments of $53.1 million were allclassified as held-to-maturity and were held in a variety of interest-bearinginstruments, consisting primarily of U.S. Treasury bills and 

 

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certificates of deposit. We did not hold anyderivative instruments, foreign exchange contracts, asset backed securities,mortgage backed securities, auction rate securities, or securities of issuersin bankruptcy in our investment portfolio as of March 31, 2010.  We have the ability and intent to hold ourremaining investments to recover the entire amortized cost basis of theinvestments as of March 31, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

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

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

**Disclosure Controls andProcedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act”.  Based on that evaluation, our management,including our principal executive officer and principal financial officer,concluded that our disclosure controls and procedures were effective as of March 31,2010 to ensure that information required to be disclosed by us in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**NoChanges in Internal Control over Financial Reporting**

 

There were no changes inour internal controls over financial reporting during the three months ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**PART II.  OTHERINFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

None.

 

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**ITEM 1A.  RISK FACTORS**

 

*Our business faces significantrisks. These risks include those described below and may include additionalrisks of which we are not currently aware or which we currently do not believeare material. If any of the events or circumstances described in the followingrisk factors actually occurs, they may materially harm our business, financialcondition, operating results and cash flow. As a result, the market price ofour common stock could decline. Additional risks and uncertainties that are notyet identified or that we think are immaterial may also materially harm ourbusiness, operating results and financial condition. **Stockholders and potential investorsin shares of our common stock should carefully consider the following riskfactors, which hereby update those risks contained in the “Risk Factors”section of our Annual Report on Form 10-K for the year ended December 31,2009 in addition to other information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of the Company.  We are relyingupon the safe harbor for all forward-looking statements in this report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this report. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors that have been substantivelychanged from those set forth in our Annual Report on Form 10-K for theperiod ended December 31, 2009 have been marked with an asteriskimmediately following the heading of such risk factor.*

 

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

 

We have experiencedsignificant net losses and negative cash flows from operations. To date, wehave financed our operations primarily through the public and private sale ofsecurities.  For the three months ended March 31,2010, we had a net loss of $20.5 million. As of March 31, 2010, we had accumulated a deficit of$393.8 million.  We have incurredthese losses principally from costs incurred in our research and developmentprograms and from our selling, general and administrative expenses.

 

On September 24,2009, we obtained accelerated approval from the FDA for FOLOTYN for use as asingle agent for the treatment of patients with relapsed or refractoryPTCL.  Our ability to generate revenue and achieve profitability isdependent on our ability, alone or with partners, to successfully commercializeFOLOTYN for the treatment of patients with relapsed or refractory PTCL. We are also developing FOLOTYN for use as a single agent and in combinationtherapy regimens in a range of hematologic malignancies and solid tumorindications, which may or may not lead to obtaining the necessary regulatoryapprovals to market FOLOTYN for additional indications. We expect to continueto spend substantial amounts on research and development, including amountsspent on conducting clinical trials and seeking additional regulatory approvalsfor FOLOTYN, 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 aredependent 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.***

 

FOLOTYN is our only product approved for marketing bythe FDA and our ability to generate revenue in the near term is entirelydependent upon sales of FOLOTYN.  We maynot be able to successfully commercialize FOLOTYN for a number of reasons,including:

 

·      we may not be able to establish ordemonstrate in the medical community the safety and efficacy of FOLOTYN and itspotential advantages over existing therapeutics and products currently inclinical development;

 

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

 

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

 

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

 

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

 

·                  the relative price of FOLOTYN as compared toalternative treatment options;

 

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

 

·                  we may not have adequate financial or other resourcesto successfully commercialize FOLOTYN; and

 

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

 

If weare unable to successfully commercialize FOLOTYN for the treatment of patientswith relapsed or refractory PTCL, our ability to generate revenue from productsales to achieve profitability will be adversely affected and our stock pricewould likely decline.

 

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

 

Our operating results aredifficult to predict and will likely fluctuate from quarter to quarter and yearto year.  Due to the recent approval ofFOLOTYN for the treatment of patients for relapsed or refractory PTCL in theUnited States and the lack of historical sales data, FOLOTYN sales will bedifficult to predict from period to period. We believe that our quarterly and annual results of operations may benegatively affected by a variety of factors, including:

 

·                  the level of patient demand for FOLOTYN;

 

·                  the timing and level of investment in our sales andmarketing efforts to support FOLOTYN sales;

 

·                  the timing and level of investment in our research anddevelopment activities involving FOLOTYN; and

 

·                  expenditures we may incur to acquire or developadditional products.

 

In addition, we measurecompensation cost for stock-based awards made to employees at the grant date ofthe award, based on the fair value of the award, and recognize the cost as anexpense over the employee’s requisite service period. As the variables that weuse as a basis for valuing these awards change over time, including ourunderlying stock price, the magnitude of the expense that we must recognize mayvary significantly. Any such variance from one period to the next could cause asignificant 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. indication.  Accordingly, we have limitedexperience in sales, marketing and distribution of pharmaceuticalproducts. We may not be able to adequately maintain the necessary sales,marketing, supply chain management and reimbursement capabilities on our own orenter into arrangements with third parties to perform these functions in atimely manner or on acceptable terms.  Additionally, maintaining sales,marketing and distribution capabilities may be more expensive than weanticipate, requiring us to divert capital from other intended purposes orpreventing us from building our sales, marketing and distribution capabilitiesto the desired levels. To be successful we must:

 

·                  recruit and retain adequate numbers of effective salespersonnel;

 

·                  effectively train our sales personnel in the benefitsof FOLOTYN;

 

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·                  establish and maintain successful sales and marketingand education programs that encourage physicians to recommend FOLOTYN to theirpatients; and

 

·                  manage geographically dispersed sales and marketingoperations.

 

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 to ongoingregulatory obligations and review, including post-approval requirements.****

 

FOLOTYNwas approved for the treatment of patients with relapsed or refractory PTCLunder the FDA’s accelerated approval program, which allows the FDA to approveproducts for cancer or other life threatening diseases based on initialpositive clinical data.  Under these provisions, we are subject to certainpost-approval requirements pursuant to which we have agreed to conduct tworandomized Phase 3 trials to verify and describe FOLOTYN’s clinical benefit inpatients with T-cell lymphoma.  The FDA has also required that we conducttwo Phase 1 trials to assess whether FOLOTYN poses a serious risk of altereddrug levels resulting from organ impairment.  Failure to complete the studiesor adhere to the timelines established by the FDA could result in penalties,including fines or withdrawal of FOLOTYN from the market.  The FDA mayalso initiate proceedings to withdraw approval if our Phase 3 studies fail toverify 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 also subject to additional, continuingpost-approval regulatory obligations, including the possibility of additionalclinical studies required by the FDA, safety reporting requirements andregulatory oversight of the promotion and marketing 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 strict compliance with cGMP orother applicable government regulations and corresponding foreign standards. Wehave limited control over a third-party manufacturer’s compliance with theseregulations and standards.  If we or our third-party manufacturers fail tocomply with applicable regulatory requirements, we may be subject to fines,suspension, modification or withdrawal of regulatory approvals, productrecalls, 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.  Significantuncertainty exists as to the coverage and reimbursement of newly approvedhealth care products.  In addition, theU.S. Congress recently enacted legislation to reform the health care systemthat includes cost containment measures that may adversely affect the amount ofreimbursement for pharmaceutical products, including FOLOTYN.  These measures include increasing the minimumrebates for products covered by Medicaid programs and extending such rebates todrugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed care organizationsas well as expansion of the 340(B) Public Health Services drug discountprogram.

 

Healthcareproviders and third-party payers use coding systems to identify diagnoses,procedures, services, drugs, pharmaceutical devices, equipment and other health-relateditems and services.  Proper coding is an integral component to receivingappropriate reimbursement for the administration of FOLOTYN and relatedservices. The majority of payers use

 

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nationally recognizedcode sets to report medical conditions, services and drugs.  We recentlyobtained transitional pass-through status which enables FOLOTYN to be reimbursedunder the hospital outpatient prospective payment system.  In addition, wehave applied for a permanent reimbursement J-code for FOLOTYN, althoughhealthcare providers prescribing FOLOTYN will initially be 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 whetherour customers will receive adequate reimbursement for FOLOTYN, nor can wepredict whether FOLOTYN 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 of customers for asignificant portion of our revenue, and the loss of, or significant reductionor cancellation in sales to, any one of these customers could adversely affectour operations and financial condition.****

 

In theUnited States, we sell FOLOTYN to a small number of distributors who in turnsell-through to patient health care providers. These distributors also providemultiple logistics services relating to the distribution of FOLOTYN, includingtransportation, warehousing, cross-docking, inventory management, packaging andfreight-forwarding.  We do not promoteFOLOTYN to these distributors and they do not set or determine demand forFOLOTYN.  For the three months ended March 31,2010, three companies affiliated with AmerisourceBergen Corporation accountedfor substantially all of our FOLOTYN sales. We expect significant customer concentration to continue for theforeseeable future.  Our ability tosuccessfully commercialize FOLOTYN will depend, in part, on the extent to whichthese distributors are able to provide adequate distribution of FOLOTYN topatient health care providers.  Althoughwe believe we can find alternative distributors on a relatively short notice,our revenue during that period of time may suffer and we may incur additionalcosts to replace a distributor.  The lossof any large customer, a significant reduction in sales we make to them, anycancellation of orders they have made with us or any failure to pay for theproducts we have shipped to them could materially and adversely affect ourresults of operations and financial condition.

 

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

 

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

 

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

 

·                  not effectively distribute or support FOLOTYN;

 

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

 

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

 

·                  cease operations.

 

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******.****

 

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

 

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

 

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

 

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

 

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

 

·                  state law equivalents of each of the above federallaws, such as anti-kickback and false claims laws that may apply to items orservices reimbursed by any third-party payer, including commercial insurers,and state laws governing the privacy of health information in certain circumstances,many of which differ from each other in significant ways and often are notpreempted by HIPAA.

 

Althoughthere are a number of statutory exemptions and regulatory safe harborsprotecting certain common activities from prosecution under the federal Anti-Kickbackstatute, the exemptions and safe harbors are drawn narrowly, and practices thatinvolve remuneration intended to induce prescriptions, purchases orrecommendations 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.

 

The PPACA, enacted in 2010, imposes new reportingand disclosure requirements for pharmaceutical and device manufacturers withregard to payments or other transfers of value made to physicians and teachinghospitals, effective March 30, 2013. Such information will be made publicly available in a searchable formatbeginning September 30, 2013.  Inaddition, pharmaceutical and device manufacturers will also be required toreport and disclose investment interests held by physicians and their immediatefamily members during the preceding calendar year.  Failure to submit required information mayresult in civil monetary penalties of up to $150,000 per year (and up to $1million per year for “knowing failures”), for all payments, transfers of valueor ownership or investment interests not reported in 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 marketing compliance programs, and file periodic reports with thestate or make periodic public disclosures on sales, marketing, pricing,clinical trials, and other activities. Similar legislation is being consideredin other states. Many of these requirements are new and uncertain, and thepenalties for failure to comply with these requirements are unclear.Nonetheless, if we are found not to be in full compliance with these laws, wecould face enforcement action and fines and other penalties, and could receiveadverse publicity.

 

If ouroperations are found to be in violation of any of the healthcare fraud andabuse laws described above or any other governmental regulations that apply tous, we may be subject to penalties, including civil and criminal penalties,damages, fines and the curtailment or restructuring of our operations. Anypenalties, damages, fines, curtailment or restructuring of our operations couldadversely affect our ability to operate our business and our financial results.Although compliance programs can mitigate the risk of investigation andprosecution for violations of these laws, the risks cannot be entirelyeliminated. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legal

 

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expenses and divert our management’sattention from the operation of our business. Moreover, achieving andsustaining compliance with all applicable federal and state fraud and abuselaws 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.***

 

We aresubject to stringent regulations with respect to product safety and efficacy byvarious international, federal, state and local authorities. FOLOTYN has notbeen approved for marketing in the United States for any indication other thanthe treatment of patients with relapsed or refractory PTCL. In addition,FOLOTYN has not been approved for marketing for this or any other indication inany other country. A pharmaceutical product cannot be marketed in the UnitedStates or most other countries until it has completed a rigorous and extensiveregulatory review and approval process. Satisfaction of regulatory requirementstypically takes many years, is dependent upon the type, complexity and noveltyof the product and requires the expenditure of substantial resources. Ofparticular significance are the requirements covering research and development,preclinical and clinical testing, manufacturing, quality control, labeling andpromotion of drugs for human use. We may not obtain the necessary regulatoryapprovals to market FOLOTYN in the United States for any additional indicationsor in any other countries. If we fail to obtain or maintain regulatoryapprovals to market FOLOTYN in the United States for any additional indicationsor in any other countries, our ability to generate significant revenue orachieve 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 publicperception of FOLOTYN.****

 

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. An independent datasafety monitoring board, the FDA, other regulatory authorities or we maysuspend or terminate clinical trials at any time. We may also be required tostrengthen the warnings and precautions section of the FOLOTYN package insertbased on reports of adverse events or safety concerns, or impose a Risk Evaluationand Mitigation Strategy, which could adversely affect FOLOTYN’s acceptance inthe market.  We cannot assure you thatFOLOTYN will be safe for human use.

 

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

 

***If FOLOTYN fails to meet safety or efficacy endpoints 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 besafe

 

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and efficacious inclinical trials for other indications and may not meet all of the applicableregulatory requirements needed to receive regulatory approval for thoseindications. The clinical development and regulatory approval process isexpensive and takes many years. Failure can occur at any stage of development,and the timing of any regulatory approval cannot be accurately predicted. Inaddition, failure to comply with the FDA and other applicable U.S. and foreignregulatory requirements applicable to clinical trials may subject us toadministrative 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 aPhase 3 clinical trial. If FOLOTYN fails to show clinically significantbenefits in any clinical trial or for any particular indication, it may not beapproved for marketing for such indication. Additionally, if FOLOTYN isdemonstrated to be unsafe in clinical trials for other indications, suchdemonstration could negatively impact FOLOTYN’s existing approval for thetreatment of patients with relapsed or refractory PTCL.

 

Evenif we achieve positive interim results in clinical trials, these results do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. Data obtained from preclinical and clinicalactivities are susceptible to varying interpretations that could delay, limitor prevent regulatory clearances, and the FDA can request that we conductadditional clinical trials.  A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter promising results in earlier trials. In addition, negative orinconclusive results or adverse safety events during a clinical trial couldcause a clinical trial to be repeated or terminated. Also, failure to constructclinical trial protocols to screen patients for risk profile factors relevantto the trial for purposes of segregating patients into the patient populationstreated with the drug being tested and the control group could result in eithergroup experiencing a disproportionate number of adverse events and could causea clinical trial to be repeated or terminated. If we have to conduct additionalclinical trials for FOLOTYN for any particular indication, it willsignificantly increase our expenses and may delay marketing of FOLOTYN for suchindication.

 

***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 othercountries. We have limited experience in filing and pursuing applicationsnecessary to gain regulatory approvals, which may place us at risk of delays,overspending and human resources inefficiencies.

 

FOLOTYNmay not be approved for any additional indications even if it achieves its endpointsin clinical trials. Regulatory agencies, including the FDA, or their advisors,may disagree with our interpretations of data from preclinical studies andclinical trials. The FDA has substantial discretion in the approval process,and when or whether regulatory approval will be obtained for any drug wedevelop.  Regulatory agencies also may approve a product candidate forfewer conditions than requested or may grant approval subject to theperformance of post-approval studies or risk evaluation and mitigationstrategies for a product candidate. In addition, regulatory agencies may notapprove the labeling claims that are necessary or desirable for the successfulcommercialization 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

 

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clinical benefit inpatients with T-cell lymphoma as well as two Phase 1 trials to assess whetherFOLOTYN poses a serious risk of altered drug levels resulting from organimpairment.  Any unforeseen problems with an approved product, any failureto meet the post-approval study requirements or any violation of regulationscould result in restrictions on the product, including its withdrawal from themarket. Any delay in or failure to obtain or maintain regulatory approvals forFOLOTYN in the United States for any additional indication or in any othercountries could harm our business and prevent us from ever generatingsignificant revenues or achieving profitability.

 

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

 

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

 

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

 

***We may be required to suspend, repeat or terminate 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 the FDA’s current Good ClinicalPractices, or cGMP, or other applicable foreign government guidelines and aresubject to oversight by the FDA, other foreign governmental agencies andInstitutional Review Boards at the medical institutions where the clinicaltrials are conducted. In addition, clinical trials must be conducted withproduct candidates produced under cGMP and may require large numbers of testsubjects. Clinical trials may be suspended by the FDA, other foreigngovernmental agencies, or us for various reasons, including:

 

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

 

·                  deficiencies in the clinical trial operations or trialsites;

 

·                  the product candidate may have unforeseen adverse sideeffects;

 

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

 

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

 

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

 

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

 

·                  insufficient quantities of the product candidate tocomplete the trials.

 

Inaddition, changes in regulatory requirements and guidance may occur and we mayneed to amend clinical trial protocols to reflect these changes. Amendments mayrequire us to resubmit our clinical trial protocols to Institutional ReviewBoards for reexamination, which may impact the costs, timing or successfulcompletion of a clinical trial. Due to these and

 

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other factors, FOLOTYNcould take a significantly longer time to gain regulatory approval for anyadditional indications than we expect or we may never gain approval foradditional indications, which could reduce our revenue by delaying orterminating the commercialization 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 the capital necessary to fund ouroperations, we will be unable to successfully develop or commercializeFOLOTYN.****

 

Based uponthe current status of our product development and commercialization plans, webelieve that our cash, cash equivalents, and investments as of March 31,2010 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 continuing our current development programsand beginning other long-term development projects involving FOLOTYN, includingthe post-approval clinical studies required for FOLOTYN. These projects mayrequire many years and substantial expenditures to complete and may ultimatelybe unsuccessful.  In addition, we expect to incur significant costsrelating to the commercialization of FOLOTYN, including costs related to oursales and marketing, medical affairs and manufacturing operations. Therefore, we may need to raise additional capital to support our futureoperations.  Our actual capital requirements will depend on many factors,including:

 

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

 

·                  the timing and costs associated with our sales andmarketing and medical affairs activities involving FOLOTYN;

 

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

 

·                  the timing and costs associated with conductingpreclinical and clinical development of FOLOTYN, including the post-approvalstudies required by the FDA, as well as our evaluation of, and decisions withrespect to, additional therapeutic indications for which we may developFOLOTYN;

 

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

 

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

 

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

 

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operations, we may berequired to delay, reduce the scope of or eliminate one or more of ourdevelopment programs and our business and future prospects for revenue andprofitability may be harmed.

 

***Budget constraints may force us to delay our efforts 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 inpatients with relapsed or refractory PTCL is conditioned upon us undertakingtwo additional Phase 3 studies and two additional Phase 1 studies which willresult in significant additional expense.  As a result of our limitedresources, we may have to prioritize the development of FOLOTYN for additionalindications and may not be able to fully realize the value of FOLOTYN for otherindications in 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.****

 

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

 

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

 

Wehave entered into arrangements with 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 addition, we are in the process ofestablishing additional supply agreements for the commercial production ofFOLOTYN bulk drug substance and formulated drug product.  However, givenour current lack of formal supply agreements and the fact that in some casesour components are supplied by a single source, 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:

 

·                  our current and future manufacturers are subject toongoing, periodic, unannounced inspections by the FDA and corresponding stateand international regulatory authorities for compliance with strictly enforcedcGMP regulations and similar state and foreign standards, and we do not havecontrol over our contract manufacturers’ compliance with these regulations andstandards;

 

·                  our manufacturers may not be able to comply withapplicable regulatory requirements, which would prohibit them frommanufacturing products for us;

 

·                  our manufacturers may have staffing difficulties, mayundergo changes in control or may become financially distressed, adverselyaffecting their willingness or ability to manufacture products for us;

 

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·                  our manufacturers might not be able to fulfill ourcommercial needs, which would require us to seek new manufacturing arrangementsand may result in substantial delays in meeting market demands;

 

·                  if we need to change to other commercial manufacturingcontractors, the FDA and comparable foreign regulators must approve our use ofany new manufacturer, which would require additional testing, regulatoryfilings and compliance inspections, and the new manufacturers would have to beeducated in, or themselves develop substantially equivalent processes necessaryfor, the production of our products; and

 

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

 

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

 

***If we are unable to effectively protect our 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 uscould be challenged, invalidated, infringed, circumvented or heldunenforceable, based on, among other things, obviousness, inequitable conduct,anticipation or enablement. In addition, it is possible that no patents willissue on any of our licensed patent applications. It is possible that theclaims in patents that have been issued or licensed to us or that may be issuedor licensed to us in the future will not be sufficiently broad to protect ourintellectual property or that the patents will not provide protection againstcompetitive products or otherwise be commercially valuable. Failure to obtainand maintain adequate patent protection for our intellectual property wouldimpair our ability to be commercially competitive.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  strategic partners may experience financialdifficulties;

 

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

 

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

 

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

 

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

 

***Health care reform measures couldadversely affect our business.****

 

The business and financial condition of pharmaceuticaland biotechnology companies are affected by the efforts of governmental andthird-party payers to contain or reduce the costs of health care.  The U.S. Congress recently enacted

 

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legislationto reform the health care system.  Whilewe anticipate that this legislation may, over time, increase the number ofpatients who have insurance coverage for pharmaceutical products, it alsoimposes cost containment measures that may adversely affect the amount ofreimbursement for pharmaceutical products, including FOLOTYN.  These measures include increasing the minimumrebates for products covered by Medicaid programs and extending such rebates todrugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed careorganizations as well as expansion of the 340(B) Public Health Services drugdiscount program.  In foreignjurisdictions there have been, and we expect that there will continue to be, anumber of legislative and regulatory proposals aimed at changing the healthcare system. For example, in some countries other than the United States,pricing of prescription drugs is subject to government control and we expect tosee continued efforts to reduce healthcare costs in international markets.

 

Some states are also considering legislation thatwould control the prices of drugs, and state Medicaid programs are increasinglyrequesting manufacturers to pay supplemental rebates and requiring priorauthorization by the state program for use of any drug for which supplementalrebates are not being paid.  Managed careorganizations continue to seek price discounts and, in some cases, to imposerestrictions on the coverage of particular drugs.  Government efforts to reduce Medicaidexpenses may lead to increased use of managed care organizations by Medicaid programs.  This may result in managed care organizationsinfluencing prescription decisions for a larger segment of the population and acorresponding constraint on prices and reimbursement for drugs, includingFOLOTYN.  It is likely that federal andstate legislatures and health agencies will continue to focus on additionalhealth care reform in the future although we are unable to predict whatadditional legislation or regulation, if any, relating to the health careindustry or third-party coverage and reimbursement may be enacted in the futureor what effect such legislation or regulation would have on our business. Thependency or approval of such proposals or reforms could result in a decrease inour stock price or limit our ability to raise capital or to obtain strategicpartnerships 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 FOA has awarded orphan drug designation to pralatrexatefor the treatment of patients with follicular lymphoma and diffuse large B-celllymphoma, for which we do not have approval. Under the Orphan Drug Act, thefirst company to receive FDA approval for pralatrexate for the designatedorphan drug indication will obtain seven years of marketing exclusivity duringwhich the FDA may not approve another company’s application for pralatrexatefor 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 drugexclusivity does not prevent FDA approval of a different drug for the orphanindication or the same drug for a different 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 by consumersor health care providers or by pharmaceutical companies or others sellingFOLOTYN or any future products. If we cannot successfully defend ourselvesagainst such claims, we may incur substantial liabilities or be required tolimit the commercialization of FOLOTYN. We have obtained limited productliability insurance coverage for our human clinical trials and commercial salesof FOLOTYN. However, product liability insurance coverage is becomingincreasingly expensive, and we may be unable to maintain such insurancecoverage at a reasonable cost or in sufficient amounts to protect us againstlosses due to product liability. A successful product liability claim in excessof our insurance coverage could have a material adverse effect on our business,financial condition and results of operations.

 

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

 

We arehighly dependent on our President and Chief Executive Officer, Paul L. Berns,and other members of our management team. We are named as the beneficiary on aterm life insurance policy covering Mr. Berns in the amount of$10.0 million. We also depend on key employees and academic collaboratorsfor each of our research and development programs. The loss of any of our keyemployees or academic collaborators could delay the development andcommercialization of FOLOTYN or result in the termination of our FOLOTYNdevelopment program in its entirety. Mr. Berns and others on our executivemanagement team have employment agreements with us, but the agreements providefor “at-will” employment with no specified term. Our future success also willdepend in large part on our continued ability to attract and retain otherhighly qualified scientific, technical and management personnel, as well aspersonnel with expertise in

 

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clinical testing,governmental regulation and commercialization of pharmaceutical products. Weface competition for personnel from other companies, universities, public andprivate research institutions, government entities and other organizations. Ifwe are unsuccessful in our recruitment and retention efforts, our business willbe harmed.

 

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.

 

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

 

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

 

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

 

Ourmanagement, including our chief executive officer and principal 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 identify amaterial 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 the sell-through methodis complex and depends upon the accuracy and consistency of third party data aswell as dependence upon key finance and accounting personnel to maintain andimplement 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

 

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personnel, the accuracyof our consolidated financial statements could be materially affected. Thiscould cause future delays in our earnings announcements, regulatory filingswith the Securities and Exchange Commission, or SEC, and delisting with theNASDAQ.

 

***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 our estimatesare included in this report. Our estimates are based on information availableto us as of the date of this report and a variety of assumptions. Many of theunderlying assumptions are outside of our control. If milestones are notachieved when we estimated that they would be, investors could be disappointedand our stock price may decrease.

 

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

 

On March 2,2005, we entered into a Securities Purchase Agreement with Warburg PincusPrivate Equity VIII, L.P., or Warburg, and certain other investors 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.

 

As of April 30,2010, we had 105,229,081 shares of common stock outstanding, of which Warburgowned 26,124,430 shares, or approximately 25% of the voting power of ouroutstanding common stock.  Although Warburg has entered into a standstillagreement with us, Warburg is, and will continue to be, able to exercisesubstantial influence over any actions requiring stockholder approval.

 

***Anti-takeover provisions in our charter documents and 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” preferredstock that could be issued by our board of directors to increase the number ofoutstanding shares or change the balance of voting control and thwart atakeover attempt;

 

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

 

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

 

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

 

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

 

Inaddition, we are subject to Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engagingin any of a broad range of business combinations with an interested stockholderfor a period of three years following the date on which the stockholder becamean interested stockholder. This provision could have the effect of delaying orpreventing a change of control, whether or not it is desired by or beneficialto our stockholders. Notwithstanding the foregoing, the three-year moratoriumimposed on business combinations by Section 203 will not apply to Warburgbecause, prior to the date on which Warburg became an interested stockholder,our board of directors approved

 

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the transactions thatresulted in Warburg becoming an interested stockholder. However, in connectionwith Warburg’s participation in an equity financing we completed in March 2005,Warburg and certain of its affiliates entered into a standstill agreementpursuant to which they agreed not to pursue, for so long as they continue toown a specified number of shares of our common stock, certain activities thepurpose or effect of which may be to change or influence the control of ourcompany.

 

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

 

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

 

BecauseWarburg owns a substantial percentage of our outstanding common stock, weamended the stockholder rights plan in connection with Warburg’s participationin an equity financing we completed in March 2005 to provide that Warburgand its affiliates will be exempt from the stockholder rights plan, unlessWarburg and its affiliates become, without the prior consent of our board ofdirectors, the beneficial owner of more than 44% of our common stock. Likewise,in connection with our completion of an underwritten offering of 9,000,000shares of common stock in February 2007, we amended the stockholder rightsplan to provide that Baker Brothers Life Sciences, L.P. and certain otheraffiliated funds, which are collectively referred to herein as “Baker,” will beexempt from the stockholder rights plan, unless Baker becomes, without theprior consent of our board of directors, the beneficial owner of more than 20%of our common stock.  According to filings with the SEC, Baker owned lessthan 10% of our outstanding common stock as of February 2009. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

 

***Unstable market conditions mayhave serious adverse consequences on our business.***

 

The recent economic downturn and market instabilityhas made the business climate more volatile and more costly. Our generalbusiness strategy may be adversely affected by unpredictable and unstablemarket conditions. If the current equity and credit markets deterioratefurther, or do not improve, it may make any necessary equity or debt financingmore difficult, more costly, and more dilutive. While we believe we haveadequate capital resources to meet our expected working capital and capitalexpenditure requirements for at least the next 12 months, a radical economicdownturn or increase in our expenses could require additional financing on lessthan attractive rates or on terms that are excessively dilutive to existingstockholders. Failure to secure any necessary financing in a timely manner andon favorable terms could have a material adverse effect on our growth strategy,financial performance and stock price and could require us to delay or abandonclinical development plans. There is a risk that one or more of our currentservice providers, manufacturers or other partners may encounter difficultiesduring challenging economic times, which could have an adverse effect on ourbusiness, 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:

 

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

 

·                  actual or anticipated variations in quarterlyoperating results;

 

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

 

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

 

·                  actual or anticipated results of our clinical trialsinvolving FOLOTYN;

 

·                  changes in laws or regulations applicable to FOLOTYN;

 

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

 

·                  announcements of technological innovations by us orour competitors;

 

·                  changes in financial estimates or recommendations bysecurities analysts;

 

·                  conditions or trends in the biotechnology andpharmaceutical industries;

 

·                  changes in the market valuations of similar companies;

 

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

 

·                  additions or departures of key personnel;

 

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

 

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

 

·                  sales of large blocks of our common stock;

 

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

 

·                  economic and other external factors, includingdisasters or crises.

 

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

 

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

 

If our stockholders sellsubstantial amounts of our common stock, the market price of our common stockmay decline. These sales also might make it more difficult for us to sellequity or equity-related securities in the future at a time and price that weconsider appropriate. We are unable to predict the effect that sales may haveon the then prevailing market price of our common stock.  We have enteredinto a Registration Rights Agreement with Warburg pursuant to which Warburg isentitled to certain registration rights with respect to shares of our common stock. On July 20, 2009, we filed a Registration Statement on Form S-3 withthe SEC providing for the registration for resale by Warburg of up to26,124,430 shares of our common stock, which registration statement wasdeclared effective on August 28, 2009.

 

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| **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** |
| 10.21†      |       | Executive Compensation and Equity Awards.                                                       |       | 8-K                           |       | 2/26/2010        |   | 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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†                  Indicatesmanagement contract or compensatory plan or arrangement.

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

 

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**SIGNATURES**

 

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

 
| Date: May 5, 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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