Table of Contents

 

 

 

**UNITED STATESSECURITIES 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,  2009.**                                                                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| **o**      | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| ** ** | **For the transition period from                        to                      .** |

 

**CommissionFile Number000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**11080CirclePoint Road, Suite 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 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o No o

 

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

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

 

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 May 1, 2009,there were 89,360,666 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

 

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**Table of Contents**

** **

**ALLOS THERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLE OF CONTENTS**

 
| PART I.  Financial  Information | 3                                                                                                                                                                                               |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.                                   | Financial  Statements (unaudited)                                                                                                                                                               | 3 |
|                                      | Balance Sheets — as  of March 31, 2009 and December 31, 2008                                                                                                                     | 3 |
|                                      | Statements of Operations — for the  three months ended March 31, 2009 and 2008 and the cumulative period  from September 1, 1992 (date of inception) through March 31, 2009 | 4 |
|                                      | Statements of Cash Flows — for the three  months ended March 31, 2009 and 2008 and the cumulative period from  September 1, 1992 (date of inception) through March 31, 2009 | 5 |
|                                      | Notes  to Financial Statements                                                                                                                                                                  | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                     | 13 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                     | 20 |
| ITEM 4.                                   | Controls and  Procedures                                                                                                                                                                        | 21 |
| PART II.   Other Information    | 21                                                                                                                                                                                              |
| ITEM 1.                                   | Legal Proceedings                                                                                                                                                                               | 21 |
| ITEM  1A.                                 | Risk  Factors                                                                                                                                                                                   | 22 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                    | 37 |
| ITEM 3.                                   | Defaults Upon  Senior Securities                                                                                                                                                                | 37 |
| ITEM 4.                                   | Submission of  Matters to a Vote of Security Holders                                                                                                                                            | 37 |
| ITEM  5.                                  | Other  Information                                                                                                                                                                              | 37 |
| ITEM 6.                                   | Exhibits                                                                                                                                                                                        | 37 |
| SIGNATURES                                |                                                                                                                                                                                            | 38 |

 

NOTE:

 

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

* *

*2*

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**Table of Contents**

** **

**PART I. FINANCIALINFORMATION**

** **

**ITEM1.  FINANCIAL STATEMENTS**

** **

**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                             |       | $                  | 47,032,269 |                  | $          | 30,458,424 |   |
| Restricted cash                                                                                                                                                                                                                                        |       | 237,632            |       | 237,632               |       |
| Investments in  marketable securities                                                                                                                                                                                                                  |       | 25,158,223         |       | 53,468,942            |       |
| Prepaid research  and development expenses                                                                                                                                                                                                             |       | 726,977            |       | 919,384               |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                     |       | 1,448,966          |       | 2,772,235             |       |
| Total current  assets                                                                                                                                                                                                                                  |       | 74,604,067         |       | 87,856,617            |       |
| Property and  equipment, net                                                                                                                                                                                                                           |       | 1,421,574          |       | 1,307,084             |       |
| Investments in  marketable securities                                                                                                                                                                                                                  |       | 348,327            |       | 38,480                |       |
| Other assets                                                                                                                                                                                                                                           |       | 115,200            |       | 137,423               |       |
| Total assets                                                                                                                                                                                                                                           |       | $                  | 76,489,168 |                  | $          | 89,339,604 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                  |       |               |       |                  |       |
| Trade accounts  payable                                                                                                                                                                                                                                |       | $                  | 1,999,338  |                  | $          | 280,526 |   |
| Accrued  liabilities                                                                                                                                                                                                                                   |       | 6,607,329          |       | 9,594,712             |       |
| Total current  liabilities                                                                                                                                                                                                                             |       | 8,606,667          |       | 9,875,238             |       |
| Commitments and  contingencies (See Note 6)                                                                                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                            |       |               |       |                  |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at March 31, 2009 and  December 31, 2008; no shares issued or outstanding                                                                                              |       | —             |       | —                |       |
| Series A  Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares  designated from authorized preferred stock at March 31, 2009 and  December 31, 2008; no shares issued or outstanding                           |       | —             |       | —                |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at March 31, 2009 and  December 31, 2008; 81,610,666 and 81,238,812 shares issued and  outstanding at March 31, 2009 and December 31, 2008,  respectively |       | 81,611             |       | 81,239                |       |
| Additional  paid-in capital                                                                                                                                                                                                                            |       | 382,610,202        |       | 379,042,015           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                      |       | (314,809,312       | )          | (299,658,888          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                       |       | 67,882,501         |       | 79,464,366            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                       |       | $                  | 76,489,168 |                  | $          | 89,339,604 |   |

 

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

 

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** **

**ALLOS THERAPEUTICS, INC.**

**(A Development Stage Enterprise)**

**STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                         | ** **  | **2008**                                                                                                                  | ** ** | **2009** | ** ** |
|                                                                  |       |                                             |        |                                                                                                                      |       |   |   |
| Operating  expenses:                                                  |       |                                             |        |                                                                                                                      |       |   |   |
| Research and  development                                             |       | $                                                | 5,705,102   |                                                                                                                      | $          | 5,973,612 |   | $ | 154,853,026 |   |
| Clinical  manufacturing                                               |       | 2,655,272                                        |        | 1,586,558                                                                                                                 |       | 44,014,524 |   |
| Marketing,  general and administrative                                |       | 6,962,650                                        |        | 5,011,364                                                                                                                 |       | 132,836,619 |   |
| Restructuring  and separation costs                                   |       | —                                           |        | —                                                                                                                    |       | 1,663,821 |   |
| Total operating  expenses                                             |       | 15,323,024                                       |        | 12,571,534                                                                                                                |       | 333,367,990 |   |
| Loss from  operations                                                 |       | (15,323,024                                      | )           | (12,571,534                                                                                                               | )          | (333,367,990 | ) |
| Gain on  settlement claims                                            |       | —                                           |        | —                                                                                                                    |       | 5,110,083 |   |
| Interest and  other income, net                                       |       | 172,600                                          |        | 564,935                                                                                                                   |       | 23,685,059 |   |
| Net loss                                                              |       | (15,150,424                                      | )           | (12,006,599                                                                                                               | )          | (304,572,848 | ) |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                           |        | —                                                                                                                    |       | (10,236,464 | ) |
| Net loss  attributable to common stockholders                         |       | $                                                | (15,150,424 | )                                                                                                                         | $          | (12,006,599 | ) | $ | (314,809,312 | ) |
| Net loss per  share: basic and diluted                                |       | $                                                | (0.19       | )                                                                                                                         | $          | (0.18 | ) |   |   |
| Weighted average  shares outstanding: basic and diluted               |       | 81,096,293                                       |        | 67,266,819                                                                                                                |       |   |   |

 

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

 

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** **

**ALLOS THERAPEUTICS, INC.**

**(A Development Stage Enterprise)**

**STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  March 31,** | ** **  | **Cumulative  Period from  September 1, 1992  (date of inception)  through** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2009**                                         | ** **  | **2008**                                                                                              | ** ** | **March 31, 2009** | ** ** |
| Cash Flows From  Operating Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Net loss                                                                                                                |       | $                                                | (15,150,424 | )                                                                                                     | $          | (12,006,599 | ) | $ | (304,572,848 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                            |       |                                             |        |                                                                                                  |       |   |   |
| Depreciation and  amortization                                                                                          |       | 92,787                                           |        | 103,336                                                                                               |       | 3,933,832 |   |
| Stock-based  compensation expense                                                                                       |       | 2,378,155                                        |        | 2,114,511                                                                                             |       | 42,680,323 |   |
| Write-off of  long-term investment                                                                                      |       | —                                           |        | —                                                                                                |       | 1,000,000 |   |
| Realized loss on  sale of marketable securities                                                                         |       | 157,141                                          |        | —                                                                                                |       | 708,839 |   |
| Other                                                                                                                   |       | —                                           |        | —                                                                                                |       | 117,809 |   |
| Changes in  operating assets and liabilities:                                                                           |       |                                             |        |                                                                                                  |       |   |   |
| Prepaid expenses  and other assets                                                                                      |       | 1,537,899                                        |        | (339,110                                                                                              | )          | (2,281,143 | ) |
| Interest  receivable on investments                                                                                     |       | 363,343                                          |        | 105,879                                                                                               |       | (469,817 | ) |
| Accounts payable                                                                                                        |       | 1,718,812                                        |        | 466,261                                                                                               |       | 1,999,338 |   |
| Accrued  liabilities                                                                                                    |       | (2,987,383                                       | )           | 224,674                                                                                               |       | 6,607,329 |   |
| Net cash used in  operating activities                                                                                  |       | (11,889,670                                      | )           | (9,331,048                                                                                            | )          | (250,276,338 | ) |
| Cash Flows From  Investing Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Acquisition of  property and equipment                                                                                  |       | (207,278                                         | )           | (86,524                                                                                               | )          | (5,120,089 | ) |
| Pledge of  restricted cash                                                                                              |       | —                                           |        | —                                                                                                |       | (237,632 | ) |
| Purchases of  marketable securities                                                                                     |       | (133,412                                         | )           | (27,050,872                                                                                           | )          | (609,729,669 | ) |
| Proceeds from  maturities of marketable securities                                                                      |       | 23,720,000                                       |        | 31,200,000                                                                                            |       | 573,342,797 |   |
| Proceeds from  sales of marketable securities                                                                           |       | 3,893,800                                        |        | —                                                                                                |       | 10,641,300 |   |
| Purchase of  long-term investment                                                                                       |       | —                                           |        | —                                                                                                |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                           |        | —                                                                                                |       | 49,687 |   |
| Net cash  provided by (used in) investing activities                                                                    |       | 27,273,110                                       |        | 4,062,604                                                                                             |       | (32,053,606 | ) |
| Cash Flows From  Financing Activities:                                                                                  |       |                                             |        |                                                                                                  |       |   |   |
| Principal  payments under capital leases                                                                                |       | —                                           |        | —                                                                                                |       | (422,088 | ) |
| Proceeds from  sales leaseback                                                                                          |       | —                                           |        | —                                                                                                |       | 120,492 |   |
| Proceeds from  issuance of convertible preferred stock, net of issuance costs                                           |       | —                                           |        | —                                                                                                |       | 89,125,640 |   |
| Proceeds from  issuance of common stock associated with stock options, stock warrants and  employee stock purchase plan |       | 1,190,405                                        |        | 2,281,097                                                                                             |       | 16,201,222 |   |
| Proceeds from  issuance of common stock, net of issuance costs                                                          |       | —                                           |        | —                                                                                                |       | 224,336,947 |   |
| Net cash  provided by financing activities                                                                              |       | 1,190,405                                        |        | 2,281,097                                                                                             |       | 329,362,213 |   |
| Net increase (decrease)  in cash and cash equivalents                                                                   |       | 16,573,845                                       |        | (2,987,347                                                                                            | )          | 47,032,269 |   |
| Cash and cash  equivalents, beginning of period                                                                         |       | 30,458,424                                       |        | 15,919,664                                                                                            |       | — |   |
| Cash and cash  equivalents, end of period                                                                               |       | $                                                | 47,032,269  |                                                                                                  | $          | 12,932,317 |   | $ | 47,032,269 |   |
| Supplemental  Schedule of Cash and Non-cash Operating and Financing Activities:                                    |       |                                             |        |                                                                                                  |       |   |   |
| Cash paid for  interest                                                                                                 |       | $                                                | —      |                                                                                                  | $          | — |   | $ | 1,033,375 |   |
| Issuance of  stock in exchange for license agreement                                                                    |       | —                                           |        | —                                                                                                |       | 40,000 |   |
| Capital lease  obligations incurred for acquisition of property and equipment                                           |       | —                                           |        | —                                                                                                |       | 422,088 |   |
| Issuance of  stock in exchange for notes receivable                                                                     |       | —                                           |        | —                                                                                                |       | 139,687 |   |
| Conversion of  preferred stock to common stock                                                                          |       | —                                           |        | —                                                                                                |       | 89,125,640 |   |

 

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

 

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** **

**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**NOTES TO FINANCIALSTATEMENTS**

**(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, 2009 are not necessarilyindicative of the results that may be expected for the year ending December 31,2009.  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 31,2008, as amended, for a broader discussion of our business and theopportunities and risks inherent in such business.

 

Since our inception in1992, we have not generated any revenue from product sales and have experiencedsignificant net losses and negative cash flows from operations.  Our activities have consisted primarily ofdeveloping product candidates, raising capital and recruiting personnel.  Accordingly, we are considered to be in thedevelopment stage as of March 31, 2009, as defined in Statement ofFinancial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises.*

 

*Liquidity*

 

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of pralatrexate, conduct clinical trials,obtain the necessary regulatory approvals, and manufacture and marketpralatrexate. The timing and costs to complete the successful development ofpralatrexate is highly uncertain, and therefore difficult to estimate. Thelengthy process of seeking regulatory approvals for pralatrexate, and thesubsequent compliance with applicable regulations, require the expenditure ofsubstantial resources. Clinical development timelines, likelihood of successand total costs vary widely and are impacted by a variety of risks anduncertainties. Because of these risks and uncertainties, we cannot predict whenor whether we will successfully complete the development of pralatrexate or theultimate costs of such efforts. Due to these same factors, we cannot be certainwhen, or if, we will generate any revenue or net cash inflow from pralatrexate.

 

Even if our clinical trials demonstrate the safety andeffectiveness of pralatrexate in its target indications, we do not expect to beable to generate commercial sales of pralatrexate until the second half of2009, at the earliest. We expect to continue incurring net losses and negativecash flows for the foreseeable future. Although the size and timing of our future net losses are subject tosignificant uncertainty, we expect them to increase over the next several yearsas we continue to fund our research and development programs and prepare forthe potential commercial launch of pralatrexate.

 

As of March 31, 2009, we had $72.5 million incash, cash equivalents and investments in marketable securities.  Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of March 31, 2009, together with the netproceeds of $46.8 million from the April 2009 Financing discussed in Note8, Subsequent Event, should be adequate to support our operations through atleast the next 12 months, although there can be no assurance that this can, infact, be accomplished.

 

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We anticipatecontinuing our current development programs and/or beginning other long-termdevelopment projects involving pralatrexate. These projects may require manyyears and substantial expenditures to complete and may ultimately beunsuccessful.  In addition, we submitteda New Drug Application, or NDA, to the U.S. Food and Drug Administration, orFDA, for pralatrexate for the treatment of patients with relapsed or refractoryperipheral T-cell lymphoma, or PTCL, in March of 2009.  We expect to incur significant costs relatingto the potential commercialization of pralatrexate, including pre-commercialscale up of manufacturing and development of sales and marketingcapabilities.  Therefore, we will need toraise additional capital to support our future operations.  Our actual capital requirements will dependon many factors, including:

 

·       thetiming and outcome of our NDA for pralatrexate for the treatment of patientswith relapsed or refractory PTCL;

 

·       the timing and costsassociated with developing sales and marketing capabilities and commercializingpralatrexate, if it is approved for marketing;

 

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

 

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

 

·       thetiming and costs associated with conducting preclinical and clinicaldevelopment of pralatrexate, as well as our evaluation of, and decisions withrespect to, additional therapeutic indications for which we may developpralatrexate;

 

·       thetiming, costs and potential revenue associated with any co-promotion or otherpartnering arrangements entered into to commercialize pralatrexate, if it isapproved for marketing; and

 

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

 

**We may seek to obtain this additional capital throughequity or debt financings, arrangements with corporate partners, or from othersources. Such financings or arrangements, if successfully consummated, may be dilutiveto our existing stockholders. However, there is no assurance that additionalfinancing will be available when needed, or that, if available, we will obtainsuch financing on terms that are favorable to our stockholders or us. Inparticular, the current instability in the global financial markets and lack ofliquidity in the credit and capital markets may adversely affect our ability tosecure adequate capital to support our future operations.  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 wouldotherwise seek to develop or commercialize ourselves on terms that are lessfavorable than might otherwise be available. If we are unable to generate meaningful amounts of revenue from futureproduct sales, if any, or cannot otherwise raise sufficient additional funds tosupport 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.**                 Prepaid Expenses and Other Assets

** **

Prepaid expensesand other assets are comprised of the following:

 
| ** **                                                                                | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Prepaid expenses  and other assets                                                        |       | $                        | 1,448,966  |                        | $          | 772,235 |   |
| Receivable and  cash in escrow related to pending litigation settlement (see Note 6) |       | —                   |       | 2,000,000                   |       |
|                                                                                      |       | $                        | 1,448,966  |                        | $          | 2,772,235 |   |

 

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**3.**                 Accrued Liabilities

** **

Accrued liabilities arecomprised of the following:

 
| ** **                                        | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued  personnel costs                          |       | $                        | 1,952,953  |                        | $          | 2,816,404 |   |
| Accrued clinical  manufacturing expenses          |       | 1,952,748                |       | 1,153,028                   |       |
| Accrued research  and development expenses        |       | 1,353,902                |       | 2,272,219                   |       |
| Accrued  litigation settlement costs (see Note 6) |       | —                   |       | 2,000,000                   |       |
| Accrued  expenses—other                      |       | 1,347,726                |       | 1,353,061                   |       |
|                                              |       | $                        | 6,607,329  |                        | $          | 9,594,712 |   |

 

**4.**                 Stock-Based Compensation

** **

In accordance with the modified prospective transitionmethod of SFAS No. 123 (Revised 2004), *Share-Based Payment*(“SFAS 123R”), stock-based compensation expense for the three months ended March 31,2009 and 2008 has been recognized in the accompanying Statements of Operationsas follows:

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Research and  development               |       | $                                                    | 864,414    |   | $ | 675,787 |   |
| Clinical  manufacturing                 |       | 108,298                                              |       | 103,230 |   |
| Marketing,  general and administrative  |       | 1,405,443                                            |       | 1,335,494 |   |
| Total  stock-based compensation expense |       | $                                                    | 2,378,155  |   | $ | 2,114,511 |   |

 

We did not recognize a related tax benefit during thethree months ended March 31, 2009 and 2008, as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2009. SFAS 123R did not impact our net cash flows from operating, investing orfinancing activities for the three months ended March 31, 2009 and2008.  No stock-based compensationexpense was capitalized on our Balance Sheet as of March 31, 2009 and December 31,2008.

 

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, 2008** |       | 7,236,512                    |       | $                                          | 5.14       |   | 3,122,681 |   | $ | 4.15 |   |
| Granted                                    |       | 1,620,072                    |       | 6.52                                       |       |   |   |   |   |
| Exercised                                  |       | (371,854                     | )          | 3.20                                       |       |   |   |   |   |
| Canceled                                   |       | —                       |       | —                                     |       |   |   |   |   |
| **Outstanding  at March 31, 2009**    |       | 8,484,730                    |       | $                                          | 5.49       |   | 3,371,232 |   | $ | 4.53 |   |

 

During the three months ended March 31, 2009, wegranted 1,620,072 stock options with a weighted-averagegrant-date fair value of $3.97 per share. During the three months ended March 31, 2009 and 2008, werecorded stock-based compensation related to our stock option plans of$2,224,730 and $1,946,600, respectively. As of March 31, 2009, the unrecorded stock-based compensationbalance related to stock option awards was $10,911,125 and will be recognizedover an estimated weighted-average amortization period of 1.5 years.

 

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The followingtable summarizes information about outstanding stock options that are fullyvested and currently exercisable, and outstanding stock options that are expectedto vest in the future:

 
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  March 31, 2009:**                                           | ** ** | ** **              | ** ** | ** **                                             | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully  vested and exercisable                                     |       | 3,371,232               |       | 6.6                                                    |       | $                                          | 4.53       |                                | $          | 6,311,144 |   |
| Options expected  to vest, including effects of expected forfeitures |       | 4,394,705               |       | 9.0                                                    |       | $                                          | 6.10       |                                | 1,971,836  |   |
| Options fully  vested and expected to vest                                |       | 7,765,937               |       | 7.9                                                    |       | $                                          | 5.42       |                                | $          | 8,282,980 |   |

 

The aggregate intrinsic value in the tables aboverepresents the total pretax intrinsic value, based on our closing stock priceof $6.18 as of March 31, 2009, which would have been received by theoption holders had all option holders with in-the-money options exercised theiroptions as of that date.  The totalnumber of in-the-money options exercisable as of March 31, 2009 was2,762,110.

 

The total intrinsic value of options exercised duringthe three months ended March 31, 2009 and 2008 was $1,544,156 and$728,260, 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, 2009 and 2008 as we maintain net operatingloss carryforwards and we have established a valuation allowance against theentire tax benefit as of March 31, 2009.

 

The following table summarizes activity and relatedinformation for restricted stock, or RS, awards granted under our equity incentiveplans:

 
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RS at December 31, 2008** |       | 293,750                    |       | $                                                  | 4.07       |   |
| Granted                                     |       | —                     |       | —                                             |       |
| Vested                                      |       | (101,250                   | )          | 3.90                                               |       |
| **Nonvested  RS at March 31, 2009**    |       | 192,500                    |       | $                                                  | 4.16       |   |

 

The shares of restrictedstock vest in four equal annual installments from the date of grant.  During the three months ended March 31,2009 and 2008, we recorded stock-based compensation related to restricted stockawards of $85,313 and $147,499, respectively. As of March 31, 2009, the unrecorded stock-based compensationbalance related to restricted stock awards was $247,779 and will be recognizedover an estimated weighted-average amortization period of 1.3 years.

 

The following table summarizes activity and relatedinformation for restricted stock unit, or RSU, awards granted under our equityincentive plans:

 
| ** **                                   | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RSU at December 31, 2008** |       | —                     |       | $                                                  | —     |   |
| Granted                                      |       | 151,941                    |       | 6.40                                               |       |
| Vested                                       |       | —                     |       | —                                             |       |
| **Nonvested  RSU at March 31, 2009**    |       | 151,941                    |       | $                                                  | 6.40       |   |

 

The shares of restrictedstock unit awards vest in four equal annual installments from the date ofgrant.  During the three monthsended March 31, 2009 and 2008, we recorded stock-based compensationrelated to restricted stock unit awards of $47,232 and $0, respectively.  As of March 31, 2009, the unrecordedstock-based compensation balance related to restricted stock unit awards was$849,363 and will be recognized over an estimated weighted-average amortizationperiod of 1.7 years.

 

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** **

**5.**                 Net Loss Per Share

** **

Net loss per share is calculated in accordance withSFAS No. 128, *Earnings Per Share*(“SFAS 128”). Under the provisions of SFAS 128, basic net loss pershare is computed by dividing the net loss attributable to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period.  Diluted earnings pershare is computed by giving effect to all dilutive potential common stockoutstanding during the period, including stock options, restricted stock,restricted stock unit awards and shares to be issued under our employee stockpurchase plan.

 

Diluted net loss per share is the same as basic netloss per share for all periods presented because any potential dilutive commonshares were anti-dilutive due to our net loss (as including such shares woulddecrease our basic net loss per share). Potential dilutive common shares thatwould have been included in the calculation of diluted earnings per share if wehad net income are as follows:

 
| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Common stock  options   |       | 1,963,239                                            |       | 1,953,517 |   |
| Restricted stock        |       | 264,877                                              |       | 384,478 |   |
| Restricted stock  units |       | 62,465                                               |       | — |   |
|                    |       | 2,290,581                                            |       | 2,337,995 |   |

 

**6.**                 Commitments and Contingencies

** **

*Royalty and License Fee Commitments for pralatrexate*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related topralatrexate and its uses. Under the terms of the agreement, we paid anup-front license fee of $2.0 million upon execution of the agreement and arealso required to make certain additional cash payments based upon theachievement of certain clinical development or regulatory milestones or thepassage of certain time periods. To date, we have made aggregate milestonepayments of $2.5 million based on the passage of time. In the future, we couldmake an aggregate milestone payment of $500,000 upon the earlier of achievementof a clinical development milestone or the passage of certain time periods, orthe Clinical Milestone, and up to $10.3 million upon achievement of certainregulatory milestones, or the Regulatory Milestones, including regulatoryapproval to market pralatrexate in the United States or Europe. The last scheduledpayment towards the Clinical Milestone of $500,000 is currently due on December 23,2009. We submitted an NDA for pralatrexate for the treatment of patients withrelapsed or refractory PTCL in March 2009. We have requested a priority review of the application, which, ifgranted, would give the FDA six months from receipt of the submission to takeaction on the application.  If the FDAaccepts our NDA for review and if we obtain FDA approval to market pralatrexate,we will be obligated to make payments of $1,500,000 and $5,300,000,respectively, which represent a portion of the Regulatory Milestones. Theup-front license fee and all milestone payments under the agreement have beenor will be recorded to research and development expense when incurred. Underthe terms of the agreement, we are required to fund all development programsand will have sole responsibility for all commercialization activities. Inaddition, we will pay the licensors a royalty based on a percentage of netrevenues arising from sales of the product or sublicense revenues arising fromsublicensing the product, if and when such sales or sublicenses occur.

 

*Contingencies*

* *

We were named as a defendant in a purported securitiesclass action lawsuit filed in May 2004 seeking unspecified damagesrelating to the issuance of allegedly false and misleading statements regardingEFAPROXYN during the period from May 29, 2003 to April 29, 2004 andsubsequent declines in our stock price. In an opinion dated October 20,2005, the U.S. District Court for the District of Colorado concluded that theplaintiffs’ complaint failed to meet the legal requirements applicable to itsalleged claims and dismissed the lawsuit. On November 20, 2005, theplaintiffs appealed the District Court’s decision to the U.S. Court of Appealsfor the Tenth Circuit. On February 6, 2008, the parties signed astipulation of settlement, settling the case for $2,000,000. The settlement wassubject to various conditions, including without limitation approval of theDistrict Court.  On January 29,2009, the District Court issued its Order and Final Judgment approving thesettlement, including the releases of the defendants for which the settlementprovided.  Neither we nor our formerofficer, who was also named as a defendant, admitted any liability inconnection with the settlement.  Theamount of the settlement in excess of our deductible was covered by ourinsurance carrier.  The period to appealthe District Court’s approval of the settlement 

 

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lapsed during the three months ended March 31, 2009 withoutany further appeals being filed and the settlement is final. As of March 31,2009, we have been released of our obligation related to this lawsuit and have noaccrual remaining related to the settlement.

 

**7.**                 Recent Accounting Pronouncements

** **

In November 2007, the Emerging Issues Task Force,or EITF, issued a consensus, EITF 07-1, *Accountingfor Collaboration Arrangements Related to the Development and Commercializationof Intellectual Property*, which is focused on how the parties to acollaborative agreement should account for costs incurred and revenue generatedon sales to third parties, how sharing payments pursuant to a collaborationagreement should be presented in the income statement and certain relateddisclosure questions. EITF 07-1 is to be applied retrospectively forcollaboration arrangements in fiscal years beginning after December 15,2008 and we adopted it January 1, 2009. We currently do not have any such arrangements.

 

In December 2007,the Financial Accounting Standards Board, or FASB, issued SFAS No. 141(R),*Business Combinations*. ThisStatement replaces SFAS No. 141, *BusinessCombinations,* and requires an acquirer to recognize the assetsacquired, the liabilities assumed, including those arising from contractualcontingencies, any contingent consideration, and any noncontrolling interest inthe acquiree at the acquisition date, measured at their fair values as of thatdate, with limited exceptions specified in the statement. SFAS No. 141(R) alsorequires the acquirer in a business combination achieved in stages (sometimesreferred to as a step acquisition) to recognize the identifiable assets andliabilities, as well as the noncontrolling interest in the acquiree, at thefull amounts of their fair values (or other amounts determined in accordancewith SFAS No. 141(R)). In addition, SFAS No. 141(R)’s requirement tomeasure the noncontrolling interest in the acquiree at fair value will resultin recognizing the goodwill attributable to the noncontrolling interest inaddition to that attributable to the acquirer. SFAS No. 141(R) amendsSFAS No. 109, *Accounting for IncomeTaxes*, to require the acquirer to recognize changes in the amount ofits deferred tax benefits that are recognizable because of a businesscombination either in income from continuing operations in the period of thecombination or directly in contributed capital, depending on the circumstances.It also amends SFAS No. 142, *Goodwilland Other Intangible Assets*, to, among other things, provideguidance on the impairment testing of acquired research and developmentintangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008 and we adopted it January 1, 2009. We have not entered into anybusiness combinations and will apply it to any business combinations in thefuture.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements*. SFAS No. 160amends Accounting Research Bulletin 51, *ConsolidatedFinancial Statements*, to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It also clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS No. 160 also changes the way the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the noncontrollinginterest. It also requires disclosure, on the face of the consolidatedstatement of income, of the amounts of consolidated net income attributable tothe parent and to the noncontrolling interest. SFAS No. 160 requires thata parent recognize a gain or loss in net income when a subsidiary isdeconsolidated and requires expanded disclosures in the consolidated financialstatements that clearly identify and distinguish between the interests of theparent owners and the interests of the noncontrolling owners of a subsidiary.SFAS No. 160 is effective for fiscal periods, and interim periods withinthose fiscal years, beginning on or after December 15, 2008 and we adoptedit January 1, 2009. We currently do not have any subsidiaries.

 

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

 

In May 2008,the FASB issued SFAS No. 162, The Hierarchy of Generally*Accepted Accounting Principles*. SFAS No. 162

 

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identifiesthe sources of accounting principles and the framework for selecting theprinciples to be used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples in the United States of America. SFAS No. 162 is effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard, or PCAOB, amendments to AICPA Codification of Auditing Standards, AU Section 411,*The Meaning of Present Fairly in Conformitywith Generally Accepted Accounting Principles*. This amendmentwas approved by the PCAOB on September 16, 2008. We do not anticipate that the adoption ofSFAS No. 162 will materially impact our financial statements.

 

In June 2008, theFASB issued FASB Staff Position, or FSP, EITF 03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities, or*FSP EITF 03-6-1, to address whetherinstruments granted in share-based payment transactions are participatingsecurities prior to their vesting and therefore need to be included in theearnings per share calculation under the two-class method described in SFAS No. 128,*Earnings per Share*. This FSP requirescompanies to treat unvested share-based payment awards that havenon-forfeitable rights to dividends or dividend equivalents as participatingsecurities and thus, include them in calculations of basic earnings per share.FSP EITF 03-6-1 is effective for fiscal years beginning after December 15,2008 and we adopted it January 1, 2009. There was no impact to our financial statements.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*. This FSPamends FASB Statement No. 107, *Disclosuresabout Fair Value of Financial Instruments*, to require disclosuresabout fair value of financial instruments for interim reporting periods ofpublicly traded companies as well as in annual financial statements.  ThisFSP also amends APB Opinion No. 28, *InterimFinancial Reporting*, to require those disclosures in summarizedfinancial information at interim reporting periods.  This FSP shall beeffective for interim reporting periods ending after June 15, 2009, withearly adoption permitted for periods ending after March 15, 2009.  Weare currently evaluating the disclosure requirements, but do not anticipatethat the adoption will materially impact our financial statements.

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments*. This FSPamends the other-than-temporary impairment guidance in U.S. Generally AcceptedAccounting Principles for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities in the financial statements. This FSPdoes not amend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities.  This FSP shall beeffective for interim and annual reporting periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  We are currently evaluating the potential impact, but do notanticipate that the adoption of this FSP will materially impact our financialstatements.

 

**8.**                 SubsequentEvent

 

On April 3, 2009, wecompleted an underwritten public offering of 7,750,000 shares of our commonstock at the public offering price of $6.30 per share (the April 2009Financing). We received net proceeds from the offering of approximately $46.8million, after deducting underwriting commissions and estimated offeringexpenses.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF 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 our New DrugApplication for pralatrexate as a treatment for patients with relapsed orrefractory peripheral T-cell lymphoma; our intent to present final results fromthe PROPEL trial at an upcoming scientific meeting; our projected timeline forcompleting enrollment in our Phase 2b trial comparing pralatrexate anderlotinib in patients with advanced non-small cell lung cancer; our projectednet cash use in operating activities for fiscal year 2009; other statementsregarding our future product development and regulatory strategies, includingour intent to develop or seek regulatory approval for our product candidates inspecific indications; the ability of our third-party manufacturing parties tosupport our requirements for drug supply; any statements regarding our futurefinancial performance, results of operations or sufficiency of capitalresources to fund our operating requirements; and any other statements that areother than statements of historical fact. In some cases, these statementsmay be identified by terminology such as “may,” “will,” “should,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,”or the negative of such terms and other comparable terminology. Although webelieve that the expectations reflected in the forward-looking statementscontained herein are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. These statements involve known andunknown risks and uncertainties that may cause our, or our industry’sresults, levels of activity, performance or achievements to be materiallydifferent from those expressed or implied by the forward-looking statements.Factors that may cause or contribute to such differences include, among otherthings, those discussed in Part II, Item 1A of this report under thecaption “Risk Factors.” All forward-looking statements included in this reportare based on information available to us as of the date hereof and we undertakeno obligation to revise any forward-looking statements in order to reflect anysubsequent events or circumstances. Forward-looking statements not specificallydescribed above also may be found in these and other sections of this report.

* *

**Overview**

 

We are a biopharmaceutical company focused ondeveloping and commercializing innovative small molecule drugs for thetreatment of cancer. Our goal is to build a profitable company by generatingincome from products we develop and commercialize, either alone or with one ormore potential strategic partners.  Westrive to develop proprietary products that have the potential to improve thestandard of care in cancer therapy.  Ourfocus is on product opportunities for oncology that leverage our internalclinical development and regulatory expertise and address important marketswith unmet medical need. We may also seek to grow our existing portfolio ofproduct candidates through product acquisition and in-licensing efforts.

 

**Pralatrexate**

 

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

 

In February 2009, we announced the final resultsfrom PROPEL, our pivotal Phase 2 trial of pralatrexate in patients withrelapsed or refractory peripheral T-cell lymphoma, or PTCL.  The trial enrolled a total of 115 patients,109 of whom were considered evaluable for response according to the trialprotocol.  The results of the trialdemonstrated that 29 of 109 evaluable patients, or 27%, achieved a response asassessed by central independent oncology review, which is the primary endpointof the trial.  The Kaplan-Meier estimatefor the median duration of response was 287 days, or 9.4 months.  Duration of response is the key secondaryendpoint of the trial.  The most commongrade 3/4 adverse events were thrombocytopenia, which was observed in 32% ofpatients; mucosal inflammation in 21% of patients; neutropenia in 20% ofpatients; and anemia in 17% of patients.

 

Based on the results of this trial, we submitted a NewDrug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, forpralatrexate for the treatment of patients with relapsed or refractory PTCL in March 2009.  We have requested a priority review of theapplication, which, if granted, would give the FDA six months from receipt ofthe submission to take 

 

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action on the application.  If it is approved for marketing, we intend tocommercialize pralatrexate by building an oncology focused U.S. sales andmarketing organization that may be complemented by co-promotion arrangementswith pharmaceutical or biotechnology partners, where appropriate.  We intend to enter into co-promotion or out-licensingarrangements with other pharmaceutical or biotechnology partners, wherenecessary to reach foreign market segments that are not reachable by aU.S.-based sales force or when deemed strategically and economicallyadvisable.  We currently retain exclusiveworldwide commercial rights to pralatrexate for all indications.

 

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

 

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

 

·             a Phase 2b,randomized, multi-center study comparing pralatrexate and Tarceva (erlotinib),both with vitamin B12 and folic acid supplementation, in patientswith Stage IIIB/IV non-small cell lung cancer, or NSCLC, who are, or have been,cigarette smokers who have failed treatment with at least one priorplatinum-based chemotherapy regimen.  Weinitiated patient enrollment in this study in January 2008. The study willseek to enroll a minimum of 160 patients in up to 50 investigative sitesworldwide. Based on current enrollment rates, we expect to complete patientenrollment in this study in the third quarter of 2009.

 

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

 

·             a Phase 1/2a,open-label, multi-center study of pralatrexate and gemcitabine with vitamin B12 and folic acid supplementationin patients with relapsed or refractory non-Hodgkin’s lymphoma, or NHL, andHodgkin’s disease.  We initiated patientenrollment in this study in May 2007. We plan to enroll up to 54 evaluable patients in the Phase 1 portion ofthe study and up to 45 additional patients in the expanded Phase 2a portion ofthe study.

 

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

 

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

 

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

 

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

 

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

 

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

 

**RH1**

 

**RH1** is a small molecule chemotherapeutic agent that webelieve is bioactivated by the enzyme DT-diaphorase, or DTD, also known asNAD(P)H quinone oxidoreductase, or NQ01. We believe DTD is over-expressed in many tumors, relative to normaltissue, including lung, colon, breast and liver tumors.  We believe that because RH1 is bioactivatedin the presence of DTD, it may have the potential to provide targeted drugdelivery to these tumor types while limiting the amount of toxicity to normaltissue.

** **

**In November 2007, we initiatedpatient enrollment in a Phase 1, open-label, multi-center dose escalation studyof RH1 in patients with advanced solid tumors or NHL.  We have closed this study and are in theprocess of determining our future development plans, if any, for RH1.**

** **

**Resultsof Operations**

 

We are a developmentstage company. Since our inception in 1992, we have not generated any revenuefrom product sales and have experienced significant net losses and negativecash flows from operations. We have incurred these losses principally fromcosts incurred in our research and development programs, clinical manufacturingand from our marketing, general and administrative expenses. Our ability to generaterevenue and achieve profitability is dependent on our ability, alone or withpartners, to successfully complete the development of pralatrexate, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket pralatrexate. The timing and costs to complete the successfuldevelopment of pralatrexate  is highlyuncertain, and therefore difficult to estimate. The lengthy process of seekingregulatory approvals for pralatrexate, and the subsequent compliance withapplicable regulations, require the expenditure of substantial resources.Clinical development timelines, likelihood of success and total costs varywidely and are impacted by a variety of risks and uncertainties, includingthose discussed in the “Risk Factors” section of Part II, Item 1Abelow. Because of these risks and uncertainties, we cannot predict when orwhether we will successfully complete the development of pralatrexate or theultimate costs of such efforts. Due to these same factors, we cannot be certainwhen, or if, we will generate any revenue or net cash inflow from pralatrexate.

 

Even if our clinical trials demonstrate the safety andeffectiveness of pralatrexate in its target indications, we do not expect to beable to generate commercial sales of pralatrexate until the second half of2009, at the earliest. We expect to continue incurring net losses and negativecash flows for the foreseeable future. Although the size and timing of our future net losses are subject tosignificant uncertainty, we expect them to increase over the next several yearsas we continue to fund our 

 

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research and development programs, prepare for thepotential commercial launch of pralatrexate, and commercialize pralatrexate forthe treatment of patients with relapsed or refractory PTCL, if it is approvedfor marketing.

 

We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involvingpralatrexate. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, we submitted an NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL in March 2009.  We have requested a priority review of theapplication, which, if granted, would give the FDA six months from receipt ofthe submission to take action on the application.  We expect to incur significant costs relatingto the potential commercialization of pralatrexate, including pre-commercialscale up of manufacturing and development of sales and marketingcapabilities.  Therefore, we will need toraise additional capital to support our future operations, including thepotential commercialization of pralatrexate if approved for marketing.  Our actual capital requirements will dependon many factors, including those discussed under the “Liquidity andCapital Resources” section below.

 

***Comparisonof three months ended March 31, 2009 and 2008***

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                   |       |                                             |       |   |   |
| Operating  expenses:                   |       |                                             |       |   |   |
| Research and  development              |       | $                                                | 5,705,102  |   | $ | 5,973,612 |   |
| Clinical  manufacturing                |       | 2,655,272                                        |       | 1,586,558 |   |
| Marketing,  general and administrative |       | 6,962,650                                        |       | 5,011,364 |   |
|                                   |       |                                             |       |   |   |
| Total operating  expenses              |       | $                                                | 15,323,024 |   | $ | 12,571,534 |   |

 

*Researchand Development.* Researchand development expenses include the costs of certain personnel, basicresearch, preclinical studies, clinical trials, regulatory affairs,biostatistical data analysis and licensing fees for our productcandidates.  Research and developmentexpenses for the three months ended March 31, 2009 and 2008 were $5.7million and $6.0 million, respectively. The $269,000 decrease in research and development expenses in the threemonths ended March 31, 2009 as compared to the same period in 2008 wasprimarily due to a $663,000 decrease in clinical trial costs involvingpralatrexate, including decreased costs for PROPEL which completed patientenrollment in April 2008.  Thisdecrease was partially offset by a $525,000 increase related to key personnelchanges, mainly attributable to additional headcount and increases incompensation costs year over year.

 

For the remainderof 2009, we expect our average quarterly research and development expenses toincrease relative to the amount recorded for the three months ended March 31,2009 due to the following:

 

·          potential increases in licensing costs forpralatrexate, as $1.5 million of regulatory milestone payments under thelicense agreement for pralatrexate will become due if the FDA accepts our NDAfor review in 2009 and $5.3 million of regulatory milestone payments under thelicense agreement for pralatrexate will become due if the FDA approvespralatrexate for marketing in the United States in 2009;

 

·          an increase in personnel costs primarilyresulting from additional headcount; and

 

·          an increase in non-cash stock-basedcompensation expense related to grants for new employees and a full quarter ofexpense related to our annual grants to existing employees that occurred at theend of February 2009.

 

*ClinicalManufacturing.* Clinicalmanufacturing expenses include the costs of certain personnel, third-partymanufacturing costs for development of drug materials for use in clinicaltrials and preclinical studies, and costs associated with pre-commercialscale-up of manufacturing to support anticipated regulatory and potentialcommercial requirements.  Clinicalmanufacturing expenses for the three months ended March 31, 2009 and 2008were $2.7 million and $1.6 million, respectively.  The $1.1 million increase in clinicalmanufacturing expenses in the three months ended March 31, 2009 ascompared to the same period in 2008 was primarily due to the following:

 

·                  an $829,000 increase in third-partymanufacturing costs for clinical trial material and pre-commercial scale-upactivities for pralatrexate; and

 

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·                  a $392,000 increase in consultingexpenses, primarily related to preparations for submission of the NDA to theFDA for pralatrexate for the treatment of patients with relapsed or refractoryPTCL in March 2009.

 

For the remainder of 2009, we expect our averagequarterly clinical manufacturing expenses to increase relative to the amountrecorded for the three months ended March 31, 2009 due to the following:

 

·                  an increase in third-partymanufacturing costs for pralatrexate to support ongoing and planned clinicaltrials and pre-commercial scale-up;

 

·                  an increase in personnel costsprimarily resulting from additional headcount; and

 

·                  an increase in non-cash stock-basedcompensation expense related to grants for new employees and a full quarter ofexpense related to our annual grants to existing employees which occurred atthe end of February 2009.

 

*Marketing,General and Administrative.*  Marketing, general and administrativeexpenses include costs for pre-marketing activities, corporate development,executive administration, corporate offices and related infrastructure.  Marketing, general and administrativeexpenses for the three months ended March 31, 2009 and 2008 were $7.0million and $5.0 million, respectively. The $2.0 million increase in marketing, general and administrativeexpenses in the three months ended March 31, 2009 as compared to the sameperiod in 2008 was primarily due to the following:

 

·                  a $1.1 million increase related topre-commercial planning activities for pralatrexate; and

 

·                  a $413,000increase related to key personnel changes and related travel costs, mainlyattributable to additional headcount and increases in compensation costs year overyear.

 

For the remainderof 2009, we expect our average quarterly marketing, general and administrativeexpenses to increase relative to the amount recorded for the three months endedMarch 31, 2009 due to the following:

 

·                  anincrease in non-cash stock-based compensation expense related to grants for newemployees and a full quarter of expense related to our annual equity grants toexisting employees that occurred at the end of February 2009;

 

·                  anincrease in costs relating to pre-commercial planning activities forpralatrexate; and

 

·                  anincrease in personnel costs, primarily resulting from additional headcountrelated to preparation for the potential commercial launch of pralatrexate, ifit is approved for marketing.

 

*Stock-based Compensation Expense. *Stock-based compensationexpense for the three months ended March 31, 2009 and 2008 has beenrecognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Research and  development               |       | $                                                    | 864,414    |   | $ | 675,787 |   |
| Clinical  manufacturing                 |       | 108,298                                              |       | 103,230 |   |
| Marketing,  general and administrative  |       | 1,405,443                                            |       | 1,335,494 |   |
| Total  stock-based compensation expense |       | $                                                    | 2,378,155  |   | $ | 2,114,511 |   |

 

Of the $2.4 millionof stock-based compensation recognized in the three months ended March 31,2009, $2.2 million was related to our stock option plans, $133,000 relatedto restricted stock and restricted stock units and $21,000 related to ouremployee stock purchase plan.  Of the$2.1 million of stock-based compensation recognized in the three monthsended March 31, 2008, $1.9 million was related to our stock optionplans, $147,000 related to restricted stock and $20,000 related to our employeestock purchase plan.  The $264,000increase in stock-based compensation expense in the three months ended March 31,2009 as compared to the same period in 2008 was primarily due to the increasein the number of options granted resulting from grants for new employees andour annual grants to existing employees that occurred in February 2009.

 

As of March 31,2009, the unrecorded stock-based compensation balance related to stock optionawards was $10.9 million and will be recognized over an estimatedweighted-average amortization period of 1.5 years. As of March 31, 2009,the unrecorded stock-based compensation balance related to restricted stockunit awards was $849,000 and will be recognized 

 

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over an estimatedweighted-average amortization period of 1.7 years.  As of March 31, 2009, the unrecordedstock-based compensation balance related to restricted stock awards was$248,000 and will be recognized over an estimated weighted-average amortizationperiod of 1.3 years.

 

*Interestand Other Income, Net*.  Interest income, net ofinterest expense, for the three months ended March 31, 2009 and 2008 was$173,000 and $565,000, respectively.  The$392,000 decrease in net interest income in the three months ended March 31,2009 as compared to the same period in 2008 was primarily due to lower yieldson our cash, cash equivalents and investments in marketable securities, and arealized loss of approximately $157,000 on the sale of certain of ourinvestments in marketable securities during the three months ended March 31,2009.  In response to the instability inthe global financial markets, we reviewed our investments in marketablesecurities and sold certain investments during the three months ended March 31,2009 prior to their maturity in order to preserve our principal, as the issuersof these securities experienced significant deteriorations in theircreditworthiness as evidenced by investment rating downgrades.  We have the ability and intent to hold ourremaining investments in marketable securities as of March 31, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

**Liquidityand Capital Resources**

 

As of March 31,2009, we had $72.5 million in cash, cash equivalents, and investments inmarketable securities.  Until requiredfor use in our business, we invest our cash reserves in bank deposits, moneymarket funds, high-grade corporate notes and U.S. government instruments inaccordance with our investment policy. The weighted average duration of the remaining time to maturity for ourportfolio of investments in marketable securities as of March 31, 2009 wasapproximately three months.   Ourinvestments in marketable securities as of March 31, 2009 primarilyconsisted of high-grade corporate notes. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of March 31, 2009.  Our liquidity, capital resources and resultsof operations may be adversely affected by future declines in the value of ourinvestments in marketable securities. The value of our investments in marketable securities may be adverselyaffected by rating downgrades or bankruptcies affecting the issuers of suchsecurities, whether caused by instability in the global financial markets, lackof liquidity in the credit and capital markets, or other factors.  We have the ability and intent to hold ourremaining investments in marketable securities as of March 31, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

Since our inception, we have financed our operationsprimarily through public and private sales of our equity securities, which haveresulted in net proceeds to us of $329.7 million through March 31,2009.  On April 3, 2009, wecompleted an underwritten public offering of 7,750,000 shares of our commonstock at the public offering price of $6.30 per share, (the April 2009Financing). We received net proceeds from the offering of approximately $46.8million, after deducting underwriting commissions and estimated offeringexpenses. We plan to use the net proceeds from the offering primarily foractivities relating to preparations for the potential commercial launch ofpralatrexate, clinical and preclinical research and development ofpralatrexate, working capital and general corporate purposes. We have alsogenerated $23.7 million of net interest income since our inception frominvesting the net proceeds of these financings.

 

We have used $250.3million of cash for operating activities from our inception through March 31,2009.  Net cash used to fund ouroperating activities for the three months ended March 31, 2009 and 2008was $11.9 million and $9.3 million, respectively.

 

For fiscal year 2009, wecurrently anticipate that net cash use in operating activities will approximate$55 to $60 million.  Our 2009 financialguidance includes the phase-in of certain key investments related to thepotential commercialization of pralatrexate, as well as $1.5 million and $5.3million of potential milestone payments under our license agreement forpralatrexate payable upon FDA acceptance of our NDA for review and FDA approvalto market pralatrexate, respectively.

 

Net cash provided byinvesting activities for the three months ended March 31, 2009 was $27.3million and consisted primarily of proceeds from maturities and sales ofinvestments in marketable securities. Net cash provided by investing activities for the three months ended March 31,2008 was $4.1 million and consisted primarily of proceeds from maturities ofinvestments in marketable securities, partially offset by the purchase ofinvestments in marketable securities.

 

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Net cash provided by financing activities for thethree months ended March 31, 2009 was $1.2 million and consisted primarilyof proceeds associated with the exercise of common stock options.  On April 3, 2009, we completed the April 2009Financing and we received net proceeds of approximately $46.8 million, afterdeducting underwriting commissions and estimated offering expenses. Netcash provided by financing activities for the three months ended March 31,2008 was $2.3 million and consisted primarily of proceeds associated with theexercise of common stock options.

 

Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of March 31, 2009, together with the netproceeds from the April 2009 Financing, should be adequate to support ouroperations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished. Our forecast of the periodof time through which our financial resources will be adequate to support ouroperations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.

 

We anticipate continuing our current developmentprograms and/or beginning other long-term development projects involvingpralatrexate. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, we submitted an NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL in March 2009.  We have requested a priority review of theapplication, which, if granted, would give the FDA six months from receipt ofthe submission to take action on the application.  If the FDA accepts our NDA for review and ifwe obtain FDA approval to market pralatrexate, we will be obligated to makelicense fee payments of $1.5 million and $5.3 million, respectively.  We expect to incur significant costs relatingto the potential commercialization of pralatrexate, including pre-commercialscale up of manufacturing and development of sales and marketing capabilities.Therefore, we will need to raise additional capital to support our future operations.  Our actual capital requirements will dependon many factors, including:

 

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

 

·       the timing and costsassociated with developing sales and marketing capabilities and commercializingpralatrexate, if it is approved for marketing;

 

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

 

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

 

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

 

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

 

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

 

We may seek to 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 particular, the current instability in the global financial markets andlack of liquidity in the credit and capital markets may adversely affect ourability to secure adequate capital to support our future operations.  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 wouldotherwise seek to develop or commercialize ourselves on terms that are lessfavorable than might otherwise be available. If we are unable to generate meaningful amounts of revenue from futureproduct sales, if any, or cannot otherwise raise sufficient additional funds tosupport 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.

 

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**Obligations and Commitments**

 

*Royalty and License Fee Commitments for Pralatrexate*

* *

In December 2002, we entered into a licenseagreement with Memorial Sloan-Kettering Cancer Center, SRI International andSouthern Research Institute, as amended, under which we obtained exclusiveworldwide rights to a portfolio of patents and patent applications related topralatrexate and its uses. Under the terms of the agreement, we paid anup-front license fee of $2.0 million upon execution of the agreement and arealso required to make certain additional cash payments based upon theachievement of certain clinical development or regulatory milestones or thepassage of certain time periods. To date, we have made aggregate milestonepayments of $2.5 million based on the passage of time. In the future, we couldmake an aggregate milestone payment of $500,000 upon the earlier of achievementof a clinical development milestone or the passage of certain time periods, orthe Clinical Milestone, and up to $10.3 million upon achievement of certainregulatory milestones, or the Regulatory Milestones, including regulatoryapproval to market pralatrexate in the United States or Europe. The lastscheduled payment towards the Clinical Milestone of $500,000 is currently dueon December 23, 2009. We submitted an NDA for pralatrexate for thetreatment of patients with relapsed or refractory PTCL in March 2009.  We have requested a priority review of theapplication, which, if granted, would give the FDA six months from receipt ofthe submission to take action on the application.  If the FDA accepts our NDA for review and ifwe obtain FDA approval to market pralatrexate, we will be obligated to makepayments of $1.5 million and $5.3 million, respectively, which represent aportion of the Regulatory Milestones. The up-front license fee and allmilestone payments under the agreement have been or will be recorded toresearch and development expense when incurred. Under the terms of theagreement, we are required to fund all development programs and will have soleresponsibility for all commercialization activities. In addition, we will paythe licensors a royalty based on a percentage of net revenues arising fromsales of the product or sublicense revenues arising from sublicensing theproduct, if and when such sales or sublicenses occur.

 

**CriticalAccounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, and expenses.  We base our estimates on historicalexperience, available information and assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  For adescription of our critical accounting policies, please see our Annual Reporton Form 10-K for the fiscal year ended December 31, 2008, as amended.

 

**RecentAccounting Pronouncements**

 

For a description of our recent accountingpronouncements, please see Note 7 of the unaudited March 31, 2009financial statements included herein.

 

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

** **

Our financial instruments as of March 31, 2009consisted of cash, cash equivalents, investments in marketable securities, andaccounts payable.  All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.  We invest inmarketable securities in accordance with our investment policy.  The primary objectives of our investmentpolicy are to preserve principal, maintain proper liquidity to meet operatingneeds and maximize yields.  Ourinvestment policy specifies credit quality standards for our investments andlimits the amount of credit exposure to any single issue, issuer or type ofinvestment.  The weighted averageduration of the remaining time to maturity for our portfolio of investments inmarketable securities as of March 31, 2009 was approximately threemonths.  As of March 31, 2009, ourinvestments in marketable securities of $25.5 million were all classifiedas held-to-maturity and were held in a variety of interest-bearing instruments,consisting mainly of high-grade corporate notes. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of March 31, 2009.  The value of our investments in marketablesecurities may be adversely affected by rating downgrades or bankruptcies affectingthe issuers of such securities, whether caused by instability in the globalfinancial markets, lack of liquidity in the credit and capital markets, orother factors.  In response to the recentinstability in the global financial markets, we reviewed our investments inmarketable securities and sold certain investments that we deemed to haveincreased risk during the three months ended March 31, 2009.  We have the ability and intent to hold ourremaining investments in marketable securities as of March 31, 2009 totheir scheduled maturity, although we monitor our investment portfolio with theprimary objectives of preserving principal and maintaining proper liquidity tomeet our operating needs.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

** **

**Disclosure Controls 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 31,2009 to ensure that information required to be disclosed by us in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**NoChanges in Internal Control over Financial Reporting**

 

There were no changes inour internal controls over financial reporting during the three months ended March 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting. In the first quarter of2009, we implemented new accounting software in preparation for our potentialgrowth and the commercialization of pralatrexate.

 

**PART II.  OTHERINFORMATION**

** **

**ITEM1.  LEGAL PROCEEDINGS**

** **

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

 

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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, 2008, as amended, in addition toother information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of the Company.  We are relyingupon the safe harbor for all forward-looking statements in this report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this report. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors that have been substantivelychanged from those set forth in our Annual Report on Form 10-K for theperiod ended December 31, 2008, as amended, have been marked with anasterisk immediately following the heading of such risk factor.*

 

**We have a history of net losses and an accumulateddeficit, and we may never generate revenue or achieve or maintain profitabilityin the future. ***

** **

Since our inception in 1992, we have not generated anyrevenue from product sales and have experienced significant net losses andnegative cash flows from operations. To date, we have financed our operationsprimarily through the public and private sale of securities.  For the three months ended March 31,2009, we had a net loss of $15.2 million. As of March 31, 2009, we had accumulated a deficit during ourdevelopment stage of $314.8 million. We have incurred these losses principally from costs incurred in ourresearch and development programs, clinical manufacturing and from ourmarketing, general and administrative expenses. We expect to continue incurringnet losses for the foreseeable future. Our ability to generate revenue andachieve profitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of pralatrexate, conduct clinical trials,obtain the necessary regulatory approvals, and manufacture and marketpralatrexate. We may never generate revenue from product sales or becomeprofitable. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials for pralatrexate,and in preparing for the potential commercial launch of pralatrexate. We maynot be able to continue as a going concern if we are unable to generatemeaningful amounts of revenue to support our operations or cannot otherwiseraise the necessary funds to support our operations.

 

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

 

**We currently have no products thatare approved for commercial sale. Our product candidates are in various stagesof development, and significant research and development, financial resourcesand personnel will be required to develop commercially viable products, obtainthe necessary regulatory approvals therefor, and successfully commercializethem.  Substantially all of our effortsand expenditures over the next few years will be devoted to pralatrexate as wehave closed our Phase 1 clinical study of RH1 in patients with advanced solidtumors or NHL and are in the process of determining our future developmentplans, if any, for RH1. Accordingly, our future prospects are substantiallydependent on the successful development, regulatory approval andcommercialization of pralatrexate for the treatment of patients with relapsedor refractory PTCL. Even if we receive regulatory approval, pralatrexate is notexpected to be commercially available for this or any other indication until atleast the second half of 2009. Further, certain of the indications that we arepursuing  for pralatrexate haverelatively low incidence rates, which may make it difficult for us to enroll asufficient number of patients in our clinical trials on a timely basis, or atall, and may limit the revenue potential of pralatrexate. If we are unable tosuccessfully develop, obtain regulatory approval for and commercializepralatrexate for the treatment of patients with relapsed or refractory PTCL,our ability to generate revenue from product sales will be significantlydelayed and our stock price would likely decline.**

** **

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

** **

Pralatrexate is in theclinical stage of development and has not been approved for marketing in theUnited States or any other 

 

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country. A pharmaceuticalproduct cannot be marketed in the United States or most other countries untilit has completed a rigorous and extensive regulatory review and approvalprocess. If we fail to obtain regulatory approval to market pralatrexate, wewill be unable to sell pralatrexate and generate revenue, which wouldjeopardize our ability to continue operating our business. Satisfaction ofregulatory requirements typically takes many years, is dependent upon the type,complexity and novelty of the product and requires the expenditure ofsubstantial resources. Of particular significance are the requirements coveringresearch and development, testing, manufacturing, quality control, labeling andpromotion of drugs for human use. We may not obtain regulatory approval forpralatrexate, or we may not obtain regulatory review of pralatrexate in atimely manner.

 

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

** **

The protocol for thePROPEL trial was reviewed by the FDA under its special protocol assessment, orSPA process, which allows for FDA evaluation of a clinical trial protocolintended to form the primary basis of an efficacy claim in support of a newdrug application, and provides an agreement that the study design, includingtrial size, clinical endpoints and/or data analyses are acceptable to the FDA.However, the SPA agreement is not a guarantee of approval, and we cannot becertain that the design of, or data collected from, the PROPEL trial will beadequate to demonstrate the safety and efficacy of pralatrexate for the treatmentof patients with relapsed or refractory PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. In addition, the response rate, duration of response and safety profilerequired to support FDA approval are not specified in the PROPEL trial protocoland will be subject to FDA review. Further, the SPA agreement is not binding onthe FDA if public health concerns unrecognized at the time the SPA agreementwas entered into become evident, other new scientific concerns regarding productsafety or efficacy arise, or if we fail to comply with the agreed upon trialprotocols. In addition, the SPA agreement may be changed by us or the FDA onwritten agreement of both parties, and the FDA retains significant latitude anddiscretion in interpreting the terms of the SPA agreement and the data andresults from the PROPEL trial. As a result, we do not know how the FDA willinterpret the parties’ respective commitments under the SPA agreement, how itwill interpret the data and results from the PROPEL trial, or whetherpralatrexate will receive any regulatory approvals as a result of the SPAagreement or the PROPEL trial. Therefore, despite the potential benefits of theSPA agreement, significant uncertainty remains regarding the clinical developmentand regulatory approval process for pralatrexate for the treatment of patientswith relapsed or refractory PTCL.

 

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

** **

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

 

Pralatrexate may not beapproved even if it achieves its endpoints in clinical trials. Regulatoryagencies, including the FDA, or their advisors, may disagree with ourinterpretations of data from preclinical studies and clinical trials. The FDAhas substantial discretion in the approval process, and when or whetherregulatory approval will be obtained for any drug we develop. For example, eventhough we established an SPA with the FDA for our PROPEL trial, there is noguarantee that the data generated from the PROPEL trial will be adequate tosupport FDA approval. Regulatory agencies also may approve a product candidatefor fewer conditions than requested or may grant approval subject to theperformance of post-marketing studies or risk evaluation and mitigationstrategies (REMS) for a product candidate. In addition, regulatory agencies maynot approve the labeling claims that are necessary or desirable for thesuccessful commercialization of pralatrexate.

 

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

 

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

** **

Following any regulatoryapproval of pralatrexate, we will be subject to continuing regulatoryobligations such as safety reporting requirements and additional post-marketingobligations, including regulatory oversight of the promotion and marketing ofpralatrexate. In addition, we or our third-party manufacturers will be requiredto adhere to regulations setting forth the FDA’s current Good ManufacturingPractices, or cGMP. These regulations cover all aspects of the manufacturing,storage, testing, quality control and record keeping relating to pralatrexate.Furthermore, we or our third-party manufacturers must pass a pre-approvalinspection of manufacturing facilities by the FDA and foreign authoritiesbefore obtaining marketing approval and will be subject to periodic inspectionby these regulatory authorities to ensure strict compliance with cGMP or otherapplicable government regulations and corresponding foreign standards. We donot have control over a third-party manufacturer’s compliance with theseregulations and standards. Such inspections may result in compliance issuesthat could prevent or delay marketing approval, or require the expenditure ofsubstantial financial or other resources to address. If we or our third-partymanufacturers fail to comply with applicable regulatory requirements, we may besubject to fines, suspension or withdrawal of regulatory approvals, productrecalls, seizure of products, operating restrictions and criminal prosecution.

 

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

** **

Based upon the current status of our product developmentplans, we believe that our cash, cash equivalents, and investments inmarketable securities as of March 31, 2009, together with the net proceedsfrom the April 2009 Financing, should be adequate to support ouroperations through at least the next 12 months, although there can be noassurance that this can, in fact, be accomplished.  We anticipate continuing our currentdevelopment programs and/or beginning other long-term development projectsinvolving pralatrexate. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, we submitted an NDA to the FDAfor pralatrexate for the treatment of patients with relapsed or refractory PTCLin March 2009.  We expect to incursignificant costs relating to the potential commercialization of pralatrexate,including pre-commercial scale up of manufacturing and development of sales andmarketing capabilities.  Therefore, wewill need to raise additional capital to support our future operations.  Our actual capital requirements will depend onmany factors, including:

 

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

 

·       the timing and costsassociated with developing sales and marketing capabilities and commercializingpralatrexate, if it is approved for marketing;

 

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

 

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

 

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

 

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

 

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

 

We may seek to obtainthis additional capital through equity or debt financings, arrangements withcorporate partners, or from other sources. Such financings or arrangements, ifsuccessfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that additional financing will be available whenneeded, or that, if available, we will obtain such financing on terms that arefavorable to our stockholders or us. In particular, the current instability inthe global financial markets and lack of liquidity in the credit and capitalmarkets may adversely affect our ability to secure adequate capital to supportour future operations.  In the event thatadditional funds are obtained through arrangements with collaborative partnersor other sources, such arrangements may require us to relinquish rights to someof our technologies, product candidates or products under development that wemight otherwise seek to develop or commercialize ourselves on terms that areless favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue 

 

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from future productsales, if any, or cannot otherwise raise sufficient additional funds to supportour operations, we may be required to delay, reduce the scope of or eliminateone or more of our development programs and our business and future prospectsfor revenue and profitability may be harmed.

 

**Budget constraintsmay force us to delay our efforts to develop pralatrexate for certainindications in favor of developing it for other indications, which may preventus from commercializing pralatrexate for all desired indications as quickly aspossible.**

** **

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

 

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

** **

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

 

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

 

Even if we achieve positive interim results inclinical trials, these results do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Dataobtained from preclinical and clinical activities are susceptible to varyinginterpretations that could delay, limit or prevent regulatory clearances, andthe FDA can request that we conduct additional clinical trials. A number ofcompanies in the pharmaceutical industry have suffered significant setbacks inadvanced clinical trials, even after promising results in earlier trials. Inaddition, negative or inconclusive results or adverse medical events during aclinical trial could cause a clinical trial to be repeated or terminated. Also,failure to construct clinical trial protocols to screen patients for riskprofile factors relevant to the trial for purposes of segregating patients intothe patient populations treated with the drug being tested and the controlgroup could result in either group experiencing a disproportionate number ofadverse events and could cause a clinical trial to be repeated or terminated.If we have to conduct additional clinical trials for pralatrexate, it wouldsignificantly increase our expenses and delay potential marketing ofpralatrexate.

 

We announced the finalresults from our pivotal Phase 2 PROPEL trial in February 2009. Basedon the results of the trial, we submitted an NDA to the FDA for pralatrexatefor the treatment of patients with relapsed or refractory PTCL in March 2009.  We cannot assure you that the design of, ordata collected from, the PROPEL trial will be adequate to demonstrate thesafety and efficacy of pralatrexate for the treatment of patients with relapsedor refractory PTCL, or otherwise be sufficient to support FDA or any foreignregulatory approval. The FDA may disagree with our interpretation of theresults of the trial and determine that the data are not sufficient to supportapproval. If we fail to obtain regulatory approval for pralatrexate, we will beunable to market and sell pralatrexate and therefore may never generatemeaningful amounts of revenue or become profitable.

 

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

** **

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

 

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

 

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

** **

Clinical trials must beconducted in accordance with the FDA’s current Good Clinical Practices or otherapplicable foreign government guidelines and are subject to oversight by theFDA, other foreign governmental agencies and Institutional Review Boards at themedical institutions where the clinical trials are conducted. In addition,clinical trials must be conducted with product candidates produced under cGMPand may require large numbers of test subjects. Clinical trials may besuspended by the FDA, other foreign governmental agencies, or us for variousreasons, including:

 

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

 

·                  deficiencies in the clinical trialoperations or trial sites;

 

·                  the product candidate may have unforeseenadverse side effects;

 

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

 

·                  fatalities or other adverse eventsarising during a clinical trial due to medical problems that may not be relatedto clinical trial treatments;

 

·                  the product candidate may not appear tobe more effective than current therapies;

 

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

 

·                  we may not be able to produce sufficientquantities of the product candidate to complete the trials.

 

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

 

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

** **

Pralatrexate may produceserious adverse events. These adverse events could interrupt, delay or haltclinical trials of pralatrexate and could result in the FDA or other regulatoryauthorities denying approval of pralatrexate for any or all targetedindications. An independent data safety monitoring board, the FDA, otherregulatory authorities or we may suspend 

 

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or terminate clinicaltrials at any time. We cannot assure you that pralatrexate or any other productcandidate will be safe for human use.

 

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

 

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

** **

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

 

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

** **

We are dependent on thirdparties for the manufacture and storage of pralatrexate for clinical trialsand, if approved, for commercial sale. If we are unable to contract for asufficient supply of pralatrexate on acceptable terms, or if we encounterdelays or difficulties in the manufacturing process or our relationships withour manufacturers, we may not have sufficient product to conduct or completeour clinical trials or support commercial requirements for pralatrexate, if itis approved for marketing.

 

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

 

Given our lack of formalsupply agreements and the fact that in many cases our components are suppliedby a single source, our third party suppliers may not be able to fulfill ourpotential commercial needs or meet our deadlines, or the components they supplyto us may not meet our specifications and quality policies and procedures. Ifwe need to find an alternative supplier of pralatrexate or its components, wemay not be able to contract for those components on acceptable terms, if atall. Any such failure to supply or delay caused by such suppliers would have anadverse effect on our ability to continue clinical development of pralatrexateor commercialize pralatrexate, if it is approved for marketing.

 

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

 

·       our currentand future manufacturers are subject to ongoing, periodic, unannouncedinspections by the FDA and corresponding state and international regulatoryauthorities for compliance with strictly enforced cGMP regulations and similarstate and foreign standards, and we do not have control over our contractmanufacturers’ compliance with 

 

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these regulations and standards;

 

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

 

·       our manufacturers may have staffingdifficulties, may undergo changes in control or may become financiallydistressed, adversely affecting their willingness or ability to manufactureproducts for us;

 

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

 

·       if we need tochange to other commercial manufacturing contractors, the FDA and comparableforeign regulators must approve our use of any new manufacturer, which wouldrequire additional testing, regulatory filings and compliance inspections, andthe new manufacturers would have to be educated in, or themselves developsubstantially equivalent processes necessary for, the production of ourproducts; and

 

·       we may nothave intellectual property rights, or may have to share intellectual propertyrights, to any improvements in the manufacturing processes or new manufacturingprocesses for our products.

 

Any of these factorscould result in the delay of clinical trials, regulatory submissions, requiredapprovals or commercialization of pralatrexate. They could also entail highercosts and result in our being unable to effectively commercialize pralatrexate.

 

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

** **

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

 

Our commercial successwill also depend in part on our ability to commercialize pralatrexate withoutinfringing patents or other proprietary rights of others or breaching thelicenses granted to us. We may not be able to obtain a license to third-partytechnology that we may require to conduct our business or, if obtainable, wemay not be able to license such technology at a reasonable cost. If we fail toobtain a license to any technology that we may require to commercializepralatrexate, or fail to obtain a license at a reasonable cost, we will beunable to commercialize pralatrexate or to commercialize it at a price thatwill allow us to become profitable.

 

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

 

Furthermore, as with anypharmaceutical company, our patent and other proprietary rights are subject touncertainty. Our patent rights related to pralatrexate might conflict withcurrent or future patents and other proprietary rights of others. For the samereasons, the products of others could infringe our patents or other proprietaryrights. Litigation or patent interference proceedings, either of which couldresult in substantial costs to us, may be necessary to enforce any of ourpatents or other proprietary rights, or to determine the scope and validity orenforceability of other parties’ proprietary rights. We may be 

 

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dependent on thirdparties, including our licensors, for cooperation and information that may berequired in connection with the defense and prosecution of our patents andother proprietary rights. The defense and prosecution of patent andintellectual property infringement claims are both costly and time consuming,even if the outcome is favorable to us. Any adverse outcome could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from third parties, or require us to cease selling our futureproducts. We are not currently a party to any patent or other intellectualproperty infringement claims.

 

**We may explore strategic partnerships that maynever materialize or may fail.**

 

We may, in the future,periodically explore a variety of possible strategic partnerships in an effortto gain access to additional product candidates or resources. At the currenttime, we cannot predict what form such a strategic partnership might take. Weare likely to face significant competition in seeking appropriate strategicpartners, and these strategic partnerships can be complicated and timeconsuming to negotiate and document. We may not be able to negotiate strategicpartnerships on acceptable terms, or at all. We are unable to predict when, ifever, we will enter into any additional strategic partnerships because of thenumerous risks and uncertainties associated with establishing strategicpartnerships.

 

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

 

Any future strategicpartnerships we enter into could subject us to a number of risks, including:

 

·                  we may be required to undertake theexpenditure of substantial operational, financial and management resources inintegrating new businesses, technologies and products;

 

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

 

·                  we may be required to assume substantialactual or contingent liabilities;

 

·                  we may not be able to control the amountand timing of resources that our strategic partners devote to the developmentor commercialization of pralatrexate;

 

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

 

·                  strategic partners may not pursue furtherdevelopment and commercialization of products resulting from the strategicpartnering arrangement or may elect to discontinue research and developmentprograms;

 

·                  strategic partners may not commitadequate resources to the marketing and distribution of pralatrexate or anyother products, limiting our potential revenues from these products;

 

·                  disputes may arise between us and ourstrategic partners that result in the delay or termination of the research,development or commercialization of pralatrexate or any other product candidateor that result in costly litigation or arbitration that diverts management’sattention and consumes resources;

 

·                  strategic partners may experiencefinancial difficulties;

 

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

 

·                  business combinations or significantchanges in a strategic partner’s business strategy may also adversely affect astrategic partner’s willingness or ability to complete its obligations underany arrangement;

 

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

 

·                  strategic partners could terminate thearrangement or allow it to expire, which would delay the development and mayincrease the cost of developing pralatrexate or any other product candidate.

 

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

** **

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

 

·       the receiptof timely regulatory approval for the uses that we are studying;

 

·       theestablishment and demonstration in the medical community of the safety andefficacy of pralatrexate and its potential advantages over existing and newlydeveloped therapeutic products;

 

·       ease of useof pralatrexate;

 

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

 

·       the scope andeffectiveness of our sales and marketing efforts.

 

Physicians, patients,payors or the medical community in general may be unwilling to accept, utilizeor recommend the use of pralatrexate.

 

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

** **

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

 

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

 

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

** **

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

 

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

** **

The FDA has awarded orphan drug status to pralatrexatefor the treatment of patients with T-cell lymphoma, follicular lymphoma anddiffuse large B-cell lymphoma. Under the Orphan Drug Act, if we are the firstcompany to receive FDA approval for pralatrexate for the designated orphan drugindication, we will obtain seven years of marketing exclusivity during whichthe FDA may not approve another company’s application for pralatrexate for thesame orphan indication. Orphan drug exclusivity would not prevent FDA approvalof a different drug for the orphan indication or the same drug for a differentindication.

 

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

** **

As a biopharmaceuticalcompany, even though we do not and will not control referrals of health careservices or bill directly to Medicare, Medicaid or other third-party payors,certain federal and state healthcare laws and regulations pertaining to fraudand abuse will be applicable to our business. These laws and regulations,include, among others:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

** **

We have limited experiencein sales, marketing and distribution.  Ifit is approved for marketing, we intend to build commercialize pralatrexate bybuilding an oncology-focused U.S. sales and marketing organization that may becomplemented by co-promotion arrangements with pharmaceutical or biotechnologypartners, where appropriate.  We intendto enter into co-promotion or out-licensing arrangements with otherpharmaceutical or biotechnology partners where necessary to reach foreign marketsegments that are not reachable by a U.S.-based sales force or when deemedstrategically and economically advisable. To directly market and distributepralatrexate, we must build a sales and marketing organization with appropriatetechnical expertise and distribution capabilities. We may not be able toestablish sales, marketing and distribution capabilities of our own or enterinto such arrangements with third parties in a timely manner or on acceptableterms. To the extent that we enter into co-promotion or other licensingarrangements, our product revenues are likely to be lower than if we directlymarketed and sold pralatrexate, and some or all of the revenues we receive willdepend upon the 

 

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efforts of third parties,and these efforts may not be successful. Additionally, building marketing anddistribution capabilities may be more expensive than we anticipate, requiringus to divert capital from other intended purposes or preventing us frombuilding our marketing and distribution capabilities to the desired levels.

 

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

** **

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

 

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

** **

The testing and marketingof pharmaceutical products entail an inherent risk of product liability.Product liability claims might be brought against us by consumers or healthcare providers or by pharmaceutical companies or others selling our futureproducts. If we cannot successfully defend ourselves against such claims, wemay incur substantial liabilities or be required to limit the commercializationof our pralatrexate. We have obtained limited product liability insurancecoverage for our human clinical trials. However, product liability insurancecoverage is becoming increasingly expensive, and we may be unable to maintainsuch insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses due to product liability. A successful productliability claim in excess of our insurance coverage could have a materialadverse effect on our business, financial condition and results of operations.We may not be able to obtain commercially reasonable product liabilityinsurance for pralatrexate, if it is approved for marketing.

 

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

 

We are highly dependent on our President and ChiefExecutive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,M.D., and other members of our management team. We are named as the beneficiaryon a term life insurance policy covering Mr. Berns in the amount of$10.0 million. We also depend on academic collaborators for each of ourresearch and development programs. The loss of any of our key employees oracademic collaborators could delay our discovery research program and thedevelopment and commercialization of pralatrexate or result in termination ofour pralatrexate development program in its entirety. Mr. Berns and Dr. Cagnoni,as well as others on our executive management team, have employment agreementswith us, but the agreements provide for “at-will” employment with no specifiedterm. Our future success also will depend in large part on our continuedability to attract and retain other highly qualified scientific, technical andmanagement personnel, as well as personnel with expertise in 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.

 

We also rely onconsultants, collaborators and advisors to assist us in formulating andconducting our research. All of our consultants, collaborators and advisors areemployed by other employers or are self-employed and may have commitments to orconsulting contracts with other entities that may limit their ability tocontribute to the Company.

 

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

** **

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

 

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

 

**If our internalcontrols over financial reporting are not considered effective, our businessand stock price could be adversely affected.**

** **

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

 

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

 

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

** **

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

 

**Warburg PincusPrivate Equity VIII, L.P. and Baker Brothers Life Sciences, L.P. each control asubstantial percentage of the voting power of our outstanding common stock.***

** **

On March 2, 2005, weentered into a Securities Purchase Agreement with Warburg Pincus Private EquityVIII, L.P., or Warburg, and certain other investors pursuant to which we issuedand sold an aggregate of 2,352,443 shares of our Series A ExchangeablePreferred Stock, or the Exchangeable Preferred, at a price per share of $22.10,for aggregate gross proceeds of approximately $52.0 million. On May 18,2005, at our Annual Meeting of Stockholders, our stockholders voted to approvethe issuance of shares of our common stock upon exchange of shares of theExchangeable Preferred. As a result of such approval, we issued a total of23,524,430 shares of common stock upon exchange of 2,352,443 shares ofExchangeable Preferred. In connection with its purchase of the ExchangeablePreferred, Warburg entered into a standstill agreement agreeing not to pursuecertain activities the purpose or effect of which may be to change or influencethe control of the Company.

 

On February 2, 2007,we completed an underwritten offering of 9,000,000 shares of common stock, ofwhich Baker Brothers Life Sciences, L.P. and certain other affiliated funds,which are collectively referred to hereinafter as “Baker,” purchased 3,300,000shares, at a price per share of $6.00, for aggregate gross proceeds ofapproximately $54.0 million. In connection 

 

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therewith, Baker enteredinto a standstill agreement agreeing not to pursue certain activities thepurpose or effect of which may be to change or influence the control of theCompany.

 

On May 29, 2008, wesold 12,420,000 shares of our common stock in an underwritten public offeringat a price of $5.64 per share, for aggregate gross proceeds of approximately$70.0 million.  Warburg and Baker purchased 3,500,000 and 1,500,000shares, respectively, of the 12,420,000 shares sold in such public offering.

 

As of March 31,2009, we had 81,610,666 shares of common stock outstanding, of which Warburgowned 26,124,430 shares, or approximately 32.0% of the voting power of ouroutstanding common stock. According to filings with the SEC, as of February 6,2009, Baker owns less than 10% of our outstanding common stock.  Although each of Warburg and Baker haveentered into a standstill agreement with us, they are, and will continue to be,able to exercise substantial influence over any actions requiring stockholderapproval.

 

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

** **

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

 

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

 

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

 

·       eliminating the ability of stockholders to calla special 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.

 

In addition, weare subject to Section 203 of the Delaware General Corporation Law, whichgenerally prohibits a Delaware corporation from engaging in any of a broadrange of business combinations with an interested stockholder for a period ofthree years following the date on which the stockholder became an interestedstockholder. This provision could have the effect of delaying or preventing achange of control, whether or not it is desired by or beneficial to ourstockholders. Notwithstanding the foregoing, the three year moratorium imposedon business combinations by Section 203 will not apply to either Warburgor Baker because, prior to the dates on which they became interestedstockholders, our board of directors approved the transactions that resulted inWarburg and Baker becoming interested stockholders. However, in connection withits purchase of Exchangeable Preferred in March 2005, Warburg entered intoa standstill agreement agreeing not to pursue certain activities the purpose oreffect of which may be to change or influence the control of the Company.  Similarly, in connection with our February 2007Financing, Baker entered into a standstill agreement agreeing not to pursuecertain activities the purpose or effect of which may be to change or influencethe control of the Company.

 

**We have adopted astockholder rights plan that may discourage, delay or prevent a merger oracquisition 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 

 

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group who hasacquired or announced an offer to acquire 15% or more of our outstanding commonstock) would generally become exercisable for shares of our common stock at adiscount. Because the potential acquirer’s rights would not become exercisablefor our shares of common stock at a discount, the potential acquirer wouldsuffer substantial dilution and may lose its ability to acquire us. Inaddition, the existence of the plan itself may deter a potential acquirer fromacquiring or making an offer to acquire us. As a result, either by operation of the plan or by its potentialdeterrent effect, mergers and acquisitions of the Company that our stockholdersmay consider in their best interests may not occur.

 

Because Warburg owns asubstantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with Warburg’s purchase of ExchangeablePreferred in March 2005 to provide that Warburg and its affiliates will beexempt from the stockholder rights plan, unless Warburg and its affiliatesbecome, without the prior consent of our board of directors, the beneficialowner of more than 44% of our common stock. Likewise, since Baker owns asubstantial percentage of our outstanding common stock, we amended thestockholder rights plan in connection with our February 2007 Financing toprovide that Baker and its affiliates will be exempt from the stockholderrights plan, unless Baker becomes, without the prior consent of our board ofdirectors, the beneficial owner of more than 20% of our common stock. Under thestockholder rights plan, our board of directors has express authority to amendthe rights plan without stockholder approval.

 

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

 

The recent 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.

 

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

 

As of March 31,2009, we had $72.5 million in cash, cash equivalents, and investments inmarketable securities.  Until requiredfor use in our business, we invest our cash reserves in bank deposits, moneymarket funds, high-grade corporate notes and U.S. government instruments inaccordance with our investment policy. The weighted average duration of the remaining time to maturity for ourportfolio of investments in marketable securities as of March 31, 2009 wasapproximately three months.   Ourinvestments in marketable securities as of March 31, 2009 primarilyconsisted of high-grade corporate notes. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of March 31, 2009.

 

Based upon the currentstatus of our product development and commercialization plans, we believe thatour cash, cash equivalents, and investments in marketable securities as of March 31,2009, together with the net proceeds from the April 2009 Financing, shouldbe adequate to support our operations through at least the next 12 months,although there can be no assurance that this can, in fact, beaccomplished.  In particular, ourliquidity, capital resources and results of operations may be adverselyaffected by declines in the value of our investments in marketable securities.  The value of our investments in marketable securitiesmay be adversely affected by rating downgrades or bankruptcies affecting theissuers of such securities, whether caused by instability in the globalfinancial markets, lack of liquidity in the credit and capital markets, orother factors.  For example, during thethree months ended March 31, 2009 and September 30, 2008, we realizedlosses of approximately $157,000 and $552,000, respectively, on the sale ofcertain of our investments in marketable securities, which were sold in orderto preserve our principal as the issuers of these securities experiencedsignificant deteriorations in their creditworthiness as evidenced by investmentrating downgrades.  We have the abilityand intent to hold our remaining investments in marketable securities as of March 31,2009 to their scheduled maturity, although we monitor our investment portfoliowith the primary objectives of preserving principal and maintaining properliquidity to meet our operating needs.

 

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

** **

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

 

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

 

·       actual or anticipated results of our clinicaltrials involving pralatrexate;

 

·       changes in laws or regulations applicable topralatrexate;

 

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

 

·       actual or anticipated variations in quarterlyoperating results;

 

·       announcements of technological innovations by usor our competitors;

 

·       changes in financial estimates orrecommendations by securities analysts;

 

·       conditions or trends in the biotechnology andpharmaceutical industries;

 

·       changes in the market valuations of similarcompanies;

 

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

 

·       additions or departures of key personnel;

 

·       disputes or other developments relating toproprietary rights, including patents, litigation matters and our ability toobtain patent protection 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 executiveofficers, directors and five percent stockholders; and

 

·       economic and other external factors, includingdisasters or crises.

 

Public companies in generaland companies included on the Nasdaq Global Market in particular haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.There has been particular volatility in the market prices of securities ofbiotechnology and other life sciences companies, and the market prices of thesecompanies have often fluctuated because of problems or successes in a givenmarket segment or because investor interest has shifted to other segments.These broad market and industry factors may cause the market price of ourcommon stock to decline, regardless of our operating performance. We have nocontrol over this volatility and can only focus our efforts on our ownoperations, and even these may be affected due to the state of the capitalmarkets. In the past, following large price declines in the public market priceof a company’s securities, securities class action litigation has often beeninitiated against that company, including in 2004 against us. Litigation ofthis type could result in substantial costs and diversion of management’sattention and resources, which would hurt our business. Any adversedetermination in litigation could also subject us to significant liabilities.

 

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

** **

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

 

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consider appropriate. Weare unable to predict the effect that sales may have on the then prevailingmarket price of our common stock.  Wehave entered into a Registration Rights Agreement with Warburg and the otherpurchasers of our Exchangeable Preferred pursuant to which such investors areentitled to certain registration rights with respect to the shares of commonstock that we issued upon exchange of the Exchangeable Preferred.

 

In addition, we will needto raise substantial additional capital in the future to fund our operations.  If we raise additional funds by issuingequity securities, the market price of our common stock may decline and ourexisting stockholders may experience significant dilution.

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

 
| Exhibit No. | ** ** | **Note** | ** ** | **Description**                                                                                                                         |
|------------------|------------|----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 10.22.3†    |       | (1)      |       | Form of Restricted Stock Unit Grant Notice and  Agreement under the 2008 Equity Incentive Plan.                                    |
| 10.23†      |       | (2)      |       | Allos Therapeutics, Inc. Severance Benefit  Plan, as amended and restated effective December 11, 2007.                        |
| 10.23.1†    |       | (3)      |       | Allos Therapeutics, Inc. Change in Control  Severance Benefit Schedule, as amended and restated effective  February 23, 2009. |
| 10.24†      |       | (4)      |       | Executive Compensation and Equity Awards.                                                                                               |
| 31.1             |       |     |       | Certification of principal executive officer  required by Rule 13a-14(a)/15d-14(a).                                                |
| 31.2             |       |     |       | Certification of principal financial officer  required by Rule 13a-14(a)/15d-14(a).                                                |
| 32.1#            |       |     |       | Section 1350 Certification..                                                                                                       |

 

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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.

 

(1)             Incorporatedby reference to exhibit 10.2 filed with our current report on Form 8-Kfiled on February 27, 2009.

 

(2)             Incorporatedby reference to exhibit 10.3 filed with our current report on Form 8-Kfiled on February 27, 2009.

 

(3)             Incorporatedby reference to exhibit 10.4 filed with our current report on Form 8-Kfiled on February 27, 2009.

 

(4)             Incorporatedby reference to exhibit 10.1 filed with our current report on Form 8-Kfiled on February 27, 2009.

 

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

 

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