Tableof Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **  ****x** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                           |
|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                        |
| ** **            | ** ** | **For the quarterly period ended  September 30, 2008.**                                                                                                                                                                                                      |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                        |
| **  ****o** | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                          |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                        |
| ** **            | ** ** | **For the transition period from                    to                    .** |

 

**CommissionFile Number**

**000-29815**

 

**AllosTherapeutics, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**11080CirclePoint Road, Suite 200**

**Westminster,Colorado  80020**

**(303)426-6262**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes x    No o

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

 

As of November 3,2008, there were 81,142,937 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

 

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**ALLOSTHERAPEUTICS, INC.**

** **

**FORM 10-Q**

** **

**TABLE OF CONTENTS**

 
|                                      |                                                                                                                                                                                                              |   |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART I.  Financial  Information |                                                                                                                                                                                                              | 3      |
| ITEM 1.                                   | Financial Statements (unaudited)                                                                                                                                                                                  |   | 3 |
|                                      | Balance Sheets — as of September 30, 2008  and December 31, 2007                                                                                                                                   |   | 3 |
|                                      | Statements  of Operations — for the three and nine months ended September 30, 2008  and 2007 and the cumulative period from September 1, 1992 (date of  inception) through September 30, 2008 |   | 4 |
|                                      | Statements  of Cash Flows — for the nine months ended September 30, 2008 and 2007  and the cumulative period from September 1, 1992 (date of inception)  through September 30, 2008           |   | 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                                                                                                                                                       |   | 22 |
| ITEM 4.                                   | Controls and Procedures                                                                                                                                                                                           |   | 22 |
| PART II.   Other Information    |                                                                                                                                                                                                              | 22     |
| ITEM 1.                                   | Legal Proceedings                                                                                                                                                                                                 |   | 22 |
| ITEM 1A.                                  | Risk Factors                                                                                                                                                                                                      |   | 23 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                      |   | 39 |
| ITEM 3.                                   | Defaults Upon  Senior Securities                                                                                                                                                                                  |   | 39 |
| ITEM 4.                                   | Submission of  Matters to a Vote of Security Holders                                                                                                                                                              |   | 39 |
| ITEM 5.                                   | Other Information                                                                                                                                                                                                 |   | 39 |
| ITEM 6.                                   | Exhibits                                                                                                                                                                                                          |   | 39 |
| SIGNATURES                                |                                                                                                                                                                                                              |   | 40 |

 

NOTE:

 

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

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

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

**BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                     | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                     | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                     |       | $                      | 21,376,097  |                  | $          | 15,919,664 |   |
| Restricted cash                                                                                                                                                                                                                                                |       | 420,966                |        | 183,334               |       |
| Investments in  marketable securities                                                                                                                                                                                                                          |       | 70,530,659             |        | 41,836,566            |       |
| Prepaid research  and development expenses                                                                                                                                                                                                                     |       | 1,075,822              |        | 524,704               |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                             |       | 2,810,541              |        | 2,374,471             |       |
| Total current  assets                                                                                                                                                                                                                                          |       | 96,214,085             |        | 60,838,739            |       |
| Investments in  marketable securities                                                                                                                                                                                                                          |       | 4,453,178              |        | —                |       |
| Property and  equipment, net                                                                                                                                                                                                                                   |       | 847,196                |        | 621,451               |       |
| Total assets                                                                                                                                                                                                                                                   |       | $                      | 101,514,459 |                  | $          | 61,460,190 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                  | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                          |       |                   |        |                  |       |
| Trade accounts  payable                                                                                                                                                                                                                                        |       | $                      | 2,153,687   |                  | $          | 1,191,849 |   |
| Accrued  liabilities                                                                                                                                                                                                                                           |       | 7,745,222              |        | 7,689,338             |       |
| Total current  liabilities                                                                                                                                                                                                                                     |       | 9,898,909              |        | 8,881,187             |       |
| Commitments and  contingencies (See Note 7)                                                                                                                                                                                                                    |       |                   |        |                  |       |
|                                                                                                                                                                                                                                                           |       |                   |        |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                                    |       |                   |        |                  |       |
| Preferred stock,  $0.001 par value; 10,000,000 shares authorized at September 30, 2008 and  December 31, 2007; 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 September 30, 2008 and  December 31, 2007; no shares issued or outstanding                               |       | —                 |        | —                |       |
| Common stock,  $0.001 par value; 150,000,000 shares authorized at September 30, 2008  and December 31, 2007; 81,140,937 and 67,641,943 shares issued and  outstanding at September 30, 2008 and December 31, 2007,  respectively |       | 81,141                 |        | 67,642                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                    |       | 376,454,219            |        | 300,440,336           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                              |       | (284,919,810           | )           | (247,928,975          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                               |       | 91,615,550             |        | 52,579,003            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                               |       | $                      | 101,514,459 |                  | $          | 61,460,190 |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** | **Cumulative  Period from  September 1, 1992  (date of inception)  through  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                             | ** **  | **2007**                                            | ** ** | **2008**                                                                                                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Operating  expenses:                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Research and  development                                             |       | $                                                    | 6,360,950   |                                                | $          | 4,394,726                                                                                                                 |       | $ | 17,738,486 |   | $ | 12,044,941 |   | $ | 143,038,358 |   |
| Clinical  manufacturing                                               |       | 1,727,630                                            |        | 1,506,255                                           |       | 4,799,240                                                                                                                 |       | 4,038,363 |   | 39,411,346 |   |
| Marketing,  general and administrative                                |       | 5,326,357                                            |        | 4,240,704                                           |       | 15,776,485                                                                                                                |       | 14,503,223 |   | 118,607,026 |   |
| Restructuring  and separation costs                                   |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | 1,663,821 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Total operating  expenses                                             |       | 13,414,937                                           |        | 10,141,685                                          |       | 38,314,211                                                                                                                |       | 30,586,527 |   | 302,720,551 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Loss from  operations                                                 |       | (13,414,937                                          | )           | (10,141,685                                         | )          | (38,314,211                                                                                                               | )          | (30,586,527 | ) | (302,720,551 | ) |
| Gain on  settlement claims                                            |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | 5,110,083 |   |
| Interest and  other income, net                                       |       | 254,416                                              |        | 843,542                                             |       | 1,323,376                                                                                                                 |       | 2,526,146 |   | 22,927,122 |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net loss                                                              |       | (13,160,521                                          | )           | (9,298,143                                          | )          | (36,990,835                                                                                                               | )          | (28,060,381 | ) | (274,683,346 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Dividend related  to beneficial conversion feature of preferred stock |       | —                                               |        | —                                              |       | —                                                                                                                    |       | — |   | (10,236,464 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net loss  attributable to common stockholders                         |       | $                                                    | (13,160,521 | )                                                   | $          | (9,298,143                                                                                                                | )          | $ | (36,990,835 | ) | $ | (28,060,381 | ) | $ | (284,919,810 | ) |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Net loss per  share: basic and diluted                                |       | $                                                    | (0.16       | )                                                   | $          | (0.14                                                                                                                     | )          | $ | (0.50 | ) | $ | (0.43 | ) |   |   |
|                                                                  |       |                                                 |        |                                                |       |                                                                                                                      |       |   |   |   |   |
| Weighted average  shares outstanding:  basic and diluted         |       | 80,752,024                                           |        | 66,042,023                                          |       | 73,554,904                                                                                                                |       | 64,627,285 |   |   |   |

 

***The accompanying notes are an integral partof these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** **  | **Cumulative  Period From  September 1, 1992  (date of inception)  through  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2008**                                            | ** **  | **2007**                                                                                                                  | ** ** | **2008** | ** ** |
| Cash Flows From  Operating Activities:                                                                                  |       |                                                |        |                                                                                                                      |       |   |   |
| Net loss                                                                                                                |       | $                                                   | (36,990,835 | )                                                                                                                         | $          | (28,060,381 | ) | $ | (274,683,346 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                       |       |                                                |        |                                                                                                                      |       |   |   |
| Depreciation and  amortization                                                                                          |       | 304,322                                             |        | 258,323                                                                                                                   |       | 3,752,631 |   |
| Stock-based  compensation expense                                                                                       |       | 5,936,499                                           |        | 4,775,997                                                                                                                 |       | 38,218,218 |   |
| Write-off of  long-term investment                                                                                      |       | —                                              |        | —                                                                                                                    |       | 1,000,000 |   |
| Realized loss on  sale of marketable securities                                                                         |       | 551,698                                             |        | —                                                                                                                    |       | 551,698 |   |
| Other                                                                                                                   |       | —                                              |        | —                                                                                                                    |       | 99,121 |   |
| Changes in  operating assets and liabilities:                                                                           |       |                                                |        |                                                                                                                      |       |   |   |
| Prepaid expenses  and other assets                                                                                      |       | (987,188                                            | )           | (543,529                                                                                                                  | )          | (3,876,363 | ) |
| Interest  receivable on investments                                                                                     |       | (539,283                                            | )           | (299,118                                                                                                                  | )          | (1,204,592 | ) |
| Accounts payable                                                                                                        |       | 961,838                                             |        | 320,956                                                                                                                   |       | 2,153,687 |   |
| Accrued  liabilities                                                                                                    |       | 55,884                                              |        | 1,017,275                                                                                                                 |       | 7,745,222 |   |
| Net cash used in  operating activities                                                                                  |       | (30,707,065                                         | )           | (22,530,477                                                                                                               | )          | (226,243,724 | ) |
| Cash Flows From  Investing Activities:                                                                                  |       |                                                |        |                                                                                                                      |       |   |   |
| Acquisition of  property and equipment                                                                                  |       | (530,067                                            | )           | (198,056                                                                                                                  | )          | (4,345,821 | ) |
| Pledge of  restricted cash                                                                                              |       | (237,632                                            | )           | —                                                                                                                    |       | (420,966 | ) |
| Purchases of  marketable securities                                                                                     |       | (94,048,013                                         | )           | (86,562,254                                                                                                               | )          | (609,706,239 | ) |
| Proceeds from  maturities of marketable securities                                                                      |       | 54,140,827                                          |        | 53,222,462                                                                                                                |       | 528,627,796 |   |
| Proceeds from  sales of marketable securities                                                                           |       | 6,747,500                                           |        | —                                                                                                                    |       | 6,747,500 |   |
| Purchase of long-term  investment                                                                                       |       | —                                              |        | —                                                                                                                    |       | (1,000,000 | ) |
| Payments  received on notes receivable                                                                                  |       | —                                              |        | —                                                                                                                    |       | 49,687 |   |
| Net cash used in  investing activities                                                                                  |       | (33,927,385                                         | )           | (33,537,848                                                                                                               | )          | (80,048,043 | ) |
| 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 |       | 4,905,755                                           |        | 2,745,728                                                                                                                 |       | 14,506,873 |   |
| Proceeds from  issuance of common stock, net of issuance costs                                                          |       | 65,185,128                                          |        | 50,257,207                                                                                                                |       | 224,336,947 |   |
| Net cash  provided by financing activities                                                                              |       | 70,090,883                                          |        | 53,002,935                                                                                                                |       | 327,667,864 |   |
| Net increase  (decrease) in cash and cash equivalents                                                                   |       | 5,456,433                                           |        | (3,065,390                                                                                                                | )          | 21,376,097 |   |
| Cash and cash  equivalents, beginning of period                                                                         |       | 15,919,664                                          |        | 10,070,526                                                                                                                |       | — |   |
| Cash and cash  equivalents, end of period                                                                               |       | $                                                   | 21,376,097  |                                                                                                                      | $          | 7,005,136 |   | $ | 21,376,097 |   |
| Supplemental  Schedule of Cash and Non-cash Operating and Financing Activities:                                    |       |                                                |        |                                                                                                                      |       |   |   |
| Cash paid for  interest                                                                                                 |       | $                                                   | —      |                                                                                                                      | $          | — |   | $ | 1,033,375 |   |
| Issuance of  stock in exchange for license agreement                                                                    |       | —                                              |        | —                                                                                                                    |       | 40,000 |   |
| Capital lease  obligations incurred for acquisition of property and equipment                                           |       | —                                              |        | —                                                                                                                    |       | 422,088 |   |
| Issuance of  stock in exchange for notes receivable                                                                     |       | —                                              |        | —                                                                                                                    |       | 139,687 |   |
| Conversion of  preferred stock to common stock                                                                          |       | —                                              |        | —                                                                                                                    |       | 89,125,640 |   |

 

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

 

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**ALLOS THERAPEUTICS, INC.**

**(A Development StageEnterprise)**

**NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.**                 Basis ofPresentation

 

The unaudited financialstatements of Allos Therapeutics, Inc. (referred to herein as the “Company,”“we,” “us” or “our”) included herein reflect all adjustments, consisting onlyof normal recurring adjustments, which in the opinion of management arenecessary to fairly state our financial position, results of operations andcash flows for the periods presented. Certain information and footnote disclosures normally included inaudited financial information prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to the rules and regulations of the Securities andExchange Commission, or SEC.  Operatingresults for the three and nine months ended September 30, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.  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 31,2007, as amended, for a broader discussion of our business and theopportunities and risks inherent in such business. The year-end balance sheetdata included herein was derived from our audited financial statements, butdoes not include all disclosures required by generally accepted accountingprinciples in the United States of America.

 

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 ofin-licensing and developing product candidates, raising capital and recruitingpersonnel.  Accordingly, we areconsidered to be in the development stage as of September 30, 2008, asdefined in Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development StageEnterprises.*

 

*Liquidity*

 

Our ability to generate revenue and achieveprofitability is dependent on our ability, alone or with partners, tosuccessfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, and the subsequent compliance with applicableregulations, require the expenditure of substantial resources. Clinicaldevelopment timelines, likelihood of success and total costs vary widely andare impacted by a variety of risks and uncertainties. Because of these risksand uncertainties, we cannot predict when or whether we will successfullycomplete the development of any of our product candidates or the ultimate costsof such efforts. Due to these same factors, we cannot be certain when, or if,we will generate any revenue or net cash inflow from any of our current productcandidates.

 

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target indications, we do notexpect to be able to generate commercial sales for any of our product candidatesuntil the second half of 2009 at the earliest. We expect to incur significant and growing net losses for theforeseeable future as a result of our research and development programs and thecosts of preparing for the potential commercial launch of pralatrexate(PDX).  Although the size and timing ofour future net losses are subject to significant uncertainty, we expect them toincrease over the next several years as we continue to fund our developmentprograms and prepare for the potential commercial launch of pralatrexate.

 

As of September 30, 2008, we had $96.4 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 September 30, 2008 should be adequate tosupport our operations for at least 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 involving ourproduct candidates. These projects may require many years and substantialexpenditures to complete and may ultimately be unsuccessful.  In addition, following our review of theresults of our pivotal Phase 2 PROPEL trial of pralatrexate in patients withrelapsed or refractory peripheral T-cell lymphoma, or PTCL, we intend to submita New Drug Application for pralatrexate for the treatment of patients withrelapsed or refractory PTCL as expeditiously as possible.  We expect to incur significant costs relatingto preparations for the potential commercial launch of pralatrexate, includingpre-commercial scale up of manufacturing and development of sales and marketingcapabilities, prior to the receipt of regulatory approval to marketpralatrexate.  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:

 

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·      thetiming and outcome of our ongoing PROPEL trial;

 

·      thetiming and costs associated with conducting preclinical and clinicaldevelopment of our product candidates, as well as our evaluation of, anddecisions with respect to, additional therapeutic indications for which we maydevelop our product candidates;

 

·      thetiming and costs associated with developing sales and marketing capabilitiesand commercializing our product candidates, if approved for marketing;

 

·      thetiming and costs associated with manufacturing preclinical, clinical andcommercial supplies of our product candidates;

 

·      thetiming and amount of revenues generated by our business activities, if any; 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 through arrangements withcorporate partners, equity or debt financings, or from other sources. Sucharrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In particular, the currentinstability in the global financial markets and lack of liquidity in the creditand capital markets may adversely affect our ability to secure adequate capitalto support our future operations.  In theevent that additional funds are obtained through arrangements withcollaborative partners or other sources, such arrangements may require us torelinquish rights to some of our technologies, product candidates or productsunder development that we would otherwise seek to develop or commercialize ourselveson terms that are less favorable than might otherwise be available.  If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

 

**2.**                 Prepaid Expensesand Other Assets

** **

Prepaid expensesand other assets are comprised of the following:

 

| ** **                                                             | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Prepaid expenses  and other assets                                     |       | $                            | 810,541    |                        | $          | 615,471 |   |
| Receivable  related to pending litigation settlement (see Note 7) |       | 2,000,000                    |       | 1,759,000                   |       |
|                                                                   |       | $                            | 2,810,541  |                        | $          | 2,374,471 |   |

 

**3.**                 AccruedLiabilities

** **

Accrued liabilities arecomprised of the following:

 

| ** **                                        | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued  personnel costs                          |       | $                            | 2,563,045  |                        | $          | 2,122,805 |   |
| Accrued  litigation settlement costs (see Note 7) |       | 2,000,000                    |       | 2,000,000                   |       |
| Accrued research  and development expenses        |       | 1,767,341                    |       | 1,571,975                   |       |
| Accrued clinical  manufacturing expenses          |       | 696,420                      |       | 1,259,799                   |       |
| Accrued  expenses—other                      |       | 718,416                      |       | 734,759                     |       |
|                                              |       | $                            | 7,745,222  |                        | $          | 7,689,338 |   |

 

**4.**                 Stockholders’Equity

** **

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.  The number of shares issued includes1,620,000 shares purchased by the underwriters pursuant to their exercise infull of their overallotment option.  Wereceived net proceeds from the offering of approximately $65.2 million, afterdeducting $4.2 million of underwriting commissions and $660,744 of offeringexpenses. The shares of common stock were sold under our shelfRegistration Statement on Form S-3, declared effective by the SEC on June 5,2007.

 

At our Annual Meeting ofStockholders held on June 24, 2008, our stockholders approved the AllosTherapeutics, Inc. 2008 Equity Incentive Plan (the “2008 Plan”).  The 2008 Plan authorizes the issuance ofincentive stock options, nonstatutory stock options, restricted stock awards,restricted stock unit awards, stock appreciation rights, performance stockawards and forms of equity compensation, which may be granted to employees,directors and consultants. Only employees may receive incentive stock options.The 2008 Plan succeeds and continues the Company’s 2006 Inducement Award Plan,2002 Broad Based Equity Incentive Plan, and 2000 Stock Incentive CompensationPlan (the “Prior Plans”).  As of June 24, 2008, no additional stockawards will be granted under the Prior Plans and all outstanding stock awardsgranted under the Prior Plans are deemed to be stock awards granted under the2008 Plan (but remain subject to the terms of the Prior Plans with respect towhich they were originally granted).

 

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12,550,843 shares of theCompany’s common stock may be issued pursuant to stock awards granted under the2008 Plan, provided that all stock awards granted after the June 24, 2008effective date of the 2008 Plan, other than stock options and stockappreciation rights granted with an exercise price of at least 100% of suchstock award’s fair market value on the date of grant, will reduce the number ofshares available for issuance under the 2008 Plan by 1.35 shares per sharegranted pursuant to the stock award.  If a stock award under the 2008 Planexpires or otherwise terminates without being exercised in full, the shares ofcommon stock of the Company not acquired pursuant to the stock award will againbecome available for issuance under the 2008 Plan.  In addition, sharesissued pursuant to a stock award that are forfeited to or repurchased by theCompany prior to becoming fully vested and shares that are cancelled pursuantto an exchange or repricing program will become available for the grant of newstock awards under the 2008 Plan.  Shares of common stock that revert toand again become available for issuance under the 2008 Plan and that prior tosuch reversion were granted pursuant to a stock award that reduced the numberof shares available under the 2008 Plan by 1.35 shares per share grantedpursuant to such stock award, shall cause the number of shares of common stockof the Company available for issuance under the 2008 Plan to increase by 1.35shares upon such reversion.

 

**5.**                 Stock-BasedCompensation

** **

In accordance with themodified prospective transition method of SFAS No. 123 (Revised 2004), *Share-Based Payment*, stock-based compensation expense forthe three and nine months ended September 30, 2008 and 2007 has beenrecognized in the accompanying Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                    | 609,767    |                                                | $          | 473,090 |   | $ | 1,947,384 |   | $ | 1,281,501 |   |
| Clinical  manufacturing                 |       | 98,744                                               |       | 44,221                                              |       | 305,756 |   | 127,170 |   |
| Marketing,  general and administrative  |       | 1,124,329                                            |       | 1,141,390                                           |       | 3,683,359 |   | 3,367,326 |   |
| Total  stock-based compensation expense |       | $                                                    | 1,832,840  |                                                | $          | 1,658,701 |   | $ | 5,936,499 |   | $ | 4,775,997 |   |

 

We did not recognize arelated tax benefit during the three or nine months ended September 30,2008 and 2007 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit as of September 30,2008.   No stock-based compensationexpense was capitalized on our Balance Sheets as of September 30, 2008 andDecember 31, 2007.

 

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

 
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding  at December 31, 2007**  |       | 6,405,430                    |       | $                                          | 4.68       |   | 2,754,274 |   | $ | 3.80 |   |
| Granted                                     |       | 2,270,312                    |       | 6.43                                       |       |   |   |   |   |
| Exercised                                   |       | (1,057,936                   | )          | 4.58                                       |       |   |   |   |   |
| Canceled                                    |       | (614,626                     | )          | 5.92                                       |       |   |   |   |   |
| **Outstanding  at September 30, 2008** |       | 7,003,180                    |       | $                                          | 5.15       |   | 2,916,547 |   | $ | 4.10 |   |

 

During the nine months ended September 30, 2008,we granted 2,270,312 stock options with a weighted-average grant-date fair value of $4.04 per share.  As of September 30, 2008, theunrecorded stock-based compensation balance related to stock option awards was $7,970,272and will be recognized over an estimated weighted-average amortization periodof 1.4 years.

 

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The following table summarizes information aboutoutstanding stock options that are fully vested and currently exercisable, andoutstanding stock options that are expected to vest in the future:

 
| ** **                                                                | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| **As of  September 30, 2008:**                                       | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully  vested and exercisable                                     |       | 2,916,547               |       | 6.4                                                         |       | $                                          | 4.10       |                                | $          | 9,780,298 |   |
| Options expected  to vest, including effects of expected forfeitures |       | 3,500,601               |       | 8.8                                                         |       | $                                          | 5.87       |                                | 5,566,147  |   |
| Options fully  vested and expected to vest                                |       | 6,417,148               |       | 7.7                                                         |       | $                                          | 5.07       |                                | $          | 15,346,445 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on our closing stock priceof $7.41 as of September 30, 2008, 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 September 30, 2008 was2,546,034.

 

The total intrinsic value of options exercised duringthe three months ended September 30, 2008 and 2007 was $1,522,485 and$994,500, respectively, determined as of the date of option exercise.  The total intrinsic value of optionsexercised during the nine months ended September 30, 2008 and 2007 was$2,966,342 and $1,945,941, respectively, determined as of the date of optionexercise. We settle employee stock option exercises with newly issued commonshares.  No tax benefits were realized byus in connection with these exercises during the three or nine months ended September 30,2008 and 2007 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit.

 

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

 

| ** **                                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  restricted stock at December 31, 2007**  |       | 412,500                    |       | $                                                  | 3.89       |   |
| Granted                                                    |       | 10,000                     |       | 7.49                                               |       |
| Vested                                                     |       | (128,750                   | )          | 3.74                                               |       |
| **Nonvested  restricted stock at September 30, 2008** |       | 293,750                    |       | $                                                  | 4.07       |   |

 

The shares of restrictedstock vest in four equal annual installments from the date of grant.  During the three months ended September 30,2008 and 2007, we recorded stock-based compensation related to restricted stockawards of $85,691 and $164,217, respectively. During the nine monthsended September 30, 2008 and 2007, we recorded stock-based compensationrelated to restricted stock awards of $326,670 and $523,405, respectively.  As of September 30, 2008, the unrecordedstock-based compensation balance related to restricted stock awards was$425,169 and will be recognized over an estimated weighted-average amortizationperiod of 1.4 years.

 

**6.**      NetLoss Per Share

** **

Net loss per share is calculated in accordance withSFAS No. 128, *Earnings Per Share*.Under the provisions of SFAS No. 128, basic net loss per share is computedby dividing the net loss attributable to common stockholders for the period bythe weighted average number of common shares outstanding during theperiod.  Diluted earnings per share iscomputed by giving effect to all dilutive potential common stock outstandingduring the period, including stock options, restricted stock, stock warrantsand shares to be issued under our employee stock purchase 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).

 

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Potential dilutive common shares that would have beenincluded in the calculation of diluted earnings per share if we had net incomeare as follows:

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Common stock  options  |       | 2,835,595                                            |       | 1,342,540                                           |       | 2,030,579 |   | 1,773,673 |   |
| Restricted stock       |       | 283,967                                              |       | 412,500                                             |       | 323,901 |   | 412,500 |   |
| Common stock  warrants |       | —                                               |       | 206,427                                             |       | — |   | 278,267 |   |
|                   |       | 3,119,562                                            |       | 1,961,467                                           |       | 2,354,480 |   | 2,464,440 |   |

 

**7.**      Commitmentsand Contingencies

 

*Royalty and License Fee Commitments for Pralatrexate(PDX)*

* *

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 $2.0 million based on the passage of time. In the future, we couldmake aggregate milestone payments of $1.0 million upon the earlier ofachievement of a clinical development milestone or the passage of certain timeperiods (the “Clinical Milestone”), and up to $10.3 million upon achievement ofcertain regulatory milestones, including regulatory approval to marketpralatrexate in the U.S. or Europe. The next scheduled payments toward theClinical Milestone of $500,000 each are currently due on December 23, 2008and 2009. The up-front license fee and all milestone payments under theagreement have been or will be recorded to research and development expensewhen incurred. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors a royaltybased on a percentage of net revenues arising from sales of the product orsublicense revenues arising from sublicensing the product, if and when suchsales or sublicenses occur.

 

*Contingencies*

* *

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the U.S. District Court for the District of Colorado (the “District Court”).An amended complaint was filed in August 2004. The lawsuit was brought onbehalf of a purported class of purchasers of our securities during the periodfrom May 29, 2003 to April 29, 2004, and sought unspecified damagesrelating to the issuance of allegedly false and misleading statements regardingEFAPROXYN, one of our former product candidates, during this period andsubsequent declines in our stock price. On October 20, 2005, the DistrictCourt granted the defendants’ motion to dismiss the lawsuit with prejudice. Inan opinion dated October 20, 2005, the District Court concluded that theplaintiffs’ complaint failed to meet the legal requirements applicable to itsalleged claims.

 

On November 20, 2005, the plaintiffs appealed theDistrict Court’s decision to the U.S. Court of Appeals for the Tenth Circuit(the “Court of Appeals”).   On February 6, 2008, the partiessigned a stipulation of settlement, settling the case for $2,000,000. Thesettlement is subject to various conditions, including without limitationapproval of the District Court.  On September 15,2008, the District Court issued an order preliminarily approving the settlementand scheduling a hearing on January 21, 2009 to consider final approval ofthe settlement.  Neither we nor ourformer officer admits any liability in connection with the settlement.  The amount of the settlement in excess of ourdeductible has been covered by our insurance carrier.  In the event the settlement does not becomefinal, we intend to vigorously defend against the plaintiffs’ appeal. If theCourt of Appeals then were to reverse the District Court’s decision and we werenot successful in our defense of such claims, we could be forced to makesignificant payments to the plaintiffs, and such payments could have a materialadverse effect on our business, financial condition, results of operations andcash flows to the extent such payments are not covered by our insurancecarriers. Even if our defense against such claims were successful, thelitigation could result in substantial costs and divert management’s attentionand resources, which could adversely affect our business. As of September 30,2008, we have recorded $2,000,000 in accrued litigation settlement costs, whichrepresents our best estimate of the potential gross amount of the settlementcosts to be paid to the plaintiffs, and $2,000,000 in prepaid expenses andother assets, which represents the approximately $235,000 of remainingdeductible under our insurance policy paid by us and $1,765,000 paid by ourinsurance carrier into the settlement fund escrow in September 2008.  A claims administrator appointed by theparties will administer 

 

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the distribution of the settlement fund to authorizedclaimants in 2009.

 

*Lease Commitments*

* *

On June 16, 2008, we entered into an amendment tothe lease agreement for our corporate headquarters facility.  As part of the amendment we extended the termof the lease from November 1, 2008 for a period of 39 months to expire January 31,2012.  We also will have the right, subject to the terms of the amendment,to extend the term of the lease agreement for one additional period of threeyears thereafter. We reduced the number of rentable square feet included in theleased premises from 43,956 square feet to 34,536 square feet.

 

**8.**      RecentAccounting Pronouncements

** **

In September 2006,the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, *Fair Value Measurements*, which defines fair value, providesa framework for measuring fair value, and expands the disclosures required forfair value measurements. SFAS No. 157 applies to other accountingpronouncements that require fair value measurements; it does not require anynew fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007 and we adopted it on January 1,2008. The application of SFAS No. 157 to certain items has been deferredand will be effective for fiscal years beginning after November 15, 2008and interim periods within that year. The adoption of this pronouncement did not have a material impact on ourresults of operations or financial position for the three and nine monthperiods ended September 30, 2008. We have no assets or liabilities thatwere measured using significant unobservable inputs (Level 3 assets andliabilities) as of September 30, 2008. Our financial instruments include cash and cash equivalents, investmentsin marketable securities, prepaid expenses, accounts payable and accruedliabilities. The carrying amounts of financial instruments approximate theirfair value due to their short maturities. The carrying values of our cashequivalents and investments in marketable securities approximate their marketvalues based on quoted market prices, or Level 1 inputs. We account forinvestments in marketable securities in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*. Investments in marketable securities are classified asheld to maturity and are carried at cost plus accrued interest.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment ofFASB Statement No. 115,* which is effective for fiscal yearsbeginning after November 15, 2007 and we adopted it on January 1,2008. This statement permits an entity to choose to measure many financialinstruments and certain other items at fair value at specified election dates.Subsequent unrealized gains and losses on items for which the fair value optionhas been elected will be reported in earnings. The adoption of thispronouncement did not have a material impact on our results of operations orfinancial position for the three and nine month periods ended September 30,2008, as we did not elect to measure any of our financial instruments at fairvalue.

 

InJune 2007, the Emerging Issues Task Force, or EITF, issued a consensus,EITF 07-3, *Advance Payments for Research andDevelopment Activities*, which states that non-refundable advancepayments for goods that will be used or services that will be performed infuture research and development activities should be deferred and capitalizeduntil the goods have been delivered or the related services have beenrendered.  EITF 07-3 is to be appliedprospectively for new contractual arrangements entered into in fiscal yearsbeginning after December 15, 2007 and we adopted it on January 1,2008. The adoption did not result in a material change to our currentaccounting practice.

 

In November 2007, the EITF issued a consensus,EITF 07-1, *Accounting for CollaborationArrangements Related to the Development and Commercialization of IntellectualProperty*, which is focused on how the parties to a collaborativeagreement should account for costs incurred and revenue generated on sales tothird parties, how sharing payments pursuant to a collaboration agreementshould be presented in the income statement and certain related disclosurequestions. EITF 07-1 is to be applied retrospectively for collaborationarrangements in fiscal years beginning after December 15, 2008.  We currently do not have any sucharrangements.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations*. This Statementreplaces 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 

 

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requirement to measure the noncontrolling interest in the acquiree atfair value will result in recognizing the goodwill attributable to thenoncontrolling interest in addition 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. We are currently evaluating the potential impact of this statement.  We do not expect any impact on our financialstatements.

 

In December 2007, theFASB 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. We arecurrently evaluating the potential impact of this statement. We do notexpect any impact on our financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*. SFAS No. 161is intended to improve financial reporting about derivative instruments andhedging activities by requiring companies to enhance disclosure about how theseinstruments and activities affect their financial position, performance andcash flows. SFAS 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. We are currentlyevaluating the potential impact of this statement. We do not expect anyimpact on our financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles*.SFAS No. 162 identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles in the United Statesof America. SFAS No. 162 is effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board, or PCAOB, amendments to AICPACodification of Auditing Standards, AU Section 411, *The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles*. This amendment wasapproved 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, the FASB issued FASB Staff Position, or FSP, EITF03-6-1, *Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities, or*FSP EITF 03-6-1, to addresswhether instruments granted in share-based payment transactions areparticipating securities prior to their vesting and therefore need to beincluded in the earnings per share calculation under the two-class methoddescribed in SFAS No. 128, *Earnings per Share*.This FSP requires companies to treat unvested share-based payment awards thathave non-forfeitable rights to dividends or dividend equivalents asparticipating securities and thus, include them in calculations of basicearnings per share. FSP EITF 03-6-1 is effective for fiscal years beginningafter December 15, 2008. We do not anticipate that our adoption of FSP EITF 03-6-1 will materially impact our financialstatements or our computation of basic earnings per share upon adoption.

 

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**ITEM2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF 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 concerning our projectedtimelines for the initiation of new trials and announcement of results from ourongoing clinical trials, including our Phase 2 PROPEL trial; the potentialfor the results of our Phase 2 PROPEL trial to support marketing approval ofpralatrexate (PDX); other statements regarding our future product developmentand regulatory strategies, including our intent to develop or seek regulatoryapproval for our product candidates in specific indications; the ability of ourthird-party manufacturing parties to support our requirements for drug supply;any statements regarding our future financial performance, results ofoperations or sufficiency of capital resources to fund our operating requirements;and any other statements that are other than statements of historical fact. Insome cases, these statements may be identified by terminology such as “may,”“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential” or “continue,” or the negative of such terms and other comparableterminology. Although we believe that the expectations reflected in theforward-looking statements contained herein are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Thesestatements involve known and unknown risks and uncertainties thatmay cause our, or our industry’s results, levels of activity, performanceor achievements to be materially different from those expressed or implied bythe forward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed in Part II, Item1A of this report under the caption “Risk Factors.” All forward-lookingstatements included in this report are based on information available to us asof the date hereof and we undertake no obligation to revise any forward-lookingstatements in order to reflect any subsequent events or circumstances.Forward-looking statements not specifically described above also may be foundin these and other sections of this report.

* *

**Overview**

 

We are 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.

 

We currently have two small molecule chemotherapeuticproduct candidates in clinical development, pralatrexate (PDX) and RH1.

 

**Pralatrexate (PDX)**

 

Pralatrexate is a novel,small molecule chemotherapeutic agent that inhibits dihydrofolate reductase, orDHFR, a folic acid (folate)-dependent enzyme involved in the building ofnucleic acid, or DNA, and other processes. Pralatrexate was rationallydesigned for efficient transport into tumor cells via the reduced folate carrier,or RFC-1, and effective intracellular drug retention. We believe thesebiochemical features, together with preclinical and clinical data in a varietyof tumors, suggest that pralatrexate may have a favorable safety and efficacyprofile relative to methotrexate and other related DHFR inhibitors. We believepralatrexate has the potential to be delivered as a single agent or incombination therapy regimens.

 

In August 2006, we initiated PROPEL, aninternational, multi-center, open-label, single-arm Phase 2 clinical trial ofpralatrexate in patients with relapsed or refractory peripheral T-celllymphoma, or PTCL, that we believe, if positive, will be sufficient to supportthe filing of a new drug application, or NDA, to seek marketing approval forpralatrexate in this indication.  Patients receive 30 mg/m2 of pralatrexate once every week for sixweeks followed by one week of rest per cycle of treatment.  The treatment regimen also includesvitamin B12 and folic acid supplementation. The primaryendpoint of the study is objective response rate, either complete or partialresponse, which will be assessed by central independent oncology review.  Duration of response is the key secondaryendpoint.  All patients enrolled in thetrial will continue to be followed for long-term survival.

 

In July 2006, we reached agreement with the U.S.Food and Drug Administration, or FDA, under its special protocol assessment, orSPA, process on the design of this Phase 2 trial.  The SPA process allows for FDA evaluation ofa clinical trial 

 

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protocol intended to form the primary basis of anefficacy claim in support of an NDA, and provides an agreement that the trialdesign, including trial size, clinical endpoints and data analyses areacceptable to the FDA.  However, the SPAagreement is not a guarantee of approval, and we cannot assure you that thedesign of, or data collected from, the PROPEL trial will be adequate todemonstrate the safety and efficacy of pralatrexate for the treatment ofpatients with relapsed or refractory PTCL, or otherwise be sufficient tosupport FDA or any foreign regulatory approval. 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.

 

In accordance with the PROPEL trial protocol, threepre-planned interim analyses of safety data and one pre-planned interimanalysis of response data have been conducted. In January, September and December 2007, we announced that anindependent data monitoring committee, or DMC, completed interim analyses ofsafety data from the first 10, 35 and 65 evaluable patients who completed atleast one cycle of treatment with pralatrexate, respectively, and recommendedthat the trial continue per the protocol at each analysis.  No major safety concerns were identified bythe DMC.  In September 2007, weannounced that the results of the interim analysis of patient response dataexceeded the pre-specified threshold for continuation of the trial, whichrequired a minimum of four responses, either complete or partial responses, outof the first 35 evaluable patients, as determined by central independentoncology review.

 

We completed patient enrollment in the PROPEL trial inApril 2008, with more than 100 evaluable patients enrolled at sites acrossthe U.S., Canada and Europe. In May 2008, we reported interim response and safety data from thePROPEL trial. Twenty-nine percent, or 19, of the first 65 evaluablepatients enrolled in the trial, experienced either a complete or partialresponse, as assessed by central independent oncology review. Forty-fivepercent, or 29, of the first 65 evaluable patients, experienced either acomplete or partial response, as assessed by the PROPEL investigators. Patientsare considered evaluable if they received at least one dose of pralatrexate andtheir diagnosis of PTCL has been confirmed by independent review.  The median duration of response for thesepatients could not be estimated due to the current length of follow-up. Themost common drug related grade 3/4 adverse events were mucositis andthrombocytopenia, which were observed in 14% and 23% of patients, respectively.Patients received a median of three prior treatment regimens.

 

We currently expect to report top line results of thePROPEL trial at the 50th Annual Meeting of the American Society ofHematology (ASH), taking place December 6-9, 2008 in San Francisco,California, or the December 2008 ASH conference.  Owen O’Connor, M.D., Ph.D., is scheduled toreport top line results from PROPEL in an oral presentation titled “PROPEL: AMulti-center Phase 2 Open-label Study of Pralatrexate (PDX) with Vitamin B12and Folic Acid Supplementation in Patients with Relapsed or RefractoryPeripheral T-cell Lymphoma (PTCL).”  Dr. O’Connoris Director of the Lymphoid Development and Malignancy Program and Chief of theLymphoma Service at the Irving Comprehensive Cancer Center at ColumbiaUniversity Medical Center and is Principal Investigator of the PROPELtrial.  Following our review of the trialresults, we intend to submit a New Drug Application (NDA) for pralatrexate forthe treatment of patients with relapsed or refractory PTCL as expeditiously aspossible.

 

Our decision to begin PROPEL was based upon interim data from anongoing Phase 1/2 single-center, open-label, single-arm study ofpralatrexate in patients with relapsed or refractory non-Hodgkin’s lymphoma, orNHL, and Hodgkin’s disease. Interim data from this trial, which was mostrecently presented at the AACR-NCI-EORTC conference in October 2007,demonstrated a high overall response rate in patients with various subtypes ofT-cell lymphoma. Notably, investigator-assessed responses were observed in 14of 26 (54%) evaluable patients with T-cell lymphoma, including nine completeresponses and five partial responses. The addition of vitamins to the treatmentregimen appeared to mitigate the occurrence of advanced grade stomatitis, ormouth ulcers, a toxicity commonly associated with pralatrexate.

 

In July 2006, the FDA awarded orphan drug designation topralatrexate for the treatment of patients with T-cell lymphoma. The FDA mayaward orphan drug designation to drugs that target conditions affecting 200,000or fewer patients per year in the U.S. Under the Orphan Drug Act, if we are thefirst company to receive FDA approval for pralatrexate for this orphan drugindication, we will obtain seven years of marketing exclusivity during whichthe FDA may not approve another company’s application for the same drug for thesame orphan indication. Orphan drug exclusivity would not prevent FDA approvalof a different drug for the orphan drug indication or the same drug for adifferent indication. In October 2006, the FDA granted fast trackdesignation to pralatrexate for the treatment of patients with T-cell lymphoma.The fast track program is designed to facilitate the development and expeditethe review of new drugs that are intended to treat serious or life-threateningconditions and that demonstrate the potential to address unmet medical needs.In April 2007, the European Commission, with a favorable opinion of theCommittee for Orphan Medicinal Products of the European Medicines Agency, orEMEA, granted orphan medicinal product designation to pralatrexate for thetreatment of patients with PTCL. The EMEA orphan medicinal product designation,or OMPD, is intended to promote the development of drugs that may provide 

 

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significant benefit to patients suffering from rare diseases identifiednotably as life-threatening, chronically debilitating or very serious. UnderEuropean Union regulation, OMPD provides ten years of potential marketexclusivity once the product candidate is approved for marketing for thedesignated indication in the European Union, which can be reduced to six yearsor terminated in certain circumstances.

 

We currently have the following clinical trialsinvolving pralatrexate open for enrollment:

 

·      aPhase 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 approximately 160 patients in up to 50 investigative sitesworldwide. Based on current enrollment rates, we expect to complete patientenrollment in this study in the second half of 2009.

 

·      aPhase 2, open-label, single-arm, multi-center study of pralatrexate withvitamin 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.

 

·      aPhase 1/2a, open-label, multi-center study of pralatrexate and gemcitabine withvitamin B12 and folic acidsupplementation in patients with relapsed or refractory NHL and Hodgkin’sdisease.  We initiated patient enrollmentin this study in May 2007.  We planto enroll up to 54 evaluable patients in the Phase 1 portion of the study andup to 30 additional patients with relapsed or refractory PTCL in the expandedPhase 2a portion of the study.  Interimdata from this study will be presented at the December 2008 ASHconference.

 

·      aPhase 1, open-label, multi-center study of pralatrexate with vitamin B12 and folic acidsupplementation in patients with relapsed or refractory cutaneous T-celllymphoma, or CTCL.  We initiated patientenrollment in this study in August 2007. We plan to enroll up to 56 evaluable patients in the study, including atleast 20 patients at what we believe to be the optimal dose and schedule.  Interim data from this study will bepresented at the December 2008 ASH conference.

 

·      aPhase 1/2, open-label, single-center study of pralatrexate with vitamin B12 and folic acidsupplementation in patients with relapsed or refractory NHL and Hodgkin’sdisease.  This study is currently focusedon exploring alternate dosing and administration schedules in patients with B-celllymphoma to further evaluate pralatrexate’s potential clinical utility in thissetting.

 

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 developmentefforts will be ultimately successful.

 

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. The portfolio currently consists of two issuedpatents in the U.S., two granted patents in Europe, and pending patentapplications in the U.S., Canada, Europe, Australia, Japan, China, Brazil,Indonesia, India, South Korea, Mexico, Norway, New Zealand, the Philippines,Singapore, and South Africa.

 

**RH1**

 

**RH1**is a small molecule chemotherapeutic agent that we believe is bioactivated bythe enzyme DT-diaphorase, or DTD, also known as NAD(P)H quinone oxidoreductase,or NQ01.  We believe DTD isover-expressed in many tumors, relative to normal tissue, including lung,colon, breast and liver tumors.  Webelieve that because RH1 is bioactivated in the presence of DTD, it has thepotential to provide targeted drug delivery to these tumor types while limitingthe amount of toxicity to normal tissue.

** **

**In November 2007, we initiated patient enrollment in aPhase 1, open-label, multi-center dose escalation study of RH1 in patients withadvanced solid tumors or NHL.  We plan toenroll up to 60 evaluable patients in the study with the objective of**

 

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**determining the maximum tolerated dose, recommended Phase 2dose and safety profile of RH1 in this population.  We plan to enroll three to six patients percohort.  Once we determine what we believeto be the optimal dose and schedule, we plan to recruit an expanded cohort ofup to 24 evaluable patients who have tumor types with a high likelihood of DTDover-expression to explore possible markers of anticancer activity.**

** **

In December 2004, we entered into an agreementwith the University of Colorado Health Sciences Center, the University ofSalford and Cancer Research Technology under which we obtained exclusiveworldwide rights to certain intellectual property surrounding RH1.

 

***EFAPROXYNTM (efaproxiral)***** Development Discontinued**

 

In mid-2007, we discontinued the development ofEFAPROXYN, one of our former product candidates, after announcing top-lineresults from ENRICH, a Phase 3 clinical trial of EFAPROXYN plus whole brainradiation therapy, or WBRT, in women with brain metastases originating frombreast cancer.  The study failed toachieve its primary endpoint of demonstrating a statistically significantimprovement in overall survival in patients receiving EFAPROXYN plus WBRT,compared to patients receiving WBRT alone. We are currently pursuing the sale of our rights to EFAPROXYN althoughwe may not receive any material consideration for any sale.

 

**Resultsof Operations**

 

We are a development stage company. Since ourinception in 1992, we have not generated any revenue from product sales andhave experienced significant net losses and negative cash flows fromoperations. We have incurred these losses principally from costs incurred inour research and development programs, clinical manufacturing and from ourmarketing, general and administrative expenses. Our ability to generate revenueand achieve profitability is dependent on our ability, alone or with partners,to successfully complete the development of our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. The timing and costs to complete the successfuldevelopment of any of our product candidates are highly uncertain, andtherefore difficult to estimate. The lengthy process of seeking regulatoryapprovals for our product candidates, 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 discussed inthe “Risk Factors” section of Part II, Item 1A below. Because ofthese risks and uncertainties, we cannot predict when or whether we willsuccessfully complete the development of any of our product candidates 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 any of ourcurrent product candidates.

 

Even if our clinical trials demonstrate the safety andeffectiveness of our product candidates in their target indications, we do notexpect to be able to generate commercial sales of any of our product candidatesuntil the second half of 2009, at the earliest. We expect to continue incurringnet losses and negative cash flows for the foreseeable future.  Although the size and timing of our futurenet losses are subject to significant uncertainty, we expect them to increaseover the next several years as we continue to fund our research and developmentprograms and prepare for the potential commercial launch of pralatrexate.

** **

***Comparisonof three and nine months ended September 30, 2008 and 2007***

 

| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:                   |       |                                                 |       |                                                |       |   |   |   |   |
| Research and  development              |       | $                                                    | 6,360,950  |                                                | $          | 4,394,726 |   | $ | 17,738,486 |   | $ | 12,044,941 |   |
| Clinical  manufacturing                |       | 1,727,630                                            |       | 1,506,255                                           |       | 4,799,240 |   | 4,038,363 |   |
| Marketing,  general and administrative |       | 5,326,357                                            |       | 4,240,704                                           |       | 15,776,485 |   | 14,503,223 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total operating  expenses              |       | $                                                    | 13,414,937 |                                                | $          | 10,141,685 |   | $ | 38,314,211 |   | $ | 30,586,527 |   |

 

*Researchand Development.* Research and development expensesinclude the costs of certain personnel, basic research, preclinical studies,clinical trials, regulatory affairs, biostatistical data analysis and licensingfees for our product candidates.

 

Research and developmentexpenses for the three months ended September 30, 2008 and 2007 were $6.4million and $4.4 

 

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million,respectively.  The $2.0 million increasein research and development expenses in the three months ended September 30,2008 as compared to the same period in 2007 was primarily due to the following:

 

·      a $1.4 million increase inclinical trial costs involving pralatrexate, including initiation of patientenrollment in three new trials involving pralatrexate since the start of thethird quarter of 2007; and

 

·      a $621,000 increase relatedto key personnel changes and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year.

 

This increase waspartially offset by a $360,000 decrease related to payment of a non-recurringdata option fee for RH1 in the third quarter of 2007, with no correspondingamount in the same period in 2008.

 

Research and developmentexpenses for the nine months ended September 30, 2008 and 2007 were $17.7million and $12.0 million, respectively. The $5.7 million increase in research and development expenses in thenine months ended September 30, 2008 as compared to the same period in2007 was primarily due to the following:

 

·      a $5.8 million increase inclinical trial costs involving pralatrexate, including increased costs forPROPEL and initiation of patient enrollment in three new trials involvingpralatrexate since the start of the third quarter of 2007;

 

·      an $860,000 increase relatedto key personnel changes and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year; and

 

·      a $666,000 increase innon-cash stock-based compensation expense, as discussed in more detail below.

 

These increases werepartially offset by:

 

·      a $757,000 decrease inpreclinical study costs, primarily related to pralatrexate;

 

·      a $585,000 decrease inclinical trial costs resulting from the discontinuation of the EFAPROXYNdevelopment program in mid-2007; and

 

·      a $360,000 decrease relatedto payment of a non-recurring data option fee for RH1 in the third quarter of2007, with no corresponding amount in the same period in 2008.

 

For the fourth quarter of2008, we expect our research and development expenses to increase relative tothe quarterly average for the nine months ended September 30, 2008 due tothe following:

 

·      increases in costs for ourongoing and planned clinical trials and preclinical studies for pralatrexate;

 

·      increases in licensing costsfor pralatrexate, as a $500,000 milestone payment under the license agreementfor pralatrexate is due in December 2008;

 

·      an increase in personnelcosts, primarily resulting from additional headcount; and

 

·      an increase in non-cashstock-based compensation expense related to grants for new employees.

 

*ClinicalManufacturing.* Clinical manufacturing expenses includethe costs of certain personnel, third-party manufacturing costs for developmentof drug materials for use in clinical trials and preclinical studies, and costsassociated with pre-commercial scale-up of manufacturing to support anticipatedregulatory and potential commercial requirements.

 

Clinical manufacturingexpenses for the three months ended September 30, 2008 and 2007 were $1.7million and $1.5 million, respectively. The $221,000 increase in clinical manufacturing expenses in the threemonths ended September 30, 2008 as compared to the same period in 2007 wasprimarily due to a $425,000 increase in consulting costs, partially offset by a$251,000 decrease related to third-party manufacturing costs for pralatrexate.

 

Clinical manufacturingexpenses for the nine months ended September 30, 2008 and 2007 were $4.8million and $4.0 

 

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million,respectively.  The $761,000 increase inclinical manufacturing expenses in the nine months ended September 30,2008 as compared to the same period in 2007 was primarily due to the following:

 

·      a $611,000 increase inconsulting expenses;

 

·      a $457,000 increase relatedto key personnel changes and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year; and

 

·      a $373,000 increaseprimarily related to manufacturing pralatrexate drug substance.

 

This increase waspartially offset by a $668,000 decrease primarily related to pralatrexate drugproduct manufacturing.

 

For the fourth quarter of2008, we expect our clinical manufacturing expenses to significantly increaserelative to the quarterly average for the nine months ended September 30,2008 due to the following:

 

·      increases in pralatrexatemanufacturing expenses in order to support our requirements for ongoingclinical trials and pre-commercial scale-up; and

 

·      an increase in non-cashstock-based compensation expense related to grants for new employees.

 

*Marketing, General andAdministrative.*  Marketing, general and administrativeexpenses include costs for pre-marketing activities, corporate development,executive administration, corporate offices and related infrastructure.

 

Marketing, general and administrative expenses for thethree months ended September 30, 2008 and 2007 were $5.3 million and $4.2million, respectively.  The $1.1 millionincrease in marketing, general and administrative expenses in the three monthsended September 30, 2008 as compared to the same period in 2007 wasprimarily due to the following:

 

·      a $433,000 increase inpralatrexate portfolio development and commercialization planning activities;

 

·      a $364,000 increase inmarket research and consulting expenses related to pralatrexate; and

 

·      a $282,000 increase relatedto key personnel changes and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year.

 

Marketing, general and administrative expenses for thenine months ended September 30, 2008 and 2007 were $15.8 million and $14.5million, respectively.  The $1.3 millionincrease in marketing, general and administrative expenses in the nine monthsended September 30, 2008 as compared to the same period in 2007 wasprimarily due to the following:

 

·      a $1.0 million increase inpralatrexate portfolio development and commercialization planning activities;

 

·      a $377,000 increase relatedto key personnel changes and related travel costs, mainly attributable toadditional headcount and increases in compensation costs year over year; and

 

·      a $316,000 increase innon-cash stock-based compensation expense, as discussed in more detail below.

 

This increase was partially offset by a $367,000decrease in market research and consulting expenses as a result of thediscontinuation of our EFAPROXYN development program in mid-2007.

 

For the fourth quarter of 2008, we expect ourmarketing, general and administrative expenses to significantly increaserelative to the quarterly average for the nine months ended September 30,2008 due to the following:

 

·      an increase in personnelcosts, primarily resulting from additional headcount;

 

·      an increase in costsrelating to the preparation for the potential commercial launch ofpralatrexate; and

 

·      an increase in non-cashstock-based compensation expense related to grants for new employees.

 

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*Stock-based CompensationExpense. *Stock-basedcompensation expense for the three and nine months ended September 30,2008 and 2007 has been recognized in our Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                                    | 609,767    |                                                | $          | 473,090 |   | $ | 1,947,384 |   | $ | 1,281,501 |   |
| Clinical  manufacturing                 |       | 98,744                                               |       | 44,221                                              |       | 305,756 |   | 127,170 |   |
| Marketing,  general and administrative  |       | 1,124,329                                            |       | 1,141,390                                           |       | 3,683,359 |   | 3,367,326 |   |
| Total  stock-based compensation expense |       | $                                                    | 1,832,840  |                                                | $          | 1,658,701 |   | $ | 5,936,499 |   | $ | 4,775,997 |   |

 

The $1.8 million ofstock-based compensation recognized in the three months ended September 30,2008 was primarily related to our stock option plans.  Of the $1.7 million of stock-basedcompensation recognized in the three months ended September 30, 2007,$1.5 million was related to our stock option plans and $164,000 related torestricted stock. The $174,000 increase in stock-based compensation expense inthe three months ended September 30, 2008 as compared to the same periodin 2007 was primarily due to an increase in the number of options granted tonew employees.

 

Of the $5.9 million ofstock-based compensation recognized in the nine months ended September 30,2008, $5.6 million was related to our stock option plans, $327,000 relatedto restricted stock and $40,000 was related to our employee stock purchaseplan.  Of the $4.8 million ofstock-based compensation recognized in the nine months ended September 30,2007, $4.2 million was related to our stock option plans and $523,000related to restricted stock. The $1.2 million increase in stock-basedcompensation expense in the nine months ended September 30, 2008 ascompared to the same period in 2007 was primarily due to an increase in thenumber of options granted to new employees and to existing employees pursuantto our annual grants that occurred in February 2008.

 

As of September 30,2008, the unrecorded stock-based compensation balance related to stock optionawards was $8.0 million and will be recognized over an estimatedweighted-average amortization period of 1.4 years. As of September 30,2008, the unrecorded stock-based compensation balance related to restrictedstock awards was $425,000 and will be recognized over an estimatedweighted-average amortization period of 1.4 years.

 

*Interest and Other Income, Net*.  Interest income for the three months ended September 30,2008 and 2007 was $254,000 and $844,000, respectively.  Interest income, net of interest expense, forthe nine months ended September 30, 2008 and 2007 was $1.3 million and$2.5 million, respectively.  The $589,000and $1.2 million decreases in net interest income in the three and nine monthsended September 30, 2008 as compared to the same periods in 2007 wereprimarily due to lower yields on our cash, cash equivalents and investments inmarketable securities, and a realized loss of approximately $552,000 on thesale of certain of our investments in marketable securities during the threemonths ended September 30, 2008.  Inresponse to the recent instability in the global financial markets, we reviewedour investments in marketable securities and sold certain investments prior totheir maturity in order to preserve our principal, as the issuers of thesesecurities experienced significant deteriorations in their creditworthiness asevidenced by investment rating downgrades. We currently expect to hold our remaining investments in marketablesecurities as of September 30, 2008 to their scheduled maturity, althoughwe intend to continuously monitor our investment portfolio with the primaryobjectives of preserving principal and maintaining proper liquidity to meet ouroperating needs.

 

**Liquidity and Capital Resources**

 

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 $328.0 million through September 30,2008.  We have also generated $22.9million of net interest income since our inception from investing the netproceeds of these financings.

 

As of September 30, 2008, we had $96.4 million incash, cash equivalents, and investments in marketable securities.  Until required for use in our business, weinvest our cash reserves in bank deposits, money market funds, high-gradecorporate notes and U.S. government instruments in accordance with ourinvestment policy.  As of September 30,2008, we had short-term investments in marketable securities of $70.5 millionwith a weighted average duration of approximately 5.7 months.  As of September 30, 2008, we hadlong-term investments in marketable securities of $4.5 million with a weightedaverage duration of approximately 12.4 months. Our investments in marketable securities as of September 30, 2008primarily consisted of high-grade corporate notes.  We did not hold any derivative instruments,foreign exchange contracts, asset backed securities, mortgage backedsecurities, auction rate securities, or securities of issuers in bankruptcy inour investment portfolio as of September 30, 2008. Our liquidity, capitalresources and results of operations may be adversely affected by future declinesin the value of our investments in marketable securities.  The value of our investments in marketablesecurities may be adversely affected by rating downgrades or bankruptciesaffecting the issuers of such securities, whether caused by instability in theglobal financial markets, lack of liquidity in the credit and capital markets,or other factors.  In response to therecent instability in the global financial markets, we reviewed our investmentsin marketable securities and sold certain investments that we deemed to haveincreased risk.  We currently expect tohold our remaining investments in marketable securities as of September 30,2008 to their scheduled maturity, although we intend to continuously monitorour investment portfolio with the primary objectives of preserving principaland maintaining proper liquidity to meet our operating needs.

 

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We have used $226.2 million of cash for operating activities from ourinception through September 30, 2008. Net cash used to fund our operating activities for the nine months endedSeptember 30, 2008 and 2007 was $30.7 million and $22.5 million,respectively.

 

Net cash used in investing activities for the nine months ended September 30,2008 was $33.9 million and consisted primarily of the purchase of investmentsin marketable securities of $94.0 million, $530,000 for the acquisition ofproperty and equipment and $238,000 related to the pledging of collateral for aletter of credit related to a facility lease, partially offset by the proceedsfrom maturities and sales of investments in marketable securities.  Net cash used in investing activities for thenine months ended September 30, 2007 was $33.5 million and consistedprimarily of the purchase of investments in marketable securities, partially offsetby the proceeds from maturities of investments in marketable securities.

 

Net cash provided by financing activities for the nine months ended September 30,2008 was $70.1 million and consisted primarily of the net proceeds from thesale of 12,420,000 shares of our common stock in May 2008 in anunderwritten public offering at a price of $5.64 per share (the “May 2008Financing”) and $4.9 million of proceeds from the issuance of common stockassociated with stock options exercised by our employees and sales of stockunder our employee stock purchase plan. We received net proceeds from the May 2008 Financing ofapproximately $65.2 million, after deducting $4.2 million of underwritingcommissions and $661,000 of offering expenses. The shares of common stock were sold under our shelf RegistrationStatement on Form S-3, declared effective by the SEC on June 5,2007.  Net cash provided by financingactivities for the nine months ended September 30, 2007 was $53.0 millionand consisted of the net proceeds from the sale of 9,000,000 shares of ourcommon stock in February 2007 in an underwritten offering at a price of$6.00 per share (the “February 2007 Financing”) and $2.7 million ofproceeds from the issuance of common stock associated with stock options exercisedby our employees and sales of stock under our employee stock purchaseplan.  We received net proceeds from the February 2007Financing of approximately $50.3 million, after deducting underwritingcommissions of approximately $3.2 million and other offering expenses ofapproximately $503,000. The shares of common stock were sold under our shelfRegistration Statement on Form S-3, declared effective by the SEC on July 10,2006.

 

Based upon the current status of our productdevelopment plans, we believe that our cash, cash equivalents, and investmentsin marketable securities as of September 30, 2008 should be adequate tosupport our operations through at least the next 12 months, although there canbe no assurance that this can, in fact, be accomplished. Our forecast of theperiod of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.

 

We anticipate continuingour current development programs and/or beginning other long-term developmentprojects involving our product candidates. These projects may require manyyears and substantial expenditures to complete and may ultimately beunsuccessful.  In addition, following ourreview of the results of the PROPEL trial, we intend to submit an NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL asexpeditiously as possible.  We expect toincur significant costs relating to preparations for the potential commerciallaunch of pralatrexate, including pre-commercial scale up of manufacturing anddevelopment of sales and marketing capabilities, prior to the receipt ofregulatory approval to market pralatrexate. Therefore, we will need to raise additional capital to support ourfuture operations, including the potential commercialization of pralatrexate ifapproved for marketing.  Our actualcapital requirements will depend on many factors, including:

·       thetiming and outcome of our ongoing PROPEL trial;

·       thetiming and costs associated with conducting preclinical and clinicaldevelopment of our product candidates, as well as our evaluation of, anddecisions with respect to, additional therapeutic indications for which we maydevelop our product candidates;

·       thetiming and costs associated with developing sales and marketing capabilitiesand commercializing our product candidates, if approved for marketing;

·       thetiming and costs associated with manufacturing preclinical, clinical andcommercial supplies of our product candidates;

·       thetiming and amount of revenues generated by our business activities, if any; and

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

 

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We may seek to obtain this additional capital througharrangements with corporate partners, equity or debt financings, or from othersources. Such arrangements, if successfully consummated, may be dilutive to ourexisting stockholders. However, there is no assurance that additional financingwill be available when needed, or that, if available, we will obtain suchfinancing on terms that are favorable to our stockholders or us. In particular,the current instability in the global financial markets and lack of liquidityin the credit and capital markets may adversely affect our ability to secureadequate 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 that 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.

 

**Obligationsand Commitments**

 

*Royalty and License Fee Commitments for Pralatrexate(PDX)*

* *

In December 2002, weentered into a license agreement with Memorial Sloan-Kettering Cancer Center,SRI International and Southern Research Institute, as amended, under which weobtained exclusive worldwide rights to a portfolio of patents and patentapplications related to pralatrexate and its uses. Under the terms of theagreement, we paid an up-front license fee of $2.0 million upon execution ofthe agreement and are also required to make certain additional cash paymentsbased upon the achievement of certain clinical development or regulatorymilestones or the passage of certain time periods. To date, we have madeaggregate milestone payments of $2.0 million based on the passage of time. Inthe future, we could make aggregate milestone payments of $1.0 million upon theearlier of achievement of a clinical development milestone or the passage ofcertain time periods (the “Clinical Milestone”), and up to $10.3 million uponachievement of certain regulatory milestones, including regulatory approval tomarket pralatrexate in the U.S. or Europe. The next scheduled payments towardthe Clinical Milestone of $500,000 each are currently due on December 23,2008 and 2009. The up-front license fee and all milestone payments under theagreement have been or will be recorded to research and development expensewhen incurred. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors a royaltybased on a percentage of net revenues arising from sales of the product orsublicense revenues arising from sublicensing the product, if and when suchsales or sublicenses occur.

 

*LeaseCommitments*

* *

On June 16, 2008, weentered into an amendment to the lease agreement for our corporate headquartersfacility.  As part of the amendment weextended the term of the lease from November 1, 2008 for a period of 39months to expire January 31, 2012.  We also will have the right,subject to the terms of the amendment, to extend the term of the leaseagreement for one additional period of three years thereafter. We reduced thenumber of rentable square feet included in the leased premises from 43,956square feet to 34,536 square feet.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, 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, 2007, as amended.

 

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**RecentAccounting Pronouncements**

 

For a description of ourrecent accounting pronouncements, please see Note 8 of the unaudited September 30,2008 financial statements included herein.

 

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

** **

Our financial instruments as of September 30,2008 consisted of cash, cash equivalents, investments in marketable securities,and accounts 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 average duration of theissues in our portfolio of investments in marketable securities as of September 30,2008 was approximately six months.  As ofSeptember 30, 2008, our investments in marketable securities of$75.0 million were all classified as held-to-maturity and were held in avariety of interest-bearing instruments, consisting mainly of high-gradecorporate notes. We did not hold any derivative instruments, foreign exchangecontracts, asset backed securities, mortgage backed securities, auction ratesecurities, or securities of issuers in bankruptcy in our investment portfolioas of September 30, 2008. 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.  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.  We currently expect tohold our remaining investments in marketable securities as of September 30,2008 to their scheduled maturity, although we intend to continuously monitorour investment portfolio with the primary objectives of preserving principaland maintaining proper liquidity to meet our operating needs.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

** **

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer (the “EvaluatingOfficers”), of the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”).  Based onthat evaluation, our management, including the Evaluating Officers, concludedthat our disclosure controls and procedures were effective as of September 30,2008 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 the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including the Evaluating Officers, 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 September 30,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

The Company and one of its former officers were namedas defendants in a purported securities class action lawsuit filed in May 2004in the U.S. District Court for the District of Colorado (the “District Court”). An amended complaint was filed in August 2004.The lawsuit was brought on behalf of a purported class of purchasers of oursecurities during the period from May 29, 2003 to April 29, 2004, andsought unspecified damages relating to the issuance of allegedly false andmisleading statements regarding EFAPROXYN, one of our former productcandidates, during this period and subsequent declines in our stock price.  On October 20, 2005, the District Courtgranted the defendants’ motion to dismiss the lawsuit with prejudice. In anopinion dated October 20, 2005, the District Court concluded that theplaintiffs’ complaint failed to meet the legal requirements applicable to itsalleged claims.

 

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On November 20,2005, the plaintiffs appealed the District Court’s decision to the U.S. Courtof Appeals for the Tenth Circuit (the “Court of Appeals”).   On February 6,2008, the parties signed a stipulation of settlement, settling the case for$2,000,000. The settlement is subject to various conditions, includingwithout limitation approval of the District Court.  On September 15, 2008, the DistrictCourt issued an order preliminarily approving the settlement and scheduling ahearing on January 21, 2009 to consider final approval of thesettlement.  Neither we nor our formerofficer admits any liability in connection with the settlement.  The amount of the settlement in excess of ourdeductible has been covered by our insurance carrier.  In the event the settlement does not becomefinal, we intend to vigorously defend against the plaintiffs’ appeal.  If the Court of Appeals then were to reversethe District Court’s decision and we were not successful in our defense of suchclaims, we could be forced to make significant payments to the plaintiffs, andsuch payments could have a material adverse effect on our business, financialcondition, results of operations and cash flows to the extent such payments arenot covered by our insurance carriers.  Even if our defense against such claims weresuccessful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect ourbusiness. As of September 30, 2008, we have recorded $2,000,000 in accruedlitigation settlement costs, which represents our best estimate of thepotential gross amount of the settlement costs to be paid to the plaintiffs,and $2,000,000 in prepaid expenses and other assets, which represents theapproximately $235,000 of remaining deductible under our insurance policy paidby us and $1,765,000 paid by our insurance carrier into the settlement fundescrow in September 2008.  A claimsadministrator appointed by the parties will administer the distribution of thesettlement fund to authorized claimants in 2009.

 

**ITEM 1A.  RISKFACTORS**

** **

*Ourbusiness faces significant risks. These risks include those described below andmay include additional risks of which we are not currently aware or which wecurrently do not believe are material. If any of the events or circumstancesdescribed in the following risk factors actually occurs, they may materiallyharm our business, financial condition, operating results and cash flow. As aresult, the market price of our common stock could decline. Additional risksand uncertainties that are not yet identified or that we think are immaterialmay also materially harm our business, operating results and financialcondition.  Stockholders and potential investors inshares 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, as amended,  for the year ended December 31, 2007, inaddition to other information and risk factors in this report.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of the Company.  We are relyingupon the safe harbor for all forward-looking statements in this report, and anysuch statements made by or on behalf of the Company are qualified by referenceto the following cautionary statements, as well as to those set forth elsewherein this report. We consistently update and include our risk factors in ourQuarterly Reports on Form 10-Q. Risk factors that have been substantivelychanged from those set forth in our Annual Report on Form 10-K for theperiod ended December 31, 2007, 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 private and public sale of securities.  For the nine months ended September 30,2008, we had a net loss of $37.0 million. As of September 30, 2008, we had accumulated a deficit during ourdevelopment stage of $284.9 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 our product candidates, conductclinical trials, obtain the necessary regulatory approvals, and manufacture andmarket our product candidates. We may never generate revenue from product salesor become profitable. We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsfor our product candidates, and in preparing for the potential commerciallaunch of our product candidates. We may not be able to continue as a goingconcern if we are unable to generate meaningful amounts of revenue to supportour operations or cannot otherwise raise the necessary funds to support ouroperations.

 

**Our near-term prospects are substantiallydependent on pralatrexate (PDX), our lead product candidate.  If we areunable to successfully develop and obtain regulatory approval for pralatrexatefor the treatment of patients with relapsed or refractory PTCL, our ability togenerate revenue will be significantly delayed.** *

 

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We currently have no products that are approved forcommercial sale. Our product candidates are in various stages of development,and significant research and development, financial resources and personnelwill be required to develop commercially viable products, obtain the necessaryregulatory approvals therefor, and successfully commercialize them. Most of ourefforts and expenditures over the next few years will be devoted topralatrexate (PDX). 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. RH1 is in an earlier stage of developmentrelative to pralatrexate, and if both pralatrexate and RH1 are approved formarketing, we expect that RH1 would not be commercially available until afterpralatrexate is commercially available. Further, certain of the indicationsthat we are pursuing have relatively low incidence rates, which may make itdifficult for us to enroll a sufficient number of patients in our clinicaltrials on a timely basis, or at all, and may limit the revenue potential of ourproduct candidates. If we are unable to successfully develop, obtain regulatoryapproval for and commercialize pralatrexate for the treatment of patients withrelapsed or refractory PTCL, our ability to generate revenue from product saleswill be significantly delayed and our stock price would likely decline.

 

**We cannot predict when or if we will obtain regulatoryapproval to commercialize our product candidates. ***

 

Our product candidates are in the preclinical andclinical stages of development and have not been approved for marketing in theU.S. or any other country. A pharmaceutical product cannot be marketed in theU.S. or most other countries until it has completed a rigorous and extensiveregulatory review and approval process. If we fail to obtain regulatoryapproval to market our product candidates, we will be unable to sell ourproducts and generate revenue, which would jeopardize our ability to continue operatingour business. Satisfaction of regulatory requirements typically takes manyyears, is dependent upon the type, complexity and novelty of the product andrequires the expenditure of substantial resources. Of particular significanceare the requirements covering research and development, testing, manufacturing,quality control, labeling and promotion of drugs for human use. We may notobtain regulatory approval for any product candidates we develop, includingpralatrexate, or we may not obtain regulatory review of such product candidatesin a timely manner. For a complete description of the regulatory approvalprocess and related risks, please refer to the “Government Regulation” sectionof Item 1 of our Annual Report on Form 10-K for the year ended December 31,2007, as amended.

 

**If our product candidates, including pralatrexate,fail to meet safety and efficacy endpoints in clinical trials, they will notreceive regulatory approval and we will be unable to market them. ***

** **

Our product candidatesmay not prove to be safe and efficacious in clinical trials and may not meetall of the applicable regulatory requirements needed to receive regulatoryapproval. The clinical development and regulatory approval process is extremelyexpensive and takes many years. Failure can occur at any stage of development,and the timing of any regulatory approval cannot be accurately predicted. Inaddition, failure to comply with the FDA and other applicable U.S. and foreignregulatory requirements applicable to clinical trials may subject us toadministrative or judicially imposed sanctions.

 

As part of the regulatoryprocess, we must conduct clinical trials for each product candidate todemonstrate safety and efficacy to the satisfaction of the FDA and otherregulatory authorities abroad. The number and design of clinical trials thatwill be required varies depending on the product candidate, the condition beingevaluated, the trial results and regulations applicable to any particularproduct candidate. The design of our clinical trials is based on manyassumptions about the expected effect of our product candidates, and if thoseassumptions prove incorrect, the clinical trials may not demonstrate the safetyor efficacy of our product candidates. Preliminary results may not be confirmedupon full analysis of the detailed results of a trial, and prior clinical trialprogram designs and results may not be predictive of future clinical trialdesigns or results. Product candidates in later stage clinical trials may failto show the desired safety and efficacy despite having progressed throughinitial clinical trials with acceptable endpoints. For example, we terminatedthe development of EFAPROXYN, one of our former product candidates, when itfailed to demonstrate statistically significant improvement in overall survivalin the targeted patients in a Phase 3 clinical trial. If our productcandidates fail to show clinically significant benefits, they will not beapproved for marketing.

 

Even if we achieve positive interim results in clinicaltrials, these results do not necessarily predict final results, and acceptableresults in early trials may not be repeated in later trials. Data obtained frompreclinical and clinical activities are susceptible to varying interpretationsthat could delay, limit or prevent regulatory clearances, and the FDA canrequest that we conduct additional clinical trials. A number of companies inthe pharmaceutical industry have suffered significant 

 

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setbacks in advanced clinical trials, even afterpromising results in earlier trials. As a result, there can be no assurancethat our PROPEL trial will achieve its primary or secondary endpoints. 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, whether for pralatrexate orany other product candidate, it would significantly increase our expenses anddelay potential marketing of our product candidates.

 

We completed patientenrollment in our pivotal Phase 2 PROPEL trial in April 2008. Wecannot assure you that the design of, or data collected from, the PROPEL trialwill be adequate to demonstrate the safety and efficacy of pralatrexate for thetreatment of patients with relapsed or refractory PTCL, or otherwise besufficient to support FDA or any foreign regulatory approval. If the PROPELtrial fails to achieve its safety and efficacy endpoints, we may be unable toobtain regulatory approval to commercialize pralatrexate, and our business andstock price would be harmed. Further, even if we believe the data from thetrial are positive, the FDA may disagree with our interpretation and determinethat the data are not sufficient to support approval. If we fail to obtainregulatory approval for pralatrexate or any of our other current or futureproduct candidates, we will be unable to market and sell them and therefore maynever generate meaningful amounts of revenue or become profitable.

 

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

** **

We do not know when ourcurrent clinical trials, including our PROPEL trial, will be completed, if atall. We also cannot accurately predict when other planned clinical trials willbegin or be completed. Many factors affect patient enrollment, including thesize of the patient population, the proximity of patients to clinical sites,the eligibility criteria for the trial, competing clinical trials and new drugsapproved for the conditions we are investigating. Other companies areconducting clinical trials and have announced plans for future trials that areseeking or likely to seek patients with the same diseases as those we arestudying. Competition for patients in some cancer trials is particularlyintense because of the limited number of leading specialist physicians and thegeographic concentration of major clinical centers.

 

As 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.

 

**While we have negotiated a special protocol assessmentwith the FDA relating to our PROPEL trial, this agreement does not guaranteeany particular outcome from regulatory review of the trial or the product,including any regulatory approval. ***

** **

The protocol for the PROPEL trial was reviewed by theFDA under its special protocol assessment, or SPA process, which allows for FDAevaluation of a clinical trial protocol intended to form the primary basis ofan efficacy claim in support of a new drug application, and provides anagreement that the study design, including trial size, clinical endpoints anddata analyses are acceptable to the FDA. However, the SPA agreement is not aguarantee of approval, and we cannot be certain that the design of, or datacollected from, the PROPEL trial will be adequate to demonstrate the safety andefficacy of pralatrexate for the treatment of patients with relapsed orrefractory PTCL, or otherwise be sufficient to support FDA or any foreignregulatory approval.  In addition, theresponse rate, duration of response and safety profile required to support FDAapproval are not specified in the PROPEL trial protocol and will be subject toFDA review. Further, the SPA agreement is not binding on the FDA if publichealth concerns unrecognized at the time the SPA agreement was entered intobecome evident, other new scientific concerns regarding product safety orefficacy arise, or if we fail to comply with the agreed upon trial protocols.In addition, the SPA agreement may be changed by us or the FDA on writtenagreement 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 

 

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regulatory approvals as a result of the SPA agreementor the PROPEL trial. Therefore, despite the potential benefits of the SPAagreement, significant uncertainty remains regarding the clinical developmentand regulatory approval process for pralatrexate for the treatment of patientswith relapsed or refractory PTCL.

 

**We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in accordance with regulatoryrequirements, the results are negative or inconclusive or the trials are notwell 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, orIRBs, at the medical institutions where the clinical trials are conducted. Inaddition, clinical trials must be conducted with product candidates producedunder the FDA’s current Good Manufacturing Practices, or cGMP, and may requirelarge numbers of test subjects. Clinical trials may be suspended by the FDA,other foreign governmental agencies, or us for various reasons, including:

 

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

 

·                  deficienciesin the clinical trial operations or trial sites;

 

·                  theproduct candidate may have unforeseen adverse side effects;

 

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

 

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

 

·                  theproduct candidate may not appear to be more effective than current therapies;

 

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

 

·                  wemay not be able to produce sufficient quantities of the product candidate tocomplete 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 IRBs for reexamination, which mayimpact the costs, timing or successful completion of a clinical trial. Due tothese and other factors, our current product candidates or any of our otherfuture product candidates could take a significantly longer time to gainregulatory approval than we expect or may never gain approval, which couldreduce or eliminate our revenue by delaying or terminating the potentialcommercialization of our product candidates.

 

**Reports of adverse events or safety concerns involvingour product candidates or in related technology fields or other companies’clinical trials could delay or prevent us from obtaining regulatory approval ornegatively impact public perception of our product candidates.**

** **

Our product candidates may produce serious adverseevents. These adverse events could interrupt, delay or halt clinical trials ofour product candidates and could result in the FDA or other regulatoryauthorities denying approval of our product candidates for any or all targetedindications. An independent data safety monitoring board, the FDA, otherregulatory authorities or we may suspend or terminate clinical trials at anytime. We cannot assure you that any of our product candidates will be safe forhuman use.

 

At present, there are a number of clinical trialsbeing conducted by other pharmaceutical companies involving small moleculechemotherapeutic agents. If other pharmaceutical companies announce that theyobserved frequent adverse events or unknown safety issues in their trialsinvolving compounds similar to, or competitive with, our product candidates, wecould encounter delays in the timing of our clinical trials or difficulties inobtaining the approval of our product candidates. In addition, the public perceptionof our product candidates 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.

 

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

 

We rely primarily on third parties to conduct ourclinical trials, including the PROPEL trial. As a result, we have had and willcontinue to have less control over the conduct of our clinical trials, thetiming and completion of the trials, the required reporting of adverse eventsand the management of data developed through the trial than would be the caseif we were relying entirely upon our own staff. Communicating with outsideparties can also be challenging, potentially leading to mistakes as well asdifficulties in coordinating activities. Outside parties may have staffingdifficulties, may undergo changes in priorities or may become financiallydistressed, adversely affecting their willingness or ability to conduct ourtrials. We may experience unexpected cost increases that are beyond ourcontrol. Problems with the timeliness or quality of the work of a contractresearch organization may lead us to seek to terminate the relationship and usean alternative service provider. However, making this change may be costly andmay delay our trials, and contractual restrictions may make such a changedifficult or impossible. Additionally, it may be impossible to find a replacementorganization that can conduct our trials in an acceptable manner and at anacceptable cost.

 

**Even if our product candidates meet safety andefficacy endpoints in clinical trials, regulatory authorities may not approvethem, or we may face post-approval problems that require withdrawal of ourproducts from the market. ***

 

The research, testing, manufacturing, labeling, approval, selling,marketing and distribution of drug products are subject to extensive regulationby the FDA and other regulatory authorities in the U.S. and other countries,which regulations differ from country to country. We will not be able tocommercialize any of our product candidates until we have obtained regulatoryapproval. We have limited experience in filing and pursuing applicationsnecessary to gain regulatory approvals, which may place us at risk of delays,overspending and human resources inefficiencies.

 

Our product candidatesmay not be approved even if they achieve their endpoints in clinical trials.Regulatory agencies, including the FDA, or their advisors, may disagree withour interpretations of data from preclinical studies and clinical trials. TheFDA has 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 mitigation strategies(REMS) for a product candidate. In addition, regulatory agencies may notapprove the labeling claims that are necessary or desirable for the successfulcommercialization of our product candidates.

 

Even if we receive regulatory approvals, our productcandidates may later produce adverse events that limit or prevent theirwidespread use or that force us to withdraw those product candidates from themarket. 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 any of our products could harm our business and preventus from ever generating meaningful revenues or achieving profitability.

 

**Even if we receive regulatory approval for our productcandidates, we will be subject to ongoing regulatory obligations and review. ***

** **

Following any regulatory approval of our product candidates,we will be subject to continuing regulatory obligations such as safetyreporting requirements and additional post-marketing obligations, includingregulatory oversight of the promotion and marketing of our products. Inaddition, we or our third-party manufacturers will be required to adhere toregulations setting forth cGMP. These regulations cover all aspects of themanufacturing, storage, testing, quality control and record keeping relating toour product candidates. Furthermore, we or our third-party manufacturers mustpass a pre-approval inspection of manufacturing facilities by the FDA andforeign authorities before obtaining marketing approval and will be subject toperiodic inspection by these regulatory authorities to ensure strict compliancewith cGMP or other applicable government regulations and corresponding foreignstandards. We do not have control over a third-party manufacturer’s compliancewith these regulations and standards. Such inspections may result in complianceissues that could prevent or delay marketing approval, or require theexpenditure of substantial financial or other resources to address. If we orour third-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to fines, suspension or withdrawal ofregulatory approvals, product recalls, seizure of products, operatingrestrictions and criminal prosecution.

 

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**Budget constraints may force us to delay our effortsto develop certain product candidates in favor of developing others, which mayprevent us from commercializing all product candidates as quickly as possible.**

 

Because we have limited resources, and becauseresearch and development is an expensive process, we must regularly assess themost efficient allocation of our research and development budget. As a result,we may have to prioritize development candidates and may not be able to fullyrealize the value of some of our product candidates in a timely manner, if atall.

 

**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 commercializeour product candidates. ***

Based upon the currentstatus of our product development plans, we believe that our cash, cashequivalents, and investments in marketable securities as of September 30, 2008should be adequate to support our operations through at least the next 12months, although there can be no assurance that this can, in fact, beaccomplished.  We anticipate continuingour current development programs and/or beginning other long-term developmentprojects involving our product candidates. These projects may require manyyears and substantial expenditures to complete and may ultimately beunsuccessful.  In addition, following ourreview of the results of the PROPEL trial, we intend to submit an NDA forpralatrexate for the treatment of patients with relapsed or refractory PTCL asexpeditiously as possible.  We expect toincur significant costs relating to preparations for the potential commerciallaunch of pralatrexate, including pre-commercial scale up of manufacturing anddevelopment of sales and marketing capabilities, prior to the receipt ofregulatory approval to market pralatrexate. Therefore, we will need to raise additional capital to support ourfuture operations, including the potential commercialization of pralatrexate ifapproved for marketing.  Our actualcapital requirements will depend on many factors, including:

·       thetiming and outcome of our ongoing PROPEL trial;

·       thetiming and costs associated with conducting preclinical and clinicaldevelopment of our product candidates, as well as our evaluation of, anddecisions with respect to, additional therapeutic indications for which we maydevelop our product candidates;

·       thetiming and costs associated with developing sales and marketing capabilitiesand commercializing our product candidates, if approved for marketing;

·       thetiming and costs associated with manufacturing preclinical, clinical andcommercial supplies of our product candidates;

·       thetiming and amount of revenues generated by our business activities, if any; 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 through arrangements withcorporate partners, equity or debt financings, or from other sources. Sucharrangements, if successfully consummated, may be dilutive to our existingstockholders. However, there is no assurance that additional financing will beavailable when needed, or that, if available, we will obtain such financing onterms that are favorable to our stockholders or us. In particular, the currentinstability in the global financial markets and lack of liquidity in the creditand capital markets may adversely affect our ability to secure adequate capitalto support our future operations.  In theevent that additional funds are obtained through arrangements withcollaborative partners or other sources, such arrangements may require us torelinquish rights to some of our technologies, product candidates or productsunder development that we would otherwise seek to develop or commercializeourselves on terms that are less favorable than might otherwise beavailable.  If we are unable to generatemeaningful amounts of revenue from future product sales, if any, or cannototherwise raise sufficient additional funds to support our operations, we maybe required to delay, reduce the scope of or eliminate one or more of ourdevelopment programs and our business and future prospects for revenue and profitabilitymay be harmed.

 

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

** **

As of September 30,2008, we had $96.4 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. As of September 30, 2008, we had short-term investments inmarketable securities of $70.5 million with a weighted average duration ofapproximately 5.7 months.  As of September 30,2008, we had long-term investments in marketable securities of $4.5 millionwith a weighted average duration of approximately 12.4 months.  Our investments in marketable securities as ofSeptember 30, 2008 primarily consisted of high-grade corporate notes. We didnot hold any derivative instruments, foreign exchange contracts, asset backedsecurities, mortgage backed securities, auction rate securities, or securitiesof issuers in bankruptcy in our investment portfolio as of September 30,2008.

 

Based upon the currentstatus of our product development plans, we believe that our cash, cashequivalents, and investments in marketable securities as of September 30,2008 should be adequate to support our operations through at least the next 12months, although there can be no assurance that this can, in fact, beaccomplished.  In particular, ourliquidity, capital resources and results of operations may be adverselyaffected by declines in the value of our investments in marketablesecurities.  The value of our investmentsin marketable securities may be adversely affected by rating downgrades orbankruptcies affecting the issuers of such securities, whether caused byinstability in the global financial markets, lack of liquidity in the creditand capital markets, or other factors. For example, during the three months ended September 30, 2008, werealized a loss of approximately $552,000 on the sale of certain of ourinvestments in marketable securities, which were sold in order to preserve ourprincipal as the issuers of these securities experienced significantdeteriorations in their creditworthiness as evidenced by investment ratingdowngrades.  We currently expect to holdour remaining investments in marketable securities as of September 30,2008 to their scheduled maturity, although we intend to continuously monitorour investment portfolio with the primary objectives of preserving principaland maintaining proper liquidity to meet our operating needs.

 

**If we are unable to effectively protect ourintellectual property, we will be unable to prevent third parties from usingour technology, which would impair our competitiveness and ability tocommercialize our product candidates. In addition, enforcing our proprietaryrights may be expensive and result in increased losses. ***

** **

Our success will dependin part on our ability to obtain and maintain meaningful patent protection forour products, both in the U.S. and in other countries. We rely on patents toprotect a large part of our intellectual property and our competitive position.Any patents issued to or licensed by us could be challenged, invalidated,infringed, circumvented or held unenforceable, based on, among other things,obviousness, inequitable conduct, anticipation or enablement. In addition, itis possible that no patents will issue on any of our licensed patentapplications. It is possible that the claims in patents that have been issuedor licensed to us or that may be issued or licensed to us in the future willnot be sufficiently broad to protect our intellectual property or that thepatents will not provide protection against competitive products or otherwisebe commercially valuable. Failure to obtain and maintain adequate patent protectionfor our intellectual property would impair our ability to be commerciallycompetitive.

 

Our commercial successwill also depend in part on our ability to commercialize our product candidateswithout infringing patents or other proprietary rights of others or breachingthe licenses granted to us. We may not be able to obtain a license tothird-party technology that we may require to conduct our business or, ifobtainable, we may not be able to license such technology at a reasonable cost.If we fail to obtain a license to any technology that we may require tocommercialize our technologies or product candidates, or fail to obtain alicense at a reasonable cost, we will be unable to commercialize the affectedproduct or to commercialize it at a price that will allow us to becomeprofitable.

 

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 and consultants. Our employees andconsultants are required to enter into confidentiality agreements with us. Wealso enter into non-disclosure agreements with 

 

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our collaborators andvendors, which agreements are intended to protect our confidential informationdelivered to third parties for research and other purposes. However, theseagreements could be breached and we may not have adequate remedies for anybreach, or our trade secrets and proprietary know-how could otherwise becomeknown or be independently discovered by others.

 

Furthermore, as with any pharmaceutical company, ourpatent and other proprietary rights are subject to uncertainty. Our patentrights related to our product candidates might conflict with current or futurepatents and other proprietary rights of others. For the same reasons, theproducts of others could infringe our patents or other proprietary rights.Litigation or patent interference proceedings, either of which could result insubstantial costs to us, may be necessary to enforce any of our patents orother proprietary rights, or to determine the scope and validity orenforceability of other parties’ proprietary rights. We may be dependant onthird parties, including our licensors, for cooperation and information thatmay be required in connection with the defense and prosecution of our patentsand other proprietary rights. The defense and prosecution of patent andintellectual property infringement claims are both costly and time consuming,even if the outcome is favorable to us. Any adverse outcome could subject us tosignificant liabilities to third parties, require disputed rights to be licensedfrom third parties, or require us to cease selling our future products. We arenot currently a party to any patent or other intellectual property infringementclaims.

 

**We do not have manufacturing facilities orcapabilities and are dependent on third parties to fulfill our manufacturingneeds, which could result in the delay of clinical trials, regulatoryapprovals, product introductions and commercial sales.**

** **

We are dependent on thirdparties for the manufacture and storage of our product candidates for clinicaltrials and, if approved, for commercial sale. If we are unable to contract fora sufficient supply of our product candidates on acceptable terms, or if weencounter delays or difficulties in the manufacturing process or ourrelationships with our manufacturers, we may not have sufficient product toconduct or complete our clinical trials or support commercial requirements forour product candidates, if approved for marketing.

 

Both pralatrexate and RH1are cytotoxic, which requires the manufacturers of these substances to havespecialized equipment and safety systems to handle such substances. Inaddition, the starting materials for pralatrexate require custom preparations,which will require us to manage an additional set of suppliers to obtain theneeded supplies 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 other 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 affect on our ability to continue clinical development of our productcandidates or commercialize any future products.

 

Even if we obtainapproval to market our product candidates in one or more indications, ourcurrent or future manufacturers may be unable to accurately and reliablymanufacture commercial quantities of our product candidates at reasonablecosts, on a timely basis and in compliance with the FDA’s cGMP. If our currentor future contract manufacturers fail in any of these respects, our ability totimely complete our clinical trials, obtain required regulatory approvals andsuccessfully commercialize our product candidates will be materially andadversely affected. This risk may be heightened with respect to pralatrexateand RH1 as there are a limited number of fill/finish manufacturers with theability to handle cytotoxic products such as pralatrexate and RH1. Our relianceon contract manufacturers exposes us to additional risks, including:

 

·       delays or failure tomanufacture sufficient quantities needed for clinical trials in accordance withour specifications or to deliver such quantities on the dates we require;

 

·       our current and futuremanufacturers are subject to ongoing, periodic, unannounced inspections by theFDA and corresponding state and international regulatory authorities forcompliance with strictly enforced cGMP regulations and similar state andforeign standards, and we do not have control over our contract manufacturers’compliance with these regulations and standards;

 

·       our manufacturers may notbe able to comply with applicable regulatory requirements, which would prohibitthem from manufacturing products for us;

 

·       our manufacturers may have staffingdifficulties, may undergo changes in control or may become financially 

 

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distressed, adversely affecting their willingness orability to manufacture products for us;

 

·       our manufacturers might notbe able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements and may result in substantial delays in meetingmarket demands;

 

·       if we need to change toother commercial manufacturing contractors, the FDA and comparable foreignregulators must approve our use of any new manufacturer, which would requireadditional testing, regulatory filings and compliance inspections, and the newmanufacturers would have to be educated in, or themselves develop substantiallyequivalent processes necessary for, the production of our products; and

 

·       we may not haveintellectual 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 factors could result in the delay ofclinical trials, regulatory submissions, required approvals orcommercialization of our product candidates. They could also entail highercosts and result in our being unable to effectively commercialize our productcandidates.

 

**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 our product candidates or otherwise be subject tounfavorable terms.**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  strategicpartners may not commit adequate resources to the marketing and distribution ofany future products, limiting our potential revenues from these products;

 

·                  disputesmay arise between us and our strategic partners that result in the delay ortermination of the research, development or commercialization of our productcandidates or that result in costly litigation or arbitration that divertsmanagement’s attention and consumes resources;

 

·                  strategicpartners may experience financial difficulties;

 

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

 

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

 

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

 

·                  strategicpartners could terminate the arrangement or allow it to expire, which woulddelay the development and may increase the cost of developing our productcandidates.

 

**Acceptance of our products in the marketplace isuncertain, and failure to achieve market acceptance will limit our ability togenerate revenue and become profitable.**

** **

Even if ourproducts are approved for marketing, they may not achieve market acceptance.The degree of market acceptance will depend upon a number of factors,including:

 

·       the receipt of timely regulatory approval forthe uses that we are studying;

 

·       the establishment and demonstration in themedical community of the safety and efficacy of our products and theirpotential advantages over existing and newly developed therapeutic products;

 

·       the easeof use of our products;

 

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

 

·       the scope and effectiveness of our sales andmarketing efforts.

 

Physicians, patients, payors or the medical communityin general may be unwilling to accept, utilize or recommend the use of any ofour products.

 

**The status of reimbursement from third-party payorsfor newly approved health care drugs is uncertain and failure to obtainadequate coverage and reimbursement could limit our ability to generaterevenue.**

** **

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

 

Significant uncertainty exists as to the reimbursementstatus of newly approved health care products. Third-party payors, includingMedicare, are challenging the prices charged for medical products and services.Government and other third-party payors increasingly are attempting to containhealth care costs by limiting both coverage and the level of reimbursement fornew drugs and by refusing, in some cases, to provide coverage for uses ofapproved products for disease conditions for which the FDA has not grantedlabeling approval. Third-party insurance coverage may not be available topatients for our products. If government and other third-party payors do notprovide adequate coverage and reimbursement levels for our product candidates,their market acceptance may be reduced.

 

**Health care reform measures could adversely affect ourbusiness.**

** **

The business and financial condition of pharmaceuticaland biotechnology companies are affected by the efforts of governmental andthird-party payors to contain or reduce the costs of health care. In the U.S.and in foreign jurisdictions there have been, and we expect that there willcontinue to be, a number of legislative and regulatory proposals aimed atchanging the health care system. For example, in some countries other than theU.S., pricing of prescription drugs is subject to government control, and weexpect proposals to implement similar controls in the U.S. to continue. We areunable to predict what additional legislation or regulation, if any, relatingto the health care industry or third-party coverage and reimbursement may beenacted in the future or what effect such legislation or regulation would haveon our business. The pendency or approval of such proposals or reforms couldresult in a decrease in our stock price or limit our ability to raise capitalor to obtain strategic partnerships or licenses.

 

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*** ***

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

** **

The FDA has awardedorphan drug status to pralatrexate for the treatment of patients with T-celllymphoma. Under the Orphan Drug Act, if we are the first company to receive FDAapproval for this drug for the designated orphan drug indication, we willobtain seven years of marketing exclusivity during which the FDA may notapprove another company’s application for the same drug for the same orphanindication. Orphan drug exclusivity would not prevent FDA approval of adifferent drug for the orphan indication or the same drug for a differentindication.

 

**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:

 

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

 

·       federal false claims laws that prohibit, amongother things, individuals or entities from knowingly presenting, or causing tobe presented, claims for payment from Medicare, Medicaid, or other third-partypayors that are false or fraudulent;

 

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

 

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

 

·       state law equivalents of each of the 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 provecostly.

 

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*** ***

**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 our products effectively.**

** **

We have limitedexperience in sales, marketing and distribution. To directly market anddistribute any products, we must build a sales and marketing organization withappropriate technical expertise and distribution capabilities. We may attemptto build such a sales and marketing organization on our own or with theassistance of a contract sales organization. For some market opportunities, wemay need to enter into co-promotion or other licensing arrangements with largerpharmaceutical or biotechnology firms in order to increase the likelihood ofcommercial success for our products. We may not be able to establish sales, marketingand distribution capabilities of our own or enter into such arrangements withthird parties in a timely manner or on acceptable terms. To the extent that weenter into co-promotion or other licensing arrangements, our product revenuesare likely to be lower than if we directly marketed and sold our products, andsome or all of the revenues we receive will depend upon the efforts of thirdparties, and these efforts may not be successful. Additionally, buildingmarketing and distribution capabilities may be more expensive than weanticipate, requiring us to divert capital from other intended purposes orpreventing us from building our marketing and distribution capabilities to thedesired levels.

 

**If our competitorsdevelop and market products that are more effective than ours, our commercialopportunity will be reduced or eliminated.**

** **

Even if we obtain thenecessary regulatory approvals to market pralatrexate or any other productcandidate, our commercial opportunity will be reduced or eliminated if ourcompetitors develop and market products that are more effective, have fewerside effects or are less expensive than our product candidates. Our potentialcompetitors include large, fully-integrated pharmaceutical companies and moreestablished biotechnology companies, both of which have significant resourcesand expertise in research and development, manufacturing, testing, obtainingregulatory approvals and marketing. Academic institutions, government agencies,and other public and private research organizations conduct research, seekpatent protection and establish collaborative arrangements for research,development, manufacturing and marketing. It is possible that competitors willsucceed in developing technologies that are more effective than those beingdeveloped by us or that would 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 of ourproduct candidates.**

** **

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 product candidates. 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 liability insurancefor any products approved for marketing.

 

**We are currentlyinvolved in a securities class action litigation, which could harm our businessif management attention is diverted or the claims are decided against us. ***

** **

We have been named as adefendant in a purported securities class action lawsuit seeking unspecifieddamages relating to the issuance of allegedly false and misleading statementsregarding EFAPROXYN during the period from May 29, 2003 to April 29,2004 and subsequent 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 issubject to various conditions, including without limitation approval of theDistrict Court.  On September 15,2008, the District Court issued an order preliminarily approving the settlementand scheduling a hearing on January 21, 2009 to consider final approval ofthe settlement.  Neither we nor ourformer officer admits any liability in connection with the settlement.  The amount of the settlement in excess of ourdeductible has been covered by our insurance carrier.  In the event the settlement does not becomefinal, we intend to vigorously defend against the plaintiffs’ appeal. If theCourt of Appeals then were to reverse the District Court’s decision and we werenot successful in our defense of such claims, we could be forced to makesignificant payments to the plaintiffs, and such payments could have a materialadverse effect on 

 

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our business, financialcondition, results of operations and cash flows to the extent such payments arenot covered by our insurance carriers. Even if our defense against such claimswere successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect ourbusiness. As of September 30, 2008, we have recorded $2,000,000 in accruedlitigation settlement costs, which represents our best estimate of thepotential gross amount of the settlement costs to be paid to the plaintiffs,and $2,000,000 in prepaid expenses and other assets, which represents theapproximately $235,000 of remaining deductible under our insurance policy paidby us and $1,765,000 paid by our insurance carrier into the settlement fundescrow in September 2008.  A claimsadministrator appointed by the parties will administer the distribution of thesettlement fund to authorized claimants in 2009.

 

**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 our product candidates or result intermination of them in their entirety. Mr. Berns and Dr. Cagnoni, aswell 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.

 

**We cannotguarantee that we will be in compliance with all potentially applicableregulations.**

** **

The development,manufacturing, and, if approved, pricing, marketing, sale and reimbursement ofour products, together with our general operations, are subject to extensiveregulation by federal, state and other authorities within the U.S. and numerousentities outside of the U.S. We also have significantly fewer employees thanmany other companies that have the same or fewer product candidates in latestage clinical development and we rely heavily on third parties to conduct manyimportant functions.

 

As a publicly-tradedcompany, we are subject to significant regulations, some of which have onlyrecently been adopted, including the Sarbanes Oxley Act of 2002. We cannotassure you that we are or will be in compliance with all potentially applicableregulations. If we fail to comply with the Sarbanes Oxley Act of 2002 or anyother regulations we could be subject to a range of consequences, includingrestrictions on our ability to sell equity securities or otherwise raisecapital funds, the de-listing of our common stock from the Nasdaq GlobalMarket, suspension or termination of our clinical trials, failure to obtainapproval to market our product candidates, 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, the effectiveness of ourinternal 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 

 

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design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraudinvolving a company have been, or will be, detected. The design of any systemof controls is based in part on certain assumptions about the likelihood offuture events, and we cannot assure you that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become ineffective because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected. We cannot assure you thatwe or our independent registered public accounting firm will not identify amaterial weakness in our internal controls in the future. A material weaknessin our internal controls over financial reporting would require management andour independent registered public accounting firm to consider our internalcontrols as ineffective. If our internal controls over financial reporting arenot considered effective, we may experience a loss of public confidence, whichcould have an adverse effect on our business and on the market price of ourcommon stock.

 

**If we do notprogress in our programs as anticipated, our stock price could decrease.**

** **

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. (“Warburg”) and certain other investors pursuant to which we issuedand sold an aggregate of 2,352,443 shares of our Series A ExchangeablePreferred Stock (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 closed an underwritten offering of 9,000,000 shares of common stock, ofwhich Baker Brothers Life Sciences, L.P. and certain other affiliated funds(collectively “Baker”) purchased 3,300,000 shares, at a price per share of$6.00, for aggregate gross proceeds of approximately $54.0 million (the “February 2007Financing”). In connection therewith, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which mightbe to change or influence the control of the Company.

 

On May 29, 2008, wesold 12,420,000 shares of our common stock in an underwritten public offeringat a price of $5.64 per share, for aggregate 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 September 30,2008, we had 81,140,937 shares of common stock outstanding, of which Warburgowned 26,124,430 shares, or approximately 32.2% of the voting power of ouroutstanding common stock, and Baker owned 11,248,621 shares, or approximately13.9% of the voting power of our outstanding common stock. Although each ofWarburg and Baker have entered into a standstill agreement with us, they are,and will continue to be, able to exercise substantial influence over anyactions requiring stockholder approval.

 

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

** **

Provisions of our amendedand restated certificate of incorporation and bylaws, as well as provisions ofDelaware law, could make it more difficult for a third party to acquire us,even if doing so would benefit our stockholders. In addition, these provisionsmay frustrate or prevent any attempts by our stockholders to replace or removeour current management by 

 

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making it more difficultfor stockholders to replace members of our board of directors. Because ourboard of directors is responsible for appointing the members of our managementteam, these provisions could in turn affect any attempt by our stockholders toreplace current members of our management team. These provisions include:

 

·       authorizing the issuance of “blank check”preferred stock that could be issued by our board of directors to increase 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, we aresubject 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 which resultedin Warburg and Baker becoming interested stockholders. However, in connectionwith its purchase of Exchangeable Preferred in March 2005, Warburg 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.  Similarly, in connection withthe February 2007 Financing, Baker entered into a standstill agreementagreeing not to pursue certain activities the purpose or effect of which may beto change or influence the 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 group whohas acquired or announced an offer to acquire 15% or more of our outstandingcommon stock) would generally become exercisable for shares of our common stockat a discount. Because the potential acquirer’s rights would not becomeexercisable for our shares of common stock at a discount, the potentialacquirer would suffer substantial dilution and may lose its ability to acquireus. In addition, the existence of the plan itself may deter a potentialacquirer from acquiring or making an offer to acquire us.  As a result, either by operation of the planor by its potential deterrent effect, mergers and acquisitions of the Companythat our stockholders may 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 the 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.

 

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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 results of our clinicaltrials, including our pivotal Phase 2 PROPEL trial;

 

·       actual or anticipated regulatory approvals ornon-approvals of our product candidates, including pralatrexate, or ofcompeting product candidates;

 

·       changes in laws or regulations applicable to ourproduct candidates;

 

·       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 executive officers,directors and five percent stockholders; and

 

·       economic and other external factors, includingdisasters or crises.

 

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

 

**We are required torecognize stock-based compensation expense relating to employee stock options,restricted stock, and stock purchases under our Employee Stock Purchase Plan,and the amount of expense we recognize may not**

 

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**accurately reflectthe value of our share-based payment awards. Further, the recognition ofstock-based compensation expense will cause our net losses to increase and maycause the trading price of our common stock to fluctuate.**

** **

On January 1, 2006, weadopted SFAS No. 123 (Revised 2004), *Share-Based Payment*(“SFAS 123R”), which requires the measurement and recognition of compensationexpense for all stock-based compensation based on estimated fair values. As aresult, our operating results for the three and nine months ended September 30,2008 and 2007 include, and future periods will include, a charge forstock-based compensation related to employee stock options, restricted stockand discounted employee stock purchases. The application of SFAS 123R requires the use of an option-pricingmodel to determine the fair value of share-based payment awards.  This determination of fair value is affectedby our stock price as well as assumptions regarding a number of highly complexand subjective variables. These variables include, but are not limited to, ourexpected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. Option-pricing models weredeveloped for use in estimating the value of traded options that have novesting or hedging restrictions and are fully transferable. Because ouremployee stock options have certain characteristics that are significantlydifferent from traded options, and because changes in the subjectiveassumptions can materially affect the estimated value, in management’s opinionthe existing valuation models may not provide an accurate measure of the fairvalue of our employee stock options.

 

SFAS 123R has had amaterial impact on our financial statements and results of operations. We alsoexpect that SFAS 123R will have a material impact on our future financialstatements and results of operations. We cannot predict the effect that ourstock-based compensation expense will have on the trading price of our commonstock.

 

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

** **

If our stockholders sellsubstantial amounts of our common stock, the market price of our common stockmay decline. These sales also might make it more difficult for us to sellequity or equity-related securities in the future at a time and price that weconsider appropriate. We are unable to predict the effect that sales may haveon the then prevailing market price of our common stock.  We have entered into a Registration RightsAgreement with Warburg and the other purchasers of our Exchangeable Preferredpursuant to which such investors are entitled to certain registration rightswith respect to the shares of common stock that we issued upon exchange of theExchangeable Preferred.

 

In addition, we will needto raise substantial additional capital in the future to fund ouroperations.  If we raise additional fundsby issuing equity securities, the market price of our common stock may declineand our existing 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. | ** ** | **Description**                                                                                 |
|------------------|------------|-------------------------------------------------------------------------------------------------|
| 10.1             |       | Corporate Bonus  Plan, as amended and restated effective September 15, 2008.               |
| 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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#                    Thecertifications attached as Exhibit 32.1 that accompany this QuarterlyReport on Form 10-Q are not deemed filed with the Securities and ExchangeCommission and are not to be incorporated by reference into any filing of AllosTherapeutics, Inc. under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporation languagecontained in such filing.

** **

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** **

**SIGNATURES**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date: November 5,  2008 | **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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