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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**Commission File Number000-29815**

 

**Allos Therapeutics, Inc.**

(Exact name of Registrant as specified in itscharter)

 

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

 

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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 check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the  preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes o    No o

 

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

 

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

 

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

 

As of July 26, 2010, there were 105,332,676 sharesof the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

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**ALLOS THERAPEUTICS, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I.   Financial Information | 3                                                                                               |
|-------------------------------------------|-------------------------------------------------------------------------------------------------|
| ITEM 1.                                   | Financial  Statements (unaudited)                                                               | 3 |
|                                      | Balance Sheets — as of June 30, 2010 and  December 31, 2009                      | 3 |
|                                      | Statements of Operations — for the three and six  months ended June 30, 2010 and 2009 | 4 |
|                                      | Statements of Cash Flows — for the six months ended  June 30, 2010 and 2009           | 5 |
|                                      | Notes to Financial Statements                                                                   | 6 |
| ITEM 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     | 16 |
| ITEM 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                     | 28 |
| ITEM 4.                                   | Controls and  Procedures                                                                        | 28 |
| PART II.   Other Information    | 28                                                                                              |
| ITEM 1.                                   | Legal Proceedings                                                                               | 28 |
| ITEM  1A.                                 | Risk  Factors                                                                                   | 29 |
| ITEM 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                    | 46 |
| ITEM 3.                                   | Defaults  Upon Senior Securities                                                                | 46 |
| ITEM 4.                                   | Removed  and Reserved                                                                           | 46 |
| ITEM 5.                                   | Other  Information                                                                              | 46 |
| ITEM 6.                                   | Exhibits                                                                                        | 46 |
| SIGNATURES                                | 47                                                                                              |

 

NOTE:

 

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

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**ALLOSTHERAPEUTICS, INC.BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                                      | ** ** | **June 30,********2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                                                 |       |                          |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                       |       | $                             | 76,790     |                        | $          | 141,185 |   |
| Short-term investments                                                                                                                                                                                                                                                          |       | 45,221                        |       | 17,016                      |       |
| Restricted cash                                                                                                                                                                                                                                                                 |       | 238                           |       | 238                         |       |
| Accounts receivable                                                                                                                                                                                                                                                             |       | 9,943                         |       | 4,862                       |       |
| Inventory                                                                                                                                                                                                                                                                       |       | 235                           |       | 36                          |       |
| Prepaid expenses and other  assets                                                                                                                                                                                                                                              |       | 4,561                         |       | 3,808                       |       |
| Total current assets                                                                                                                                                                                                                                                            |       | 136,988                       |       | 167,145                     |       |
| Property and equipment,  net                                                                                                                                                                                                                                                    |       | 2,500                         |       | 2,169                       |       |
| Long-term investments                                                                                                                                                                                                                                                           |       | 338                           |       | 343                         |       |
| Intangible asset, net                                                                                                                                                                                                                                                           |       | 5,452                         |       | 5,679                       |       |
| Other assets                                                                                                                                                                                                                                                                    |       | 48                            |       | 48                          |       |
| Total assets                                                                                                                                                                                                                                                                    |       | $                             | 145,326    |                        | $          | 175,384 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                  |       |                          |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                            |       |                          |       |                        |       |
| Trade accounts payable                                                                                                                                                                                                                                                          |       | $                             | 2,863      |                        | $          | 2,035 |   |
| Deferred revenue                                                                                                                                                                                                                                                                |       | 1,153                         |       | 669                         |       |
| Accrued liabilities                                                                                                                                                                                                                                                             |       | 12,432                        |       | 13,136                      |       |
| Total current liabilities                                                                                                                                                                                                                                                       |       | 16,448                        |       | 15,840                      |       |
| Commitments and  contingencies (Note 10)                                                                                                                                                                                                                                   |       |                          |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                      |       |                          |       |                        |       |
| Preferred stock, $0.001  par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                                                                                                                               |       | —                        |       | —                      |       |
| Series A Junior  Participating Preferred Stock, $0.001 par value; 1,500,000 shares designated  from authorized preferred stock at June 30, 2010 and December 31,  2009; no shares issued or outstanding                                                          |       | —                        |       | —                      |       |
| Common stock, $0.001 par  value; 200,000,000 and 150,000,000 shares authorized at June 30, 2010  and December 31, 2009, respectively; 105,330,426 and 104,234,409 shares  issued and outstanding at June 30, 2010 and December 31, 2009,  respectively |       | 105                           |       | 104                         |       |
| Additional paid-in capital                                                                                                                                                                                                                                                      |       | 542,486                       |       | 532,652                     |       |
| Accumulated deficit                                                                                                                                                                                                                                                             |       | (413,713                      | )          | (373,212                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                 |       | 128,878                       |       | 159,544                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                |       | $                             | 145,326    |                        | $          | 175,384 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

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**ALLOSTHERAPEUTICS, INC.STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Net product sales                              |       | $                                               | 7,885      |                                          | $          | — |   | $ | 15,292 |   | $ | — |   |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Operating costs and  expenses:                 |       |                                            |       |                                          |       |   |   |   |   |
| Cost of sales, excluding  amortization expense |       | 752                                             |       | —                                        |       | 1,441 |   | — |   |
| Research and development                       |       | 6,522                                           |       | 8,776                                         |       | 15,807 |   | 17,137 |   |
| Selling, general and  administrative           |       | 20,517                                          |       | 8,037                                         |       | 38,449 |   | 14,999 |   |
| Amortization of intangible  asset              |       | 114                                             |       | —                                        |       | 227 |   | — |   |
| Total operating costs and  expenses            |       | 27,905                                          |       | 16,813                                        |       | 55,924 |   | 32,136 |   |
| Operating loss                                 |       | (20,020                                         | )          | (16,813                                       | )          | (40,632 | ) | (32,136 | ) |
| Interest and other income,  net                |       | 66                                              |       | 6                                             |       | 131 |   | 179 |   |
| Net loss                                       |       | $                                               | (19,954    | )                                             | $          | (16,807 | ) | $ | (40,501 | ) | $ | (31,957 | ) |
| Net loss per share: basic  and diluted         |       | $                                               | (0.19      | )                                             | $          | (0.19 | ) | $ | (0.39 | ) | $ | (0.38 | ) |
| Weighted average shares:  basic and diluted    |       | 105,187,206                                     |       | 89,011,044                                    |       | 104,896,286 |   | 85,075,532 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Cash Flows From Operating  Activities:                                                                                  |       |                                          |       |   |   |
| Net loss                                                                                                                |       | $                                             | (40,501    | ) | $ | (31,957 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                                            |       |                                          |       |   |   |
| Depreciation and  amortization                                                                                          |       | 440                                           |       | 190 |   |
| Stock-based compensation  expense                                                                                       |       | 5,715                                         |       | 4,848 |   |
| Amortization of intangible  asset                                                                                       |       | 227                                           |       | — |   |
| Realized loss on sale of  marketable securities                                                                         |       | —                                        |       | 157 |   |
| Other                                                                                                                   |       | 3                                             |       | 149 |   |
| Changes in operating  assets and liabilities:                                                                           |       |                                          |       |   |   |
| Accounts receivable                                                                                                     |       | (4,597                                        | )          | — |   |
| Prepaid expenses and other  assets                                                                                      |       | (564                                          | )          | 799 |   |
| Interest receivable on  investments                                                                                     |       | (62                                           | )          | 653 |   |
| Inventory                                                                                                               |       | (195                                          | )          | — |   |
| Trade accounts payable                                                                                                  |       | 796                                           |       | 1,396 |   |
| Accrued liabilities                                                                                                     |       | (897                                          | )          | (1,881 | ) |
| Net cash used in operating  activities                                                                                  |       | (39,635                                       | )          | (25,646 | ) |
| Cash Flows From Investing  Activities:                                                                                  |       |                                          |       |   |   |
| Acquisition of property  and equipment                                                                                  |       | (741                                          | )          | (554 | ) |
| Purchases of investments                                                                                                |       | (45,128                                       | )          | (36 | ) |
| Proceeds from maturities  of investments                                                                                |       | 16,988                                        |       | 39,250 |   |
| Proceeds from sales of  marketable securities                                                                           |       | —                                        |       | 3,894 |   |
| Net cash (used in)  provided by investing activities                                                                    |       | (28,881                                       | )          | 42,554 |   |
| Cash Flows From Financing  Activities:                                                                                  |       |                                          |       |   |   |
| Proceeds from issuance of  common stock associated with stock options, stock warrants and employee stock  purchase plan |       | 4,089                                         |       | 1,314 |   |
| Proceeds from issuance of  common stock, net of issuance costs                                                          |       | 32                                            |       | 46,941 |   |
| Net cash provided by  financing activities                                                                              |       | 4,121                                         |       | 48,255 |   |
| Net (decrease) increase in  cash and cash equivalents                                                                   |       | (64,395                                       | )          | 65,163 |   |
| Cash and cash equivalents,  beginning of period                                                                         |       | 141,185                                       |       | 30,458 |   |
| Cash and cash equivalents,  end of period                                                                               |       | $                                             | 76,790     |   | $ | 95,621 |   |
| Supplemental  Schedule of Cash and Non-cash Activities:                                                            |       |                                          |       |   |   |
| Deferred revenue in  accounts receivable                                                                                |       | $                                             | 484        |   | $ | — |   |
| Assets recorded for which  payment has not yet occurred                                                                 |       | 224                                           |       | — |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

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**ALLOS THERAPEUTICS, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(Dollars shown in tables arein thousands, except per share amounts)**

**(unaudited)**

 

**1.****                ****Basis of Presentation**

 

The unaudited financial statements of AllosTherapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or“our”) included herein reflect all adjustments, consisting only of normalrecurring adjustments, which in the opinion of management are necessary tofairly state our financial position, results of operations and cash flows forthe periods presented.  Certaininformation and footnote disclosures normally included in audited financialinformation prepared in accordance with accounting principles generallyaccepted in the United States of America have been condensed or omittedpursuant to the rules and regulations of the Securities and ExchangeCommission, or SEC.  Operating resultsfor the six months ended June 30, 2010, are not necessarily indicative ofthe results that may be expected for the year ending December 31,2010.  These financial statements shouldbe read in conjunction with the audited financial statements and notes theretowhich are included in our Annual Report on Form 10-K for the year endedDecember 31, 2009 for a broader discussion of our business and theopportunities and risks inherent in such business.

 

*Liquidity*

 

As of June 30, 2010, we had $122.3 millionin cash, cash equivalents, and investments. Based upon the current status ofour product development and commercialization plans, we believe that our cash,cash equivalents, and investments as of June 30, 2010, will be adequate tosupport our operations through at least the next 12 months, although there canbe no assurance that this can, in fact, be accomplished.

 

Our ability to achieve profitability is dependent onour ability to grow product sales of FOLOTYN® (pralatrexate injection) for thetreatment of patients with relapsed or refractory peripheral T-cell lymphoma,or PTCL, in the United States.  Theamount of our future product sales are subject to significant uncertainty.  We may never generate sufficient revenue fromproduct sales to become profitable.

 

We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsand seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spendsubstantial amounts on selling, general and administrative expenses inconnection with our commercialization of FOLOTYN for the treatment of patientswith relapsed or refractory PTCL. Therefore, we may need to raise additional capital to support our futureoperations.  Our actual capital requirements will depend on many factors,including:

 

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

 

·      thetiming and costs associated with our sales and marketing activities for thecommercialization of FOLOTYN;

 

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

 

·      thetiming and costs associated with conducting preclinical and clinicaldevelopment of FOLOTYN, including the post-approval clinical studies requiredby the U.S. Food and Drug Administration, or FDA, as well as our evaluation of,and decisions with respect to, additional therapeutic indications for which wemay develop FOLOTYN;

 

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

 

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

 

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

 

**2.****                ****Fair Value of Financial Instruments**

 

*Cash, Cash Equivalents andInvestments*

 

All highly liquid investments with original maturitiesof three months or less are considered to be cash equivalents. The carryingvalues of our cash equivalents and investments approximate their market valuesbased on quoted market prices. Investments are classified as held to maturityand are carried at cost plus accrued interest. Our cash and cash equivalentsare maintained in a financial institution in amounts that, at times, may exceedfederally insured limits. The weighted average duration of the remaining timeto maturity for our portfolio of investments as of June 30, 2010, wasapproximately six months.  As of June 30,2010, our investments were held in a variety of interest-bearing instruments,consisting mainly of U.S. Treasury bills. We did not hold any derivativeinstruments, foreign exchange contracts, asset backed securities, mortgagebacked securities, auction rate securities, or securities of issuers inbankruptcy in our investment portfolio as of June 30, 2010.

 

*Fair Value of FinancialInstruments*

 

Fairvalue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date. The following fair value hierarchy prioritizes theinputs into valuation techniques used to measure fair value. Accordingly, weuse valuation techniques that maximize the use of observable inputs andminimize the use of unobservable inputs when determining fair value. The threelevels of the hierarchy are as follows:

 

Level 1: Inputs that reflect unadjusted quoted pricesin active markets that are accessible to us for identical assets orliabilities;

 

Level 2: Inputs include quoted prices for similarassets and liabilities in active and inactive markets or that are observablefor the asset or liability either directly or indirectly; and

 

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

 

We have no assets or liabilities that were measuredusing quoted prices for similar assets and liabilities or significantunobservable inputs (Level 2 and Level 3 assets and liabilities, respectively)as of June 30, 2010.  Our financialinstruments include cash and cash equivalents, investments, accountsreceivable, prepaid expenses, accounts payable and accrued liabilities. Thecarrying amounts of financial instruments approximate their fair value due totheir short maturities. The carrying value of our cash held in money marketfunds totaling $76.2 million as of June 30, 2010, is included in cash andcash equivalents on our Balance Sheet and approximates market values based onquoted market prices, or Level 1 inputs.

 

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The carrying value of investments consisted of thefollowing as of June 30, 2010:

 
| ** **                                   | ** ** | **Amortized  cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Short-term  held-to-maturity securities:     |       |                |       |                         |       |                          |       |            |       |
| U.S. Treasury bills                          |       | $                   | 45,221     |                         | $          | 8                             |       | $               | —     |   | $ | 45,229 |   |
| Total due in one year or  less               |       | $                   | 45,221     |                         | $          | 8                             |       | $               | —     |   | $ | 45,229 |   |
|                                         |       |                |       |                         |       |                          |       |            |       |
| Long-term held-to-maturity  securities:      |       |                |       |                         |       |                          |       |            |       |
| U. S. Government agency  securities          |       | $                   | 270        |                         | $          | 10                            |       | $               | —     |   | $ | 280 |   |
| Corporate notes                              |       | 306                 |       | 13                           |       | —                        |       | 319             |       |
| Sub-total                                    |       | $                   | 576        |                         | $          | 23                            |       | $               | —     |   | $ | 599 |   |
| Less: Amounts classified  as restricted cash |       | (238                | )          | —                       |       | —                        |       | (238            | )          |
| Total due in one to three  years             |       | $                   | 338        |                         | $          | 23                            |       | $               | —     |   | $ | 361 |   |

 

The carrying value of investments consisted of thefollowing as of December 31, 2009:

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

 

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

 

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

 

*Inventory*

 

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

 

Costsassociated with the production of FOLOTYN by our third party manufacturers areexpensed to research and development expense at the time of production when:

 

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·      theformulated drug product is packaged for clinical trial use;

 

·  the bulk drug substance andformulated drug product is produced prior to receiving regulatory approval tomarket the product candidate; and

 

·  the bulk drug substance andformulated drug product is produced prior to receiving FDA approval for therespective third party manufacturing facilities.

 

Ifand when we receive the related regulatory approval, we capitalize thosemanufacturing costs for our marketed products at the lower of cost (first-in,first-out method) or market (current replacement cost) with cost determined onthe first-in, first-out basis and then expense the sold inventory as acomponent of cost of goods sold.

 

Prior to receiving FDA approval of FOLOTYN, all costsrelated to purchases of the active pharmaceutical ingredient and themanufacturing of the product were recorded as research and developmentexpense.  We have remaining supplies ofdrug substance and drug product that are not recorded as inventory on ourBalance Sheet as of June 30, 2010 because they were purchased prior to FDAapproval.   Accordingly, our cost ofsales will be lower with respect to product manufactured prior to FDAapproval.  Until we sell these suppliesfor which the costs were previously expensed, our cost of sales will reflectonly incremental costs incurred subsequent to the FDA approval date.  During the three months ended June 30,2010, we began selling a portion of our finished goods which were manufacturedsubsequent to the FDA approval date totaling $15,000 which was recorded in costof sales, excluding amortization expense in the Statement of Operations.  See further discussion in Note 7 below.  We continue to expense costs associated withclinical trial material as research and development expense.  Inventory as of June 30, 2010, consistsof work in process of $83,000 and finished goods of $152,000.

 

**4.****                ****Prepaid Expenses and Other Assets**

 

Prepaid expenses and other assets are comprised of thefollowing:

 
| ** **                                             | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Prepaid sales, marketing  and medical affairs expenses |       | $                       | 2,294      |                        | $          | 1,839 |   |
| Prepaid expenses and other  assets                     |       | 1,378                   |       | 1,251                       |       |
| Prepaid research and  development expenses             |       | 889                     |       | 718                         |       |
|                                                   |       | $                       | 4,561      |                        | $          | 3,808 |   |

 

**5.****                ****Intangible asset, net**

 

Costs incurred for products or product candidates notyet approved by the FDA and for which no alternative future use exists arerecorded as expense. In the event a product or product candidate has beenapproved by the FDA or an alternative future use exists for a product orproduct candidate, patent and license costs are capitalized and amortized overthe shorter of the expected patent life and the expected life cycle of therelated product or product candidate.

 

As a result of the FDA’s approval to market FOLOTYN onSeptember 24, 2009, we met a milestone under our license agreement withMemorial Sloan-Kettering Cancer Center, SRI International and Southern ResearchInstitute, discussed in Note 10, which required us to make a milestone paymentof $5.8 million. We capitalized the $5.8 million payment as an intangibleasset and began amortizing the asset immediately following the FDA approval ofFOLOTYN. Amortization expense is being recorded on a straight line basis overthe remaining expected life of the patent for FOLOTYN, which we expect to lastuntil July 16, 2022. This includes the anticipated Hatch-Waxman extensionthat provides patent protection for drug compounds for a period of up to fiveyears to compensate for time spent in development. This term is our bestestimate of the life of the patent. If, however, the Hatch-Waxman extension isnot granted, the intangible asset will be amortized over a shorter period.Amortization expense of $114,000 and $227,000 for the three and six monthsended June 30, 2010, was recorded as amortization of intangible asset inthe Statement of Operations.  Theestimated annual amortization expense for the intangible asset is approximately$454,000 per year during 2010 through 2021 and $234,000 in 2022.

 

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The carrying values of intangible assets areperiodically reviewed to determine if the facts and circumstances suggest thata potential impairment may have occurred. No trigger events occurred for the three months ended June 30,2010, on the $5,452,000 of intangible asset, net.

 

**6.****                ****Accrued Liabilities**

 

Accrued liabilities are comprised of the following:

 
| ** **                                                                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued personnel costs                                                   |       | $                       | 4,334      |                        | $          | 5,133 |   |
| Accrued research and  development expenses                                |       | 2,364                   |       | 3,363                       |       |
| Accrued sales and  marketing expenses                                     |       | 2,332                   |       | 2,407                       |       |
| Accrued royalties, government  rebates, chargebacks and distribution fees |       | 2,059                   |       | 963                         |       |
| Accrued expenses—other                                               |       | 1,343                   |       | 1,270                       |       |
|                                                                      |       | $                       | 12,432     |                        | $          | 13,136 |   |

 

**7.****                ****Product Sales**

 

*Product Sales*

 

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

 

We sell FOLOTYN to a limited number of pharmaceuticalwholesale distributors, or distributors, three of which are affiliates undercommon control of an unrelated party. These distributors then resell FOLOTYN to the patients’ respectivehealth care providers.  Given our limitedsales history, we are currently unable to reasonably estimate returns.Therefore, we have determined that domestic shipments of FOLOTYN made todistributors do not meet the criteria for revenue recognition at the time ofshipment, and therefore such shipments are accounted for using the sell-throughmethod. Under the sell-through method, we do not recognize revenue uponshipment of FOLOTYN to the distributor. For these product sales, we invoice thedistributor and record deferred revenue equal to the gross invoice sales price.We then recognize revenue when the product is sold through, or upon shipment ofthe product from the distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limitednumber of patients, the short period from sale of product to patient infusionand limited contractual return rights, FOLOTYN distributors and their customersgenerally carry limited inventory. Through June 30, 2010, product returns have been negligible.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1,153,000 as of June 30,2010.

 

We estimate sell-through revenue and certain gross tonet sales adjustments based upon analysis of third-party information,including information obtained from certain distributors with respect to theirinventory levels and sell-through to the distributors’ customers. Our estimatesare subject to the inherent limitations of estimates that rely on third-partydata. The information received from distributors is a product of theirrecord-keeping process and their internal controls surrounding suchprocesses.  Our sales and revenuerecognition under the sell-through method reflect our estimate of actual productsold through the distribution channel.

 

*Net Product Sales*

 

Ournet product sales represent total sell-through revenue less estimatedallowances for rebates and chargebacks to be incurred on the selling price ofFOLOTYN related to the respective revenue. In addition, we incur certaindistributor fees related to the management of our product by distributors.These distributor fees are recorded within net revenues and are 

 

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knownat the time of sale. Due to estimates and assumptions inherent in determiningthe amount of rebates and chargebacks, the actual amount of claims for rebatesand chargebacks may be different from our estimates, at which time we wouldadjust our reserves accordingly.  Productsales allowances and accruals are based on definitive contractual agreements orlegal requirements (such as Medicaid laws and regulations) related to thepurchase and/or utilization of the product by these entities.  Allowances and accruals are generallyrecorded in the same period that the related revenue is recognized.

 

*Classification of Product Sales Allowances and Accruals*

 

Accrualsrelated to Medicaid rebates, government chargebacks and distributor fees arerecognized at the time sell-through revenue is recorded, resulting in areduction in product sales revenue and the recording of an increase in accruedexpenses.

 

*Medicaid Rebates*

 

Ourproduct is subject to state government-managed Medicaid programs wherebydiscounts and rebates are provided to participating state governments. Werecord estimated rebates payable under governmental programs, includingMedicaid, as a reduction of revenue at the time sell-through revenues arerecorded. Our calculations related to these rebate accruals require estimates,including estimates of customer mix primarily based on a combination of marketand clinical research, to determine which sales will be subject to rebates andthe amount of such rebates. During the first quarter of 2010, we obtainedadditional market research and were able to refine our estimated Medicaidutilization, which resulted in a reversal of Medicaid rebate allowances relatedto 2009 sales totaling $208,000.  We alsoconsider any legal interpretations of the applicable laws related to Medicaidand qualifying federal and state government programs and any new informationregarding changes in the Medicaid programs’ regulations and guidelines thatwould impact the amount of the rebates. In March 2010, the Patient Protection and Affordable Care Act, asmodified by the Health Care and Education Affordability Reconciliation Act of2010, or PPACA, was enacted, which increased the Medicaid rebate percentagefrom 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to earlyadopt portions of PPACA, and any implementing regulations, could impact futureestimates related to our Medicaid rebate allowances. We update our estimatesand assumptions each period and record any necessary adjustments to ourreserves. Although allowances and accruals are recorded at the time of productsale, certain rebates are typically paid out, on average, up to six months orlonger after the sale. We account for Medicaid rebates by establishing anaccrual in an amount equal to our estimate of Medicaid rebate claimsattributable to sales recognized in that period.  If actual future results vary from ourestimates, we may need to adjust our previous estimates, which would affect ourearnings in the period of the adjustment. For reference purposes, a 10% to 20% variance in Medicaid utilizationestimates for state Medicaid rebates as of June 30, 2010, would result inan approximate $301,000 to $602,000 adjustment to cumulative net product sales.

 

*Government Chargebacks*

 

Our products are subject to certain programs withfederal government qualified entities whereby pricing on products is discountedbelow distributor list price to participating entities. These entities purchaseproducts through distributors at the discounted price, and the distributorscharge the difference between their acquisition cost and the discounted priceback to us. We account for chargebacks by establishing an accrual in an amountequal to our estimate of maximum chargeback claims. We determine our chargebackestimates based on actual FOLOTYNsell-through sales data from third-party information. Chargeback amountsare determined at the time of resale to the federal government qualifiedentities, and we generally issue credits for such amounts within several weeksof receiving claims from the distributor. We do not expect the impact of the340B program expansion included in the PPACA to significantly change ourestimated government chargeback accruals because drugs approved under an OrphanDrug designation were specifically excluded from the provisions of thePPACA.  The FDA has awarded orphan drugstatus to FOLOTYN for the treatment of patients with T-cell lymphoma, whichincludes patients with relapsed or refractory PTCL.**Estimatedchargeback amounts are recorded at the time the sell-through sale occurs and weadjust the accrual quarterly to reflect actual experience. Due to estimates andassumptions inherent in determining the amount of government chargebacks, theactual amount of claims for chargebacks may be different from our estimates, atwhich time we would adjust our reserves accordingly*.*

 

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Balances and activity in the deferred revenue accountand a reconciliation of gross to net product sales for the three and six monthsended June 30, 2010 and 2009 are as follows:

 
| ** **                                 | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                    | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                       |       |                                        |       |                                |       |   |   |   |   |
| Deferred revenue,  beginning of the period |       | $                                           | 1,150      |                                | $          | — |   | $ | 669 |   | $ | — |   |
| Gross product sales to  distributors       |       | 9,021                                       |       | —                              |       | 17,722 |   | — |   |
| Less: Gross product sales  recognized      |       | (9,018                                      | )          | —                              |       | (17,238 | ) | — |   |
| Deferred revenue as of  June 30, 2010 |       | $                                           | 1,153      |                                | $          | — |   | $ | 1,153 |   | $ | — |   |
|                                       |       |                                        |       |                                |       |   |   |   |   |
| Gross product sales                        |       | $                                           | 9,018      |                                | $          | — |   | $ | 17,238 |   | $ | — |   |
| *Less:  Gross to Net Sales Adjustments*    |       |                                        |       |                                |       |   |   |   |   |
| Government rebates and  chargebacks        |       | (860                                        | )          | —                              |       | (1,434 | ) | — |   |
| Distribution fees                          |       | (257                                        | )          | —                              |       | (496 | ) | — |   |
| Returns                                    |       | (16                                         | )          | —                              |       | (16 | ) | — |   |
| Net product sales                          |       | $                                           | 7,885      |                                | $          | — |   | $ | 15,292 |   | $ | — |   |

 

Balancesand activity in the government rebates and chargebacks and distribution feespayable accounts for the six months ended June 30, 2010, are as follows:

 
| ** **                                               | ** ** | **Government  Rebates and  Chargebacks** | ** ** | **Distribution  Fees** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------------------|------------|
| **Balance  at December 31, 2009**                   |       | $                                        | 487        |                   | $          | 86 |   |
| Reserve for current period  sales                        |       | 1,642                                    |       | 496                    |       |
| Change in estimated  Medicaid utilization for 2009 sales |       | (208                                     | )          | —                 |       |
| Credits/payments made for  current period sales          |       | (717                                     | )          | (286                   | )          |
| Credits/payments made for  prior period sales            |       | (126                                     | )          | (77                    | )          |
| **Balance  at June 30, 2010**                       |       | $                                        | 1,078      |                   | $          | 219 |   |

 

*Major Customers and Concentrationof Credit Risk*

 

We sell FOLOTYN to a limited number of pharmaceuticalwholesale distributors, or distributors, three of which are affiliates undercommon control of an unrelated party, without requiring collateral.  We periodically assess the financial strengthof these customers and establish allowances for anticipated losses, ifnecessary.  Substantially all of our 2010sales were made in the United States.

 
| ** ** | ** ** | **% of Total  Trade  Accounts  Receivable at  June 30,  2010** | ** ** | **% of Total  Gross Product  Sales for the  Six Months  Ended  June 30,  2010** | ** ** |
|------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| Customer A |       | 49.0                                                                | %          | 51.0                                                                                 | %          |
| Customer B |       | 27.5                                                                | %          | 24.6                                                                                 | %          |
| Customer C |       | 22.6                                                                | %          | 24.0                                                                                 | %          |

 

*Cost of sales*

 

Cost of sales, excluding amortization expense,includes cost of product sold, royalties, inventory packaging and labeling,warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 10 regarding theroyalty rates under our license agreement for FOLOTYN.  Prior to receiving FDA approval of FOLOTYN,all costs related to purchases of the active pharmaceutical ingredient and themanufacturing of the product were recorded as research and development expense.  Accordingly, our cost of sales will be lowerwith respect to product manufactured prior to FDA approval.  Until we sell these supplies for which thecosts were previously expensed, our cost of sales will reflect only incrementalcosts incurred subsequent to the FDA approval date.  Cost of sales, excluding amortization expensewere

 

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$752,000 and $1,441,000 for the three and six monthsended June 30, 2010, respectively. Cost of sales, excluding amortization expense primarily relates to an 8%royalty on gross product sales payable to the licensors of FOLOTYN under theterms of our license agreement.  Duringthe three months ended June 30, 2010, we began selling a portion of ourfinished goods which were manufactured subsequent to the FDA approval datetotaling $15,000 which was recorded in cost of sales, excluding amortizationexpense in the Statement of Operations.

 

Under the sell-through method, royalties paid to ourlicensors of FOLOTYN based on the unit shipments to distributors are deferredand recognized as royalty expense when those units are sold through andrecognized as revenue. Royalties paid are deferred as we have the right tooffset royalties paid for product that are later returned against subsequentroyalty obligations.

 

**8.****                ****Stock-Based Compensation**

 

Stock-based compensation expense for the three and sixmonths ended June 30, 2010 and 2009 has been recognized in theaccompanying Statements of Operations as follows:

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2010**                              | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development                |       | $                                     | 681        |                                          | $          | 947 |   | $ | 1,363 |   | $ | 1,920 |   |
| Selling, general and  administrative    |       | 2,127                                 |       | 1,523                                         |       | 4,352 |   | 2,928 |   |
| Total stock-based  compensation expense |       | $                                     | 2,808      |                                          | $          | 2,470 |   | $ | 5,715 |   | $ | 4,848 |   |

 

We did not recognize a related tax benefit during thesix months ended June 30, 2010 and 2009, as we maintain net operating losscarryforwards and we have established a valuation allowance against the entiretax benefit as of June 30, 2010.  Nostock-based compensation expense was capitalized on our Balance Sheet as ofJune 30, 2010 and December 31, 2009.

 

The following table summarizes activity and relatedinformation for stock option awards granted under our equity incentive plans:

 
| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**               | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Outstanding  at December 31, 2009** |       | 8,292,496                    |       | $                                          | 5.83       |   | 3,823,683 |   | $ | 5.02 |   |
| Granted                                    |       | 2,374,851                    |       | 7.55                                       |       |   |   |   |   |
| Exercised                                  |       | (1,004,474                   | )          | 3.77                                       |       |   |   |   |   |
| Forfeited/Expired                          |       | (450,746                     | )          | 7.04                                       |       |   |   |   |   |
| **Outstanding  at June 30, 2010**     |       | 9,212,127                    |       | $                                          | 6.44       |   | 4,041,243 |   | $ | 5.72 |   |

 

During the six months ended June 30, 2010, wegranted 2,374,851 stock options with a weighted-averagegrant-date fair value of $4.27 per share. During the three months ended June 30, 2010 and 2009, werecorded stock-based compensation related to our stock option plans of$2,310,000 and $2,273,000, respectively. During the six monthsended June 30, 2010 and 2009, we recorded stock-based compensation relatedto our stock option plans of $4,914,000 and $4,498,000, respectively.  As of June 30, 2010, the unrecordedstock-based compensation balance related to stock option awards was $11,646,000and will be recognized over an estimated weighted-average amortization periodof 1.8 years.

 

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  June 30, 2010:**                                            | ** ** | ** **              | ** ** | ** **                                                  | ** ** | ** **                                 | ** ** | ** **                          | ** ** |
| Options fully vested and  exercisable                                     |       | 4,041,243               |       | 6.6                                                         |       | $                                          | 5.72       |                                | $          | 3,504,000 |   |
| Options expected to vest,  including effects of expected forfeitures |       | 4,293,462               |       | 9.0                                                         |       | $                                          | 7.01       |                                | 228,000    |   |
| Options fully vested and  expected to vest                                |       | 8,334,705               |       | 7.8                                                         |       | $                                          | 6.38       |                                | $          | 3,732,000 |   |

 

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The aggregate intrinsic value in the tables aboverepresents the total pretax intrinsic value, based on our closing stock priceof $6.13 as of June 30, 2010, which would have been received by the optionholders 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 June 30, 2010, was2,088,429.

 

The total intrinsic value of options exercised duringthe three months ended June 30, 2010 and 2009 was $1,630,000 and $50,000,respectively, determined as of the date of option exercise.  The total intrinsic value of optionsexercised during the six months ended June 30, 2010 and 2009 was$3,948,000 and $1,594,000, respectively, determined as of the date of optionexercise.  We settle employee stockoption exercises with newly issued common shares.  No tax benefits were realized by us inconnection with these exercises during the six months ended June 30, 2010and 2009 as we maintain net operating loss carryforwards and we haveestablished a valuation allowance against the entire tax benefit as of June 30,2010.

 

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

 
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RS at December 31, 2009** |       | 125,000                    |       | $                                                  | 3.72       |   |
| Granted                                     |       | —                     |       | —                                             |       |
| Vested                                      |       | (110,000                   | )          | 3.32                                               |       |
| **Nonvested  RS at June 30, 2010**     |       | 15,000                     |       | $                                                  | 6.67       |   |

 

The shares of restrictedstock vest in four equal annual installments from the date of grant.  Duringthe three months ended June 30, 2010 and 2009, we recorded stock-basedcompensation related to restricted stock awards of $6,000 and $55,000,respectively.  During the six months ended June 30, 2010 and 2009, werecorded stock-based compensation related to restricted stock awards of $32,000and $140,000, respectively.  As of June 30,2010, the unrecorded stock-based compensation balance related to restrictedstock awards was $21,000 and will be recognized over an estimatedweighted-average amortization period of 1.4 years.

 

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

 
| ** **                                   | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|
| **Nonvested  RSU at December 31, 2009** |       | 155,479                    |       | $                                                  | 6.48       |   |
| Granted                                      |       | 439,403                    |       | 7.71                                               |       |
| Vested                                       |       | (34,116                    | )          | 6.46                                               |       |
| **Nonvested  RSU at June 30, 2010**     |       | 560,766                    |       | $                                                  | 7.45       |   |

 

The shares of restrictedstock unit awards vest in four equal annual installments from the date ofgrant.  Duringthe three months ended June 30, 2010 and 2009, we recorded stock-basedcompensation related to restricted stock unit awards of $436,000 and $120,000,respectively.  During the six months ended June 30, 2010 and 2009, werecorded stock-based compensation related to restricted stock unit awards of$661,000 and $168,000, respectively.  Asof June 30, 2010, the unrecorded stock-based compensation balance relatedto restricted stock unit awards was $3,003,000 and will be recognized over anestimated weighted-average amortization period of 2.3 years.

 

**9.****                ****Net Loss Per Share**

 

Basic net loss per share is computed by dividing thenet loss attributable to common stockholders for the period by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share is computed bygiving effect to all dilutive potential common stock outstanding during theperiod, including stock options, restricted stock, restricted stock unit awardsand 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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Such potentially dilutiveshares are excluded when the effect would be to reduce net loss per share.Because we reported a net loss for the six months ended June 30, 2010 and2009, all potentially dilutive common shares have been excluded from thecomputation of the dilutive net loss per share for all periods presented. Suchpotentially dilutive common shares consist of the following:

 
| ** **                       | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Common stock options             |       | 9,212,127         |       | 8,995,911 |   |
| Unvested restricted stock        |       | 15,000            |       | 165,000 |   |
| Unvested restricted stock  units |       | 560,766           |       | 164,981 |   |
|                             |       | 9,787,893         |       | 9,325,892 |   |

 

**10.****         ****Commitments and Contingencies**

 

*Royalty and License FeeCommitments*

 

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 toFOLOTYN and its uses. Under the terms of the agreement, we paid an up-frontlicense fee of $2.0 million upon execution of the agreement and have madeaggregate milestone payments of $2.5 million based on the passage of time.Additionally, in May and September 2009, we made milestone paymentsof $1.5 million based on the FDA accepting our New Drug Application for reviewand $5.8 million based on the FDA approval to market FOLOTYN,respectively.  The up-front license feeand all milestone payments under the agreement prior to FDA approval to marketFOLOTYN were recorded to research and development expense as incurred.  As discussed in Note 5, the $5.8 millionmilestone payment based on the FDA approval was capitalized as an intangibleasset and is being amortized over the expected useful life of the compositionof matter patent for FOLOTYN, which we expect to last until July 16, 2022.The only remaining potential milestone payment under the license agreement isfor $3.5 million upon regulatory approval to market FOLOTYN in Europe, which,if made would be capitalized and amortized over the expected useful life of thelicensed patents. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors royaltiesbased on graduated annual levels of net sales of FOLOTYN to our distributors,net of actual rebates and chargebacks, or distributor sales, which may bedifferent than our net product revenue recognized in accordance with U.S.generally accepted accounting principles, or GAAP, or sublicense revenues arisingfrom sublicensing the product, if and when such sales or sublicensesoccur.  Royalties are 8% of annualdistributor sales up to $150.0 million; 9% of annual distributor sales of$150.0 million through $300.0 million; and 11% of annual distributor sales inexcess of $300.0 million.  In 2010 and2009, our royalties were 8% of our net distributor sales.  As of June 30, 2010, accrued royaltieswere $762,000 and are included in accrued liabilities on the Balance Sheet.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations, aswell as information contained elsewhere in this report,**contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Theseforward-looking statements include, but are not limited to, statementsregarding our commercialization of FOLOTYN for patients with relapsed orrefractory peripheral T-cell lymphoma; our intent and projected timeline tosubmit a Marketing Authorization Application, or MAA, in Europe for FOLOTYN;our projected operating costs and expenses for fiscal year 2010; otherstatements regarding our future product development and regulatory strategies,including our intent to develop or seek regulatory approval for FOLOTYN foradditional indications; the ability of our third-party manufacturers to supportour requirements for drug supply; any statements regarding our future financialperformance, results of operations or sufficiency of capital resources to fundour operating requirements; and any other statements that are other thanstatements of historical fact. In some cases, these statements may beidentified by terminology such as “may,” “will,” “should,” “expects,” “plans,”“anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,”or the negative of such terms and other comparable terminology. Although webelieve that the expectations reflected in the forward-looking statementscontained herein are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. These statements involve known andunknown risks and uncertainties that may cause our, or our industry’sresults, levels of activity, performance or achievements to be materially differentfrom those expressed or implied by the forward-looking statements. Factors thatmay cause or contribute to such differences include, among other things, thosediscussed in Part II, Item 1A of this report under the caption “RiskFactors.” All forward-looking statements included in this report are based oninformation available to us as of the date hereof and we undertake noobligation to revise any forward-looking statements in order to reflect anysubsequent events or circumstances. Forward-looking statements not specificallydescribed above also may be found in these and other sections of this report.*

 

**Overview**

 

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

 

We are currently focused on the development andcommercialization of FOLOTYN® (pralatrexate injection).  FOLOTYN is a targeted antifolate inhibitordesigned to accumulate preferentially in cancer cells.  FOLOTYN targets the inhibition ofdihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway,thereby interfering with DNA and RNA synthesis and triggering cancer celldeath.  FOLOTYN can be delivered as a single agent, for which we currentlyhave approval for the treatment of patients with relapsed or refractoryperipheral T-cell lymphoma, or PTCL, and has the potential to be used incombination therapy regimens.  We believethat FOLOTYN’s unique mechanism of action offers us the ability to target thedrug for development in a variety of hematological malignancies and solid tumorindications.  We currently retainexclusive worldwide commercial rights to FOLOTYN for all indications.  We may also seek to grow our productportfolio through product acquisition and in-licensing efforts.

 

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

 

We began making FOLOTYN available for commercial salein the United States in October 2009 and commenced our commercial launchof FOLOTYN in January 2010.  We haveestablished a commercial organization, including sales, marketing, supply chainmanagement and reimbursement capabilities, for sales of FOLOTYN in the UnitedStates.  We believe the market forrelapsed or refractory PTCL is addressable with a targeted U.S. sales andmarketing organization, and we intend to promote FOLOTYN ourselves in theUnited States.

 

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Based on the results of the PROPEL trial, we intend toseek regulatory approval to market FOLOTYN in Europe for the treatment ofpatients with relapsed or refractory PTCL. Our current intention is to submit a Marketing AuthorizationApplication, or MAA, in Europe in the fourth quarter of 2010.   We may also seek regulatory approval tomarket FOLOTYN for the treatment of patients with relapsed or refractory PTCLin Japan and other countries.  We intendto enter into co-promotion or out-licensing arrangements with otherpharmaceutical or biotechnology partners where necessary to reach foreignmarket segments and when deemed strategically and economically advisable.

 

We are committed to evaluating FOLOTYN for oncologyuse as a single agent and in combination with other therapies.  We currently are conducting clinical trialsinvolving FOLOTYN in multiple indications and plan to initiate additionaltrials in the future to evaluate FOLOTYN’s potential utility in other hematologicmalignancies and solid tumor indications. The following table summarizes the target indications and clinicaldevelopment status of the FOLOTYN development program, including our plannedpost-approval studies:

 
| **Line of Therapy / Indication**                                                                 | ** ** | **Phase**  | ** ** | **Status**                                              |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------|
| **HEMATOLOGIC MALIGNANCIES**                                                                     | ** ** | ** ** | ** ** | ** **                                              |
| **Peripheral T-cell Lymphoma**                                                                   | ** ** | ** ** | ** ** | ** **                                              |
| 2nd line+: PROPEL Pivotal Study                                                             |       | 2          |       | FDA accelerated approval on 9/24/09; Marketed in  U.S.  |
| 1st Line: CHOP sequential study*                                                            |       | 3          |       | Planned initiation in 2010                              |
| **Cutaneous T-cell Lymphoma**                                                                    | ** ** | ** ** | ** ** | ** **                                              |
| 2nd Line+: Single agent study in relapsed or  refractory CTCL                               |       | 1          |       | Patient enrollment completed                            |
| 2nd Line: Bexarotene combination**bexarotene +/- FOLOTYN*                                   |       | 1/3        |       | Patient enrollment ongoing in Phase 1 MTD study         |
| **Lymphoma**                                                                                     | ** ** | ** ** | ** ** | ** **                                              |
| 2nd Line+: non-Hodgkin’s lymphoma combination*FOLOTYN + gemcitabine*                   |       | 1/2a       |       | Phase 2a patient enrollment ongoing                     |
| 2nd Line+: B-cell non-Hodgkin’s lymphoma                                               |       | 2          |       | Patient enrollment ongoing                              |
| **SOLID TUMORS**                                                                                 | ** ** | ** ** | ** ** | ** **                                              |
| **Non-Small Cell Lung Cancer**                                                                   | ** ** | ** ** | ** ** | ** **                                              |
| 2nd &  3rd Line:  Current or former smokers, Stage IIIB/IV *FOLOTYN vs. erlotinib* |       | 2b         |       | Enrollment complete; top line results reported 3Q  2010 |
| **Bladder Cancer**                                                                               | ** ** | ** ** | ** ** | ** **                                              |
| 2nd Line: Metastatic relapsed transitional cell  carcinoma (TCC) of the urinary bladder     |       | 2          |       | Patient enrollment ongoing                              |
| **Breast Cancer**                                                                                | ** ** | ** ** | ** ** | ** **                                              |
| 2nd Line+: Previously treated advanced or  metastatic breast cancer                         |       | 2          |       | Patient enrollment ongoing                              |

 

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*           Thesestudies are required by the FDA as a condition of the accelerated approval ofFOLOTYN for the treatment of patients with relapsed or refractory PTCL and mustverify the clinical benefit of FOLOTYN.

 

**Recent Developments**

 

On July 28, 2010, weannounced topline results from our randomized Phase 2b investigational trial ofFOLOTYN versus erlotinib in patients with Stage IIIB/IV (advanced) non-smallcell lung cancer, or NSCLC, who had received one or two prior systemictreatments including at least one prior platinum-based regimen.  The objective of the trial was to estimatethe efficacy of FOLOTYN compared to that of erlotinib as assessed by overallsurvival.  The results demonstratedclinical activity of FOLOTYN in this patient population.

 

Theprimary endpoint of the trial was overall survival.  Patients receiving FOLOTYN had a 16 percentreduction in the risk of death compared to erlotinib in the overall patientpopulation (n=201; hazard ratio (HR)=0.84) and a 13 percent reduction in therisk of death in the primary efficacy analysis population (n=166; HR=0.87).

 

Analyseswere also performed in predefined patient cohorts, including light vs. heavysmokers, current vs. former smokers, squamous vs. non-squamous histology, andpatients who received prior pemetrexed vs. those who had not. The largestreductions in risk of death for FOLOTYN were observed in patients withnon-squamous cell carcinoma (n=107; HR=0.65) and light smokers (n=37; HR=0.63),with the results demonstrating a 35 percent and 37 percent reduction in therisk of death, respectively. Positive trends in overall survival were observedin favor of FOLOTYN in all other patient cohorts except patients with squamouscell carcinoma and patients who received prior pemetrexed.

 

Thesafety profile of FOLOTYN was consistent with that observed and reported inprevious FOLOTYN solid tumor studies. The most common Grade 3-4 adverse event observed in patients treatedwith FOLOTYN was mucositis (23 percent). Other Grade 3-4 adverse events occurring in more than 5 percent (butless than 10 percent) of patients were fatigue, dyspnea, neutropenia,thrombocytopenia and anemia in patients treated with FOLOTYN and rash, dyspnea,anemia and fatigue in patients treated with erlotinib.

 

Weintend to review these data with our expert advisors to further evaluate theclinical potential of FOLOTYN in this patient population. We believe these datawarrant further analysis to determine the future development strategy based onour assessment of the potential clinical, regulatory and commercialopportunities for FOLOTYN in this indication. We also plan to submit the complete study results for presentation at anupcoming medical meeting.

 

InJanuary 2008, we initiated patient enrollment and completed enrollment inJuly 2009.  The trial enrolledpatients across 43 locations worldwide (15 U.S. sites and 28 ex-U.S.sites).  The first 35 patients enrolledin the study were randomly assigned one-to-one to receive FOLOTYN (intravenouspush on days 1 and 15 of a 28-day cycle; initial dose of 230 mg/m2) or erlotinib (oral, 150 mgdaily in a 28-day cycle).  Subsequently,following a protocol amendment, 166 patients were randomly assigned one-to-oneto receive either FOLOTYN at 190 mg/m2 or erlotinib at 150 mg/day and then furtherstratified by light and heavy smokers. All patients received concurrent vitamin therapy of B12 and folic acid.  According to the statistical analysis plan,the full analysis set included all 201 patients who were randomized in thestudy and the primary efficacy analysis included the 166 patients enrolledsubsequent to the protocol amendment.

 

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**Results of Operations**

 

We have incurred significant net losses andnegative cash flows from operations. We have incurred these losses principallyfrom costs incurred in our research and development programs and from ourselling, general and administrative expenses. Our primary business activities have been focused on the development ofFOLOTYN and other programs that we discontinued in previous years.  Our ability to achieve profitability isdependent on our ability to grow product sales of FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL in the United States.  The amount of our future product sales aresubject to significant uncertainty.  Wemay never generate sufficient revenue from product sales to become profitable.

 

We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsand seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spend substantialamounts on selling, general and administrative expenses in connection with ourcommercialization of FOLOTYN for the treatment of patients with relapsed orrefractory PTCL.  Therefore, we may needto raise additional capital to support our future operations.  Our actual capital requirements will dependon many factors, including those discussed under the “Liquidity andCapital Resources” section below.  If weare unable to generate meaningful amounts of revenue from future product salesor cannot otherwise raise sufficient additional funds to support ouroperations, we may be required to delay, reduce the scope of or eliminate oneor more of our development programs and our business and future prospects forrevenue and profitability may be harmed.

 

***Comparison of the three and sixmonths ended June 30, 2010 and 2009***

 

*Net product sales.***Netproduct sales represent total sales of FOLOTYN less distributor fees andestimated allowances for sales returns, government rebates and chargebacks, asfurther described in the “Critical Accounting Policies” section below. We began making FOLOTYN available forcommercial sale in the United States in October 2009.

 

We sell FOLOTYN to a limited number of pharmaceuticalwholesale distributors, or distributors, three of which are affiliates undercommon control of an unrelated party. These distributors then resell FOLOTYN to the patients’ respectivehealth care providers.  Given our limitedsales history, we are currently unable to reasonably estimate returns.  Therefore, we have determined that domesticshipments of FOLOTYN made to distributors do not meet the criteria for revenuerecognition at the time of shipment, and therefore such shipments are accountedfor using the sell-through method. Under the sell-through method, we do notrecognize revenue upon shipment of FOLOTYN to the distributor. For theseproduct sales, we invoice the distributor and record deferred revenue equal tothe gross invoice sales price. We then recognize revenue when the product issold through, or upon shipment of the product from the distributors to thedistributors’ customers.  Because of theprice of FOLOTYN, the limited number of patients, the short period from sale ofproduct to patient infusion and limited contractual return rights, FOLOTYNdistributors and their customers generally carry limited inventory.  Through June 30, 2010, product returnshave been negligible.  Deferred revenueresults from amounts receivable in advance of revenue recognition and totaled$1.2 million as of June 30, 2010.

 

Balances and activity in the deferred revenue accountand a reconciliation of gross to net product sales for the three and six monthsended June 30, 2010 and 2009 are as follows:

 
| ** **                                 | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                    | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in millions)**                      | ** ** |
|                                       |       |                                        |       |                                |       |   |   |   |   |
| Deferred revenue,  beginning of the period |       | $                                           | 1.2        |                                | $          | — |   | $ | 0.7 |   | $ | — |   |
| Gross product sales to  distributors       |       | 9.0                                         |       | —                              |       | 17.7 |   | — |   |
| Less: Gross product sales  recognized      |       | (9.0                                        | )          | —                              |       | (17.2 | ) | — |   |
| Deferred revenue as of  June 30, 2010 |       | $                                           | 1.2        |                                | $          | — |   | $ | 1.2 |   | $ | — |   |
|                                       |       |                                        |       |                                |       |   |   |   |   |
| Gross product sales                        |       | $                                           | 9.0        |                                | $          | — |   | $ | 17.2 |   | $ | — |   |
| *Less:  Gross to Net Sales Adjustments*    |       |                                        |       |                                |       |   |   |   |   |
| Government rebates and  chargebacks        |       | (0.9                                        | )          | —                              |       | (1.4 | ) | — |   |
| Distribution fees                          |       | (0.2                                        | )          | —                              |       | (0.5 | ) | — |   |
| Returns                                    |       | —                                      |       | —                              |       | — |   | — |   |
| Net product sales                          |       | $                                           | 7.9        |                                | $          | — |   | $ | 15.3 |   | $ | — |   |

 

Net product sales for the three months ended June 30,2010 of $7.9 million represented an increase of 6.5% compared to the $7.4million of net product sales for the three months ended March 31,2010.  There were no corresponding netproduct sales in the three and six months ended June 30, 2009, as sales ofFOLOTYN commenced in the fourth quarter of 2009.

 

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Balancesand activity in the government rebates and chargebacks and distribution feespayable accounts for the six months ended June 30, 2010 are as follows:

 
| ** **                                               | ** ** | **Government  Rebates and  Chargebacks** | ** ** | **Distribution********Fees** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **(in millions)**                   | ** ** |
| ** **                                               | ** ** | ** **                               | ** ** | ** **                   | ** ** |
| **Balance  at December 31, 2009**                   |       | $                                        | 0.5        |                         | $          | 0.1 |   |
| Reserve for current period  sales                        |       | 1.6                                      |       | 0.5                          |       |
| Change in estimated  Medicaid utilization for 2009 sales |       | (0.2                                     | )          | —                       |       |
| Credits/payments made for  current period sales          |       | (0.7                                     | )          | (0.3                         | )          |
| Credits/payments made for  prior period sales            |       | (0.1                                     | )          | (0.1                         | )          |
| **Balance  at June 30, 2010**                       |       | $                                        | 1.1        |                         | $          | 0.2 |   |

 

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

 

*Cost of sales, excludingamortization expense.***Cost of sales, excluding amortization expense, includes cost of productsold, royalties, inventory packaging and labeling, warehousing and shippingcosts associated with FOLOTYN product revenue.

 
| ** **                                     | ** ** | **Three********Months Ended********June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                           | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in millions)**                             | ** ** |
| Cost of sales, excluding  amortization expense |       | $                                                  | 0.8        |                                      | $          | — |   | $ | 1.4 |   | $ | — |   |
|                                                |            |                                                    |            |                                           |            |  |  |  |  |  |  |  |  |

 

Prior to receiving FDA approval of FOLOTYN onSeptember 24, 2009, all costs related to purchases of the active pharmaceuticalingredient and manufacturing of the product were recorded as research anddevelopment expense.  We have remainingsupplies of drug substance and drug product that are not recorded as inventoryon our Balance Sheet as of June 30, 2010 because they were purchased priorto FDA approval.   Accordingly, our costof sales will be lower with respect to product manufactured prior to FDAapproval.  Until we sell these suppliesfor which the costs were previously expensed, our cost of sales will reflectonly incremental costs incurred subsequent to the FDA approval date.  This occurred with respect to a majority ofour sales of FOLOTYN in the first half of 2010 and is expected to occur for asignificant amount of sales of FOLOTYN during the remainder of 2010.  Accordingly, our cost of sales of FOLOTYNwill be lower with respect to product that was manufactured prior to FDAapproval.  After the inventory has beensold that was already expensed to research and development prior to FDAapproval, we expect cost of sales, excluding amortization expense toapproximate 10% of net product sales, which includes our current 8% royalty.

 

The $752,000 and $1.4 million of cost of sales,excluding amortization expense for the three and six months ended June 30,2010, respectively, was primarily due to an 8% royalty on gross product salespayable to the licensors of FOLOTYN under the terms of our licenseagreement.  During the three months endedJune 30, 2010, we began selling a portion of our finished goods which weremanufactured subsequent to the FDA approval date totaling $15,000 which wasrecorded in cost of sales, excluding amortization expense.  There were no corresponding cost of sales forthe three and six months ended June 30, 2009.

 

*Research and Development.* Research and development expenses include the costs of certainpersonnel, preclinical studies, clinical trials, regulatory affairs,biostatistical data analysis, third-party manufacturing costs for developmentof drug materials for use in preclinical studies and clinical trials, andmanufacturing costs and licensing fees incurred for FOLOTYN prior to receipt ofFDA approval.

 
| ** **               | ** ** | **Three********Months Ended********June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2010**                                           | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(in millions)**                             | ** ** |
| Research and development |       | $                                                  | 6.5        |                                      | $          | 8.8 |   | $ | 15.8 |   | $ | 17.1 |   |
|                          |            |                                                    |            |                                           |            |  |  |  |  |  |  |  |  |

 

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The $2.3 million decrease in research and developmentexpenses in the three months ended June 30, 2010, as compared to the sameperiod in 2009 was primarily due to:

 

·          a $1.5 million decrease in licensing costs resulting from the milestonepayment made under the license agreement for FOLOTYN upon FDA acceptance of ourNDA for review in the three months ended June 30, 2009, with nocorresponding amount in the same period in 2010;

 

·          a $622,000 decrease in third-party manufacturing costs for clinicaltrial material and manufacturing pre-commercial product in preparation forapproval;

 

·          a $537,000 decrease in costs related to clinical trials involvingFOLOTYN which have closed enrollment, including decreased costs for our Phase2b NSCLC study, which completed patient enrollment in July 2009; and

 

·          a $266,000 decrease in non-cash stock-based compensation expense, asdiscussed in more detail below.

 

This decrease was partially offset by:

 

·   a $344,000increase in consulting and professional fees, primarily related to preparationfor submission of a MAA in Europe planned in the fourth quarter of 2010; and

 

·   a $403,000increase in costs related to clinical trials involving FOLOTYN, includingstart-up costs for the post-approval studies required by the FDA and othertrials with ongoing enrollment.

 

The $1.3 million decrease in research and developmentexpenses in the six months ended June 30, 2010, as compared to the sameperiod in 2009 was primarily due to:

 

·          a $1.5 million decrease in licensing costs resulting from the milestonepayment made under the license agreement for FOLOTYN upon FDA acceptance of ourNDA for review in the three months ended June 30, 2009, with nocorresponding amount in the same period in 2010;

 

·          a $1.2 million decrease in costs related to clinical trials involvingFOLOTYN which have closed enrollment, including decreased costs for our Phase2b NSCLC study, which completed patient enrollment in July 2009;

 

·          a $604,000 decrease in third-party manufacturing costs for clinicaltrial material and manufacturing pre-commercial product in preparation forapproval; and

 

·          a $557,000 decrease in stock-based compensation, primarily related tothe resignation of our former Chief Medical Officer in September 2009,resulting in no corresponding stock-based compensation expense in the firstfour months of 2010, as compared to the corresponding period of 2009.

 

This increase was partially offset by:

 

·          a $1.9 million increase in costs related to clinical trials involvingFOLOTYN, including start-up costs for the post-approval studies required by theFDA and other trials with ongoing enrollment; and

 

·          a $520,000 increase in personnel and related travel costs, mainlyattributable to additional headcount and increases in compensation costs yearover year.

 

For the second half of 2010, we expect our researchand development expenses to increase relative to the amount recorded for thesix months ended June 30, 2010, due to the following:

 

·                  an increase in clinical trial costs involving FOLOTYN, includingstart-up costs for the post-approval studies required by the FDA;

 

·                  an increase in personnel and related travel costs primarily resultingfrom additional headcount; and

 

·                  an increase in non-cash stock-based compensation expense related to ourannual equity grants to existing employees and grants to new employees.

 

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*Selling, General and Administrative.*  Selling, general and administrative expenses include costs forsales and marketing activities, corporate development, medical affairs,executive administration, corporate offices and related infrastructure.

 
| ** **                           | ** ** | **Three********Months Ended********June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                           | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(in millions)**                             | ** ** |
| Selling, general and  administrative |       | $                                                  | 20.5       |                                      | $          | 8.0 |   | $ | 38.4 |   | $ | 15.0 |   |
|                                      |            |                                                    |            |                                           |            |  |  |  |  |  |  |  |  |

 

The $12.5 million increase in selling, general andadministrative expenses in the three months ended June 30, 2010, ascompared to the same period in 2009 was primarily due to the following:

 

·            a$6.4 million increase in personnel and related travel and facilities costs,mainly attributable to additional headcount to support the commercialization ofFOLOTYN, including our sales and marketing organization, and increases incompensation costs year over year;

 

·            a$4.4 million increase in sales and marketing costs associated with thecommercial launch, including promotional expenses, advisory boards, marketresearch and costs related to trade shows;

 

·            a$973,000 increase in grants and sponsored medical education programs; and

 

·            a$604,000 increase in non-cash stock-based compensation expense, as discussed inmore detail below.

 

The $23.4 million increase in selling, general andadministrative expenses in the six months ended June 30, 2010, as comparedto the same period in 2009 was primarily due to the following:

 

·            a$13.3 million increase in personnel and related travel and facilities costs,mainly attributable to additional headcount to support the commercialization ofFOLOTYN, including our sales and marketing organization, and increases incompensation costs year over year;

 

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

 

·            a$1.9 million increase in grants and sponsored medical education programs; and

 

·            a$1.4 million increase in non-cash stock-based compensation expense, asdiscussed in more detail below.

 

For the second half of 2010, we expect our selling,general and administrative expenses to increase relative to the amount recordedfor the six months ended June 30, 2010, due to the following:

 

·       anincrease in sales and marketing costs associated with executing our marketingand promotional programs for the commercialization of FOLOTYN;

 

·       anincrease in costs associated with medical affairs and medical educationexpenses to educate the medical community;

 

·       anincrease in general and administrative expenses associated with building andmaintaining our administrative infrastructure to support the commercializationof FOLOTYN;

 

·       anincrease in personnel costs, primarily resulting from additional headcount,including a full six months of costs for employees hired in the first half of2010; and

 

·       anincrease in non-cash stock-based compensation expense related to grants for newemployees and our annual equity grants to existing employees.

 

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

 

Amortization expense of our intangible asset for thethree and six months ended June 30, 2010, was $114,000 and $227,000,respectively.  There was no expense forthe three and six months ended June 30, 2009.  The $114,000 and $227,000 expense in thethree and six months ended June 30, 2010, respectively, was due to theamortization of the $5.8 million intangible asset resulting from a milestonepayment under our license agreement for FOLOTYN in September 2009discussed further in the “Obligations and Commitments” section below.  Amortization expense is being recorded on astraight line basis over the estimated remaining life of the composition ofmatter patent for FOLOTYN, which we expect to last until July 16, 2022.This includes the anticipated Hatch-Waxman extension that provides patentprotection for drug compounds for a period of up to five years to compensatefor time spent in development. This term is our best estimate of the life ofthe patent.  If, however, theHatch-Waxman extension is not granted, the intangible asset will be amortized overa shorter period.

 

*Stock-based Compensation Expense. *Stock-based compensation expense for the threeand six months ended June 30, 2010 and 2009 has been recognized in ourStatements of Operations as follows:

 
| ** **                              | ** ** | **Three********Months Ended********June 30,** | ** ** | **Six********Months Ended********June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                           | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in millions)**                                  | ** ** |
| Research and development                |       | $                                                  | 0.7        |                                                  | $          | 1.0 |   | $ | 1.4 |   | $ | 1.9 |   |
| Selling, general and  administrative    |       | 2.1                                                |       | 1.5                                                   |       | 4.3 |   | 2.9 |   |
| Total stock-based  compensation expense |       | $                                                  | 2.8        |                                                  | $          | 2.5 |   | $ | 5.7 |   | $ | 4.8 |   |

 

Of the $2.8 million of stock-based compensationrecognized in the three months ended June 30, 2010, $2.3 million wasrelated to our stock option plans, $442,000 related to restricted stock andrestricted stock units and $55,000 related to our employee stock purchaseplan.  Of the $2.5 million ofstock-based compensation recognized in the three months ended June 30,2009, $2.3 million was related to our stock option plans, $175,000 relatedto restricted stock and restricted stock units and $22,000 related to our employeestock purchase plan.  The $0.3 millionincrease in stock-based compensation expense in the three months ended June 30,2010, as compared to the same period in 2009 was primarily due to an increasein the number of options granted to new employees and to existing employeespursuant to our annual grants in February 2010.

 

Of the $5.7 million of stock-based compensationrecognized in the six months ended June 30, 2010, $4.9 million wasrelated to our stock option plans, $693,000 related to restricted stock andrestricted stock units and $107,000 related to our employee stock purchaseplan.  Of the $4.8 million ofstock-based compensation recognized in the six months ended June 30, 2009,$4.5 million was related to our stock option plans, $308,000 related torestricted stock and restricted stock units and $42,000 related to our employeestock purchase plan.  The $0.9 millionincrease in stock-based compensation expense in the six months ended June 30,2010, as compared to the same period in 2009 was primarily due to an increasein the number of options granted to new employees and to existing employeespursuant to our annual grants in February 2010.

 

As of June 30, 2010, the unrecorded stock-basedcompensation balance related to stock option awards was $11.6 million and willbe recognized over an estimated weighted-average amortization period of 1.8years. As of June 30, 2010, the unrecorded stock-based compensationbalance related to restricted stock unit awards was $3.0 million and will berecognized over an estimated weighted-average amortization period of 2.3years.  As of June 30, 2010, theunrecorded stock-based compensation balance related to restricted stock awardswas $21,000 and will be recognized over an estimated weighted-averageamortization period of 1.4 years.

 

Stock-based compensation expense in fiscal year 2010is expected to be approximately $12 to $13 million.

 

*Interest and Other Income, Net*.  Interest and other income, netfor the three months ended June 30, 2010 and 2009 was $66,000 and $6,000,respectively.  Interest income, net ofinterest expense, for the six months ended June 30, 2010 and 2009 was$131,000 and $179,000, respectively.  The$60,000 increase in net interest income in the three months ended June 30,2010, as compared to the same period in 2009 was primarily due to lower yieldson our cash, cash equivalents and investments, offset by a $149,000 loss duringthe three months ended June 30, 2009 on the disposal of certain softwarethat was no longer in use.  The $48,000decrease in net interest income in the six months ended June 30, 2010, ascompared to the same period in 2009 was primarily due to lower yields on ourcash, cash equivalents and investments, offset by a $149,000

 

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loss on the disposal of certain software that was nolonger in use and a realized loss of approximately $157,000 on the sale ofcertain of our investments during the six months ended June 30, 2009.

 

**Liquidity and Capital Resources**

 

As of June 30, 2010, we had $122.3 million incash, cash equivalents, and investments. Until required for use in our business, we invest our cash reserves inbank deposits, money market funds, U.S. government instruments and certificatesof deposit in accordance with our investment policy.  The weighted average duration of theremaining time to maturity for our portfolio of investments as of June 30,2010, was approximately six months.   Ourinvestments as of June 30, 2010, primarily consisted of U.S. Treasurybills. We did not hold any derivative instruments, foreign exchange contracts,asset backed securities, mortgage backed securities, auction rate securities,or securities of issuers in bankruptcy in our investment portfolio as of June 30,2010.  We have the ability and intent tohold our remaining investments to recover the entire amortized cost basis ofthe investments as of June 30, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

Since our inception, we have financed our operationsprimarily through public and private sales of our equity securities, which haveresulted in net proceeds to us of $477.6 million through June 30,2010.

 

Net cash used to fund our operating activities for thesix months ended June 30, 2010 and 2009 was $39.6 million and$25.6 million, respectively.  The$14.0 million increase in net cash used to fund our operating activities in thesix months ended June 30, 2010, as compared to the same period in 2009 wasprimarily due to the increase in our net loss and the $4.6 million increase inaccounts receivable, as we had no accounts receivable in the correspondingperiod in 2009.

 

For fiscal year 2010, total operating costs andexpenses are expected to be approximately $115 to $120 million, excludingnon-cash stock-based compensation expense. Stock-based compensation expense is expected to be approximately $12 to$13 million.  Actual financial resultsfor 2010 will vary based upon many factors, including the amount of FOLOTYNsales and rate of patient enrollment in clinical trials that are ongoing andplanned for initiation in 2010.

 

Net cash used in investing activities for the sixmonths ended June 30, 2010, was $28.9 million and consisted primarily ofpurchases of investments offset by proceeds from maturities ofinvestments.  Net cash provided byinvesting activities for the six months ended June 30, 2009 was $42.6million and consisted primarily of proceeds from maturities and sales ofinvestments.

 

Net cash provided by financing activities for the sixmonths ended June 30, 2010, was $4.1 million and consisted primarily ofproceeds from the issuance of common stock associated with stock optionsexercised by our employees and sales of stock under our employee stock purchaseplan.  Net cash provided by financingactivities for the six months ended June 30, 2009 was $48.3 million andconsisted primarily of the $46.9 million of net proceeds from our financing inApril 2009 and $1.3 million of proceeds from the issuance of common stockassociated with stock options exercised by our employees and sales of stockunder our employee stock purchase plan.

 

Based upon the current status of our productdevelopment and commercialization plans, we believe that our cash, cashequivalents, and investments as of June 30, 2010, will be adequate tosupport our operations through at least the next 12 months, although there canbe no assurance that this can, in fact, be accomplished. Our 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 continuing our current developmentprograms and beginning other long-term development projects involving FOLOTYN,including the post-approval clinical studies required for FOLOTYN. Theseprojects may require many years and substantial expenditures to complete andmay ultimately be unsuccessful.  In addition, we expect to incursignificant costs relating to the commercialization of FOLOTYN, including costsrelated to our sales and marketing, medical affairs and manufacturingoperations.  Therefore, we may need to raise additional capital to supportour future operations.  Our actual capital requirements will depend onmany factors, including:

 

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

 

·                  thetiming and costs associated with our sales and marketing activities for thecommercialization of FOLOTYN;

 

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

 

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

 

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

 

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

 

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

 

**Obligations and Commitments**

 

*Royalty and License FeeCommitments*

 

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 toFOLOTYN and its uses. Under the terms of the agreement, we paid an up-frontlicense fee of $2.0 million upon execution of the agreement and have madeaggregate milestone payments of $2.5 million based on the passage of time.Additionally, in May and September 2009, we made milestone paymentsof $1.5 million based on the FDA accepting our New Drug Application for reviewand $5.8 million based on the FDA approval to market FOLOTYN,respectively.  The up-front license feeand all milestone payments under the agreement prior to FDA approval to marketFOLOTYN were recorded to research and development expense as incurred.  The $5.8 million milestone payment based onthe FDA approval was capitalized as an intangible asset and is being amortizedover the expected useful life of the composition of matter patent for FOLOTYN,which we expect to last until July 16, 2022. The only remaining potentialmilestone payment under the license agreement is for $3.5 million uponregulatory approval to market FOLOTYN in Europe, which, if made would becapitalized and amortized over the expected useful life of the licensedpatents. Under the terms of the agreement, we are required to fund alldevelopment programs and will have sole responsibility for allcommercialization activities. In addition, we will pay the licensors royaltiesbased on graduated annual levels of net sales of FOLOTYN to our distributors,net of actual rebates and chargebacks, or distributor sales, which may bedifferent than our net product revenue recognized in accordance with U.S.generally accepted accounting principles, or GAAP, or sublicense revenuesarising from sublicensing the product, if and when such sales or sublicensesoccur.  Royalties are 8% of annualdistributor sales up to $150.0 million; 9% of annual distributor sales of$150.0 million through $300.0 million; and 11% of annual distributor sales inexcess of $300.0 million.  In 2010 and2009, our royalties were 8% of our net distributor sales.

 

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**Critical Accounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, and expenses. We base our estimates on historical experience,available information and assumptions that we believe to be reasonable underthe circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions. We believe the following policies to bethe most critical to an understanding of our financial condition and results ofoperations because they require us to make estimates, assumptions and informedmanagement judgments about matters that are inherently uncertain:

 

·       revenuerecognition;

 

·          accounting for research and development expenses;

 

·          accounting for inventory; and

 

·       accountingfor stock-based compensation expense.

 

*Revenue Recognition.*   We generate revenue fromproduct sales.  We recognize product revenue when it is realized orrealizable and earned. Revenue is realized or realizable and earned when all ofthe following criteria are met: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services have been rendered; (3) ourprice to the buyer is fixed and determinable; and (4) collectability isreasonably assured. Revenue from sales transactions where the buyer has theright to return the product is recognized at the time of sale only if(1) our price to the buyer is substantially fixed or determinable at thedate of sale, (2) the buyer has paid us, or the buyer is obligated to payus and the obligation is not contingent on resale of the product, (3) thebuyer’s obligation to us would not be changed in the event of theft or physicaldestruction or damage of the product, (4) the buyer acquiring the productfor resale has economic substance apart from that provided by us, (5) wedo not have significant obligations for future performance to directly bringabout resale of the product by the buyer, and (6) the amount of futurereturns can be reasonably estimated.

 

We sell FOLOTYN to a limited number of pharmaceuticalwholesale distributors, or distributors, three of which are affiliates undercommon control of an unrelated party. These distributors then resell FOLOTYN to the patients’ respectivehealth care providers.  Given our limitedsales history, we are currently unable to reasonably estimate returns.Therefore, we have determined that domestic shipments of FOLOTYN made todistributors do not meet the criteria for revenue recognition at the time ofshipment, and therefore such shipments are accounted for using the sell-throughmethod. Under the sell-through method, we do not recognize revenue uponshipment of FOLOTYN to the distributor. For these product sales, we invoice thedistributor and record deferred revenue equal to the gross invoice sales price.We then recognize revenue when the product is sold through, or upon shipment ofthe product from the distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limitednumber of patients, the short period from sale of product to patient infusionand limited contractual return rights, FOLOTYN distributors and their customersgenerally carry limited inventory.  ThroughJune 30, 2010, we have had negligible returns.  Deferred revenue results from amountsreceivable in advance of revenue recognition and totaled $1.2 million as ofJune 30, 2010.

 

We estimate sell-through revenue and certain gross tonet sales adjustments based upon analysis of third-party information,including information obtained from certain distributors with respect to theirinventory levels and sell-through to the distributors’ customers. Our estimatesare subject to the inherent limitations of estimates that rely on third-partydata. The information received from distributors is a product of theirrecord-keeping process and their internal controls surrounding suchprocesses.  Our sales and revenuerecognition under the sell-through method reflect our estimate of actualproduct sold through the distribution channel.

 

Additionally under the sell-through method, royaltiespaid based on unit shipments to distributors are deferred and recognized asroyalty expense when those units are sold through and recognized as revenue.Royalties paid are deferred as we have the right to offset royalties paid forproduct that are later returned against subsequent royalty obligations.

 

*Net Product Sales*

 

Ournet product sales represent total sell-through revenue less estimatedallowances for rebates and chargebacks to be incurred on the selling price ofFOLOTYN related to the respective revenue. In addition, we incur certaindistributor fees related to the management of our product by distributors.These distributor fees are recorded within net revenues and are

 

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knownat the time of sale. Due to estimates and assumptions inherent in determiningthe amount of rebates and chargebacks, the actual amount of claims for rebatesand chargebacks may be different from our estimates, at which time we wouldadjust our reserves accordingly.  Productsales allowances and accruals are based on definitive contractual agreements orlegal requirements (such as Medicaid laws and regulations) related to thepurchase and/or utilization of the product by these entities.  Allowances and accruals are generally recordedin the same period that the related revenue is recognized.

 

*Classification of Product Sales Allowances and Accruals*

 

Accrualsrelated to Medicaid rebates, government chargebacks and distributor fees arerecognized at the time sell-through revenue is recorded, resulting in areduction in product sales revenue and the recording of an increase in accruedexpenses.

 

*Medicaid Rebates*

 

Ourproduct is subject to state government-managed Medicaid programs wherebydiscounts and rebates are provided to participating state governments. Werecord estimated rebates payable under governmental programs, includingMedicaid, as a reduction of revenue at the time sell-through revenues arerecorded. Our calculations related to these rebate accruals require estimates,including estimates of customer mix primarily based on a combination of marketand clinical research, to determine which sales will be subject to rebates andthe amount of such rebates. During the first quarter of 2010, we obtainedadditional market research and were able to refine our estimated Medicaidutilization, which resulted in a reversal of Medicaid rebate allowances relatedto 2009 sales totaling $208,000.  We alsoconsider any legal interpretations of the applicable laws related to Medicaidand qualifying federal and state government programs and any new informationregarding changes in the Medicaid programs’ regulations and guidelines thatwould impact the amount of the rebates. In March 2010, the Patient Protection and Affordable Care Act, asmodified by the Health Care and Education Affordability Reconciliation Act of2010, or PPACA, was enacted, which increased the Medicaid rebate percentagefrom 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to earlyadopt portions of PPACA, and any implementing regulations, could impact futureestimates related to our Medicaid rebate allowances. We update our estimatesand assumptions each period and record any necessary adjustments to ourreserves. Although allowances and accruals are recorded at the time of productsale, certain rebates are typically paid out, on average, up to six months orlonger after the sale. We account for Medicaid rebates by establishing anaccrual in an amount equal to our estimate of Medicaid rebate claimsattributable to sales recognized in that period.  If actual future results vary from ourestimates, we may need to adjust our previous estimates, which would affect ourearnings in the period of the adjustment. For reference purposes, a 10% to 20% variance in Medicaid utilizationestimates for state Medicaid rebates as of June 30, 2010, would result inan approximate $0.3 million to $0.6 million adjustment to cumulative netproduct sales.

 

*Government Chargebacks*

 

Our products are subject to certain programs withfederal government qualified entities whereby pricing on products is discountedbelow distributor list price to participating entities. These entities purchaseproducts through distributors at the discounted price, and the distributorscharge the difference between their acquisition cost and the discounted priceback to us. We account for chargebacks by establishing an accrual in an amountequal to our estimate of maximum chargeback claims. We determine our chargebackestimates based on actual FOLOTYNsell-through sales data from third-party information. Chargeback amountsare determined at the time of resale to the federal government qualifiedentities, and we generally issue credits for such amounts within several weeksof receiving claims from the distributor. We do not expect the impact of the340B program expansion included in the PPACA to significantly change ourestimated government chargeback accruals because drugs approved under an OrphanDrug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status toFOLOTYN for the treatment of patients with T-cell lymphoma, which includespatients with relapsed or refractory PTCL.**Estimatedchargeback amounts are recorded at the time the sell-through sale occurs and weadjust the accrual quarterly to reflect actual experience. Due to estimates andassumptions inherent in determining the amount of government chargebacks, theactual amount of claims for chargebacks may be different from our estimates, atwhich time we would adjust our reserves accordingly.

 

*Researchand Development.*** Research and developmentexpenditures are charged to expense as incurred. Research and developmentexpenses include the costs of certain personnel, preclinical studies, clinicaltrials, regulatory affairs, biostatistical data analysis, third partymanufacturing costs for development of drug materials for use in clinicaltrials and preclinical studies and licensing fees for our product candidatesprior to FDA approval.  All finished druginventory costs

 

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associated with production activities in our thirdparty manufacturing facilities prior to receiving FDA approval for suchfacilities and prior to receiving regulatory approval to market our product areexpensed to research and development expenses. Upon receipt of the relatedregulatory approval, we capitalize those manufacturing costs for our marketedproducts at the lower of cost or market and then expense the sold inventory asa component of cost of sales. We accrue research and development expenses foractivity as incurred during the fiscal year and prior to receiving invoicesfrom clinical sites and third party clinical and preclinical researchorganizations. We accrue external costs for clinical and preclinical studiesbased on an evaluation of the following: the progress of the studies, includingpatient enrollment, dosing levels of patients enrolled, estimated costs to dosepatients, invoices received, and contracted costs with clinical sites and thirdparty clinical and preclinical research organizations. Significant judgmentsand estimates must be made and used in determining the accrued balance in anyaccounting period. Actual results could differ from those estimates. During thequarters ended June 30, 2010 and 2009, we did not have any changes inestimates that would have resulted in material adjustments to research anddevelopment expenses accrued in the prior period.

 

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

 

*Inventory****. ***Costs associated with the production of FOLOTYN bulk drug substance andformulated drug product by our third party manufacturers are recorded as eitherresearch and development expense or inventory.

 

Costsassociated with the production of FOLOTYN by our third party manufacturers areexpensed to research and development expense at the time of production when:

 

·    theformulated drug product is packaged for clinical trial use;

 

·    the bulkdrug substance and formulated drug product is produced prior to receiving regulatoryapproval to market the product candidate; and

 

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

 

Ifand when we receive the related regulatory approval, we capitalize thosemanufacturing costs for our marketed products at the lower of cost (first-in,first-out method) or market (current replacement cost) with cost determined onthe first-in, first-out basis and then expense the sold inventory as acomponent of cost of goods sold.

 

Priorto receiving FDA approval of FOLOTYN, all costs related to purchases of theactive pharmaceutical ingredient and the manufacturing of the product wererecorded as research and development expense. We have remaining supplies of drug substance and drug product that arenot recorded as inventory on our Balance Sheet as of June 30, 2010 becausethey were purchased prior to FDA approval.  Accordingly, our cost of sales will be lower with respect to productmanufactured prior to FDA approval. Until we sell these supplies for which the costs were previouslyexpensed, our cost of sales will reflect only incremental costs incurredsubsequent to the FDA approval date. During the three months ended June 30, 2010, we began selling aportion of our finished goods which were manufactured subsequent to the FDAapproval date totaling $15,000 which was recorded in cost of sales, excludingamortization expense in the Statement of Operations.  We continue to expense costs associated withclinical trial material as research and development expense.  Inventory as of June 30, 2010, consistsof work in process of $83,000 and finished goods of $152,000.

 

*Stock-basedCompensation Expense.*** We have several stock-basedcompensation plans under which incentive and non-qualified stock options,restricted stock units and restricted shares may be granted, and an employeestock purchase plan.  We measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant datefair value of the award. That cost is recognized over the period during whichan employee is required to provide services in exchange for the award, therequisite service period (usually the vesting period). We provide an estimateof forfeitures at initial grant date.

 

During the six months ended June 30, 2010 and2009, we recorded stock-based compensation expense of approximately $5.7million and $4.8 million, respectively, related to stock-based awards,including stock options, restricted stock units,

 

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restricted stock and our employee stock purchase plan.As of June 30, 2010, the unrecorded deferred stock-based compensationbalance related to these stock-based awards was approximately $14.7 million andwill be recognized over the remaining vesting periods of the awards. Judgmentsand estimates must be made and used in determining the factors used incalculating the fair value of stock-based awards, including the expectedforfeiture rate of our stock-based awards, the expected life of our stock-basedawards, and the expected volatility of our stock price. For more information onstock-based compensation expense during the six months ended June 30,2010, refer to Note 8 “Stock-Based Compensation” of the unaudited June 30,2010, financial statements included herein.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our financial instruments as of June 30, 2010,consisted of cash, cash equivalents, investments, accounts receivable andaccounts payable.  All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.  We invest in securitiesin accordance with our investment policy. The primary objectives of our investment policy are to preserveprincipal and maintain proper liquidity to meet our operating needs.  Our investment policy specifies creditquality standards for our investments and limits the amount of credit exposureto any single issue, issuer or type of investment.  The weighted average duration of theremaining time to maturity for our portfolio of investments as of June 30,2010, was approximately six months.  Asof June 30, 2010, our investments of $45.6 million were allclassified as held-to-maturity and were held in a variety of interest-bearinginstruments, consisting primarily of U.S. Treasury bills. We did not hold anyderivative instruments, foreign exchange contracts, asset backed securities,mortgage backed securities, auction rate securities, or securities of issuersin bankruptcy in our investment portfolio as of June 30, 2010.  We have the ability and intent to hold ourremaining investments to recover the entire amortized cost basis of theinvestments as of June 30, 2010, although we monitor our investmentportfolio with the primary objectives of preserving principal and maintainingproper liquidity to meet our operating needs.

 

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

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, anevaluation was carried out under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, of the effectiveness of our disclosure controls andprocedures, as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934, as amended, or the Exchange Act”. Based on that evaluation, our management, including our principalexecutive officer and principal financial officer, concluded that ourdisclosure controls and procedures were effective as of June 30, 2010, toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**No Changes in Internal Control overFinancial Reporting**

 

There were no changes in our internal controls overfinancial reporting during the three months ended June 30, 2010, that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

None.

 

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**ITEM1A.  RISK FACTORS**

 

*Our business faces significant risks. These risks include thosedescribed below and may include additional risks of which we are not currentlyaware or which we currently do not believe are material. If any of the eventsor circumstances described in the following risk factors actually occurs, theymay materially harm our business, financial condition, operating results andcash flow. As a result, the market price of our common stock could decline.Additional risks and uncertainties that are not yet identified or that we thinkare immaterial may also materially harm our business, operating results andfinancial condition. **Stockholders and potential investors in shares of ourcommon stock should carefully consider the following risk factors, which herebyupdate those risks contained in the “Risk Factors” section of our Annual Reporton Form 10-K  for the year endedDecember 31, 2009 in addition to other information and risk factors inthis report.  We are identifying theserisk factors as important factors that could cause our actual results to differmaterially from those contained in any written or oral forward-lookingstatements made by or on behalf of the Company. We are relying upon the safe harbor for all forward-looking statementsin this report, and any such statements made by or on behalf of the Company arequalified by reference to the following cautionary statements, as well as tothose set forth elsewhere in this report. We consistently update and includeour risk factors in our Quarterly Reports on Form 10-Q. Risk factors thathave been substantively changed from those set forth in our Annual Report onForm 10-K for the period ended December 31, 2009 have been marked withan asterisk immediately following the heading of such risk factor.*

 

***We have a history of net losses and anaccumulated deficit, and we may never generate sufficient revenue to achieve ormaintain profitability in the future.********

 

We have experienced significant net losses andnegative cash flows from operations. To date, we have financed our operationsprimarily through the public and private sale of securities.  For the six months ended June 30, 2010,we had a net loss of $40.5 million. As of June 30, 2010, we had accumulated a deficit of$413.7 million.  We have incurredthese losses principally from costs incurred in our research and developmentprograms and from our selling, general and administrative expenses.

 

On September 24, 2009, we obtained acceleratedapproval from the FDA for FOLOTYN for use as a single agent for the treatmentof patients with relapsed or refractory PTCL.  Our ability to generaterevenue and achieve profitability is dependent on our ability, alone or withpartners, to successfully commercialize FOLOTYN for the treatment of patientswith relapsed or refractory PTCL.  We are also developing FOLOTYN for useas a single agent and in combination therapy regimens in a range of hematologicmalignancies and solid tumor indications, which may or may not lead toobtaining the necessary regulatory approvals to market FOLOTYN for additionalindications. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials and seekingadditional regulatory approvals for FOLOTYN, and commercializing FOLOTYN forthe treatment of patients with relapsed or refractory PTCL. As a result, we maynever generate sufficient revenue from product sales to become profitable orgenerate positive cash flows.

 

***Our near-term prospects are dependent onFOLOTYN.  If we are unable to successfully commercialize FOLOTYN for thetreatment of patients with relapsed or refractory PTCL, our ability to generatesignificant revenue or achieve profitability will be adversely affected.*** *

 

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

 

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

 

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

 

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

 

·                  ourlimited experience in marketing, selling and distributing FOLOTYN;

 

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

 

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

 

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

 

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

 

·                  wemay not be able to manufacture FOLOTYN in commercial quantities or atacceptable costs.

 

If we are unable tosuccessfully commercialize FOLOTYN for the treatment of patients with relapsedor refractory PTCL, our ability to generate revenue from product sales andachieve profitability will be adversely affected and our stock price wouldlikely decline.

 

***Our operatingresults are unpredictable and may fluctuate. If our operating results are belowthe expectations of securities analysts or investors, the trading price of ourstock could decline.*** *

 

Our operating results are difficult to predict andwill likely fluctuate from quarter to quarter and year to year.  Due to the recent approval of FOLOTYN for thetreatment of patients for relapsed or refractory PTCL in the United States andthe lack of historical sales data, FOLOTYN sales will be difficult to predictfrom period to period.  We believe thatour quarterly and annual results of operations may be negatively affected by avariety of factors, including:

 

·                  thelevel of patient demand for FOLOTYN;

 

·                  thetiming and level of investment in our sales and marketing efforts to supportFOLOTYN sales;

 

·                  thetiming and level of investment in our research and development activitiesinvolving FOLOTYN; and

 

·      expenditures we may incur to acquire ordevelop additional products.

 

In addition, we measure compensation cost forstock-based awards made to employees at the grant date of the award, based onthe fair value of the award, and recognize the cost as an expense over theemployee’s requisite service period. As the variables that we use as a basisfor valuing these awards change over time, including our underlying stockprice, the magnitude of the expense that we must recognize may varysignificantly. Any such variance from one period to the next could cause asignificant fluctuation in our operating results.

 

For these reasons, it is difficult for us toaccurately forecast future profits or losses. As a result, it is possible thatin some quarters our operating results could be below the expectations ofsecurities analysts or investors, which could cause the trading price of ourcommon stock to decline, perhaps substantially.

 

***If we are unable to maintain adequate sales,marketing or distribution capabilities or enter into agreements with thirdparties to perform some of these functions, we will not be able tocommercialize FOLOTYN effectively.****

 

The approval of FOLOTYN for the treatment of patientswith relapsed or refractory PTCL is our first U.S. approval.  Accordingly,we have limited experience in sales, marketing and distribution ofpharmaceutical products. We may not be able to adequately maintain thenecessary sales, marketing, supply chain management and reimbursementcapabilities on our own or enter into arrangements with third parties toperform these functions in a timely manner or on acceptable terms. Additionally, maintaining sales, marketing and distribution capabilities may bemore expensive than we anticipate, requiring us to divert capital from other intendedpurposes or preventing us from building our sales, marketing and distributioncapabilities to the desired levels. To be successful we must:

 

·                  recruitand retain adequate numbers of effective sales personnel;

 

·                  effectivelytrain our sales personnel in the benefits of FOLOTYN;

 

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

 

·                  managegeographically dispersed sales and marketing operations.

 

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

 

***Even though we have obtained acceleratedapproval to market FOLOTYN for the treatment of patients with relapsed orrefractory PTCL, we are subject to ongoing regulatory obligations and review,including post-approval requirements. ****

 

FOLOTYN was approved for the treatment of patientswith relapsed or refractory PTCL under the FDA’s accelerated approvalregulations, which allow the FDA to approve products for cancer or other lifethreatening diseases based on initial positive data from clinical trials. Under these provisions, we are subject to certain post-approval requirementspursuant to which we are required to conduct two randomized Phase 3 trials toverify and describe FOLOTYN’s clinical benefit in patients with T-celllymphoma.  The FDA has also required that we conduct two Phase 1 trials toassess whether FOLOTYN poses a serious risk of altered drug levels resultingfrom organ impairment.  Failure to complete the studies or adhere to thetimelines established by the FDA could result in penalties, including fines orwithdrawal of FOLOTYN from the market.  The FDA may also initiateproceedings to withdraw approval if our Phase 3 studies fail to verify clinicalbenefit.  Further, the FDA may require us to strengthen the warnings andprecautions section of the FOLOTYN package insert or institute a RiskEvaluation and Mitigation Strategy based on the results of these studies orclinical experience.  We are also subject to additional, continuingpost-approval regulatory obligations, including the possibility of additionalclinical studies required by the FDA, safety reporting requirements andregulatory oversight of the promotion and marketing of FOLOTYN.

 

In addition, we or our third-party manufacturers arerequired to adhere to regulations setting forth the FDA’s current GoodManufacturing Practices, or cGMP. These regulations cover all aspects of themanufacturing, storage, testing, quality control and record keeping relating toFOLOTYN. Furthermore, we or our third-party manufacturers are subject toperiodic inspection by the FDA and foreign regulatory authorities to ensurecompliance with cGMP or other applicable government regulations andcorresponding foreign standards. We have limited control over a third-partymanufacturer’s compliance with these regulations and standards.  If we orour third-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to fines, suspension, modification orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

 

***The status of coverage and reimbursementfrom third-party payers for newly approved health care drugs is uncertain andfailure to obtain adequate coverage and reimbursement could limit our abilityto generate revenue.****

 

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

 

Healthcare providers and third-party payers use codingsystems to identify diagnoses, procedures, services, drugs, pharmaceuticaldevices, equipment and other health-related items and services.  Propercoding is an integral component to receiving appropriate reimbursement for theadministration of FOLOTYN and related services. The majority of payers use

 

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nationally recognized code sets to report medicalconditions, services and drugs.  We recently obtained transitionalpass-through status which enables FOLOTYN to be reimbursed under the hospitaloutpatient prospective payment system.  In addition, we have applied for apermanent reimbursement J-code for FOLOTYN, although healthcare providersprescribing FOLOTYN are currently required to submit claims for reimbursement usinga temporary J-code, which may result in payment delays or incorrect paymentlevels. We cannot predict at this time whether our customers will receiveadequate reimbursement for FOLOTYN, nor can we predict whether FOLOTYN willreceive a permanent J-code in the future.

 

Third-party payers, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payers increasingly are attempting to contain health carecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing, in some cases, to provide coverage for uses of approvedproducts for disease conditions for which the FDA has not granted labelingapproval. Third-party insurance coverage may not be available to patients forFOLOTYN. If government and other third-party payers do not provide adequatecoverage and reimbursement levels for FOLOTYN, FOLOTYN’s market acceptance maybe adversely affected.

 

***We are dependentupon a small number of customers for a significant portion of our revenue, andthe loss of, or significant reduction or cancellation in sales to, any one ofthese customers could adversely affect our operations and financial condition.****

 

In the United States, we sell FOLOTYN to a smallnumber of distributors who in turn sell-through to patient health careproviders. These distributors also provide multiple logistics services relatingto the distribution of FOLOTYN, including transportation, warehousing,cross-docking, inventory management, packaging and freight-forwarding.  We do not promote FOLOTYN to thesedistributors and they do not set or determine demand for FOLOTYN.  For the six months ended June 30, 2010,three companies affiliated with AmerisourceBergen Corporation accounted forsubstantially all of our FOLOTYN sales. We expect significant customer concentration to continue for theforeseeable future.  Our ability tosuccessfully commercialize FOLOTYN will depend, in part, on the extent to whichthese distributors are able to provide adequate distribution of FOLOTYN topatient health care providers.  Althoughwe believe we can find alternative distributors on a relatively short notice,our revenue during that period of time may suffer and we may incur additionalcosts to replace a distributor.  The lossof any large customer, a significant reduction in sales we make to them, anycancellation of orders they have made with us or any failure to pay for theproducts we have shipped to them could materially and adversely affect ourresults of operations and financial condition.

 

***If the distributorsthat we rely upon to sell FOLOTYN fail to perform, our business may beadversely affected.*** *

 

Our success depends on the continued customer supportefforts of our network of distributors. The use of distributors involves certain risks, including, but notlimited to, risks that these distributors will:

 

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

 

·                  not effectively distribute or support FOLOTYN;

 

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

 

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

 

·                  cease operations.

 

Any such failure may result in decreased sales ofFOLOTYN, which would harm our business.

 

***If we fail to comply with healthcare fraudand abuse laws, we could face substantial penalties and our business,operations and financial condition could be adversely affected******.****

 

As a biopharmaceutical company, even though we do notand will not control referrals of health care services or bill directly toMedicare, Medicaid or other third-party payers, certain federal and statehealthcare laws and regulations pertaining to fraud and abuse will beapplicable to our business. These laws and regulations, include, among others:

 

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

 

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

 

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

 

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

 

·                  statelaw equivalents of each of the above federal laws, such as anti-kickback andfalse claims laws that may apply to items or services reimbursed by anythird-party payer, including commercial insurers, and state laws governing theprivacy of health information in certain circumstances, many of which differfrom each other in significant ways and often are not preempted by HIPAA.

 

Although there are a number of statutory exemptionsand regulatory safe harbors protecting certain common activities fromprosecution under the federal Anti-Kickback statute, the exemptions and safeharbors are drawn narrowly, and practices that involve remuneration intended toinduce prescriptions, purchases or recommendations may be subject to scrutinyif they do not qualify for an exemption or safe harbor. Further, the recentlyenacted health care reform law known as the Patient Protection and AffordableCare Act (PPACA), enacted in 2010, amends the intent requirement of the federalanti-kickback and criminal health care fraud statutes. A person or entity nolonger needs to have actual knowledge of this statute or specific intent toviolate it. In addition, the government may assert that a claim including itemsor services resulting from a violation of the federal anti-kickback statuteconstitutes a false or fraudulent claim for purposes of the false claims laws.Our practices may not in all cases meet all of the criteria for safe harborprotection from anti-kickback liability.

 

Although physicians are permitted to, based on theirmedical judgment, prescribe products for indications other than those clearedor approved by the FDA, manufacturers are prohibited from promoting theirproducts for such off-label uses. We market FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL and provide promotional materials andtraining programs to physicians regarding the use of FOLOTYN for the treatmentof patients with relapsed or refractory PTCL. Although we believe ourmarketing, promotional materials and training programs for physicians do notconstitute off-label promotion of FOLOTYN, the FDA may disagree. If the FDAdetermines that our promotional materials, training or other activitiesconstitute off-label promotion of FOLOTYN, it could request that we modify ourtraining or promotional materials or other activities or subject us toregulatory enforcement actions, including the issuance of a warning letter,injunction, seizure, civil fine and criminal penalties. It is also possiblethat other federal, state or foreign enforcement authorities might take actionif they believe that the alleged improper promotion led to the submission andpayment of claims for an unapproved use, which could result in significantfines or penalties under other statutory authorities, such as laws prohibitingfalse claims for reimbursement. Even if it is later determined we are not inviolation of these laws, we may be faced with negative publicity, incursignificant expenses defending our position and have to divert significantmanagement resources from other matters.

 

The PPACA, enacted in 2010, imposes new reporting anddisclosure requirements for pharmaceutical and device manufacturers with regardto payments or other transfers of value made to physicians and teachinghospitals, effective March 30, 2013. Such information will be made publicly available in a searchable formatbeginning September 30, 2013.  Inaddition, pharmaceutical and device manufacturers will also be required toreport and disclose investment interests held by physicians and their immediatefamily members during the preceding calendar year.  Failure to submit required information mayresult in civil monetary penalties of up to $150,000 per year (and up to $1million per year for “knowing failures”), for all payments, transfers of valueor ownership or investment interests not reported in an annual submission.

 

In recent years, several states and localities,including California, the District of Columbia, Maine, Massachusetts,Minnesota, Nevada, Vermont, and West Virginia, have enacted legislationrequiring pharmaceutical companies to establish

 

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marketing compliance programs, and file periodicreports with the state or make periodic public disclosures on sales, marketing,pricing, clinical trials, and other activities. Similar legislation is beingconsidered in other states. Many of these requirements are new and uncertain,and the penalties for failure to comply with these requirements are unclear.Nonetheless, if we are found not to be in full compliance with these laws, wecould face enforcement action and fines and other penalties, and could receiveadverse publicity.

 

If our operations are found to be in violation of anyof the healthcare fraud and abuse 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 attention fromthe operation of our business. Moreover, achieving and sustaining compliancewith all applicable federal and state fraud and abuse laws may be costly.

 

***If our competitors develop and marketproducts that are more effective than FOLOTYN, our commercial opportunity willbe reduced or eliminated.*** *

 

Even though we have obtained approval to marketFOLOTYN for the treatment of patients with relapsed or refractory PTCL, ourcommercial opportunity will be reduced or eliminated if our competitors developand market products that are more effective, have fewer side effects or areless expensive than FOLOTYN for this or any other potential indication. Ourpotential competitors include large, fully-integrated pharmaceutical companiesand more established biotechnology companies, both of which have significantresources and expertise in research and development, manufacturing, testing,obtaining regulatory approvals and marketing. Academic institutions, governmentagencies, and other public and private research organizations conduct research,seek patent 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.

 

***We cannot predict when or if we will obtainregulatory approval to market FOLOTYN in the United States for any additionalindications or in any other countries.*** *

 

We are subject to stringent regulations with respectto product safety and efficacy by various international, federal, state andlocal authorities. FOLOTYN has not been approved for marketing in the UnitedStates for any indication other than the treatment of patients with relapsed orrefractory PTCL. In addition, FOLOTYN has not been approved for marketing forthis or any other indication in any other country. A pharmaceutical productcannot be marketed in the United States or most other countries until it hascompleted a rigorous and extensive regulatory review and approval process.Satisfaction of regulatory requirements typically takes many years, is dependentupon the type, complexity and novelty of the product and requires theexpenditure of substantial resources. Of particular significance are therequirements covering research and development, preclinical and clinicaltesting, manufacturing, quality control, labeling and promotion of drugs forhuman use. We may not obtain the necessary regulatory approvals to marketFOLOTYN in the United States for any additional indications or in any othercountries. If we fail to obtain or maintain regulatory approvals to marketFOLOTYN in the United States for any additional indications or in any othercountries, our ability to generate significant revenue or achieve profitabilitymay be adversely affected.

 

***Reports of adverse events or safety concernsinvolving FOLOTYN or similar small molecule chemotherapeutic agents could delayor prevent us from obtaining or maintaining regulatory approval or negativelyimpact sales of FOLOTYN.****

 

FOLOTYN may cause serious adverse events. Theseadverse events could interrupt, delay or halt clinical trials of FOLOTYN,including the FDA-required post-approval studies, and could result in the FDAor other regulatory authorities denying or withdrawing approval of FOLOTYN forany or all indications, including for the treatment of patients with relapsedor refractory PTCL. Adverse events may also negatively impact the sales ofFOLOTYN.  An independent data safetymonitoring board, the FDA, other regulatory authorities or we may suspend orterminate clinical trials at any time. We may also be required to update thewarnings and precautions section of the FOLOTYN package insert based on reportsof adverse events or safety concerns or implement a Risk Evaluation andMitigation Strategy, which could adversely affect FOLOTYN’s acceptance in themarket.  We cannot assure you thatFOLOTYN will be safe for human use.

 

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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, FOLOTYN, we couldencounter delays in the timing of our clinical trials or difficulties inobtaining or maintaining the necessary regulatory approvals for FOLOTYN. Inaddition, the public perception of FOLOTYN might be adversely affected, whichcould harm our business and results of operations and cause the market price ofour common stock to decline, even if the concern relates to another company’sproduct or product candidate.

 

***If FOLOTYN fails to meet safety or efficacyendpoints in clinical trials for additional indications, it will not receiveregulatory approval and we will be unable to market FOLOTYN for thoseindications studied.****

 

We have ongoing clinical trials involving FOLOTYN andplan to initiate additional trials to evaluate FOLOTYN’s potential clinicalutility in other hematologic malignancies and solid tumor indications. FOLOTYN may not prove to be safe and efficacious in clinical trials for otherindications and may not meet all of the applicable regulatory requirementsneeded to receive regulatory approval for those indications. The clinicaldevelopment and regulatory approval process is expensive and takes many years.Failure can occur at any stage of development, and the timing of any regulatoryapproval cannot be accurately predicted. In addition, failure to comply withthe FDA and other applicable U.S. and foreign regulatory requirementsapplicable to clinical trials may subject us to administrative or judiciallyimposed sanctions.

 

As part of the regulatory approval process, we mustconduct clinical trials for FOLOTYN and any other 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 designs of our clinical trials for FOLOTYN are based onmany assumptions about the expected effect of FOLOTYN, and if those assumptionsprove incorrect, the clinical trials may not demonstrate the safety or efficacyof FOLOTYN. Preliminary results may not be confirmed upon full analysis of thedetailed results of a trial, and prior clinical trial program designs andresults may not be predictive of future clinical trial designs or results.Product candidates in later stage clinical trials may fail to show the desiredsafety and efficacy despite having progressed through initial clinical trialswith acceptable endpoints. For example, we terminated the development ofEFAPROXYN, one of our former product candidates, when it failed to demonstratestatistically significant improvement in overall survival in the targetedpatients in a Phase 3 clinical trial. If FOLOTYN fails to show clinicallysignificant benefits in any clinical trial or for any particular indication, itmay not be approved for marketing for such indication. Additionally, if FOLOTYNis demonstrated to be unsafe in clinical trials for other indications, suchdemonstration could negatively impact FOLOTYN’s existing approval for thetreatment of patients with relapsed or refractory PTCL.

 

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

 

***Even if FOLOTYN meets safety and efficacyendpoints in clinical trials for additional indications, regulatory authoritiesmay not approve FOLOTYN, or we may face post-approval problems that requirewithdrawal of FOLOTYN from the market.****

 

We will not be able to market FOLOTYN in the UnitedStates for any additional indications or in any other countries for anyindications until we have obtained the necessary regulatory approvals. Ourreceipt of approval of FOLOTYN in the United States for the treatment ofpatients with relapsed or refractory PTCL does not guarantee that we willobtain regulatory approval to market FOLOTYN in the United States for anyadditional indications or in any other countries. We have limited experience infiling and pursuing applications necessary to gain regulatory approvals, whichmay place us at risk of delays, overspending and human resourcesinefficiencies.

 

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FOLOTYN may not be approved for any additionalindications even if it achieves its endpoints in clinical trials. Regulatoryagencies, including the FDA, or their advisors, may disagree with ourinterpretations of data from preclinical studies and clinical trials. The FDAhas substantial discretion in the approval process, and when or whetherregulatory approval will be obtained for any drug we develop.  Regulatoryagencies also may approve a product candidate for fewer conditions thanrequested or may grant approval subject to the performance of post-approvalstudies or Risk Evaluation and Mitigation Strategies for a product candidate.In addition, regulatory agencies may not approve the labeling claims that arenecessary or desirable for the successful commercialization of FOLOTYN.

 

Following regulatory approval for any additionalindication, FOLOTYN may later produce adverse events that limit or prevent itswidespread use or that force us to withdraw FOLOTYN from the market for thatindication or other indications. In addition, a marketed product continues tobe subject to strict regulation after approval and may be required to undergopost-approval studies. For example, we are required to conduct two randomizedPhase 3 trials to verify and describe FOLOTYN’s clinical benefit in patientswith T-cell lymphoma as well as two Phase 1 trials to assess whether FOLOTYNposes a serious risk of altered drug levels resulting from organimpairment.  Any unforeseen problems with an approved product, any failureto meet the post-approval study requirements or any violation of regulationscould result in restrictions on the product, including its withdrawal from the market.Any delay in or failure to obtain or maintain regulatory approvals for FOLOTYNin the United States for any additional indication or in any other countriescould harm our business and prevent us from ever generating significantrevenues or achieving profitability.

 

***We may experience delays in our clinicaltrials that could adversely affect our financial position and our commercialprospects.****

 

We do not know when our current clinical trials willbe completed, if at all. We also cannot accurately predict when other plannedclinical trials will begin or be completed. Many factors affect patientenrollment, including the size of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, competingclinical trials and new drugs approved for the conditions we are investigating.Other companies are conducting clinical trials and have announced plans forfuture trials that are seeking or likely to seek patients with the samediseases as those we are studying. Competition for patients in some cancertrials is particularly intense because of the limited number of leadingspecialist physicians and the geographic concentration of major clinicalcenters.

 

As a result of the numerous factors that can affectthe pace of progress of clinical trials, our trials may take longer to enrollpatients than we anticipate, if they can be completed at all. Delays in patientenrollment in the trials may increase our costs and slow our productdevelopment and approval process. Our product development costs will alsoincrease if we need to perform more or larger clinical trials than planned. Ifother companies’ product candidates show favorable results, we may be requiredto conduct additional clinical trials to address changes in treatment regimensor for our products to be commercially competitive. Any delays in completingour clinical trials will delay our ability to obtain regulatory approval tomarket FOLOTYN in the United States for any additional indications or in anyother countries, which may adversely affect our ability to generate significantrevenues or achieve profitability.

 

***We may be required to suspend, repeat orterminate our clinical trials if they are not conducted in accordance withregulatory requirements, the results are negative or inconclusive or the trialsare not well designed.****

 

Clinical trials must be conducted in accordance withthe FDA’s current Good Clinical Practices, or cGCP, or other applicable foreigngovernment guidelines and are subject to oversight by the FDA, other foreigngovernmental agencies and Institutional Review Boards at the medicalinstitutions where the clinical trials are conducted. In addition, clinicaltrials must be conducted with product candidates produced under cGMP and mayrequire large numbers of test subjects. Clinical trials may be suspended by theFDA, 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;

 

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

 

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

 

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

 

·                  insufficientquantities of the product candidate to complete the trials.

 

In addition, changes in regulatory requirements andguidance may occur and we may need to amend clinical trial protocols to reflectthese changes. Amendments may require us to resubmit our clinical trialprotocols to Institutional Review Boards for reexamination, which may impactthe costs, timing or successful completion of a clinical trial. Due to theseand other factors, FOLOTYN could take a significantly longer time to gainregulatory approval for any additional indications than we expect or we maynever gain approval for additional indications, which could reduce our revenueby delaying or terminating the commercialization of FOLOTYN for additionalindications.

 

***Due to our reliance on contract researchorganizations and other third parties to conduct our clinical trials, we areunable to directly control the timing, conduct and expense of our clinicaltrials.*** *

 

We rely primarily on third parties to conduct ourclinical trials. As a result, we have had and will continue to have lesscontrol over the conduct of our clinical trials, the timing and completion ofthe trials, the required reporting of adverse events and the management of datadeveloped through the trial than would be the case if we were relying entirelyupon our own staff. Communicating with outside parties can also be challenging,potentially leading to mistakes as well as difficulties in coordinatingactivities. Outside parties may have staffing difficulties, may undergo changesin priorities or may become financially distressed, any of which may adverselyaffect their willingness or ability to conduct our trials. We may experienceunexpected cost increases that are beyond our control. Problems with thetimeliness or quality of the work of a contract research organization may leadus to seek to terminate the relationship and use an alternative serviceprovider. However, making this change may be costly and may delay our trials,and contractual restrictions may make such a change difficult or impossible.Additionally, it may be impossible to find a replacement organization that canconduct our trials in an acceptable manner and at an acceptable cost.

 

***We may need to raise additional capital tosupport our future operations.  If we fail to obtain the capital necessaryto fund our operations, we will be unable to successfully develop orcommercialize FOLOTYN.****

 

Based upon the current status of our productdevelopment and commercialization plans, we believe that our cash, cashequivalents, and investments as of June 30, 2010, 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.  We anticipatecontinuing our current development programs and beginning other long-termdevelopment projects involving FOLOTYN, including the post-approval clinicalstudies required for FOLOTYN. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful. In addition, we expect to incur significant costs relating to thecommercialization of FOLOTYN, including costs related to our sales and marketing,medical affairs and manufacturing operations.  Therefore, we may need toraise additional capital to support our future operations.  Our actualcapital requirements will depend on many factors, including:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***Budget constraints may force us to delay ourefforts to develop FOLOTYN for additional indications while we complete thepost-approval clinical studies required by the FDA, which may prevent us fromcommercializing FOLOTYN for all desired indications 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.  Inparticular, our approval of FOLOTYN in patients with relapsed or refractoryPTCL is conditioned upon us undertaking two additional Phase 3 studies and twoadditional Phase 1 studies which will result in significant additionalexpense.  As a result of our limited resources, we may have to prioritizethe development of FOLOTYN for additional indications and may not be able tofully realize the value of FOLOTYN for other indications in a timely manner, ifat all.

 

***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 third parties for the manufactureand storage of FOLOTYN for clinical trials and for commercial sale. If we areunable to contract for a sufficient supply of FOLOTYN on acceptable terms, orif we encounter delays or difficulties in the manufacturing process or ourrelationships with our manufacturers, we may not have sufficient product toconduct or complete our clinical trials or support commercial requirements forFOLOTYN.

 

FOLOTYN is cytotoxic, which requires the manufacturersof FOLOTYN to have specialized equipment and safety systems to handle such asubstance. In addition, the starting materials for FOLOTYN require custompreparations, which require us to manage an additional set of suppliers toobtain the needed supplies of FOLOTYN.

 

We have entered into arrangements with two third-partymanufacturers to produce FOLOTYN bulk drug substance and two third-partymanufacturers to produce FOLOTYN formulated drug product. We believe thesethird-party manufacturers have the capability to meet our projected worldwideclinical trial and commercial requirements for FOLOTYN although we cannotassure you of this.  In particular, ourthird party manufacturers may not be able to fulfill our potential commercialneeds or meet our deadlines, or the components they supply to us may not meetour specifications and quality policies and procedures. If we need to findadditional alternative suppliers of FOLOTYN or its components, we may not beable to contract for those components on acceptable terms, if at all. Any suchfailure to supply or delay caused by such suppliers would have an adverseeffect on our ability to continue clinical development of FOLOTYN orcommercialize FOLOTYN.

 

Our current or future manufacturers may be unable toaccurately and reliably manufacture commercial quantities of FOLOTYN atreasonable costs, on a timely basis and in compliance with the FDA’s cGMP. Ifour current or future contract manufacturers fail in any of these respects, ourability to timely complete our clinical trials, obtain or maintain requiredregulatory approvals and successfully commercialize FOLOTYN may be materiallyand adversely affected. This risk may be heightened with respect to FOLOTYN asthere are a limited number of manufacturers with the ability to handlecytotoxic products such as FOLOTYN. Our reliance on contract manufacturersexposes us to additional risks, including:

 

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

 

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

 

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

 

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

 

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

 

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

 

Any of these factors could result in the delay ofclinical trials, regulatory submissions, required approvals orcommercialization of FOLOTYN. They could also entail higher costs and result inour being unable to effectively commercialize FOLOTYN.

 

***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 FOLOTYN. In addition, enforcing our proprietary rights may beexpensive and result in increased losses.*** *

 

Our success will depend in part on our ability toobtain and maintain meaningful patent protection for FOLOTYN, both in theUnited States and in other countries. We rely on patents to protect a largepart of our intellectual property and our competitive position. Any patentsissued 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, it is possiblethat no patents will issue on any of our licensed patent applications. It ispossible that the claims in patents that have been issued or licensed to us orthat may be issued or licensed to us in the future will not be sufficientlybroad to protect our intellectual property or that the patents will not provideprotection against competitive products or otherwise be commercially valuable.Failure to obtain and maintain adequate patent protection for our intellectualproperty would impair our ability to be commercially competitive.

 

Our commercial success will also depend in part on ourability to commercialize FOLOTYN without infringing patents or otherproprietary rights of others or breaching the licenses granted to us. We maynot be able to obtain a license to third-party technology that we may requireto conduct our business or, if obtainable, we may not be able to license suchtechnology at a reasonable cost. If we fail to obtain a license to anytechnology that we may require to commercialize FOLOTYN, or fail to obtain alicense at a reasonable cost, we will be unable to commercialize FOLOTYN or tocommercialize it at a price that will allow us to become profitable.

 

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

 

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Furthermore, as with any pharmaceutical company, ourpatent and other proprietary rights are subject to uncertainty. Our patentrights related to FOLOTYN might conflict with current or future patents andother proprietary rights of others. For the same reasons, the products ofothers could infringe our patents or other proprietary rights. Litigation orpatent interference proceedings, either of which could result in substantialcosts to us, may be necessary to enforce any of our patents or otherproprietary rights, or to determine the scope and validity or enforceability ofother parties’ proprietary rights. We may be dependent on third parties,including our licensors, for cooperation and information that may be requiredin connection with the defense and prosecution of our patents and otherproprietary rights. The defense and prosecution of patent and intellectual propertyinfringement claims are both costly and time consuming, even if the outcome isfavorable to us. Any adverse outcome could subject us to significantliabilities to third parties, require disputed rights to be licensed from thirdparties, or require us to cease selling our future products. We are notcurrently a party to any patent or other intellectual property infringementclaims.

 

***We may explore strategic partnerships thatmay never materialize or may fail.*** *

 

We may, in the future, periodically explore a varietyof possible strategic partnerships in an effort to gain access to additionalproduct candidates or resources. At the current time, we cannot predict whatform such a strategic partnership might take. We are likely to face significantcompetition in seeking appropriate strategic partners, and these strategicpartnerships can be complicated and time consuming to negotiate and document.We may not be able to negotiate strategic partnerships on acceptable terms, orat all. We are unable to predict when, if ever, we will enter into anyadditional strategic partnerships because of the numerous risks anduncertainties associated with establishing strategic partnerships.

 

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

 

Any future strategic partnerships we enter into couldsubject 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 FOLOTYN;

 

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

 

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

 

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

 

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

 

·                  strategicpartners may experience financial difficulties;

 

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

 

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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 FOLOTYN or anyother product candidate.

 

***Health care reform measures could adverselyaffect our business.****

 

The business and financial condition of pharmaceuticaland biotechnology companies are affected by the efforts of governmental andthird-party payers to contain or reduce the costs of health care.  The U.S. Congress recently enacted legislationto reform the health care system.  Whilewe anticipate that this legislation may, over time, increase the number ofpatients who have insurance coverage for pharmaceutical products, it alsoimposes cost containment measures that may adversely affect the amount ofreimbursement for pharmaceutical products, including FOLOTYN.  These measures include increasing the minimumrebates for products covered by Medicaid programs and extending such rebates todrugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed careorganizations as well as expansion of the 340(B) Public Health Servicesdrug discount program.  In foreignjurisdictions there have been, and we expect that there will continue to be, anumber of legislative and regulatory proposals aimed at changing the health caresystem. For example, in some countries other than the United States, pricing ofprescription drugs is subject to government control and we expect to seecontinued efforts to reduce healthcare costs in international markets.

 

Some states are also considering legislation thatwould control the prices of drugs, and state Medicaid programs are increasinglyrequesting manufacturers to pay supplemental rebates and requiring priorauthorization by the state program for use of any drug for which supplementalrebates are not being paid.  Managed careorganizations continue to seek price discounts and, in some cases, to imposerestrictions on the coverage of particular drugs.  Government efforts to reduce Medicaidexpenses may lead to increased use of managed care organizations by Medicaidprograms.  This may result in managedcare organizations influencing prescription decisions for a larger segment ofthe population and a corresponding constraint on prices and reimbursement for drugs,including FOLOTYN.  It is likely thatfederal and state legislatures and health agencies will continue to focus onadditional health care reform in the future although we are unable to predictwhat additional legislation or regulation, if any, relating to the health careindustry or third-party coverage and reimbursement may be enacted in the futureor what effect such legislation or regulation would have on our business. Thependency or approval of such proposals or reforms could result in a decrease inour stock price or limit our ability to raise capital or to obtain strategicpartnerships or licenses.

 

***We may not obtain orphan drug exclusivity orwe may not receive the full benefit of orphan drug exclusivity even if weobtain such exclusivity.****

 

The FDA has awarded orphan drug status topralatrexate, which we market under the tradename FOLOTYN, for the treatment ofpatients with relapsed or refractory PTCL. In addition, the FDA has awarded orphan drug designation to pralatrexatefor the treatment of patients with follicular lymphoma and diffuse large B-celllymphoma, for which we do not have approval. Under the Orphan Drug Act, thefirst company to receive FDA approval for pralatrexate for a designated orphandrug indication will obtain seven years of marketing exclusivity during which theFDA may not approve another company’s application for pralatrexate for the sameorphan indication.  Because the FDA approved FOLOTYN for the treatment ofpatients with relapsed or refractory PTCL, we have received seven years ofmarketing exclusivity for that indication.  Orphan drug exclusivity doesnot prevent FDA approval of a different drug for the orphan indication or thesame drug for a different indication.  In addition, the FDA may voidorphan drug exclusivity under certain circumstances.

 

***If product liability lawsuits aresuccessfully brought against us, we may incur substantial liabilities and maybe required to limit commercialization of FOLOTYN.****

 

The testing and marketing of pharmaceutical productsentail an inherent risk of product liability. Product liability claims might bebrought against us by consumers or health care providers or by pharmaceuticalcompanies or others selling FOLOTYN or any future products. If we cannotsuccessfully defend ourselves against such claims, we may incur substantialliabilities or be required to limit the commercialization of FOLOTYN. We haveobtained limited product liability insurance coverage for our human clinicaltrials and commercial sales of FOLOTYN. However, product liability insurancecoverage is

 

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becoming increasingly expensive, and we may be unableto maintain such insurance coverage at a reasonable cost or in sufficientamounts to protect us against losses due to product liability. A successfulproduct liability claim in excess of our insurance coverage could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Our success depends on the retention of ourPresident and Chief Executive******Officer and other key personnel.****

 

We are highly dependent on our President and ChiefExecutive Officer, Paul L. Berns, and other members of our management team. Weare named as the beneficiary on a term life insurance policy coveringMr. Berns in the amount of $10.0 million. We also depend on keyemployees and academic collaborators for each of our research and developmentprograms. The loss of any of our key employees or academic collaborators coulddelay the development and commercialization of FOLOTYN or result in thetermination of our FOLOTYN development program in its entirety. Mr. Bernsand others on our executive management team have employment agreements with us,but the agreements provide for “at-will” employment with no specified term. Ourfuture success also will depend in large part on our continued ability toattract and retain other highly qualified scientific, technical and managementpersonnel, 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 on consultants, collaborators andadvisors to assist us in formulating and conducting our research anddevelopment programs. 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 our company.

 

***We cannot guarantee that we will be incompliance with all potentially applicable regulations.*** *

 

The development, manufacturing, pricing, marketing,sale and reimbursement of FOLOTYN, together with our general operations, aresubject to extensive regulation by federal, state and other authorities withinthe United States and numerous entities outside of the United States. We havefewer employees than many other companies that have one or more productcandidates that are approved for marketing and we rely heavily on third partiesto conduct many important functions.

 

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

 

***If our internal controls over financialreporting are not considered effective, our business and stock price could beadversely affected.*** *

 

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

 

Our management, including our chief executive officerand principal financial officer, does not expect that our internal controlsover financial reporting will prevent all error and all fraud. A controlsystem, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the control system’s objectives will be met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud involving a company have been, or will be, detected.

 

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The design of any system of controls is based in parton certain assumptions about the likelihood of future events, and we cannotassure you that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become ineffective becauseof changes in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected. We cannot assure you that we or our independent registered publicaccounting firm will not identify a material weakness in our internal controlsin the future. A material weakness in our internal controls over financialreporting would require management and our independent registered publicaccounting firm to consider our internal controls as ineffective. If ourinternal controls over financial reporting are not considered effective, we mayexperience a loss of public confidence, which could have an adverse effect onour business and on the market price of our common stock.

 

***Our revenuerecognition model under the sell-through method is complex and depends upon theaccuracy and consistency of third party data as well as dependence upon keyfinance and accounting personnel to maintain and implement the surroundingcontrols.*** *

 

We have developed a revenue recognition model underthe sell-through method that is complex and incorporates a significant amountof third party data from our wholesalers. To effectively maintain the revenuerecognition model, we depend to a considerable degree upon the timely andaccurate reporting to us of such data from these third parties and our keyaccounting and finance personnel to accurately interpolate such data into themodel.  If the third party data is notcalculated on a consistent basis and reported to us on an accurate or timelybasis or we lose any of our key accounting and finance personnel, the accuracyof our consolidated financial statements could be materially affected. Thiscould cause future delays in our earnings announcements, regulatory filingswith the Securities and Exchange Commission, or SEC, and delisting with theNASDAQ.

 

***If we do not progress in our programs asanticipated, our stock price could decrease.*** *

 

For planning purposes, we estimate the timing of avariety of clinical, regulatory and other milestones, such as when a certainproduct candidate will enter clinical development, when a clinical trial willbe initiated or completed, or when an application for regulatory approval willbe filed. Some of our estimates are included in this report. Our estimates arebased on information available to us as of the date of this report and avariety of assumptions. Many of the underlying assumptions are outside of ourcontrol. If milestones are not achieved when we estimated that they would be,investors could be disappointed and our stock price may decrease.

 

***Warburg Pincus Private Equity VIII, L.P.controls a substantial percentage of the voting power of our outstanding commonstock.****

 

On March 2, 2005, we entered into a SecuritiesPurchase Agreement with Warburg Pincus Private Equity VIII, L.P., or Warburg,and certain other investors in connection with an equity financing.  In connection with this financing, Warburgand certain of its affiliates entered into a standstill agreement pursuant towhich they agreed not to pursue, for so long as they continue to own a specifiednumber of shares of our common stock, certain activities the purpose or effectof which may be to change or influence the control of our company.

 

As of July 26, 2010, we had 105,332,676 shares ofcommon stock outstanding, of which Warburg owned 26,124,430 shares, orapproximately 25% of the voting power of our outstanding common stock. Although Warburg has entered into a standstill agreement with us, Warburg is,and will continue to be, able to exercise substantial influence over anyactions requiring stockholder approval.

 

***Anti-takeover provisions in our charterdocuments and under Delaware law could discourage, delay or prevent anacquisition of us, even if an acquisition would be beneficial to ourstockholders, and may prevent attempts by our stockholders to replace or removeour current management.********

 

Provisions of our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders. In addition, these provisions may make it more difficult forstockholders to replace members of our board of directors. Because our board ofdirectors is responsible for appointing the members of our management team,these provisions could in turn affect any attempt by our stockholders toreplace current members of our management team. These provisions include:

 

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·                  authorizingthe issuance of “blank check” preferred stock that could be issued by our boardof directors to increase the number of outstanding shares or change the balanceof voting control and thwart a takeover attempt;

 

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

 

·                  prohibitingstockholder action by written consent, thereby requiring all stockholderactions to be taken at a meeting of our stockholders;

 

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

 

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

 

In addition, we are subject to Section 203 of theDelaware General Corporation Law, which generally prohibits a Delawarecorporation from engaging in any of a broad range of business combinations withan interested stockholder for a period of three years following the date onwhich the stockholder became an interested stockholder. This provision couldhave the effect of delaying or preventing a change of control, whether or notit is desired by or beneficial to our stockholders. Notwithstanding the foregoing,the three-year moratorium imposed on business combinations by Section 203will not apply to Warburg because, prior to the date on which Warburg became aninterested stockholder, our board of directors approved the transactions thatresulted in Warburg becoming an interested stockholder. However, in connectionwith Warburg’s participation in an equity financing we completed inMarch 2005, Warburg and certain of its affiliates entered into astandstill agreement pursuant to which they agreed not to pursue, for so longas they continue to own a specified number of shares of our common stock,certain activities the purpose or effect of which may be to change or influencethe control of our company.

 

***We have adopted a stockholder rights planthat may discourage, delay or prevent a merger or acquisition that isbeneficial to our stockholders.****

 

In May 2003, our board of directors adopted astockholder rights plan that may have the effect of discouraging, delaying orpreventing a merger or acquisition of us that our stockholders may considerbeneficial by diluting the ability of a potential acquirer to acquire us.Pursuant to the terms of the stockholder rights plan, when a person or group,except under certain circumstances, acquires 15% or more of our outstandingcommon stock or 10 business days after announcement of a tender or exchangeoffer for 15% or more of our outstanding common stock, the rights (except thoserights held by the person or group who has acquired or announced an offer toacquire 15% or more of our outstanding common stock) would generally becomeexercisable for shares of our common stock at a discount. Because the potentialacquirer’s rights would not become exercisable for our shares of common stockat a discount, the potential acquirer would suffer substantial dilution and maylose its ability to acquire us. In addition, the existence of the plan itselfmay deter a potential acquirer from acquiring or making an offer to acquireus.  As a result, either by operation of the plan or by its potentialdeterrent effect, mergers and acquisitions of our company that our stockholdersmay consider in their best interests may not occur.

 

Because Warburg owns a substantial percentage of ouroutstanding common stock, we amended the stockholder rights plan in connectionwith Warburg’s participation in an equity financing we completed inMarch 2005 to provide that Warburg and its affiliates will be exempt fromthe stockholder rights plan, unless Warburg and its affiliates become, withoutthe prior consent of our board of directors, the beneficial owner of more than44% of our common stock. Likewise, in connection with our completion of anunderwritten offering of 9,000,000 shares of common stock inFebruary 2007, we amended the stockholder rights plan to provide thatBaker Brothers Life Sciences, L.P. and certain other affiliated funds, whichare collectively referred to herein as “Baker,” will be exempt from thestockholder rights plan, unless Baker becomes, without the prior consent of ourboard of directors, the beneficial owner of more than 20% of our commonstock.  According to filings with the SEC, Baker owned less than 10% ofour outstanding common stock as of February 2009. Under the stockholderrights plan, our board of directors has express authority to amend the rightsplan without stockholder approval.

 

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

 

The recent economic downturn and market instabilityhas made the business climate more volatile and more costly. Our generalbusiness strategy may be adversely affected by unpredictable and unstablemarket conditions. If the current equity and credit markets deterioratefurther, or do not improve, it may make any necessary equity or debt financingmore difficult,

 

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more costly, and more dilutive. While we believe wehave adequate capital resources to meet our expected working capital andcapital expenditure requirements for at least the next 12 months, a radicaleconomic downturn or increase in our expenses could require additionalfinancing on less than attractive rates or on terms that are excessivelydilutive to existing stockholders. Failure to secure any necessary financing ina timely manner and on favorable terms could have a material adverse effect onour growth strategy, financial performance and stock price and could require usto delay or abandon clinical development plans. There is a risk that one ormore of our current service providers, manufacturers or other partners mayencounter difficulties during challenging economic times, which could have anadverse effect on our business, results of operations and financial condition.

 

***The market price for our common stock hasbeen and may continue to be highly volatile, and an active trading market forour common stock may never exist.****

 

We cannot assure you that an active trading market forour common stock will exist at any time. Holders of our common stock may not beable to sell shares quickly or at the market price if trading in our commonstock is not active. The trading price of our common stock has been and islikely to continue to be highly volatile and could be subject to widefluctuations in price in response to various factors, many of which are beyondour control, including:

 

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

 

·                  actualor anticipated variations in quarterly operating results;

 

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

 

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

 

·                  actualor anticipated results of our clinical trials involving FOLOTYN;

 

·                  changesin laws or regulations applicable to FOLOTYN;

 

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

 

·                  announcementsof technological innovations by us or our competitors;

 

·                  changesin financial estimates or recommendations by securities analysts;

 

·                  conditionsor trends in the biotechnology and pharmaceutical industries;

 

·                  changesin the market valuations of similar companies;

 

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

 

·                  additionsor departures of key personnel;

 

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

 

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

 

·                  salesof large blocks of our common stock;

 

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

 

·                  economicand other external factors, including disasters or crises.

 

Public companies in general and companies included onThe NASDAQ Global Market in particular have experienced extreme price andvolume fluctuations that have often been unrelated or disproportionate to theoperating performance of

 

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those companies. There has been particular volatilityin the market prices of securities of biotechnology and other life sciencescompanies, and the market prices of these companies have often fluctuatedbecause of problems or successes in a given market segment or because investorinterest has shifted to other segments. These broad market and industry factorsmay cause the market price of our common stock to decline, regardless of our operatingperformance. We have no control over this volatility and can only focus ourefforts on our own operations, and even these may be affected due to the stateof the capital markets. In the past, following large price declines in thepublic market price of a company’s securities, securities class actionlitigation has often been initiated against that company, including in 2004against us. Litigation of this type could result in substantial costs anddiversion of management’s attention and resources, which would hurt ourbusiness. Any adverse determination in litigation could also subject us tosignificant liabilities.

 

***Substantial sales of shares may impact themarket price of our common stock.********

 

If our stockholders sell substantial amounts of ourcommon stock, the market price of our common stock may decline. These salesalso might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and price that we consider appropriate. Weare unable to predict the effect that sales may have on the then prevailingmarket price of our common stock.  We have entered into a RegistrationRights Agreement with Warburg pursuant to which Warburg is entitled to certainregistration rights with respect to shares of our common stock.  OnJuly 20, 2009, we filed a Registration Statement on Form S-3 with theSEC providing for the registration for resale by Warburg of up to 26,124,430shares of our common stock, which registration statement was declared effectiveon August 28, 2009.

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

 
| ** **       | ** ** | ** **                                                                                                                             | ** ** | **Incorporated by Reference** | ** ** | ** **             |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|
| **Exhibit  No.** | ** ** | **Description**                                                                                                                        | ** ** | **Form**                      | ** ** | **Filing********Date** | ** ** | **Number** | ** ** | **Filed********Herewith** |
| 3.1              |       | Certificate of Amendment  to Restated Certificate of Incorporation.                                                                    |       | 8-K                           |       | 6/25/2010              |   | 3.1 |   |   |
| 10.17.2†    |       | Second Amended and Restated Employment Agreement  dated June 2, 2010 between Allos Therapeutics, Inc. and Marc H.  Graboyes. |       | 8-K                           |       | 6/3/2010               |   | 10.1 |   |   |
| 10.20†      |       | Allos  Therapeutics, Inc. 2008 Equity Incentive Plan, as amended.                                                                 |       | 8-K                           |       | 6/25/2010              |   | 10.1 |   |   |
| 31.1             |       | Certification of principal executive officer  required by Rule 13a-14(a) / 15d-14(a).                                        |       |                          |       |                   |   |   |   | X |
| 31.2             |       | Certification of principal financial officer  required by Rule 13a-14(a) / 15d-14(a).                                        |       |                          |       |                   |   |   |   | X |
| 32.1#            |       | Section 1350 Certification.                                                                                                       |       |                          |       |                   |   |   |   | X |

 

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†            Indicates management contract or compensatory plan or arrangement.

 

#           The certifications attached as Exhibit 32.1 that accompany thisQuarterly Report on Form 10-Q are not deemed filed with the Securities andExchange Commission and are not to be incorporated by reference into any filingof Allos Therapeutics, Inc. under the Securities Act of 1933, as amended,or the Securities Exchange Act of 1934, as amended, whether made before orafter the date of this Form 10-Q, irrespective of any generalincorporation language contained in such filing.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| Date: July 28, 2010 | **ALLOS THERAPEUTICS, INC.**            |
|-------------------------------|----------------------------------------------|
| ** **                    | ** **                                   |
|                          | /s/ Paul L. Berns                            |
|                          | Paul L. Berns                                |
|                          | President and Chief Executive Officer        |
|                          | (Principal Executive Officer)                |
|                          |                                         |
|                          |                                         |
|                          | /s/ David C. Clark                           |
|                          | David C. Clark                               |
|                          | Vice President, Finance and Treasurer        |
|                          | (Principal Financial and Accounting Officer) |

 

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