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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File Number:  0-15006**

 

**CELLDEX THERAPEUTICS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **No. 13-3191702**              |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or   organization) |       | (I.R.S. Employer Identification No.) |

 

**119 Fourth Avenue, Needham, Massachusetts 02494**

(Address of principal executive offices) (Zip Code)

 

**(781) 433-0771**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).Yes * *oNo x

 

Asof August 2, 2010, 31,886,930 shares of common stock, $.001 par value pershare, were outstanding.

 

 

 

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**CELLDEX THERAPEUTICS, INC.**

 

**FORM 10-Q**

**Quarter Ended June 30, 2010**

**Table of Contents**

** **
| ** **                                                                                                      | ** ** | **Page**   |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I—Financial  Information**                                                                     | ** ** | ** ** |
|                                                                                                            |       |       |
| Item 1. Unaudited Financial Statements.                                                                         |       |       |
|                                                                                                            |       |       |
| Condensed Consolidated Balance Sheets at June 30,  2010 and December 31, 2009                         |       | 3          |
|                                                                                                            |       |       |
| Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2010 and 2009 |       | 4          |
|                                                                                                            |       |       |
| Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2010 and 2009           |       | 5          |
|                                                                                                            |       |       |
| Notes to Unaudited Condensed Consolidated Financial  Statements                                                 |       | 6          |
|                                                                                                            |       |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations.            |       | 17         |
|                                                                                                            |       |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk.                                            |       | 31         |
|                                                                                                            |       |       |
| Item 4. Controls and Procedures.                                                                                |       | 32         |
| ** **                                                                                                      | ** ** | ** ** |
| **Part II  — Other Information**                                                                      | ** ** | ** ** |
|                                                                                                            |       |       |
| Item  1. Legal Proceedings.                                                                                     |       | 32         |
|                                                                                                            |       |       |
| Item 1A. Risk Factors.                                                                                          |       | 32         |
|                                                                                                            |       |       |
| Item 6. Exhibits.                                                                                               |       | 33         |
|                                                                                                            |       |       |
| Signatures                                                                                                      |       | 34         |
|                                                                                                            |       |       |
| Exhibit Index                                                                                              |       | 35         |

 

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** **

**PART I—FINANCIAL INFORMATION**

**Item 1. Unaudited Financial Statements**

 

**CELLDEX THERAPEUTICS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

**(In thousands, except share and per share amounts)**

 
| ** **                                                                                                                                                                             | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current Assets:                                                                                                                                                                        |       |                   |       |                       |       |
| Cash and Cash Equivalents                                                                                                                                                              |       | $                      | 15,158     |                       | $          | 57,002 |   |
| Marketable Securities                                                                                                                                                                  |       | 50,674                 |       | 25,451                     |       |
| Accounts and Other Receivables                                                                                                                                                         |       | 738                    |       | 544                        |       |
| Prepaid and Other Current Assets                                                                                                                                                       |       | 1,681                  |       | 979                        |       |
| Total Current Assets                                                                                                                                                                   |       | 68,251                 |       | 83,976                     |       |
| Property and Equipment, Net                                                                                                                                                            |       | 10,972                 |       | 11,489                     |       |
| Intangible Assets, Net                                                                                                                                                                 |       | 27,801                 |       | 29,979                     |       |
| Other Assets                                                                                                                                                                           |       | 5,582                  |       | 5,955                      |       |
| Goodwill                                                                                                                                                                               |       | 8,965                  |       | 8,965                      |       |
| Total Assets                                                                                                                                                                           |       | $                      | 121,571    |                       | $          | 140,364 |   |
| ** **                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **                 | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                         | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current Liabilities:                                                                                                                                                                   |       |                   |       |                       |       |
| Accounts Payable                                                                                                                                                                       |       | $                      | 1,073      |                       | $          | 1,445 |   |
| Accrued Expenses                                                                                                                                                                       |       | 4,134                  |       | 5,615                      |       |
| Current Portion of Deferred Revenue                                                                                                                                                    |       | 5,285                  |       | 5,191                      |       |
| Current Portion of Long-Term Liabilities                                                                                                                                               |       | 1,174                  |       | 2,156                      |       |
| Convertible Subordinated Debt                                                                                                                                                          |       | 12,048                 |       | —                     |       |
| Total Current Liabilities                                                                                                                                                              |       | 23,714                 |       | 14,407                     |       |
| Deferred Revenue                                                                                                                                                                       |       | 32,057                 |       | 34,191                     |       |
| Convertible Subordinated Debt                                                                                                                                                          |       | —                 |       | 11,684                     |       |
| Other Long-Term Liabilities                                                                                                                                                            |       | 5,798                  |       | 6,315                      |       |
| Total Liabilities                                                                                                                                                                      |       | 61,569                 |       | 66,597                     |       |
|                                                                                                                                                                                   |       |                   |       |                       |       |
| Commitments and Contingent Liabilities                                                                                                                                                 |       |                   |       |                       |       |
|                                                                                                                                                                                   |       |                   |       |                       |       |
| Stockholders’ Equity:                                                                                                                                                             |       |                   |       |                       |       |
| Convertible Preferred Stock, $.01 Par Value;  3,000,000 Shares Authorized; No Shares Issued and Outstanding at  June 30, 2010 and December 31, 2009                          |       | —                 |       | —                     |       |
| Common Stock, $.001 Par Value; 297,000,000 Shares  Authorized; 31,886,930 and 31,685,061 Shares Issued and Outstanding at  June 30, 2010 and December 31, 2009, respectively |       | 32                     |       | 32                         |       |
| Additional Paid-In Capital                                                                                                                                                             |       | 231,093                |       | 228,863                    |       |
| Accumulated Other Comprehensive Income                                                                                                                                                 |       | 2,658                  |       | 2,546                      |       |
| Accumulated Deficit                                                                                                                                                                    |       | (173,781               | )          | (157,674                   | )          |
| Total Stockholders’ Equity                                                                                                                                                        |       | 60,002                 |       | 73,767                     |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                        |       | $                      | 121,571    |                       | $          | 140,364 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements

 

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**CELLDEX THERAPEUTICS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(Unaudited)**

 

**(In thousands, except per share amounts)**

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30, 2010**           | ** ** | **June 30, 2009**         | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| **REVENUE:**                                                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product Development and Licensing Agreements                              |       | $                                | 1,399      |                           | $          | 1,497 |   | $ | 2,746 |   | $ | 2,999 |   |
| Contracts and Grants                                                      |       | —                           |       | —                         |       | 220 |   | 139 |   |
| Product Royalties                                                         |       | 1,552                            |       | 1,188                          |       | 3,698 |   | 3,279 |   |
| Total Revenue                                                             |       | 2,951                            |       | 2,685                          |       | 6,664 |   | 6,417 |   |
| ** **                                                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OPERATING EXPENSE:**                                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and Development                                                  |       | 7,256                            |       | 6,433                          |       | 13,694 |   | 12,890 |   |
| Royalty                                                                   |       | 1,732                            |       | 1,369                          |       | 4,059 |   | 3,598 |   |
| General and Administrative                                                |       | 2,591                            |       | 3,511                          |       | 5,426 |   | 6,851 |   |
| Gain on Sale of Assets                                                    |       | —                           |       | —                         |       | — |   | (604 | ) |
| Amortization of Acquired Intangible Assets                                |       | 658                              |       | 95                             |       | 2,178 |   | 191 |   |
| Total Operating Expense                                                   |       | 12,237                           |       | 11,408                         |       | 25,357 |   | 22,926 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Operating Loss                                                            |       | (9,286                           | )          | (8,723                         | )          | (18,693 | ) | (16,509 | ) |
| Investment and Other Income, Net                                          |       | 95                               |       | 55                             |       | 3,257 |   | 179 |   |
| Interest Expense                                                          |       | (334                             | )          | (37                            | )          | (671 | ) | (78 | ) |
| Net Loss                                                                  |       | $                                | (9,525     | )                              | $          | (8,705 | ) | $ | (16,107 | ) | $ | (16,408 | ) |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Basic and Diluted Net Loss Per Common Share (Note  4)                     |       | $                                | (0.30      | )                              | $          | (0.55 | ) | $ | (0.51 | ) | $ | (1.04 | ) |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Shares Used in Calculating Basic and Diluted Net  Loss per Share (Note 4) |       | 31,815                           |       | 15,834                         |       | 31,755 |   | 15,826 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements

 

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**CELLDEX THERAPEUTICS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 

**(In thousands)**

 
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30, 2010**         | ** ** | **June 30, 2009** | ** ** |
| **Cash Flows from Operating  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net Loss                                                                     |       | $                              | (16,107    | ) | $ | (16,408 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used  in Operating Activities: |       |                           |       |   |   |
| Depreciation and Amortization                                                |       | 1,608                          |       | 1,336 |   |
| Amortization of Intangible Assets                                            |       | 2,178                          |       | 191 |   |
| Amortization and Accretion of Marketable  Securities                         |       | (520                           | )          | — |   |
| Loss on Sales and Maturities of Marketable  Securities                       |       | 31                             |       | — |   |
| (Gain) loss on Sale or Disposal of Assets                                    |       | 38                             |       | (599 | ) |
| Stock-Based Compensation Expense                                             |       | 1,614                          |       | 1,864 |   |
| Non-Cash Interest Expense                                                    |       | 364                            |       | — |   |
| Changes in Operating Assets and Liabilities:                                 |       |                           |       |   |   |
| Accounts and Other Receivables                                               |       | (194                           | )          | 814 |   |
| Prepaid and Other Current Assets                                             |       | (702                           | )          | 129 |   |
| Other Assets                                                                 |       | 373                            |       | 361 |   |
| Accounts Payable and Accrued Expenses                                        |       | (1,853                         | )          | (1,346 | ) |
| Deferred Revenue                                                             |       | (2,040                         | )          | 86 |   |
| Other Long-Term Liabilities                                                  |       | (1,405                         | )          | 50 |   |
| Net Cash Used in Operating Activities                                        |       | (16,615                        | )          | (13,522 | ) |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash Flows from Investing  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Sales and Maturities of Marketable Securities                                |       | 19,252                         |       | — |   |
| Purchases of Marketable Securities                                           |       | (43,875                        | )          | — |   |
| Acquisition of Property and Equipment                                        |       | (1,129                         | )          | (325 | ) |
| Proceeds from Sale or Disposal of Assets                                     |       | —                         |       | 850 |   |
| Net Cash (Used in) Provided by Investing  Activities                         |       | (25,752                        | )          | 525 |   |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash Flows from Financing  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net Proceeds from Stock Issuances                                            |       | 616                            |       | 478 |   |
| Payments of Other Long-Term Liabilities                                      |       | (94                            | )          | (90 | ) |
| Net Cash Provided by Financing Activities                                    |       | 522                            |       | 388 |   |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Effect of Exchange Rate Changes on Cash and Cash  Equivalents                |       | 1                              |       | (15 | ) |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net Decrease in Cash and Cash Equivalents                                    |       | (41,844                        | )          | (12,624 | ) |
| Cash and Cash Equivalents at Beginning of Period                             |       | 57,002                         |       | 44,257 |   |
| Cash and Cash Equivalents at End of Period                                   |       | $                              | 15,158     |   | $ | 31,633 |   |
|                                                                         |       |                           |       |   |   |
| **Supplemental Disclosure of  Non-Cash Flow Information**                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Shares Issued to Executive Officers                                          |       | $                              | —     |   | $ | 250 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements

 

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**CELLDEX THERAPEUTICS, INC.**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

**June 30, 2010**

 

**(1) Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Celldex Therapeutics, Inc. (the “Company” or “Celldex”) inaccordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) and reflect the operations of the Company and itswholly-owned subsidiaries. All intercompany transactions have been eliminatedin consolidation.

 

Theseinterim financial statements do not include all the information and footnotesrequired by U.S. GAAP for annual financial statements and should be read inconjunction with the audited financial statements for the year ended December 31,2009, which are included in the Company’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission (“SEC”) on March 12,2010.  In the opinion of management, theinterim financial statements reflect all normal recurring adjustments necessaryto fairly state the Company’s financial position and results of operations forthe interim periods presented.  Theyear-end consolidated balance sheet data presented for comparative purposes wasderived from audited financial statements, but does not include all disclosuresrequired by U.S. GAAP.

 

Theresults of operations for the interim periods are not necessarily indicative ofthe results of operations to be expected for any future interim period or thefiscal year ending December 31, 2010.

 

*AVANT Merger*

 

On March 7, 2008, the Company (formerly known as AVANTImmunotherapeutics, Inc.) (“AVANT”) merged with Celldex ResearchCorporation (formerly known as Celldex Therapeutics, Inc.) (“CelldexResearch”), a privately-held company, (the “AVANT Merger”). EffectiveOctober 1, 2008, the Company changed its name from AVANTImmunotherapeutics, Inc. to Celldex Therapeutics, Inc.  The AVANT Merger was accounted for using theformer purchase method of accounting and was treated as an acquisition byCelldex Research of AVANT, with Celldex Research being considered theaccounting acquirer even though AVANT was the issuer of common stock and thesurviving legal entity in the transaction.

 

*Acquisition of CuraGen Corporation (“CuraGen”)*

 

As more fully discussed in Note 12, on October 1, 2009,CuraGen, a former publicly-traded company, merged with a wholly-ownedsubsidiary (“Merger Sub”) of the Company (the “CuraGen Merger”). Following theCuraGen Merger, the financial statements reflect the financial position, resultsof operation and cash flows of the combined companies.  On December 31, 2009, the Companycompleted the merger of the Merger Sub with and into Celldex pursuant to ashort-form merger effected under Delaware law. As a result, the separatecorporate existence of CuraGen has ceased and the Company has succeeded to allrights, privileges, powers and franchises of CuraGen.

 

**(2)  Significant Accounting Policies**

 

Thesignificant accounting policies used in preparation of these condensedconsolidated financial statements for the six months ended June 30, 2010are consistent with those discussed in Note 2 to the consolidated financialstatements in our Annual Report on Form 10-K for the year endedDecember 31, 2009, except for the adoption of new accounting standardsduring the first six months of 2010 as discussed below.

 

*Recent Accounting Pronouncements*

 

From time to time, new accounting pronouncements are issued by theFinancial Accounting Standards Board (“FASB”) or other standard setting bodiesthat are adopted by the Company as of the specified effective date. Unlessotherwise discussed, the Company believes that the impact of recently issuedstandards that are not yet effective will not have a material impact on theCompany’s financial position or results of operations upon adoption.

 

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InJanuary 2010, the Company adopted a new U.S. GAAP accounting standardwhich requires additional disclosure about the amounts of and reasons forsignificant transfers in and out of Level 1 and Level 2 fair valuemeasurements. This standard also clarifies existing disclosure requirementsrelated to the level of disaggregation of fair value measurements for eachclass of assets and liabilities and disclosures about inputs and valuationtechniques used to measure fair value for both recurring and nonrecurringLevel 2 and Level 3 measurements. As this newly issued accounting standardonly requires enhanced disclosure, the adoption of this standard did not impactthe Company’s financial position or results of operations. In addition,effective for interim and annual periods beginning January 1, 2011, thisstandard will require additional disclosure and require an entity to presentdisaggregated information about activity in Level 3 fair valuemeasurements on a gross basis, rather than as one net amount.

 

In January 2010, the Company adopted a new U.S. GAAPaccounting standard which amends existing revenue recognition accountingguidance to provide accounting principles and application guidance on whethermultiple deliverables exist, how the arrangement should be separated, and theconsideration allocated. This new guidance eliminates the requirement toestablish objective evidence of fair value of undelivered products and servicesand instead provides for separate revenue recognition based upon management’sestimate of the selling price for an undelivered item when there is no othermeans to determine the fair value of that undelivered item. The old guidancepreviously required that the fair value of the undelivered item be the price ofthe item either sold in a separate transaction between unrelated third partiesor the price charged for each item when the item is sold separately by thevendor. This was difficult to determine when the product was not individuallysold because of its unique features. Under the old guidance, if the fair valueof all of the undelivered elements in the arrangement was not determinable,then revenue was deferred until all of the items were delivered or fair valuewas determined. The adoption of the new standard was done on a prospectivebasis and did not impact the Company’s financial position or results ofoperations.   This standard may impactthe Company in the event it completes future transactions or modifies existingcollaborative relationships.

 

**(3)  Comprehensive Loss**

 

For the three and six months ended June 30, 2010 and 2009,comprehensive loss was as follows:

 
| ** **                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                                  | ** ** |
| Net loss                                             |       | $                                                   | (9,525     | )                                                 | $          | (8,705 | ) | $ | (16,107 | ) | $ | (16,408 | ) |
| Other comprehensive loss:                            |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized (loss) gain on marketable securities      |       | (7                                                  | )          | —                                            |       | 111 |   | — |   |
| Unrealized foreign exchange translation gain  (loss) |       | 2                                                   |       | (3                                                | )          | 1 |   | (15 | ) |
| Total other comprehensive (loss) gain                |       | (5                                                  | )          | (3                                                | )          | 112 |   | (15 | ) |
| Total comprehensive loss                             |       | $                                                   | (9,530     | )                                                 | $          | (8,708 | ) | $ | (15,995 | ) | $ | (16,423 | ) |

 

**(4)  Net Loss Per Share**

 

Basic net loss per common share is based upon the weighted-averagenumber of common shares outstanding during the period, excluding restrictedstock that has been issued but is not yet vested. Diluted net loss per commonshare is based upon the weighted-average number of common shares outstandingduring the period plus additional weighted-average potentially dilutive commonshares outstanding during the period when the effect is dilutive.

 

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The potentially dilutive common shares that have not been included inthe net loss per common share calculations because the effect would have beenanti-dilutive are as follows:

 
| ** **       | ** ** | **Six months ended June 30,** | ** ** |
|------------------|------------|---------------------------------------------------|------------|
| ** **       | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
|             |       |                                              |       |   |   |
| Stock options    |       | 4,176,328                                         |       | 2,719,983 |   |
| Convertible debt |       | 353,563                                           |       | — |   |
| Restricted stock |       | 8,000                                             |       | — |   |
|             |       | 4,537,891                                         |       | 2,719,983 |   |

 

**(5)  Fair Value Measurements**

 

The fair value of the Company’s assets and liabilities reflects theCompany’s estimate of the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in an orderly transaction betweenmarket participants on the measurement date. Market participants are buyers andsellers in the principal market that are (i) independent,(ii) knowledgeable, (iii) able to transact, and (iv) willing totransact.

 

In connection with measuring the fair value of its assets andliabilities, the Company seeks to maximize the use of observable inputs (marketdata obtained from sources independent from the Company) and to minimize theuse of unobservable inputs (the Company’s assumptions about how marketparticipants would price assets and liabilities). The following fair valuehierarchy is used to classify assets and liabilities based on the observableinputs and unobservable inputs used in order to value the assets andliabilities:

 
| Level 1: |   | Observable inputs such as  quoted prices in active markets for identical assets or liabilities. An  active market for an asset or liability is a market in which transactions for  the asset or liability occur with sufficient frequency and volume to provide  pricing information on an ongoing basis. |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level 2: |   | Observable  inputs other than Level 1 prices, such as quoted prices in active  markets for similar assets or liabilities and quoted prices for identical  assets or liabilities in markets that are not active.                                                                                      |
| Level 3: |   | Unobservable  inputs based on the Company’s assessment of the assumptions that market  participants would use in pricing the asset or liability.                                                                                                                                                     |

 

The following tables set forth the Company’s financial assets subjectto fair value measurements:

 
| ** **            | ** ** | **As of  June 30, 2010** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **(In thousands)**                      | ** ** |
| Cash equivalents      |       | $                                       | 13,710     |             | $          | 13,710           |       | —           |       | — |   |
| Marketable securities |       | 50,674                                  |       | —           |       | $                | 50,674     |             | —     |   |
|                  |       | $                                       | 64,384     |             | $          | 13,710           |       | $                | 50,674     |   | — |   |

 
| ** **            | ** ** | **As of  December 31, 2009** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **(In thousands)**                     | ** ** |
| Cash equivalents      |       | $                                           | 53,780     |             | $          | 53,780           |       | —           |       | — |   |
| Marketable securities |       | 25,451                                      |       | —           |       | $                | 25,451     |             | —     |   |
|                  |       | $                                           | 79,231     |             | $          | 53,780           |       | $                | 25,451     |   | — |   |

 

There have been no transfers of assets or liabilities between the fairvalue measurement classifications.  TheCompany’s financial instruments consist mainly of cash and cash equivalents,marketable securities, short-term accounts receivable, accounts payable anddebt obligations. Marketable securities have been valued by a third partypricing service at each balance sheet date, using observable market inputs thatmay include trade information, broker or dealer quotes, bids, offers or acombination of these data sources. Short-term accounts receivable and accountspayable are reflected in the accompanying consolidated financial statements atcost, which approximates fair value due to the short-term nature of theseinstruments. Based on current market interest rates available to the Companyfor long-term liabilities with similar terms and maturities, the Companybelieves the fair value of the loan payable and note payable approximates itscarrying value at June 30, 2010.

 

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At June 30, 2010, the estimated fair value of the Company’soutstanding $12.5 million in CuraGen Debt was approximately $11.3 millionbased on quoted market prices.

 

**(6)  Marketable Securities**

 

A summary of cash, cash equivalents and marketable securities is shownbelow:

 
| **June 30, 2010**                             | ** ** | **Amortized  Cost**     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** |
| Cash and cash equivalents                               |       |                    |       |                         |       |                          |       |                |       |
| Cash and money market funds                             |       | $                       | 15,158     |                         | $          | —                        |       | $                   | —     |   | $ | 15,158 |   |
| Total cash and cash equivalents                         |       | $                       | 15,158     |                         | $          | —                        |       | $                   | —     |   | $ | 15,158 |   |
| Marketable securities                                   |       |                    |       |                         |       |                          |       |                |       |
| U.S. government obligations                             |       |                    |       |                         |       |                          |       |                |       |
| Maturing in one year or less                            |       | $                       | 15,860     |                         | $          | 23                            |       | $                   | —     |   | $ | 15,883 |   |
| Maturing after one year through two years               |       | 13,546                  |       | 113                          |       | —                        |       | 13,659              |       |
| Total U.S. government obligations                       |       | $                       | 29,406     |                         | $          | 136                           |       | $                   | —     |   | $ | 29,542 |   |
| Corporate debt securities                               |       |                    |       |                         |       |                          |       |                |       |
| Maturing in one year or less                            |       | $                       | 14,277     |                         | $          | —                        |       | $                   | (34        | ) | $ | 14,243 |   |
| Maturing after one year through two years               |       | 6,928                   |       | 29                           |       | (68                           | )          | 6,889               |       |
| Total corporate debt securities                         |       | $                       | 21,205     |                         | $          | 29                            |       | $                   | (102       | ) | $ | 21,132 |   |
| Total marketable securities                             |       | $                       | 50,611     |                         | $          | 165                           |       | $                   | (102       | ) | $ | 50,674 |   |
| Total cash, cash equivalents and marketable  securities |       | $                       | 65,769     |                         | $          | 165                           |       | $                   | (102       | ) | $ | 65,832 |   |

 
| **December 31, 2009**                         | ** ** | **Amortized  Cost**     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** |
| Cash and cash equivalents                               |       |                    |       |                         |       |                          |       |                |       |
| Cash and money market funds                             |       | $                       | 57,002     |                         | $          | —                        |       | $                   | —     |   | $ | 57,002 |   |
| Total cash and cash equivalents                         |       | $                       | 57,002     |                         | $          | —                        |       | $                   | —     |   | $ | 57,002 |   |
| Marketable securities                                   |       |                    |       |                         |       |                          |       |                |       |
| U.S. government obligations                             |       |                    |       |                         |       |                          |       |                |       |
| Maturing in one year or less                            |       | $                       | 9,698      |                         | $          | 5                             |       | $                   | —     |   | $ | 9,703 |   |
| Maturing after one year through two years               |       | 7,129                   |       | 6                            |       | (22                           | )          | 7,113               |       |
| Total U.S. government obligations                       |       | $                       | 16,827     |                         | $          | 11                            |       | $                   | (22        | ) | $ | 16,816 |   |
| Corporate debt securities                               |       |                    |       |                         |       |                          |       |                |       |
| Maturing in one year or less                            |       | $                       | —     |                         | $          | —                        |       | $                   | —     |   | $ | — |   |
| Maturing after one year through two years               |       | 8,672                   |       | —                       |       | (37                           | )          | 8,635               |       |
| Total corporate debt securities                         |       | $                       | 8,672      |                         | $          | —                        |       | $                   | (37        | ) | $ | 8,635 |   |
| Total marketable securities                             |       | $                       | 25,499     |                         | $          | 11                            |       | $                   | (59        | ) | $ | 25,451 |   |
| Total cash, cash equivalents and marketable  securities |       | $                       | 82,501     |                         | $          | 11                            |       | $                   | (59        | ) | $ | 82,453 |   |

 

As of June 30, 2010, unrealized losses in the portfolio wereprimarily due to increases in interest rates. The marketable securities held bythe Company were high investment grade and the Company did not consider anyinvestments to be other-than-temporarily impaired as of June 30, 2010.

 

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**(7)  Stock-BasedCompensation**

 

At June 30, 2010, the Company had two stock-based compensationplans: the 2004 Employee Stock Purchase Plan (the “2004 ESPP Plan”) and the2008 Stock Option and Incentive Plan (the “2008 Plan”).

 

*Employee Stock Purchase Plan*

 

At June 30, 2010, a total of 62,500 shares of common stock arereserved for issuance under the 2004 ESPP Plan. Under the 2004 ESPP Plan, eachparticipating employee may purchase up to 250 shares of common stock per year,through payroll deductions, at a purchase price equal to 85% of the lower ofthe fair market value of the common stock at either the beginning of the offeringperiod or the applicable exercise date. During the six months ended June 30, 2010 and 2009, the Companyissued 4,753 and 1,497 shares under the 2004 ESPP Plan, respectively. At June 30,2010, 52,153 shares were available for issuance under the 2004 ESPP Plan.

 

*Employee Stock Option and Incentive Plan*

 

The 2008 Plan permits the granting of incentive stock options (intendedto qualify as such under Section 422A of the Internal Revenue Code of1986, as amended), non-qualified stock options, stock appreciation rights,performance share units, restricted stock and other awards of restricted stockin lieu of cash bonuses to employees, consultants and outside directors.

 

At June 30, 2010, the 2008 Plan allowed for a maximum of 3,900,000shares of common stock to be issued prior to October 19, 2017. The Company’sboard of directors determines the term of each option, option price, and numberof shares for which each option is granted and the rate at which each optionvests. Options generally vest over a period not to exceed four years. The termof each option cannot exceed ten years (five years for options granted toholders of more than 10% of the voting stock of the Company) and the exerciseprice of stock options cannot be less than the fair market value of the commonstock at the date of grant (110% of fair market value for incentive stockoptions granted to holders of more than 10% of the voting stock of theCompany).  Vesting of all employee andnon-employee director stock option awards is accelerated upon a change incontrol as defined in the 2008 Plan.

 

In connection with the CuraGen Merger, the Company assumed theobligations of CuraGen under CuraGen’s 2007 Stock Plan (the “CuraGen 2007 Plan”)and each outstanding option to purchase CuraGen common stock (a “CuraGen StockOption”) granted under the CuraGen 2007 Plan. Each CuraGen Stock Option assumedby the Company is deemed to constitute an option to acquire, on the same termsand conditions as were applicable under the CuraGen 2007 Plan, shares of the Company’scommon stock that have been adjusted consistent with the ratio at which theCompany’s common stock was issued in exchange for CuraGen’s common stock in theCuraGen Merger. As of October 1, 2009, the Company assumed options toacquire 931,315 shares of its common stock with a weighted average exerciseprice of $3.17.  As of October 1,2009, all of the CuraGen Stock Options were fully vested except for 8,993shares which generally vest over a two year period. No additional awards willbe issued under the CuraGen 2007 Plan. The fair value of the CuraGen StockOptions that were attributed to precombination service was included in theCuraGen Merger consideration.

 

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A summary of stock option activity for the six months ended June 30,2010 is as follows:

 
| ** **                                                 | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (In Years)** | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Options Outstanding at December 31, 2009              |       | 3,576,159  |       | $                                                      | 7.10       |                                                                     | 6.6        |   |
| Granted                                                    |       | 805,000    |       | 4.54                                                   |       |                                                                     |       |
| Exercised                                                  |       | (197,116   | )          | 3.03                                                   |       |                                                                     |       |
| Canceled/forfeited                                         |       | (1,500     | )          | 5.84                                                   |       |                                                                     |       |
| Expired                                                    |       | (6,215     | )          | 2.57                                                   |       |                                                                     |       |
| Options Outstanding at June 30, 2010                  |       | 4,176,328  |       | $                                                      | 6.81       |                                                                     | 7.0        |   |
| Options Vested and Expected to Vest at  June 30, 2010 |       | 4,115,409  |       | $                                                      | 6.82       |                                                                     |       |   |
| Options Exercisable at June 30, 2010                  |       | 2,646,291  |       | $                                                      | 7.13       |                                                                     |       |   |
| Shares Available for Grant under the 2008 Plan             |       | 1,691,147  |       |                                                   |       |                                                                     |       |

 

The total intrinsic value of stock options exercised during the sixmonths ended June 30, 2010 and 2009 was $0.8 million and $0.1million, respectively. The weighted average grant-date fair value of stockoptions granted during the six months ended June 30, 2010 and 2009 was$2.81 and $5.33, respectively. The total fair value of stock options thatvested during the six months ended June 30, 2010 and 2009 was$1.9 million.

 

The aggregate intrinsic value of stock options outstanding at June 30,2010 was $1.1 million. The aggregate intrinsic value of stock options vestedand expected to vest at June 30, 2010 was $1.1 million. As of June 30,2010, total compensation cost related to non-vested employee and non-employeedirector stock options not yet recognized was approximately $4.9 million,net of estimated forfeitures, which is expected to be recognized as expenseover a weighted average period of 2.9 years.

 

*Restricted Stock*

 

A summary of restricted stock activity under the 2008 Plan for the sixmonths ended June 30, 2010 is as follows:

 
| ** **                                         | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value  (per share)** | ** ** |
|----------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|
| Outstanding and unvested at December 31, 2009 |       | 16,000     |       | $                                                                         | 4.48       |   |
| Granted                                            |       | —     |       | —                                                                    |       |
| Vested                                             |       | (8,000     | )          | 4.48                                                                      |       |
| Canceled                                           |       | —     |       | —                                                                    |       |
| Outstanding and unvested at June 30, 2010     |       | 8,000      |       | $                                                                         | 4.48       |   |

 

*Valuation and Expenses Information*

 

Stock-based compensation expense related to employee and non-employeestock options, restricted stock and employee stock purchases for the three andsix months ended June 30, 2010 and 2009 was recorded as follows:

 
| ** **                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                             | ** ** | **(In thousands)**                                  | ** ** |
| Research and development               |       | $                                                   | 393        |                                              | $          | 421 |   | $ | 909 |   | $ | 821 |   |
| General and administrative             |       | 251                                                 |       | 330                                               |       | 705 |   | 1,043 |   |
| Total stock-based compensation expense |       | $                                                   | 644        |                                              | $          | 751 |   | $ | 1,614 |   | $ | 1,864 |   |

 

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The fair values of employee and non-employee director stock options andemployee stock purchases granted during the three and six months ended June 30,2010 and 2009 were valued using the Black-Scholes option-pricing model with thefollowing assumptions:

 
| ** **                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected stock price volatility (options)   |       | 66                                                  | %          | 68                                                | %          | 65-66 | % | 68 | % |
| Expected stock price volatility (2004 ESPP) |       | —                                              |       | —                                            |       | 51 | % | 98 | % |
| Expected option term (options)              |       | 6.2 years                                           |       | 6.1 years                                         |       | 6.2 years |   | 6.1-6.3 years |   |
| Expected option term (2004 ESPP)            |       | —                                              |       | —                                            |       | 0.5 years |   | 0.5 years |   |
| Risk-free interest rate (options)           |       | 2.9                                                 | %          | 2.8                                               | %          | 2.9-3.2 | % | 1.9-2.8 | % |
| Risk-free interest rate (2004 ESPP)         |       | —                                              |       | —                                            |       | 0.2 | % | 0.3 | % |
| Expected dividend yield                     |       | None                                                |       | None                                              |       | None |   | None |   |

 

Prior to January 1, 2010, the Company used the simplified methodof estimating the expected term for share-based compensation.  Starting January 1, 2010, the Companyceased using the simplified method, and now uses the average of expected termsfor industry peers.  Due to the AVANTMerger and the CuraGen Merger, historical exercise patterns do not provide areasonable basis to estimate expected term of current option grants.  Industry peers consist of several publiccompanies that are similar in size in the biopharmaceutical industry.  The Company uses its historical stock pricevolatility consistent with the expected term of grant as the basis for itsexpected volatility assumption. The risk-free interest rate is based upon theyield of U.S. Treasury securities consistent with the expected term of theoption. The dividend yield assumption is based on the Company’s history of zerodividend payouts and expectation that no dividends will be paid in theforeseeable future.

 

**(8)  Intangible Assets and Goodwill**

 

Intangible assets, net of accumulated amortization, and goodwill are asfollows:

 
| ** **                  | ** ** | ** **          | ** ** | **June 30, 2010** | ** ** | **December 31, 2009**    | ** ** |
|-----------------------------|------------|---------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **Estimated  Life** | ** ** | **Cost**               | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| ** **                  | ** ** | ** **          | ** ** | **(In thousands)**     | ** ** |
| Intangible Assets:          |       |                |       |                   |       |                          |       |   |   |   |   |   |   |   |   |
| IPR&D                   |       | Indefinite          |       | $                      | 11,800     |                          | —     |   | $ | 11,800 |   | $ | 11,800 |   | — |   | $ | 11,800 |   |
| Amgen Amendment             |       | 16 years       |       | 14,500                 |       | $                             | (673       | ) | 13,827 |   | 14,500 |   | $ | (224 | ) | 14,276 |   |
| TopoTarget Agreement        |       | 1.75 years     |       | 2,400                  |       | (1,714                        | )          | 686 |   | 2,400 |   | (343 | ) | 2,057 |   |
| Core Technology             |       | 4.5-11 years   |       | 1,948                  |       | (905                          | )          | 1,043 |   | 2,193 |   | (832 | ) | 1,361 |   |
| Strategic Partner Agreement |       | 8 years        |       | 630                    |       | (185                          | )          | 445 |   | 630 |   | (145 | ) | 485 |   |
| Total Intangible Assets     |       |                |       | $                      | 31,278     |                          | $          | (3,477 | ) | $ | 27,801 |   | $ | 31,523 |   | $ | (1,544 | ) | $ | 29,979 |   |
| Goodwill                    |       | Indefinite          |       | $                      | 8,965      |                          | —     |   | $ | 8,965 |   | $ | 8,965 |   | — |   | $ | 8,965 |   |

 

In January 2009, the Company entered into a purchase agreement(the “LAHI Agreement”) with Lohmann Animal Health International (“LAHI”) tosell its poultry vaccines assets to LAHI. Under the LAHI Agreement, LAHI paidan upfront fee of $0.8 million and agreed to pay potential milestonepayments. The Company recorded a gain of $0.6 million during the threemonths ended March 31, 2009 related to the LAHI Agreement based on theupfront fee less the net book value of the related asset.

 

The estimated fair value attributed to the April 2008 agreement (“TopoTargetAgreement”) between the Company (as a successor to CuraGen) and TopoTarget A/S(“TopoTarget”) relates to the Company’s rights under the TopoTarget Agreementto receive up to $6 million in either potential commercial milestonepayments related to future net sales of Belinostat or 10% of any sublicenseincome received by TopoTarget (“TopoTarget Payments”).  In February 2010, TopoTarget enteredinto a co-development and commercialization agreement for Belinostat withSpectrum Pharmaceuticals, Inc. which resulted in the Company’s receipt of$3 million of the TopoTarget Payments. The Company recorded this cash receipt as Other Income for the threemonths ended March 31, 2010 and recorded amortization expense related tothe TopoTarget Agreement of $0.2 million and $1.4 million for the three and sixmonths ended June 30, 2010, respectively.

 

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During the three months ended June 30, 2010, the Company wrote-off$0.2 million in Core Technology to amortization of intangible asset expense.

 

**(9)  Income Taxes**

 

Massachusetts, New Jersey and Connecticut are the three states in whichthe Company primarily operates or has operated and has income tax nexus. TheCompany is currently under examination for sales and use taxes by the State ofConnecticut for CuraGen’s operations for the period from July 1, 2006through June 30, 2009 and by the Internal Revenue Service with respect to2008.  The Company is not currently underexamination by any other jurisdictions for any tax year.

 

The Company has evaluated the positive and negative evidence bearingupon the realizability of its net deferred tax assets, which are comprisedprincipally of net operating loss carryforwards, capitalized R&Dexpenditures and R&D tax credit carryforwards. The Company has determined thatit is more likely than not that it will not recognize the benefits of federaland state deferred tax assets and, as a result, a full valuation allowance wasmaintained at June 30, 2010 and December 31, 2009 against the Company’snet deferred tax assets.

 

**(10)  Significant Revenue Arrangements**

 

A summary of the Company’s significant revenue contracts andarrangements follows:

 

*GlaxoSmithKline plc (“Glaxo”) and Paul RoyaltyFund II, L.P. (“PRF”)*

 

In 1997, the Company entered into an agreement with Glaxo to collaborateon the development and commercialization of the Company’s oral rotavirus strainand Glaxo assumed responsibility for all subsequent clinical trials and allother development activities. The Company licensed-in the rotavirus strain thatwas used to develop Glaxo’s Rotarix® rotavirus vaccine in 1995 and owes a licensefee of 30% to Cincinnati Children’s Hospital Medical Center (“CCH”) on netroyalties received from Glaxo. The Company is obligated to maintain a licensewith CCH with respect to the Glaxo agreement. The term of the Glaxo agreementis through the expiration of the last of the relevant patents covered by theagreement, although Glaxo may terminate the agreement upon 90 days priorwritten notice.

 

In May 2005, the Company entered into an agreement whereby anaffiliate of PRF purchased an interest in the net royalties the Company willreceive on worldwide sales of Rotarix®. The Company’sretained interests in Rotarix® net royalties which were not sold to PRF arerecorded as product royalty revenue and a corresponding amount that is payableto CCH is recorded as royalty expense. Product royalty revenue and royaltyexpense related to the Company’s retained interest in Rotarix® was $1.6 million and$1.2 million for the three months ended June 30, 2010 and 2009 and$3.7 million and $3.2 million for the six months ended June 30,2010 and 2009, respectively.

 

Royaltyrates on Rotarix® escalate from 7% to 10% based on net productsales in countries that have valid patent protection. These royalty rates arediscounted by 30% for “non-patent” countries (primarily international markets).In September 2006, the Company received notice from Glaxo that Glaxo wouldbegin paying royalties on sales of Rotarix® at the lower of the two royalty rates undertheir 1997 license agreement. Glaxo’s decision to pay the lower royalty rate(which is 70% of the full rate) is based upon Glaxo’s assertion that Rotarix® is not covered by the patentsGlaxo licensed from the Company in Australia and certain European countries. IfGlaxo’s position stands, the royalties to which PRF is entitled will no longerbe limited by a $27.5 million annual threshold, which the Companyprojected may have been reached in later years as sales of Rotarix® increased.  Irrespective of Glaxo’s position, the Companywill still retain approximately 65% of the royalties on worldwide sales ofRotarix® once PRF receives 2.45 times the aggregatecash payments of $60 million it made to the Company, though the potentialamount of such residual royalties will be lower if Glaxo’s position stands. TheCompany has received $60 million in total milestone payments under the PRFagreement. No additional milestone payments are due from PRF under theagreement.  In late March 2010, theFDA temporarily suspended the use of Rotarix® in the United States as a precautionarymeasure following the discovery of PCV-1 DNA material in the vaccine.  In May 2010, the FDA determined thathealthcare practitioners could resume the use of Rotarix®.

 

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*Pfizer Inc. (“Pfizer”) License and DevelopmentAgreement*

 

On April 16, 2008, the Company and Pfizer entered into a Licenseand Development Agreement (the “Pfizer Agreement”) under which Pfizer wasgranted an exclusive worldwide license to a therapeutic cancer vaccinecandidate, Rindopepimut (PF-04948568) (formerly CDX-110), in Phase 2development for the treatment of glioblastoma multiforme. The Pfizer Agreementalso gives Pfizer exclusive rights to the use of EGFRvIII vaccines in otherpotential indications. Under the Pfizer Agreement, Pfizer made an upfrontpayment to the Company of $40 million and made a $10 million equityinvestment in the Company. Pfizer will fund all development costs for theseprograms. The Company is also eligible to receive potential milestone paymentsexceeding $390 million for the successful development andcommercialization of Rindopepimut and additional EGFRvIII vaccine products, aswell as royalties on any product sales. The Pfizer Agreement became effectiveafter clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976(as amended) on May 19, 2008.

 

On May 27, 2008, the Company received $10 million from Pfizerin exchange for 781,250 shares of the Company’s common stock having a fairvalue of $10.9 million, or $13.91 per share, on that date. The$0.9 million over the amount received from Pfizer was recorded as areduction to deferred revenue of the $40 million upfront payment receivedfrom Pfizer on June 18, 2008.

 

The Company has determined that its performance obligations under thiscollaboration should be accounted for as a single unit of accounting. TheCompany’s deliverables under this collaboration primarily include an exclusivelicense to its Rindopepimut product candidate and its EGFRvIII technologies,research and development services as required under the collaboration andparticipation in the joint clinical development committee. The Company has estimatedthat its performance period under the collaboration will be 9.5 yearsbased on an assessment of the period over which the Company will have met itsperformance obligations under the collaboration. Revenue, including researchand development reimbursements, is being recognized on a straight-line basisover this period using the Contingency Adjusted Performance Model (“CAPM”). The$40 million up-front payment, less the $0.9 million in excess fairvalue for the Company’s common stock discussed above, was recorded as deferredrevenue and is being amortized over the 9.5-year performance period at a rateof $1.0 million per quarter.

 

The Pfizer Agreement also provides for reimbursement by Pfizer of allcosts incurred by the Company in connection with the collaboration since theeffective date. The Company invoices Pfizer monthly for its reimbursable costsand records the invoiced amount as deferred revenue. These deferred revenueamounts are amortized to revenue over the estimated 9.5-year performance periodon a straight-line basis using the CAPM model. The Company incurred andinvoiced Pfizer reimbursable costs related to the Pfizer collaboration of $0.3million and $1.1 million for the three months ended June 30, 2010 and2009, respectively, and $0.5 million and $2.6 million for the six months ended June 30,2010 and 2009, respectively.

 

The Company recorded product development and licensing agreementsrevenue under the Pfizer Agreement as follows:

 
| ** **                 | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **(In thousands)**                                  | ** ** |
| Up-front portion           |       | $                                                   | 1,030      |                                              | $          | 1,030 |   | $ | 2,060 |   | $ | 2,060 |   |
| Reimbursable costs portion |       | 276                                                 |       | 297                                               |       | 542 |   | 569 |   |
|                       |       | $                                                   | 1,306      |                                              | $          | 1,327 |   | $ | 2,602 |   | $ | 2,629 |   |

 

At June 30, 2010, the Company had total deferred revenue of $37.1million related to the Pfizer Agreement.

 

In connection with the Pfizer Agreement, the Company paid a total of$6.9 million in sublicense fees to Duke University and Thomas JeffersonUniversity. The Company recorded these deferred sublicense fees to other assetsin the consolidated balance sheets and is amortizing them to royalty expenseover the 9.5-year performance period at a rate of $0.2 million perquarter.  At June 30, 2010 andDecember 31, 2009, the unamortized balance of deferred costs was$5.3 million and $5.7 million, respectively.

 

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*Rockefeller University (“Rockefeller”)*

 

The Company is providing research and development support toRockefeller on the development of their vaccine, DCVax-001, which the Companyrefers to as CDX-2401, aimed at providing protection from infection with HIV,the virus known to cause AIDS. This program is in a Bill & Melinda GatesFoundation funded partnership called the Grand Challenges initiative.Preclinical studies and manufacturing development are in progress and paymentsto the Company are made on a time and materials basis. The Company recordedgrant revenue from Rockefeller of $0.2 million and $0.1 million forthe six months ended June 30, 2010 and 2009, respectively, and no grantrevenue for the three months ended June 30, 2010 and 2009.

 

**(11)  OtherLong-Term Liabilities**

 

Other long-term liabilities include the following:

 
| ** **               | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **(In thousands)**          | ** ** |
| Deferred Rent            |       | $                           | 435        |                            | $          | 377 |   |
| CuraGen Merger Severance |       | 1,160                       |       | 2,623                           |       |
| Deferred Tax Liabilities |       | 4,661                       |       | 4,661                           |       |
| Loan Payable             |       | 606                         |       | 632                             |       |
| Note Payable             |       | 110                         |       | 178                             |       |
| Total                    |       | 6,972                       |       | 8,471                           |       |
| Less Current Portion     |       | (1,174                      | )          | (2,156                          | )          |
| Long-Term Portion        |       | $                           | 5,798      |                            | $          | 6,315 |   |

 

**(12) CuraGen Acquisition**

 

In connection with the CuraGen Merger, effective October 1, 2009,the Company (i) issued 15,722,713 shares of common stock of the Company,or 0.2739 shares, in exchange for each share of outstanding CuraGen commonstock, plus cash in lieu of fractional shares (the “CuraGen Exchange Ratio”),(ii) assumed all of the CuraGen Stock Options and (iii) assumed theCuraGen Debt. The Company acquired CuraGen to gain access to a pipeline ofoncology-focused antibody-drug conjugates, including CDX-011 currently inPhase 2 clinical development for the treatment of breast cancer andmelanoma, and cash, cash equivalents and marketable securities of$70.3 million.

 

The transaction was accounted for under the acquisition method ofaccounting. All of the assets acquired and liabilities assumed in thetransaction are recognized at their acquisition-date fair values, whiletransaction costs associated with the transaction are expensed as incurred.

 

*Purchase Price*

 

The purchase price for CuraGen was based on the acquisition-date fairvalue of the consideration transferred, which was calculated based on theclosing price of the Company’s common stock of $5.43 per share onOctober 1, 2009. The acquisition-date fair value of the considerationtransferred consisted of the following (in thousands):

 
| Fair value of common stock issued   |   | $     | 85,374 |   |
|-------------------------------------|--------|-------|--------|--------|
| Fair value of CuraGen Stock Options |   | 2,868 |   |
| Total consideration transferred     |   | $     | 88,242 |   |

 

U.S. GAAP requires that the fair value of replacement awardsattributable to precombination service be included in the considerationtransferred. Of the CuraGen Stock Options assumed, all but 1%, were immediatelyvested upon closing in accordance with the terms of the stock option agreementsand employment agreements. The fair value of the CuraGen Stock Options that hasbeen attributed to precombination service was included in the considerationtransferred.

 

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*Allocations of Assets and Liabilities*

 

The Company allocated the consideration transferred for CuraGen to nettangible assets, intangible assets, goodwill and a severance obligation. Thedifference between the aggregate consideration transferred and the fair valueof assets acquired and liabilities assumed was allocated to goodwill. Thisgoodwill relates to the potential synergies from the CuraGen Merger and adeferred tax liability related to acquired IPR&D intangible assets. None ofthe goodwill is expected to be deductible for income tax purposes. Thefollowing table summarizes the fair values of the assets acquired andliabilities assumed at the acquisition date (in thousands):

 
| Cash and cash equivalents          |   | $       | 51,654 |   |
|------------------------------------|--------|---------|--------|--------|
| Marketable securities              |   | 18,638  |   |
| Identifiable intangible assets:    |   |    |   |
| IPR&D                          |   | 11,800  |   |
| Amgen Amendment                    |   | 14,500  |   |
| TopoTarget Agreement               |   | 2,400   |   |
| Other current and long-term assets |   | 756     |   |
| Goodwill                           |   | 8,965   |   |
| CuraGen Debt                       |   | (11,503 | )      |
| Deferred tax liabilities, net      |   | (5,190  | )      |
| Other assumed liabilities          |   | (3,778  | )      |
| Total                              |   | $       | 88,242 |   |

 

**(13) Stockholders’ Equity**

 

In April 2010, the Company filed a shelf registration statementwith the Securities and Exchange Commission to register for sale anycombination of the types of securities described in the filing up to a dollaramount of $150 million.  The shelfregistration went effective on April 22, 2010.  No securities have been sold by the Companyfrom this shelf registration.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995:***  This report on Form 10-Q containsforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995 under Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Forward-looking statements include statementswith respect to our beliefs, plans, objectives, goals, expectations,anticipations, assumptions, estimates, intentions and future performance, andinvolve known and unknown risks, uncertainties and other factors, which may bebeyond our control, and which may cause our actual results, performance orachievements to be materially different from future results, performance orachievements expressed or implied by such forward-looking statements. Allstatements other than statements of historical fact are statements that couldbe forward-looking statements. You can identify these forward-lookingstatements through our use of words such as “may,” “will,” “can,” “anticipate,”“assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,”“estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,”“target,” “potential” and other similar words and expressions of the future.

 

There are a number of important factors that could cause the actualresults to differ materially from those expressed in any forward-lookingstatement made by us. These factors include, but are not limited to:

 

·                  our ability to successfullycomplete product research and further development, including animal,preclinical and clinical studies, and commercialization of Rindopepimut,CDX-011, CDX-1307, CDX-1401, CDX-1135, and other products and the growth of themarkets for those product candidates;

 

·                  our ability to raisesufficient additional capital on terms acceptable to us, or at all;

 

·                  the cost, timing, scope andresults of ongoing safety and efficacy trials of Rindopepimut, CDX-011,CDX-1307, CDX-1401, CDX-1135, and other preclinical and clinical testing;

 

·                  our ability to adapt our APCTargeting TechnologyTM to develop new, safe and effective vaccines againstoncology and infectious disease indications;

 

·                  the ability to negotiatestrategic partnerships or other disposition transactions for our non-coreprograms;

 

·                  our ability to managemultiple clinical trials for a variety of product candidates at differentstages of development;

 

·                  the strategies and businessplans of our partners, such as Pfizer’s plans for Rindopepimut, GlaxoSmithKline’splans with respect to Rotarix® and Vaccine Technologies’ plans concerning theCholeraGarde® (Peru-15) and ETEC E. coli vaccines, which arenot within our control, and our ability to maintain strong, mutually beneficialrelationships with those partners;

 

·                  our ability to developtechnological capabilities and expand our focus to broader markets forvaccines;

 

·                  the availability, cost,delivery and quality of clinical and commercial grade materials produced by ourown manufacturing facility or supplied by contract manufacturers and partners;

 

·                  the timing, cost anduncertainty of obtaining regulatory approvals for product candidates;

 

·                  our ability to develop andcommercialize products before competitors that are superior to the alternativesdeveloped by such competitors;

 

·                  the validity of our patentsand our ability to avoid intellectual property litigation, which can be costlyand divert management time and attention; and

 

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·*                 *the factorslisted under the headings “Business,” “RiskFactors” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s annual report on Form 10-K for theyear ended December 31, 2009 and other reports that Celldex files with theSecurities and Exchange Commission*.*

 

All forward-looking statements are expressly qualified in theirentirety by this cautionary notice. You are cautioned not to place unduereliance on any forward-looking statements, which speak only as of the date ofthis report or the date of the document incorporated by reference into thisreport. We have no obligation, and expressly disclaim any obligation, toupdate, revise or correct any of the forward-looking statements, whether as aresult of new information, future events or otherwise. We have expressed ourexpectations, beliefs and projections in good faith and we believe they have areasonable basis. However, we cannot assure you that our expectations, beliefsor projections will result or be achieved or accomplished.

 

**OVERVIEW**

 

We are an integrated biopharmaceutical company that applies ourcomprehensive Precision Targeted Immunotherapy Platform to generate a pipelineof candidates to treat cancer and other difficult-to-treat diseases. Ourimmunotherapy platform includes a complementary portfolio of monoclonalantibodies, antibody-targeted vaccines, antibody-drug conjugates andimmunomodulators to create novel disease-specific drug candidates.

 

Our strategy is to develop and demonstrate proof-of-concept for ourproduct candidates before leveraging their value through partnerships or, inappropriate situations, continuing late stage development throughcommercialization ourselves. Demonstrating proof-of-concept for a productcandidate generally involves bringing it through Phase 1 clinical trialsand one or more Phase 2 clinical trials so that we are able todemonstrate, based on human trials, good safety data for the product candidateand some data indicating its effectiveness. We thus leverage the value of ourtechnology portfolio through corporate, governmental and non-governmentalpartnerships. This approach allows us to maximize the overall value of ourtechnology and product portfolio while best ensuring the expeditiousdevelopment of each individual product.

 

Our current collaborations include the commercialization of an oralhuman rotavirus vaccine and the development of oncology vaccines. Our productcandidates address market opportunities for which we believe current therapiesare inadequate or non-existent.

 

**Acquisition of CuraGen**

 

In connection with the CuraGen Merger, effective October 1, 2009,we (i) issued 15,722,713 shares of our common stock, or 0.2739 shares, in exchangefor each share of outstanding CuraGen common stock, plus cash in lieu offractional shares (the “CuraGen Exchange Ratio”), (ii) assumed all of theCuraGen Stock Options and (iii) assumed the CuraGen Debt. We acquiredCuraGen to gain access to a pipeline of oncology-focused antibody-drugconjugates, including CDX-011 (formerly CR011) currently in Phase 2clinical development for the treatment of breast cancer and melanoma, and cash,cash equivalents and marketable securities of $70.3 million.

 

The transaction was accounted for under the acquisition method ofaccounting. All of the assets acquired and liabilities assumed in thetransaction are recognized at their acquisition-date fair values, whiletransaction costs associated with the transaction are expensed as incurred.

 

**CURRENT PROGRAMS AND PARTNERSHIPS**

 

Our products are derived from a broad set of complementary technologieswhich have the ability to utilize the human immune system and enable thecreation of preventative and therapeutic agents. We are using thesetechnologies to develop targeted immunotherapeutics comprised of antibodies,adjuvants and monotherapies and antibody-drug conjugates that prevent or treatcancer and other diseases that modify undesirable activity by the body’s ownproteins or cells. A number of our immunotherapeutic and antibody-drugconjugate product candidates are in various stages of clinical trials. Weexpect that a large percentage of our research and development expenses will beincurred in support of our current and future clinical trial programs.

 

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The following table includes the programs that we currently believe arematerial to our business:

 
| **Product**                     | ** ** | **Indication/Field**                       | ** ** | **Partner**           | ** ** | **Status**     |
|---------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|----------------|
| **CLINICAL**                    |       |                                       |       |                  |       |           |
| Rindopepimut (formerly CDX-110) |       | Glioblastoma  multiforme                   |       | Pfizer  (PF-04948568) |       | Phase 2b  |
| CDX-011 (glembatumumab vedotin) |       | Metastatic  melanoma and breast cancer     |       | —                |       | Phase 2   |
| CDX-1307                        |       | Invasive  bladder cancer                   |       | —                |       | Phase 2   |
| CDX-1401                        |       | Multiple  solid tumors                     |       | —                |       | Phase 1/2 |
| CDX-1135                        |       | Renal  disease                             |       | —                |       | Pilot  Study   |
| **PRECLINICAL**                 |       |                                       |       |                  |       |           |
| CDX-301                         |       | Cancer,  autoimmune disease and transplant |       | —                |       | Preclinical    |
| CDX-1127                        |       | Immuno-modulation,  multiple tumors        |       | —                |       | Preclinical    |
| CDX-014                         |       | Renal  and ovarian cancer                  |       | —                |       | Preclinical    |
| CDX-1189                        |       | Renal  disease                             |       | —                |       | Preclinical    |
| **MARKETED PRODUCTS**           |       |                                       |       |                  |       |           |
| Rotarix®                   |       | Rotavirus  infection                       |       | GlaxoSmithKline       |       | Marketed       |

 

The expenditures that will be necessary to execute our business planare subject to numerous uncertainties. Completion of clinical trials may takeseveral years or more, and the length of time generally varies substantiallyaccording to the type, complexity, novelty and intended use of a productcandidate. It is not unusual for the clinical development of these types ofproduct candidates to each take five years or more, and for total developmentcosts to exceed $100 million for each product candidate. Our estimatesthat clinical trials of the type we generally conduct are typically completedover the following timelines:

 
| **Clinical Phase** | ** ** | **Estimated  Completion  Period** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| Phase 1       |       | 1 - 2 Years             |       |
| Phase 2       |       | 1 - 5 Years             |       |
| Phase 3       |       | 1 - 5 Years             |       |

 

The duration and the cost of clinical trials may vary significantlyover the life of a project as a result of differences arising during theclinical trial protocol, including, among others, the following:

 

·                  the number of patients thatultimately participate in the trial;

 

·                  the duration of patientfollow-up that seems appropriate in view of results;

 

·                  the number of clinical sitesincluded in the trials;

 

·                  the length of time requiredto enroll suitable patient subjects; and

 

·                  the efficacy and safetyprofile of the product candidate.

 

We test potential product candidates in numerous preclinical studiesfor safety, toxicology and immunogenicity. We may then conduct multipleclinical trials for each product candidate. As we obtain results from trials,we may elect to discontinue or delay clinical trials for certain productcandidates in order to focus our resources on more promising productcandidates.

 

An element of our business strategy is to pursue the research anddevelopment of a broad portfolio of product candidates within our therapeuticcategories and consistent with our technology and capabilities.  This is intended to allow us to diversify therisks associated with our research and development expenditures. As a result,we believe our future capital requirements and our future financial success arenot substantially dependent on any 

 

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oneproduct candidate. To the extent we are unable to maintain a broad range ofproduct candidates, our dependence on the success of one or a few productcandidates increases.

 

Regulatory approval is required before we can market our productcandidates as immunotherapeutics. In order to proceed to subsequent clinicaltrial stages and to ultimately achieve regulatory approval, the regulatoryagency must conclude that our product candidate is safe and effective.Historically, the results from preclinical testing and early clinical trials(through Phase 2) have often not been predictive of results obtained inlater clinical trials. A number of new drugs, biologics and immunotherapeuticshave shown promising results in early clinical trials, but subsequently failedto establish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.

 

Furthermore, our business strategy includes the option of entering intocollaborative arrangements with third parties to complete the development andcommercialization of our product candidates. In the event that third parties takeover the clinical trial process for one of our product candidates, theestimated completion date would largely be under control of that third partyrather than us. We cannot forecast with any degree of certainty whichproprietary products, if any, will be subject to future collaborativearrangements, in whole or in part, and how such arrangements would affect ourdevelopment plan or capital requirements. Our programs may also benefit fromsubsidies, grants, contracts or government or agency-sponsored studies thatcould reduce our development costs.

 

As a result of the uncertainties discussed above, among others, we areunable to estimate the duration and completion costs of our research anddevelopment projects or when, if ever, and to what extent we will receive cashinflows from the commercialization and sale of a product. Our inability tocomplete our research and development projects in a timely manner or ourfailure to enter into collaborative agreements, when appropriate, couldsignificantly increase our capital requirements and could adversely impact ourliquidity. These uncertainties could force us to seek additional, externalsources of financing from time to time in order to continue with our businessstrategy. Our inability to raise additional capital, or to do so on termsreasonably acceptable to us, would jeopardize the future success of ourbusiness.

 

During the past five years through December 31, 2009, we incurredan aggregate of $73.5 million in research and development expenses. Thefollowing table indicates the amount incurred for each of our significantresearch programs and for other identified research and development activitiesduring the six months ended June 30, 2010 and 2009. The amounts disclosedin the following table reflect direct research and development costs, licensefees associated with the underlying technology and an allocation of indirectresearch and development costs to each program. Prior to 2008, theprivately-held Celldex Research did not maintain records that allowed forquantification of research and development expenses by project.

 
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **            | ** ** | **(In thousands)**                           | ** ** |
| **CLINICAL**          |       |                                              |       |   |   |
| Rindopepimut          |       | $                                                 | 598        |   | $ | 2,546 |   |
| CDX-011               |       | 2,221                                             |       | — |   |
| CDX-1307              |       | 2,285                                             |       | 3,949 |   |
| CDX-1401              |       | 1,451                                             |       | 3,056 |   |
| CDX-1135              |       | 416                                               |       | 234 |   |
| **PRECLINICAL**       |       |                                              |       |   |   |
| CDX-301               |       | 2,964                                             |       | 300 |   |
| CDX-1127              |       | 1,357                                             |       | 339 |   |
| CDX-014               |       | 24                                                |       | — |   |
| CDX-1189              |       | 42                                                |       | 207 |   |
| **OTHER**             |       |                                              |       |   |   |
| CDX-2401              |       | 510                                               |       | 829 |   |
| Other Programs        |       | 1,826                                             |       | 1,430 |   |
| Total R&D Expense |       | $                                                 | 13,694     |   | $ | 12,890 |   |

 

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** **

**Clinical Development Programs**

 

*Rindopepimut**(**PF-04948568)**(formerly CDX-110)*

 

Our lead clinical development program, Rindopepimut, is a peptide-basedimmunotherapy that targets the tumor specific molecule called EGFRvIII, afunctional variant of the naturally expressed epidermal growth factor receptor(“EGFR”), a protein which has been well validated as a target for cancertherapy. Unlike EGFR, EGFRvIII is not present in normal tissues, and has beenshown to be a transforming oncogene that can directly contribute to the cancercell growth. EGFRvIII is commonly present in glioblastoma multiforme, or GBM,the most common and aggressive form of brain cancer, and has also been observedin various other cancers such as breast, ovarian, prostate, colorectal, andhead & neck cancer.

 

In April 2008, we and Pfizer Inc. (“Pfizer”) entered into aLicense and Development Agreement (the “Pfizer Agreement”) under which Pfizerwas granted an exclusive worldwide license to Rindopepimut. The PfizerAgreement also gives Pfizer exclusive rights to the use of EGFRvIII vaccines inother potential indications. Pfizer funds all development costs for theseprograms. We and Pfizer are currently pursuing the development of Rindopepimutfor GBM therapy. The FDA has granted orphan drug designation for Rindopepimutfor the treatment of EGFRvIII expressing GBM as well as fast track designation.

 

Initial clinical development of EGFRvIII immunotherapy was led bycollaborating investigators at the Brain Center at Duke Comprehensive CancerCenter in Durham, North Carolina and at M.D. Anderson Cancer Center in Houston,Texas. The results from the Phase 1 (VICTORI) and Phase 2a (ACTIVATE)studies, which enrolled 14 and 18 evaluable patients, respectively, havedemonstrated a significant increase in the time to disease progression (“TTP”)and overall survival (“OS”) rates.  InACTIVATE, improvements in TTP and OS were approximately 125% and 73%,respectively, relative to appropriately matched historical controls. Anextension of the Phase 2a program (ACT II) at the same twoinstitutions has evaluated 22 additional GBM patients treated in combinationwith maintenance temozolomide (the current standard of care). Preliminaryresults from ACT II  estimate medianoverall survival to be 23.6 months, although the median has not yet beenreached, while the survival of a matched historical control group was15.0 months (p value = 0.0194). Overall TTP in the ACT II study was15.2 months compared with 6.3 months for the historical control group(p value = 0.0237).

 

We initiated a Phase 2b/3 randomized study (ACT III) ofRindopepimut combined with standard of care, temozolomide, versus standard ofcare alone in patients with GBM in over 30 sites throughout the United States.In December 2008, we announced an amendment to convert the ACT III studyto a single-arm Phase 2 clinical trial in which all patients will receiveRindopepimut in combination with temozolomide. The decision, which followed therecommendation of the Independent Data Monitoring Committee, was based on theobservation that the majority of patients randomized to the control (standardof care) arm withdrew from this open-label study after being randomized to thecontrol arm. Patients participating on the control arm of the study wereoffered the option to receive treatment with Rindopepimut. Under thisamendment, the ACT III study provided for a multi-center, non-randomizeddataset for Rindopepimut in patients with newly diagnosed GBM.

 

In June 2010, we announced interim data for the first 40 of thetotal 65 patients enrolled in the ACT III study.  The interim data showed that 28 of 40patients (70%) were progression-free at 5.5 months after entry into the study.  Taking into account the 3 to 3.5 monthsrequired to complete pre-study chemoradiation and enter into the study, the 5.5month time point in ACT III corresponds to approximately 8.5 months afterdiagnosis.  The ACTIVATE and ACT IItrials, which were conducted in just two leading centers, reportedprogression-free rates at 8.5 months after diagnosis of 70% and 80%,respectively, whereas similar results were seen in the ACT III trial, whichenrolled patients in over 25 centers in the United States.  These data will provide important additionalinformation that can be used to better design the future development ofRindopepimut. 

 

*CDX-011*

 

CDX-011 (formerly CR011-vcMMAE) is an antibody-drug conjugate (ADC)that consists of a fully-human monoclonal antibody, CR011, linked to a potentcell-killing drug, monomethyl-auristatin E (MMAE). The CR011 antibodyspecifically targets glycoprotein NMB or (GPNMB) that is expressed in a varietyof human cancers 

 

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includingbreast cancer and melanoma. The ADC technology, comprised of MMAE and a stablelinker system for attaching it to CR011, was licensed from SeattleGenetics, Inc. The ADC is designed to be stable in the bloodstream.Following intravenous administration, CDX-011 targets and binds to GPNMBand upon internalization into the targeted cell, CDX-011 is designed to releaseMMAE from CR011 to produce a cell-killing effect. We acquired the rights toCDX-011 in connection with the CuraGen Merger.

 

**Treatment of Breast Cancer:**  In June 2008, an open-label,multi-center Phase 1/2 study was initiated of CDX-011 administeredintravenously once every three weeks to patients with locally advanced ormetastatic breast cancer who have received prior therapy (median of seven priorregimens). The study began with a bridging phase to confirm the maximumtolerated dose (“MTD”) and then expanded into a Phase 2 open-label,multi-center study.

 

The study confirmed the safety of CDX-011 at the pre-defined maximumdose level (1.88 mg/kg) in 6 patients. An additional 28 patients were enrolledas an expanded Phase 2 cohort (for a total of 34 treated patients at 1.88mg/kg, the Phase 2 dose) to evaluate the progression-free survival (“PFS”)rate at 12 weeks. As previously seen in melanoma patients, the 1.88 mg/kgdose was well tolerated in this patient population with the most common adverseevents of rash, alopecia, and fatigue. The primary activity endpoint, whichcalled for at least 5 of 25 (20%) patients in the Phase 2 study portion tobe progression-free at twelve weeks, has been met as 9 of 26 (35%) evaluablepatients were progression-free at twelve weeks.

 

For all patients treated at the maximum dose level, tumor shrinkage wasseen in 62% (16/26) and PFS was 9.1 weeks. A subset of 10 patients had “triplenegative disease,” a more aggressive breast cancer subtype that carries a highrisk of relapse and reduced survival as well as limited therapeutic options dueto lack of over-expression of HER2/neu, estrogen and progesterone receptors. Inthese patients, 78% (7/9) had any tumor shrinkage, 12-week PFS rate was 70%(7/10), and median PFS was 17.9 weeks. Tumor samples from a subset of patientsacross all dose groups were analyzed for GPNMB expression using a newlydeveloped, centralized assay intended for use in Phase 2 studies of CDX-011 andoutcomes were examined for patients with significant stromal and tumor cellexpression of GPNMB. In the small subset of patients with significant stromalor tumor cell expression of GPNMB, overall response rate was 22%, median PFSwas 17.3 weeks, and the 12-week PFS rate was 67%. The most commontreatment-related toxicities were fatigue, rash, nausea, alopecia (hair loss),neutropenia and vomiting.

 

In May 2010, the FDA granted Fast Trackdesignation to CDX-011 for the treatment of advanced, refractory/resistantGPNMB-expressing breast cancer.  We expect to initiate a randomizedPhase 2 controlled study in patients with advanced breast cancer thatexpress GPNMB in the third quarter of 2010.

 

**Treatment of Metastatic Melanoma:**  In June 2006, a Phase 1/2 open-label,multi-center, dose escalation study was initiated to evaluate the safety,tolerability and pharmacokinetics of CDX-011 for patients with un-resectableStage III or Stage IV melanoma who have failed no more thanone prior line of cytotoxic therapy. A total of 117 patients were enrolledin this trial.  The trial initiallyevaluated doses of CDX-011 between 0.03 mg/kg to 2.63 mg/kg given once everythree weeks.  CDX-011 was generally welltolerated, with rash and neutropenia emerging at higher doses. The MTD wasdetermined to be 1.88 mg/kg administered intravenously (IV) once everythree weeks.

 

The study achieved its primary activity objective with an overallresponse rate (ORR) in the phase II cohort of 15% (5/34).  Median progression free survival (PFS) was3.9 months. CDX-011 was found to be active in advanced melanoma patients in thestudy.  The most frequenttreatment-related adverse events included rash, fatigue, alopecia (hair loss),pruritus, diarrhea and neuropathy.

 

More frequent dosing schedules of CDX-011 were also evaluated,including a weekly and a two out of every three-week regimen, to explore ifmore frequent administration can provide additional activity in patients withmetastatic melanoma. Doses of 1.0 mg/kg given once every week and 1.5mg/kggiven for two out of three weeks were identified as the MTD in each schedule.The response rate was observed to be 20% and 33%, respectively.  Thisincreased activity was accompanied by increased toxicity.

 

In the subset of patients with tumor biopsies, high levels of tumorexpression of GPNMB appeared to correlate with favorable outcome.  In the seven patients whose tumors were foundto express high amounts of GPNMB, and who were treated at the maximum tolerateddoses across all dosing schedules, median PFS was 4.9 

 

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months.The development of rash, which may be associated with the presence of GPNMB inthe skin also seemed to correlate with greater PFS.

 

*CDX-1307*

 

Our lead APC Targeting TechnologyTM product candidate, CDX-1307, is indevelopment for the treatment of epithelial tumors such as colorectal,pancreatic, bladder, ovarian and breast cancers. CDX-1307 targets the betachain of human chorionic gonadotropin, known as hCG-Beta, which is an antigenoften found in epithelial tumors. The presence of hCG-Beta in these cancerscorrelates with a poor clinical outcome, suggesting that this molecule maycontribute to tumor growth. Normal adult tissues have minimal expression ofhCG-Beta; therefore, targeted immune responses are not expected to generatesignificant side effects.

 

Enrollment is complete in our two Phase 1 studies at multiplecenters designed to explore safety and dose/effect relationships via twoadministration routes—intradermal (ID), a traditional vaccine route that allowsefficient access to local dermal dendritic cells and intravenous (IV), a novelsystemic approach to vaccination that might target a much larger population ofdendritic cells. The Phase 1 studies investigated the safety andimmunogenicity of CDX-1307 alone and in combination with adjuvants, includingGM-CSF (known to increase mannose receptor expression on dendritic cells) andToll-Like Receptor (“TLR”) agonists (poly-ICLC or HiltonolTM and R848 orresiquimod). Patients with an assortment of different tumor types that areknown to express hCG-Beta were enrolled with retrospective analysis forhCG-Beta expression. A regimen of every two week dosing for four doses wasutilized with the possibility of retreatment if patients demonstrate tumorregression or stable disease.

 

The Phase 1 studies enrolled over 80 patients with heavilypretreated, advanced-stage colorectal, breast, pancreatic, bladder/ureteral,ovarian and testicular cancer. All patient cohorts demonstrated a favorablesafety profile with no dose limiting toxicity. The combination of CDX-1307 withTLR agonists significantly enhanced immune responses against hCG-Beta.  Immune responses occurred even in the presenceof high circulating levels of hCG-Beta, suggesting that the CDX-1307 canovercome antigen tolerance in advanced and heavily pretreated cancers. Ninepatients in the studies experienced disease stabilization from 2.3 monthsto 16 months following the initiation of CDX-1307 vaccination.  These data provide the basis for advancingCDX-1307 into a front-line patient population selected for hCG-Beta-expressingcancers.

 

In May 2010, we initiated a 60 patient randomized (1:1) Phase 2controlled study to evaluate the CDX-1307 regimen in both neoadjuvant andadjuvant settings in patients with newly diagnosed muscle-invasive bladdercancers that express hCG-beta.  We expectpreliminary data by year-end 2011.

 

*CDX-1401*

 

CDX-1401 is a fusion protein consisting of a fully human monoclonalantibody with specificity for the dendritic cell receptor, DEC-205, linked tothe NY-ESO-1 tumor antigen. In humans, NY-ESO-1 is one of the most immunogenictumor antigens and has been detected in 20 - 30% of cancers, thusrepresenting a broad opportunity. This product is intended to selectivelydeliver the NY-ESO-1 antigen to APCs for generating robust immune responsesagainst cancer cells expressing NY-ESO-1. Unlike CDX-1307, which targets themannose receptor expressing dendritic cells, CDX-1401 is the first APC producttargeting DEC-205 expressing dendritic cells. We are developing CDX-1401 forthe treatment of malignant melanoma and a variety of solid tumors which expressthe proprietary cancer antigen NY-ESO-1, which we licensed from the LudwigInstitute for Cancer Research in 2006. We believe that preclinical studies haveshown that CDX-1401 is effective for activation of human T-cell responsesagainst NY-ESO-1.

 

In September 2009, we initiated enrollment in a dose-escalatingPhase 1/2 clinical trial aimed at determining the optimal dose for furtherdevelopment based on the safety, tolerability, and immunogenicity of theCDX-1401 vaccine. The trial will evaluate three different doses of the vaccinein combination with TLR agonists poly-ICLC or HiltonolTM and/or R848 orresiquimod. We expect to enroll approximately 48 patients with solid tumorcancers at multiple clinical sites in the United States.  We expect to present preliminary data fromthis study during the fourth quarter of 2010.

 

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*CDX-1135*

 

CDX-1135 is a molecule that inhibits a part of the immune system calledthe complement system. The complement system is a series of proteins that areimportant initiators of the body’s acute inflammatory response against disease,infection and injury. Excessive complement activation also plays a role in somepersistent inflammatory conditions. CDX-1135 is a soluble form of naturallyoccurring Complement Receptor 1 that inhibits the activation of the complementcascade in animal models and in human clinical trials. We believe thatregulating the complement system could have therapeutic and prophylacticapplications in several acute and chronic conditions, including organtransplantation, multiple sclerosis, rheumatoid arthritis, age-related maculardegeneration (“AMD”), atypical Hemolytic Uremic Syndrome (“aHUS”), ParoxysmalNocturnal Hemaglobinuria (“PNH”), Dense Deposit Disease (“DDD”) in kidneys, andmyasthenia gravis. We are currently defining the most appropriate clinicaldevelopment path for CDX-1135 and are focusing on rare disease conditions ofunregulated complement activation as the fastest route to FDA approval.

 

**Preclinical Development Programs**

 

*CDX-301*

 

CDX-301 is a FMS-like tyrosine kinase 3 ligand (Flt3L) that we licensedfrom Amgen in March 2009. CDX-301 is a growth factor for stem cells andimmune cells called dendritic cells. Based on previous experience with thismolecule, we believe that CDX-301 has considerable opportunity in varioustransplant settings as a stem cell mobilizing agent. In addition, CDX-301 is animmune modulating molecule that increases the numbers and activity of specifictypes of immune cells. We believe CDX-301 has significant opportunity forsynergistic development in combination with proprietary molecules in ourportfolio. We expect to initiate a Phase 1 trial in healthy subjects withCDX-301 during the fourth quarter of 2010.

 

*CDX-1127*

 

We have entered into a License Agreement with the University ofSouthampton, UK, to develop human antibodies to CD27, a potentially importanttarget for immunotherapy of various cancers. In preclinical models, antibodiesto CD27 alone have been shown to mediate anti-tumor effects, and may beparticularly effective in combination with other immunotherapy. CD27 is acritical molecule in the activation pathway of lymphocytes. It is downstreamfrom CD40, and may provide a novel way to regulate the immune responses.Engaging CD27 with the appropriate monoclonal antibody has proven highlyeffective at promoting anti-cancer immunity in mouse models. We are evaluatingnew human monoclonal antibodies in preclinical models.

 

*CDX-014*

 

CDX-014 (formerly CR014-vcMMAE) is a fully-human monoclonal ADC thattargets TIM-1, an immunomudulatory protein that appears to down regulate immuneresponse to tumors. The antibody, CDX-014, is linked to a potentchemotherapeutic, monomethyl auristatin E (MMAE), using Seattle Genetics’proprietary technology. The ADC is designed to be stable in the bloodstream,but to release MMAE upon internalization into TIM-1-expressing tumor cells,resulting in a targeted cell-killing effect. CDX-014 has shown potent activityin preclinical models of ovarian and renal cancer. We acquired the rights toCDX-014 in connection with the CuraGen Merger.

 

*CDX-1189*

 

We are developing therapeutic human antibodies to a signaling moleculeknown as CD89 or Fca receptor type I (FcaRI). CD89 isexpressed by some white blood cells and leukemic cell lines, and has been shownto be important in controlling inflammation and tumor growth in animal models.We have proprietary, fully human antibodies to CD89 in preclinical development.Depending upon the specific antibody used, anti-CD89 antibodies can either beactivating and thus stimulate immune responses, or down-regulating and act asan anti-inflammatory agent.

 

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**Marketed Products**

 

*Rotavirus Vaccine*

 

Rotavirus is a major cause of diarrhea and vomiting in infants andchildren. In 1997, we licensed our oral rotavirus strain to Glaxo and Glaxoassumed responsibility for all subsequent clinical trials and all otherdevelopment activities. Glaxo gained approval for its rotavirus vaccine,Rotarix®, in Mexico inJuly 2004, which represented the first in a series of worldwide approvalsand commercial launches for the product leading up to the approval in Europe in2006 and in the U.S. in 2008. We licensed-in our rotavirus strain in 1995 andowe a license fee of 30% to Cincinnati Children’s Hospital Medical Center (“CCH”)on net royalties received from Glaxo. We are obligated to maintain a licensewith CCH with respect to the Glaxo agreement. The term of the Glaxo agreementis through the expiration of the last of the relevant patents covered by theagreement, although Glaxo may terminate the agreement upon 90 days priorwritten notice.

 

In May 2005, we entered into an agreement whereby an affiliate ofPRF purchased an interest in the milestone payments and net royalties that wewill receive on the development and worldwide sales of Rotarix®. We have received a total of $60 million in milestone paymentsunder the PRF agreement. No additional milestone payments are due from PRFunder the agreement.

 

Royalty rates on Rotarix® escalate from 7% to 10% based on net productsales in countries that have valid patent protection. These royalty rates arediscounted by 30% for “non-patent” countries (primarily international markets).In September 2006, we received notice from Glaxo that Glaxo would beginpaying royalties on sales of Rotarix® vaccine at the lower of the two royalty ratesunder their 1997 license agreement. Glaxo’s decision to pay the lower royaltyrate (which is 70% of the full rate) is based upon Glaxo’s assertion thatRotarix® is not covered by the patents Glaxo licensedfrom us in Australia and certain European countries. We are currentlyevaluating the basis for Glaxo’s action and our potential remedies. If Glaxo’sposition stands, the royalties to which PRF is entitled will no longer belimited by a $27.5 million annual threshold, which we projected may havebeen reached in later years as sales of Rotarix® increased. Irrespective of Glaxo’s position,we will still retain approximately 65% of the royalties on worldwide sales ofRotarix® once PRF receives 2.45 times the aggregatecash payments of $60 million it made to us, though the potential amount ofsuch residual royalties will be lower if Glaxo’s position stands.

 

Inlate March 2010, the FDA temporarily suspended the use of Rotarix® in the United States as aprecautionary measure following the discovery of PCV-1 DNA material in thevaccine.  In May 2010, the FDAdetermined that healthcare practitioners could resume the use of Rotarix®.  We believe our royalties fromsales of Rotarix® will be negatively impacted during the threemonths ended September 30, 2010 by the FDA’s decision to temporarilysuspend the use of Rotarix® from March 2010 through May 2010 andthat negative impact from the temporary suspension may extend to futurequarters as well.  However, if ourroyalty revenue from Rotarix® is negatively impacted by the FDA’s decision,our royalty expense for Rotarix® would be similarly impacted and therefore ournet loss or cash position will not be impacted as a result of the FDA’sdecision.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

Ourcritical accounting policies are more fully described in Note 2 to ourconsolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2009 and there have been nomaterial changes to such critical accounting policies.  We believe our most critical accountingpolicies include accounting for business combinations, revenue recognition,property and equipment, impairment of long-lived assets, marketable securities,research and development expenses and stock-based compensation expense.

 

**RESULTS OF OPERATIONS**

 

Our financial statements prior to the CuraGen Merger reflect thefinancial position, results of operations and cash flows of Celldex.  Following the CuraGen Merger, our financialstatements reflect the financial position, results of operation and cash flowsof Celldex and CuraGen.

 

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***Three Months Ended June 30, 2010compared with Three Months Ended June 30, 2009***

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase/  (Decrease)** | ** ** | **Increase/  (Decrease)** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2010**                                        | ** ** | **2009**                  | ** ** | **$**                     | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                         | ** ** |
| Revenue:                                     |       |                                            |       |                      |       |                      |       |   |   |
| Product Development and Licensing Agreements |       | $                                               | 1,399      |                      | $          | 1,497                     |       | $ | (98 | ) | (7 | )% |
| Product Royalties                            |       | 1,552                                           |       | 1,188                     |       | 364                       |       | 31 | % |
| Total Revenue                                |       | $                                               | 2,951      |                      | $          | 2,685                     |       | $ | 266 |   | 10 | % |
| Operating Expense:                           |       |                                            |       |                      |       |                      |       |   |   |
| Research and Development                     |       | 7,256                                           |       | 6,433                     |       | 823                       |       | 13 | % |
| Royalty                                      |       | 1,732                                           |       | 1,369                     |       | 363                       |       | 27 | % |
| General and Administrative                   |       | 2,591                                           |       | 3,511                     |       | (920                      | )          | (26 | )% |
| Amortization of Acquired Intangible Assets   |       | 658                                             |       | 95                        |       | 563                       |       | 593 | % |
| Total Operating Expense                      |       | 12,237                                          |       | 11,408                    |       | 829                       |       | 7 | % |
| Operating Loss                               |       | (9,286                                          | )          | (8,723                    | )          | 563                       |       | 6 | % |
| Investment and Other Income, Net             |       | 95                                              |       | 55                        |       | 40                        |       | 73 | % |
| Interest Expense                             |       | (334                                            | )          | (37                       | )          | 297                       |       | 803 | % |
| Net Loss                                     |       | $                                               | (9,525     | )                         | $          | (8,705                    | )          | $ | 820 |   | 9 | % |

 

*Net Loss*

 

The $0.8 million increase in net loss for the three months ended June 30,2010 was primarily due to an increase in research and development andamortization of acquired intangible asset expense, partially offset by adecrease in general and administrative expense.

 

*Revenue*

 

The $0.1 million decrease in product development and licensingagreement revenue for the three months ended June 30, 2010 was primarilydue to $0.1 million in revenue recorded for the three months ended June 30,2009 related to the Corixa termination agreement.  The $0.4 million increase in productroyalty revenue for the three months ended June 30, 2010 was primarilyrelated to our retained interests in Rotarix® net royalties which were not sold to PRF andwhich is equal to the amount payable to CCH and recognized in royalty expenseby us.

 

*Research and Development Expense*

 

Research and development expenses consist primarily of(i) personnel expenses, (ii) laboratory supply expenses relating tothe development of our technology, (iii) facility expenses, and(iv) product development expenses associated with our product candidatesas follows:

 
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase/  (Decrease)** | ** ** | **Increase/  (Decrease)** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **2010**                                        | ** ** | **2009**                  | ** ** | **$**                     | ** ** | **%** | ** ** |
| ** **          | ** ** | **(In thousands)**                         | ** ** |
| Personnel           |       | $                                               | 2,991      |                      | $          | 2,515                     |       | $ | 476 |   | 19 | % |
| Laboratory Supplies |       | 207                                             |       | 640                       |       | (433                      | )          | (68 | )% |
| Facility            |       | 1,243                                           |       | 1,125                     |       | 118                       |       | 10 | % |
| Product Development |       | 1,884                                           |       | 1,748                     |       | 136                       |       | 8 | % |
|                     |            |                                                 |            |                           |            |                           |            |  |  |  |  |  |

 

Personnel expenses primarily include salary, benefits, stock-basedcompensation and payroll taxes. The $0.5 million increase in personnelexpenses for the three months ended June 30, 2010 was primarily due tohigher headcount.  We expect personnelexpenses to increase over the next twelve months as we plan to continue toincrease our headcount.

 

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Laboratory supply expenses include laboratory materials and supplies,services, and other related expenses incurred in the development of ourtechnology.  The $0.4 milliondecrease in laboratory supply expense for the three months ended June 30,2010 was primarily due to the renovation of our Fall River manufacturingfacility during which manufacturing activities ceased for the three monthsended June 30, 2010.  We expectsupply expenses to increase over the next twelve months as a result ofincreased research and development activities, although there may befluctuations on a quarterly basis.

 

Facility expenses include depreciation, amortization, utilities, rent,maintenance, and other related expenses incurred at our facilities. The$0.1 million increase in facility expenses for the three months ended June 30,2010 was primarily due to higher depreciation and amortization expenses.  We expect facility expenses to increase overthe next twelve months as a result of continued capital expansion, althoughthere may be fluctuations on a quarterly basis.

 

Product development expenses include clinical investigator site fees,external trial monitoring costs, data accumulation costs, contracted researchand outside clinical drug product manufacturing. The $0.1 million increasein product development expenses for the three months ended June 30, 2010was primarily due to an increase in contract manufacturing expense.  We expect product development expenses toincrease over the next twelve months due to the increase in clinical trialexpenses related to our CDX-011, CDX-1307, and CDX-1401 programs, althoughthere may be fluctuations on a quarterly basis.

 

*Royalty Expense*

 

Royalty expenses include product royalty and sublicense royalty fees onour out-licensed programs. The $0.4 million increase in royalty expensesfor the three months ended June 30, 2010 was due to an increase in Rotarix® related royalty fees. Ourretained interests in Rotarix® net royalties which were not sold to PRF arerecorded as product royalty revenue and a corresponding amount that is payableto CCH is recorded as royalty expense.

 

*General and Administrative Expense*

 

The $0.9 million decrease in general and administrative expensesfor the three months ended June 30, 2010 was primarily due to a decreaseof $0.8 million in consultant and legal expense primarily related to theCuraGen Merger.  We expect general andadministrative expense to remain relatively consistent over the next twelvemonths, although there may be fluctuations on a quarterly basis.

 

*Amortization Expense*

 

The $0.6 million increase in amortization expenses for the threemonths ended June 30, 2010 was primarily due to intangible assets acquiredin connection with the CuraGen Merger. We expect amortization expense of acquired intangible assets to remainrelatively consistent over the next twelve months, although there may befluctuations on a quarterly basis.

 

*Investment and Other Income, Net*

 

Investment and other income, net for the three months ended June 30,2010 was relatively consistent as compared to the three months ended June 30,2009.  We anticipate investment income todecrease over the next twelve months due to lower cash and investment balancescaused by the utilization of cash and investment balances in the normal courseof operations.

 

*Interest Expense*

 

The $0.3 million increase in interest expense for the three monthsended June 30, 2010 was primarily due to the CuraGen Debt we assumed inconnection with the CuraGen Merger. We anticipate interest expense to remainrelatively consistent over the next twelve months until the CuraGen Debtmatures in February 2011.

 

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***Six Months Ended June 30, 2010compared with Six Months Ended June 30, 2009***

 
| ** **                                   | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase/  (Decrease)** | ** ** | **Increase/  (Decrease)** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2010**                                      | ** ** | **2009**                  | ** ** | **$**                     | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                       | ** ** |
| Revenue:                                     |       |                                          |       |                      |       |                      |       |   |   |
| Product Development and Licensing Agreements |       | $                                             | 2,746      |                      | $          | 2,999                     |       | $ | (253 | ) | (8 | )% |
| Contracts and Grants                         |       | 220                                           |       | 139                       |       | 81                        |       | 58 | % |
| Product Royalties                            |       | 3,698                                         |       | 3,279                     |       | 419                       |       | 13 | % |
| Total Revenue                                |       | $                                             | 6,664      |                      | $          | 6,417                     |       | $ | 247 |   | 4 | % |
| Operating Expense:                           |       |                                          |       |                      |       |                      |       |   |   |
| Research and Development                     |       | 13,694                                        |       | 12,890                    |       | 804                       |       | 6 | % |
| Royalty                                      |       | 4,059                                         |       | 3,598                     |       | 461                       |       | 13 | % |
| General and Administrative                   |       | 5,426                                         |       | 6,851                     |       | (1,425                    | )          | (21 | )% |
| Gain on Sale of Assets                       |       | —                                        |       | (604                      | )          | 604                       |       | 100 | % |
| Amortization of Acquired Intangible Assets   |       | 2,178                                         |       | 191                       |       | 1,987                     |       | 1,040 | % |
| Total Operating Expense                      |       | 25,357                                        |       | 22,926                    |       | 2,431                     |       | 11 | % |
| Operating Loss                               |       | (18,693                                       | )          | (16,509                   | )          | 2,184                     |       | 13 | % |
| Investment and Other Income, Net             |       | 3,257                                         |       | 179                       |       | 3,078                     |       | 1,720 | % |
| Interest Expense                             |       | (671                                          | )          | (78                       | )          | 593                       |       | 760 | % |
| Net Loss                                     |       | $                                             | (16,107    | )                         | $          | (16,408                   | )          | $ | (301 | ) | (2 | )% |

 

*Net Loss*

 

The $0.3 million decrease in net loss for the six months ended June 30,2010 was primarily due to an increase in other income and a decrease in generaland administrative expenses, partially offset by increases in research anddevelopment, interest, royalty and amortization of acquired intangible assetexpense.

 

*Revenue*

 

The $0.3 million decrease in product development and licensingagreement revenue for the six months ended June 30, 2010 was primarily dueto $0.2 million in revenue recorded for the six months ended June 30, 2009related to the Corixa termination agreement. The $0.1 million increase in contract and grant revenue for the sixmonths ended June 30, 2010 was due to an increase in revenue related toour vaccine development work on Rockefeller’s CDX-2401 program.  The $0.4 million increase in productroyalty revenue for the six months ended June 30, 2010 was primarilyrelated to our retained interests in Rotarix® net royalties which were not sold to PRF andwhich is equal to the amount payable to CCH and recognized in royalty expenseby us.

 

*Research and Development Expense*

 

Research and development expenses consist primarily of(i) personnel expenses, (ii) laboratory supply expenses relating tothe development of our technology, (iii) facility expenses, and(iv) product development expenses associated with our product candidatesas follows:

 
| ** **          | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase/  (Decrease)** | ** ** | **Increase/  (Decrease)** | ** ** |
|---------------------|------------|-----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **2010**                                      | ** ** | **2009**                  | ** ** | **$**                     | ** ** | **%** | ** ** |
| ** **          | ** ** | **(In thousands)**                       | ** ** |
| Personnel           |       | $                                             | 6,150      |                      | $          | 5,057                     |       | $ | 1,093 |   | 22 | % |
| Laboratory Supplies |       | 743                                           |       | 1,236                     |       | (493                      | )          | (40 | )% |
| Facility            |       | 2,735                                         |       | 2,373                     |       | 362                       |       | 15 | % |
| Product Development |       | 2,674                                         |       | 3,225                     |       | (551                      | )          | (17 | )% |
|                     |            |                                               |            |                           |            |                           |            |  |  |  |  |  |

 

The $1.1 million increase in personnel expenses for the six monthsended June 30, 2010 was primarily due to higher headcount.

 

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The $0.5 million decrease in laboratory supply expense for the sixmonths ended June 30, 2010 was primarily due to the renovation of our FallRiver manufacturing facility during which manufacturing activities ceased for thethree months ended June 30, 2010.

 

The $0.4 million increase in facility expenses for the six monthsended June 30, 2010 was primarily due to higher depreciation andamortization expenses.

 

The $0.6 million decrease in product development expenses for thesix months ended June 30, 2010 was primarily due to a decrease in clinicalexpenses largely due to the transfer of clinical management of our Rindopepimutprogram to Pfizer in 2009.

 

*Royalty Expense*

 

The $0.5 million increase in royalty expenses for the six monthsended June 30, 2010 was due to an increase in Rotarix® related royalty fees.

 

*General and Administrative Expense*

 

The $1.4 million decrease in general and administrative expensesfor the six months ended June 30, 2010 was primarily due to a decrease of$1.0 million in consultant and legal expense primarily related to theCuraGen Merger and $0.7 million in severance expense, including relatednon-cash stock-based compensation expense, incurred during the three monthsended March 31, 2009 related to the departure of our former SVP, BusinessDevelopment. The effect of these decreases was partially offset by$0.2 million in higher personnel expense during the six months ended June 30,2010, primarily related to higher headcount.

 

*Amortization Expense*

 

The $2.0 million increase in amortization expenses for the sixmonths ended June 30, 2010 was primarily due to intangible assets acquiredin connection with the CuraGen Merger including the TopoTarget Agreement.  In February 2010, TopoTarget enteredinto a co-development and commercialization agreement for Belinostat withSpectrum Pharmaceuticals, Inc. which resulted in our receipt of$3.0 million which we recorded as Other Income for the six months ended June 30,2010 and we recorded amortization expense related to the TopoTarget Agreementof $1.4 million for the six months ended June 30, 2010.

 

*Investment and Other Income, Net*

 

The $3.1 million increase in investment and other income, net forthe six months ended June 30, 2010 was primarily due to $3.0 millionreceived in connection with the TopoTarget Agreement.

 

*Interest Expense*

 

The $0.6 million increase in interest expense for the six monthsended June 30, 2010 was primarily due to the CuraGen Debt we assumed inconnection with the CuraGen Merger.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At June 30, 2010, our principal sources of liquidity consisted ofcash, cash equivalents and marketable securities of $65.8 million. Ourworking capital at June 30, 2010 was $44.5 million. At June 30,2010, we had 4% convertible subordinated debt due in February 2011 of$12.5 million. We incurred a loss of $16.1 million for the six monthsended June 30, 2010.  Net cash usedin operations for the six months ended June 30, 2010 was$16.6 million. We believe that the cash inflows from existingcollaborations, interest income on invested funds and our current cash, cashequivalents and marketable securities at June 30, 2010 are sufficient tomeet estimated working capital requirements and fund planned operations for atleast the next twelve months.

 

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Our cash equivalents are highly liquid investments with a maturity ofthree months or less at the date of purchase and consist primarily ofinvestments in money market mutual funds with commercial banks and financialinstitutions. We maintain cash balances with financial institutions in excessof insured limits. We do not anticipate any losses with respect to such cashbalances. We invest our excess cash balances in marketable securities includingmunicipal bond securities, U.S. government agency securities, and high-gradecorporate bonds that meet high credit quality standards, as specified in ourinvestment policy. Our investment policy seeks to manage these assets toachieve our goals of preserving principal and maintaining adequate liquidity.

 

The use of our cash flows for operations has primarily consisted ofsalaries and wages for our employees, facility and facility-related costs forour offices, laboratories and manufacturing facility, fees paid in connectionwith preclinical studies, clinical studies, contract manufacturing, laboratorysupplies and services, consulting, legal and other professional fees. To date,and for the foreseeable future, the primary sources of cash flows fromoperations have been payments received from our collaborative partners and fromgovernment entities. The timing of any new collaboration agreements, governmentcontracts or grants and any payments under these agreements, contracts orgrants cannot be easily predicted and may vary significantly from quarter toquarter.

 

During the next twelve to twenty-four months, we may take further stepsto raise additional capital to meet our long-term liquidity needs including,but not limited to, the licensing of technology programs with existing or newcollaborative partners, possible business combinations, or the issuance ofcommon stock or other securities via private placements or public offerings.While we may continue to seek capital through a number of means, there can beno assurance that additional financing will be available on acceptable terms,if at all, particularly in light of the recent disruptions in the financialmarkets and our negotiating position in capital-raising efforts may worsen asexisting resources are used. There is also no assurance that we will be able toenter into further collaborative relationships. Additional equity financing maybe dilutive to our stockholders; debt financing, if available, may involvesignificant cash payment obligations and covenants that restrict our ability tooperate as a business; and licensing or strategic collaborations may result inroyalties or other terms which reduce our economic potential from productsunder development. If we are unable to raise the funds necessary to meet ourlong-term liquidity needs, we may have to delay or discontinue the developmentof one or more programs, license out programs earlier than expected, raisefunds at significant discount or on other unfavorable terms, or sell all orpart of us.

 

*Operating Activities*

 

Net cash used in operating activities was $16.6 million for thesix months ended June 30, 2010 compared to $13.5 million for the sixmonths ended June 30, 2009. The increase in net cash used in operatingactivities was primarily due to decreases of $2.0 million in deferred revenueand $1.4 million in other long-term liabilities for the six months ended June 30,2010 as compared to increases of $0.1 million in both deferred revenue andother long-term liabilities for the six months ended June 30, 2009.  The decrease in other long-term liabilitieswas primarily due to severance payments made related to the CuraGenMerger.  We expect that cash used inoperations will continue to increase in over the next twelve months primarilyrelated to the continued development of our therapeutic product pipeline,including bringing forward new product candidates into clinical development.

 

We have incurred and will continue to incur significant costs in thearea of research and development, including preclinical and clinical trials, asour product candidates are developed. We plan to spend significant amounts toprogress our current product candidates through the clinical trial andcommercialization process as well as to develop additional product candidates.As our product candidates progress through the clinical trial process, we maybe obligated to make significant milestone payments.

 

*Investing Activities*

 

Net cash used in investing activities was $25.8 million for thesix months ended June 30, 2010 compared to net cash provided by investingactivities of $0.5 million for the six months ended June 30, 2009.The increase in net cash used in investing activities was primarily due to netpurchases of marketable securities for the six months ended June 30, 2010of $24.6 million. We expect to incur future facility cost as a result ofcontinued capital expansion, renovation and replacements. Our investment incapital equipment is discretionary and there may be significant fluctuations ona quarterly basis.

 

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*Financing Activities*

 

Net cash provided by financing activities was $0.5 million for thesix months ended June 30, 2010 compared to $0.4 million for the sixmonths ended June 30, 2009.  Theincrease in net cash provided by financing activities was primarily due to anincrease in proceeds from stock option exercises.

 

*Other Liquidity Matters*

 

Under the Pfizer Agreement, Pfizer made an upfront payment$40 million, an equity investment of $10.0 million and will fund alldevelopment costs for the licensed programs. We are also eligible to receivepotential milestone payments exceeding $390.0 million for the successfuldevelopment and commercialization of Rindopepimut and additional EGFRvIIIvaccine products, as well as royalties on any product sales.

 

**AGGREGATE CONTRACTUAL OBLIGATIONS**

 

Exceptas set forth below, the disclosures relating to our contractual obligationsreported in our Annual Report on Form 10-K for the year endedDecember 31, 2009 which was filed with the SEC on March 12, 2010 havenot materially changed since we filed that report.

 

InJune 2010, we amended our lease with MassDevelopment for our manufacturingfacility in Fall River, Massachusetts. The initial term under the amended lease expires in December 2017and includes two renewal options of five years each.

 

**Item 3.         Quantitative and Qualitative Disclosures about MarketRisk**

 

We own financial instruments that are sensitive to market risk as partof our investment portfolio. Our investment portfolio is used to preserve ourcapital until it is used to fund operations, including our research anddevelopment activities. None of these market-risk sensitive instruments areheld for trading purposes. We invest our cash primarily in money market mutualfunds. These investments are evaluated quarterly to determine the fair value ofthe portfolio. From time to time, we invest our excess cash balances inmarketable securities including municipal bond securities, U.S. governmentagency securities, and high-grade corporate bonds that meet high credit qualitystandards, as specified in our investment policy. Our investment policy seeksto manage these assets to achieve our goals of preserving principal andmaintaining adequate liquidity. Because of the short-term nature of theseinvestments, we do not believe we have material exposure due to market risk.The impact to our financial position and results of operations from likelychanges in interest rates is not material.

 

We do not utilize derivative financial instruments. The carryingamounts reflected in the consolidated balance sheet of cash and cashequivalents, accounts receivables and accounts payable approximates fair valueat June 30, 2010 due to the short-term maturities of these instruments.

 

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**Item 4.         Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures.*

 

As of June 30, 2010, we evaluated, with the participation of ourChief Executive Officer and Chief Financial Officer, the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)). Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level as of June 30, 2010. Ourdisclosure controls and procedures are designed to provide reasonable assurancethat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withintime periods specified by the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

*Changes in Internal Control Over Financial Reporting.*

 

There were no changes in our internal control over financial reportingduring the six months ended June 30, 2010 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.         Legal Proceedings**

 

None.

 

**Item 1A.      Risk Factors**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year endedDecember 31, 2009, which could materially affect our business, financialcondition or future results. The risks described in our Annual Report onForm 10-K may not be the only risks facing the Company. Additional risksand uncertainties not currently known to the Company or that the Companycurrently deems to be immaterial also may materially adversely affect theCompany’s business, financial condition and/or operating results.

 

Therewere no material changes to the risk factors previously disclosed in our AnnualReport on Form 10-K filed with the Securities and Exchange Commission onMarch 12, 2010.

 

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**Item 6.         Exhibits**

 
| 2.1    |   | Agreement  and Plan of Merger, dated as of May 28, 2009, by and among Celldex  Therapeutics, Inc., CuraGen Corporation and Cottrell Merger  Sub, Inc. incorporated by reference to Exhibit 2.1 of the Company’s  Current Report on Form 8-K filed May 29, 2009 with the Securities  and Exchange Commission.                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    |   | Third  Restated Certificate of Incorporation of the Company, incorporated by  reference to Exhibit 3.1 of the Company’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the  Securities and Exchange Commission.                                                                                                                            |
| 3.2    |   | Certificate  of Amendment of Third Restated Certificate of Incorporation of the Company,  incorporated by reference to Exhibit 3.1 of the Company’s Registration  Statement on Form S-4 (Reg. No. 333-59215), filed July 16,  1998 with the Securities and Exchange Commission.                                                                                                |
| 3.3    |   | Second  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.2 of the Company’s  Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                         |
| 3.4    |   | Third  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.1 of the Company’s  Quarterly Report on Form 10-Q, filed May 10, 2002 with the  Securities and Exchange Commission.                                                                                                                          |
| 3.5    |   | Fourth  Certificate of Amendment of Third Restated Certificate of Incorporation  of the Company, incorporated by reference to Exhibit 3.1 of the  Company’s Current Report on Form 8-K, filed on March 11, 2008 with  the Securities and Exchange Commission.                                                                                                                  |
| 3.6    |   | Fifth  Certificate of Amendment of Third Restated Certificate of Incorporation  of the Company, incorporated by reference to Exhibit 3.2 of the  Company’s Current Report on Form 8-K, filed on March 11, 2008 with  the Securities and Exchange Commission.                                                                                                                   |
| 3.7    |   | Sixth  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.7 of the Company’s  Quarterly Report on Form 10-Q, filed November 10, 2008 with the  Securities and Exchange Commission.                                                                                                                     |
| 4.3    |   | Amendment  No. 2 to Shareholder Rights Agreement dated November 5, 2004,  between the Company and Computershare Trust Company, N.A. (formerly EquiServe  Trust Company, N.A.), as Rights Agent, incorporated by reference to  Exhibit 10.1 of the Company’s Registration Statement on  Form 8-A1G/A, filed on March 7, 2008 with the Securities and  Exchange Commission. |
| *10.1  |   | Seventh  Amendment to Lease by and between the Company and the Massachusetts  Development Finance Agency dated as of June 22, 2010                                                                                                                                                                                                                                                                 |
| *31.1  |   | Certification  of President and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                 |
| *31.2  |   | Certification  of Senior Vice President and Chief Financial Officer                                                                                                                                                                                                                                                                                                                                     |
| **32.1 |   | Section 1350  Certifications                                                                                                                                                                                                                                                                                                                                                                       |

 

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| *  | Filed  herewith.     |
|----|----------------------|
| ** | Furnished  herewith. |

 

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**SIGNATURES**

 

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

 
| ** **                 | **CELLDEX  THERAPEUTICS, INC.**                          |
|----------------------------|---------------------------------------------------------------|
|                       |                                                          |
|                       | BY:                                                           |
|                       |                                                          |
|                       | /s/  ANTHONY S. MARUCCI                                       |
| Dated: August 5, 2010 | Anthony  S. Marucci                                           |
|                       | President  and Chief Executive Officer                        |
|                       | (Principal  Executive Officer)                                |
|                       |                                                          |
|                       | /s/  AVERY W. CATLIN                                          |
| Dated: August 5, 2010 | Avery  W. Catlin                                              |
|                       | Senior  Vice President, Treasurer and Chief Financial Officer |
|                       | (Principal  Financial and Accounting Officer)                 |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement  and Plan of Merger, dated as of May 28, 2009, by and among Celldex  Therapeutics, Inc., CuraGen Corporation and Cottrell Merger  Sub, Inc. incorporated by reference to Exhibit 2.1 of the Company’s  Current Report on Form 8-K filed May 29, 2009 with the Securities  and Exchange Commission.                                                       |
| 3.1              |       | Third  Restated Certificate of Incorporation of the Company, incorporated by  reference to Exhibit 3.1 of the Company’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the  Securities and Exchange Commission.                                                                                                                          |
| 3.2              |       | Certificate  of Amendment of Third Restated Certificate of Incorporation of the Company,  incorporated by reference to Exhibit 3.1 of the Company’s Registration  Statement on Form S-4 (Reg. No. 333-59215), filed July 16,  1998 with the Securities and Exchange Commission.                                                                                              |
| 3.3              |       | Second  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.2 of the Company’s  Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                       |
| 3.4              |       | Third  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.1 of the Company’s  Quarterly Report on Form 10-Q, filed May 10, 2002 with the  Securities and Exchange Commission.                                                                                                                        |
| 3.5              |       | Fourth  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.1 of the Company’s  Current Report on Form 8-K, filed on March 11, 2008 with the  Securities and Exchange Commission.                                                                                                                     |
| 3.6              |       | Fifth  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.2 of the Company’s  Current Report on Form 8-K, filed on March 11, 2008 with the  Securities and Exchange Commission.                                                                                                                      |
| 3.7              |       | Sixth  Certificate of Amendment of Third Restated Certificate of Incorporation of  the Company, incorporated by reference to Exhibit 3.7 of the Company’s  Quarterly Report on Form 10-Q, filed November 10, 2008 with the  Securities and Exchange Commission.                                                                                                                   |
| 4.3              |       | Amendment  No. 2 to Shareholder Rights Agreement dated November 5, 2004,  between the Company and Computershare Trust Company, N.A. (formerly EquiServe  Trust Company, N.A.) as Rights Agent, incorporated by reference to Exhibit 10.1  of the Company’s Registration Statement on Form 8-A1G/A, filed on  March 7, 2008 with the Securities and Exchange Commission. |
| *10.1            |       | Seventh  Amendment to Lease by and between the Company and the Massachusetts  Development Finance Agency dated as of June 22, 2010                                                                                                                                                                                                                                                               |
| *31.1            |       | Certification  of President and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                               |
| *31.2            |       | Certification  of Senior Vice President and Chief Financial Officer                                                                                                                                                                                                                                                                                                                                   |
| **32.1           |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                                                                                                     |

 

----

| *  | Filed  herewith.     |
|----|----------------------|
| ** | Furnished  herewith. |

 

35

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