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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number
000-29815

Allos Therapeutics, Inc.
(Exact name of Registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

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

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

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

As of November 2, 2010, there were 105,352,676 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

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ALLOS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

NOTE:

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

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ALLOS THERAPEUTICS, INC.
BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

The accompanying notes are an integral part of these financial statements.

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ALLOS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

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

(unaudited)

1.                 Basis of Presentation

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.  Operating results for the nine months ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  These financial statements should be read in conjunction with the audited financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2009 for a broader discussion of our business and the opportunities and risks inherent in such business.

Liquidity

As of September 30, 2010, we had $108.9 million in cash, cash equivalents, and investments. Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of September 30, 2010, will be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished.

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

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

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

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

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

·      the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the U.S. Food and Drug Administration, or FDA, as well as our evaluation of, and decisions with respect to, additional therapeutic indications for which we may develop FOLOTYN;

·      the timing, costs and potential revenue associated with any co-promotion or other partnering arrangements entered into to commercialize FOLOTYN; and

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

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We may seek to obtain this additional capital through equity or debt financings, arrangements with corporate partners, or from other sources. Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us. In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to generate meaningful amounts of revenue from future product sales or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our business and future prospects for revenue and profitability may be harmed.

2.                 Fair Value of Financial Instruments

Cash, Cash Equivalents and Investments

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The carrying values of our cash equivalents and investments approximate their market values based on quoted market prices. Investments are classified as held to maturity and are carried at cost plus accrued interest. Our cash and cash equivalents are maintained in a financial institution in amounts that, at times, may exceed federally insured limits. The weighted average duration of the remaining time to maturity for our portfolio of investments as of September 30, 2010, was approximately four months.  As of September 30, 2010, our investments were held in a variety of interest-bearing instruments, consisting mainly of U.S. Treasury notes. We did not hold any derivative instruments, foreign exchange contracts, asset backed securities, mortgage backed securities, auction rate securities, or securities of issuers in bankruptcy in our investment portfolio as of September 30, 2010.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to us for identical assets or liabilities;

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

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

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of September 30, 2010.  Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities. The carrying value of our cash held in money market funds totaling $62.8 million as of September 30, 2010, is included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs.

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The carrying value of investments consisted of the following as of September 30, 2010:

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

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

3.                 Inventory

Inventory

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

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

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·    the formulated drug product is packaged for clinical trial use;

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

·            the bulk drug substance and formulated drug product is produced prior to receiving FDA approval for the respective third party manufacturing facilities.

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

Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  We have remaining supplies of FOLOTYN drug substance and drug product that are not recorded as inventory on our Balance Sheet as of September 30, 2010 because they were purchased prior to FDA approval.   Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.  We sold a portion of our finished goods that were manufactured subsequent to the FDA approval date totaling $67,000 and $82,000 during the three and nine months ended September 30, 2010, respectively, which were recorded in cost of sales, excluding amortization expense in the Statement of Operations.  See further discussion in Note 7 below.  We continue to expense costs associated with clinical trial material as research and development expense.  Inventory as of September 30, 2010, consists of work in process of $83,000 and finished goods of $68,000.

4.                 Prepaid Expenses and Other Assets

Prepaid expenses and other assets are comprised of the following:

5.                 Intangible asset, net

Costs incurred for products or product candidates not yet approved by the FDA and for which no alternative future use exists are recorded as expense. In the event a product or product candidate has been approved by the FDA or an alternative future use exists for a product or product candidate, patent and license costs are capitalized and amortized over the shorter of the expected patent life and the expected life cycle of the related product or product candidate.

As a result of the FDA’s approval to market FOLOTYN on September 24, 2009, we met a milestone under our license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, discussed in Note 10, which required us to make a milestone payment of $5.8 million. We capitalized the $5.8 million payment as an intangible asset and began amortizing the asset immediately following the FDA approval of FOLOTYN. Amortization expense is being recorded on a straight line basis over the remaining expected life of the patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent in development. This term is our best estimate of the life of the patent. If, however, the Hatch-Waxman extension is not granted, the intangible asset will be amortized over a shorter period. Amortization expense of $113,000 and $340,000 for the three and nine months ended September 30, 2010 was recorded as amortization of intangible asset in the Statement of Operations.  Amortization expense of $7,000 for the three and nine months ended September 30, 2009, was recorded as amortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense for the intangible asset is approximately $454,000 per year during 2010 through 2021 and $234,000 in 2022.

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The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred.  No trigger events occurred for the three months ended September 30, 2010, on the $5,339,000 of intangible asset, net.

6.                 Accrued Liabilities

Accrued liabilities are comprised of the following:

7.                 Product Sales

Product Sales

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

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Given our limited sales history, we are currently unable to reasonably estimate returns. Therefore, we have determined that domestic shipments of FOLOTYN made to distributors do not meet the criteria for revenue recognition at the time of shipment, and therefore such shipments are accounted for using the sell-through method. Under the sell-through method, we do not recognize revenue upon shipment of FOLOTYN to the distributor. For these product sales, we invoice the distributor and record deferred revenue equal to the gross invoice sales price. We then recognize revenue when the product is sold through, or upon shipment of the product from the distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limited number of patients, the short period from sale of product to patient infusion and limited contractual return rights, FOLOTYN distributors and their customers generally carry limited inventory.  Through September 30, 2010, product returns have been negligible.  Deferred revenue results from amounts receivable in advance of revenue recognition and totaled $1,587,000 as of September 30, 2010.

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

Net Product Sales

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

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known at the time of sale. Due to estimates and assumptions inherent in determining the amount of rebates and chargebacks, the actual amount of claims for rebates and chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.  Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities.  Allowances and accruals are generally recorded in the same period that the related revenue is recognized.

Classification of Product Sales Allowances and Accruals

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

Medicaid Rebates

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time sell-through revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to early adopt portions of PPACA, and any implementing regulations, could impact future estimates related to our Medicaid rebate allowances. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. We account for Medicaid rebates by establishing an accrual in an amount equal to our estimate of Medicaid rebate claims attributable to sales recognized in that period.  If actual future results vary from our estimates, we may need to adjust our previous estimates, which would affect our earnings in the period of the adjustment.  For reference purposes, a 10% to 20% variance in Medicaid utilization estimates for state Medicaid rebates as of September 30, 2010, would result in an approximate $449,000 to $898,000 adjustment to cumulative net product sales.

Government Chargebacks

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual in an amount equal to our estimate of maximum chargeback claims. We determine our chargeback estimates based on actual FOLOTYN sell-through sales data from third-party information. Chargeback amounts are determined at the time of resale to the federal government qualified entities, and we generally issue credits for such amounts within several weeks of receiving claims from the distributor. We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Estimated chargeback amounts are recorded at the time the sell-through sale occurs and we adjust the accrual quarterly to reflect actual experience. Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

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Balances and activity in the deferred revenue account and a reconciliation of gross to net product sales for the three and nine months ended September 30, 2010 and 2009 are as follows:

Balances and activity in the government rebates and chargebacks and distribution fees payable accounts for the nine months ended September 30, 2010, are as follows:

Major Customers and Concentration of Credit Risk

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary.  Substantially all of our 2010 sales were made in the United States.

Cost of sales

Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 10 regarding the royalty rates under our license agreement for FOLOTYN.  Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and

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development expense.  Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.  Cost of sales, excluding amortization expense were $889,000 and $2,330,000 for the three and nine months ended September 30, 2010, respectively.  Cost of sales, excluding amortization expense primarily relates to an 8% royalty on gross product sales payable to the licensors of FOLOTYN under the terms of our license agreement.  We sold a portion of our finished goods that were manufactured subsequent to the FDA approval date totaling $67,000 and $82,000 during the three and nine months ended September 30, 2010, respectively, which were recorded in cost of sales, excluding amortization expense in the Statement of Operations.

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

8.                 Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 has been recognized in the accompanying Statements of Operations as follows:

Effective August 24, 2010, James V. Caruso, our former Executive Vice President and Chief Commercial Officer (CCO), departed the Company.  As a result of Mr. Caruso’s departure, we adjusted the forfeiture rate applied to his equity compensation, which resulted in a one-time $787,000 reversal of selling, general and administrative stock-based compensation expense during the three and nine months ended September 30, 2010, of which $605,000 related to stock option awards and $182,000 related to restricted stock unit awards.  Effective September 30, 2009, Pablo J. Cagnoni, M.D., our former Senior Vice President and Chief Medical Officer (CMO), resigned.  As a result of Dr. Cagnoni’s resignation, we adjusted the forfeiture rate applied to his equity compensation, which resulted in a one-time $906,000 reversal of research and development stock-based compensation expense during the three and nine months ended September 30, 2009, of which $699,000 related to stock option awards, $166,000 related to restricted stock awards and $41,000 related to restricted stock unit awards.

We did not recognize a related tax benefit during the nine months ended September 30, 2010 and 2009, as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of September 30, 2010.  No stock-based compensation expense was capitalized on our Balance Sheet as of September 30, 2010 and December 31, 2009.

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

During the nine months ended September 30, 2010, we granted 2,628,251 stock options with a weighted-average grant-date fair value of $4.14 per share.  During the three months ended September 30, 2010 and 2009, we recorded stock-based compensation related to our stock option plans of $1,840,000 and $1,754,000, respectively.  During the nine months ended

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September 30, 2010 and 2009, we recorded stock-based compensation related to our stock option plans of $6,754,000 and $6,252,000, respectively.  The stock-based compensation expense amounts for the three and nine months ended September 30, 2010 include the $605,000 one-time reversal related to the departure of our former CCO discussed above.  The stock-based compensation expense amounts for the three and nine months ended September 30, 2009 include the $699,000 one-time reversal related to the resignation of our former CMO discussed above. As of September 30, 2010, the unrecorded stock-based compensation balance related to stock option awards was $9,265,000 and will be recognized over an estimated weighted-average amortization period of 1.7 years.

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

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $4.72 as of September 30, 2010, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.  The total number of in-the-money options exercisable as of September 30, 2010, was 1,047,425.

The total intrinsic value of options exercised during the three months ended September 30, 2010 and 2009 was $36,000 and $2,775,000, respectively, determined as of the date of option exercise.  The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $3,984,000 and $4,370,000, respectively, determined as of the date of option exercise.  We settle employee stock option exercises with newly issued common shares.  No tax benefits were realized by us in connection with these exercises during the nine months ended September 30, 2010 and 2009 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of September 30, 2010.

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

The shares of restricted stock vest in four equal annual installments from the date of grant.  During the three months ended September 30, 2010 and 2009, we recorded stock-based compensation related to restricted stock awards of $6,000 and $(119,000), respectively.  During the nine months ended September 30, 2010 and 2009, we recorded stock-based compensation related to restricted stock awards of $38,000 and $21,000, respectively.  The stock-based compensation expense amounts for the three and nine months ended September 30, 2009 include the $166,000 one-time reversal related to the resignation of our former CMO discussed above.  As of September 30, 2010, the unrecorded stock-based compensation balance related to restricted stock awards was $15,000 and will be recognized over an estimated weighted-average amortization period of 1.4 years.

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

The shares of restricted stock unit awards vest in four equal annual installments from the date of grant.  During the three months ended September 30, 2010 and 2009, we recorded stock-based compensation related to restricted stock unit awards of $273,000 and $87,000, respectively.  During the nine months ended September 30, 2010 and 2009, we recorded stock-based compensation related to restricted stock unit awards of $934,000 and $255,000, respectively.  The stock-based compensation expense amounts for the three and nine months ended September 30, 2010 include the $182,000 one-time reversal related to the departure of our former CCO discussed above.  The stock-based compensation expense amounts for the three and nine months ended September 30, 2009 include the $41,000 one-time reversal related to the resignation of our former CMO discussed above.  As of September 30, 2010, the unrecorded stock-based compensation balance related to restricted stock unit awards was $2,231,000 and will be recognized over an estimated weighted-average amortization period of 2.2 years.

9.                 Net Loss Per Share

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

Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential dilutive common shares were anti-dilutive due to our net loss (as including such shares would decrease our basic net loss per share). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for the nine months ended September 30, 2010 and 2009, all potentially dilutive common shares have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive common shares consist of the following:

10.          Commitments and Contingencies

Royalty and License Fee Commitments

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, as amended, under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications related to FOLOTYN and its uses. Under the terms of the agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and have made aggregate milestone payments of $2.5 million based on the passage of time. Additionally, in May and September 2009, we made milestone payments of $1.5 million based on the FDA accepting our New Drug Application for review and $5.8 million based on the FDA approval to market FOLOTYN, respectively.  The up-front license fee and all milestone payments under the agreement prior to FDA approval to market FOLOTYN were recorded to research and development expense as incurred.  As discussed in Note 5, the $5.8 million milestone payment based on the FDA approval was capitalized as an intangible asset and is being amortized over the expected useful life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. The only

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remaining potential milestone payment under the license agreement is for $3.5 million upon regulatory approval to market FOLOTYN in Europe, which, if made would be capitalized and amortized over the expected useful life of the licensed patents. Under the terms of the agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we will pay the licensors royalties based on graduated annual levels of net sales of FOLOTYN to our distributors, net of actual rebates and chargebacks, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur.  Royalties are 8% of annual distributor sales up to $150.0 million; 9% of annual distributor sales of $150.0 million through $300.0 million; and 11% of annual distributor sales in excess of $300.0 million.  In 2010 and 2009, our royalties were 8% of our net distributor sales.  As of September 30, 2010, accrued royalties were $669,000 and are included in accrued liabilities on the Balance Sheet.

11.  Subsequent Event

In October 2010, we issued an aggregate of 2,016,315 RSUs to our employees under the Company’s 2008 Equity Incentive Plan, as amended.  The RSU awards vest in three equal annual installments from the date of grant, subject to the employees’ continued service with the Company through such vesting dates.

In October 2010, we received notice that we were approved for the Therapeutic Discovery Tax Credit, which we elected to receive in the form of a cash payment, or grant totaling approximately $1,467,000 and which will be recorded in Other Income in the fourth quarter.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements regarding our commercialization of FOLOTYN for patients with relapsed or refractory peripheral T-cell lymphoma; our intent and projected timeline to submit a Marketing Authorisation Application, or MAA, in Europe for FOLOTYN; our projected operating costs and expenses for fiscal year 2010; other statements regarding our future product development and regulatory strategies, including our intent to develop or seek regulatory approval for FOLOTYN for additional indications; the ability of our third-party manufacturers to support our requirements for drug supply; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements that are other than statements of historical fact. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our, or our industry’s results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among other things, those discussed in Part II, Item 1A of this report under the caption “Risk Factors.” All forward-looking statements included in this report are based on information available to us as of the date hereof and we undertake no obligation to revise any forward-looking statements in order to reflect any subsequent events or circumstances. Forward-looking statements not specifically described above also may be found in these and other sections of this report.

Overview

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

We are currently focused on the development and commercialization of FOLOTYN® (pralatrexate injection).  FOLOTYN is a targeted folate inhibitor designed to accumulate preferentially in cancer cells.  FOLOTYN targets the inhibition of dihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway, thereby interfering with DNA and RNA synthesis and triggering cancer cell death.  FOLOTYN can be delivered as a single agent, for which we currently have approval for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, and has the potential to be used in combination therapy regimens.  We believe that FOLOTYN’s unique mechanism of action offers us the ability to target the drug for development in a variety of hematological malignancies and solid tumor indications.  We currently retain exclusive worldwide commercial rights to FOLOTYN for all indications.  We may also seek to grow our product portfolio through product acquisition and in-licensing efforts.

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

We began making FOLOTYN available for commercial sale in the United States in October 2009 and commenced our commercial launch of FOLOTYN in January 2010.  We have established a commercial organization, including sales, marketing, supply chain management and reimbursement capabilities, for sales of FOLOTYN in the United States.  We believe the market for relapsed or refractory PTCL is addressable with a targeted U.S. sales and marketing organization, and we intend to promote FOLOTYN ourselves in the United States.

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

We are committed to evaluating FOLOTYN for oncology use as a single agent and in combination with other therapies.  We currently are conducting clinical trials involving FOLOTYN in multiple indications and plan to initiate additional trials in the future to evaluate FOLOTYN’s potential utility in other hematologic malignancies and solid tumor indications.  The following table summarizes the target indications and clinical development status of the FOLOTYN development program, including our planned post-approval studies:

*           These studies are required by the FDA as a condition of the accelerated approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL and must verify the clinical benefit of FOLOTYN.

Recent Developments

On October 11, 2010, we announced the presentation of favorable survival data from our international, randomized, multi-center Phase 2b investigational trial of FOLOTYN relative to erlotinib in patients with Stage IIIB/IV (advanced) non-small cell lung cancer, or NSCLC, who had received one or two prior systemic treatments including at least one prior platinum-based regimen.  We previously announced the top line results from this trial in July 2010.  The objective of this Phase 2b study was to estimate the efficacy of FOLOTYN relative to that of erlotinib as assessed by overall survival, or OS, the primary endpoint of the trial.  The results demonstrated that patients receiving FOLOTYN had a 16% reduction in the risk of death compared to erlotinib in the overall (intent-to-treat) population (n=201; hazard ratio (HR)=0.84) and a 13% reduction in the risk of death in the primary efficacy analysis population (n=166; HR=0.87).  At six months, 56% of patients treated with FOLOTYN were alive and 51% of patients treated with erlotinib were alive; at one year, 28 % of patients treated with FOLOTYN were alive and 18% of patients treated with erlotinib were alive. The median OS time was 6.7 months for patients who received FOLOTYN and 7.0 months for patients who received erlotinib.

Secondary endpoints included progression-free survival (PFS) (HR=0.91; median PFS=3.4 months and 2.8 months for FOLOTYN and erlotinib, respectively) and objective response rate (2% and 7%, respectively). Disease control rate, which includes patients with complete responses, partial responses or stable disease, was 36% for FOLOTYN and 43% for erlotinib.

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Analyses were also performed according to the statistical analysis plan to assess the activity of FOLOTYN and erlotinib in predefined patient cohorts. Most notably, patients with non-squamous cell carcinoma (n=107) who received FOLOTYN experienced a 35% reduction in the risk of death (OS HR=0.65) and 42% reduction in the risk of disease progression (PFS HR=0.58) relative to erlotinib. In patients with squamous cell carcinoma, a hazard ratio for OS of 1.06 was observed, which suggests activity of FOLOTYN given that erlotinib has historically shown a survival benefit in these patients. In the small subset of patients who received prior pemetrexed (n=30), a hazard ratio for OS of 1.15 was observed.

The safety profile of FOLOTYN was consistent with that observed and reported in previous FOLOTYN solid tumor studies. The most common Grade 3-4 adverse event observed in patients treated with FOLOTYN was mucositis (23%). Other Grade 3-4 adverse events occurring in more than 5% of patients were fatigue (9%), dyspnea (6%), neutropenia (6%), thrombocytopenia (5%) and anemia (5%) in patients treated with FOLOTYN, and rash (8%), dyspnea (8%), anemia (8%) and fatigue (5%) in patients treated with erlotinib.

We believe these data warrant further analysis to determine the future development strategy based on our assessment of the potential clinical, regulatory and commercial opportunities for FOLOTYN in this indication.  We are in the process of exploring potential Phase 3 development options for FOLOTYN in this indication.

Results of Operations

We have incurred significant net losses and negative cash flows from operations. We have incurred these losses principally from costs incurred in our research and development programs and from our selling, general and administrative expenses.  Our primary business activities have been focused on the development of FOLOTYN and other programs that we discontinued in previous years.  Our ability to achieve profitability is dependent on our ability to grow product sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  The amount of our future product sales are subject to significant uncertainty.  We may never generate sufficient revenue from product sales to become profitable.

We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spend substantial amounts on selling, general and administrative expenses in connection with our commercialization of FOLOTYN for the treatment of patients with relapsed or refractory PTCL.  Therefore, we may need to raise additional capital to support our future operations.  Our actual capital requirements will depend on many factors, including those discussed under the “Liquidity and Capital Resources” section below.  If we are unable to generate meaningful amounts of revenue from future product sales or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our business and future prospects for revenue and profitability may be harmed.

Comparison of the three and nine months ended September 30, 2010 and 2009

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

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Given our limited sales history, we are currently unable to reasonably estimate returns.  Therefore, we have determined that domestic shipments of FOLOTYN made to distributors do not meet the criteria for revenue recognition at the time of shipment, and therefore such shipments are accounted for using the sell-through method. Under the sell-through method, we do not recognize revenue upon shipment of FOLOTYN to the distributor. For these product sales, we invoice the distributor and record deferred revenue equal to the gross invoice sales price. We then recognize revenue when the product is sold through, or upon shipment of the product from the distributors to the distributors’ customers.  Because of the price of FOLOTYN, the limited number of patients, the short period from sale of product to patient infusion and limited contractual return rights, FOLOTYN distributors and their customers generally carry limited inventory.  Through September 30, 2010, product returns have been negligible.  Deferred revenue results from amounts receivable in advance of revenue recognition and totaled $1.6 million as of September 30, 2010.

Balances and activity in the deferred revenue account and a reconciliation of gross to net product sales for the three and

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nine months ended September 30, 2010 and 2009 are as follows:

Net product sales for the three months ended September 30, 2010 of $8.2 million represented an increase of 4.4% compared to the $7.9 million of net product sales for the three months ended June 30, 2010.  There were no corresponding net product sales in the three and nine months ended September 30, 2009, as sales of FOLOTYN commenced in the fourth quarter of 2009.

Balances and activity in the government rebates and chargebacks and distribution fees payable accounts for the nine months ended September 30, 2010 are as follows:

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

Cost of sales, excluding amortization expense. Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product revenue.

Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and manufacturing of the product were recorded as research and development expense.  We have remaining supplies of drug substance and drug product that are not recorded as inventory on our Balance Sheet as of September 30, 2010 because they were purchased prior to FDA approval.   Accordingly, our cost of sales will be lower with respect to product manufactured

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prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.  This occurred with respect to a majority of our sales of FOLOTYN in the nine months ended September 30, 2010.  After the inventory has been sold that was already expensed to research and development prior to FDA approval, we expect cost of sales, excluding amortization expense to approximate 10% of net product sales, which includes our current 8% royalty.

The $0.9 million and $2.3 million of cost of sales, excluding amortization expense for the three and nine months ended September 30, 2010, respectively, was primarily due to an 8% royalty on gross product sales payable to the licensors of FOLOTYN under the terms of our license agreement.  We sold a portion of our finished goods that were manufactured subsequent to the FDA approval date totaling $67,000 and $82,000 during the three and nine months ended September 30, 2010, respectively, which were recorded in cost of sales, excluding amortization expense.  There were no corresponding cost of sales for the three and nine months ended September 30, 2009.

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

The $0.3 million decrease in research and development expenses in the three months ended September 30, 2010, as compared to the same period in 2009 was primarily due to:

·          a $1.2 million decrease in costs related to clinical trials involving FOLOTYN that have closed enrollment, including decreased costs for our Phase 2b NSCLC study, which completed patient enrollment in July 2009;

·          a $539,000 decrease in consulting, professional fees and grants, primarily resulting from regulatory affairs and preparations for the FDA’s Oncologic Drugs Advisory Committee, or ODAC, meeting for FOLOTYN in September 2009, with no corresponding amounts in 2010; and

·          a $522,000 decrease in third-party manufacturing costs for clinical trial material and manufacturing pre-commercial product in preparation for approval.

This decrease was partially offset by:

·          a $1.1 million increase in costs related to clinical trials involving FOLOTYN, including start-up costs for the post-approval studies required by the FDA and other trials with ongoing enrollment; and

·          an $828,000 increase in non-cash stock-based compensation expense, primarily resulting from  the one-time $0.9 million reversal of stock-based compensation expense in connection with the resignation of our former Chief Medical Officer in September 2009, as discussed in more detail in the Stock-based Compensation Expense section below.

The $1.6 million decrease in research and development expenses in the nine months ended September 30, 2010, as compared to the same period in 2009 was primarily due to:

·          a $1.6 million decrease in costs related to clinical trials involving FOLOTYN that have closed enrollment, including decreased costs for our Phase 2b NSCLC study, which completed patient enrollment in July 2009;

·          a $1.5 million decrease in licensing costs resulting from the milestone payment made under the license agreement for FOLOTYN upon FDA acceptance of our NDA for review in the three months ended June 30, 2009, with no corresponding amount in the same period in 2010;

·          a $1.1 million decrease in third-party manufacturing costs for clinical trial material and manufacturing pre-commercial product in preparation for approval; and

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·          a $581,000 decrease in consulting, professional fees and grants, primarily resulting from regulatory affairs and preparations related to the filing of our NDA and the FDA’s ODAC meeting for FOLOTYN in September 2009, with no corresponding amounts in 2010.

This decrease was partially offset by:

·          a $2.3 million increase in costs related to clinical trials involving FOLOTYN, including start-up costs for the post-approval studies required by the FDA and other trials with ongoing enrollment;

·          a $610,000 increase in personnel and related travel costs, mainly attributable to additional headcount and increases in compensation costs year over year; and

·          a $271,000 increase in non-cash stock-based compensation expense, primarily resulting from  the one-time $0.9 million reversal of stock-based compensation expense in connection with the resignation of our former Chief Medical Officer in September 2009, as discussed in more detail in the Stock-based Compensation Expense section below.

For the fourth quarter of 2010, we expect our research and development expenses to increase compared to the quarterly average for the nine months ended September 30, 2010, due to the following:

·                  an increase in costs related to clinical trials involving FOLOTYN, including start-up costs for the post-approval studies required by the FDA; and

·                  an increase in non-cash stock-based compensation expense related to the broad-based RSU awards to existing employees in October 2010 and grants to new employees.

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

The $7.4 million increase in selling, general and administrative expenses in the three months ended September 30, 2010, as compared to the same period in 2009 was primarily due to the following:

·            a $3.7 million increase in personnel and related travel and facilities costs, mainly attributable to additional headcount to support the commercialization of FOLOTYN, including our sales and marketing organization, and increases in compensation costs year over year;

·            a $2.8 million increase in sales and marketing costs associated with the commercialization of FOLOTYN, including promotional expenses, advisory boards, market research and costs related to trade shows;

·            a $924,000 increase in grants and sponsored medical education programs; and

·            a $330,000 increase in professional fees primarily related to increased portfolio and intellectual property development activities and administrative compliance associated with commercialization and additional headcount.