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Allos Therapeutics 10-Q 2007

 

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

FORM 10-Q

x

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

 

 

 

For the quarterly period ended June 30, 2007.

 

 

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

 

 

 

For the transition period from                   to                   .

 

Commission File Number

000-29815

Allos Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

 

54-1655029

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

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 August 2, 2007, there were 66,272,722 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 




ALLOS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I.   Financial Information

 

 

ITEM 1.

 

Financial Statements (unaudited)

 

 

 

 

Balance Sheets — as of December 31, 2006 and June 30, 2007

 

 

 

 

Statements of Operations — for the three and six months ended June 30, 2006 and 2007 and the cumulative period from September 1, 1992 (date of inception) through June 30, 2007

 

 

 

 

Statements of Cash Flows — for the six months ended June 30, 2006 and 2007 and the cumulative period from September 1, 1992 (date of inception) through June 30, 2007

 

 

 

 

Notes to Financial Statements

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

ITEM 4.

 

Controls and Procedures

 

 

PART II.   Other Information

 

 

ITEM 1.

 

Legal Proceedings

 

 

ITEM 1A.

 

Risk Factors

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

ITEM 3.

 

Defaults Upon Senior Securities

 

 

ITEM 4.

 

Submission of Matters to a Vote of Security Holders

 

 

ITEM 5.

 

Other Information

 

 

ITEM 6.

 

Exhibits

 

 

SIGNATURES

 

 

 

NOTE:

Allos Therapeutics, Inc., the Allos Therapeutics, Inc. logo, EFAPROXYN™ (efaproxiral), 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.

2




PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ALLOS THERAPEUTICS, INC.
BALANCE SHEETS

(unaudited)

 

 

December 31,

 

June 30,

 

 

 

2006

 

2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,070,526

 

$

16,887,419

 

Restricted cash

 

366,667

 

366,667

 

Investments in marketable securities

 

22,725,525

 

51,833,017

 

Prepaid research and development expenses

 

496,265

 

659,353

 

Prepaid expenses and other assets

 

2,069,840

 

2,486,077

 

Total current assets

 

35,728,823

 

72,232,533

 

Property and equipment, net

 

603,520

 

567,239

 

Other assets

 

49,247

 

49,247

 

Total assets

 

$

36,381,590

 

$

72,849,019

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

400,133

 

$

764,116

 

Accrued liabilities

 

6,431,521

 

7,038,688

 

Total current liabilities

 

6,831,654

 

7,802,804

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2006 and June 30, 2007; no shares issued or outstanding

 

 

 

Series A Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares designated from authorized preferred stock at December 31, 2006 and June 30, 2007; no shares issued or outstanding

 

 

 

Common stock, $0.001 par value; 150,000,000 shares authorized at December 31, 2006 and June 30, 2007; 56,695,633 and 66,166,955 shares issued and outstanding at December 31, 2006 and June 30, 2007, respectively

 

56,695

 

66,167

 

Additional paid-in capital

 

238,052,617

 

292,301,662

 

Deficit accumulated during the development stage

 

(208,559,376

)

(227,321,614

)

Total stockholders’ equity

 

29,549,936

 

65,046,215

 

Total liabilities and stockholders’ equity

 

$

36,381,590

 

$

72,849,019

 

 

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

3




ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS

(unaudited)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Cumulative
Period from
September 1, 1992
(date of inception)
through June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,320,667

 

$

4,360,787

 

$

6,760,497

 

$

7,650,215

 

$

115,505,767

 

Clinical manufacturing

 

390,866

 

1,384,804

 

952,439

 

2,532,108

 

31,596,803

 

Marketing, general and administrative

 

3,738,720

 

5,514,923

 

6,664,518

 

10,262,519

 

93,421,046

 

Restructuring and separation costs

 

 

 

645,666

 

 

1,663,821

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

7,450,253

 

11,260,514

 

15,023,120

 

20,444,842

 

242,187,437

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(7,450,253

)

(11,260,514

)

(15,023,120

)

(20,444,842

)

(242,187,437

)

Gain on settlement claims

 

 

 

 

 

5,110,083

 

Interest and other income, net

 

487,900

 

909,140

 

991,852

 

1,682,604

 

19,992,204

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(6,962,353

)

(10,351,374

)

(14,031,268

)

(18,762,238

)

(217,085,150

)

 

 

 

 

 

 

 

 

 

 

 

 

Dividend related to beneficial conversion feature of preferred stock

 

 

 

 

 

(10,236,464

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(6,962,353

)

$

(10,351,374

)

$

(14,031,268

)

$

(18,762,238

)

$

(227,321,614

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.13

)

$

(0.16

)

$

(0.25

)

$

(0.29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:  basic and diluted

 

55,102,627

 

65,645,678

 

55,090,968

 

63,908,192

 

 

 

 

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

4




ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Six Months Ended
June 30,

 

Cumulative
Period From
September 1, 1992
(date of inception)
through

 

 

 

2006

 

2007

 

June 30, 2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(14,031,268

)

$

(18,762,238

)

$

(217,085,150

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

152,796

 

170,545

 

3,257,809

 

Stock-based compensation expense

 

1,685,172

 

3,117,296

 

28,748,390

 

Write-off of long-term investment

 

 

 

1,000,000

 

Other

 

 

 

99,121

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(614,232

)

(579,325

)

(3,184,677

)

Interest receivable on investments

 

147,601

 

(418,790

)

(852,898

)

Accounts payable

 

285,255

 

363,982

 

764,116

 

Accrued liabilities

 

769,791

 

607,168

 

7,038,688

 

Net cash used in operating activities

 

(11,604,885

)

(15,501,362

)

(180,214,601

)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(133,453

)

(134,264

)

(3,571,042

)

Purchases of marketable securities

 

(11,684,401

)

(57,348,702

)

(483,992,896

)

Proceeds from sales of marketable securities

 

26,000,000

 

28,660,000

 

433,012,777

 

Purchase of long-term investment

 

 

 

(1,000,000

)

Payments received on notes receivable

 

 

 

49,687

 

Net cash provided by (used in) investing activities

 

14,182,146

 

(28,822,966

)

(55,501,474

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Principal payments under capital leases

 

 

 

(422,088

)

Proceeds from sales leaseback

 

 

 

120,492

 

Pledge of restricted cash

 

 

 

(366,667

)

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

89,125,640

 

Proceeds from issuance of common stock associated with stock options, stock warrants and employee stock purchase plan

 

110,565

 

884,014

 

4,994,298

 

Proceeds from issuance of common stock, net of issuance costs

 

 

50,257,207

 

159,151,819

 

Net cash provided by financing activities

 

110,565

 

51,141,221

 

252,603,494

 

Net increase in cash and cash equivalents

 

2,687,826

 

6,816,893

 

16,887,419

 

Cash and cash equivalents, beginning of period

 

4,224,634

 

10,070,526

 

 

Cash and cash equivalents, end of period

 

$

6,912,460

 

$

16,887,419

 

$

16,887,419

 

Supplemental Schedule of Cash and Non-cash Operating and Financing Activities:

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

$

1,033,375

 

Issuance of stock in exchange for license agreement

 

 

 

40,000

 

Capital lease obligations incurred for acquisition of property and equipment

 

 

 

422,088

 

Issuance of stock in exchange for notes receivable

 

 

 

139,687

 

Conversion of preferred stock to common stock

 

 

 

89,125,640

 

 

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

5




ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS

(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 Securities and Exchange Commission’s rules and regulations.  Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  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, 2006 for a broader discussion of our business and the opportunities and risks inherent in such business.

Since our inception in 1992, we have not generated any revenue and have experienced significant net losses and negative cash flows from operations.  Our activities have consisted primarily of licensing and developing product candidates.  Accordingly, we are considered to be in the development stage as of June 30, 2007 as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises.

On June 19, 2007, we announced top line results from ENRICH, our pivotal Phase 3 study of EFAPROXYNTM (efaproxiral) plus whole brain radiation therapy, or WBRT, in women with brain metastases originating from breast cancer.  The study failed to achieve its primary endpoint of demonstrating a statistically significant improvement in overall survival in patients receiving EFAPROXYN plus WBRT, compared to patients receiving WBRT alone.  Based on these results, we discontinued our EFAPROXYN development program during the second quarter of 2007.

Liquidity

Our ability to generate revenue and achieve profitability is dependent on our ability, alone or with partners, to successfully complete the development of our product candidates, conduct clinical trials, obtain the necessary regulatory approvals, and manufacture and market our product candidates.  The timing and costs to complete the successful development of any of our product candidates are highly uncertain, and therefore difficult to estimate. The lengthy process of seeking regulatory approvals for our product candidates, and the subsequent compliance with applicable regulations, require the expenditure of substantial resources.  Clinical development timelines, likelihood of success and total costs vary widely and are impacted by a variety of risks and uncertainties.  Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the ultimate costs of such efforts.  Due to these same factors, we cannot be certain when, or if, we will generate any revenue or net cash inflow from any of our current product candidates.

Even if our clinical trials demonstrate the safety and effectiveness of our product candidates in their target indications, we do not expect to be able to record commercial sales for any of our product candidates until 2009 at the earliest.  We expect to incur significant and growing net losses for the foreseeable future as a result of our research and development programs and the costs of preparing for the potential commercial launch of PDX.  Although the size and timing of our future net losses are subject to significant uncertainty, we expect them to increase over the next several years as we continue to fund our development programs and prepare for the potential commercial launch of our product candidates.

Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments in marketable securities as of June 30, 2007 should be adequate to support our operations through the first quarter of 2009, although there can be no assurance that this can, in fact, be accomplished.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We anticipate continuing our current development programs and/or beginning other long-term development projects involving our product candidates. These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful. Therefore, we may need to obtain additional funds from outside sources to continue research and development

6




activities, fund operating expenses, pursue regulatory approvals and build sales and marketing capabilities, as necessary. However, our actual capital requirements will depend on many factors, including:

·       the status of our product development programs;

·       the time and cost involved in conducting clinical trials and obtaining regulatory approvals;

·       the time and cost involved in filing, prosecuting and enforcing patent claims;

·       competing technological and market developments; and

·       our ability to market and distribute our future products and establish new collaborative and licensing arrangements.

2.                 Prepaid Expenses and Other Assets

Prepaid expenses and other assets are comprised of the following:

 

December 31,
2006

 

June 30,
2007

 

Prepaid expenses and other assets

 

$

151,538

 

$

151,172

 

Prepaid insurance

 

169,302

 

581,905

 

Receivable related to pending litigation settlement (see Note 9)

 

1,749,000

 

1,753,000

 

 

 

$

2,069,840

 

$

2,486,077

 

 

3.                 Accounts Payable and Accrued Liabilities

Accounts payable are comprised of the following:

 

December 31,
2006

 

June 30,
2007

 

Trade accounts payable

 

$

388,133

 

$

764,116

 

Related parties

 

12,000

 

 

 

 

$

400,133

 

$

764,116

 

 

Accrued liabilities are comprised of the following:

 

December 31,
2006

 

June 30,
2007

 

Accrued research and development expenses

 

$

1,430,417

 

$

1,411,935

 

Accrued restructuring and separation costs

 

427,266

 

122,293

 

Accrued personnel costs

 

1,481,849

 

1,574,580

 

Accrued litigation settlement costs (see Note 9)

 

2,000,000

 

2,000,000

 

Accrued clinical manufacturing expenses

 

655,552

 

1,421,482

 

Accrued expenses — other

 

436,437

 

508,398

 

 

 

$

6,431,521

 

$

7,038,688

 

 

During the three months ended June 30, 2007, we accrued approximately $308,000 in research and development expenses and $117,000 in clinical manufacturing expenses related to the discontinuation of the EFAPROXYN development program.  These expenses represent estimated costs to be incurred by contract research organizations in connection with closing out our EFAPROXYN clinical trials and estimated costs for the destruction and storage of EFAPROXYN bulk drug substance and formulated drug product.

4.                 Stockholders’ Equity

On February 2, 2007, we sold 9,000,000 shares of our common stock in an underwritten offering at a price of $6.00 per share (the “February 2007 Financing”). We received net proceeds from the offering of approximately $50.3 million, after deducting underwriting commissions of approximately $3.2 million and other offering expenses of approximately $503,000. The shares of common stock were sold under our shelf Registration Statement on Form S-3 (File No. 333-134965), declared effective by the Securities and Exchange Commission (“SEC”) on July 10, 2006. We retired the unused portion of this shelf registration statement in June 2007.

7




Baker Brothers Life Sciences, L.P. and certain other affiliated funds (collectively “Baker”) purchased 3,300,000 shares of common stock in the February 2007 Financing.  As a result of such purchase, Baker held in excess of 15% of our outstanding common stock following the closing of the February 2007 Financing.  In connection with the February 2007 Financing, Baker entered into a standstill agreement, agreeing not to pursue certain activities the purpose or effect of which may be to change or influence control of the Company.

In May 2007, we filed a universal shelf Registration Statement on Form S-3 (File No. 333-143198) with the SEC that was declared effective on June 5, 2007.  Under the registration statement, we are allowed to sell, from time to time, up to $150 million of our common stock, preferred stock, depository shares, debt securities and/or warrants, either individually or in units, in one or more offerings.  We have no specific plans to offer the securities covered by the registration statement and we are not required to offer the securities in the future pursuant to the registration statement. The terms of any offering under the registration statement will be established at the time of the offering. Proceeds from the sale of any securities will be used for the purposes described in a prospectus supplement to be filed at the time of an offering.

5.                 Stock-Based Compensation

In accordance with the modified prospective transition method of SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”), stock-based compensation expense for the three and six months ended June 30, 2006 and 2007 has been recognized in the accompanying Statements of Operations as follows: 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Research and development

 

$

167,074

 

$

544,111

 

$

301,528

 

$

808,411

 

Clinical manufacturing

 

29,376

 

46,931

 

53,021

 

82,949

 

Marketing, general and administrative

 

1,007,380

 

1,222,874

 

1,330,623

 

2,225,936

 

Total stock-based compensation expense

 

$

1,203,830

 

$

1,813,916

 

$

1,685,172

 

$

3,117,296

 

 

We did not recognize a related tax benefit during the three or six months ended June 30, 2006 and 2007 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of June 30, 2007.   No stock-based compensation expense was capitalized on our Balance Sheet as of December 31, 2006 and June 30, 2007.

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

 

 

Options Outstanding

 

Options Exercisable

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

Outstanding as of December 31, 2006

 

5,778,571

 

$

3.60

 

2,900,556

 

$

4.27

 

Granted

 

2,361,574

 

6.68

 

 

 

 

 

Exercised

 

(273,108

)

3.11

 

 

 

 

 

Canceled

 

(392,853

)

4.99

 

 

 

 

 

Outstanding as of June 30, 2007

 

7,474,184

 

$

4.52

 

3,493,787

 

$

3.86

 

 

During the six months ended June 30, 2007, we granted 2,361,574 stock options with a weighted-average grant-date fair value of $4.20 per share.  As of June 30, 2007, the unrecorded stock-based compensation balance related to stock option awards was $8,542,002 and will be recognized over an estimated weighted-average amortization period of 1.5 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:

 

 

Number
Outstanding

 

Weighted Average
Remaining
Contractual Term

 

Weighted
Average
Exercise Price

 

Aggregate
Intrinsic Value

 

As of June 30, 2007:

 

 

 

 

 

 

 

 

 

Options fully vested and exercisable

 

3,493,787

 

5.6

 

$

3.86

 

$

3,848,737

 

Options expected to vest, including effects of expected forfeitures

 

3,576,022

 

9.2

 

$

3.12

 

2,361,886

 

Options fully vested and expected to vest

 

7,069,809

 

7.4

 

$

3.49

 

$

6,210,623

 

 

8




The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $4.42 as of June 29, 2007, 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 June 30, 2007 was 2,247,199.

The total intrinsic value of options exercised during the three months ended June 30, 2006 and 2007 was $172,559 and $502,894, respectively, determined as of the date of option exercise.  The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2007 was $173,659 and $951,441, 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 three or six months ended June 30, 2006 and 2007 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of June 30, 2007.

The following table summarizes activity and related information for our restricted stock awards:

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Nonvested as of December 31, 2006

 

410,000

 

$

3.14

 

Granted

 

105,000

 

6.08

 

Vested

 

(102,500

)

3.14

 

Nonvested as of June 30, 2007

 

412,500

 

$

3.89

 

 

The shares of restricted stock vest in four equal annual installments from the date of grant.  During the three months ended June 30, 2006 and 2007, we recorded stock-based compensation related to restricted stock awards of $134,766 and $181,131, respectively.  During the six months ended June 30, 2006 and 2007, we recorded stock-based compensation related to restricted stock awards of $165,607 and $359,188, respectively.  As of June 30, 2007, the unrecorded deferred stock-based compensation balance related to restricted stock awards was $1,034,591 and will be recognized over an estimated weighted-average amortization period of 1.6 years.

6.                 Net Loss Per Share

Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”). Under the provisions of SFAS 128, 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, stock warrants 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 (i.e., including such shares would decrease our basic net loss per share). Potential dilutive common shares that would have been included in the calculation of diluted earnings per share if we had net income are as follows:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Common stock options

 

798,452

 

2,142,589

 

683,676

 

2,331,681

 

Restricted stock

 

410,000

 

515,000

 

410,000

 

515,000

 

Common stock warrants

 

24,328

 

279,088

 

 

297,696

 

 

 

1,232,780

 

2,936,677

 

1,093,676

 

3,144,377

 

 

7.                 Restructuring and Separation Costs

In January 2006, Michael E. Hart notified our Board of Directors of his intent to resign from his positions as President, Chief Executive Officer and Chief Financial Officer of the Company once a successor Chief Executive Officer was appointed. On March 3, 2006, we entered into a separation agreement with Mr. Hart to provide certain incentives for his continued employment with the Company while we conducted our search for his successor.  On March 9, 2006, we appointed Paul L. Berns as our President, Chief Executive Officer and a member of the Board of Directors and Mr. Hart resigned from his

9




positions in accordance with the terms of the separation agreement. The separation agreement with Mr. Hart was amended on March 9, 2006 and on May 10, 2006 (as so amended, the “Separation Agreement”).  Pursuant to the Separation Agreement and as a result of Mr. Hart’s resignation as a director, on May 10, 2006, we entered into a consulting agreement with Mr. Hart in order to allow us to retain the benefit of Mr. Hart’s historical knowledge regarding the Company’s operations and corporate development strategies (the “Hart Consulting Agreement”). Pursuant to the Hart Consulting Agreement, Mr. Hart has agreed to provide an average of at least 10 hours of consulting services per month as and when requested from time to time by the Company.  Mr. Hart is not entitled to any compensation or benefits in connection with the performance of his consulting services, except for those payments and benefits being provided to him under the Separation Agreement. The term of the Hart Consulting Agreement is from May 10, 2006 to December 31, 2007; provided that it will automatically terminate upon the occurrence of one or more events constituting just cause (as defined in the agreement).

We recorded separation costs of $645,666 during the six months ended June 30, 2006 relating to our estimate of our total obligations under the Separation Agreement with Mr. Hart.  During the year ended December 31, 2006 and the six months ended June 30, 2007, we made payments to Mr. Hart under the Separation Agreement of $325,208 and $249,218, respectively.  As of June 30, 2007, the remaining liability of $71,239 relating to the Separation Agreement with Mr. Hart is recorded in accrued restructuring and separation costs.

8.                 Income Taxes

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the periods from December 31, 1993 through June 30, 2007, the tax periods which remain subject to examination by major tax jurisdictions as of June 30, 2007.

We have net operating loss (“NOL”) carryforwards, research and development (“R&D”) credit carryforwards and orphan drug credit carryforwards and other deferred tax assets that represent an unrecognized future tax benefit.  A valuation allowance has been established for the entire tax benefit as of June 30, 2007 as we believe that it is more likely than not that such assets will not be realized.  The utilization of these carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the carryforwards, which begin expiring in 2009. Further, the Internal Revenue Code of 1986, as amended, contains provisions in Section 382 that limit the NOL, R&D credit, and orphan drug credit carryforwards available for use in any given year upon the occurrence of certain events, including significant changes in ownership interest and are subject to review and possible adjustment by the Internal Revenue Service. A greater than 50% change in ownership of a company within a three-year period results in an annual limitation on the ability to utilize NOL, R&D credit and orphan drug credit carryforwards from tax periods prior to the ownership change. Our NOL, R&D credit and orphan drug credit carryforwards as of June 30, 2007 will likely be subject to annual limitation due to changes in ownership resulting from our previous financings. While the amount of these limitations has not been determined, management believes that the amount subject to limitation could be significant, and our NOL, R&D credit and orphan drug credit carryforwards may expire unused. Additionally, future ownership changes could further limit the utilization of our NOL, R&D credit and orphan drug credit carryforwards. Until a full Section 382 study is performed and the amount of limitation is known, no amounts are presented as uncertain under FIN 48.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically, with no material impact to our financial results. In the event we receive an assessment for interest and/or penalties, it would be classified in the financial statements as income tax expense.

9.                 Commitments and Contingencies

Manufacturing Commitments

In June 2005, we entered into a manufacturing agreement with Hovione Inter Limited (“Hovione”) covering the supply of EFAPROXYN bulk drug substance, or efaproxiral sodium.  Based on the results of the ENRICH trial, we have discontinued the development of EFAPROXYN and we retain the right to terminate this agreement, without penalty.

10




Royalty and License Fee Commitments for PDX

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, under which we obtained exclusive worldwide rights to several issued United States patents and equivalent foreign patent applications to develop and market any product derived from any formulation of PDX in connection with all diagnostic and therapeutic uses, including human and veterinary diseases. Under the terms of the agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and are also required to make certain additional cash payments based upon the achievement of certain clinical development or regulatory milestones or the passage of certain time periods. To date, we have made aggregate milestone payments of $1.5 million based on the passage of time. In the future, we could make aggregate milestone payments of $1.5 million upon the earlier of achievement of a clinical development milestone or the passage of certain time periods (the “Clinical Milestone”), and up to $10 million upon achievement of certain regulatory milestones, including regulatory approval to market PDX in the United States or Europe. The next scheduled payments toward the Clinical Milestone of $500,000 each are currently due on December 23, 2007, 2008 and 2009. The up-front license fee and all milestone payments under the agreement, have been or will be recorded to research and development expense when incurred. 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 a royalty based on a percentage of net revenues arising from sales of the product or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. As of June 30, 2007, no royalty payments have been made or accrued.

Contingencies

The Company and one of its former officers were named as defendants in a purported securities class action lawsuit filed in May 2004 in the United States District Court for the District of Colorado (the “District Court”). An amended complaint was filed in August 2004. The lawsuit was brought on behalf of a purported class of purchasers of our securities during the period from May 29, 2003 to April 29, 2004, and sought unspecified damages relating to the issuance of allegedly false and misleading statements regarding EFAPROXYN during this period and subsequent declines in our stock price. On October 20, 2005, the District Court granted the defendants’ motion to dismiss the lawsuit with prejudice. In an opinion dated October 20, 2005, the District Court concluded that the plaintiff’s complaint failed to meet the legal requirements applicable to its alleged claims.

On November 20, 2005, the plaintiff appealed the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).   In October 2006, the parties held discussions to settle the matter, although the terms of any such potential settlement remain subject to negotiation and no binding agreement has been reached. A settlement would be subject to various conditions, including approval of the District Court. We expect that any settlement in excess of our deductible would be covered by our insurance carrier. As with any litigation proceeding, we cannot predict with certainty the eventual outcome of our settlement discussions or the legal proceedings. In the event a settlement is not concluded, we intend to vigorously defend against the plaintiff’s appeal. If the Court of Appeals reverses the District Court’s decision and we are not successful in our defense of such claims, we could be forced to make significant payments to the plaintiffs, and such payments could have a material adverse effect on our business, financial condition, results of operations and cash flows to the extent such payments are not covered by our insurance carriers. Even if our defense against such claims is successful, the litigation could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. As of June 30, 2007, we have recorded $2,000,000 in accrued litigation settlement costs, which represents our best estimate of the potential gross amount of the settlement costs to be paid to the plaintiffs, and $1,753,000 in prepaid expenses and other assets, which represents the amount we expect to be reimbursed from our insurance carrier. The net difference of $247,000 between these amounts represents the remaining unpaid deductible under our insurance policy, and this amount was recorded to marketing, general and administrative expenses during the year ended December 31, 2006.

10.          Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.

The Emerging Issues Task Force (“EITF”) issued a consensus, EITF 07-3, Advance Payments for Research and Development Activities, which states that non-refundable advance payments for goods that will be used or services that will be performed

11




in future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been rendered.  The Consensus is to be applied prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007.

The EITF has an issue currently under consideration that may impact the Company in the future. EITF 07-01, Accounting for Collaboration Arrangements Related to the Development and Commercialization of Intellectual Property, is focused on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure questions. We will continue to monitor the development of this EITF and evaluate the effect on our financial statements and disclosures.

12




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 statements that constitute “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 concerning our projected timelines for the completion of enrollment, performance of interim and final analyses and announcement of results from our ongoing clinical trials, including our Phase 2 PROPEL trial; the potential for the results of our Phase 2 PROPEL trial to support marketing approval of PDX; other statements regarding our future product development and regulatory strategies, including our intent to develop or seek regulatory approval for our product candidates in specific indications; the ability of our third-party manufacturing parties 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 which 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 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 focused on developing and commercializing innovative small molecule drugs for the treatment of cancer. We strive to develop proprietary products that have the potential to improve the standard of care in cancer therapy. 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. Our focus is on product opportunities that leverage our internal clinical development and regulatory expertise and address important markets with unmet medical need. We may also seek to grow our existing portfolio of product candidates through product acquisition and in-licensing efforts.

We have two product candidates that are currently under development, PDX (pralatrexate) and RH1.

PDX

PDX (pralatrexate) is a novel, small molecule chemotherapeutic agent that inhibits dihydrofolate reductase, or DHFR, a folic acid (folate)-dependent enzyme involved in the building of nucleic acid, or DNA, and other processes. PDX was rationally designed for efficient transport into tumor cells via the reduced folate carrier, or RFC-1, and effective intracellular drug retention. We believe these biochemical features, together with preclinical and clinical data in a variety of tumors, suggest that PDX may have a favorable safety and efficacy profile relative to methotrexate and other related DHFR inhibitors. We believe PDX has the potential to be delivered as a single agent or in combination therapy regimens.

In August 2006, we initiated PROPEL, a Phase 2 clinical trial of PDX in patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, that we believe, if positive, will be sufficient to support the filing of a new drug application, or NDA, to seek marketing approval for PDX in this indication.   In July 2006, we reached agreement with the United States Food and Drug Administration, or FDA, under its special protocol assessment, or SPA, process on the design of this Phase 2 trial.  The SPA process allows for FDA evaluation of a clinical trial protocol intended to form the primary basis of an efficacy claim in support of an NDA, and provides an agreement that the study design, including trial size, clinical endpoints and/or data analyses are acceptable to the FDA.  The PROPEL trial will seek to enroll a minimum of 100 evaluable patients at approximately 35 centers across the United States, Canada and Europe.  The primary endpoint of the study is objective response rate (complete and partial response).  Secondary endpoints include duration of response, progression-free survival and overall survival.  In January 2007, an independent Data Monitoring Committee, or DMC, completed a planned interim analysis of safety data from the PROPEL trial and recommended that the trial continue per the protocol. This interim assessment was based upon an evaluation of the first 10 patients enrolled to the study who completed at least one cycle of

13




treatment with PDX.  No major patient safety concerns were identified by the DMC.  According to the PROPEL trial protocol, we will conduct an interim analysis of patient response from the PROPEL trial after 35 evaluable patients have completed at least one cycle of treatment with PDX, and must observe at least four responses (complete or partial) out of the first 35 patients in order to continue the trial.  We currently expect to announce the outcome of the interim analysis prior to the end of October 2007, and complete patient enrollment in the trial by the third quarter of 2008, although the actual timing of the interim analysis and completion of enrollment may vary based on a number of factors, including site initiation and patient enrollment rates.

In July 2006, the FDA awarded orphan drug status to PDX for the treatment of patients with T-cell lymphoma. Under the Orphan Drug Act, if we are the first company to receive FDA approval for PDX for this orphan drug indication, we will obtain seven years of marketing exclusivity during which the FDA may not approve another company’s application for the same drug for the same orphan indication.  In October 2006, the FDA granted fast track designation to PDX for the treatment of patients with T-cell lymphoma. The fast track program is designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs.  In April 2007, the Commission of the European Communities, with a favorable opinion of the Committee for Orphan Medicinal Products of the European Medicines Agency, or EMEA, granted orphan drug designation to PDX for the treatment of patients with PTCL.  The EMEA Orphan Medicinal Product Designation, or OMPD, is intended to promote the development of drugs that may provide significant benefit to patients suffering from rare diseases identified as life-threatening or very serious. Under EMEA guidelines, OMPD provides ten years of potential market exclusivity once the product candidate is approved for marketing for the designated indication in the European Union.  OMPD also provides potential protocol assistance, advice on the conduct of clinical trials, a reduced Marketing Authorization Application filing fee for the drug’s sponsor and the potential for grant funding.

In addition to the PROPEL study, the following clinical trials are also open for enrollment:

·                  a Phase 1/2 study of PDX in patients with non-Hodgkin’s lymphoma, or NHL, and Hodgkin’s disease;

·                  a Phase 1 dose escalation study of PDX with vitamin B12 and folic acid supplementation in patients with previously treated advanced non-small cell lung cancer, or NSCLC; and

·                  a Phase 1/2a open-label, multi-center study of sequential PDX and gemcitabine with vitamin B12 and folic acid supplementation in patients with relapsed or refractory NHL or Hodgkin’s disease.

Patient enrollment in the Phase 1/2a study of sequential PDX and gemcitabine with vitamin B12 and folic acid supplementation in patents with relapsed refractory NHL or Hodgkin’s disease was initiated in May 2007.  In the Phase 1 portion of this study, patients with either relapsed or refractory NHL (diffuse large B- or T-cell lymphoma, mantle cell lymphoma, transformed large cell lymphomas) or Hodgkin’s disease will receive PDX followed the next day by gemcitabine as part of a weekly schedule for three or four weeks with concurrent vitamin B12 and folic acid supplementation.  Up to 54 evaluable patients will be enrolled in the Phase 1 portion of the study with the objective of determining the maximum tolerated dose, or MTD, safety, tolerability, and pharmacokinetic profile of escalating doses of sequential PDX and gemcitabine.  In the expanded Phase 2a portion of the trial, up to 30 additional patients with relapsed or refractory PTCL will be enrolled at the established MTD to assess preliminary efficacy of PDX and gemcitabine.

During the second half of 2007, we plan to initiate a Phase 1/2 study of PDX in patients with relapsed or persistent cutaneous T-cell lymphoma, or CTCL. We also plan to initiate a study of PDX in one or more solid tumors once we have determined the MTD for PDX in the ongoing Phase 1 dose escalation study of PDX with vitamin B12 and folic acid supplementation in patients with previously-treated advanced NSCLC.

RH1

RH1 is a small molecule chemotherapeutic agent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD, also known as NAD(P)H quinone oxidoreductase, or NQ01.  We believe DTD is over-expressed in many tumors, including lung, colon, breast and liver tumors. We believe that because RH1 is bioactivated in the presence of DTD, it has the potential to provide targeted drug delivery to these tumor types while limiting the amount of toxicity to normal tissue.  We expect to initiate a Phase 1 study of RH1 in patients with advanced solid tumors during the second half of 2007.

14




EFAPROXYN Development Discontinued

In June 2007, we announced top-line results from ENRICH, our Phase 3 clinical trial of EFAPROXYNTM (efaproxiral) plus whole brain radiation therapy, or WBRT, in women with brain metastases originating from breast cancer.  The study failed to achieve its primary endpoint of demonstrating a statistically significant improvement in overall survival in patients receiving EFAPROXYN plus WBRT, compared to patients receiving WBRT alone.  Based on these results, we discontinued our EFAPROXYN development program during the second quarter of 2007.

In addition to the ENRICH trial, our other clinical trials involving EFAPROXYN included a Phase 1 trial in patients with locally advanced NSCLC receiving concurrent chemoradiotherapy (chemotherapy and radiation therapy administered at the same time), and a Phase 1b/2 trial of EFAPROXYN in patients with locally advanced cancer of the cervix receiving concurrent chemoradiotherapy.   These trials are currently being closed and we are working with our investigators to ensure any active patients are transitioned off study drug appropriately.

Results of Operations

Since our inception in 1992, we have not generated any revenue from product sales and have experienced 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 clinical manufacturing and general and administrative expenses.

Our ability to generate revenue and achieve profitability is dependent on our ability, alone or with partners, to successfully complete the development of our product candidates, conduct clinical trials, obtain the necessary regulatory approvals, and manufacture and market our product candidates. The timing and costs to complete the successful development of any of our product candidates are highly uncertain, and therefore difficult to estimate. The lengthy process of seeking regulatory approvals for our product candidates, and the subsequent compliance with applicable regulations, require the expenditure of substantial resources.  Clinical development timelines, likelihood of success and total costs vary widely and are impacted by a variety of risks and uncertainties discussed in the “Risk Factors” section of Part II, Item 1A below.  Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the ultimate costs of such efforts. Due to these same factors, we cannot be certain when, or if, we will generate any revenue or net cash inflow from any of our current product candidates.

Even if our clinical trials demonstrate the safety and effectiveness of our product candidates in their target indications, we do not expect to be able to record commercial sales of any our product candidates until 2009 at the earliest. We expect to incur significant and growing net losses for the foreseeable future as a result of our research and development programs and the costs of preparing for the potential commercial launch of PDX.  Although the size and timing of our future net losses are subject to significant uncertainty, we expect them to increase over the next several years as we continue to fund our development programs and prepare for the potential commercial launch of our product candidates.

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,320,667

 

$

4,360,787

 

$

6,760,497

 

$

7,650,215

 

Clinical manufacturing

 

390,866

 

1,384,804

 

952,439

 

2,532,108

 

Marketing, general and administrative

 

3,738,720

 

5,514,923

 

6,664,518

 

10,262,519

 

Restructuring and separation costs

 

 

 

645,666

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

7,450,253

 

$

11,260,514

 

$

15,023,120

 

$

20,444,842

 

 

Research and Development.  Research and development expenses include the costs of certain personnel, basic research, preclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, patents and licensing fees for our product candidates.

15




Research and development expenses for the three months ended June 30, 2006 and 2007 were $3.3 million and $4.4 million, respectively.  The $1.0 million increase in research and development expenses in the three months ended June 30, 2007 as compared to the same period in 2006 was primarily due to the following:

·                  a $965,000 increase in clinical trial and preclinical study costs involving PDX;

·                  a $500,000 increase related to key personnel changes; and

·                  a $377,000 increase in non-cash stock-based compensation expense.

These increases were partially offset by a $920,000 decrease in clinical trial costs resulting from the completion of patient enrollment in our Phase 3 ENRICH trial in September 2006, which is net of $308,000 in expense accrued during the three months ended June 30, 2007 for estimated costs to be incurred by contract research organizations in connection with closing out our EFAPROXYN trials as a result of the discontinuation of the EFAPROXYN development program.

Research and development expenses for the six months ended June 30, 2006 and 2007 were $6.8 million and $7.7 million, respectively.  The $890,000 increase in research and development expenses in the six months ended June 30, 2007 as compared to the same period in 2006 was primarily due to the following:

·                  a $1.7 million increase in clinical trial and preclinical study costs involving PDX;

·                  a $868,000 increase related to key personnel changes; and

·                  a $506,000 increase in non-cash stock-based compensation expense.

These increases were partially offset by a $2.4 million decrease in clinical trial costs resulting from the completion of patient enrollment in our Phase 3 ENRICH trial in September 2006, which is net of $308,000 in expense accrued during the six months ended June 30, 2007 for estimated costs to be incurred by contract research organizations in connection with closing out our EFAPROXYN trials as a result of the discontinuation of the EFAPROXYN development program.

For the second half of 2007, we expect our research and development expenses to increase relative to the amount recorded for the six months ended June 30, 2007 due to increases in costs for our preclinical studies and planned clinical trials for PDX, and non-cash stock-based compensation expense.  The amount and timing of the costs related to our clinical trials are difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, the rate of patient enrollment and the detailed design of future trials.

Clinical Manufacturing. Clinical manufacturing expenses include the costs of certain personnel, third party manufacturing costs for development of drug materials for use in clinical trials and preclinical studies, and costs associated with pre-commercial scale-up of manufacturing to support anticipated regulatory and commercial requirements.

Clinical manufacturing expenses for the three months ended June 30, 2006 and 2007 were $391,000 and $1.4 million, respectively.  The $994,000 increase in clinical manufacturing expenses in the three months ended June 30, 2007 as compared to the same period in 2006 was partially due to a $117,000 increase related to estimated costs to be incurred for the storage and destruction of EFAPROXYN bulk drug substance and formulated drug product as a result of the discontinuation of the EFAPROXYN development program. The remaining $877,000 increase was primarily due to increases in third-party manufacturing costs for PDX bulk drug substance and formulated drug product.

Clinical manufacturing expenses for the six months ended June 30, 2006 and 2007 were $952,000 and $2.5 million, respectively.  The $1.6 million increase in clinical manufacturing expenses in the six months ended June 30, 2007 as compared to the same period in 2006 was partially due to a $117,000 increase related to estimated costs to be incurred for the storage and destruction of EFAPROXYN bulk drug substance and formulated drug product as a result of the discontinuation of the EFAPROXYN development program. The remaining $1.5 million increase was primarily due to increases in third-party manufacturing costs for PDX bulk drug substance and formulated drug product.

16




For the second half of 2007, we expect our clinical manufacturing expenses to increase relative to the amount recorded for the six months ended June 30, 2007 in order to support our requirements for ongoing and planned clinical trials and preclinical studies involving PDX and RH1.

Marketing, General and Administrative.  Marketing, general and administrative expenses include costs for pre-marketing activities, corporate development, executive administration, corporate offices and related infrastructure.

Marketing, general and administrative expenses for the three months ended June 30, 2006 and 2007 were $3.7 million and $5.5 million, respectively.  The $1.8 million increase in marketing, general and administrative expenses in the three months ended June 30, 2007 as compared to the same period in 2006 was primarily due to the following:

·                  a $775,000 increase in market research and consulting expenses related to our product development and commercialization planning for EFAPROXYN and PDX;

·                  a $753,000 increase in personnel and travel costs, mainly attributable to additional headcount and increases in compensation costs year over year; and

·                  a $215,000 increase in non-cash stock-based compensation expense.

Marketing, general and administrative expenses for the six months ended June 30, 2006 and 2007 were $6.7 million and $10.3 million, respectively.  The $3.6 million increase in marketing, general and administrative expenses in the six months ended June 30, 2007 as compared to the same period in 2006 was primarily due to the following:

·                  a $1.3 million increase in personnel and travel costs, mainly attributable to additional headcount and increases in compensation costs year over year;

·                  a $1.2 million increase in market research and consulting expenses related to our product development and commercialization planning for EFAPROXYN and PDX;

·                  an $895,000 increase in non-cash stock-based compensation expense; and

·                  a $210,000 increase in legal, accounting and other public company costs.

For the second half of 2007, we expect our marketing, general and administrative expenses to be similar to the amount recorded for the six months ended June 30, 2007.

Stock-based Compensation Expense.  In accordance with the modified prospective transition method of SFAS 123R, stock-based compensation expense for the three and six months ended June 30, 2006 and 2007 has been recognized in the accompanying Statements of Operations as follows: 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Research and development

 

$

167,074

 

$

544,111

 

$

301,528

 

$

808,411

 

Clinical manufacturing

 

29,376

 

46,931

 

53,021

 

82,949

 

Marketing, general and administrative

 

1,007,380

 

1,222,874

 

1,330,623

 

2,225,936

 

Total stock-based compensation expense

 

$

1,203,830

 

$

1,813,916

 

$

1,685,172

 

$

3,117,296

 

 

The $1.2 million of stock-based compensation recognized in the three months ended June 30, 2006 was primarily related to our stock option plans.  Of the $1.8 million of stock-based compensation recognized in the three months ended June 30, 2007, $1.6 million was related to our stock option plans, $181,000 related to restricted stock and $14,000 was related to our employee stock purchase plan. The $610,000 increase in stock-based compensation expense in the three months ended June 30, 2007 as compared to the same period in 2006 was primarily due to a higher fair-value for options granted in 2007 compared to the options granted in 2006 due to our stock price being higher for the 2007 option grants as compared to the same period in 2006.

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The $1.7 million of stock-based compensation recognized in the six months ended June 30, 2006 was primarily related to our stock option plans.  Of the $3.1 million of stock-based compensation recognized in the six months ended June 30, 2007, $2.7 million was related to our stock option plans, $359,000 related to restricted stock and $23,000 was related to our employee stock purchase plan. The $1.4 million increase in stock-based compensation expense in the six months ended June 30, 2007 as compared to the same period in 2006 was primarily due to a higher fair-value for options granted in 2007 compared to the options granted in 2006 due to our stock price being higher during the six months ended June 30, 2007 as compared to the same period in 2006.

As of June 30, 2007, the unrecorded stock-based compensation balance related to stock option awards was $8,542,002 and will be recognized over an estimated weighted-average amortization period of 1.5 years. As of June 30, 2007, the unrecorded deferred stock-based compensation balance related to restricted stock awards was $1,034,591 and will be recognized over an estimated weighted-average amortization period of 1.6 years.

Restructuring and Separation Costs.   Restructuring and separation costs for the six months ended June 30, 2006 and 2007 were $646,000 and $0, respectively.  For a discussion of the separation costs recorded for the six months ended June 30, 2006, please see Note 7 of Part I, Item 1 in this quarterly report.

Interest and Other Income, Net.  Interest income, net of interest expense, for the three months ended June 30, 2006 and 2007 was $488,000 and $909,000, respectively.  Interest income, net of interest expense, for the six months ended June 30, 2006 and 2007 was $992,000 and $1.7 million, respectively.  The $421,000 and $690,000 increases in net interest income in the three and six months ended June 30, 2007 as compared to the same periods in 2006 were primarily due to higher average investment balances resulting from a financing completed in February 2007 and higher yields on our cash, cash equivalents and investments in marketable securities.

Liquidity and Capital Resources

Our cash, cash equivalents, and investments in marketable securities amounted to $68.7 million at June 30, 2007.  Since our inception, we have financed our operations primarily through public and private sales of our equity securities, which have resulted in net proceeds to us of $253.3 million through June 30, 2007.  We have also generated $20.0 million of net interest income since our inception from investing the net proceeds of these financings.

We have used $180.2 million of cash for operating activities from our inception through June 30, 2007.  Net cash used to fund our operating activities for the six months ended June 30, 2006 and 2007 was $11.6 million and $15.5 million, respectively.

Net cash provided by investing activities for the six months ended June 30, 2006 was $14.2 million and consisted primarily of proceeds from maturities of investments in marketable securities, partially offset by the purchase of investments in marketable securities.  Net cash used in investing activities for the six months ended June 30, 2007 was $28.8 million and consisted primarily of the purchase of investments in marketable securities, partially offset by the proceeds from maturities of investments in marketable securities.

Net cash provided by financing activities for the six months ended June 30, 2006 was $110,565 and consisted of proceeds from the issuance of common stock associated with stock options exercised by our employees.  Net cash provided by financing activities for the six months ended June 30, 2007 was $51.1 million and consisted primarily of the net proceeds from the sale of 9,000,000 shares of our common stock in an underwritten offering at a price of $6.00 per share (the “February 2007 Financing”).  We received net proceeds from the February 2007 Financing of approximately $50.3 million, after deducting underwriting commissions of approximately $3.2 million and other offering expenses of approximately $503,000. The shares of common stock were sold under our shelf Registration Statement on Form S-3 (File No. 333-134965), declared effective by the Securities and Exchange Commission on July 10, 2006. We retired the unused portion of this shelf registration statement in June 2007.

In May 2007, we filed a new universal shelf Registration Statement on Form S-3 (File No. 333-143198) with the Securities and Exchange Commission (“SEC”) that was declared effective on June 5, 2007.  Under the registration statement, we are allowed to sell, from time to time, up to $150 million of our common stock, preferred stock, depository shares, debt securities and/or warrants, either individually or in units, in one or more offerings.  We have no specific plans to offer the securities covered by the registration statement and we are not required to offer the securities in the future pursuant to the registration statement. The terms of any offering under the registration statement will be established at the time of the offering. Proceeds from the sale of any securities will be used for the purposes described in a prospectus supplement filed at the time of an offering.

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Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments in marketable securities as of June 30, 2007 should be adequate to support our operations through the first quarter of 2009, although there can be no assurance that this can, in fact, be accomplished.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We anticipate continuing our current development programs and/or beginning other long-term development projects involving our product candidates. These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful. Therefore, we may need to obtain additional funds from outside sources to continue research and development activities, fund operating expenses, pursue regulatory approvals and build sales and marketing capabilities, as necessary. However, our actual capital requirements will depend on many factors, including:

·       the status of our product development programs;

·       the time and cost involved in conducting clinical trials and obtaining regulatory approvals;

·       the time and cost involved in filing, prosecuting and enforcing patent claims;

·       competing technological and market developments; and

·       our ability to market and distribute our future products and establish new collaborative and licensing arrangements.

We will be required to raise additional capital to support our future operations, including the potential commercialization of PDX, in the event we obtain regulatory approval to market PDX. We may seek to obtain this additional capital through arrangements with corporate partners, equity or debt financings, or from other sources. Such arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that we will be successful in consummating any such arrangements. In addition, 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 that we would otherwise seek to develop or commercialize ourselves. If we are unable to generate meaningful amounts of revenue from future product sales, if any, 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.

Obligations and Commitments

Manufacturing Commitments

In June 2005, we entered into a manufacturing agreement with Hovione Inter Limited (“Hovione”) covering the supply of EFAPROXYN bulk drug substance, or efaproxiral sodium.  Based on the results of the ENRICH trial, we have discontinued the development of EFAPROXYN and we retain the right to terminate this agreement, without penalty.

Royalty and License Fee Commitments for PDX

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, under which we obtained exclusive worldwide rights to several issued United States patents and equivalent foreign patent applications to develop and market any product derived from any formulation of PDX in connection with all diagnostic and therapeutic uses, including human and veterinary diseases. Under the terms of the agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and are also required to make certain additional cash payments based upon the achievement of certain clinical development or regulatory milestones or the passage of certain time periods. To date, we have made aggregate milestone payments of $1.5 million based on the passage of time. In the future, we could make aggregate milestone payments of $1.5 million upon the earlier of achievement of a clinical development milestone or the passage of certain time periods (the “Clinical Milestone”), and up to $10 million upon achievement of certain regulatory milestones, including regulatory approval to market PDX in the United States or Europe. The next scheduled payments toward the Clinical Milestone of $500,000 each are currently due on December 23, 2007, 2008 and 2009. The up-front license fee and all milestone payments under the agreement, have been or will be recorded to research and

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development expense when incurred. 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 a royalty based on a percentage of net revenues arising from sales of the product or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. As of June 30, 2007, no royalty payments have been made or accrued.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses.  For a description of our critical accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts.  Our financial instruments as of June 30, 2007 consist of cash, cash equivalents, investments in marketable securities, and accounts payable.  All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

We invest in marketable securities in accordance with our investment policy.  The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields.  Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.  The average duration of the issues in our portfolio of investments in marketable securities as of June 30, 2007 is approximately four months.  As of June 30, 2007, our investments in marketable securities of $51.8 million are all classified as held-to-maturity and were held in a variety of interest-bearing instruments, consisting mainly of high-grade corporate notes.

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

ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer (the “Evaluating Officers”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”).  Based on that evaluation, our management, including the Evaluating Officers, concluded that our disclosure controls and procedures were effective as of June 30, 2007 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Evaluating Officers, as appropriate, to allow timely decisions regarding required disclosure.

No Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company and one of its former officers were named as defendants in a purported securities class action lawsuit filed in May 2004 in the United States District Court for the District of Colorado (the “District Court”). An amended complaint was filed in August 2004. The lawsuit was brought on behalf of a purported class of purchasers of our securities during the period from May 29, 2003 to April 29, 2004, and sought unspecified damages relating to the issuance of allegedly false and misleading statements regarding EFAPROXYN during this period and subsequent declines in our stock price. On October 20, 2005, the District Court granted the defendants’ motion to dismiss the lawsuit with prejudice. In an opinion dated October 20, 2005, the District Court concluded that the plaintiff’s complaint failed to meet the legal requirements applicable to its alleged claims.

On November 20, 2005, the plaintiff appealed the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”).   In October 2006, the parties held discussions to settle the matter, although the terms of any such potential settlement remain subject to negotiation and no binding agreement has been reached. A settlement would be subject to various conditions, including approval of the District Court. We expect that any settlement in excess of our deductible would be covered by our insurance carrier. As with any litigation proceeding, we cannot predict with certainty the eventual outcome of our settlement discussions or the legal proceedings. In the event a settlement is not concluded, we intend to vigorously defend against the plaintiff’s appeal. If the Court of Appeals reverses the District Court’s decision and we are not successful in our defense of such claims, we could be forced to make significant payments to the plaintiffs, and such payments could have a material adverse effect on our business, financial condition, results of operations and cash flows to the extent such payments are not covered by our insurance carriers. Even if our defense against such claims is successful, the litigation could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. As of June 30, 2007, we have recorded $2,000,000 in accrued litigation settlement costs, which represents our best estimate of the potential gross amount of the settlement costs to be paid to the plaintiffs, and $1,753,000 in prepaid expenses and other assets, which represents the amount we expect to be reimbursed from our insurance carrier. The net difference of $247,000 between these amounts represents the remaining unpaid deductible under our insurance policy, and this amount was recorded to marketing, general and administrative expenses during the year ended December 31, 2006.

ITEM 1A.  RISK FACTORS

Our business faces significant risks. These risks include those described below and may include additional risks of which we are not currently aware or which we currently do not believe are material. If any of the events or circumstances described in the following risk factors actually occurs, they may materially harm our business, financial condition, operating results and cash flow. As a result, the market price of our common stock could decline. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, operating results and financial condition.  Stockholders and potential investors in shares of our common stock should carefully consider the following risk factors, which hereby update those risks contained in the “Risk Factors” section of our Annual Report on Form 10-K  for the year ended December 31, 2006, in addition to other information and risk factors in this report.  We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of the Company.  We are relying upon the safe harbor for all forward-looking statements in this report, and any such statements made by or on behalf of the Company are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this report. We consistently update and include our risk factors in our Quarterly Reports on Form 10-Q. Risk factors which have been substantively changed from those set forth in our Annual Report on Form 10-K for the period ended December 31, 2006 have been marked with an asterisk immediately following the heading of such risk factor.

We have a history of net losses and an accumulated deficit, and we may never generate revenue or achieve or maintain profitability in the future. *

Since our inception in 1992, we have not generated any revenue from product sales and have experienced significant net losses and negative cash flows from operations.  To date, we have financed our operations primarily through public and private sales of our equity securities.  For the six months ended June 30, 2007, we had a net loss of $18.8 million.  As of June 30, 2007, we had accumulated a deficit during our development stage of $227.3 million.  We have incurred these losses principally from costs incurred in our research and development programs and from our clinical manufacturing and general and administrative expenses.  We expect to incur significant and growing net losses for the foreseeable future as a result of

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our research and development programs and the costs of preparing for the potential commercial launch of PDX.  Our ability to generate revenue and achieve profitability is dependent on our ability, alone or with partners, to successfully complete the development of our product candidates, conduct clinical trials, obtain the necessary regulatory approvals, and manufacture and market our product candidates. We may never generate revenue from product sales or become profitable.  We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials for our product candidates, and in preparing for the potential commercial launch of our product candidates. We may not be able to continue as a going concern if we are unable to generate meaningful amounts of revenue to support our operations or cannot otherwise raise the necessary funds to support our operations.

Our near-term prospects are substantially dependent on PDX, our lead product candidate.  If we are unable to successfully develop and obtain regulatory approval for PDX for the treatment of patients with relapsed or refractory PTCL, our ability to generate revenue will be significantly delayed. *

We currently have no products that are approved for commercial sale.  Our product candidates are in various stages of development, and significant research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals.  Most of our efforts and expenditures over the next few years will be devoted to PDX.  Accordingly, our future prospects are substantially dependent on the successful development, regulatory approval and commercialization of PDX for the treatment of patients with relapsed or refractory PTCL.  PDX is not expected to be commercially available for this or any other indication until at least 2009.  RH1 is in an earlier stage of development relative to PDX, and if both PDX and RH1 are approved for marketing, we expect that RH1 would not be commercially available until after PDX is commercially available.  Further, certain of the indications that we are pursuing have relatively low incidence rates, which may make it difficult for us to enroll a sufficient number of patients in our clinical trials on a timely basis, or at all, and may limit the revenue potential of our product candidates.  If we are unable to successfully develop, obtain regulatory approval for and commercialize PDX for the treatment of relapsed or refractory PTCL, our ability to generate revenue from product sales will be significantly delayed and our stock price would likely decline.

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

A pharmaceutical product cannot be marketed in the United States or most other countries until it has completed a rigorous and extensive regulatory approval process. If we fail to obtain regulatory approval to market our product candidates, we will be unable to sell our products and generate revenue, which would jeopardize our ability to continue operating our business. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. We may not obtain regulatory approval for any product candidates we develop, including PDX, or we may not obtain regulatory review of such product candidates in a timely manner. For a complete description of the regulatory approval process and related risks, please refer to the “Government Regulation” section of Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2006.

If our product candidates, including PDX, fail to meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them. *

Our product candidates may not prove to be safe and efficacious in clinical trials and may not meet all of the applicable regulatory requirements needed to receive regulatory approval. The clinical development and regulatory approval process is extremely expensive and takes many years. Failure can occur at any stage of development, and the timing of any regulatory approval cannot be accurately predicted.

According to the PROPEL trial protocol, we will conduct an interim analysis of patient response from the PROPEL trial after 35 evaluable patients have completed at least one cycle of treatment with PDX, and must observe at least four responses (complete or partial) out of the first 35 patients in order to continue the trial. We currently expect to announce the outcome of the interim analysis prior to the end of October 2007, although the actual timing of the interim analysis may vary based on a number of factors, including patient enrollment rates. We cannot assure you that the design of, or data collected from, the PROPEL trial will be adequate to continue the trial beyond the first 35 patients or demonstrate the safety and efficacy of PDX for the treatment of patients with relapsed or refractory PTCL, or otherwise be sufficient to support FDA or any foreign regulatory approval.

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If the PROPEL trial fails to achieve its safety and efficacy endpoints, we may be unable to obtain regulatory approval to commercialize PDX, and our business and stock price may be harmed. If we fail to obtain regulatory approval for PDX or any of our other current or future product candidates, we will be unable to market and sell them and therefore may never generate meaningful amounts of revenue or become profitable.

As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate. The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. Preliminary results may not be confirmed upon full analysis of the detailed results of a trial, and prior clinical trial program designs and results may not be predictive of future clinical trial designs or results. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints. For example, we recently terminated the development of EFAPROXYN when it failed to demonstrate statistically significant improvement in overall survival in the targeted patients in a Phase 3 clinical trial. If our product candidates fail to show clinically significant benefits, they will not be approved for marketing.

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

We do not know when our current clinical trials, including our PROPEL trial, will be completed, if at all. We also cannot accurately predict when other planned clinical trials will begin or be completed. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Other companies are conducting clinical trials and have announced plans for future trials that are seeking or likely to seek patients with the same diseases as those we are studying. Competition for patients in some cancer trials is particularly intense because of the limited number of leading specialist physicians and the geographic concentration of major clinical centers.

As a result of the numerous factors which can affect the pace of progress of clinical trials, our trials may take longer to enroll patients than we anticipate, if they can be completed at all. Delays in patient enrollment in the trials may increase our costs and slow our product development and approval process. Our product development costs will also increase if we need to perform more or larger clinical trials than planned. If other companies’ product candidates show favorable results, we may be required to conduct additional clinical trials to address changes in treatment regimens or for our products to be commercially competitive. Any delays in completing our clinical trials will delay our ability to generate revenue from product sales, and we may have insufficient capital resources to support our operations.  Even if we do have sufficient capital resources, our ability to become profitable will be delayed.

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

The protocol for the PROPEL trial was reviewed by the FDA under the special protocol assessment, or SPA, process, which allows for FDA evaluation of a clinical trial protocol intended to form the primary basis of an efficacy claim in support of a new drug application, and provides an agreement that the study design, including trial size, clinical endpoints and/or data analyses are acceptable to the FDA. However, a SPA agreement is not a guarantee of approval, and we cannot be certain that the design of, or data collected from, the PROPEL trial will be adequate to demonstrate the safety and efficacy of PDX for the treatment of patients with relapsed or refractory PTCL, or otherwise be sufficient to support FDA or any foreign regulatory approval. Further, the SPA agreement is not binding on the FDA if public health concerns unrecognized at the time the SPA agreement is entered into become evident, other new scientific concerns regarding product safety or efficacy arise, or if we fail to comply with the agreed upon trial protocols. In addition, the SPA agreement may be changed by us or the FDA on written agreement of both parties, and the FDA retains significant latitude and discretion in interpreting the terms of the SPA agreement and the data and results from the PROPEL trial. As a result, we do not know how the FDA will interpret the parties’ respective commitments under the SPA agreement, how it will interpret the data and results from the PROPEL trial, or whether PDX will receive any regulatory approvals as a result of the SPA agreement or the clinical trial. Therefore, despite the potential benefits of the SPA agreement, significant uncertainty remains regarding the clinical development and regulatory approval process for PDX for the treatment of PTCL.

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

Clinical trials must be conducted in accordance with the FDA’s Good Clinical Practices and are subject to oversight by the FDA and Institutional Review Boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under the FDA’s Good Manufacturing Practices, and may require large numbers of test subjects. Clinical trials may be suspended by the FDA or us at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these trials.

Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances, and the FDA can request that we conduct additional clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. As a result, there can be no assurance that our PROPEL trial will achieve its primary endpoint. In addition, negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated or terminated. Also, failure to construct clinical trial protocols to screen patients for risk profile factors relevant to the trial for purposes of segregating patients into the patient populations treated with the drug being tested and the control group could result in either group experiencing a disproportionate number of adverse events and could cause a clinical trial to be repeated or terminated. If we have to conduct additional clinical trials, whether for PDX or any other product candidate, it would significantly increase our expenses and delay potential marketing of our product candidates.

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

Our product candidates may produce serious adverse events. These adverse events could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. An independent data safety monitoring board, the FDA, other regulatory authorities or the Company may suspend or terminate clinical trials at any time. We cannot assure you that any of our product candidates will be safe for human use.

At present, there are a number of clinical trials being conducted by other pharmaceutical companies involving small molecule chemotherapeutic agents. If other pharmaceutical companies announce that they observed frequent adverse events or unknown safety issues in their trials involving compounds similar to, or competitive with, our product candidates, we could encounter delays in the timing of our clinical trials or difficulties in obtaining the approval of our product candidates.  In addition, the public perception of our product candidates might be adversely affected, which could harm our business and results of operations and cause the market price of our common stock to decline, even if the concern relates to another company’s product or product candidate.

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

We rely primarily on third parties to conduct our clinical trials, including the PROPEL trial. As a result, we have had and will continue to have less control over the conduct of our clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

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Even if our product candidates meet safety and efficacy endpoints in clinical trials, regulatory authorities may not approve them, or we may face post-approval problems that require withdrawal of our products from the market.

We will not be able to commercialize any of our product candidates until we have obtained regulatory approval. We have limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may place us at risk of delays, overspending and human resources inefficiencies.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA or their advisors, may disagree with our interpretations of data from preclinical studies and clinical trials. Regulatory agencies also may approve a product candidate for fewer conditions than requested or may grant approval subject to the performance of post-marketing studies for a product candidate. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

Even if we receive regulatory approvals, our product candidates may later produce adverse events that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. In addition, a marketed product continues to be subject to strict regulation after approval and may be required to undergo post-approval studies. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Any delay in, or failure to receive or maintain regulatory approval for, any of our products could harm our business and prevent us from ever generating meaningful revenues or achieving profitability.

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

Following any regulatory approval of our product candidates, we will be subject to continuing regulatory obligations such as safety reporting requirements and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products. In addition, we or our third-party manufacturers will be required to adhere to regulations setting forth current Good Manufacturing Practices. These regulations cover all aspects of the manufacturing, storage, testing, quality control and record keeping relating to our product candidates. Furthermore, we or our third-party manufacturers must pass a pre-approval inspection of manufacturing facilities by the FDA and foreign authorities before obtaining marketing approval and will be subject to periodic inspection by these regulatory authorities. Such inspections may result in compliance issues that could prevent or delay marketing approval, or require the expenditure of financial or other resources to address. If we or our third-party manufacturers fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

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

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

If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop or commercialize our product candidates. *

We expect that significant additional capital will be required in the future to continue our research and development efforts and to commercialize our product candidates, if approved for marketing. Our actual capital requirements will depend on many factors, including, among other factors:

·       the timing and outcome of our ongoing PROPEL trial;

·       costs associated with the commercialization of our product candidates, if approved for marketing;

·       our evaluation of, and decisions with respect to, additional therapeutic indications for which PDX may be developed;

·       our evaluation of, and decisions with respect to, our strategic alternatives; and

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·       costs associated with securing in-license opportunities, purchasing product candidates and conducting preclinical research and clinical development for our current and future product candidates.

We will be required to raise additional capital to support our future operations, including the potential commercialization of PDX in the event we obtain regulatory approval to market such product candidates. We may seek to obtain this additional capital through arrangements with corporate partners, equity or debt financings, or from other sources. Such arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that we will be successful in consummating any such arrangements. In addition, 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 that we would otherwise seek to develop or commercialize ourselves.  If we are unable to generate meaningful amounts of revenue from future product sales, if any, 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.

If we are unable to effectively protect our intellectual property, we will be unable to prevent third parties from using our technology, which would impair our competitiveness and ability to commercialize our product candidates. In addition, enforcing our proprietary rights may be expensive and result in increased losses.

Our success will depend in part on our ability to obtain and maintain meaningful patent protection for our products, both in the United States and in other countries. We rely on patents to protect a large part of our intellectual property and our competitive position. Any patents issued to or licensed by us could be challenged, invalidated, infringed, circumvented or held unenforceable. In addition, it is possible that no patents will issue on any of our licensed patent applications. It is possible that the claims in patents that have been issued or licensed to us or that may be issued or licensed to us in the future will not be sufficiently broad to protect our intellectual property or that the patents will not provide protection against competitive products or otherwise be commercially valuable. Failure to obtain and maintain adequate patent protection for our intellectual property would impair our ability to be commercially competitive.

Our commercial success will also depend in part on our ability to commercialize our product candidates without infringing patents or other proprietary rights of others or breaching the licenses granted to us. We may not be able to obtain a license to third-party technology that we may require to conduct our business or, if obtainable, we may not be able to license such technology at a reasonable cost. If we fail to obtain a license to any technology that we may require to commercialize our technologies or product candidates, or fail to obtain a license at a reasonable cost, we will be unable to commercialize the affected product or to commercialize it at a price that will allow us to become profitable.

In addition to patent protection, we also rely upon trade secrets, proprietary know-how and technological advances which we seek to protect through confidentiality agreements with our collaborators, employees and consultants. Our employees and consultants are required to enter into confidentiality agreements with us. We also have entered into non-disclosure agreements, which are intended to protect our confidential information delivered to third parties for research and other purposes. However, these agreements could be breached and we may not have adequate remedies for any breach, or our trade secrets and proprietary know-how could otherwise become known or be independently discovered by others.

Furthermore, as with any pharmaceutical company, our patent and other proprietary rights are subject to uncertainty. Our patent rights related to our product candidates might conflict with current or future patents and other proprietary rights of others. For the same reasons, the products of others could infringe our patents or other proprietary rights. Litigation or patent interference proceedings, either of which could result in substantial costs to us, may be necessary to enforce any of our patents or other proprietary rights, or to determine the scope and validity or enforceability of other parties’ proprietary rights. The defense and prosecution of patent and intellectual property infringement claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease selling our future products. We are not currently a party to any patent or other intellectual property infringement claims.

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We do not have manufacturing facilities or capabilities and are dependent on third parties to fulfill our manufacturing needs, which could result in the delay of clinical trials, regulatory approvals, product introductions and commercial sales. *

We are dependent on third parties for the manufacture and storage of our product candidates for clinical trials and, if approved, for commercial sale. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support commercial requirements for our product candidates, if approved for marketing.

Both PDX and RH1 are cytotoxic which requires manufacturers of these substances to have specialized equipment and safety systems to handle such substances. In addition, the starting materials for PDX require custom preparations, which will require us to manage an additional set of suppliers to obtain the needed supplies of PDX.

Even if we obtain approval to market our product candidates in one or more indications, our current or future manufacturers may be unable to accurately and reliably manufacture commercial quantities of our product candidates at reasonable costs, on a timely basis and in compliance with the FDA’s current Good Manufacturing Practices. If our current or future contract manufacturers fail in any of these respects, our ability to timely complete our clinical trials, obtain required regulatory approvals and successfully commercialize our product candidates will be materially and adversely affected. This risk may be heightened with respect to PDX and RH1 as there are a limited number of fill/finish manufacturers with the ability to handle cytotoxic products such as PDX and RH1.  Our reliance on contract manufacturers exposes us to additional risks, including:

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

·       our current and future manufacturers are subject to ongoing, periodic, unannounced inspections by the FDA and corresponding state and international regulatory authorities for compliance with strictly enforced current Good Manufacturing Practice regulations and similar state and foreign standards, and we do not have control over our contract manufacturers’ compliance with these regulations and standards;

·       our current and future manufacturers may not be able to comply with applicable regulatory requirements, which would prohibit them from manufacturing products for us;

·       our manufacturers may have staffing difficulties, may undergo changes in control or may become financially distressed, adversely affecting their willingness or ability to manufacture products for us;

·       if we need to change to other commercial manufacturing contractors, the FDA and comparable foreign regulators must approve our use of any new manufacturer, which would require additional testing, regulatory filings and compliance inspections, and the new manufacturers would have to be educated in, or themselves develop substantially equivalent processes necessary for, the production of our products;

·       our manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demands; and

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

Any of these factors could result in the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product candidates.  They could also entail higher costs and result in our being unable to effectively commercialize our product candidates.

We may explore new alliances that may never materialize or may fail.

We may, in the future, periodically explore a variety of possible partnerships or alliances in an effort to gain access to additional complimentary resources. At the current time, we cannot predict what form such a partnership or alliance might take. Such strategic business alliances could result in:

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·                  the issuance of equity securities that would dilute stockholders’ percentage ownership;

·                  the expenditure of substantial operational, financial, and management resources in integrating new businesses, technologies, and products;

·                  the assumption of substantial actual or contingent liabilities;

·                  or a business combination transaction featuring terms that stockholders might not deem desirable.

Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance will limit our ability to generate revenue and become profitable.

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

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

·       the establishment and demonstration in the medical community of the safety and efficacy of our products and their potential advantages over existing and newly developed therapeutic products;

·       ease of use of our products;

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

·       the scope and effectiveness of our sales and marketing efforts.

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

The status of reimbursement from third-party payors for newly approved health care drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to generate revenue.

Our ability to successfully commercialize our products will depend, in part, on the extent to which coverage and reimbursement for the products will be available from: government and health administration authorities; private health insurers; managed care programs; and other third-party payors.

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

Health care reform measures could adversely affect our business.

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

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

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

·       the federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

·       federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

·       the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and

·       state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution under the federal Anti-Kickback statute, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with all applicable federal and state fraud and abuse laws may prove costly.

If we are unable to develop adequate sales, marketing or distribution capabilities or enter into agreements with third parties to perform some of these functions, we will not be able to commercialize our products effectively.

We have limited experience in sales, marketing and distribution. To directly market and distribute any products, we must build a sales and marketing organization with appropriate technical expertise and distribution capabilities. We may attempt to build such a sales and marketing organization on our own or with the assistance of a contract sales organization. For some market opportunities, we may need to enter into co-promotion or other licensing arrangements with larger pharmaceutical or biotechnology firms in order to increase the likelihood of commercial success for our products. We may not be able to establish sales, marketing and distribution capabilities of our own or enter into such arrangements with third parties in a timely manner or on acceptable terms. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and some or all of the revenues we receive will depend upon the efforts of third parties, and these efforts may not be successful. Additionally, building marketing and distribution capabilities may be more expensive than we anticipate, requiring us to divert capital from other intended purposes or preventing us from building our marketing and distribution capabilities to the desired levels.

If our competitors develop and market products that are more effective than ours, our commercial opportunity will be reduced or eliminated.

Even if we obtain the necessary regulatory approvals to market PDX or any other product candidates, our commercial opportunity will be reduced or eliminated if our competitors develop and market products that are more effective, have fewer

29




side effects or are less expensive than our product candidates. Our potential competitors include large fully integrated pharmaceutical companies and more established biotechnology companies, both of which have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Academic institutions, government agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing. It is possible that competitors will succeed in developing technologies that are more effective than those being developed by us or that would render our technology obsolete or noncompetitive.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

The testing and marketing of pharmaceutical products entail an inherent risk of product liability. Product liability claims might be brought against us by consumers, health care providers or by pharmaceutical companies or others selling our future products. If we cannot successfully defend ourselves against such claims, we may incur substantial liabilities or be required to limit the commercialization of our product candidates. We have obtained limited product liability insurance coverage for our human clinical trials. However, product liability insurance coverage is becoming increasingly expensive, and we may be unable to maintain product liability insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. We may not be able to obtain commercially reasonable product liability insurance for any products approved for marketing.

We are currently involved in a securities class action litigation, which could harm our business if management attention is diverted or the claims are decided against us.

We have been named as a defendant in an alleged securities class action lawsuit seeking unspecified damages relating to the issuance of allegedly false and misleading statements regarding EFAPROXYN during the period from May 29, 2003 to April 29, 2004 and subsequent declines in our stock price. On October 20, 2005, the District Court granted our motion to dismiss the lawsuit with prejudice and entered judgment in our favor. On November 20, 2005, the plaintiff appealed the decision to the United States Court of Appeals for the Tenth Circuit. In October 2006, the parties held discussions to settle the matter, although the terms of any such potential settlement remain subject to negotiation and no binding agreement has been reached. A settlement would be subject to various conditions, including approval of the District Court. We expect that any settlement in excess of our deductible would be covered by our insurance carrier. As with any litigation proceeding, we cannot predict with certainty the eventual outcome of our settlement discussions or the legal proceedings. In the event a settlement is not concluded, we intend to vigorously defend against the plaintiff’s appeal. If the Court of Appeals reverses the District Court’s decision and we are not successful in our defense of such claims, we could be forced to make significant payments to the plaintiffs, and such payments could have a material adverse effect on our business, financial condition, results of operations and cash flows to the extent such payments are not covered by our insurance carriers. Even if our defense against such claims is successful, the litigation could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. As of June 30, 2007, we have recorded $2,000,000 in accrued litigation settlement costs, which represents our best estimate of the potential gross amount of the settlement costs to be paid to the plaintiffs, and $1,753,000 in prepaid expenses and other assets, which represents the amount we expect to be reimbursed from our insurance carrier. The net difference of $247,000 between these amounts represents the remaining unpaid deductible under our insurance policy, and this amount was recorded to marketing, general and administrative expenses during the year ended December 31, 2006.

Failure to attract, retain and motivate skilled personnel and cultivate key academic collaborations will delay our product development programs and our research and development efforts. *

We are a small company with 66 full-time employees, and our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions and scientists. Competition for personnel and academic collaborations is intense.  In particular, our product development programs depend on our ability to attract and retain highly skilled clinical development personnel.  In addition, we will need to hire additional personnel and develop additional academic collaborations as we continue to expand our research and development activities. We do not know if we will be able to attract, retain or motivate personnel or maintain our relationships with academic institutions and scientists. If we fail to negotiate additional acceptable collaborations with academic institutions and scientists, or if our existing academic collaborations were to be unsuccessful, our product development programs may be delayed.

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We cannot guarantee that we will be in compliance with all potentially applicable regulations.

The development, manufacturing, and, if approved, pricing, marketing, sales and reimbursement of our products, together with our general obligations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. We also have significantly fewer employees than many other companies that have the same or fewer product candidates in late stage clinical development and we rely heavily on third parties to conduct many important functions.

As a publicly-traded company, we are subject to significant regulations, some of which have either only recently been adopted, including the Sarbanes Oxley Act of 2002, or are currently proposals subject to change. We cannot assure that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002 or any other regulations we could be subject to a range of consequences, including restrictions on our ability to sell equity or otherwise raise capital funds, the de-listing of our common stock from the Nasdaq Global Market, suspension or termination of our clinical trials, failure to obtain approval to market our product candidates, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation.

If our internal controls over financial reporting are not considered effective, our business and stock price could be adversely affected.

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

Our management, including our chief executive officer and principal financial officer, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become ineffective because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to consider our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.

If we do not progress in our programs as anticipated, our stock price could decrease.

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

Warburg Pincus Private Equity VIII, L.P. (“Warburg”) and Baker Brothers Life Sciences, L.P. (“Baker”) each control a substantial percentage of the voting power of our outstanding common stock.*

On March 2, 2005, we entered into a Securities Purchase Agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg”) and certain other investors pursuant to which we issued and sold an aggregate of 2,352,443 shares of our Series A Exchangeable Preferred Stock (the “Exchangeable Preferred”) at a price per share of $22.10, for aggregate gross proceeds of approximately $52.0 million. On May 18, 2005, at our Annual Meeting of Stockholders, our stockholders voted

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to approve the issuance of shares of our common stock upon exchange of shares of the Exchangeable Preferred. As a result of such approval, we issued a total of 23,524,430 shares of common stock upon exchange of 2,352,443 shares of Exchangeable Preferred. In connection with its purchase of the Exchangeable Preferred, Warburg entered into a standstill agreement agreeing not to pursue certain activities the purpose or effect of which may be to change or influence the control of the Company.

On February 2, 2007, we closed an underwritten offering of 9,000,000 shares of common stock, of which Baker Brothers Life Sciences, L.P. and certain other affiliated funds (collectively “Baker”) purchased 3,300,000 shares, at a price per share of $6.00, for aggregate gross proceeds of approximately $54.0 million. In connection with its purchase of shares in the February 2007 Financing, Baker entered into a standstill agreement agreeing not to pursue certain activities the purpose or effect of which might be to change or influence the control of the Company.

As of June 30, 2007, we had approximately 66.2 million shares of common stock outstanding, of which Warburg owned 22,624,430 shares, or approximately 34% of the voting power of our outstanding common stock, and Baker owned 8,741,480 shares, or approximately 13% of the voting power of our outstanding common stock. Although each of Warburg and Baker have entered into a standstill agreement with us, they are, and will continue to be, able to exercise substantial influence over any actions requiring stockholder approval.

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

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

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

·       prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;

·       prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

·       eliminating the ability of stockholders to call a special meeting of stockholders; and

·       establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

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

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We have adopted a stockholder rights plan that may discourage, delay or prevent a merger or acquisition that is beneficial to our stockholders.

In May 2003, our board of directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or acquisition of us that is beneficial to our stockholders by diluting the ability of a potential acquirer to acquire us. Pursuant to the terms of our plan, when a person or group, except under certain circumstances, acquires 15% or more of our outstanding common stock or 10 business days after announcement of a tender or exchange offer for 15% or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 15% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirer’s rights would not become exercisable for our shares of common stock at a discount, the potential acquirer would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquirer from acquiring or making an offer to acquire the Company.  As a result, either by operation of the plan or by its potential deterrent effect, mergers and acquisitions of the Company that our stockholders may consider in their best interests may not occur.

Because Warburg owns a substantial percentage of our outstanding common stock, we amended the stockholder rights plan in connection with Warburg’s purchase of Exchangeable Preferred in March 2005 to provide that Warburg and its affiliates will be exempt from the stockholder rights plan, unless Warburg and its affiliates become, without the prior consent of our board of directors, the beneficial owner of more than 44% of our common stock. Likewise, since Baker owns a substantial percentage of our outstanding common stock, we amended the stockholder rights plan in connection with the February 2007 Financing to provide that Baker and its affiliates will be exempt from the stockholder rights plan, unless Baker becomes, without the prior consent of our board of directors, the beneficial owner of more than 20% of our common stock. Under the stockholder rights plan, our board of directors has express authority to amend the rights plan without stockholder approval.

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

We cannot be sure that an active trading market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active. The trading price of our common stock has been and is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

·       actual or anticipated results of our clinical trials, including PROPEL;

·       actual or anticipated regulatory approvals or non-approvals of our product candidates, including PDX, or of competing product candidates;

·       changes in laws or regulations applicable to our product candidates;

·       changes in the expected or actual timing of our development programs;

·       actual or anticipated variations in quarterly operating results;

·       announcements of technological innovations by us or our competitors;

·       changes in financial estimates or recommendations by securities analysts;

·       conditions or trends in the biotechnology and pharmaceutical industries;

·       changes in the market valuations of similar companies;

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

·       additions or departures of key personnel;

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

·       developments concerning any of our research and development, manufacturing, and marketing collaborations;

·       sales of large blocks of our common stock;

·       sales of our common stock by our executive officers, directors and five percent stockholders; and

·       economic and other external factors, including disasters or crises.

Public companies in general and companies included on the Nasdaq Global Market in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. There has been particular volatility in the market prices of securities of biotechnology and other life sciences companies, and the market prices of these companies have often fluctuated because of problems or successes in a given market segment or because investor interest has shifted to other segments. These broad market and industry factors may cause the market price of our common stock to decline, regardless of our operating performance. We have no control over this volatility and can only focus our efforts on our own operations, and even these may be affected due to the state of the capital markets. In the past, following large price declines in the public market price of a company’s securities, securities class action litigation has often been initiated against that company, including in 2004 against us. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which would hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

We are required to recognize stock-based compensation expense relating to employee stock options, restricted stock, and stock purchases under our Employee Stock Purchase Plan, and the amount of expense we recognize may not accurately reflect the value of our share-based payment awards. Further, the recognition of stock-based compensation expense will cause our net losses to increase and may cause the trading price of our common stock to fluctuate.

On January 1, 2006, we adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values. As a result, our operating results for the three and six months ended June 30, 2006 and 2007 include, and future periods will include, a charge for stock-based compensation related to employee stock options, restricted stock and discounted employee stock purchases.  The application of SFAS 123R requires the use of an option-pricing model to determine the fair value of share-based payment awards.  This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options.

Our adoption of SFAS 123R has had a material impact on our financial statements and results of operations. We also expect that SFAS 123R will have a material impact on our future financial statements and results of operations. We cannot predict the effect that our stock-based compensation expense will have on the trading price of our common stock.

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

If our stockholders sell substantial amounts of our common stock, the market price of our common stock may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we consider appropriate. We are unable to predict the effect that sales may have on the then prevailing market price of our common stock.  We have entered into a Registration Rights Agreement entered into between us with Warburg and the other purchasers of our Exchangeable Preferred, pursuant to which such investors are entitled to certain registration rights with respect to the shares of common stock that we issued upon exchange of the Exchangeable Preferred.

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

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ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

None

 

 

 

 

 

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

We held our 2007 Annual Meeting of Stockholders on June 19, 2007. At such meeting, the following actions were voted upon:

a.         Election of Directors

 

For

 

Withheld

 

Stephen J. Hoffman, Ph.D., M.D.

 

59,723,125

 

417,259

 

Paul L. Berns

 

59,766,572

 

373,812

 

Michael D. Casey

 

58,578,831

 

1,561,553

 

Stewart Hen

 

59,744,730

 

395,654

 

Jeffrey R. Latts, M.D.

 

59,779,248

 

361,136

 

Jonathan S. Leff

 

58,073,787

 

2,066,597

 

Timothy P. Lynch

 

58,715,083

 

1,425,301

 

William R. Ringo

 

59,780,326

 

360,058

 

 

b.           Ratification of the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007.

For

 

Against

 

Abstentions

 

60,048,017

 

77,759

 

14,608

 

 

ITEM 5.

 

OTHER INFORMATION

 

None

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

 

 

Exhibit No.

 

Note

 

Description

3.04

 

(1)

 

Amended and Restated Bylaws of Allos Therapeutics, Inc.

10.01

 

(1)

 

Form of Amended and Restated Indemnity Agreement between Allos and each of its directors and officers.

10.12.1

 

(1)

 

2001 Employee Stock Purchase Plan Offering (Series Beginning July 1, 2007).

10.32

 

 

 

Summary of Compensation Arrangements for Non-Employee Directors.

10.44

 

(2)

 

Corporate Bonus Plan.

10.45*

 

 

 

License Agreement for 10-Propargyl-10-Deazaaminopterin “PDX” between Allos and SRI International, Sloan-Kettering Institute for Cancer Research and Southern Research Institute dated December 23, 2002 and amended May 9, 2006.

31.1

 

 

 

Certification of principal executive officer required by Rule 13a-14(a) / 15d-14(a).

31.2

 

 

 

Certification of principal financial officer required by Rule 13a-14(a) / 15d-14(a).

32.1

 

 

 

Section 1350 Certification.

 


*                    Confidential treatment has been requested with respect to portions of this exhibit.  Omitted portions have been filed with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(1)          Incorporated by reference to the same numbered exhibit filed with our Current Report on Form 8-K filed on June 25, 2007.

(2)          Incorporated by reference to the same numbered exhibit filed with our Current Report on Form 8-K filed on May 1, 2007.

35




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 7, 2007

ALLOS THERAPEUTICS, INC.

 

 

 

/s/ Paul L. Berns

 

Paul L. Berns

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

/s/ David C. Clark

 

David C. Clark

 

Vice President, Finance

 

(Principal Financial and Accounting Officer)

 

36



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