Annual Reports

 
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  • 10-Q (Aug 17, 2012)
  • 10-Q (Aug 3, 2012)
  • 10-Q (May 3, 2012)
  • 10-Q (Nov 3, 2011)
  • 10-Q (Aug 4, 2011)
  • 10-Q (May 10, 2011)

 
8-K

 
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Allos Therapeutics 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

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 September 30, 2011.

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of November 1, 2011, there were 105,926,068 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 



Table of Contents

 

ALLOS THERAPEUTICS, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I.  Financial Information

3

ITEM 1.

Financial Statements (unaudited)

3

 

Balance Sheets — as of September 30, 2011 and December 31, 2010

3

 

Statements of Operations — for the three and nine months ended September 30, 2011 and 2010

4

 

Statements of Cash Flows — for the nine months ended September 30, 2011 and 2010

5

 

Notes to Financial Statements

6

ITEM 2.

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

21

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

39

ITEM 4.

Controls and Procedures

39

PART II.  Other Information

39

ITEM 1.

Legal Proceedings

39

ITEM 1A.

Risk Factors

41

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

ITEM 3.

Defaults Upon Senior Securities

59

ITEM 4.

Removed and Reserved

60

ITEM 5.

Other Information

60

ITEM 6.

Exhibits

60

SIGNATURES

61

 

NOTE:

 

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

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ALLOS THERAPEUTICS, INC.
BALANCE SHEETS

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

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

69,643

 

$

48,164

 

Short-term investments

 

30,752

 

50,334

 

Restricted cash

 

238

 

238

 

Accounts receivable

 

15,606

 

12,076

 

Inventory

 

330

 

178

 

Prepaid expenses and other assets

 

3,179

 

2,180

 

Total current assets

 

119,748

 

113,170

 

Property and equipment, net

 

1,706

 

2,245

 

Long-term investments

 

 

67

 

Intangible asset, net

 

4,885

 

5,225

 

Other assets

 

 

49

 

Total assets

 

$

126,339

 

$

120,756

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

2,488

 

$

4,931

 

Deferred revenue

 

6,084

 

 

Accrued liabilities

 

19,047

 

17,627

 

Total current liabilities

 

27,619

 

22,558

 

Long-term deferred revenue

 

15,258

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding

 

 

 

Series A Junior Participating Preferred Stock, $0.001 par value; 1,500,000 shares designated from authorized preferred stock; no shares issued or outstanding

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized; 105,679,986 and 105,493,546 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

 

106

 

105

 

Additional paid-in capital

 

558,276

 

548,722

 

Accumulated deficit

 

(474,920

)

(450,629

)

Total stockholders’ equity

 

83,462

 

98,198

 

Total liabilities and stockholders’ equity

 

$

126,339

 

$

120,756

 

 

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

 

3



Table of Contents

 

ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS

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

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

13,215

 

$

8,230

 

$

35,051

 

$

23,522

 

License and other revenue

 

980

 

 

29,107

 

 

Total revenue

 

14,195

 

8,230

 

64,158

 

23,522

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales, excluding amortization expense

 

1,230

 

889

 

3,217

 

2,330

 

Cost of license and other revenue

 

437

 

 

11,008

 

 

Research and development

 

4,996

 

7,249

 

17,567

 

23,056

 

Selling, general and administrative

 

18,688

 

18,702

 

56,398

 

57,151

 

Amortization of intangible asset

 

113

 

113

 

340

 

340

 

Total operating costs and expenses

 

25,464

 

26,953

 

88,530

 

82,877

 

Operating loss

 

(11,269

)

(18,723

)

(24,372

)

(59,355

)

Interest and other income, net

 

14

 

(129

)

74

 

2

 

Loss before income taxes

 

(11,255

)

(18,852

)

(24,298

)

(59,353

)

Income tax benefit

 

7

 

78

 

7

 

78

 

Net loss

 

$

(11,248

)

$

(18,774

)

$

(24,291

)

$

(59,275

)

 

 

 

 

 

 

 

 

 

 

Net loss per share: basic and diluted

 

$

(0.11

)

$

(0.18

)

$

(0.23

)

$

(0.56

)

Weighted average shares: basic and diluted

 

105,677,687

 

105,320,554

 

105,604,438

 

105,039,263

 

 

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

 

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Table of Contents

 

ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss

 

$

(24,291

)

$

(59,275

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

614

 

668

 

Stock-based compensation expense

 

9,431

 

7,892

 

Amortization of intangible asset

 

340

 

340

 

Other

 

5

 

226

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,530

)

(3,852

)

Prepaid expenses and other assets

 

(950

)

40

 

Interest receivable on investments

 

(24

)

(60

)

Inventory

 

(154

)

(136

)

Trade accounts payable

 

(2,443

)

480

 

Accrued liabilties

 

1,419

 

761

 

Deferred revenue

 

21,342

 

 

Net cash provided by (used in) operating activities

 

1,759

 

(52,916

)

Cash Flows From Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(77

)

(937

)

Purchases of investments

 

(30,299

)

(55,050

)

Proceeds from maturities of investments

 

49,972

 

26,980

 

Net cash provided by (used in) investing activities

 

19,596

 

(29,007

)

Cash Flows From Financing Activities:

 

 

 

 

 

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

 

124

 

4,138

 

Proceeds from issuance of common stock, net of issuance costs

 

 

32

 

Net cash provided by financing activities

 

124

 

4,170

 

Net increase (decrease) in cash and cash equivalents

 

21,479

 

(77,753

)

Cash and cash equivalents, beginning of period

 

48,164

 

141,185

 

Cash and cash equivalents, end of period

 

$

69,643

 

$

63,432

 

Supplemental Schedule of Cash and Non-cash Activities:

 

 

 

 

 

Deferred revenue in accounts receivable

 

$

 

$

918

 

Assets recorded for which payment has not yet occurred

 

 

142

 

 

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

 

5



Table of Contents

 

ALLOS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

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

(unaudited)

 

1.                 Basis of Presentation

 

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.  Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  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, 2010 for a broader discussion of our business and the opportunities and risks inherent in such business.

 

Liquidity

 

As of September 30, 2011, we had $100.4 million in cash, cash equivalents, and investments. Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of September 30, 2011, will be adequate to support our operations through the end of 2014, although there can be no assurance that this can, in fact, be accomplished.

 

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

 

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

 

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

 

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

 

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

 

·                  the timing and costs associated with conducting preclinical and clinical development of FOLOTYN, including the post-approval clinical studies required by the U.S. Food and Drug Administration, or FDA;

 

·                  the timing and costs associated with our evaluation of, and decisions with respect to, the potential development of FOLOTYN for additional therapeutic indications;

 

·                  the timing, costs and revenue associated with our strategic collaboration with Mundipharma International Corporation Limited, or Mundipharma, for the co-development of FOLOTYN globally and commercialization outside the United States and Canada; and

 

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

 

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Table of Contents

 

We may seek to obtain this additional capital through equity or debt financings, arrangements with corporate partners, or from other sources. Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders.  However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us.  In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to significantly increase sales of FOLOTYN 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 future prospects for profitability may be harmed.

 

2.                 Fair Value of Financial Instruments

 

Cash, Cash Equivalents and Investments

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  The carrying values of our cash equivalents and investments approximate their market values based on quoted market prices. Investments are classified as held to maturity and are carried at cost plus accrued interest.  Our cash and cash equivalents are maintained in a financial institution in amounts that, at times, may exceed federally insured limits.  The weighted average duration of the remaining time to maturity for our portfolio of investments as of September 30, 2011 was approximately two months.  As of September 30, 2011, our investments were held in a variety of interest-bearing instruments, consisting mainly of U.S. Treasury notes.  We did not hold any derivative instruments, foreign exchange contracts, asset backed securities, mortgage backed securities, auction rate securities, or securities of issuers in bankruptcy in our investment portfolio as of September 30, 2011.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of September 30, 2011.  Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities. The carrying value of our cash held in money market funds totaling $68.7 million as of September 30, 2011 are included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs.

 

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Table of Contents

 

The carrying value of investments consisted of the following as of September 30, 2011:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

cost

 

Gains

 

Losses

 

Value

 

Short-term held-to-maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

30,135

 

$

 

$

2

 

$

30,133

 

Certificate of deposit

 

584

 

4

 

1

 

587

 

U.S. Government agency securities

 

271

 

 

 

271

 

Sub-total

 

$

30,990

 

$

4

 

$

3

 

$

30,991

 

Less: Amounts classified as restricted cash

 

(238

)

 

 

(238

)

Total due in one year or less

 

$

30,752

 

$

4

 

$

3

 

$

30,753

 

 

The carrying value of investments consisted of the following as of December 31, 2010:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

cost

 

Gains

 

Losses

 

Value

 

Short-term held-to-maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Treasury bills and notes

 

$

50,063

 

$

11

 

$

1

 

$

50,073

 

U.S. Government agency securities

 

271

 

6

 

 

277

 

Total due in one year or less

 

$

50,334

 

$

17

 

$

1

 

$

50,350

 

 

 

 

 

 

 

 

 

 

 

Long-term held-to-maturity securities:

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

305

 

$

11

 

$

 

$

316

 

Less: Amounts classified as restricted cash

 

(238

)

 

 

(238

)

Total due in one to three years

 

$

67

 

$

11

 

$

 

$

78

 

 

We had no realized losses on our investments during the nine months ended September 30, 2011 or 2010.  Market values were determined for each individual security in the investment portfolio.  If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. Additionally, management assesses whether it intends to sell or would more-likely-than-not not be required to sell the investment before the expected recovery of the amortized cost basis. We do not intend to sell and believe it is more-likely-than-not that we will not be required to sell the investment before recovery of its amortized cost basis.  All of the investments as of September 30, 2011 that were in a loss position have been in a continuous unrealized loss position for less than 12 months.  As of September 30, 2011, we had immaterial unrealized losses on two of our U.S. Treasury note investments with aggregate fair values of $10.0 million each.  As of September 30, 2011, no other than temporary impairment has been recorded on any of our investments since these unrealized losses are on U.S. government issued securities maturing within one year. The decline in value of the investments as of September 30, 2011 was caused primarily by changes in interest rates.  All of the investments as of December 31, 2010 that were in a loss position, have been in a continuous unrealized loss position for less than 12 months.  As of December 31, 2010, we have an unrealized loss of $1,000 on one of our U.S. Treasury bill investments with an aggregate fair value of $10.0 million.  As of December 31, 2010, no other than temporary impairment has been recorded on any of our investments since these unrealized losses are on U.S. government issued securities maturing within one year. The decline in value of the investments as of December 31, 2010 was caused primarily by changes in interest rates.  We do not intend to sell and we do not believe that it is more likely than not that we will be required to sell our investments before recovering the cost of securities, nor do we expect not to recover the entire amortized cost basis of our investments as of September 30, 2011.  We have the ability and intent to hold our remaining investments to recover the entire amortized cost basis of the investments as of September 30, 2011.

 

3.                 Inventory

 

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

 

Costs associated with the production of FOLOTYN by our third party manufacturers are expensed to research and development expense at the time of production when the formulated drug product is packaged for clinical trial use.

 

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We capitalize the costs for our marketed products at the lower of cost (first-in, first-out method) or market (current replacement cost) with cost determined on the first-in, first-out basis and then expense the sold inventory as a component of cost of goods sold.

 

Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  We have remaining supplies of FOLOTYN drug substance and drug product that are not recorded as inventory on our Balance Sheet as of September 30, 2011 because they were purchased prior to FDA approval.  Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.

 

Inventory consisted of:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Work in process

 

$

247

 

$

254

 

Raw materials

 

148

 

 

Finished goods

 

52

 

38

 

 

 

447

 

292

 

Less reserve

 

(117

)

(114

)

Total inventory

 

$

330

 

$

178

 

 

4.                 Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets are comprised of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Prepaid sales, marketing and medical affairs expenses

 

$

1,589

 

$

1,308

 

Prepaid expenses and other assets

 

1,299

 

650

 

Prepaid research and development expenses

 

291

 

222

 

 

 

$

3,179

 

$

2,180

 

 

5.                 Intangible asset, net

 

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

 

As a result of the FDA’s approval to market FOLOTYN on September 24, 2009, we met a milestone under our license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, discussed in Note 11, which required us to make a milestone payment of $5.8 million. We capitalized the $5.8 million payment as an intangible asset and began amortizing the asset immediately following the FDA approval of FOLOTYN. Amortization expense is being recorded on a straight line basis over the remaining expected life of the patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent in development. This term is our best estimate of the life of the patent. If, however, the Hatch-Waxman extension is not granted, the intangible asset will be amortized over a shorter period. Amortization expense of $113,000 and $340,000 for both the three and nine months ended September 30, 2011 and 2010 was recorded as amortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense for the intangible asset is approximately $454,000 per year during 2011 through 2021 and $234,000 in 2022.

 

The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred.  No trigger events occurred for the three months ended September 30, 2011 on the $4,885,000 of intangible asset, net.

 

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6.                 Accrued Liabilities

 

Accrued liabilities are comprised of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Accrued royalties, government rebates, chargebacks, returns and distribution fees

 

$

4,972

 

$

3,849

 

Accrued personnel costs

 

4,460

 

6,103

 

Accrued sales and marketing expenses

 

3,442

 

3,536

 

Accrued legal costs

 

2,671

 

325

 

Accrued research and development expenses

 

1,634

 

2,762

 

Accrued expenses - other

 

1,868

 

1,052

 

 

 

$

19,047

 

$

17,627

 

 

In January 2011, we implemented a strategic reduction of our workforce by approximately 13%, or 25 employees.  Personnel reductions were primarily focused in research and development and general and administrative functions.  The restructuring was a result of our decision to prioritize our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies, and to manage our operating costs and expenses.  During the first quarter of 2011, we incurred total restructuring charges of approximately $570,000, of which $304,000 and $266,000 were recorded in research and development and sales, general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits.  As of September 30, 2011, all accrued termination benefits related to this restructuring have been paid.

 

Accrued legal costs as of September 30, 2011 primarily relate to costs associated with the terminated Agreement and Plan of Merger and Reorganization, as amended, with AMAG Pharmaceuticals, Inc., or AMAG, discussed further in Note 13.

 

7.                 Product Sales

 

Product Sales

 

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

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to health care providers because we did not have sufficient history to be able to reasonably estimate returns.  Beginning in the fourth quarter of 2010, we began recognizing revenue as product is sold to distributors as we established a sufficient history in order to reasonably estimate returns from our distributors.  We monitor inventory levels within our distribution channel and sales to end users, or health care providers, to determine whether deferral of sales is required.  No such deferrals were recorded at September 30, 2011.

 

Net Product Sales

 

We estimate gross to net sales adjustments based upon analysis of third-party information, including information obtained from our primary distributors with respect to their inventory levels and sell-through to the distributors’ customers.

 

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Our net product sales represent total product sales less distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales.  We incur distributor fees related to the management of our product by distributors, which are recorded within net product sales and are based on definitive contractual agreements. Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.  Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities.  Allowances and accruals are recorded in the same period that the related revenue is recognized.

 

Net product sales for the three and nine months ended September 30, 2011 include $3.0 million, or $0.03 per share of common stock, related to the sale of FOLOTYN for use in a clinical trial to be conducted by an unrelated party.  We expect to generate future sales of FOLOTYN for use in this clinical trial.  However, we cannot predict the timing or amount of such future sales.  Since this sale relates to product used for a clinical trial, the sale was not subject to government rebates and chargebacks and no such reserves were recorded on this sale.

 

Product Returns

 

Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not allowed for expired product.  Given these limited contractual return rights, the price of FOLOTYN and the limited number of PTCL patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.  We estimated product returns for FOLOTYN of 1% of gross product sales based upon actual returns history within our distribution channel, which were consistent with historical trends of product returns for similar companies in the pharmaceutical industry.  The actual returns history within our distribution channel is derived from third-party information obtained from certain distributors with respect to their inventory levels and sell-through to the distributors’ customers.  We will continue to monitor the historical trend of returns, including the impacts on this trend of product expiry dates and may be required to make future adjustments to our estimates.  Through September 30, 2011, product returns have been negligible.  See activity for the three and nine month periods ended September 30, 2011 and 2010 in the tables below.

 

Medicaid Rebates

 

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  Our estimate of utilization is based on market research and information about our expected patient population.  Through September 30, 2011, we have not had sufficient claims from states for rebates with which to update our estimate.  However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to early adopt portions of PPACA, and any implementing regulations, could impact future estimates related to our Medicaid rebate allowances. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% to 20% increase in the Medicaid utilization percentage within our patient population as of September 30, 2011, would result in an approximate $1.3 million to $2.6 million reduction in cumulative net product sales.

 

Government Chargebacks

 

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us.

 

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We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.  We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through September 30, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.  As a result of this evaluation, during the three and nine months ended September 30, 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $0 and $301,000, respectively.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

 

A reconciliation of gross to net product sales for the three and nine months ended September 30, 2011 and 2010 and balances and activity in the deferred revenue account for the three and nine months ended September 30, 2010 are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Gross product sales

 

$

14,727

 

$

9,274

 

$

39,321

 

$

26,512

 

Gross to Net Sales Adjustments

 

 

 

 

 

 

 

 

 

Government rebates and chargebacks

 

(968

)

(778

)

(2,765

)

(2,212

)

Distribution fees

 

(397

)

(266

)

(1,112

)

(762

)

Product returns allowance

 

(147

)

 

(393

)

(16

)

Net product sales

 

$

13,215

 

$

8,230

 

$

35,051

 

$

23,522

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, beginning of the period

 

 

 

$

1,153

 

 

 

$

669

 

Gross product sales to distributors

 

 

 

9,708

 

 

 

27,430

 

Less: Gross product sales recognized

 

 

 

(9,274

)

 

 

(26,512

)

Deferred revenue, end of the period

 

 

 

$

1,587

 

 

 

$

1,587

 

 

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Balances and activity in the product returns, government rebates and chargebacks and distribution fees payable accounts for the nine months ended September 30, 2011 and 2010 are as follows:

 

 

 

 

 

Government

 

 

 

 

 

Product

 

Rebates and

 

Distribution

 

 

 

Returns

 

Chargebacks

 

Fees

 

Balance at December 31, 2009

 

$

 

$

487

 

$

86

 

Reserve for current period sales

 

 

2,420

 

762

 

Change in estimate for prior period sales

 

 

(208

)

 

Credits/payments made for prior period sales

 

 

(1,054

)

(615

)

Credits/payments made for current period sales

 

 

(126

)

(84

)

Balance at September 30, 2010

 

$

 

$

1,519

 

$

149

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

428

 

$

2,224

 

$

263

 

Reserve for current period sales

 

393

 

3,066

 

1,112

 

Change in estimate for prior period sales

 

 

(301

)

 

Credits/payments made for prior period sales

 

 

(425

)

(198

)

Credits/payments made for current period sales

 

 

(1,812

)

(907

)

Balance at September 30, 2011

 

$

821

 

$

2,752

 

$

270

 

 

Major Customers and Concentration of Credit Risk

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary.  Substantially all of our sales for the three and nine months ended September 30, 2011 and 2010 were made in the United States.  Trade accounts receivable totaled $15.3 million and $12.1 million at September 30, 2011 and December 31, 2010, respectively.

 

 

 

% of total trade accounts

 

 

 

receivable at

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Customer A

 

42.9

%

53.8

%

Customer B

 

35.8

%

23.1

%

Customer C

 

19.2

%

22.3

%

 

 

 

% of total gross product sales

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Customer A

 

44.6

%

49.7

%

50.1

%

50.5

%

Customer B

 

37.3

%

22.4

%

26.7

%

23.9

%

Customer C

 

16.6

%

27.0

%

21.6

%

25.0

%

 

Cost of sales

 

Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 11 regarding the 8% current royalty rates under our license agreement for FOLOTYN.  Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  Accordingly, our cost of sales will be lower with respect to product manufactured prior to FDA approval.  Until we sell these supplies for which the costs were previously expensed, our cost of sales will reflect only incremental costs incurred subsequent to the FDA approval date.

 

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8.    Mundipharma Agreements

 

In May 2011, we entered into a strategic collaboration agreement to co-develop FOLOTYN with Mundipharma.  Under the agreement, or the Mundipharma Collaboration Agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world.  Under the Mundipharma Collaboration Agreement, we received an upfront payment of $50.0 million and may receive potential regulatory and commercial progress- and sales-dependent milestone payments of up to $310.5 million.  Included in the $310.5 million in potential milestone payments are potential $14.5 million and $10.0 million milestone payments related to obtaining conditional approval of FOLOTYN and first reimbursable commercial sale in the third major market in the European Union, respectively, which may be obtained in 2012.  Of the $310.5 million in potential milestone payments, we have determined that any payments that may become due upon approval by certain regulatory agencies and sales-dependent milestone payments will be deemed substantive milestones and will be accounted for as revenue in the period in which the milestone is achieved.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories.

 

Allos and Mundipharma will jointly fund worldwide development costs, initially on a 60:40 basis, respectively; which will change to a 50:50 basis if certain pre-defined milestones are achieved.  Such milestones include approval to market FOLOTYN for relapsed or refractory PTCL in the European Union, or if approval is not obtained, then the first calendar quarter in which the development cost differential equals or exceeds $15 million.  The development cost differential is the cumulative amount of joint development costs that Mundipharma would have borne if Mundipharma had been responsible for 50% of the development costs rather than 40%.  To the extent that this “development cost differential” does not meet or exceed $15.0 million by December 31, 2019, and if approval in the European Union has not been obtained, then we will pay Mundipharma the difference between $15.0 million and the “development cost differential” as of December 31, 2019.  The “development cost differential” was $112,000 as of September 30, 2011.  The parties’ development funding will support jointly agreed-upon clinical development activities including, but not limited to, the planned Phase 3 registration studies of FOLOTYN in previously undiagnosed PTCL and in relapsed or refractory cutaneous T-cell lymphoma. The 40% joint development cost reimbursement is recorded in License and other revenue in the Statement of Operations; and the full joint development costs are recorded in Research and development expense.  Pursuant to a separate supply agreement, or Mundipharma Supply Agreement, with Mundipharma Medical Company, an affiliate of Mundipharma, we will supply FOLOTYN for Mundipharma’s clinical and commercial uses.  We refer to the Mundipharma Collaboration Agreement and the Mundipharma Supply Agreement as the Mundipharma Agreements.

 

Pursuant to the accounting guidance under Accounting Standards Codification 605-25, or ASC 605-25, which governs revenue recognition for multiple element arrangements, we have evaluated the three non-contingent deliverables under the Mundipharma Agreements and determined that they all meet the criteria for separation and are therefore treated as separate units of accounting, as follows:

 

·                  License from Allos to commercialize and develop FOLOTYN worldwide, outside of the United States and Canada, or the License;

 

·                  Regulatory services provided by Allos related to the European Marketing Authorisation Application, or MAA, through May 10, 2012; and

 

·                  Research and development services provided by Allos related to jointly agreed-upon clinical development activities through approximately 2022, with cost sharing as discussed above.

 

The manufacture and supply of FOLOTYN for all of Mundipharma’s clinical and commercial needs is contingent upon regulatory approval of the MAA for commercial supply and initiation of the Mundipharma led clinical trials. Since the manufacturing obligations are contingent upon regulatory approvals for commercialization and clinical study design and there were no firm or pending orders for either clinical or commercial supply at or near the execution of the agreement, this obligation is deemed contingent and is not valued as a deliverable.  As of September 30, 2011, no clinical or commercial supply has been delivered under this agreement.

 

We allocated the agreement consideration based on the percentage of the relative selling price of all of the units of accounting.  We estimated the selling price of the License using the relief from royalty method income approach with a present value factor of 22%.  We estimated the selling prices of the regulatory and research and development services using third party costs and discounted cash flows with a present value factor of 6% and 10%, respectively.

 

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Since the delivery of the License occurred upon the execution of the Mundipharma Collaboration Agreement and there is no general right of return, all $27,167,000 of allocated arrangement consideration related to the License was recognized as revenue during the nine months ended September 30, 2011.

 

The regulatory activities will be performed over a period of up to one year, as defined in the Mundipharma Collaboration Agreement, with no general right of return.  Therefore, all allocated arrangement consideration related to the regulatory activities will be recognized using the proportional performance method, by which revenue is recognized in proportion to the costs incurred, during the service period of up to one year.

 

Research and development activities will be performed over multiple years and are related to the completion of the joint development clinical studies, with no general right of return.  Therefore, all allocated arrangement consideration related to the research and development activities will be recognized as the research and development costs that are subject to reimbursement are incurred.

 

Revenues recognized in the Statement of Operations related to the Mundipharma Agreements were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

License

 

$

 

$

 

$

27,167

 

$

 

Regulatory

 

560

 

 

1,297

 

 

Research and development

 

420

 

 

643

 

 

License and other revenue

 

$

980

 

$

 

$

29,107

 

$

 

 

The total revenue recognized in future periods under the arrangement is subject to a limitation such that deferred revenue recognized to date cannot be greater than the amounts received and receivable from Mundipharma less the remaining development cost differential that is subject to refund.

 

License and other revenue for the three and nine months ended September 30, 2011 includes $293,000 and $449,000 related to the 40% joint development cost reimbursement under the Mundipharma Agreements.

 

As of September 30, 2011, accounts receivable related to the Mundipharma Agreements totaled $293,000.  As of September 30, 2011, deferred revenue related to the Mundipharma Agreements consisted of $6.1 million and $15.3 million of current and long-term deferred revenue, respectively.

 

Cost of license and other revenue in the Statement of Operations for the three months ended September 30, 2011 was $437,000 and consisted of costs incurred in connection with the regulatory services provided related to the European MAA.

 

Cost of license and other revenue in the Statement of Operations for the nine months ended September 30, 2011 was $11.0 million and consisted of 20%, or $10.0 million, of the $50.0 million upfront payment to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute.  In addition, $1.0 million of costs were incurred in connection with the regulatory services provided related to the European MAA. Research and development, which is partially reimbursed under the Mundipharma Agreements, is included in research and development expense in the Statement of Operations.

 

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Table of Contents

 

9.                 Stock-Based Compensation

 

Stock-based compensation expense for the three and nine months ended September 30, 2011 and 2010 has been recognized in the accompanying Statements of Operations as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

833

 

$

873

 

$

2,805

 

$

2,236

 

Selling, general and administrative

 

2,101

 

1,304

 

6,626

 

5,656

 

Total stock-based compensation expense

 

$

2,934

 

$

2,177

 

$

9,431

 

$

7,892

 

 

Effective August 24, 2010, James V. Caruso, our former Executive Vice President and Chief Commercial Officer (CCO), departed the Company.  As a result of Mr. Caruso’s departure, we adjusted the forfeiture rate applied to his equity compensation, which resulted in a one-time $787,000 reversal of selling, general and administrative stock-based compensation expense during the three and nine months ended September 30, 2010, of which $605,000 related to stock option awards and $182,000 related to restricted stock unit awards.

 

We did not recognize a related tax benefit during the nine months ended September 30, 2011 and 2010, as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of September 30, 2011.  No stock-based compensation expense was capitalized on our Balance Sheet as of September 30, 2011 and December 31, 2010.

 

Stock-based compensation expense by equity award type for the three and nine months ended September 30, 2011 and 2010 was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

729

 

$

1,840

 

$

3,148

 

$

6,754

 

Restricted stock units

 

2,186

 

274

 

6,223

 

935

 

Restricted stock

 

1

 

6

 

3

 

38

 

Employee stock purchase plan

 

18

 

57

 

57

 

165

 

Total stock-based compensation expense

 

$

2,934

 

$

2,177

 

$

9,431

 

$

7,892

 

 

As of September 30, 2011, the unrecorded stock-based compensation balance and estimated weighted-average amortization period by equity award type was as follows:

 

 

 

 

 

Weighted-

 

 

 

Unrecorded

 

average

 

 

 

stock-based

 

remaining

 

 

 

compensation

 

amortization

 

 

 

balance

 

period

 

 

 

 

 

 

 

Stock options

 

$

3,637

 

1.5

 

Restricted stock units

 

8,047

 

1.6

 

Restricted stock

 

3

 

1.0

 

 

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Table of Contents

 

Stock Options

 

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

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

Weighted

 

 

 

Number of

 

Average

 

Grant-date

 

Number of

 

Average

 

 

 

Shares

 

Exercise Price

 

Fair Value

 

Shares

 

Exercise Price

 

Outstanding at December 31, 2010

 

8,716,829

 

$

6.36

 

 

 

4,539,454

 

$

5.89

 

Granted

 

835,000

 

2.21

 

$

1.23

 

 

 

 

 

Exercised

 

(4,893

)

2.91

 

 

 

 

 

 

 

Forfeited/Expired

 

(2,036,445

)

6.43

 

 

 

 

 

 

 

Outstanding at September 30, 2011

 

7,510,491

 

$

5.89

 

 

 

4,921,406

 

$

6.07

 

 

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:

 

 

 

 

 

Weighted Average

 

Weighted

 

 

 

 

 

Number

 

Remaining

 

Average

 

Aggregate

 

 

 

Outstanding

 

Contractual Term

 

Exercise Price

 

Intrinsic Value

 

As of September 30, 2011:

 

 

 

 

 

 

 

 

 

Options fully vested and exercisable

 

4,921,406

 

6.1

 

$

6.07

 

$

 

Options expected to vest, including effects of expected forfeitures

 

2,016,702

 

8.5

 

$

5.62

 

9,000

 

Options fully vested and expected to vest

 

6,938,108

 

6.8

 

$

5.93

 

$

9,000

 

 

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $1.83 as of September 30, 2011, 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.  There were no in-the-money options exercisable as of September 30, 2011.

 

There were no options exercised during the three months ended September 30, 2011.  The total intrinsic value of options exercised during the three months ended September 30, 2010 was $36,000 determined as of the date of option exercise.  The total intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $1,000 and $3,984,000, respectively, determined as of the date of option exercise.  We settle employee stock option exercises with newly issued common shares.  No tax benefits were realized by us in connection with these exercises during the nine months ended September 30, 2011 and 2010 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of September 30, 2011.

 

Restricted Stock Awards

 

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

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant-date

 

 

 

Shares

 

Fair Value

 

Nonvested RSU at December 31, 2010

 

2,492,078

 

$

4.97

 

Granted

 

2,384,824

 

3.30

 

Vested

 

(126,404

)

7.36

 

Forfeited

 

(724,363

)

3.88

 

Nonvested RSU at September 30, 2011

 

4,026,135

 

$

4.11

 

 

The shares of RSUs vest in three or four equal annual installments from the date of grant. Upon vesting of the restricted stock unit awards, we issue unrestricted shares of our common stock.  The total fair value of shares vested during the three months ended September 30, 2011 and 2010 was $11,000 and $14,000, respectively.  The total fair value of shares vested during the nine months ended September 30, 2011 and 2010 was $391,000 and $268,000, respectively.

 

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Table of Contents

 

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

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant-date

 

 

 

Shares

 

Fair Value

 

Nonvested RS at December 31, 2010

 

12,500

 

$

6.51

 

Granted

 

 

 

Vested

 

(7,500

)

5.85

 

Forfeited

 

(5,000

)

7.49

 

Nonvested RS at September 30, 2011

 

$

 

$

 

 

The shares of RS vest in four equal annual installments from the date of grant.  The total fair value of shares vested during the three months ended September 30, 2011 and 2010 was $0 and $11,000, respectively.  The total fair value of shares vested during the nine months ended September 30, 2011 and 2010 was $35,000 and $806,000, respectively.

 

10.    Net Loss Per Share

 

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

 

Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential dilutive share of common stock were anti-dilutive due to our net loss (as including such shares would decrease our basic net loss per share). Such potentially dilutive shares of common stock are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for each of the three and nine month periods ended September 30, 2011 and 2010, all potentially dilutive shares of common stock have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive shares of common stock consist of the following:

 

 

 

September 30,

 

 

 

2011

 

2010

 

Common stock options

 

7,510,491

 

8,887,973

 

Unvested restricted stock units

 

4,026,135

 

487,997

 

Unvested restricted stock

 

 

12,500

 

 

 

11,536,626

 

9,388,470

 

 

11.          Commitments and Contingencies

 

Royalty and License Fee Commitments

 

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, as amended, under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications related to FOLOTYN and its uses.  Under the terms of the agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and have made aggregate milestone payments of $2.5 million based on the passage of time. Additionally, in May and September 2009, we made milestone payments of $1.5 million based on the FDA accepting our New Drug Application for review and $5.8 million based on the FDA approval to market FOLOTYN, respectively.  The up-front license fee and all milestone payments under the agreement prior to FDA approval to market FOLOTYN were recorded to research and development expense as incurred.  As discussed in Note 5, the $5.8 million milestone payment based on the FDA approval was capitalized as an intangible asset and is being amortized over the expected useful life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. The only remaining potential milestone payment under the license agreement is for $3.5 million upon regulatory approval to market FOLOTYN in Europe, which, if made would be capitalized and amortized over the expected useful life of the licensed patents. Under the terms of the agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities.  In addition, we will pay the licensors royalties based on graduated annual levels of net sales of FOLOTYN to our distributors, net of actual rebates and chargebacks, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or

 

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GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur.  As discussed in Note 8, during the nine month period ended September 30, 2011, we made a $10.0 million sublicense fee payment under this agreement.  Royalties are 8% of annual distributor sales up to $150.0 million; 9% of annual distributor sales of $150.0 million through $300.0 million; and 11% of annual distributor sales in excess of $300.0 million.  For the nine months ended September 30, 2011 and 2010, our royalties were 8% of our net distributor sales.  As of September 30, 2011, accrued royalties were $1.1 million and are included in accrued liabilities on the Balance Sheet.

 

Lease Amendment

 

In August 2011, we extended our lease on an office in Princeton, New Jersey for one year, through September 30, 2012, at a rate of $380,000 per year.

 

Merger Transaction Class Action Lawsuits

 

On July 19, 2011, we entered into an Agreement and Plan of Merger and Reorganization, or Merger Agreement, with AMAG and Alamo Acquisition Sub, Inc., or Merger Sub, as amended on August 8, 2011.  On October 21, 2011, the Merger Agreement was terminated.

 

On July 26, 2011, a putative class action lawsuit captioned Lam v. Allos Therapeutics, Inc., et al., No. 6714-VCN, was filed in the Delaware Court of Chancery. The complaint names as defendants the members of our board of directors, as well as AMAG and Merger Sub. The plaintiff alleges that our directors breached their fiduciary duties to our stockholders in connection with the proposed merger between the Company and AMAG, and were aided and abetted by AMAG and Merger Sub. The complaint alleges that the merger involves an unfair price and an inadequate sales process, unreasonable deal protection devices, and that defendants entered into the transaction to benefit themselves personally. The complaint seeks injunctive relief, including to enjoin the merger, rescissory damages in the event the merger occurs, attorneys’ and other fees and costs, and other relief.

 

On July 28, 2011, a putative class action lawsuit captioned Mulligan v. Allos Therapeutics, Inc., et al., No. 6724-VCN, was filed in the Delaware Court of Chancery. The complaint names as defendants the Company and the members of our board of directors, as well as AMAG and Merger Sub. The plaintiff alleges that our directors breached their fiduciary duties to our stockholders in connection with the proposed merger between the Company and AMAG, and were aided and abetted by the Company, AMAG and Merger Sub. The complaint alleges that the merger involves an unfair price and an inadequate sales process, unreasonable deal protection devices, and that defendants entered into the transaction to benefit themselves personally. The complaint seeks injunctive relief, including to enjoin the merger, rescissory damages in the event the merger occurs, disgorgement of profits, attorneys’ and other fees and costs, and other relief.

 

On August 1, 2011, the Delaware Court of Chancery consolidated the Lam and Mulligan cases into In Re Allos Therapeutics, Inc. Shareholders Litigation, Consolidated C.A. No. 6714.

 

On August 15, 2011, a putative class action lawsuit captioned Gaines v. Narachi, et al., No. 6784-VCN, was filed in the Delaware Court of Chancery.  The complaint names as defendants the Company, AMAG, and the members of AMAG’s board of directors.  The plaintiff alleges that AMAG’s directors breached their fiduciary duties to AMAG’s stockholders in connection with the proposed merger between the Company and AMAG, and were aided and abetted by the Company.  The complaint alleges that the merger involved an inadequate sales process and unreasonable deal protection devices, that the AMAG board of directors improperly rejected an allegedly superior offer by MSMB Capital Management LLC, and that defendants entered into the transaction to benefit themselves personally.  The complaint seeks injunctive relief, including to enjoin the merger, rescissory damages in the even the merger occurs, disgorgement of profits, attorneys’ fees and other fees and costs, and other relief.

 

On September 1, 2011, a Verified Consolidated Amended Class Action Complaint was filed in the consolidated action pending in the Delaware Court of Chancery. The amended complaint names as defendants members of our board of directors, as well as the Company, AMAG and Merger Sub, and alleges that members of our board of directors breached their fiduciary duties to our stockholders in connection with the Merger Agreement and the disclosures related thereto, and further claims that the Company, AMAG and Merger Sub aided and abetted those alleged breaches of fiduciary duty. The amended complaint generally alleges that the Merger Agreement involves an unfair price, a flawed sales process and preclusive deal protection devices and that the defendants agreed to the transaction to benefit themselves personally. The amended complaint

 

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further alleges that the joint proxy statement fails to disclose material information relating to the Company’s and AMAG’s financial projections, the fairness opinions of J.P. Morgan and Morgan Stanley and the background of the proposed transaction. The amended complaint seeks damages and injunctive relief, including to enjoin the acquisition of the Company by AMAG, and an award of attorneys’ and other fees and costs, in addition to other relief.

 

On October 13, 2011, the Company and other defendants in the consolidated action pending in the Delaware Court of Chancery entered into a memorandum of understanding (“MOU”), pursuant to which the Company and such parties agreed in principle, and subject to certain conditions, to settle that action.  The settlement contemplated by the MOU was subject to and conditioned upon consummation of the acquisition of the Company by AMAG, which condition has not been satisfied.  No payments were made in connection with the settlement.

 

The Company and other defendants believe the allegations of all the foregoing actions lack merit.  Furthermore, inasmuch as the Merger Agreement has been terminated, the Company and other defendants believe such allegations are moot.  Defendants will continue to vigorously defend these actions as long as they remain pending.

 

12.    Recent Accounting Pronouncements

 

In March 2010, the Financial Accounting Standards Board, or FASB, completed an accounting standards update entitled “Milestone Method of Revenue Recognition.” This standard allows the milestone method to be used in the application of the proportional performance model when applied to revenue arrangements.  Under this pronouncement an accounting policy election can be made to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved.  This standard is effective for us beginning January 1, 2011, and may be applied either prospectively to milestones achieved after the adoption date or retrospectively for all periods presented. See Note 8 above for the impact of this standard with respect to the strategic collaboration with Mundipharma entered into in May 2011.

 

In October 2009, the FASB issued an accounting standards update entitled “Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.” This standard prescribes the accounting treatment for arrangements that contain multiple-deliverable elements and may enable us to account for products or services, or deliverables, separately rather than as a single unit in certain circumstances.  Prior to this standard, only certain types of evidence were acceptable for determining the relative selling price of the deliverables under an arrangement. If that evidence was not available, the deliverables were treated as a single unit of accounting. This updated standard expands the nature of evidence which may be used to determine the relative selling price of separate deliverables to include estimation. This standard is applicable to our arrangements entered into or materially modified after December 31, 2010.  See Note 8 above for the impact of this standard with respect to the strategic collaboration with Mundipharma entered into in May 2011.

 

13.    Subsequent Event

 

On October 21, 2011, the Merger Agreement, dated July 19, 2011 and as amended August 8, 2011, by and among the Company, AMAG and Merger Sub was terminated pursuant to Section 8.1(e) of the Merger Agreement and the merger contemplated thereby was not consummated.  The Merger Agreement was terminated by AMAG following the October 21, 2011, special meeting of AMAG stockholders at which AMAG’s stockholders voted against the issuance of shares of AMAG common stock to Allos’ stockholders in the proposed merger contemplated by the Merger Agreement.  In accordance with Section 8.3(c) of the Merger Agreement, AMAG paid Allos $1.8 million on October 25, 2011, consisting of the expense reimbursement equal to $2.0 million in connection with such termination, net of our portion of certain shared costs.

 

Upon the termination of the Merger Agreement, the Amendment, dated as of July 19, 2011, to the Rights Agreement, dated May 6, 2003, as amended on March 4, 2005, January 29, 2007 and July 17, 2009, between Allos and Mellon Investor Services LLC, and the Voting Agreements, dated as of July 19, 2011, between Allos and each of the directors and the then-current named executive officers of AMAG, terminated pursuant to their terms.

 

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

 

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

 

Overview

 

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

 

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

 

On September 24, 2009, the U.S. Food and Drug Administration, or FDA, granted accelerated approval of FOLOTYN for use as a single agent for the treatment of patients with relapsed or refractory PTCL. This approval was based on overall response rate from our pivotal Phase 2 trial known as PROPEL (Pralatrexate in patients with Relapsed Or refractory PEripheral T-cell Lymphoma). Clinical benefit such as improvement in progression-free survival or overall survival has not been demonstrated.  FOLOTYN represents our first drug approved for marketing in the United States.  In connection with the accelerated approval, we are required to conduct post-approval studies that are intended to confirm FOLOTYN’s clinical benefit in patients with T-cell lymphoma and to determine whether FOLOTYN poses a serious risk of altered drug levels resulting from organ impairment.

 

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

 

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We are also seeking regulatory approval to market FOLOTYN in Europe for the treatment of patients with relapsed or refractory PTCL.  In December 2010, our MAA was accepted by the European Medicines Agency, or EMA.   Acceptance of the MAA by the EMA indicates that the application is complete and initiates the EMA’s regulatory review process.  We expect a Committee for Medicinal Products for Human Use, or CHMP, opinion as early as the fourth quarter of 2011 and a regulatory decision on the MAA in early 2012.  The MAA is based on clinical data from our pivotal PROPEL trial.

 

Termination of Merger Agreement

 

On October 21, 2011, Agreement and Plan of Merger and Reorganization, or Merger Agreement, dated July 19, 2011 and as amended August 8, 2011, by and among the Company, AMAG Pharmaceuticals, Inc., or AMAG, and Alamo Acquisition Sub, Inc., or Merger Sub, was terminated pursuant to Section 8.1(e) of the Merger Agreement and the merger contemplated thereby was not consummated.  The Merger Agreement was terminated by AMAG following the October 21, 2011, special meeting of AMAG stockholders at which AMAG’s stockholders voted against the issuance of shares of AMAG common stock to Allos’ stockholders in the proposed merger contemplated by the Merger Agreement.  In accordance with Section 8.3(c) of the Merger Agreement, AMAG paid Allos $1.8 million on October 25, 2011, consisting of the expense reimbursement equal to $2.0 million in connection with such termination, net of our portion of certain shared costs.

 

Upon the termination of the Merger Agreement, the Amendment, dated as of July 19, 2011, to the Rights Agreement, dated May 6, 2003, as amended on March 4, 2005, January 29, 2007 and July 17, 2009, between Allos and Mellon Investor Services LLC, and the Voting Agreements, dated as of July 19, 2011, between Allos and each of the directors and the then-current named executive officers of AMAG, terminated pursuant to their terms.

 

Strategic Collaboration

 

In May 2011, we entered into a strategic collaboration agreement to co-develop FOLOTYN with Mundipharma, or the Mundipharma Collaboration Agreement.  Under the Mundipharma Collaboration Agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world.  Under the Mundipharma Collaboration Agreement, we received an upfront payment of $50 million and may receive potential regulatory and commercial progress- and sales-dependent milestone payments of up to $310.5 million.  Included in the $310.5 million in potential milestone payments are potential $14.5 million and $10.0 million milestone payments related to obtaining conditional approval of FOLOTYN in the European Union and first reimbursable commercial sale in the third major market in the European Union, respectively, which may be obtained in 2012.  Of the $50 million upfront payment, 20%, or $10 million, was paid by Allos to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories.  Allos and Mundipharma will jointly fund worldwide development costs, initially on a 60:40 basis, respectively; which will change to a 50:50 basis if certain pre-defined milestones are achieved, including approval to market FOLOTYN for relapsed or refractory PTCL in the European Union.  The parties’ development funding will support jointly agreed-upon clinical development activities, including, but not limited to, the planned Phase 3 registration studies of FOLOTYN in previously undiagnosed PTCL and in relapsed or refractory cutaneous T-cell lymphoma. Pursuant to a separate supply agreement with Mundipharma Medical Company, an affiliate of Mundipharma, we will supply FOLOTYN for Mundipharma’s clinical and commercial uses. We refer to the Mundipharma Collaboration Agreement and the Mundipharma Supply Agreement as the Mundipharma Agreements. During the three and nine months ended September 30, 2011, we recognized $1.0 million and $29.1 million, respectively, of license and other revenue under the Mundipharma Agreements.

 

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Development Program

 

We are prioritizing our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies.    The following table summarizes the target indications and clinical development status of the FOLOTYN development program, including our planned post-approval studies:

 

Company Sponsored Studies

 

Phase

 

Status

HEMATOLOGIC MALIGNANCIES

 

 

 

 

Peripheral T-cell Lymphoma

 

 

 

 

1st Line: CHOP Sequential Study*

 

3

 

Enrollment ongoing

Cutaneous T-cell Lymphoma

 

 

 

 

2nd Line+: Single Agent Study

 

1

 

Enrollment completed; results reported Q4 2010

2nd Line+: Bexarotene Combination*

 

1/3

 

Enrollment ongoing in Phase 1 study

Lymphoma

 

 

 

 

2nd line+: Non-Hodgkin Lymphoma combination Pralatrexate + Gemcitabine

 

1/2a

 

Enrollment completed; data expected 1H 2012

2nd Line+: B-cell Non-Hodgkin Lymphoma

 

2

 

Enrollment ongoing

 


*   These studies are required by the FDA as a condition of the accelerated approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL and must verify the clinical benefit of FOLOTYN. Additionally, these studies are jointly funded under the Mundipharma Agreements discussed above.

 

We recently closed enrollment in our ongoing Phase 2 studies of FOLOTYN in patients with advanced or metastatic relapsed transitional cell carcinoma (TCC) of the urinary bladder and in female patients with advanced or metastatic breast cancer who failed prior chemotherapy.  We intend to report the data from these studies at an appropriate scientific venue in 2012.  We do not plan to make further investments in the development of FOLOTYN for these indications at the present time given our prioritization of resources on the development and commercialization of FOLOTYN for hematologic malignancies.  We will, however, continue to support investigators who are evaluating FOLOTYN in multiple myeloma and solid tumor indications through our ongoing collaboration with the National Comprehensive Cancer Network, or NCCN, Oncology Research Program.

 

Results of Operations

 

We have incurred significant net losses and negative cash flows from operations. We have incurred these losses principally from costs incurred in our research and development programs and from our selling, general and administrative expenses.  Our primary business activities are focused on the development and commercialization of FOLOTYN.

 

Our ability to achieve sustained profitability is dependent on our ability, alone or with partners, to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  The amount of our future product sales are subject to significant uncertainty.  We may never generate sufficient revenue from product sales to become profitable.

 

We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for FOLOTYN.  We also expect to continue to spend substantial amounts on selling, general and administrative expenses to promote FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  Therefore, we may need to raise additional capital to support our future operations.  Our actual capital requirements will depend on many factors, including those discussed under the “Liquidity and Capital Resources” section below.

 

If we are unable to significantly increase sales of FOLOTYN or 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 future prospects for profitability may be harmed.

 

In January 2011, we implemented a strategic reduction of our workforce by approximately 13%, or 25 employees.  Personnel reductions were primarily focused in research and development and general and administrative functions.  The restructuring was a result of our decision to prioritize our resources on the development and commercialization of

 

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FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma and other hematologic malignancies, and to manage our operating costs and expenses.  During the first quarter of 2011, we incurred total restructuring charges of approximately $570,000 in connection with the restructuring, all in the form of one-time termination benefits, with no additional charges incurred during 2011.

 

Comparison of three and nine months ended September 30, 2011 and 2010

 

Revenue

 

Our revenues for the three and nine months ended September 30, 2011 and 2010 consisted of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Net product sales

 

$

13.2

 

$

8.2

 

$

35.1

 

$

23.5

 

License and other revenue

 

1.0

 

 

29.1

 

 

Total revenue

 

$

14.2

 

$

8.2

 

$

64.2

 

$

23.5

 

 

Net product sales.  Net product sales represent gross product sales less distributor fees and estimated allowances for product returns, government rebates and chargebacks, as further described in the “Critical Accounting Policies” section below.  We began making FOLOTYN available for commercial sale in the United States in October 2009 and commenced our commercial launch of FOLOTYN in January 2010.

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to health care providers because we did not have sufficient history to be able to reasonably estimate returns.  Beginning in the fourth quarter of 2010, we began recognizing revenue as product is sold to distributors as we established a sufficient history in order to reasonably estimate returns from our distributors.  Through September 30, 2011, product returns have been negligible.  Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not allowed for expired product.  Given these limited contractual return rights, the price of FOLOTYN and the limited number of PTCL patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.

 

Net product sales for the three and nine months ended September 30, 2011 include $3.0 million, or $0.03 per share of common stock, related to the sale of FOLOTYN for use in a clinical trial to be conducted by an unrelated party.  We expect to generate future sales of FOLOTYN for use in this clinical trial.  However, we cannot predict the timing or amount of such future sales.  Since this sale relates to product used for a clinical trial, the sale was not subject to government rebates and chargebacks and no such reserves were recorded on this sale.

 

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A reconciliation of gross to net product sales for the three and nine months ended September 30, 2011 and 2010 and balances and activity in the deferred revenue account for the three and nine months ended September 30, 2010 are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Gross product sales

 

$

14.7

 

$

9.3

 

$

39.3

 

$

26.5

 

Gross to Net Sales Adjustments

 

 

 

 

 

 

 

 

 

Government rebates and chargebacks

 

(1.0

)

(0.8

)

(2.7

)

(2.2

)

Distribution fees

 

(0.4

)

(0.3

)

(1.1

)

(0.8

)

Product returns allowance

 

(0.1

)

 

(0.4

)

 

Net product sales

 

$

13.2

 

$

8.2

 

$

35.1

 

$

23.5

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, beginning of the period

 

 

 

$

1.2

 

 

 

$

0.7

 

Gross product sales to distributors

 

 

 

9.7

 

 

 

27.4

 

Less: Gross product sales recognized

 

 

 

(9.3

)

 

 

(26.5

)

Deferred revenue, end of the period

 

 

 

$

1.6

 

 

 

$

1.6

 

 

Gross product sales to distributors for the three months ended September 30, 2011 were $14.7 million, a $5.4 million increase as compared to the same period in 2010.  Gross product sales to distributors for the nine months ended September 30, 2011 were $39.3 million, a $12.8 million increase as compared to the same period in 2010.  These increases relate to an increase in the number of units sold, as there have been no price increases to date.

 

Gross to net sales adjustments as a percent of gross product sales were 10.3% and 11.3% for the three months ended September 30, 2011 and 2010, respectively.  Gross to net sales adjustments as a percent of gross product sales were 10.9% and 11.3% for the nine months ended September 30, 2011 and 2010, respectively.  The decrease in gross to net sales adjustments as a percent of gross product sales for both the three and nine months ended September 30, 2011, primarily relates to the $3.0 million of net product sale of FOLOTYN for use in a clinical trial to be conducted by an unrelated party which was not subject to government rebates and chargebacks and no such reserves were recorded on this sale.

 

Balances and activity in the product returns, government rebates and chargebacks and distribution fees payable accounts for the nine months ended September 30, 2011 and 2010 are as follows:

 

 

 

 

 

Government

 

 

 

 

 

Product

 

Rebates and

 

Distribution

 

 

 

Returns

 

Chargebacks

 

Fees

 

Balance at December 31, 2009

 

$

 

$

0.5

 

$

0.1

 

Reserve for current period sales

 

 

2.4

 

0.8

 

Change in estimate for prior period sales

 

 

(0.2

)

 

Credits/payments made for prior period sales

 

 

(1.1

)

(0.6

)

Credits/payments made for current period sales

 

 

(0.1

)

(0.1

)

Balance at September 30, 2010

 

$

 

$

1.5

 

$

0.2

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

0.4

 

$

2.2

 

$

0.3

 

Reserve for current period sales

 

0.4

 

3.1

 

1.1

 

Change in estimate for prior period sales

 

 

(0.3

)

 

Credits/payments made for prior period sales

 

 

(0.4

)

(0.2

)

Credits/payments made for current period sales

 

 

(1.8

)

(0.9

)

Balance at September 30, 2011

 

$

0.8

 

$

2.8

 

$

0.3

 

 

During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.

 

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the

 

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discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.  We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through September 30, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time. As a result of this evaluation, during the nine months ended September 30, 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $301,000.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

 

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

 

License and other revenue.  In May 2011, we entered into a strategic collaboration agreement to co-develop FOLOTYN with Mundipharma.  Under the Mundipharma Collaboration Agreement, we received an upfront payment of $50.0 million and may receive potential regulatory and commercial progress- and sales-dependent milestone payments of up to $310.5 million, as further described in the “Critical Accounting Policies” section below.

 

License and other revenue related to the Mundipharma Agreements for the three and nine months ended September 30, 2011 and 2010 was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

License

 

$

 

$

 

$

27.2

 

$

 

Regulatory

 

0.6

 

 

1.3

 

 

Research and development

 

0.4

 

 

0.6

 

 

License and other revenue

 

$

1.0

 

$

 

$

29.1

 

$

 

 

Pursuant to the accounting guidance under Accounting Standards Codification 605-25, or ASC 605-25, which governs revenue recognition for multiple element arrangements, we have evaluated the three non-contingent deliverables under the Mundipharma Agreements and determined that they all meet the criteria for separation and are therefore treated as separate units of accounting, as follows:

 

·                  License from Allos to commercialize and develop FOLOTYN worldwide, outside of the United States and Canada, or the License;

 

·                  Regulatory services provided by Allos related to the MAA through May 10, 2012; and

 

·                  Research and development services provided by Allos related to jointly agreed-upon clinical development activities through approximately 2022, with cost sharing discussed in the “Strategic Collaboration” section above.

 

Since the delivery of the License occurred upon the execution of the Mundipharma Collaboration Agreement and there is no general right of return, all $27.2 million of allocated arrangement consideration related to the License was recognized as revenue during the nine month period ended September 30, 2011.

 

The regulatory activities will be performed over a period of up to one year, as defined in the Mundipharma Collaboration Agreement, with no general right of return.  Therefore, all allocated arrangement consideration related to the regulatory activities will be recognized using the proportional performance method, by which revenue is recognized in proportion to the costs incurred, during the service period of up to one year.

 

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Research and development activities will be performed over multiple years and are related to the completion of the joint development clinical studies, with no general right of return.  Therefore, all allocated arrangement consideration related to the research and development activities will be recognized as the research and development costs that are subject to reimbursement are incurred.

 

The total revenue recognized in future periods under the arrangement is subject to a limitation such that deferred revenue recognized to date cannot be greater than the amounts received and receivable from Mundipharma less the remaining development cost differential that is subject to refund.

 

As of September 30, 2011, deferred revenue related to the Mundipharma Agreements consisted of $6.1 million and $15.3 million of current and long-term deferred revenue, respectively.

 

We expect license and other revenue for the fourth quarter 2011 to be consistent with the amount recorded in the third quarter of 2011.  We do not expect additional revenue related to the License for the remainder of 2011.

 

Operating costs and expenses

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Cost of sales, excluding amortization expense.

 

$

1.2

 

$

0.9

 

$

3.2

 

$

2.3

 

 

Prior to receiving FDA approval of FOLOTYN on September 24, 2009, all costs related to purchases of the active pharmaceutical ingredient and manufacturing of the product were recorded as research and development expense.  Until we sell the inventory for which the costs were previously expensed, our cost of sales will reflect only royalties and other incremental costs incurred subsequent to the FDA approval date.  Accordingly, our cost of sales of FOLOTYN will be lower with respect to product that was manufactured prior to FDA approval.  This occurred with respect to the majority of sales of FOLOTYN in the three and nine month periods ended September 30, 2011 and 2010 and is expected to continue to occur for a significant amount of sales of FOLOTYN through the remainder of 2011.

 

The $1.2 million and $0.9 million of cost of sales, excluding amortization expense for the three months ended September 30, 2011 and 2010, respectively, and the $3.2 million and $2.3 million of cost of sales, excluding amortization expense for the nine months ended September 30, 2011 and 2010, respectively, was primarily attributable to an 8% royalty on gross product sales payable to the licensors of FOLOTYN under the terms of our license agreement.

 

We expect cost of sales, excluding amortization expense for the fourth quarter of 2011 to approximate 10% of net product sales to distributors, which includes the current 8% royalty on FOLOTYN sales.

 

Cost of license and other revenue. Cost of license and other revenue from the Mundipharma Agreements includes sublicense fee payments to the licensors of FOLOTYN under the terms of our license agreement, and internal and external costs associated with regulatory services provided by Allos related to the MAA.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Cost of license and other revenue

 

$

0.4

 

$

 

$

11.0

 

$

 

 

Cost of license and other revenue for the three months ended September 30, 2011 consisted of $0.4 million of costs incurred in connection with the regulatory services provided related to the MAA.  There were no corresponding costs in 2010.  Cost of license and other revenue for the nine months ended September 30, 2011 consisted of: (i) a $10 million payment to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer

 

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Research, SRI International and Southern Research Institute, which represented 20% of the $50 million upfront payment received from Mundipharma upon execution of the Mundipharma Agreements, and (ii) $1.0 million of costs incurred in connection with the regulatory services provided related to the MAA.  There were no corresponding costs in 2010.

 

We expect cost of license and other revenue for the fourth quarter of 2011 to be consistent with the amount recorded in the third quarter of 2011.  We do not expect additional cost of revenue related to sublicense fee payments to the licensors of FOLOTYN for the remainder of 2011.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Research and development