Table
of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
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Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
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For the quarterly period ended
September 30, 2008.
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o
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Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
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For the transition period from
to
.
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Commission
File Number
000-29815
Allos
Therapeutics, Inc.
(Exact name of
Registrant as specified in its charter)
Delaware
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54-1655029
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(State or other
jurisdiction of
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(I.R.S. Employer
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incorporation or
organization)
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Identification
No.)
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11080
CirclePoint Road, Suite 200
Westminster,
Colorado 80020
(303)
426-6262
(Address,
including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
x
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
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
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Accelerated filer
x
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Non-accelerated
filer
o
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(Do not check if
a smaller reporting company)
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Smaller reporting company
o
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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 3,
2008, there were 81,142,937 shares of the registrants Common Stock, par value
$0.001 per share, outstanding.
Table
of Contents
ALLOS
THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
NOTE:
Allos
Therapeutics, Inc., the Allos Therapeutics, Inc. logo, and all other Allos names are trademarks of
Allos Therapeutics, Inc. in the United States and in other selected
countries. All other brand names or trademarks appearing in this report are the
property of their respective holders. Unless the context requires otherwise,
references in this report to Allos, the Company, we, us, and our
refer to Allos Therapeutics, Inc.
2
Table
of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLOS THERAPEUTICS, INC.
(A Development
Stage Enterprise)
BALANCE SHEETS
(unaudited)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
|
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|
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Cash and cash
equivalents
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$
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21,376,097
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$
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15,919,664
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Restricted cash
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420,966
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|
183,334
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|
Investments in
marketable securities
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70,530,659
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41,836,566
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|
Prepaid research
and development expenses
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1,075,822
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524,704
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Prepaid expenses
and other assets
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2,810,541
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2,374,471
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Total current
assets
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96,214,085
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60,838,739
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Investments in
marketable securities
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4,453,178
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Property and
equipment, net
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847,196
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621,451
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Total assets
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$
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101,514,459
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$
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61,460,190
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current
liabilities:
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Trade accounts
payable
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$
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2,153,687
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$
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1,191,849
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|
Accrued
liabilities
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|
7,745,222
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7,689,338
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Total current
liabilities
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9,898,909
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8,881,187
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Commitments and
contingencies (See Note 7)
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Stockholders
equity:
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Preferred stock,
$0.001 par value; 10,000,000 shares authorized at September 30, 2008 and
December 31, 2007; no shares issued or outstanding
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Series A
Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares
designated from authorized preferred stock at September 30, 2008 and
December 31, 2007; no shares issued or outstanding
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Common stock,
$0.001 par value; 150,000,000 shares authorized at September 30, 2008
and December 31, 2007; 81,140,937 and 67,641,943 shares issued and
outstanding at September 30, 2008 and December 31, 2007,
respectively
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81,141
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67,642
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Additional
paid-in capital
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376,454,219
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300,440,336
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Deficit
accumulated during the development stage
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(284,919,810
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)
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(247,928,975
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)
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Total
stockholders equity
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91,615,550
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52,579,003
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Total
liabilities and stockholders equity
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$
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101,514,459
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$
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61,460,190
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The accompanying notes are an integral part of these
financial statements.
3
Table
of Contents
ALLOS THERAPEUTICS, INC.
(A Development Stage
Enterprise)
STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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Cumulative
Period from
September 1, 1992
(date of inception)
through
September 30,
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2008
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2007
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2008
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2007
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2008
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Operating
expenses:
|
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Research and
development
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$
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6,360,950
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$
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4,394,726
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$
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17,738,486
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$
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12,044,941
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$
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143,038,358
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Clinical
manufacturing
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1,727,630
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1,506,255
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4,799,240
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4,038,363
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39,411,346
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Marketing,
general and administrative
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5,326,357
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4,240,704
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15,776,485
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14,503,223
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118,607,026
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Restructuring
and separation costs
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1,663,821
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Total operating
expenses
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13,414,937
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10,141,685
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38,314,211
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30,586,527
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302,720,551
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Loss from
operations
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(13,414,937
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)
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(10,141,685
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)
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(38,314,211
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)
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(30,586,527
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)
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(302,720,551
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)
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Gain on
settlement claims
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5,110,083
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Interest and
other income, net
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254,416
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843,542
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1,323,376
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2,526,146
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22,927,122
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Net loss
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(13,160,521
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)
|
(9,298,143
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)
|
(36,990,835
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)
|
(28,060,381
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)
|
(274,683,346
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)
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|
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|
|
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|
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Dividend related
to beneficial conversion feature of preferred stock
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(10,236,464
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)
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|
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|
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Net loss
attributable to common stockholders
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$
|
(13,160,521
|
)
|
$
|
(9,298,143
|
)
|
$
|
(36,990,835
|
)
|
$
|
(28,060,381
|
)
|
$
|
(284,919,810
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)
|
|
|
|
|
|
|
|
|
|
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|
Net loss per
share: basic and diluted
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$
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(0.16
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)
|
$
|
(0.14
|
)
|
$
|
(0.50
|
)
|
$
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(0.43
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)
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|
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|
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Weighted average
shares outstanding: basic and diluted
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80,752,024
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66,042,023
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73,554,904
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64,627,285
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The accompanying notes are an integral part
of these financial statements.
4
Table
of Contents
ALLOS THERAPEUTICS, INC.
(A Development Stage
Enterprise)
STATEMENTS OF CASH FLOWS
(unaudited)
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Nine Months Ended
September 30,
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Cumulative
Period From
September 1, 1992
(date of inception)
through
September 30,
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2008
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2007
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2008
|
|
Cash Flows From
Operating Activities:
|
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|
|
|
|
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|
Net loss
|
|
$
|
(36,990,835
|
)
|
$
|
(28,060,381
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)
|
$
|
(274,683,346
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)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
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|
|
|
|
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Depreciation and
amortization
|
|
304,322
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258,323
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|
3,752,631
|
|
Stock-based
compensation expense
|
|
5,936,499
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|
4,775,997
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38,218,218
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Write-off of
long-term investment
|
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|
|
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1,000,000
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Realized loss on
sale of marketable securities
|
|
551,698
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|
|
|
551,698
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|
Other
|
|
|
|
|
|
99,121
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|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
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Prepaid expenses
and other assets
|
|
(987,188
|
)
|
(543,529
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)
|
(3,876,363
|
)
|
Interest
receivable on investments
|
|
(539,283
|
)
|
(299,118
|
)
|
(1,204,592
|
)
|
Accounts payable
|
|
961,838
|
|
320,956
|
|
2,153,687
|
|
Accrued
liabilities
|
|
55,884
|
|
1,017,275
|
|
7,745,222
|
|
Net cash used in
operating activities
|
|
(30,707,065
|
)
|
(22,530,477
|
)
|
(226,243,724
|
)
|
Cash Flows From
Investing Activities:
|
|
|
|
|
|
|
|
Acquisition of
property and equipment
|
|
(530,067
|
)
|
(198,056
|
)
|
(4,345,821
|
)
|
Pledge of
restricted cash
|
|
(237,632
|
)
|
|
|
(420,966
|
)
|
Purchases of
marketable securities
|
|
(94,048,013
|
)
|
(86,562,254
|
)
|
(609,706,239
|
)
|
Proceeds from
maturities of marketable securities
|
|
54,140,827
|
|
53,222,462
|
|
528,627,796
|
|
Proceeds from
sales of marketable securities
|
|
6,747,500
|
|
|
|
6,747,500
|
|
Purchase of long-term
investment
|
|
|
|
|
|
(1,000,000
|
)
|
Payments
received on notes receivable
|
|
|
|
|
|
49,687
|
|
Net cash used in
investing activities
|
|
(33,927,385
|
)
|
(33,537,848
|
)
|
(80,048,043
|
)
|
Cash Flows From
Financing Activities:
|
|
|
|
|
|
|
|
Principal
payments under capital leases
|
|
|
|
|
|
(422,088
|
)
|
Proceeds from
sales leaseback
|
|
|
|
|
|
120,492
|
|
Proceeds from
issuance of convertible preferred stock, net of issuance costs
|
|
|
|
|
|
89,125,640
|
|
Proceeds from
issuance of common stock associated with stock options, stock warrants and
employee stock purchase plan
|
|
4,905,755
|
|
2,745,728
|
|
14,506,873
|
|
Proceeds from
issuance of common stock, net of issuance costs
|
|
65,185,128
|
|
50,257,207
|
|
224,336,947
|
|
Net cash
provided by financing activities
|
|
70,090,883
|
|
53,002,935
|
|
327,667,864
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
5,456,433
|
|
(3,065,390
|
)
|
21,376,097
|
|
Cash and cash
equivalents, beginning of period
|
|
15,919,664
|
|
10,070,526
|
|
|
|
Cash and cash
equivalents, end of period
|
|
$
|
21,376,097
|
|
$
|
7,005,136
|
|
$
|
21,376,097
|
|
Supplemental
Schedule of Cash and Non-cash Operating and Financing Activities:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
|
|
$
|
|
|
$
|
1,033,375
|
|
Issuance of
stock in exchange for license agreement
|
|
|
|
|
|
40,000
|
|
Capital lease
obligations incurred for acquisition of property and equipment
|
|
|
|
|
|
422,088
|
|
Issuance of
stock in exchange for notes receivable
|
|
|
|
|
|
139,687
|
|
Conversion of
preferred stock to common stock
|
|
|
|
|
|
89,125,640
|
|
The accompanying
notes are an integral part of these financial statements.
5
Table
of Contents
ALLOS THERAPEUTICS, INC.
(A Development Stage
Enterprise)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1.
Basis of
Presentation
The unaudited financial
statements of Allos Therapeutics, Inc. (referred to herein as the Company,
we, us or our) included herein reflect all adjustments, consisting only
of normal recurring adjustments, which in the opinion of management are
necessary to fairly state our financial position, results of operations and
cash flows for the periods presented.
Certain information and footnote disclosures normally included in
audited financial information prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, or SEC. Operating
results for the three and nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending December 31,
2008. 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,
2007, as amended, for a broader discussion of our business and the
opportunities and risks inherent in such business. The year-end balance sheet
data included herein was derived from our audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles in the United States of America.
Since our inception in
1992, we have not generated any revenue from product sales and have experienced
significant net losses and negative cash flows from operations. Our activities have consisted primarily of
in-licensing and developing product candidates, raising capital and recruiting
personnel. Accordingly, we are
considered to be in the development stage as of September 30, 2008, as
defined in Statement of Financial Accounting Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage
Enterprises.
Liquidity
Our ability to generate revenue and achieve
profitability is dependent on our ability, alone or with partners, to
successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. The timing and costs to complete the successful
development of any of our product candidates are highly uncertain, and
therefore difficult to estimate. The lengthy process of seeking regulatory
approvals for our product candidates, and the subsequent compliance with applicable
regulations, require the expenditure of substantial resources. Clinical
development timelines, likelihood of success and total costs vary widely and
are impacted by a variety of risks and uncertainties. Because of these risks
and uncertainties, we cannot predict when or whether we will successfully
complete the development of any of our product candidates or the ultimate costs
of such efforts. Due to these same factors, we cannot be certain when, or if,
we will generate any revenue or net cash inflow from any of our current product
candidates.
Even if our clinical trials demonstrate the safety and
effectiveness of our product candidates in their target indications, we do not
expect to be able to generate commercial sales for any of our product candidates
until the second half of 2009 at the earliest.
We expect to incur significant and growing net losses for the
foreseeable future as a result of our research and development programs and the
costs of preparing for the potential commercial launch of pralatrexate
(PDX). Although the size and timing of
our future net losses are subject to significant uncertainty, we expect them to
increase over the next several years as we continue to fund our development
programs and prepare for the potential commercial launch of pralatrexate.
As of September 30, 2008, we had $96.4 million in
cash, cash equivalents and investments in marketable securities. Based upon the current status of our product
development plans, we believe that our cash, cash equivalents, and investments
in marketable securities as of September 30, 2008 should be adequate to
support our operations for at least 12 months, although there can be no
assurance that this can, in fact, be accomplished. Our forecast of the period
of time through which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially.
We anticipate continuing our current development
programs and/or beginning other long-term development projects involving our
product candidates. These projects may require many years and substantial
expenditures to complete and may ultimately be unsuccessful. In addition, following our review of the
results of our pivotal Phase 2 PROPEL trial of pralatrexate in patients with
relapsed or refractory peripheral T-cell lymphoma, or PTCL, we intend to submit
a New Drug Application for pralatrexate for the treatment of patients with
relapsed or refractory PTCL as expeditiously as possible. We expect to incur significant costs relating
to preparations for the potential commercial launch of pralatrexate, including
pre-commercial scale up of manufacturing and development of sales and marketing
capabilities, prior to the receipt of regulatory approval to market
pralatrexate. Therefore, we will need to
raise additional capital to support our future operations, including the
potential commercialization of pralatrexate if approved for marketing. Our actual capital requirements will depend
on many factors, including:
6
Table
of Contents
·
the
timing and outcome of our ongoing PROPEL trial;
·
the
timing and costs associated with conducting preclinical and clinical
development of our product candidates, as well as our evaluation of, and
decisions with respect to, additional therapeutic indications for which we may
develop our product candidates;
·
the
timing and costs associated with developing sales and marketing capabilities
and commercializing our product candidates, if approved for marketing;
·
the
timing and costs associated with manufacturing preclinical, clinical and
commercial supplies of our product candidates;
·
the
timing and amount of revenues generated by our business activities, if any; and
·
our
evaluation of, and decisions with respect to, potential in-licensing or product
acquisition opportunities or other strategic alternatives.
We may seek to obtain this additional capital through arrangements with
corporate partners, equity or debt financings, or from other sources. Such
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that 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 particular, the current
instability in the global financial markets and lack of liquidity in the credit
and capital markets may adversely affect our ability to secure adequate capital
to support our future operations. In the
event that additional funds are obtained through arrangements with
collaborative partners or other sources, such arrangements may require us to
relinquish rights to some of our technologies, product candidates or products
under development that we would otherwise seek to develop or commercialize ourselves
on terms that are less favorable than might otherwise be available. If we are unable to generate meaningful
amounts of revenue from future product sales, if any, or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
2.
Prepaid Expenses
and Other Assets
Prepaid expenses
and other assets are comprised of the following:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Prepaid expenses
and other assets
|
|
$
|
810,541
|
|
$
|
615,471
|
|
Receivable
related to pending litigation settlement (see Note 7)
|
|
2,000,000
|
|
1,759,000
|
|
|
|
$
|
2,810,541
|
|
$
|
2,374,471
|
|
3.
Accrued
Liabilities
Accrued liabilities are
comprised of the following:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Accrued
personnel costs
|
|
$
|
2,563,045
|
|
$
|
2,122,805
|
|
Accrued
litigation settlement costs (see Note 7)
|
|
2,000,000
|
|
2,000,000
|
|
Accrued research
and development expenses
|
|
1,767,341
|
|
1,571,975
|
|
Accrued clinical
manufacturing expenses
|
|
696,420
|
|
1,259,799
|
|
Accrued
expensesother
|
|
718,416
|
|
734,759
|
|
|
|
$
|
7,745,222
|
|
$
|
7,689,338
|
|
4.
Stockholders
Equity
On May 29, 2008, we
sold 12,420,000 shares of our common stock in an underwritten public offering
at a price of $5.64 per share. The number of shares issued includes
1,620,000 shares purchased by the underwriters pursuant to their exercise in
full of their overallotment option. We
received net proceeds from the offering of approximately $65.2 million, after
deducting $4.2 million of underwriting commissions and $660,744 of offering
expenses. The shares of common stock were sold under our shelf
Registration Statement on Form S-3, declared effective by the SEC on June 5,
2007.
At our Annual Meeting of
Stockholders held on June 24, 2008, our stockholders approved the Allos
Therapeutics, Inc. 2008 Equity Incentive Plan (the 2008 Plan). The 2008 Plan authorizes the issuance of
incentive stock options, nonstatutory stock options, restricted stock awards,
restricted stock unit awards, stock appreciation rights, performance stock
awards and forms of equity compensation, which may be granted to employees,
directors and consultants. Only employees may receive incentive stock options.
The 2008 Plan succeeds and continues the Companys 2006 Inducement Award Plan,
2002 Broad Based Equity Incentive Plan, and 2000 Stock Incentive Compensation
Plan (the Prior Plans). As of June 24, 2008, no additional stock
awards will be granted under the Prior Plans and all outstanding stock awards
granted under the Prior Plans are deemed to be stock awards granted under the
2008 Plan (but remain subject to the terms of the Prior Plans with respect to
which they were originally granted).
7
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12,550,843 shares of the
Companys common stock may be issued pursuant to stock awards granted under the
2008 Plan, provided that all stock awards granted after the June 24, 2008
effective date of the 2008 Plan, other than stock options and stock
appreciation rights granted with an exercise price of at least 100% of such
stock awards fair market value on the date of grant, will reduce the number of
shares available for issuance under the 2008 Plan by 1.35 shares per share
granted pursuant to the stock award. If a stock award under the 2008 Plan
expires or otherwise terminates without being exercised in full, the shares of
common stock of the Company not acquired pursuant to the stock award will again
become available for issuance under the 2008 Plan. In addition, shares
issued pursuant to a stock award that are forfeited to or repurchased by the
Company prior to becoming fully vested and shares that are cancelled pursuant
to an exchange or repricing program will become available for the grant of new
stock awards under the 2008 Plan. Shares of common stock that revert to
and again become available for issuance under the 2008 Plan and that prior to
such reversion were granted pursuant to a stock award that reduced the number
of shares available under the 2008 Plan by 1.35 shares per share granted
pursuant to such stock award, shall cause the number of shares of common stock
of the Company available for issuance under the 2008 Plan to increase by 1.35
shares upon such reversion.
5.
Stock-Based
Compensation
In accordance with the
modified prospective transition method of SFAS No. 123 (Revised 2004),
Share-Based Payment
, stock-based compensation expense for
the three and nine months ended September 30, 2008 and 2007 has been
recognized in the accompanying Statements of Operations as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Research and
development
|
|
$
|
609,767
|
|
$
|
473,090
|
|
$
|
1,947,384
|
|
$
|
1,281,501
|
|
Clinical
manufacturing
|
|
98,744
|
|
44,221
|
|
305,756
|
|
127,170
|
|
Marketing,
general and administrative
|
|
1,124,329
|
|
1,141,390
|
|
3,683,359
|
|
3,367,326
|
|
Total
stock-based compensation expense
|
|
$
|
1,832,840
|
|
$
|
1,658,701
|
|
$
|
5,936,499
|
|
$
|
4,775,997
|
|
We did not recognize a
related tax benefit during the three or nine months ended September 30,
2008 and 2007 as we maintain net operating loss carryforwards and we have
established a valuation allowance against the entire tax benefit as of September 30,
2008. No stock-based compensation
expense was capitalized on our Balance Sheets as of September 30, 2008 and
December 31, 2007.
The following table
summarizes activity and related information for our stock option awards:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2007
|
|
6,405,430
|
|
$
|
4.68
|
|
2,754,274
|
|
$
|
3.80
|
|
Granted
|
|
2,270,312
|
|
6.43
|
|
|
|
|
|
Exercised
|
|
(1,057,936
|
)
|
4.58
|
|
|
|
|
|
Canceled
|
|
(614,626
|
)
|
5.92
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
7,003,180
|
|
$
|
5.15
|
|
2,916,547
|
|
$
|
4.10
|
|
During the nine months ended September 30, 2008,
we granted 2,270,312 stock options with a weighted-average grant-date fair value of $4.04 per share. As of September 30, 2008, the
unrecorded stock-based compensation balance related to stock option awards was $7,970,272
and will be recognized over an estimated weighted-average amortization period
of 1.4 years.
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The following table summarizes information about
outstanding stock options that are fully vested and currently exercisable, and
outstanding stock options that are expected to vest in the future:
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Term
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
As of
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
Options fully
vested and exercisable
|
|
2,916,547
|
|
6.4
|
|
$
|
4.10
|
|
$
|
9,780,298
|
|
Options expected
to vest, including effects of expected forfeitures
|
|
3,500,601
|
|
8.8
|
|
$
|
5.87
|
|
5,566,147
|
|
Options fully
vested and expected to vest
|
|
6,417,148
|
|
7.7
|
|
$
|
5.07
|
|
$
|
15,346,445
|
|
The aggregate intrinsic value in the table above
represents the total pretax intrinsic value, based on our closing stock price
of $7.41 as of September 30, 2008, which would have been received by the
option holders had all option holders with in-the-money options exercised their
options as of that date. The total
number of in-the-money options exercisable as of September 30, 2008 was
2,546,034.
The total intrinsic value of options exercised during
the three months ended September 30, 2008 and 2007 was $1,522,485 and
$994,500, respectively, determined as of the date of option exercise. The total intrinsic value of options
exercised during the nine months ended September 30, 2008 and 2007 was
$2,966,342 and $1,945,941, respectively, determined as of the date of option
exercise. We settle employee stock option exercises with newly issued common
shares. No tax benefits were realized by
us in connection with these exercises during the three or nine months ended September 30,
2008 and 2007 as we maintain net operating loss carryforwards and we have
established a valuation allowance against the entire tax benefit.
The following table summarizes activity and related
information for restricted stock awards granted under our equity incentive
plans:
|
|
Number of
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested
restricted stock at December 31, 2007
|
|
412,500
|
|
$
|
3.89
|
|
Granted
|
|
10,000
|
|
7.49
|
|
Vested
|
|
(128,750
|
)
|
3.74
|
|
Nonvested
restricted stock at September 30, 2008
|
|
293,750
|
|
$
|
4.07
|
|
The shares of restricted
stock vest in four equal annual installments from the date of grant. D
uring the three months ended September 30,
2008 and 2007, we recorded stock-based compensation related to restricted stock
awards of $85,691 and $164,217, respectively.
During the nine months
ended September 30, 2008 and 2007, we recorded stock-based compensation
related to restricted stock awards of $326,670 and $523,405, respectively. As of September 30, 2008, the unrecorded
stock-based compensation balance related to restricted stock awards was
$425,169 and will be recognized over an estimated weighted-average amortization
period of 1.4 years.
6.
Net
Loss Per Share
Net loss per share is calculated in accordance with
SFAS No. 128,
Earnings Per Share
.
Under the provisions of SFAS No. 128, basic net loss per share is computed
by dividing the net loss attributable to common stockholders for the period by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share is
computed by giving effect to all dilutive potential common stock outstanding
during the period, including stock options, restricted stock, stock warrants
and shares to be issued under our employee stock purchase plan.
Diluted net loss per share is the same as basic net
loss per share for all periods presented because any potential dilutive common
shares were anti-dilutive due to our net loss (as including such shares would
decrease our basic net loss per share).
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Potential dilutive common shares that would have been
included in the calculation of diluted earnings per share if we had net income
are as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Common stock
options
|
|
2,835,595
|
|
1,342,540
|
|
2,030,579
|
|
1,773,673
|
|
Restricted stock
|
|
283,967
|
|
412,500
|
|
323,901
|
|
412,500
|
|
Common stock
warrants
|
|
|
|
206,427
|
|
|
|
278,267
|
|
|
|
3,119,562
|
|
1,961,467
|
|
2,354,480
|
|
2,464,440
|
|
7.
Commitments
and Contingencies
Royalty and License Fee Commitments for Pralatrexate
(PDX)
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
pralatrexate 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 are
also required to make certain additional cash payments based upon the
achievement of certain clinical development or regulatory milestones or the
passage of certain time periods. To date, we have made aggregate milestone
payments of $2.0 million based on the passage of time. In the future, we could
make aggregate milestone payments of $1.0 million upon the earlier of
achievement of a clinical development milestone or the passage of certain time
periods (the Clinical Milestone), and up to $10.3 million upon achievement of
certain regulatory milestones, including regulatory approval to market
pralatrexate in the U.S. or Europe. The next scheduled payments toward the
Clinical Milestone of $500,000 each are currently due on December 23, 2008
and 2009. The up-front license fee and all milestone payments under the
agreement have been or will be recorded to research and development expense
when incurred. Under the terms of the agreement, we are required to fund all
development programs and will have sole responsibility for all
commercialization activities. In addition, we will pay the licensors a royalty
based on a percentage of net revenues arising from sales of the product or
sublicense revenues arising from sublicensing the product, if and when such
sales or sublicenses occur.
Contingencies
The Company and one of its former officers were named
as defendants in a purported securities class action lawsuit filed in May 2004
in the U.S. District Court for the District of Colorado (the District Court).
An amended complaint was filed in August 2004. The lawsuit was brought on
behalf of a purported class of purchasers of our securities during the period
from May 29, 2003 to April 29, 2004, and sought unspecified damages
relating to the issuance of allegedly false and misleading statements regarding
EFAPROXYN, one of our former product candidates, during this period and
subsequent declines in our stock price. On October 20, 2005, the District
Court granted the defendants motion to dismiss the lawsuit with prejudice. In
an opinion dated October 20, 2005, the District Court concluded that the
plaintiffs complaint failed to meet the legal requirements applicable to its
alleged claims.
On November 20, 2005, the plaintiffs appealed the
District Courts decision to the U.S. Court of Appeals for the Tenth Circuit
(the Court of Appeals). On February 6, 2008, the parties
signed a stipulation of settlement, settling the case for $2,000,000. The
settlement is subject to various conditions, including without limitation
approval of the District Court. On September 15,
2008, the District Court issued an order preliminarily approving the settlement
and scheduling a hearing on January 21, 2009 to consider final approval of
the settlement. Neither we nor our
former officer admits any liability in connection with the settlement. The amount of the settlement in excess of our
deductible has been covered by our insurance carrier. In the event the settlement does not become
final, we intend to vigorously defend against the plaintiffs appeal. If the
Court of Appeals then were to reverse the District Courts decision and we were
not successful in our defense of such claims, we could be forced to make
significant payments to the plaintiffs, and such payments could have a material
adverse effect on our business, financial condition, results of operations and
cash flows to the extent such payments are not covered by our insurance
carriers. Even if our defense against such claims were successful, the
litigation could result in substantial costs and divert managements attention
and resources, which could adversely affect our business. As of September 30,
2008, we have recorded $2,000,000 in accrued litigation settlement costs, which
represents our best estimate of the potential gross amount of the settlement
costs to be paid to the plaintiffs, and $2,000,000 in prepaid expenses and
other assets, which represents the approximately $235,000 of remaining
deductible under our insurance policy paid by us and $1,765,000 paid by our
insurance carrier into the settlement fund escrow in September 2008. A claims administrator appointed by the
parties will administer
10
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the distribution of the settlement fund to authorized
claimants in 2009.
Lease Commitments
On June 16, 2008, we entered into an amendment to
the lease agreement for our corporate headquarters facility. As part of the amendment we extended the term
of the lease from November 1, 2008 for a period of 39 months to expire January 31,
2012. We also will have the right, subject to the terms of the amendment,
to extend the term of the lease agreement for one additional period of three
years thereafter. We reduced the number of rentable square feet included in the
leased premises from 43,956 square feet to 34,536 square feet.
8.
Recent
Accounting Pronouncements
In September 2006,
the Financial Accounting Standards Board, or FASB, issued SFAS No. 157,
Fair Value Measurements
, which defines fair value, provides
a framework for measuring fair value, and expands the disclosures required for
fair value measurements. SFAS No. 157 applies to other accounting
pronouncements that require fair value measurements; it does not require any
new fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and we adopted it on January 1,
2008. The application of SFAS No. 157 to certain items has been deferred
and will be effective for fiscal years beginning after November 15, 2008
and interim periods within that year.
The adoption of this pronouncement did not have a material impact on our
results of operations or financial position for the three and nine month
periods ended September 30, 2008. We have no assets or liabilities that
were measured using significant unobservable inputs (Level 3 assets and
liabilities) as of September 30, 2008.
Our financial instruments include cash and cash equivalents, investments
in marketable securities, prepaid expenses, accounts payable and accrued
liabilities. The carrying amounts of financial instruments approximate their
fair value due to their short maturities. The carrying values of our cash
equivalents and investments in marketable securities approximate their market
values based on quoted market prices, or Level 1 inputs. We account for
investments in marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
. Investments in marketable securities are classified as
held to maturity and are carried at cost plus accrued interest.
In February 2007,
the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of
FASB Statement No. 115,
which is effective for fiscal years
beginning after November 15, 2007 and we adopted it on January 1,
2008. This statement permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. The adoption of this
pronouncement did not have a material impact on our results of operations or
financial position for the three and nine month periods ended September 30,
2008, as we did not elect to measure any of our financial instruments at fair
value.
In
June 2007, the Emerging Issues Task Force, or EITF, issued a consensus,
EITF 07-3,
Advance Payments for Research and
Development Activities
, which states that non-refundable advance
payments for goods that will be used or services that will be performed in
future research and development activities should be deferred and capitalized
until the goods have been delivered or the related services have been
rendered. EITF 07-3 is to be applied
prospectively for new contractual arrangements entered into in fiscal years
beginning after December 15, 2007 and we adopted it on January 1,
2008. The adoption did not result in a material change to our current
accounting practice.
In November 2007, the EITF issued a consensus,
EITF 07-1,
Accounting for Collaboration
Arrangements Related to the Development and Commercialization of Intellectual
Property
, which is focused on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to
third parties, how sharing payments pursuant to a collaboration agreement
should be presented in the income statement and certain related disclosure
questions. EITF 07-1 is to be applied retrospectively for collaboration
arrangements in fiscal years beginning after December 15, 2008. We currently do not have any such
arrangements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. This Statement
replaces SFAS No. 141,
Business
Combinations,
and requires an acquirer to recognize the assets
acquired, the liabilities assumed, including those arising from contractual
contingencies, any contingent consideration, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement. SFAS No. 141(R) also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the
full amounts of their fair values (or other amounts determined in accordance
with SFAS No. 141(R)). In addition, SFAS No. 141(R)s
11
Table
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requirement to measure the noncontrolling interest in the acquiree at
fair value will result in recognizing the goodwill attributable to the
noncontrolling interest in addition to that attributable to the acquirer. SFAS No. 141(R) amends
SFAS No. 109,
Accounting for Income
Taxes
, to require the acquirer to recognize changes in the amount of
its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the
combination or directly in contributed capital, depending on the circumstances.
It also amends SFAS No. 142,
Goodwill
and Other Intangible Assets
, to, among other things, provide
guidance on the impairment testing of acquired research and development
intangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008. We are currently evaluating the potential impact of this statement. We do not expect any impact on our financial
statements.
In December 2007, the
FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
. SFAS No. 160
amends Accounting Research Bulletin 51,
Consolidated
Financial Statements
, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements.
SFAS No. 160 also changes the way the consolidated income statement is
presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to
the parent and to the noncontrolling interest. SFAS No. 160 requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary.
SFAS No. 160 is effective for fiscal periods, and interim periods within
those fiscal years, beginning on or after December 15, 2008. We are
currently evaluating the potential impact of this statement.
We do not
expect any impact on our financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
. SFAS No. 161
is intended to improve financial reporting about derivative instruments and
hedging activities by requiring companies to enhance disclosure about how these
instruments and activities affect their financial position, performance and
cash flows. SFAS No. 161 also improves the transparency about the location
and amounts of derivative instruments in a companys financial statements and
how they are accounted for under SFAS No. 133. SFAS No. 161 is
effective for financial statements issued for fiscal years beginning after November 15,
2008, and interim periods beginning after that date. We are currently
evaluating the potential impact of this statement.
We do not expect any
impact on our financial statements.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles
.
SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States
of America. SFAS No. 162 is effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board, or PCAOB, amendments to AICPA
Codification of Auditing Standards, AU Section 411,
The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles
.
This amendment was
approved by the PCAOB on September 16, 2008.
We do not anticipate that the adoption of
SFAS No. 162 will materially impact our financial statements.
In June 2008, the FASB issued FASB Staff Position, or FSP, EITF
03-6-1,
Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities, or
FSP EITF 03-6-1, to address
whether instruments granted in share-based payment transactions are
participating securities prior to their vesting and therefore need to be
included in the earnings per share calculation under the two-class method
described in SFAS No. 128,
Earnings per Share
.
This FSP requires companies to treat unvested share-based payment awards that
have non-forfeitable rights to dividends or dividend equivalents as
participating securities and thus, include them in calculations of basic
earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008
.
We do not anticipate that our adoption of FSP EITF 03-6-1 will materially impact our financial
statements or our computation of basic earnings per share upon adoption.
12
Table
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ITEM
2
. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Managements 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 concerning our projected
timelines for the initiation of new trials and announcement of results from our
ongoing clinical trials, including our Phase 2 PROPEL trial; the potential
for the results of our Phase 2 PROPEL trial to support marketing approval of
pralatrexate (PDX); other statements regarding our future product development
and regulatory strategies, including our intent to develop or seek regulatory
approval for our product candidates in specific indications; the ability of our
third-party manufacturing parties to support our requirements for drug supply;
any statements regarding our future financial performance, results of
operations or sufficiency of capital resources to fund our operating requirements;
and any other statements 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 industrys results, levels of activity, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. Factors that may cause or contribute to such
differences include, among other things, those discussed in Part II, Item
1A of this report under the caption Risk Factors. All forward-looking
statements included in this report are based on information available to us as
of the date hereof and we undertake no obligation to revise any forward-looking
statements in order to reflect any subsequent events or circumstances.
Forward-looking statements not specifically described above also may be found
in these and other sections of this report.
Overview
We are a biopharmaceutical company focused on
developing and commercializing innovative small molecule drugs for the
treatment of cancer. Our goal is to build a profitable company by generating
income from products we develop and commercialize, either alone or with one or
more potential strategic partners. We
strive to develop proprietary products that have the potential to improve the
standard of care in cancer therapy. Our
focus is on product opportunities for oncology that leverage our internal
clinical development and regulatory expertise and address important markets
with unmet medical need. We may also seek to grow our existing portfolio of
product candidates through product acquisition and in-licensing efforts.
We currently have two small molecule chemotherapeutic
product candidates in clinical development,
pralatrexate (PDX) and RH1.
Pralatrexate (PDX)
Pralatrexate is a novel,
small molecule chemotherapeutic agent that inhibits dihydrofolate reductase, or
DHFR, a folic acid (folate)-dependent enzyme involved in the building of
nucleic acid, or DNA, and other processes. Pralatrexate
was rationally
designed for efficient transport into tumor cells via the reduced folate carrier,
or RFC-1, and effective intracellular drug retention. We believe these
biochemical features, together with preclinical and clinical data in a variety
of tumors, suggest that pralatrexate may have a favorable safety and efficacy
profile relative to methotrexate and other related DHFR inhibitors. We believe
pralatrexate has the potential to be delivered as a single agent or in
combination therapy regimens.
In August 2006, we initiated PROPEL, an
international, multi-center, open-label, single-arm Phase 2 clinical trial of
pralatrexate in patients with relapsed or refractory peripheral T-cell
lymphoma, or PTCL, that we believe, if positive, will be sufficient to support
the filing of a new drug application, or NDA, to seek marketing approval for
pralatrexate in this indication.
Patients receive 30 mg/m
2
of pralatrexate once every week for six
weeks followed by one week of rest per cycle of treatment. The treatment regimen also includes
vitamin B
12
and folic acid supplementation. The primary
endpoint of the study is objective response rate, either complete or partial
response, which will be assessed by central independent oncology review. Duration of response is the key secondary
endpoint. All patients enrolled in the
trial will continue to be followed for long-term survival.
In July 2006, we reached agreement with the U.S.
Food and Drug Administration, or FDA, under its special protocol assessment, or
SPA, process on the design of this Phase 2 trial. The SPA process allows for FDA evaluation of
a clinical trial
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protocol intended to form the primary basis of an
efficacy claim in support of an NDA, and provides an agreement that the trial
design, including trial size, clinical endpoints and data analyses are
acceptable to the FDA. However, the SPA
agreement is not a guarantee of approval, and we cannot assure you that the
design of, or data collected from, the PROPEL trial will be adequate to
demonstrate the safety and efficacy of pralatrexate for the treatment of
patients with relapsed or refractory PTCL, or otherwise be sufficient to
support FDA or any foreign regulatory approval.
In addition, the response rate, duration of response and safety profile
required to support FDA approval are not specified in the PROPEL trial protocol
and will be subject to FDA review.
In accordance with the PROPEL trial protocol, three
pre-planned interim analyses of safety data and one pre-planned interim
analysis of response data have been conducted.
In January, September and December 2007, we announced that an
independent data monitoring committee, or DMC, completed interim analyses of
safety data from the first 10, 35 and 65 evaluable patients who completed at
least one cycle of treatment with pralatrexate, respectively, and recommended
that the trial continue per the protocol at each analysis. No major safety concerns were identified by
the DMC. In September 2007, we
announced that the results of the interim analysis of patient response data
exceeded the pre-specified threshold for continuation of the trial, which
required a minimum of four responses, either complete or partial responses, out
of the first 35 evaluable patients, as determined by central independent
oncology review.
We completed patient enrollment in the PROPEL trial in
April 2008, with more than 100 evaluable patients enrolled at sites across
the U.S., Canada and Europe. In May 2008, we reported interim response and safety data from the
PROPEL trial. Twenty-nine percent, or 19, of the first 65 evaluable
patients enrolled in the trial, experienced either a complete or partial
response, as assessed by central independent oncology review. Forty-five
percent, or 29, of the first 65 evaluable patients, experienced either a
complete or partial response, as assessed by the PROPEL investigators. Patients
are considered evaluable if they received at least one dose of pralatrexate and
their diagnosis of PTCL has been confirmed by independent review. The median duration of response for these
patients could not be estimated due to the current length of follow-up. The
most common drug related grade 3/4 adverse events were mucositis and
thrombocytopenia, which were observed in 14% and 23% of patients, respectively.
Patients received a median of three prior treatment regimens.
We currently expect to report top line results of the
PROPEL trial at the 50
th
Annual Meeting of the American Society of
Hematology (ASH), taking place December 6-9, 2008 in San Francisco,
California, or the December 2008 ASH conference. Owen OConnor, M.D., Ph.D., is scheduled to
report top line results from PROPEL in an oral presentation titled PROPEL: A
Multi-center Phase 2 Open-label Study of Pralatrexate (PDX) with Vitamin B
12
and Folic Acid Supplementation in Patients with Relapsed or Refractory
Peripheral T-cell Lymphoma (PTCL). Dr. OConnor
is Director of the Lymphoid Development and Malignancy Program and Chief of the
Lymphoma Service at the Irving Comprehensive Cancer Center at Columbia
University Medical Center and is Principal Investigator of the PROPEL
trial. Following our review of the trial
results, we intend to submit a New Drug Application (NDA) for pralatrexate for
the treatment of patients with relapsed or refractory PTCL as expeditiously as
possible.
Our decision to begin PROPEL was based upon interim data from an
ongoing Phase 1/2 single-center, open-label, single-arm study of
pralatrexate in patients with relapsed or refractory non-Hodgkins lymphoma, or
NHL, and Hodgkins disease. Interim data from this trial, which was most
recently presented at the AACR-NCI-EORTC conference in October 2007,
demonstrated a high overall response rate in patients with various subtypes of
T-cell lymphoma. Notably, investigator-assessed responses were observed in 14
of 26 (54%) evaluable patients with T-cell lymphoma, including nine complete
responses and five partial responses. The addition of vitamins to the treatment
regimen appeared to mitigate the occurrence of advanced grade stomatitis, or
mouth ulcers, a toxicity commonly associated with pralatrexate.
In July 2006, the FDA awarded orphan drug designation to
pralatrexate for the treatment of patients with T-cell lymphoma. The FDA may
award orphan drug designation to drugs that target conditions affecting 200,000
or fewer patients per year in the U.S. Under the Orphan Drug Act, if we are the
first company to receive FDA approval for pralatrexate for this orphan drug
indication, we will obtain seven years of marketing exclusivity during which
the FDA may not approve another companys application for the same drug for the
same orphan indication. Orphan drug exclusivity would not prevent FDA approval
of a different drug for the orphan drug indication or the same drug for a
different indication. In October 2006, the FDA granted fast track
designation to pralatrexate for the treatment of patients with T-cell lymphoma.
The fast track program is designed to facilitate the development and expedite
the review of new drugs that are intended to treat serious or life-threatening
conditions and that demonstrate the potential to address unmet medical needs.
In April 2007, the European Commission, with a favorable opinion of the
Committee for Orphan Medicinal Products of the European Medicines Agency, or
EMEA, granted orphan medicinal product designation to pralatrexate for the
treatment of patients with PTCL. The EMEA orphan medicinal product designation,
or OMPD, is intended to promote the development of drugs that may provide
14
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significant benefit to patients suffering from rare diseases identified
notably as life-threatening, chronically debilitating or very serious. Under
European Union regulation, OMPD provides ten years of potential market
exclusivity once the product candidate is approved for marketing for the
designated indication in the European Union, which can be reduced to six years
or terminated in certain circumstances.
We currently have the following clinical trials
involving pralatrexate open for enrollment:
·
a
Phase 2b, randomized, multi-center study comparing pralatrexate and Tarceva®
(erlotinib), both with vitamin B
12
and folic acid supplementation, in patients
with Stage IIIB/IV non-small cell lung cancer, or NSCLC, who are, or have been,
cigarette smokers who have failed treatment with at least one prior
platinum-based chemotherapy regimen. We
initiated patient enrollment in this study in January 2008. The study will
seek to enroll approximately 160 patients in up to 50 investigative sites
worldwide. Based on current enrollment rates, we expect to complete patient
enrollment in this study in the second half of 2009.
·
a
Phase 2, open-label, single-arm, multi-center study of pralatrexate with
vitamin B
12
and folic acid supplementation in patients
with advanced or metastatic relapsed transitional cell carcinoma, or TCC, of
the urinary bladder. We initiated
patient enrollment in this study in July 2008. The study will seek to enroll approximately
41 patients in up to 20 investigative sites worldwide.
·
a
Phase 1/2a, open-label, multi-center study of pralatrexate and gemcitabine with
vitamin B
12
and folic acid
supplementation in patients with relapsed or refractory NHL and Hodgkins
disease. We initiated patient enrollment
in this study in May 2007. We plan
to enroll up to 54 evaluable patients in the Phase 1 portion of the study and
up to 30 additional patients with relapsed or refractory PTCL in the expanded
Phase 2a portion of the study. Interim
data from this study will be presented at the December 2008 ASH
conference.
·
a
Phase 1, open-label, multi-center study of pralatrexate with vitamin B
12
and folic acid
supplementation in patients with relapsed or refractory cutaneous T-cell
lymphoma, or CTCL. We initiated patient
enrollment in this study in August 2007.
We plan to enroll up to 56 evaluable patients in the study, including at
least 20 patients at what we believe to be the optimal dose and schedule. Interim data from this study will be
presented at the December 2008 ASH conference.
·
a
Phase 1/2, open-label, single-center study of pralatrexate with vitamin B
12
and folic acid
supplementation in patients with relapsed or refractory NHL and Hodgkins
disease. This study is currently focused
on exploring alternate dosing and administration schedules in patients with B-cell
lymphoma to further evaluate pralatrexates potential clinical utility in this
setting.
In addition to our ongoing NSCLC and bladder cancer
studies, we are evaluating the potential future development of pralatrexate for
other solid tumor indications, including Stage III/IV head and neck cancer and
Stage III/IV breast cancer, among others.
There can be no assurances that we will pursue the development of
pralatrexate for one or more of these indications or that such development
efforts will be ultimately successful.
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
pralatrexate and its uses. The portfolio currently consists of two issued
patents in the U.S., two granted patents in Europe, and pending patent
applications in the U.S., Canada, Europe, Australia, Japan, China, Brazil,
Indonesia, India, South Korea, Mexico, Norway, New Zealand, the Philippines,
Singapore, and South Africa.
RH1
RH1
is a small molecule chemotherapeutic agent that we believe is bioactivated by
the enzyme DT-diaphorase, or DTD, also known as NAD(P)H quinone oxidoreductase,
or NQ01. We believe DTD is
over-expressed in many tumors, relative to normal tissue, including lung,
colon, breast and liver tumors. We
believe that because RH1 is bioactivated in the presence of DTD, it has the
potential to provide targeted drug delivery to these tumor types while limiting
the amount of toxicity to normal tissue.
In November 2007, we initiated patient enrollment in a
Phase 1, open-label, multi-center dose escalation study of RH1 in patients with
advanced solid tumors or NHL. We plan to
enroll up to 60 evaluable patients in the study with the objective of
15
Table
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determining the maximum tolerated dose, recommended Phase 2
dose and safety profile of RH1 in this population. We plan to enroll three to six patients per
cohort. Once we determine what we believe
to be the optimal dose and schedule, we plan to recruit an expanded cohort of
up to 24 evaluable patients who have tumor types with a high likelihood of DTD
over-expression to explore possible markers of anticancer activity.
In December 2004, we entered into an agreement
with the University of Colorado Health Sciences Center, the University of
Salford and Cancer Research Technology under which we obtained exclusive
worldwide rights to certain intellectual property surrounding RH1.
EFAPROXYN
TM
(efaproxiral)
Development Discontinued
In mid-2007, we discontinued the development of
EFAPROXYN, one of our former product candidates, after announcing top-line
results from ENRICH, a Phase 3 clinical trial of EFAPROXYN plus whole brain
radiation therapy, or WBRT, in women with brain metastases originating from
breast cancer. The study failed to
achieve its primary endpoint of demonstrating a statistically significant
improvement in overall survival in patients receiving EFAPROXYN plus WBRT,
compared to patients receiving WBRT alone.
We are currently pursuing the sale of our rights to EFAPROXYN although
we may not receive any material consideration for any sale.
Results
of Operations
We are a development stage company. Since our
inception in 1992, we have not generated any revenue from product sales and
have experienced significant net losses and negative cash flows from
operations. We have incurred these losses principally from costs incurred in
our research and development programs, clinical manufacturing and from our
marketing, general and administrative expenses. Our ability to generate revenue
and achieve profitability is dependent on our ability, alone or with partners,
to successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. The timing and costs to complete the successful
development of any of our product candidates are highly uncertain, and
therefore difficult to estimate. The lengthy process of seeking regulatory
approvals for our product candidates, and the subsequent compliance with
applicable regulations, require the expenditure of substantial resources.
Clinical development timelines, likelihood of success and total costs vary
widely and are impacted by a variety of risks and uncertainties discussed in
the Risk Factors section of Part II, Item 1A below. Because of
these risks and uncertainties, we cannot predict when or whether we will
successfully complete the development of any of our product candidates or the
ultimate costs of such efforts. Due to these same factors, we cannot be certain
when, or if, we will generate any revenue or net cash inflow from any of our
current product candidates.
Even if our clinical trials demonstrate the safety and
effectiveness of our product candidates in their target indications, we do not
expect to be able to generate commercial sales of any of our product candidates
until the second half of 2009, at the earliest. We expect to continue incurring
net losses and negative cash flows for the foreseeable future. Although the size and timing of our future
net losses are subject to significant uncertainty, we expect them to increase
over the next several years as we continue to fund our research and development
programs and prepare for the potential commercial launch of pralatrexate.
Comparison
of three and nine months ended September 30, 2008 and 2007
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
$
|
6,360,950
|
|
$
|
4,394,726
|
|
$
|
17,738,486
|
|
$
|
12,044,941
|
|
Clinical
manufacturing
|
|
1,727,630
|
|
1,506,255
|
|
4,799,240
|
|
4,038,363
|
|
Marketing,
general and administrative
|
|
5,326,357
|
|
4,240,704
|
|
15,776,485
|
|
14,503,223
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
$
|
13,414,937
|
|
$
|
10,141,685
|
|
$
|
38,314,211
|
|
$
|
30,586,527
|
|
Research
and Development.
Research and development expenses
include the costs of certain personnel, basic research, preclinical studies,
clinical trials, regulatory affairs, biostatistical data analysis and licensing
fees for our product candidates.
Research and development
expenses for the three months ended September 30, 2008 and 2007 were $6.4
million and $4.4
16
Table
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million,
respectively. The $2.0 million increase
in research and development expenses in the three months ended September 30,
2008 as compared to the same period in 2007 was primarily due to the following:
·
a $1.4 million increase in
clinical trial costs involving pralatrexate, including initiation of patient
enrollment in three new trials involving pralatrexate since the start of the
third quarter of 2007; and
·
a $621,000 increase related
to key personnel changes and related travel costs, mainly attributable to
additional headcount and increases in compensation costs year over year.
This increase was
partially offset by a $360,000 decrease related to payment of a non-recurring
data option fee for RH1 in the third quarter of 2007, with no corresponding
amount in the same period in 2008.
Research and development
expenses for the nine months ended September 30, 2008 and 2007 were $17.7
million and $12.0 million, respectively.
The $5.7 million increase in research and development expenses in the
nine months ended September 30, 2008 as compared to the same period in
2007 was primarily due to the following:
·
a $5.8 million increase in
clinical trial costs involving pralatrexate, including increased costs for
PROPEL and initiation of patient enrollment in three new trials involving
pralatrexate since the start of the third quarter of 2007;
·
an $860,000 increase related
to key personnel changes and related travel costs, mainly attributable to
additional headcount and increases in compensation costs year over year; and
·
a $666,000 increase in
non-cash stock-based compensation expense, as discussed in more detail below.
These increases were
partially offset by:
·
a $757,000 decrease in
preclinical study costs, primarily related to pralatrexate;
·
a $585,000 decrease in
clinical trial costs resulting from the discontinuation of the EFAPROXYN
development program in mid-2007; and
·
a $360,000 decrease related
to payment of a non-recurring data option fee for RH1 in the third quarter of
2007, with no corresponding amount in the same period in 2008.
For the fourth quarter of
2008, we expect our research and development expenses to increase relative to
the quarterly average for the nine months ended September 30, 2008 due to
the following:
·
increases in costs for our
ongoing and planned clinical trials and preclinical studies for pralatrexate;
·
increases in licensing costs
for pralatrexate, as a $500,000 milestone payment under the license agreement
for pralatrexate is due in December 2008;
·
an increase in personnel
costs, primarily resulting from additional headcount; and
·
an increase in non-cash
stock-based compensation expense related to grants for new employees.
Clinical
Manufacturing.
Clinical manufacturing expenses include
the costs of certain personnel, third-party manufacturing costs for development
of drug materials for use in clinical trials and preclinical studies, and costs
associated with pre-commercial scale-up of manufacturing to support anticipated
regulatory and potential commercial requirements.
Clinical manufacturing
expenses for the three months ended September 30, 2008 and 2007 were $1.7
million and $1.5 million, respectively.
The $221,000 increase in clinical manufacturing expenses in the three
months ended September 30, 2008 as compared to the same period in 2007 was
primarily due to a $425,000 increase in consulting costs, partially offset by a
$251,000 decrease related to third-party manufacturing costs for pralatrexate.
Clinical manufacturing
expenses for the nine months ended September 30, 2008 and 2007 were $4.8
million and $4.0
17
Table
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million,
respectively. The $761,000 increase in
clinical manufacturing expenses in the nine months ended September 30,
2008 as compared to the same period in 2007 was primarily due to the following:
·
a $611,000 increase in
consulting expenses;
·
a $457,000 increase related
to key personnel changes and related travel costs, mainly attributable to
additional headcount and increases in compensation costs year over year; and
·
a $373,000 increase
primarily related to manufacturing pralatrexate drug substance.
This increase was
partially offset by a $668,000 decrease primarily related to pralatrexate drug
product manufacturing.
For the fourth quarter of
2008, we expect our clinical manufacturing expenses to significantly increase
relative to the quarterly average for the nine months ended September 30,
2008 due to the following:
·
increases in pralatrexate
manufacturing expenses in order to support our requirements for ongoing
clinical trials and pre-commercial scale-up; and
·
an increase in non-cash
stock-based compensation expense related to grants for new employees.
Marketing, General and
Administrative.
Marketing, general and administrative
expenses include costs for pre-marketing activities, corporate development,
executive administration, corporate offices and related infrastructure.
Marketing, general and administrative expenses for the
three months ended September 30, 2008 and 2007 were $5.3 million and $4.2
million, respectively. The $1.1 million
increase in marketing, general and administrative expenses in the three months
ended September 30, 2008 as compared to the same period in 2007 was
primarily due to the following:
·
a $433,000 increase in
pralatrexate portfolio development and commercialization planning activities;
·
a $364,000 increase in
market research and consulting expenses related to pralatrexate; and
·
a $282,000 increase related
to key personnel changes and related travel costs, mainly attributable to
additional headcount and increases in compensation costs year over year.
Marketing, general and administrative expenses for the
nine months ended September 30, 2008 and 2007 were $15.8 million and $14.5
million, respectively. The $1.3 million
increase in marketing, general and administrative expenses in the nine months
ended September 30, 2008 as compared to the same period in 2007 was
primarily due to the following:
·
a $1.0 million increase in
pralatrexate portfolio development and commercialization planning activities;
·
a $377,000 increase related
to key personnel changes and related travel costs, mainly attributable to
additional headcount and increases in compensation costs year over year; and
·
a $316,000 increase in
non-cash stock-based compensation expense, as discussed in more detail below.
This increase was partially offset by a $367,000
decrease in market research and consulting expenses as a result of the
discontinuation of our EFAPROXYN development program in mid-2007.
For the fourth quarter of 2008, we expect our
marketing, general and administrative expenses to significantly increase
relative to the quarterly average for the nine months ended September 30,
2008 due to the following:
·
an increase in personnel
costs, primarily resulting from additional headcount;
·
an increase in costs
relating to the preparation for the potential commercial launch of
pralatrexate; and
·
an increase in non-cash
stock-based compensation expense related to grants for new employees.
18
Table
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Stock-based Compensation
Expense.
Stock-based
compensation expense for the three and nine months ended September 30,
2008 and 2007 has been recognized in our Statements of Operations as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Research and
development
|
|
$
|
609,767
|
|
$
|
473,090
|
|
$
|
1,947,384
|
|
$
|
1,281,501
|
|
Clinical
manufacturing
|
|
98,744
|
|
44,221
|
|
305,756
|
|
127,170
|
|
Marketing,
general and administrative
|
|
1,124,329
|
|
1,141,390
|
|
3,683,359
|
|
3,367,326
|
|
Total
stock-based compensation expense
|
|
$
|
1,832,840
|
|
$
|
1,658,701
|
|
$
|
5,936,499
|
|
$
|
4,775,997
|
|
The $1.8 million of
stock-based compensation recognized in the three months ended September 30,
2008 was primarily related to our stock option plans. Of the $1.7 million of stock-based
compensation recognized in the three months ended September 30, 2007,
$1.5 million was related to our stock option plans and $164,000 related to
restricted stock. The $174,000 increase in stock-based compensation expense in
the three months ended September 30, 2008 as compared to the same period
in 2007 was primarily due to an increase in the number of options granted to
new employees.
Of the $5.9 million of
stock-based compensation recognized in the nine months ended September 30,
2008, $5.6 million was related to our stock option plans, $327,000 related
to restricted stock and $40,000 was related to our employee stock purchase
plan. Of the $4.8 million of
stock-based compensation recognized in the nine months ended September 30,
2007, $4.2 million was related to our stock option plans and $523,000
related to restricted stock. The $1.2 million increase in stock-based
compensation expense in the nine months ended September 30, 2008 as
compared to the same period in 2007 was primarily due to an increase in the
number of options granted to new employees and to existing employees pursuant
to our annual grants that occurred in February 2008.
As of September 30,
2008, the unrecorded stock-based compensation balance related to stock option
awards was $8.0 million and will be recognized over an estimated
weighted-average amortization period of 1.4 years. As of September 30,
2008, the unrecorded stock-based compensation balance related to restricted
stock awards was $425,000 and will be recognized over an estimated
weighted-average amortization period of 1.4 years.
Interest and Other Income, Net
. Interest income for the three months ended September 30,
2008 and 2007 was $254,000 and $844,000, respectively. Interest income, net of interest expense, for
the nine months ended September 30, 2008 and 2007 was $1.3 million and
$2.5 million, respectively. The $589,000
and $1.2 million decreases in net interest income in the three and nine months
ended September 30, 2008 as compared to the same periods in 2007 were
primarily due to lower yields on our cash, cash equivalents and investments in
marketable securities, and a realized loss of approximately $552,000 on the
sale of certain of our investments in marketable securities during the three
months ended September 30, 2008. In
response to the recent instability in the global financial markets, we reviewed
our investments in marketable securities and sold certain investments prior to
their maturity in order to preserve our principal, as the issuers of these
securities experienced significant deteriorations in their creditworthiness as
evidenced by investment rating downgrades.
We currently expect to hold our remaining investments in marketable
securities as of September 30, 2008 to their scheduled maturity, although
we intend to continuously monitor our investment portfolio with the primary
objectives of preserving principal and maintaining proper liquidity to meet our
operating needs.
Liquidity and Capital Resources
Since our inception, we have financed our operations
primarily through public and private sales of our equity securities, which have
resulted in net proceeds to us of $328.0 million through September 30,
2008. We have also generated $22.9
million of net interest income since our inception from investing the net
proceeds of these financings.
As of September 30, 2008, we had $96.4 million in
cash, cash equivalents, and investments in marketable securities. Until required for use in our business, we
invest our cash reserves in bank deposits, money market funds, high-grade
corporate notes and U.S. government instruments in accordance with our
investment policy. As of September 30,
2008, we had short-term investments in marketable securities of $70.5 million
with a weighted average duration of approximately 5.7 months. As of September 30, 2008, we had
long-term investments in marketable securities of $4.5 million with a weighted
average duration of approximately 12.4 months.
Our investments in marketable securities as of September 30, 2008
primarily consisted of high-grade corporate 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, 2008. Our liquidity, capital
resources and results of operations may be adversely affected by future declines
in the value of our investments in marketable securities. The value of our investments in marketable
securities may be adversely affected by rating downgrades or bankruptcies
affecting the issuers of such securities, whether caused by instability in the
global financial markets, lack of liquidity in the credit and capital markets,
or other factors. In response to the
recent instability in the global financial markets, we reviewed our investments
in marketable securities and sold certain investments that we deemed to have
increased risk. We currently expect to
hold our remaining investments in marketable securities as of September 30,
2008 to their scheduled maturity, although we intend to continuously monitor
our investment portfolio with the primary objectives of preserving principal
and maintaining proper liquidity to meet our operating needs.
19
Table
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We have used $226.2 million of cash for operating activities from our
inception through September 30, 2008.
Net cash used to fund our operating activities for the nine months ended
September 30, 2008 and 2007 was $30.7 million and $22.5 million,
respectively.
Net cash used in investing activities for the nine months ended September 30,
2008 was $33.9 million and consisted primarily of the purchase of investments
in marketable securities of $94.0 million, $530,000 for the acquisition of
property and equipment and $238,000 related to the pledging of collateral for a
letter of credit related to a facility lease, partially offset by the proceeds
from maturities and sales of investments in marketable securities. Net cash used in investing activities for the
nine months ended September 30, 2007 was $33.5 million and consisted
primarily of the purchase of investments in marketable securities, partially offset
by the proceeds from maturities of investments in marketable securities.
Net cash provided by financing activities for the nine months ended September 30,
2008 was $70.1 million and consisted primarily of the net proceeds from the
sale of 12,420,000 shares of our common stock in May 2008 in an
underwritten public offering at a price of $5.64 per share (the May 2008
Financing) and $4.9 million of proceeds from the issuance of common stock
associated with stock options exercised by our employees and sales of stock
under our employee stock purchase plan.
We received net proceeds from the May 2008 Financing of
approximately $65.2 million, after deducting $4.2 million of underwriting
commissions and $661,000 of offering expenses.
The shares of common stock were sold under our shelf Registration
Statement on Form S-3, declared effective by the SEC on June 5,
2007. Net cash provided by financing
activities for the nine months ended September 30, 2007 was $53.0 million
and consisted of the net proceeds from the sale of 9,000,000 shares of our
common stock in February 2007 in an underwritten offering at a price of
$6.00 per share (the February 2007 Financing) and $2.7 million of
proceeds from the issuance of common stock associated with stock options exercised
by our employees and sales of stock under our employee stock purchase
plan. We received net proceeds from the February 2007
Financing of approximately $50.3 million, after deducting underwriting
commissions of approximately $3.2 million and other offering expenses of
approximately $503,000. The shares of common stock were sold under our shelf
Registration Statement on Form S-3, declared effective by the SEC on July 10,
2006.
Based upon the current status of our product
development plans, we believe that our cash, cash equivalents, and investments
in marketable securities as of September 30, 2008 should be adequate to
support our operations through at least the next 12 months, although there can
be no assurance that this can, in fact, be accomplished. Our forecast of the
period of time through which our financial resources will be adequate to
support our operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially.
We anticipate continuing
our current development programs and/or beginning other long-term development
projects involving our product candidates. These projects may require many
years and substantial expenditures to complete and may ultimately be
unsuccessful. In addition, following our
review of the results of the PROPEL trial, we intend to submit an NDA for
pralatrexate for the treatment of patients with relapsed or refractory PTCL as
expeditiously as possible. We expect to
incur significant costs relating to preparations for the potential commercial
launch of pralatrexate, including pre-commercial scale up of manufacturing and
development of sales and marketing capabilities, prior to the receipt of
regulatory approval to market pralatrexate.
Therefore, we will need to raise additional capital to support our
future operations, including the potential commercialization of pralatrexate if
approved for marketing. Our actual
capital requirements will depend on many factors, including:
·
the
timing and outcome of our ongoing PROPEL trial;
·
the
timing and costs associated with conducting preclinical and clinical
development of our product candidates, as well as our evaluation of, and
decisions with respect to, additional therapeutic indications for which we may
develop our product candidates;
·
the
timing and costs associated with developing sales and marketing capabilities
and commercializing our product candidates, if approved for marketing;
·
the
timing and costs associated with manufacturing preclinical, clinical and
commercial supplies of our product candidates;
·
the
timing and amount of revenues generated by our business activities, if any; and
·
our evaluation of, and
decisions with respect to, potential in-licensing or product acquisition
opportunities or other strategic alternatives.
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We may seek to obtain this additional capital through
arrangements with corporate partners, equity or debt financings, or from other
sources. Such arrangements, if successfully consummated, may be dilutive to our
existing stockholders. However, there is no assurance that 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 particular,
the current instability in the global financial markets and lack of liquidity
in the credit and capital markets may adversely affect our ability to secure
adequate capital to support our future operations. In the event that additional funds are
obtained through arrangements with collaborative partners or other sources,
such arrangements may require us to relinquish rights to some of our
technologies, product candidates or products under development that we would
otherwise seek to develop or commercialize ourselves on terms that are less
favorable than might otherwise be available.
If we are unable to generate meaningful amounts of revenue from future
product sales, if any, or cannot otherwise raise sufficient additional funds to
support our operations, we may be required to delay, reduce the scope of or
eliminate one or more of our development programs and our business and future
prospects for revenue and profitability may be harmed.
Obligations
and Commitments
Royalty and License Fee Commitments for Pralatrexate
(PDX)
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 pralatrexate 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 are also required to make certain additional cash payments
based upon the achievement of certain clinical development or regulatory
milestones or the passage of certain time periods. To date, we have made
aggregate milestone payments of $2.0 million based on the passage of time. In
the future, we could make aggregate milestone payments of $1.0 million upon the
earlier of achievement of a clinical development milestone or the passage of
certain time periods (the Clinical Milestone), and up to $10.3 million upon
achievement of certain regulatory milestones, including regulatory approval to
market pralatrexate in the U.S. or Europe. The next scheduled payments toward
the Clinical Milestone of $500,000 each are currently due on December 23,
2008 and 2009. The up-front license fee and all milestone payments under the
agreement have been or will be recorded to research and development expense
when incurred. Under the terms of the agreement, we are required to fund all
development programs and will have sole responsibility for all
commercialization activities. In addition, we will pay the licensors a royalty
based on a percentage of net revenues arising from sales of the product or
sublicense revenues arising from sublicensing the product, if and when such
sales or sublicenses occur.
Lease
Commitments
On June 16, 2008, we
entered into an amendment to the lease agreement for our corporate headquarters
facility. As part of the amendment we
extended the term of the lease from November 1, 2008 for a period of 39
months to expire January 31, 2012. We also will have the right,
subject to the terms of the amendment, to extend the term of the lease
agreement for one additional period of three years thereafter. We reduced the
number of rentable square feet included in the leased premises from 43,956
square feet to 34,536 square feet.
Critical
Accounting Policies
Our discussion and
analysis of our financial condition and results of operations are based upon
our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, and expenses. We base our estimates on historical
experience, available information and assumptions that we believe to be
reasonable under the circumstances.
Actual results may differ from these estimates under different
assumptions or conditions. For a
description of our critical accounting policies, please see our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007, as amended.
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Recent
Accounting Pronouncements
For a description of our
recent accounting pronouncements, please see Note 8 of the unaudited September 30,
2008 financial statements included herein.
ITEM 3
. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our financial instruments as of September 30,
2008 consisted of cash, cash equivalents, investments in marketable securities,
and accounts payable. All highly liquid
investments with original maturities of three months or less are considered to
be cash equivalents. We invest in
marketable securities in accordance with our investment policy. The primary objectives of our investment
policy are to preserve principal, maintain proper liquidity to meet operating
needs and maximize yields. Our
investment policy specifies credit quality standards for our investments and
limits the amount of credit exposure to any single issue, issuer or type of
investment. The average duration of the
issues in our portfolio of investments in marketable securities as of September 30,
2008 was approximately six months. As of
September 30, 2008, our investments in marketable securities of
$75.0 million were all classified as held-to-maturity and were held in a
variety of interest-bearing instruments, consisting mainly of high-grade
corporate 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, 2008. The value of our investments in marketable securities
may be adversely affected by rating downgrades or bankruptcies affecting the
issuers of such securities, whether caused by instability in the global
financial markets, lack of liquidity in the credit and capital markets, or
other factors. In response to the recent
instability in the global financial markets, we reviewed our investments in
marketable securities and sold certain investments that we deemed to have
increased risk. We currently expect to
hold our remaining investments in marketable securities as of September 30,
2008 to their scheduled maturity, although we intend to continuously monitor
our investment portfolio with the primary objectives of preserving principal
and maintaining proper liquidity to meet our operating needs.
Investments in fixed-rate
interest-earning instruments carry varying degrees of interest rate risk. The fair market value of our fixed-rate
securities may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities
are subject to greater interest-rate risk than those with shorter
maturities. Due in part to this factor,
our interest income may fall short of expectations or we may suffer losses in
principal if securities are sold that have declined in market value due to
changes in interest rates. Due to the
short duration of our investment portfolio, we believe an immediate 10% change
in interest rates would not be material to our financial condition or results
of operations.
ITEM 4
. CONTROLS AND PROCEDURES
As of the end of the
period covered by this report, an evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer (the Evaluating
Officers), of the effectiveness of our disclosure controls and procedures, as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on
that evaluation, our management, including the Evaluating Officers, concluded
that our disclosure controls and procedures were effective as of September 30,
2008 to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management,
including the Evaluating Officers, as appropriate, to allow timely decisions
regarding required disclosure.
No
Changes in Internal Control over Financial Reporting
There were no changes in
our internal controls over financial reporting during the three months ended September 30,
2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and one of its former officers were named
as defendants in a purported securities class action lawsuit filed in May 2004
in the U.S. District Court for the District of Colorado (the District Court).
An amended complaint was filed in August 2004.
The lawsuit was brought on behalf of a purported class of purchasers of our
securities during the period from May 29, 2003 to April 29, 2004, and
sought unspecified damages relating to the issuance of allegedly false and
misleading statements regarding EFAPROXYN, one of our former product
candidates, during this period and subsequent declines in our stock price. On October 20, 2005, the District Court
granted the defendants motion to dismiss the lawsuit with prejudice. In an
opinion dated October 20, 2005, the District Court concluded that the
plaintiffs complaint failed to meet the legal requirements applicable to its
alleged claims.
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On November 20,
2005, the plaintiffs appealed the District Courts decision to the U.S. Court
of Appeals for the Tenth Circuit (the Court of Appeals). On February 6,
2008, the parties signed a stipulation of settlement, settling the case for
$2,000,000. The settlement is subject to various conditions, including
without limitation approval of the District Court. On September 15, 2008, the District
Court issued an order preliminarily approving the settlement and scheduling a
hearing on January 21, 2009 to consider final approval of the
settlement. Neither we nor our former
officer admits any liability in connection with the settlement. The amount of the settlement in excess of our
deductible has been covered by our insurance carrier. In the event the settlement does not become
final, we intend to vigorously defend against the plaintiffs appeal. If the Court of Appeals then were to reverse
the District Courts decision and we were not successful in our defense of such
claims, we could be forced to make significant payments to the plaintiffs, and
such payments could have a material adverse effect on our business, financial
condition, results of operations and cash flows to the extent such payments are
not covered by our insurance carriers. Even if our defense against such claims were
successful, the litigation could result in substantial costs and divert
managements attention and resources, which could adversely affect our
business. As of September 30, 2008, we have recorded $2,000,000 in accrued
litigation settlement costs, which represents our best estimate of the
potential gross amount of the settlement costs to be paid to the plaintiffs,
and $2,000,000 in prepaid expenses and other assets, which represents the
approximately $235,000 of remaining deductible under our insurance policy paid
by us and $1,765,000 paid by our insurance carrier into the settlement fund
escrow in September 2008. A claims
administrator appointed by the parties will administer the distribution of the
settlement fund to authorized claimants in 2009.
ITEM 1A. RISK
FACTORS
Our
business faces significant risks. These risks include those described below and
may include additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or circumstances
described in the following risk factors actually occurs, they may materially
harm our business, financial condition, operating results and cash flow. As a
result, the market price of our common stock could decline. Additional risks
and uncertainties that are not yet identified or that we think are immaterial
may also materially harm our business, operating results and financial
condition.
Stockholders and potential investors in
shares of our common stock should carefully consider the following risk
factors, which hereby update those risks contained in the Risk Factors
section of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2007, in
addition to other information and risk factors in this report. We are identifying these risk factors as
important factors that could cause our actual results to differ materially from
those contained in any written or oral forward-looking statements made by or on
behalf of the Company. We are relying
upon the safe harbor for all forward-looking statements in this report, and any
such statements made by or on behalf of the Company are qualified by reference
to the following cautionary statements, as well as to those set forth elsewhere
in this report. We consistently update and include our risk factors in our
Quarterly Reports on Form 10-Q. Risk factors that have been substantively
changed from those set forth in our Annual Report on Form 10-K for the
period ended December 31, 2007, as amended, have been marked with an
asterisk immediately following the heading of such risk factor.
We have a history of net losses and an accumulated
deficit, and we may never generate revenue or achieve or maintain profitability
in the future. *
Since our inception in 1992, we have not generated any
revenue from product sales and have experienced significant net losses and
negative cash flows from operations. To date, we have financed our operations
primarily through the private and public sale of securities. For the nine months ended September 30,
2008, we had a net loss of $37.0 million.
As of September 30, 2008, we had accumulated a deficit during our
development stage of $284.9 million.
We have incurred these losses principally from costs incurred in our
research and development programs, clinical manufacturing and from our
marketing, general and administrative expenses. We expect to continue incurring
net losses for the foreseeable future. Our ability to generate revenue and
achieve profitability is dependent on our ability, alone or with partners, to
successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. We may never generate revenue from product sales
or become profitable. We expect to continue to spend substantial amounts on
research and development, including amounts spent on conducting clinical trials
for our product candidates, and in preparing for the potential commercial
launch of our product candidates. We may not be able to continue as a going
concern if we are unable to generate meaningful amounts of revenue to support
our operations or cannot otherwise raise the necessary funds to support our
operations.
Our near-term prospects are substantially
dependent on pralatrexate (PDX), our lead product candidate. If we are
unable to successfully develop and obtain regulatory approval for pralatrexate
for the treatment of patients with relapsed or refractory PTCL, our ability to
generate revenue will be significantly delayed.
*
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We currently have no products that are approved for
commercial sale. Our product candidates are in various stages of development,
and significant research and development, financial resources and personnel
will be required to develop commercially viable products, obtain the necessary
regulatory approvals therefor, and successfully commercialize them. Most of our
efforts and expenditures over the next few years will be devoted to
pralatrexate (PDX). Accordingly, our future prospects are substantially
dependent on the successful development, regulatory approval and
commercialization of pralatrexate for the treatment of patients with relapsed
or refractory PTCL. Even if we receive regulatory approval, pralatrexate is not
expected to be commercially available for this or any other indication until at
least the second half of 2009. RH1 is in an earlier stage of development
relative to pralatrexate, and if both pralatrexate and RH1 are approved for
marketing, we expect that RH1 would not be commercially available until after
pralatrexate is commercially available. Further, certain of the indications
that we are pursuing have relatively low incidence rates, which may make it
difficult for us to enroll a sufficient number of patients in our clinical
trials on a timely basis, or at all, and may limit the revenue potential of our
product candidates. If we are unable to successfully develop, obtain regulatory
approval for and commercialize pralatrexate for the treatment of patients with
relapsed or refractory PTCL, our ability to generate revenue from product sales
will be significantly delayed and our stock price would likely decline.
We cannot predict when or if we will obtain regulatory
approval to commercialize our product candidates. *
Our product candidates are in the preclinical and
clinical stages of development and have not been approved for marketing in the
U.S. or any other country. A pharmaceutical product cannot be marketed in the
U.S. or most other countries until it has completed a rigorous and extensive
regulatory review and approval process. If we fail to obtain regulatory
approval to market our product candidates, we will be unable to sell our
products and generate revenue, which would jeopardize our ability to continue operating
our business. Satisfaction of regulatory requirements typically takes many
years, is dependent upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Of particular significance
are the requirements covering research and development, testing, manufacturing,
quality control, labeling and promotion of drugs for human use. We may not
obtain regulatory approval for any product candidates we develop, including
pralatrexate, or we may not obtain regulatory review of such product candidates
in a timely manner. For a complete description of the regulatory approval
process and related risks, please refer to the Government Regulation section
of Item 1 of our Annual Report on Form 10-K for the year ended December 31,
2007, as amended.
If our product candidates, including pralatrexate,
fail to meet safety and efficacy endpoints in clinical trials, they will not
receive regulatory approval and we will be unable to market them. *
Our product candidates
may not prove to be safe and efficacious in clinical trials and may not meet
all of the applicable regulatory requirements needed to receive regulatory
approval. The clinical development and regulatory approval process is extremely
expensive and takes many years. Failure can occur at any stage of development,
and the timing of any regulatory approval cannot be accurately predicted. In
addition, failure to comply with the FDA and other applicable U.S. and foreign
regulatory requirements applicable to clinical trials may subject us to
administrative or judicially imposed sanctions.
As part of the regulatory
process, we must conduct clinical trials for each product candidate to
demonstrate safety and efficacy to the satisfaction of the FDA and other
regulatory authorities abroad. The number and design of clinical trials that
will be required varies depending on the product candidate, the condition being
evaluated, the trial results and regulations applicable to any particular
product candidate. The design of our clinical trials is based on many
assumptions about the expected effect of our product candidates, and if those
assumptions prove incorrect, the clinical trials may not demonstrate the safety
or efficacy of our product candidates. Preliminary results may not be confirmed
upon full analysis of the detailed results of a trial, and prior clinical trial
program designs and results may not be predictive of future clinical trial
designs or results. Product candidates in later stage clinical trials may fail
to show the desired safety and efficacy despite having progressed through
initial clinical trials with acceptable endpoints. For example, we terminated
the development of EFAPROXYN, one of our former product candidates, when it
failed to demonstrate statistically significant improvement in overall survival
in the targeted patients in a Phase 3 clinical trial. If our product
candidates fail to show clinically significant benefits, they will not be
approved for marketing.
Even if we achieve positive interim results in clinical
trials, these results do not necessarily predict final results, and acceptable
results in early trials may not be repeated in later trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
that could delay, limit or prevent regulatory clearances, and the FDA can
request that we conduct additional clinical trials. A number of companies in
the pharmaceutical industry have suffered significant
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setbacks in advanced clinical trials, even after
promising results in earlier trials. As a result, there can be no assurance
that our PROPEL trial will achieve its primary or secondary endpoints. In
addition, negative or inconclusive results or adverse medical events during a
clinical trial could cause a clinical trial to be repeated or terminated. Also,
failure to construct clinical trial protocols to screen patients for risk
profile factors relevant to the trial for purposes of segregating patients into
the patient populations treated with the drug being tested and the control
group could result in either group experiencing a disproportionate number of
adverse events and could cause a clinical trial to be repeated or terminated.
If we have to conduct additional clinical trials, whether for pralatrexate or
any other product candidate, it would significantly increase our expenses and
delay potential marketing of our product candidates.
We completed patient
enrollment in our pivotal Phase 2 PROPEL trial in April 2008. We
cannot assure you that the design of, or data collected from, the PROPEL trial
will be adequate to demonstrate the safety and efficacy of pralatrexate for the
treatment of patients with relapsed or refractory PTCL, or otherwise be
sufficient to support FDA or any foreign regulatory approval. If the PROPEL
trial fails to achieve its safety and efficacy endpoints, we may be unable to
obtain regulatory approval to commercialize pralatrexate, and our business and
stock price would be harmed. Further, even if we believe the data from the
trial are positive, the FDA may disagree with our interpretation and determine
that the data are not sufficient to support approval. If we fail to obtain
regulatory approval for pralatrexate or any of our other current or future
product candidates, we will be unable to market and sell them and therefore may
never generate meaningful amounts of revenue or become profitable.
We may experience delays in our clinical trials that
could adversely affect our financial position and our commercial prospects.
We do not know when our
current clinical trials, including our PROPEL trial, will be completed, if at
all. We also cannot accurately predict when other planned clinical trials will
begin or be completed. Many factors affect patient enrollment, including the
size of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the trial, competing clinical trials and new drugs
approved for the conditions we are investigating. Other companies are
conducting clinical trials and have announced plans for future trials that are
seeking or likely to seek patients with the same diseases as those we are
studying. Competition for patients in some cancer trials is particularly
intense because of the limited number of leading specialist physicians and the
geographic concentration of major clinical centers.
As a result of the
numerous factors that can affect the pace of progress of clinical trials, our
trials may take longer to enroll patients than we anticipate, if they can be
completed at all. Delays in patient enrollment in the trials may increase our
costs and slow our product development and approval process. Our product
development costs will also increase if we need to perform more or larger
clinical trials than planned. If other companies product candidates show
favorable results, we may be required to conduct additional clinical trials to
address changes in treatment regimens or for our products to be commercially
competitive. Any delays in completing our clinical trials will delay our
ability to generate revenue from product sales, and we may have insufficient
capital resources to support our operations. Even if we do have sufficient
capital resources, our ability to become profitable will be delayed.
While we have negotiated a special protocol assessment
with the FDA relating to our PROPEL trial, this agreement does not guarantee
any particular outcome from regulatory review of the trial or the product,
including any regulatory approval. *
The protocol for the PROPEL trial was reviewed by the
FDA under its special protocol assessment, or SPA process, which allows for FDA
evaluation of a clinical trial protocol intended to form the primary basis of
an efficacy claim in support of a new drug application, and provides an
agreement that the study design, including trial size, clinical endpoints and
data analyses are acceptable to the FDA. However, the SPA agreement is not a
guarantee of approval, and we cannot be certain that the design of, or data
collected from, the PROPEL trial will be adequate to demonstrate the safety and
efficacy of pralatrexate for the treatment of patients with relapsed or
refractory PTCL, or otherwise be sufficient to support FDA or any foreign
regulatory approval. In addition, the
response rate, duration of response and safety profile required to support FDA
approval are not specified in the PROPEL trial protocol and will be subject to
FDA review. Further, the SPA agreement is not binding on the FDA if public
health concerns unrecognized at the time the SPA agreement was entered into
become evident, other new scientific concerns regarding product safety or
efficacy arise, or if we fail to comply with the agreed upon trial protocols.
In addition, the SPA agreement may be changed by us or the FDA on written
agreement of both parties, and the FDA retains significant latitude and
discretion in interpreting the terms of the SPA agreement and the data and
results from the PROPEL trial. As a result, we do not know how the FDA will
interpret the parties respective commitments under the SPA agreement, how it
will interpret the data and results from the PROPEL trial, or whether
pralatrexate will receive any
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regulatory approvals as a result of the SPA agreement
or the PROPEL trial. Therefore, despite the potential benefits of the SPA
agreement, significant uncertainty remains regarding the clinical development
and regulatory approval process for pralatrexate for the treatment of patients
with relapsed or refractory PTCL.
We may be required to suspend, repeat or terminate our
clinical trials if they are not conducted in accordance with regulatory
requirements, the results are negative or inconclusive or the trials are not
well designed. *
Clinical trials must be
conducted in accordance with the FDAs current Good Clinical Practices or other
applicable foreign government guidelines and are subject to oversight by the
FDA, other foreign governmental agencies and Institutional Review Boards, or
IRBs, at the medical institutions where the clinical trials are conducted. In
addition, clinical trials must be conducted with product candidates produced
under the FDAs current Good Manufacturing Practices, or cGMP, and may require
large numbers of test subjects. Clinical trials may be suspended by the FDA,
other foreign governmental agencies, or us for various reasons, including:
·
deficiencies
in the conduct of the clinical trials, including failure to conduct the
clinical trial in accordance with regulatory requirements or clinical
protocols;
·
deficiencies
in the clinical trial operations or trial sites;
·
the
product candidate may have unforeseen adverse side effects;
·
the
time required to determine whether the product candidate is effective may be
longer than expected;
·
fatalities
or other adverse events arising during a clinical trial due to medical problems
that may not be related to clinical trial treatments;
·
the
product candidate may not appear to be more effective than current therapies;
·
the
quality or stability of the product candidate may fall below acceptable
standards; or
·
we
may not be able to produce sufficient quantities of the product candidate to
complete the trials.
In addition, changes in
regulatory requirements and guidance may occur and we may need to amend
clinical trial protocols to reflect these changes. Amendments may require us to
resubmit our clinical trial protocols to IRBs for reexamination, which may
impact the costs, timing or successful completion of a clinical trial. Due to
these and other factors, our current product candidates or any of our other
future product candidates could take a significantly longer time to gain
regulatory approval than we expect or may never gain approval, which could
reduce or eliminate our revenue by delaying or terminating the potential
commercialization of our product candidates.
Reports of adverse events or safety concerns involving
our product candidates or in related technology fields or other companies
clinical trials could delay or prevent us from obtaining regulatory approval or
negatively impact public perception of our product candidates.
Our product candidates may produce serious adverse
events. These adverse events could interrupt, delay or halt clinical trials of
our product candidates and could result in the FDA or other regulatory
authorities denying approval of our product candidates for any or all targeted
indications. An independent data safety monitoring board, the FDA, other
regulatory authorities or we may suspend or terminate clinical trials at any
time. We cannot assure you that any of our product candidates will be safe for
human use.
At present, there are a number of clinical trials
being conducted by other pharmaceutical companies involving small molecule
chemotherapeutic agents. If other pharmaceutical companies announce that they
observed frequent adverse events or unknown safety issues in their trials
involving compounds similar to, or competitive with, our product candidates, we
could encounter delays in the timing of our clinical trials or difficulties in
obtaining the approval of our product candidates. In addition, the public perception
of our product candidates might be adversely affected, which could harm our
business and results of operations and cause the market price of our common
stock to decline, even if the concern relates to another companys product or
product candidate.
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Due to our reliance on contract research organizations
and other third parties to conduct our clinical trials, we are unable to
directly control the timing, conduct and expense of our clinical trials.
We rely primarily on third parties to conduct our
clinical trials, including the PROPEL trial. As a result, we have had and will
continue to have less control over the conduct of our clinical trials, the
timing and completion of the trials, the required reporting of adverse events
and the management of data developed through the trial than would be the case
if we were relying entirely upon our own staff. Communicating with outside
parties can also be challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties may have staffing
difficulties, may undergo changes in priorities or may become financially
distressed, adversely affecting their willingness or ability to conduct our
trials. We may experience unexpected cost increases that are beyond our
control. Problems with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the relationship and use
an alternative service provider. However, making this change may be costly and
may delay our trials, and contractual restrictions may make such a change
difficult or impossible. Additionally, it may be impossible to find a replacement
organization that can conduct our trials in an acceptable manner and at an
acceptable cost.
Even if our product candidates meet safety and
efficacy endpoints in clinical trials, regulatory authorities may not approve
them, or we may face post-approval problems that require withdrawal of our
products from the market. *
The research, testing, manufacturing, labeling, approval, selling,
marketing and distribution of drug products are subject to extensive regulation
by the FDA and other regulatory authorities in the U.S. and other countries,
which regulations differ from country to country. We will not be able to
commercialize any of our product candidates until we have obtained regulatory
approval. We have limited experience in filing and pursuing applications
necessary to gain regulatory approvals, which may place us at risk of delays,
overspending and human resources inefficiencies.
Our product candidates
may not be approved even if they achieve their endpoints in clinical trials.
Regulatory agencies, including the FDA, or their advisors, may disagree with
our interpretations of data from preclinical studies and clinical trials. The
FDA has substantial discretion in the approval process, and when or whether
regulatory approval will be obtained for any drug we develop. For example, even
though we established an SPA with the FDA for our PROPEL trial, there is no
guarantee that the data generated from the PROPEL trial will be adequate to
support FDA approval. Regulatory agencies also may approve a product candidate
for fewer conditions than requested or may grant approval subject to the
performance of post-marketing studies or risk evaluation and mitigation strategies
(REMS) for a product candidate. In addition, regulatory agencies may not
approve the labeling claims that are necessary or desirable for the successful
commercialization of our product candidates.
Even if we receive regulatory approvals, our product
candidates may later produce adverse events that limit or prevent their
widespread use or that force us to withdraw those product candidates from the
market. In addition, a marketed product continues to be subject to strict
regulation after approval and may be required to undergo post-approval studies.
Any unforeseen problems with an approved product or any violation of
regulations could result in restrictions on the product, including its
withdrawal from the market. Any delay in or failure to receive or maintain
regulatory approval for any of our products could harm our business and prevent
us from ever generating meaningful revenues or achieving profitability.
Even if we receive regulatory approval for our product
candidates, we will be subject to ongoing regulatory obligations and review. *
Following any regulatory approval of our product candidates,
we will be subject to continuing regulatory obligations such as safety
reporting requirements and additional post-marketing obligations, including
regulatory oversight of the promotion and marketing of our products. In
addition, we or our third-party manufacturers will be required to adhere to
regulations setting forth cGMP. These regulations cover all aspects of the
manufacturing, storage, testing, quality control and record keeping relating to
our product candidates. Furthermore, we or our third-party manufacturers must
pass a pre-approval inspection of manufacturing facilities by the FDA and
foreign authorities before obtaining marketing approval and will be subject to
periodic inspection by these regulatory authorities to ensure strict compliance
with cGMP or other applicable government regulations and corresponding foreign
standards. We do not have control over a third-party manufacturers compliance
with these regulations and standards. Such inspections may result in compliance
issues that could prevent or delay marketing approval, or require the
expenditure of substantial financial or other resources to address. If we or
our third-party manufacturers fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution.
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Budget constraints may force us to delay our efforts
to develop certain product candidates in favor of developing others, which may
prevent us from commercializing all product candidates as quickly as possible.
Because we have limited resources, and because
research and development is an expensive process, we must regularly assess the
most efficient allocation of our research and development budget. As a result,
we may have to prioritize development candidates and may not be able to fully
realize the value of some of our product candidates in a timely manner, if at
all.
We will need to
raise additional capital to support our future operations. If we fail to obtain the capital necessary to
fund our operations, we will be unable to successfully develop or commercialize
our product candidates. *
Based upon the current
status of our product development plans, we believe that our cash, cash
equivalents, and investments in marketable securities as of September 30, 2008
should be adequate to support our operations through at least the next 12
months, although there can be no assurance that this can, in fact, be
accomplished. We anticipate continuing
our current development programs and/or beginning other long-term development
projects involving our product candidates. These projects may require many
years and substantial expenditures to complete and may ultimately be
unsuccessful. In addition, following our
review of the results of the PROPEL trial, we intend to submit an NDA for
pralatrexate for the treatment of patients with relapsed or refractory PTCL as
expeditiously as possible. We expect to
incur significant costs relating to preparations for the potential commercial
launch of pralatrexate, including pre-commercial scale up of manufacturing and
development of sales and marketing capabilities, prior to the receipt of
regulatory approval to market pralatrexate.
Therefore, we will need to raise additional capital to support our
future operations, including the potential commercialization of pralatrexate if
approved for marketing. Our actual
capital requirements will depend on many factors, including:
·
the
timing and outcome of our ongoing PROPEL trial;
·
the
timing and costs associated with conducting preclinical and clinical
development of our product candidates, as well as our evaluation of, and
decisions with respect to, additional therapeutic indications for which we may
develop our product candidates;
·
the
timing and costs associated with developing sales and marketing capabilities
and commercializing our product candidates, if approved for marketing;
·
the
timing and costs associated with manufacturing preclinical, clinical and
commercial supplies of our product candidates;
·
the
timing and amount of revenues generated by our business activities, if any; and
·
our
evaluation of, and decisions with respect to, potential in-licensing or product
acquisition opportunities or other strategic alternatives.
We may seek to obtain this additional capital through arrangements with
corporate partners, equity or debt financings, or from other sources. Such
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that 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 particular, the current
instability in the global financial markets and lack of liquidity in the credit
and capital markets may adversely affect our ability to secure adequate capital
to support our future operations. In the
event that additional funds are obtained through arrangements with
collaborative partners or other sources, such arrangements may require us to
relinquish rights to some of our technologies, product candidates or products
under development that we would otherwise seek to develop or commercialize
ourselves on terms that are less favorable than might otherwise be
available. If we are unable to generate
meaningful amounts of revenue from future product sales, if any, or cannot
otherwise raise sufficient additional funds to support our operations, we may
be required to delay, reduce the scope of or eliminate one or more of our
development programs and our business and future prospects for revenue and profitability
may be harmed.
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Our liquidity, capital resources and results of
operations may be adversely affected by declines in the value of our
investments in marketable securities. *
As of September 30,
2008, we had $96.4 million in cash, cash equivalents, and investments in
marketable securities. Until required
for use in our business, we invest our cash reserves in bank deposits, money
market funds, high-grade corporate notes and U.S. government instruments in
accordance with our investment policy.
As of September 30, 2008, we had short-term investments in
marketable securities of $70.5 million with a weighted average duration of
approximately 5.7 months. As of September 30,
2008, we had long-term investments in marketable securities of $4.5 million
with a weighted average duration of approximately 12.4 months. Our investments in marketable securities as of
September 30, 2008 primarily consisted of high-grade corporate 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,
2008.
Based upon the current
status of our product development plans, we believe that our cash, cash
equivalents, and investments in marketable securities as of September 30,
2008 should be adequate to support our operations through at least the next 12
months, although there can be no assurance that this can, in fact, be
accomplished. In particular, our
liquidity, capital resources and results of operations may be adversely
affected by declines in the value of our investments in marketable
securities. The value of our investments
in marketable securities may be adversely affected by rating downgrades or
bankruptcies affecting the issuers of such securities, whether caused by
instability in the global financial markets, lack of liquidity in the credit
and capital markets, or other factors.
For example, during the three months ended September 30, 2008, we
realized a loss of approximately $552,000 on the sale of certain of our
investments in marketable securities, which were sold in order to preserve our
principal as the issuers of these securities experienced significant
deteriorations in their creditworthiness as evidenced by investment rating
downgrades. We currently expect to hold
our remaining investments in marketable securities as of September 30,
2008 to their scheduled maturity, although we intend to continuously monitor
our investment portfolio with the primary objectives of preserving principal
and maintaining proper liquidity to meet our operating needs.
If we are unable to effectively protect our
intellectual property, we will be unable to prevent third parties from using
our technology, which would impair our competitiveness and ability to
commercialize our product candidates. In addition, enforcing our proprietary
rights may be expensive and result in increased losses. *
Our success will depend
in part on our ability to obtain and maintain meaningful patent protection for
our products, both in the U.S. and in other countries. We rely on patents to
protect a large part of our intellectual property and our competitive position.
Any patents issued to or licensed by us could be challenged, invalidated,
infringed, circumvented or held unenforceable, based on, among other things,
obviousness, inequitable conduct, anticipation or enablement. In addition, it
is possible that no patents will issue on any of our licensed patent
applications. It is possible that the claims in patents that have been issued
or licensed to us or that may be issued or licensed to us in the future will
not be sufficiently broad to protect our intellectual property or that the
patents will not provide protection against competitive products or otherwise
be commercially valuable. Failure to obtain and maintain adequate patent protection
for our intellectual property would impair our ability to be commercially
competitive.
Our commercial success
will also depend in part on our ability to commercialize our product candidates
without infringing patents or other proprietary rights of others or breaching
the licenses granted to us. We may not be able to obtain a license to
third-party technology that we may require to conduct our business or, if
obtainable, we may not be able to license such technology at a reasonable cost.
If we fail to obtain a license to any technology that we may require to
commercialize our technologies or product candidates, or fail to obtain a
license at a reasonable cost, we will be unable to commercialize the affected
product or to commercialize it at a price that will allow us to become
profitable.
In addition to patent
protection, we also rely upon trade secrets, proprietary know-how and
technological advances that we seek to protect through confidentiality
agreements with our collaborators, employees and consultants. Our employees and
consultants are required to enter into confidentiality agreements with us. We
also enter into non-disclosure agreements with
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our collaborators and
vendors, which agreements are intended to protect our confidential information
delivered to third parties for research and other purposes. However, these
agreements could be breached and we may not have adequate remedies for any
breach, or our trade secrets and proprietary know-how could otherwise become
known or be independently discovered by others.
Furthermore, as with any pharmaceutical company, our
patent and other proprietary rights are subject to uncertainty. Our patent
rights related to our product candidates might conflict with current or future
patents and other proprietary rights of others. For the same reasons, the
products of others could infringe our patents or other proprietary rights.
Litigation or patent interference proceedings, either of which could result in
substantial costs to us, may be necessary to enforce any of our patents or
other proprietary rights, or to determine the scope and validity or
enforceability of other parties proprietary rights. We may be dependant on
third parties, including our licensors, for cooperation and information that
may be required in connection with the defense and prosecution of our patents
and other proprietary rights. The defense and prosecution of patent and
intellectual property infringement claims are both costly and time consuming,
even if the outcome is favorable to us. Any adverse outcome could subject us to
significant liabilities to third parties, require disputed rights to be licensed
from third parties, or require us to cease selling our future products. We are
not currently a party to any patent or other intellectual property infringement
claims.
We do not have manufacturing facilities or
capabilities and are dependent on third parties to fulfill our manufacturing
needs, which could result in the delay of clinical trials, regulatory
approvals, product introductions and commercial sales.
We are dependent on third
parties for the manufacture and storage of our product candidates for clinical
trials and, if approved, for commercial sale. If we are unable to contract for
a sufficient supply of our product candidates on acceptable terms, or if we
encounter delays or difficulties in the manufacturing process or our
relationships with our manufacturers, we may not have sufficient product to
conduct or complete our clinical trials or support commercial requirements for
our product candidates, if approved for marketing.
Both pralatrexate and RH1
are cytotoxic, which requires the manufacturers of these substances to have
specialized equipment and safety systems to handle such substances. In
addition, the starting materials for pralatrexate require custom preparations,
which will require us to manage an additional set of suppliers to obtain the
needed supplies of pralatrexate.
Given our lack of formal
supply agreements and the fact that in many cases our components are supplied
by a single source, our third party suppliers may not be able to fulfill our
potential commercial needs or meet our deadlines, or the components they supply
to us may not meet our specifications and quality policies and procedures. If
we need to find an alternative supplier of pralatrexate or other components, we
may not be able to contract for those components on acceptable terms, if at
all. Any such failure to supply or delay caused by such suppliers would have an
adverse affect on our ability to continue clinical development of our product
candidates or commercialize any future products.
Even if we obtain
approval to market our product candidates in one or more indications, our
current or future manufacturers may be unable to accurately and reliably
manufacture commercial quantities of our product candidates at reasonable
costs, on a timely basis and in compliance with the FDAs cGMP. If our current
or future contract manufacturers fail in any of these respects, our ability to
timely complete our clinical trials, obtain required regulatory approvals and
successfully commercialize our product candidates will be materially and
adversely affected. This risk may be heightened with respect to pralatrexate
and RH1 as there are a limited number of fill/finish manufacturers with the
ability to handle cytotoxic products such as pralatrexate and RH1. Our reliance
on contract manufacturers exposes us to additional risks, including:
·
delays or failure to
manufacture sufficient quantities needed for clinical trials in accordance with
our specifications or to deliver such quantities on the dates we require;
·
our current and future
manufacturers are subject to ongoing, periodic, unannounced inspections by the
FDA and corresponding state and international regulatory authorities for
compliance with strictly enforced cGMP regulations and similar state and
foreign standards, and we do not have control over our contract manufacturers
compliance with these regulations and standards;
·
our manufacturers may not
be able to comply with applicable regulatory requirements, which would prohibit
them from manufacturing products for us;
·
our manufacturers may have staffing
difficulties, may undergo changes in control or may become financially
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distressed, adversely affecting their willingness or
ability to manufacture products for us;
·
our manufacturers might not
be able to fulfill our commercial needs, which would require us to seek new
manufacturing arrangements and may result in substantial delays in meeting
market demands;
·
if we need to change to
other commercial manufacturing contractors, the FDA and comparable foreign
regulators must approve our use of any new manufacturer, which would require
additional testing, regulatory filings and compliance inspections, and the new
manufacturers would have to be educated in, or themselves develop substantially
equivalent processes necessary for, the production of our products; and
·
we may not have
intellectual property rights, or may have to share intellectual property
rights, to any improvements in the manufacturing processes or new manufacturing
processes for our products.
Any of these factors could result in the delay of
clinical trials, regulatory submissions, required approvals or
commercialization of our product candidates. They could also entail higher
costs and result in our being unable to effectively commercialize our product
candidates.
We may explore strategic partnerships that may
never materialize or may fail
.
We may, in the future,
periodically explore a variety of possible strategic partnerships in an effort
to gain access to additional product candidates or resources. At the current
time, we cannot predict what form such a strategic partnership might take. We
are likely to face significant competition in seeking appropriate strategic
partners, and these strategic partnerships can be complicated and time
consuming to negotiate and document. We may not be able to negotiate strategic
partnerships on acceptable terms, or at all. We are unable to predict when, if
ever, we will enter into any additional strategic partnerships because of the
numerous risks and uncertainties associated with establishing strategic
partnerships.
If we enter into one or more strategic
partnerships, we may be required to relinquish important rights to and control
over the development of our product candidates or otherwise be subject to
unfavorable terms
.
Any future strategic
partnerships we enter into could subject us to a number of risks, including:
·
we
may be required to undertake the expenditure of substantial operational,
financial and management resources in integrating new businesses, technologies
and products;
·
we
may be required to issue equity securities that would dilute our existing stockholders
percentage ownership;
·
we
may be required to assume substantial actual or contingent liabilities;
·
we
may not be able to control the amount and timing of resources that our
strategic partners devote to the development or commercialization of product
candidates;
·
strategic
partners may delay clinical trials, provide insufficient funding, terminate a
clinical trial or abandon a product candidate, repeat or conduct new clinical
trials or require a new version of a product candidate for clinical testing;
·
strategic
partners may not pursue further development and commercialization of products
resulting from the strategic partnering arrangement or may elect to discontinue
research and development programs;
·
strategic
partners may not commit adequate resources to the marketing and distribution of
any future products, limiting our potential revenues from these products;
·
disputes
may arise between us and our strategic partners that result in the delay or
termination of the research, development or commercialization of our product
candidates or that result in costly litigation or arbitration that diverts
managements attention and consumes resources;
·
strategic
partners may experience financial difficulties;
·
strategic
partners may not properly maintain or defend our intellectual property rights
or may use our proprietary information in a manner that could jeopardize or
invalidate our proprietary information or expose us to potential litigation;
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·
business
combinations or significant changes in a strategic partners business strategy
may also adversely affect a strategic partners willingness or ability to
complete its obligations under any arrangement;
·
strategic
partners could independently move forward with a competing product candidate
developed either independently or in collaboration with others, including our
competitors; and
·
strategic
partners could terminate the arrangement or allow it to expire, which would
delay the development and may increase the cost of developing our product
candidates.
Acceptance of our products in the marketplace is
uncertain, and failure to achieve market acceptance will limit our ability to
generate revenue and become profitable.
Even if our
products are approved for marketing, they may not achieve market acceptance.
The degree of market acceptance will depend upon a number of factors,
including:
·
the receipt of timely regulatory approval for
the uses that we are studying;
·
the establishment and demonstration in the
medical community of the safety and efficacy of our products and their
potential advantages over existing and newly developed therapeutic products;
·
the ease
of use of our products;
·
reimbursement and coverage policies of
government and private payors such as Medicare, Medicaid, insurance companies,
health maintenance organizations and other plan administrators; and
·
the scope and effectiveness of our sales and
marketing efforts.
Physicians, patients, payors or the medical community
in general may be unwilling to accept, utilize or recommend the use of any of
our products.
The status of reimbursement from third-party payors
for newly approved health care drugs is uncertain and failure to obtain
adequate coverage and reimbursement could limit our ability to generate
revenue.
Our ability to
successfully commercialize our products will depend, in part, on the extent to
which coverage and reimbursement for the products will be available from
government and health administration authorities, private health insurers,
managed care programs, and other third-party payors.
Significant uncertainty exists as to the reimbursement
status of newly approved health care products. Third-party payors, including
Medicare, are challenging the prices charged for medical products and services.
Government and other third-party payors increasingly are attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new drugs and by refusing, in some cases, to provide coverage for uses of
approved products for disease conditions for which the FDA has not granted
labeling approval. Third-party insurance coverage may not be available to
patients for our products. If government and other third-party payors do not
provide adequate coverage and reimbursement levels for our product candidates,
their market acceptance may be reduced.
Health care reform measures could adversely affect our
business.
The business and financial condition of pharmaceutical
and biotechnology companies are affected by the efforts of governmental and
third-party payors to contain or reduce the costs of health care. In the U.S.
and in foreign jurisdictions there have been, and we expect that there will
continue to be, a number of legislative and regulatory proposals aimed at
changing the health care system. For example, in some countries other than the
U.S., pricing of prescription drugs is subject to government control, and we
expect proposals to implement similar controls in the U.S. to continue. We are
unable to predict what additional legislation or regulation, if any, relating
to the health care industry or third-party coverage and reimbursement may be
enacted in the future or what effect such legislation or regulation would have
on our business. The pendency or approval of such proposals or reforms could
result in a decrease in our stock price or limit our ability to raise capital
or to obtain strategic partnerships or licenses.
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We may not obtain
orphan drug exclusivity or we may not receive the full benefit of orphan drug
exclusivity even if we obtain it. *
The FDA has awarded
orphan drug status to pralatrexate for the treatment of patients with T-cell
lymphoma. Under the Orphan Drug Act, if we are the first company to receive FDA
approval for this drug for the designated orphan drug indication, we will
obtain seven years of marketing exclusivity during which the FDA may not
approve another companys application for the same drug for the same orphan
indication. Orphan drug exclusivity would not prevent FDA approval of a
different drug for the orphan indication or the same drug for a different
indication.
If we fail to
comply with healthcare fraud and abuse laws, we could face substantial
penalties and our business, operations and financial condition could be
adversely affected
. *
As a biopharmaceutical
company, even though we do not and will not control referrals of health care
services or bill directly to Medicare, Medicaid or other third-party payors,
certain federal and state healthcare laws and regulations pertaining to fraud
and abuse will be applicable to our business. These laws and regulations,
include, among others:
·
the federal Anti-Kickback Statute, which
prohibits, among other things, persons from soliciting, receiving or providing
remuneration, directly or indirectly, to induce either the referral of an
individual for an item or service or the purchasing or ordering of a good or
service, for which payment may be made under federal health care programs such
as the Medicare and Medicaid programs;
·
federal false claims laws that prohibit, among
other things, individuals or entities from knowingly presenting, or causing to
be presented, claims for payment from Medicare, Medicaid, or other third-party
payors that are false or fraudulent;
·
the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to
defraud any healthcare benefit program or making false statements relating to
healthcare matters and which also imposes certain requirements relating to the
privacy, security and transmission of individually identifiable health
information;
·
federal self-referral laws, such as STARK, which
prohibits a physician from making a referral to a provider of certain health
services with which the physician or the physicians family member has a
financial interest; and
·
state law equivalents of each of the above
federal laws, such as anti-kickback and false claims laws that may apply to
items or services reimbursed by any third-party payor, including commercial
insurers, and state laws governing the privacy of health information in certain
circumstances, many of which differ from each other in significant ways and
often are not preempted by HIPAA.
Although there are a
number of statutory exemptions and regulatory safe harbors protecting certain
common activities from prosecution under the federal Anti-Kickback statute, the
exemptions and safe harbors are drawn narrowly, and practices that involve
remuneration intended to induce prescribing, purchases or recommendations may
be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Our practices may not in all cases meet all of the criteria for safe harbor
protection from anti-kickback liability.
If our operations are
found to be in violation of any of the laws described above or any other
governmental regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines and the curtailment or
restructuring of our operations. Any penalties, damages, fines, curtailment or
restructuring of our operations could adversely affect our ability to operate
our business and our financial results. Although compliance programs can
mitigate the risk of investigation and prosecution for violations of these
laws, the risks cannot be entirely eliminated. Any action against us for
violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses and divert our managements attention
from the operation of our business. Moreover, achieving and sustaining
compliance with all applicable federal and state fraud and abuse laws may prove
costly.
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If we are unable
to develop adequate sales, marketing or distribution capabilities or enter into
agreements with third parties to perform some of these functions, we will not
be able to commercialize our products effectively.
We have limited
experience in sales, marketing and distribution. To directly market and
distribute any products, we must build a sales and marketing organization with
appropriate technical expertise and distribution capabilities. We may attempt
to build such a sales and marketing organization on our own or with the
assistance of a contract sales organization. For some market opportunities, we
may need to enter into co-promotion or other licensing arrangements with larger
pharmaceutical or biotechnology firms in order to increase the likelihood of
commercial success for our products. We may not be able to establish sales, marketing
and distribution capabilities of our own or enter into such arrangements with
third parties in a timely manner or on acceptable terms. To the extent that we
enter into co-promotion or other licensing arrangements, our product revenues
are likely to be lower than if we directly marketed and sold our products, and
some or all of the revenues we receive will depend upon the efforts of third
parties, and these efforts may not be successful. Additionally, building
marketing and distribution capabilities may be more expensive than we
anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the
desired levels.
If our competitors
develop and market products that are more effective than ours, our commercial
opportunity will be reduced or eliminated.
Even if we obtain the
necessary regulatory approvals to market pralatrexate or any other product
candidate, our commercial opportunity will be reduced or eliminated if our
competitors develop and market products that are more effective, have fewer
side effects or are less expensive than our product candidates. Our potential
competitors include large, fully-integrated pharmaceutical companies and more
established biotechnology companies, both of which have significant resources
and expertise in research and development, manufacturing, testing, obtaining
regulatory approvals and marketing. Academic institutions, government agencies,
and other public and private research organizations conduct research, seek
patent protection and establish collaborative arrangements for research,
development, manufacturing and marketing. It is possible that competitors will
succeed in developing technologies that are more effective than those being
developed by us or that would render our technology obsolete or noncompetitive.
If product
liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.
The testing and marketing
of pharmaceutical products entail an inherent risk of product liability.
Product liability claims might be brought against us by consumers or health
care providers or by pharmaceutical companies or others selling our future
products. If we cannot successfully defend ourselves against such claims, we
may incur substantial liabilities or be required to limit the commercialization
of our product candidates. We have obtained limited product liability insurance
coverage for our human clinical trials. However, product liability insurance
coverage is becoming increasingly expensive, and we may be unable to maintain
such insurance coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to product liability. A successful product
liability claim in excess of our insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to obtain commercially reasonable product liability insurance
for any products approved for marketing.
We are currently
involved in a securities class action litigation, which could harm our business
if management attention is diverted or the claims are decided against us. *
We have been named as a
defendant in a purported securities class action lawsuit seeking unspecified
damages relating to the issuance of allegedly false and misleading statements
regarding EFAPROXYN during the period from May 29, 2003 to April 29,
2004 and subsequent declines in our stock price. In an opinion dated October 20,
2005, the U.S. District Court for the District of Colorado concluded that the
plaintiffs complaint failed to meet the legal requirements applicable to its
alleged claims and dismissed the lawsuit. On November 20, 2005, the
plaintiffs appealed the District Courts decision to the U.S. Court of Appeals
for the Tenth Circuit. On February 6, 2008, the parties signed a
stipulation of settlement, settling the case for $2,000,000. The settlement is
subject to various conditions, including without limitation approval of the
District Court. On September 15,
2008, the District Court issued an order preliminarily approving the settlement
and scheduling a hearing on January 21, 2009 to consider final approval of
the settlement. Neither we nor our
former officer admits any liability in connection with the settlement. The amount of the settlement in excess of our
deductible has been covered by our insurance carrier. In the event the settlement does not become
final, we intend to vigorously defend against the plaintiffs appeal. If the
Court of Appeals then were to reverse the District Courts decision and we were
not successful in our defense of such claims, we could be forced to make
significant payments to the plaintiffs, and such payments could have a material
adverse effect on
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our business, financial
condition, results of operations and cash flows to the extent such payments are
not covered by our insurance carriers. Even if our defense against such claims
were successful, the litigation could result in substantial costs and divert
managements attention and resources, which could adversely affect our
business. As of September 30, 2008, we have recorded $2,000,000 in accrued
litigation settlement costs, which represents our best estimate of the
potential gross amount of the settlement costs to be paid to the plaintiffs,
and $2,000,000 in prepaid expenses and other assets, which represents the
approximately $235,000 of remaining deductible under our insurance policy paid
by us and $1,765,000 paid by our insurance carrier into the settlement fund
escrow in September 2008. A claims
administrator appointed by the parties will administer the distribution of the
settlement fund to authorized claimants in 2009.
Our success depends on retention of our President
and Chief Executive
Officer, Chief
Medical Officer and other key personnel.
We are highly dependent on our President and Chief
Executive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,
M.D., and other members of our management team. We are named as the beneficiary
on a term life insurance policy covering Mr. Berns in the amount of
$10.0 million. We also depend on academic collaborators for each of our
research and development programs. The loss of any of our key employees or
academic collaborators could delay our discovery research program and the
development and commercialization of our product candidates or result in
termination of them in their entirety. Mr. Berns and Dr. Cagnoni, as
well as others on our executive management team, have employment agreements
with us, but the agreements provide for at-will employment with no specified
term. Our future success also will depend in large part on our continued
ability to attract and retain other highly qualified scientific, technical and
management personnel, as well as personnel with expertise in clinical testing,
governmental regulation and commercialization of pharmaceutical products. We
face competition for personnel from other companies, universities, public and
private research institutions, government entities and other organizations. If
we are unsuccessful in our recruitment and retention efforts, our business will
be harmed.
We also rely on
consultants, collaborators and advisors to assist us in formulating and
conducting our research. All of our consultants, collaborators and advisors are
employed by other employers or are self-employed and may have commitments to or
consulting contracts with other entities that may limit their ability to
contribute to the Company.
We cannot
guarantee that we will be in compliance with all potentially applicable
regulations.
The development,
manufacturing, and, if approved, pricing, marketing, sale and reimbursement of
our products, together with our general operations, are subject to extensive
regulation by federal, state and other authorities within the U.S. and numerous
entities outside of the U.S. We also have significantly fewer employees than
many other companies that have the same or fewer product candidates in late
stage clinical development and we rely heavily on third parties to conduct many
important functions.
As a publicly-traded
company, we are subject to significant regulations, some of which have only
recently been adopted, including the Sarbanes Oxley Act of 2002. We cannot
assure you that we are or will be in compliance with all potentially applicable
regulations. If we fail to comply with the Sarbanes Oxley Act of 2002 or any
other regulations we could be subject to a range of consequences, including
restrictions on our ability to sell equity securities or otherwise raise
capital funds, the de-listing of our common stock from the Nasdaq Global
Market, suspension or termination of our clinical trials, failure to obtain
approval to market our product candidates, restrictions on future products or
our manufacturing processes, significant fines, or other sanctions or
litigation.
If our internal
controls over financial reporting are not considered effective, our business
and stock price could be adversely affected.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal controls over financial reporting as of the end of each fiscal year,
and to include a management report assessing the effectiveness of our internal
controls over financial reporting in our annual report on Form 10-K for
that fiscal year. Section 404 also requires our independent registered
public accounting firm to attest to, and report on, the effectiveness of our
internal controls over financial reporting.
Our management, including
our chief executive officer and principal financial officer, does not expect
that our internal controls over financial reporting will prevent all error and
all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control systems
objectives will be met. Further, the
35
Table of Contents
design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud
involving a company have been, or will be, detected. The design of any system
of controls is based in part on certain assumptions about the likelihood of
future events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become ineffective because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. We cannot assure you that
we or our independent registered public accounting firm will not identify a
material weakness in our internal controls in the future. A material weakness
in our internal controls over financial reporting would require management and
our independent registered public accounting firm to consider our internal
controls as ineffective. If our internal controls over financial reporting are
not considered effective, we may experience a loss of public confidence, which
could have an adverse effect on our business and on the market price of our
common stock.
If we do not
progress in our programs as anticipated, our stock price could decrease.
For planning purposes, we
estimate the timing of a variety of clinical, regulatory and other milestones,
such as when a certain product candidate will enter clinical development, when
a clinical trial will be initiated or completed, or when an application for
regulatory approval will be filed. Some of our estimates are included in this
report. Our estimates are based on information available to us as of the date
of this report and a variety of assumptions. Many of the underlying assumptions
are outside of our control. If milestones are not achieved when we estimated
that they would be, investors could be disappointed, and our stock price may
decrease.
Warburg Pincus
Private Equity VIII, L.P. and Baker Brothers Life Sciences, L.P. each control a
substantial percentage of the voting power of our outstanding common stock. *
On March 2, 2005, we
entered into a Securities Purchase Agreement with Warburg Pincus Private Equity
VIII, L.P. (Warburg) and certain other investors pursuant to which we issued
and sold an aggregate of 2,352,443 shares of our Series A Exchangeable
Preferred Stock (the Exchangeable Preferred) at a price per share of $22.10,
for aggregate gross proceeds of approximately $52.0 million. On May 18,
2005, at our Annual Meeting of Stockholders, our stockholders voted to approve
the issuance of shares of our common stock upon exchange of shares of the
Exchangeable Preferred. As a result of such approval, we issued a total of
23,524,430 shares of common stock upon exchange of 2,352,443 shares of
Exchangeable Preferred. In connection with its purchase of the Exchangeable
Preferred, Warburg entered into a standstill agreement agreeing not to pursue
certain activities the purpose or effect of which may be to change or influence
the control of the Company.
On February 2, 2007,
we closed an underwritten offering of 9,000,000 shares of common stock, of
which Baker Brothers Life Sciences, L.P. and certain other affiliated funds
(collectively Baker) purchased 3,300,000 shares, at a price per share of
$6.00, for aggregate gross proceeds of approximately $54.0 million (the February 2007
Financing). In connection therewith, Baker entered into a standstill agreement
agreeing not to pursue certain activities the purpose or effect of which might
be to change or influence the control of the Company.
On May 29, 2008, we
sold 12,420,000 shares of our common stock in an underwritten public offering
at a price of $5.64 per share, for aggregate gross proceeds of approximately
$70.0 million. Warburg and Baker purchased 3,500,000 and 1,500,000
shares, respectively, of the 12,420,000 shares sold in such public offering.
As of September 30,
2008, we had 81,140,937 shares of common stock outstanding, of which Warburg
owned 26,124,430 shares, or approximately 32.2% of the voting power of our
outstanding common stock, and Baker owned 11,248,621 shares, or approximately
13.9% of the voting power of our outstanding common stock. Although each of
Warburg and Baker have entered into a standstill agreement with us, they are,
and will continue to be, able to exercise substantial influence over any
actions requiring stockholder approval.
Anti-takeover
provisions in our charter documents and under Delaware law could discourage,
delay or prevent an acquisition of us, even if an acquisition would be
beneficial to our stockholders, and may prevent attempts by our stockholders to
replace or remove our current management.
Provisions of our amended
and restated certificate of incorporation and bylaws, as well as provisions of
Delaware law, could make it more difficult for a third party to acquire us,
even if doing so would benefit our stockholders. In addition, these provisions
may frustrate or prevent any attempts by our stockholders to replace or remove
our current management by
36
Table of Contents
making it more difficult
for stockholders to replace members of our board of directors. Because our
board of directors is responsible for appointing the members of our management
team, these provisions could in turn affect any attempt by our stockholders to
replace current members of our management team. These provisions include:
·
authorizing the issuance of blank check
preferred stock that could be issued by our board of directors to increase the
number of outstanding shares or change the balance of voting control and thwart
a takeover attempt;
·
prohibiting cumulative voting in the election of
directors, which would otherwise allow for less than a majority of stockholders
to elect director candidates;
·
prohibiting stockholder action by written
consent, thereby requiring all stockholder actions to be taken at a meeting of
our stockholders;
·
eliminating the ability of stockholders to call
a special meeting of stockholders; and
·
establishing advance notice requirements for
nominations for election to the board of directors or for proposing matters
that can be acted upon at stockholder meetings.
In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which
generally prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an interested stockholder for a period of
three years following the date on which the stockholder became an interested
stockholder. This provision could have the effect of delaying or preventing a
change of control, whether or not it is desired by or beneficial to our
stockholders. Notwithstanding the foregoing, the three year moratorium imposed
on business combinations by Section 203 will not apply to either Warburg
or Baker because, prior to the dates on which they became interested
stockholders, our board of directors approved the transactions which resulted
in Warburg and Baker becoming interested stockholders. However, in connection
with its purchase of Exchangeable Preferred in March 2005, Warburg entered
into a standstill agreement agreeing not to pursue certain activities the
purpose or effect of which may be to change or influence the control of the
Company. Similarly, in connection with
the February 2007 Financing, Baker entered into a standstill agreement
agreeing not to pursue certain activities the purpose or effect of which may be
to change or influence the control of the Company.
We have adopted a
stockholder rights plan that may discourage, delay or prevent a merger or
acquisition that is beneficial to our stockholders.
In May 2003,
our board of directors adopted a stockholder rights plan that may have the
effect of discouraging, delaying or preventing a merger or acquisition of us
that our stockholders may consider beneficial by diluting the ability of a
potential acquirer to acquire us. Pursuant to the terms of the stockholder
rights plan, when a person or group, except under certain circumstances,
acquires 15% or more of our outstanding common stock or 10 business days after
announcement of a tender or exchange offer for 15% or more of our outstanding
common stock, the rights (except those rights held by the person or group who
has acquired or announced an offer to acquire 15% or more of our outstanding
common stock) would generally become exercisable for shares of our common stock
at a discount. Because the potential acquirers rights would not become
exercisable for our shares of common stock at a discount, the potential
acquirer would suffer substantial dilution and may lose its ability to acquire
us. In addition, the existence of the plan itself may deter a potential
acquirer from acquiring or making an offer to acquire us. As a result, either by operation of the plan
or by its potential deterrent effect, mergers and acquisitions of the Company
that our stockholders may consider in their best interests may not occur.
Because Warburg owns a
substantial percentage of our outstanding common stock, we amended the
stockholder rights plan in connection with Warburgs purchase of Exchangeable
Preferred in March 2005 to provide that Warburg and its affiliates will be
exempt from the stockholder rights plan, unless Warburg and its affiliates
become, without the prior consent of our board of directors, the beneficial
owner of more than 44% of our common stock. Likewise, since Baker owns a
substantial percentage of our outstanding common stock, we amended the
stockholder rights plan in connection with the February 2007 Financing to
provide that Baker and its affiliates will be exempt from the stockholder
rights plan, unless Baker becomes, without the prior consent of our board of
directors, the beneficial owner of more than 20% of our common stock. Under the
stockholder rights plan, our board of directors has express authority to amend
the rights plan without stockholder approval.
37
Table of Contents
The market price
for our common stock has been and may continue to be highly volatile, and an
active trading market for our common stock may never exist.
We cannot assure you that
an active trading market for our common stock will exist at any time. Holders
of our common stock may not be able to sell shares quickly or at the market
price if trading in our common stock is not active. The trading price of our
common stock has been and is likely to continue to be highly volatile and could
be subject to wide fluctuations in price in response to various factors, many
of which are beyond our control, including:
·
actual or anticipated results of our clinical
trials, including our pivotal Phase 2 PROPEL trial;
·
actual or anticipated regulatory approvals or
non-approvals of our product candidates, including pralatrexate, or of
competing product candidates;
·
changes in laws or regulations applicable to our
product candidates;
·
changes in the expected or actual timing of our
development programs;
·
actual or anticipated variations in quarterly
operating results;
·
announcements of technological innovations by us
or our competitors;
·
changes in financial estimates or
recommendations by securities analysts;
·
conditions or trends in the biotechnology and
pharmaceutical industries;
·
changes in the market valuations of similar
companies;
·
announcements by us of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
·
additions or departures of key personnel;
·
disputes or other developments relating to
proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our technologies;
·
developments concerning any of our research and
development, manufacturing and marketing collaborations;
·
sales of large blocks of our common stock;
·
sales of our common stock by our executive officers,
directors and five percent stockholders; and
·
economic and other external factors, including
disasters or crises.
Public companies in
general and companies included on the Nasdaq Global Market in particular have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies.
There has been particular volatility in the market prices of securities of
biotechnology and other life sciences companies, and the market prices of these
companies have often fluctuated because of problems or successes in a given
market segment or because investor interest has shifted to other segments.
These broad market and industry factors may cause the market price of our
common stock to decline, regardless of our operating performance. We have no
control over this volatility and can only focus our efforts on our own
operations, and even these may be affected due to the state of the capital
markets. In the past, following large price declines in the public market price
of a companys securities, securities class action litigation has often been
initiated against that company, including in 2004 against us. Litigation of
this type could result in substantial costs and diversion of managements
attention and resources, which would hurt our business. Any adverse
determination in litigation could also subject us to significant liabilities.
We are required to
recognize stock-based compensation expense relating to employee stock options,
restricted stock, and stock purchases under our Employee Stock Purchase Plan,
and the amount of expense we recognize may not
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Table
of Contents
accurately reflect
the value of our share-based payment awards. Further, the recognition of
stock-based compensation expense will cause our net losses to increase and may
cause the trading price of our common stock to fluctuate.
On January 1, 2006, we
adopted SFAS No. 123 (Revised 2004),
Share-Based Payment
(SFAS 123R), which requires the measurement and recognition of compensation
expense for all stock-based compensation based on estimated fair values. As a
result, our operating results for the three and nine months ended September 30,
2008 and 2007 include, and future periods will include, a charge for
stock-based compensation related to employee stock options, restricted stock
and discounted employee stock purchases.
The application of SFAS 123R requires the use of an option-pricing
model to determine the fair value of share-based payment awards. This determination of fair value is affected
by our stock price as well as assumptions regarding a number of highly complex
and subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. Because our
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective
assumptions can materially affect the estimated value, in managements opinion
the existing valuation models may not provide an accurate measure of the fair
value of our employee stock options.
SFAS 123R has had a
material impact on our financial statements and results of operations. We also
expect that SFAS 123R will have a material impact on our future financial
statements and results of operations. We cannot predict the effect that our
stock-based compensation expense will have on the trading price of our common
stock.
Substantial sales
of shares may impact the market price of our common stock.
If our stockholders sell
substantial amounts of our common stock, the market price of our common stock
may decline. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
consider appropriate. We are unable to predict the effect that sales may have
on the then prevailing market price of our common stock. We have entered into a Registration Rights
Agreement with Warburg and the other purchasers of our Exchangeable Preferred
pursuant to which such investors are entitled to certain registration rights
with respect to the shares of common stock that we issued upon exchange of the
Exchangeable Preferred.
In addition, we will need
to raise substantial additional capital in the future to fund our
operations. If we raise additional funds
by issuing equity securities, the market price of our common stock may decline
and our existing stockholders may experience significant dilution.
ITEM 2.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
|
|
None
|
|
|
|
|
|
ITEM 3.
|
|
DEFAULTS UPON SENIOR SECURITIES
|
|
None
|
|
|
|
|
|
ITEM 4.
|
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
|
None
|
|
|
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
|
None
|
|
|
|
|
|
ITEM 6.
|
|
EXHIBITS
|
|
|
Exhibit No.
|
|
Description
|
10.1
|
|
Corporate Bonus
Plan, as amended and restated effective September 15, 2008.
|
31.1
|
|
Certification of
principal executive officer required by Rule 13a-14(a) / 15d-14(a).
|
31.2
|
|
Certification of
principal financial officer required by Rule 13a-14(a) / 15d-14(a).
|
32.1#
|
|
Section 1350
Certification.
|
#
The
certifications attached as Exhibit 32.1 that accompany this Quarterly
Report on Form 10-Q are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Allos
Therapeutics, Inc. under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Form 10-Q, irrespective of any general incorporation language
contained in such filing.
39
Table of Contents
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 5,
2008
|
ALLOS THERAPEUTICS, INC.
|
|
|
|
/s/ Paul L. Berns
|
|
Paul L. Berns
|
|
President and Chief
Executive Officer
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
/s/ David C. Clark
|
|
David C. Clark
|
|
Vice President, Finance
and Treasurer
|
|
(Principal Financial
and Accounting Officer)
|
40
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