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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2011.

 

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

 

For the transition period from                       to                     .

 

Commission File Number 000-29815

 

Allos Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		54-1655029
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

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

 

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

 

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

 

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

 

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

 

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

 

As of August 1, 2011, there were 105,677,486 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

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ALLOS THERAPEUTICS, INC.

 

FORM 10-Q

 

TABLE OF CONTEN TS

 

PART I.  Financial Information		3
ITEM 1.	Financial Statements (unaudited)	3
	Balance Sheets — as of June 30, 2011 and December 31, 2010	3
	Statements of Operations — for the three and six months ended June 30, 2011 and 2010	4
	Statements of Cash Flows — for the six months ended June 30, 2011 and 2010	5
	Notes to Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	38
ITEM 4.	Controls and Procedures	39
PART II.  Other Information		39
ITEM 1.	Legal Proceedings	39
ITEM 1A.	Risk Factors	41
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
ITEM 3.	Defaults Upon Senior Securities	63
ITEM 4.	Removed and Reserved	63
ITEM 5.	Other Information	63
ITEM 6.	Exhibits	63
SIGNATURES		64

 

NOTE:

 

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

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ALLOS THERAPEUTICS, INC.

BALANCE SHEETS

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

(unaudited)

 

		June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	68,898		$	48,164
Short-term investments		40,570			50,334
Restricted cash		238			238
Accounts receivable		13,971			12,076
Inventory		342			178
Prepaid expenses and other assets		3,189			2,180
Total current assets		127,208			113,170
Property and equipment, net		1,913			2,245
Long-term investments		—			67
Intangible asset, net		4,998			5,225
Other assets		—			49
Total assets		$	134,119		$	120,756
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	2,541		$	4,931
Deferred revenue		6,079			—
Accrued liabilities		17,773			17,627
Total current liabilities		26,393			22,558
Long-term deferred revenue		15,949			—
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Series A Junior Participating Preferred Stock, $0.001 par value; 1,500,000 shares designated from authorized preferred stock; no shares issued or outstanding		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized; 105,673,986 and 105,493,546 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		106			105
Additional paid-in capital		555,343			548,722
Accumulated deficit		(463,672		)	(450,629		)
Total stockholders’ equity		91,777			98,198
Total liabilities and stockholders’ equity		$	134,119		$	120,756

 

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

 

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

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

(unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Revenue:
Net product sales		$	10,972		$	7,885		$	21,836		$	15,292
License and other revenue		28,127			—			28,127			—
Total revenue		39,099			7,885			49,963			15,292
Operating costs and expenses:
Cost of sales, excluding amortization expense		1,044			752			1,987			1,441
Cost of license and other revenue		10,571			—			10,571			—
Research and development		5,074			6,522			12,571			15,807
Selling, general and administrative		20,158			20,517			37,710			38,449
Amortization of intangible asset		114			114			227			227
Total operating costs and expenses		36,961			27,905			63,066			55,924
Operating income (loss)		2,138			(20,020		)	(13,103		)	(40,632		)
Interest and other income, net		22			66			60			131
Net income (loss)		$	2,160		$	(19,954	)	$	(13,043	)	$	(40,501	)
Earnings (loss) per share:
Net income (loss):
Basic		$	0.02		$	(0.19	)	$	(0.12	)	$	(0.39	)
Diluted		$	0.02		$	(0.19	)	$	(0.12	)	$	(0.39	)
Weighted average shares:
Basic		105,606,587			105,187,206			105,567,206			104,896,286
Diluted		105,640,354			105,187,206			105,567,206			104,896,286

 

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

 

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2011			2010
Cash Flows From Operating Activities:
Net loss		$	(13,043	)	$	(40,501	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		399			440
Stock-based compensation expense		6,497			5,715
Amortization of intangible asset		227			227
Other		1			3
Changes in operating assets and liabilities:
Accounts receivable		(1,895		)	(4,597		)
Prepaid expenses and other assets		(960		)	(564		)
Interest receivable on investments		(23		)	(62		)
Inventory		(43		)	(195		)
Trade accounts payable		(2,390		)	796
Accrued liabilities		23			(897		)
Deferred revenue		22,028			—
Net cash provided by (used in) operating activities		10,821			(39,635		)
Cash Flows From Investing Activities:
Acquisition of property and equipment		(65		)	(741		)
Purchases of investments		(30,128		)	(45,128		)
Proceeds from maturities of investments		39,982			16,988
Net cash provided by (used in) investing activities		9,789			(28,881		)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock associated with stock options and employee stock purchase plan		124			4,089
Proceeds from issuance of common stock, net of issuance costs		—			32
Net cash provided by financing activities		124			4,121
Net increase (decrease) in cash and cash equivalents		20,734			(64,395		)
Cash and cash equivalents, beginning of period		48,164			141,185
Cash and cash equivalents, end of period		$	68,898		$	76,790
Supplemental Schedule of Cash and Non-cash Activities:
Deferred revenue in accounts receivable		$	—		$	484
Assets recorded for which payment has not yet occurred		123			224

 

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

 

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ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS

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

(unaudited)

 

1.                  Basis of Presentation

 

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.  Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  These financial statements should be read in conjunction with the audited financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a broader discussion of our business and the opportunities and risks inherent in such business.

 

Liquidity

 

As of June 30, 2011, we had $109.5 million in cash, cash equivalents, and investments. Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of June 30, 2011, will be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                   the timing, costs and potential adverse impact on net product sales associated with entering into a definitive merger agreement with AMAG Pharmaceuticals, Inc., or AMAG, on July 19, 2011 and announcing the potential merger with AMAG; and

 

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·                   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 equity or debt financings, arrangements with corporate partners, or from other sources. Such financings or arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that additional financing will be available when needed, or that, if available, we will obtain such financing on terms that are favorable to our stockholders or us. In the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development, which we might otherwise seek to develop or commercialize ourselves, on terms that are less favorable than might otherwise be available.  If we are unable to significantly increase sales of FOLOTYN or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our future prospects for profitability may be harmed.  See Note 13, Subsequent Events for additional discussion.

 

2.                  Fair Value of Financial Instruments

 

Cash, Cash Equivalents and Investments

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The carrying values of our cash equivalents and investments approximate their market values based on quoted market prices. Investments are classified as held to maturity and are carried at cost plus accrued interest. Our cash and cash equivalents are maintained in a financial institution in amounts that, at times, may exceed federally insured limits. The weighted average duration of the remaining time to maturity for our portfolio of investments as of June 30, 2011 was approximately four months.  As of June 30, 2011, our investments were held in a variety of interest-bearing instruments, consisting mainly of U.S. Treasury bills. 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 June 30, 2011.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of June 30, 2011.  Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities. The carrying value of our cash held in money market funds and U.S. Treasury notes with original maturities of three months or less totaling $13.2 million and $20.0 million, respectively, as of June 30, 2011 are included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs.

 

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

 

		Amortized cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Short-term held-to-maturity securities:
U.S. Treasury bills and notes		$	40,230		$	11		$	—		$	40,241
Corporate notes		309			8			—			317
U. S. Government agency securities		269			3			—			272
Sub-total		$	40,808		$	22		$	—		$	40,830
Less: Amounts classified as restricted cash		(238		)	—			—			(238		)
Total due in one year or less		$	40,570		$	22		$	—		$	40,592

 

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

 

		Amortized cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Short-term held-to-maturity securities:
U.S. Treasury bills and notes		$	50,063		$	11		$	1		$	50,073
U. S. Government agency securities		271			6			—			277
Total due in one year or less		$	50,334		$	17		$	1		$	50,350
Long-term held-to-maturity securities:
Corporate notes		$	305		$	11		$	—		$	316
Less: Amounts classified as restricted cash		(238		)	—			—			(238		)
Total due in one to three years		$	67		$	11		$	—		$	78

 

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

 

3.                  Inventory

 

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

 

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

 

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

 

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

 

Inventory consisted of:

 

		June 30, 2011			December 31, 2010
Work in process		$	264		$	254
Raw materials		152			—
Finished goods		37			38
		453			292
Less reserve		(111		)	(114		)
Total inventory		$	342		$	178

 

4.                  Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets are comprised of the following:

 

		June 30, 2011			December 31, 2010
Prepaid sales, marketing and medical affairs expenses		$	1,766		$	1,308
Prepaid expenses and other assets		1,173			650
Prepaid research and development expenses		250			222
		$	3,189		$	2,180

 

5.                  Intangible asset, net

 

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

 

As a result of the FDA’s approval to market FOLOTYN on September 24, 2009, we met a milestone under our license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, discussed in Note 11, which required us to make a milestone payment of $5.8 million. We capitalized the $5.8 million payment as an intangible asset and began amortizing the asset immediately following the FDA approval of FOLOTYN. Amortization expense is being recorded on a straight line basis over the remaining expected life of the patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent in development. This term is our best estimate of the life of the patent. If, however, the Hatch-Waxman extension is not granted, the intangible asset will be amortized over a shorter period. Amortization expense of $ $114,000 and $227,000 for both the three and six months ended June 30, 2011 and 2010 was recorded as amortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense for the intangible asset is approximately $454,000 per year during 2011 through 2021 and $234,000 in 2022.

 

The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred.  No trigger events occurred for the three months ended June 30, 2011 on the $4,998,000 of intangible asset, net.

 

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6.                  Accrued Liabilities

 

Accrued liabilities are comprised of the following:

 

		June 30, 2011			December 31, 2010
Accrued sales and marketing expenses		$	4,331		$	3,536
Accrued royalties, government rebates, chargebacks, returns and distribution fees		4,231			3,849
Accrued personnel costs		4,182			6,103
Accrued research and development expenses		1,852			2,762
Accrued expenses—other		3,177			1,377
		$	17,773		$	17,627

 

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

 

7.                  Product Sales

 

Product Sales

 

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

 

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

 

Net Product Sales

 

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

 

Our net product sales represent total product sales less distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales.  We incur distributor fees related to the management of our product by distributors, which are recorded within net product sales and are based on definitive contractual agreements. Due to estimates and assumptions inherent in determining the

 

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

 

Product Returns

 

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

 

Medicaid Rebates

 

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000.  Our estimate of utilization is based on market research and information about our expected patient population.  Through June 30, 2011, we have not had sufficient claims from states for rebates with which to update our estimate.  However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  In addition, the states’ ability to early adopt portions of PPACA, and any implementing regulations, could impact future estimates related to our Medicaid rebate allowances. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% to 20% increase in the Medicaid utilization percentage within our patient population as of June 30, 2011, would result in an approximate $1.1 million to $2.2 million reduction in cumulative net product sales.

 

Government Chargebacks

 

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual at the time of product sale in an amount equal to our estimate of chargeback claims to be received from qualified entities.  We do not expect the impact of the 340B program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. Given our commercial launch in January 2010 and the impact of the PPACA during the first half of 2010, our historical chargeback claims data through June 30, 2011 has not been representative of recent qualified entity utilization.  Therefore, we have not updated our expected utilization of the allowable discounted pricing by qualified entities. We also evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.  As a result of this evaluation, during the three and six months ended June 30, 2011 we recorded a reversal of government

 

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chargeback allowances related to 2010 sales totaling $0 and $301,000, respectively.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly .  A reconciliation of gross to net product sales for the three and six months ended June 30, 2011 and 2010 and balances and activity in the deferred revenue account for the three and six months ended June 30, 2010 are as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Gross product sales		$	12,522		$	9,018		$	24,594		$	17,238
Gross to Net Sales Adjustments
Government rebates and chargebacks		(1,055		)	(860		)	(1,797		)	(1,434		)
Distribution fees		(370		)	(257		)	(715		)	(496		)
Product returns allowance		(125		)	(16		)	(246		)	(16		)
Net product sales		$	10,972		$	7,885		$	21,836		$	15,292
Deferred revenue, beginning of the period					$	1,150					$	669
Gross product sales to distributors					9,021						17,722
Less: Gross product sales recognized					(9,018		)				(17,238		)
Deferred revenue, end of the period					$	1,153					$	1,153

 

Balances and activity in the government rebates and chargebacks and distribution fees payable accounts for the six months ended June 30, 2011 and 2010 are as follows:

 

		Product Returns			Government Rebates and Chargebacks			Distribution Fees
Balance at December 31, 2009		$	—		$	487		$	86
Reserve for current period sales		—			1,642			496
Change in estimate for prior period sales		—			(208		)	—
Credits/payments made for prior period sales		—			(717		)	(286		)
Credits/payments made for current period sales		—			(126		)	(77		)
Balance at June 30, 2010		$	—		$	1,078		$	219
Balance at December 31, 2010		$	428		$	2,224		$	263
Reserve for current period sales		246			2,098			715
Change in estimate for prior period sales		—			(301		)	—
Credits/payments made for prior period sales		—			(416		)	(198		)
Credits/payments made for current period sales		—			(1,215		)	(559		)
Balance at June 30, 2011		$	674		$	2,390		$	221

 

Major Customers and Concentration of Credit Risk

 

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary.  Substantially all of our sales for the six months ended June 30, 2011 and 2010 were made in the United States.

 

		% of total trade accounts receivable at
		June 30, 2011		December 31, 2010
Customer A		54.7	%	53.8	%
Customer B		17.5	%	23.1	%
Customer C		25.3	%	22.3	%

 

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		% of total gross product sales
		Three Months Ended June 30,				Six Months Ended June 30,
		2011		2010		2011		2010
Customer A		56.9	%	50.4	%	53.4	%	51.0	%
Customer B		16.5	%	26.2	%	20.3	%	24.6	%
Customer C		24.0	%	22.9	%	24.7	%	24.0	%

 

Cost of sales

 

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

 

8.    Mundipharma Agreements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The regulatory activities will be performed over a period of up to one year, as defined in the Mundipharma Collaboration Agreement, with no general right of return.  Therefore, all allocated arrangement consideration related to the regulatory activities will be recognized using the proportional performance method, by which revenue is recognized in proportion to the costs incurred, during the service period of up to one year.  Research and development activities will be performed over multiple years and are related to the completion of the joint development clinical studies, with no general right of return.  Therefore, all allocated arrangement consideration related to the research and development activities will be recognized as the research and development costs that are subject to reimbursement are incurred.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
License		$	27,167		$	—		$	27,167		$	—
Regulatory		737			—			737			—
Research and development		223			—			223			—
License and other revenue		$	28,127		$	—		$	28,127		$	—

 

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

 

As of June 30, 2011, deferred revenue related to the Mundipharma Agreements consisted of $6,079,000 and $15,949,000 of current and long-term deferred revenue, respectively.

 

Cost of license and other revenue in the Statement of Operations for the three and six months ended June 30, 2011 consisted of 20%, or $10.0 million, of the $50.0 million upfront payment to the licensors of FOLOTYN under the terms of our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute.  In addition, $571,000 of costs were incurred in connection with the regulatory services provided related to the European MAA. Research and development, which is partially reimbursed under the Mundipharma Agreements, is included in research and development expense in the Statement of Operations.

 

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9.                  Stock-Based Compensation

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Research and development		$	814		$	681		$	1,972		$	1,363
Selling, general and administrative		2,011			2,127			4,525			4,352
Total stock-based compensation expense		$	2,825		$	2,808		$	6,497		$	5,715

 

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

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Stock options		$	635		$	2,310		$	2,419		$	4,914
Restricted stock units		2,180			436			4,037			661
Restricted stock		—			6			2			32
Employee stock purchase plan		10			56			39			108
Total stock-based compensation expense		$	2,825		$	2,808		$	6,497		$	5,715

 

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

 

		Unrecorded stock-based compensation balance			Weighted- average remaining amortization period
Stock options		$	4,569		1.5
Restricted stock units		10,458			1.7
Restricted stock		6			1.0

 

Stock Options

 

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

 

		Options Outstanding								Options Exercisable
		Number of Shares		Weighted Average Exercise Price			Weighted Average Grant-date Fair Value			Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2010		8,716,829		$	6.36					4,539,454		$	5.89
Granted		565,000		2.34			$	1.31
Exercised		(4,893	)	2.91
Forfeited/Expired		(1,283,626	)	6.55
Outstanding at June 30, 2011		7,993,310		$	6.05					5,182,334		$	6.10

 

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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 June 30, 2011:
Options fully vested and exercisable		5,182,334		5.8		$	6.10		$	2,000
Options expected to vest, including effects of expected forfeitures		2,232,471		8.6		$	6.02		35,000
Options fully vested and expected to vest		7,414,805		6.6		$	6.08		$	37,000

 

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $2.14 as of June 30, 2011, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.  The total number of in-the-money options exercisable as of June 30, 2011 was 35,000.

 

The total intrinsic value of options exercised during the three months ended June 30, 2011 and 2010 was $1,000 and $1,630,000, respectively, determined as of the date of option exercise.  The total intrinsic value of options exercised during the six months ended June 30, 2011 and 2010 was $1,000 and $3,948,000, respectively, determined as of the date of option exercise. We settle employee stock option exercises with newly issued common shares.  No tax benefits were realized by us in connection with these exercises during the six months ended June 30, 2011 and 2010 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of June 30, 2011.

 

Restricted Stock Awards

 

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

 

		Number of Shares		Weighted Average Grant-Date Fair Value
Nonvested RSU at December 31, 2010		2,492,078		$	4.97
Granted		2,384,824		3.30
Vested		(120,404	)	7.44
Forfeited		(547,066	)	3.93
Nonvested RSU at June 30, 2011		4,209,432		$	4.09

 

The shares of RSUs vest in three or four equal annual installments from the date of grant. Upon vesting of the restricted stock unit awards, we issue unrestricted shares of our common stock.  The total fair value of shares vested during the three months ended June 30, 2011 and 2010 was $82,000 and $24,000, respectively.  The total fair value of shares vested during the six months ended June 30, 2011 and 2010 was $380,000 and $254,000, respectively.

 

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

 

		Number of Shares		Weighted Average Grant-Date Fair Value
Nonvested RS at December 31, 2010		12,500		$	6.51
Granted		—		—
Vested		(7,500	)	5.85
Forfeited		(5,000	)	7.49
Nonvested RS at June 30, 2011		—		$	—

 

The shares of RS vest in four equal annual installments from the date of grant.  The total fair value of shares vested during the three months ended June 30, 2011 and 2010 was $0 and $196,000, respectively.  The total fair value of shares vested during the six months ended June 30, 2011 and 2010 was $35,000 and $795,000, respectively.

 

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10 .   Net Earnings (Loss) Per Share

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
		(In thousands, except per share amounts)
Basic earnings per share:
Net income (loss)		$	2,160		$	(19,954	)	$	(13,043	)	$	(40,501	)
Shares used in computation:
Weighted average shares outstanding		105,607			105,187			105,567			104,896
Basic earnings (loss) per share		$	0.02		$	(0.19	)	$	(0.12	)	$	(0.39	)
Diluted earnings per share:
Net income (loss)		$	2,160		$	(19,954	)	$	(13,043	)	$	(40,501	)
Shares used in computation:
Weighted average shares outstanding		105,607			105,187			105,567			104,896
Weighted average share equivalents from stock options, restricted stock units and restricted stock (1)		34			—			—			—
Weighted-average shares and share equivalents outstanding		105,641			105,187			105,567			104,896
Diluted earnings (loss) per share		$	0.02		$	(0.19	)	$	(0.12	)	$	(0.39	)

 

(1)

Potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for the six months ended June 30, 2011 and the three and six months ended June 30, 2010 all potentially dilutive common shares have been excluded from the computation of the dilutive net loss per share. Such potentially dilutive common shares consist of the following:

 

		June 30,
		2011		2010
Common stock options		7,993,310		9,212,127
Unvested restricted stock units		4,209,432		560,766
Unvested restricted stock		—		15,000
		12,202,742		9,787,893

 

11.           Commitments and Contingencies

 

Royalty and License Fee Commitments

 

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

 

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