Allos Therapeutics 10Q 2006 Q2 Quarterly report

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, 2006.

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 incorporation or organization)		(I.R.S. Employer Identification No.)

11080 CirclePoint Road, Suite 200

Westminster, Colorado 80020

(303) 426-6262

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

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

As of August 3, 2006, there were 55,604,716 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

This quarterly report on Form 10-Q consists of 34 pages.

ALLOS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. Financial Information
ITEM 1.		Financial Statements (unaudited)
		Balance Sheets — as of December 31, 2005 and June 30, 2006
		Statements of Operations — for the three and six months ended June 30, 2005 and 2006 and the cumulative period from September 1, 1992 (date of inception) through June 30, 2006
		Statements of Cash Flows — for the six months ended June 30, 2005 and 2006 and the cumulative period from September 1, 1992 (date of inception) through June 30, 2006
		Notes to Financial Statements
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.		Controls and Procedures
PART II. Other Information
ITEM 1.		Legal Proceedings
ITEM 1A.		Risk Factors
ITEM 4.		Submission of Matters to a Vote of Security Holders
ITEM 6.		Exhibits
SIGNATURES

NOTE:

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLOS THERAPEUTICS, INC.

BALANCE SHEETS

(unaudited)

	December 31,			June 30,
	2005			2006
ASSETS
Current assets:
Cash and cash equivalents	$	4,224,634		$	6,912,460
Restricted cash	550,000			550,000
Short-term investments in marketable securities	50,931,466			36,594,138
Prepaid research and development expenses	222,473			443,469
Prepaid expenses and other assets	338,393			731,629
Total current assets	56,266,966			45,231,696
Long-term investments in marketable securities	125,872			—
Property and equipment, net	687,728			668,385
Total assets	$	57,080,566		$	45,900,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	365,212		$	650,467
Accrued liabilities	3,424,904			4,194,695
Total current liabilities	3,790,116			4,845,162
Commitments and contingencies (See Note 6)

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; 1,000,000 shares designated from authorized preferred stock; no shares issued or outstanding	—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 55,078,969 and 55,582,932 shares issued and outstanding at December 31, 2005 and June 30, 2006, respectively	55,079			55,583
Additional paid-in capital	231,582,277			233,377,510
Deficit accumulated during the development stage	(178,346,906		)	(192,378,174		)
Total stockholders’ equity	53,290,450			41,054,919
Total liabilities and stockholders’ equity	$	57,080,566		$	45,900,081

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

ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Cumulative Period from September 1, 1992 (date of inception) through June 30,
	2005			2006			2005			2006			2006

Operating expenses:
Research and development	$	2,620,782		$	3,320,667		$	4,968,929		$	6,760,497		$	100,293,448
Clinical manufacturing	267,992			390,866			627,738			952,439			27,733,227
Marketing, general and administrative	2,614,918			3,738,720			4,807,625			6,664,518			74,946,772
Restructuring and separation costs	—			—			380,086			645,666			1,663,821

Total operating expenses	5,503,692			7,450,253			10,784,378			15,023,120			204,637,268

Loss from operations	(5,503,692		)	(7,450,253		)	(10,784,378		)	(15,023,120		)	(204,637,268		)
Gain on settlement claims	—			—			—			—			5,110,083
Interest and other income, net	507,462			487,900			716,578			991,852			17,385,475

Net loss	(4,996,230		)	(6,962,353		)	(10,067,800		)	(14,031,268		)	(182,141,710		)

Dividend related to beneficial conversion feature of preferred stock	(623,489		)	—			(623,489		)	—			(10,236,464		)

Net loss attributable to common stockholders	$	(5,619,719	)	$	(6,962,353	)	$	(10,691,289	)	$	(14,031,268	)	$	(192,378,174	)

Basic and diluted net loss per share	$	(0.13	)	$	(0.13	)	$	(0.29	)	$	(0.25	)

Weighted average shares outstanding: basic and diluted	42,683,395			55,102,627			36,961,378			55,090,968

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

ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended June 30,						Cumulative Period From September 1, 1992 (date of inception) through
	2005			2006			June 30, 2006
Cash Flows From Operating Activities:
Net loss	$	(10,067,800	)	$	(14,031,268	)	$	(182,141,710	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	225,740			152,796			2,927,809
Stock-based compensation expense	456,092			1,685,172			23,729,265
Write-off of long-term investment	—			—			1,000,000
Other	—			—			99,121
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(608,403		)	(614,232		)	(1,165,098		)
Interest receivable on investments	(317,289		)	147,601			(465,833		)
Accounts payable	(357,511		)	285,255			650,467
Accrued liabilities	108,195			769,791			4,194,695
Net cash used in operating activities	(10,560,976		)	(11,604,885		)	(151,171,284		)
Cash Flows From Investing Activities:
Acquisition of property and equipment	(75,281		)	(133,453		)	(3,342,188		)
Purchases of marketable securities	(54,421,684		)	(11,684,401		)	(404,481,082		)
Proceeds from sales of marketable securities	17,889,000			26,000,000			368,352,777
Purchase of long-term investment	—			—			(1,000,000		)
Payments received on notes receivable	—			—			49,687
Net cash provided by (used in) investing activities	(36,607,965		)	14,182,146			(40,420,806		)
Cash Flows From Financing Activities:
Principal payments under capital leases	—			—			(422,088		)
Proceeds from sales leaseback	—			—			120,492
Pledging restricted cash	—			—			(550,000		)
Proceeds from issuance of convertible preferred stock, net of issuance costs	48,884,831			—			89,125,640
Proceeds from issuance of common stock associated with stock options and employee stock purchase plan	156,531			110,565			1,335,894
Proceeds from issuance of common stock, net of issuance costs	—			—			108,894,612
Net cash provided by financing activities	49,041,362			110,565			198,504,550
Net increase in cash and cash equivalents	1,872,421			2,687,826			6,912,460
Cash and cash equivalents, beginning of period	1,108,726			4,224,634			—
Cash and cash equivalents, end of period	$	2,981,147		$	6,912,460		$	6,912,460
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	49,508,320			—			89,125,640

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

ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. Operating results for the three and six month ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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, 2005 for a broader discussion of our business and the opportunities and risks inherent in such business.

Since our inception in 1992, we have not generated any revenue and our activities have consisted primarily of developing products, licensing products, raising capital and recruiting personnel. Accordingly, we are considered to be in the development stage as of June 30, 2006 as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises.

We have experienced significant net losses and negative cash flows since our inception. We have incurred these net losses principally from costs incurred in our research and development programs and from our general and administrative expenses. We expect to continue incurring net losses and negative cash flows 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.

Based upon the current status of our product development plans and our plans for anticipated commercialization of EFAPROXYN, we believe that our existing cash, cash equivalents, and investments in marketable securities will be adequate to satisfy our capital needs through at least 12 months from the date of this filing. However, 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 beginning other long-term development projects involving our product candidates. These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful. Therefore, we may need to obtain additional funds from outside sources to continue research and development activities, fund operating expenses, pursue regulatory approvals and build sales and marketing capabilities, as necessary. Our actual capital requirements will depend on many factors, including:

· the status of our product development programs;

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

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

· competing technological and market developments; and

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

We will be required to raise additional capital to support our future operations, including commercialization of EFAPROXYN in the event we obtain regulatory approval to market EFAPROXYN for the treatment of patients with brain metastases originating from breast cancer. We may seek to obtain this additional capital through arrangements with corporate partners, equity or debt financings, or from other sources. Such arrangements, if successfully consummated, may be dilutive to our existing stockholders. However, there is no assurance that we will be successful in consummating any such arrangements. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves. If we are unable to generate meaningful amounts of revenue from future product sales, if any, or cannot otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of or eliminate one or more of our development programs and our business and future prospects for revenue and profitability may be harmed.

2. Accounts Payable and Accrued Liabilities

Accounts payable are comprised of the following:

	December 31, 2005		June 30, 2006
Trade accounts payable	$	352,266	$	554,792
Related parties	12,946		95,675
	$	365,212	$	650,467

Accrued liabilities are comprised of the following:

	December 31, 2005		June 30, 2006
Accrued research and development expenses	$	1,570,534	$	2,048,888
Accrued restructuring and separation costs	208,786		791,365
Accrued personnel costs	1,201,821		840,303
Accrued clinical manufacturing expenses	165,479		216,380
Accrued expenses — other	278,284		297,759
	$	3,424,904	$	4,194,695

3. Stock-Based Compensation

We adopted SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”) effective January 1, 2006. Under the provisions of SFAS 123R, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period of the award. Prior to the adoption of SFAS 123R, we accounted for grants of stock-based awards according to Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related Interpretations.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. We applied the provisions of SAB 107 in connection with our adoption of SFAS 123R. We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our fiscal year 2006. Our financial statements as of and for the three and six months ended June 30, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

Prior to the Adoption of SFAS 123R

Prior to the adoption of SFAS 123R, we provided the disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosures. The following table illustrates the pro forma effect on net loss attributable to common stockholders and net loss per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for the three and six months ended June 30, 2005:

	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005

Net loss attributable to common stockholders, as reported	$	(5,619,719	)	$	(10,691,289	)
Add: Stock-based employee compensation expense included in reported net loss	471,586			456,092
Deduct: Stock-based employee compensation expense as determined under the fair value based method for all awards	(809,312		)	(1,202,656		)
Pro forma net loss attributable to common stockholders	$	(5,957,445	)	$	(11,437,853	)
Net loss per share: basic and diluted — as reported	$	(0.13	)	$	(0.29	)
Net loss per share: basic and diluted — pro forma	$	(0.14	)	$	(0.31	)

The following weighted-average assumptions were used in estimating the pro forma stock-based compensation expense under SFAS 123 for the three and six months ended June 30, 2005: an expected dividend yield of 0%; an expected stock price volatility of 83% and 84%, respectively; an expected life of 5.0 and 4.2 years, respectively; and a risk free interest rate of 3.8%.

Impact of the adoption of SFAS 123R

In accordance with the modified prospective method of SFAS 123R, we recognized total stock-based compensation expense of $1,203,830 and $1,685,172 during the three and six months ended June 30, 2006, respectively. We did not recognize a related tax benefit during the three and six months ended June 30, 2006. Had we recognized equity-based compensation in accordance with the provisions of APB 25 and related Interpretations instead of SFAS 123R for the three and six months ended June 30, 2006, stock-based compensation expense would have been $337,000 and $439,000, respectively, and our net loss per share would have been $0.11 and $0.23, respectively, on a basic and fully-diluted basis. The following table summarizes the components of stock-based compensation expense for the six months ended June 30, 2006, and our unrecognized compensation expense as of June 30, 2006, net of estimated forfeitures, including the weighted-average years over which the compensation expense will be recognized:

	Outstanding and unvested			Stock-based awards for the six months ended June 30, 2006:
	awards at December 31, 2005			Stock Options			Modification of Stock Options			Restricted Stock			Employee Stock Purchase Plan			Total
Total Fair Value of Awards	$	851,511		$	4,654,948		$	413,320		$	1,286,300		$	56,137		$	7,262,216
Less: Estimated Forfeitures over Expected Life of Award	(137,093		)	(405,462		)	—			—			—			(542,555		)
Compensation Expense of Awards, net of estimated forfeitures	714,418			4,249,486			413,320			1,286,300			56,137			6,719,661
Less: Compensation Expense recognized for the six months ended June 30, 2006	(280,280		)	(811,931		)	(413,320		)	(165,607		)	(14,034		)	(1,685,172		)
Unrecognized Compensation Expense as of June 30, 2006	$	434,138		$	3,437,555		$	—		$	1,120,693		$	42,103		$	5,034,489
Weighted-Average Remaining Amortization Period (Years)	1.0			1.5			—			1.7			1.0			1.5

Outstanding and Unvested Stock-Based Awards as of December 31, 2005

For stock-based awards that were outstanding and unvested as of December 31, 2005, we had an unrecorded deferred stock-based compensation balance of $851,511, as calculated under the provisions of SFAS 123 for purposes of pro forma disclosures. In our pro forma disclosures prior to the adoption of SFAS 123R, we accounted for forfeitures upon occurrence. SFAS 123R requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of January 1, 2006, we estimated that the stock-based compensation for the awards not expected to vest was $137,093, and therefore, the unrecorded deferred stock-based compensation balance related to stock options outstanding and unvested as of December 31, 2005 was adjusted to $714,418 after estimated forfeitures. During the three and six months ended June 30, 2006, we recorded stock-based compensation related to these awards of $133,354 and $280,280, respectively. As of June 30, 2006, the unrecorded deferred stock-based compensation balance related to outstanding and unvested stock options as of December 31, 2005 was $434,138 and will be recognized over an estimated weighted-average amortization period of 1.0 year.

Stock-Based Awards granted and modified during the six months ended June 30, 2006

During the six months ended June 30, 2006, we granted 2,623,343 stock options with an estimated total grant-date fair value of $4,654,948. Of this amount, we estimated that the stock-based compensation for the awards not expected to vest was

$405,462. During the three and six months ended June 30, 2006, we recorded stock-based compensation related to these awards of $591,232 and $811,931, respectively. As of June 30, 2006, the unrecorded deferred stock-based compensation balance related to stock options was $3,437,555 and will be recognized over an estimated weighted-average amortization period of 1.5 years.

During the six months ended June 30, 2006, we entered into a Separation Agreement with our former President and Chief Executive Officer, Michael E. Hart, as described in Note 5 below, pursuant to which we modified the terms of certain stock options held by Mr. Hart to extend the exercise period of the options beyond the original terms of the stock options. We have accounted for the modifications to these options in accordance with SFAS 123R and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, and recorded a one-time stock-based compensation charge of $413,320 during the six months ended June 30, 2006.

Valuation Assumptions

For stock options granted during the six months ended June 30, 2006, the majority vest according to the following schedule: 25% of the shares subject to the award vest one year after the date of grant, and the remaining 75% of the shares subject to the award vest in equal monthly installments thereafter over the next three years, until all such shares are vested and exercisable. Any unearned stock-based compensation calculated according to SFAS 123R is amortized over the vesting period of the individual options in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option and Award Plans (“FIN 28”). The weighted-average grant-date fair value of stock options, as determined under SFAS 123R, granted during the three and six months ended June 30, 2006 was $1.91 and $1.79 per share, respectively. The fair value of stock options granted to our employees during the three and six months ended June 30, 2006 was estimated on the date of each grant using the Black-Scholes option pricing model using the following weighted-average assumptions:

· An expected dividend yield of 0% as we do not expect to pay dividends during the expected life of these awards;

· An expected stock price volatility of 80% and 81%, respectively, determined using our historical stock volatility over the period equal to the expected life of each award;

· An expected life of 3.9 years, determined by factoring the different vesting periods of each award in combination with our employees’ expected exercise behavior; and

· A risk-free interest rate of 4.9% and 4.7%, respectively, based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of each award.

Stock Options

During 1995, our Board of Directors terminated the 1992 Stock Plan (the “1992 Plan”) and adopted the 1995 Stock Option Plan (the “1995 Plan”). The 1995 Plan was amended and restated in 1997. Termination of the 1992 Plan had no effect on the options outstanding under that plan, as they were assumed under the 1995 Plan. Under the 1995 Plan, we could grant fixed and performance-based stock options, and stock appreciation rights to officers, employees, consultants and directors. The stock options were intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code, unless specifically designated as non-qualifying stock options or unless exceeding the applicable statutory limit.

During 2000, concurrent with our initial public offering, the Board of Directors suspended the 1995 Plan and adopted the Allos Therapeutics, Inc. 2000 Stock Incentive Compensation Plan (the “2000 Plan”). The 2000 Plan provides for the granting of stock options similar to the terms of the 1995 Plan as described above. Any shares remaining for future option grants and any future cancellations of options from our 1995 Plan will be available for future grant under the 2000 Plan. Suspension of the 1995 Plan had no effect on the options outstanding under the 1995 Plan. Under the 2000 Plan, we are authorized to increase the number of shares of common stock that shall be available annually on the first day of each fiscal year beginning in 2001 in an amount equal to the lesser of 440,000 shares or 2% of the adjusted average common shares outstanding used to calculate fully diluted earning per share as reported in our Annual Report to Stockholders for the preceding year, or alternatively, by any lesser amount determined by our Board of Directors. On December 21, 2005, our stockholders approved an amendment and restatement of the 2000 Plan to: (i) increase the aggregate number of shares of common stock authorized for issuance under the 2000 Plan by 3,500,000 shares and (ii) provide that the number of shares of common stock that may be granted under the 2000 Plan to any one employee during any calendar year cannot exceed 2,000,000 shares.

In January 2002, our Board of Directors approved the Allos Therapeutics, Inc. 2002 Broad Based Equity Incentive Plan (the “2002 Plan”). Under the 2002 Plan, we are authorized to issue up to 1.0 million shares of common stock to employees, consultants and members of the Board of Directors. Under the terms of the 2002 Plan, the aggregate number of shares underlying stock awards to officers and directors once employed by us cannot exceed 49 percent of the number of shares underlying all stock awards granted, as determined on certain specific dates. The 2002 Plan will terminate on January 7, 2012.

In June 2006, our Board of Directors approved the Allos Therapeutics, Inc. 2006 Inducement Award Plan (the “2006 Plan”). Under the 2006 Plan, we may issue an aggregate of up to 1.5 million shares of our common stock pursuant to equity awards, including the grant of nonstatutory stock options, stock grant awards, stock purchase awards, stock unit awards and other forms of equity compensation. We may grant awards under the 2006 Plan only to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such individual’s entering into employment with the Company and to provide incentives for such persons to exert maximum efforts for the Company’s success.

As of June 30, 2006, we had a total of 3,699,663 shares of common stock available for grant under the 2000, 2002 and 2006 Plans. The 1995, 2000, 2002 and 2006 Plans provide for appropriate adjustments in the number of shares reserved and outstanding options in the event of certain changes to our outstanding common stock by reason of merger, recapitalization, stock split or other similar events. Options granted under the Plans may be exercised for a period of not more than 10 years from the date of grant or any shorter period as determined by our Board of Directors. Options vest as determined by the Board of Directors, generally over a period of two to four years, subject to acceleration under certain events. The exercise price of any incentive stock option granted under the Plans must equal or exceed the fair market value of our common stock on the date of grant, or 110% of the fair market value per share in the case of a 10% or greater stockholder.

The following table summarizes our stock option activity and related information for the 1995, 2000, 2002 and 2006 Plans as of and for the six months ended June 30, 2006:

	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2005	3,944,375		$	3.87
Granted	2,623,343		2.92
Exercised	(78,617	)	1.05
Canceled	(134,882	)	3.14
Outstanding at June 30, 2006	6,354,219		$	3.53

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, 2006:
Options fully vested and exercisable	3,190,319	5.6	$	4.12	$	1,929,970
Options expected to vest, including effects of expected forfeitures	2,823,562	9.4	$	2.92	1,903,919
Options fully vested and expected to vest	6,013,881	7.4	$	3.56	$	3,833,889

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $3.50 as of June 30, 2006, 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, 2006 was 1,661,917. The total fair value of options vested during the three months ended June 30, 2006 was approximately $411,000.

The total intrinsic value of options exercised during the three and six months ended June 30, 2006 was $172,559 and $173,659, respectively. The total cash received from employees as a result of employee stock option exercises during the three and six months ended June 30, 2006 was $80,051 and $82,331, respectively. 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 and six months ended June 30, 2006 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of June 30, 2006. No stock compensation expense was capitalized on the Balance Sheet as of June 30, 2006.

Restricted Stock

During the three and six months ended June 30, 2006, we granted 110,000 and 410,000 shares of restricted stock, respectively. The shares of restricted stock will vest in four equal annual installments. As of June 30, 2006, 410,000 shares

of restricted stock were outstanding and no shares were vested. The weighted-average grant-date fair value per share for restricted stock awards granted during the three and six months ended June 30, 2006 was equal to $3.13 and $3.14 per share, respectively, and was based on the closing market price of the Company’s common stock on the dates of the awards.

Employee Stock Purchase Plan

On February 28, 2001, our Board of Directors approved the Allos Therapeutics, Inc. 2001 Employee Stock Purchase Plan (“Purchase Plan”), which was also approved by our stockholders on April 17, 2001. Under the Purchase Plan, we are authorized to issue up to 2,500,000 shares of common stock to qualified employees. Qualified employees can choose to have up to 10 percent of their annual base earnings withheld to purchase shares of our common stock during each offering period. The purchase price of the common stock is 85% of the lower of the fair market value of a share of common stock on the first day of the offering or the fair market value of a share of common stock on the last day of the purchase period. We sold 32,189, 36,393, 26,675 and 15,346 shares of common stock to employees in 2003, 2004, 2005, and during the six months ended June 30, 2006, respectively. There were 2,352,726 shares available for sale under the Purchase Plan at June 30, 2006. The Purchase Plan will terminate on February 27, 2011. We recognized stock-based compensation expense in connection with the Purchase Plan for the three and six months ended June 30, 2006 of $7,017 and $14,034, respectively. The weighted-average estimated grant date fair value of purchase awards under the Purchase Plan during the three and six months ended June 30, 2006 was $0.98 per share, and was determined using the following weighted-average assumptions: an expected dividend yield of 0%; an expected stock price volatility of 55%; an expected life of 1.2 years; and a risk-free interest rate of 4.7%.

4. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period and diluted net loss per share is computed by giving effect to all dilutive potential common stock, including options, restricted stock and warrants.

Diluted net loss per share for all periods presented is the same as basic net loss per share because the potential common shares were anti-dilutive due to our net loss. Anti-dilutive common shares not included in the calculation of diluted shares outstanding are as follows:

	June 30,
	2005	2006
Common stock options	4,009,244	6,354,219
Restricted stock	—	410,000
Common stock warrants	1,706,893	1,706,893
	5,716,137	8,471,112

5. Restructuring and Separation Costs

In January 2005, we executed agreements to sublease approximately three-quarters of the 12,708 square feet of excess space in our corporate offices located in Westminster, Colorado. The term of each sublease agreement is through the term of our office lease, or October 31, 2008. The total rental payments to us under the sublease agreements are approximately $230,000. Because our obligations under our primary lease are in excess of the sum of the actual and expected sublease rental payments for this excess space, we recorded a lease abandonment charge of $380,086 during the six months ended June 30, 2005. As of June 30, 2006, the remaining liability of $159,386 relating to this lease abandonment charge is recorded in accrued restructuring and separation costs.

In January 2006, Michael E. Hart notified our Board of Directors of his intent to resign from his positions as President, Chief Executive Officer and Chief Financial Officer of the Company once a successor Chief Executive Officer was appointed. On March 3, 2006, we entered into a separation agreement with Mr. Hart to provide certain incentives for his continued employment with the Company while we conducted our search for his successor. On March 9, 2006, we appointed Paul L. Berns as our President, Chief Executive Officer and a member of the Board of Directors and Mr. Hart resigned from his positions in accordance with the terms of the separation agreement. The separation agreement with Mr. Hart was amended on March 9, 2006 and on May 10, 2006 (as so amended, the “Separation Agreement”).

Pursuant to the Separation Agreement, Mr. Hart is entitled to certain payments and benefits from the Company, including but not limited to the following:

· a lump sum payment equal to $181,229 on September 11, 2006, minus applicable deductions and withholdings;

· an amount equal to $362,456 payable over the twelve month period from September 11, 2006 to September 11, 2007, minus applicable deductions and withholdings;

· a pro rata portion of his fiscal 2006 bonus, as determined in the sole discretion of our Compensation Committee of the Board, payable at the same time 2006 bonuses are paid to the Company’s other executive officers;

· reimbursement on a grossed-up basis, for the after tax payment of the premiums on his supplemental disability and term life insurance coverage for a period of twenty-four months following his termination of employment, provided that no reimbursements will be made until September 11, 2006, at which time we will reimburse Mr. Hart for all past due amounts;

· reimbursement for the cost of his COBRA continuation coverage until the earlier of (i) September 10, 2007, or (ii) the date on which he becomes eligible to receive comparable health insurance coverage from a new employer;

· continued vesting of his stock options granted prior to March 3, 2006 for a period of one year following his termination of employment, which options will remain exercisable, subject to the terms of his consulting agreement with the Company (as described below), until ninety days following the termination of his consulting relationship with the Company; provided that in no event will Mr. Hart’s options issued under the Company’s 1995 Stock Option Plan remain exercisable beyond December 31, 2006; and

· up to $20,000 of outplacement assistance during the period from March 10, 2006 to March 10, 2007.

We recorded separation costs of $645,666 during the six months ended June 30, 2006 relating to our estimate of our total obligations under the Separation Agreement with Mr. Hart. As of June 30, 2006, the remaining liability of $631,979 relating to the Separation Agreement with Mr. Hart is recorded in accrued restructuring and separation costs.

6. Commitments and Contingencies

Commitments

In June 2005, we entered into a manufacturing agreement with Hovione Inter Limited (“Hovione”) covering the supply of EFAPROXYN bulk drug substance, or efaproxiral sodium. Under the terms of the agreement, we are required to purchase a negotiated percentage of our annual requirements for efaproxiral sodium from Hovione. We must also meet annual minimum purchase requirements of efaproxiral sodium from Hovione equal to $2,000,000 in 2006, $3,500,000 in 2007, $5,000,000 in 2008, and $5,000,000 in each year thereafter through the end of the term of the agreement. In the event that we do not meet these annual minimum purchase requirements, we have the option to pay extension fees to move the annual requirements out by a total of three years. These extension fees are equal to $100,000 for a first extension, $150,000 for a second extension, and $200,000 for a third and final extension, if necessary. Purchases under this agreement are subject to fluctuations in foreign currency exchange rates. The agreement has a term of seven years following our receipt of approval, if any, from the United States Food and Drug Administration to market EFAPROXYN in the United States. The Company and Hovione each have customary termination rights, including termination for material breach or other events relating to insolvency or bankruptcy. In addition, we may terminate the agreement at any time if we decide to discontinue development or, if approved, marketing of EFAPROXYN.

In December 2002, we entered into a license agreement with Memorial Sloan-Kettering Cancer Center, SRI International and Southern Research Institute, under which we obtained exclusive worldwide rights to several patents and equivalent foreign patent applications to develop and market any product derived from PDX in connection with all diagnostic and therapeutic uses, including human and veterinary diseases. Under the terms of the agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and are also required to make certain additional cash payments based upon the achievement of certain clinical development or regulatory milestones or the passage of certain time periods. To date, we have made aggregate milestone payments of $1.0 million based on the passage of time. In the future, we could make aggregate milestone payments of $2.0 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 million upon achievement of certain regulatory milestones, including regulatory approval to market PDX in the United States or Europe. The next scheduled payment of $500,000 toward the Clinical Milestone is due in December 2006. This and subsequent payments will be expensed as incurred. Under the terms of the agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we will pay the licensors a royalty based on a percentage of net revenues arising from sales of the product or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. As of June 30, 2006, no royalty payments have been made or accrued.

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 a proprietary molecule known as RH1. Under the terms of the agreement, we paid up-front license fee of $190,500 upon execution of the agreement and are also required to make certain additional cash payments based upon the achievement of certain clinical development, regulatory and commercialization milestones. To date, we have not made any milestone payments under the agreement. In the future, we could make aggregate milestone payments of up to $9.2 million upon the achievement of the clinical development, regulatory and commercialization milestones set forth in the agreement. The up-front license fee and all milestone payments under the agreement, as well as the one-time data option fee discussed below, have been or will be

recorded to research and development expense when incurred. Under the terms of the agreement and related data option agreement, Cancer Research UK, CRT’s parent institution, will continue to support an ongoing Phase 1 dose escalation study, and we will have the right to obtain an exclusive license to the results of the study, for use in subsequent development and regulatory activities, upon payment of a one-time data option fee of $360,000. Upon completion of the Phase 1 study, we will assume responsibility for all future development costs and activities and will have sole responsibility for all commercialization activities. In addition, we will pay the licensors a royalty based on a percentage of net revenues arising from sales of the product or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. As of June 30, 2006, no royalty payments have been made or accrued.

Contingencies

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

On November 20, 2005, the plaintiff appealed the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”). We believe the plaintiff’s claims are without merit, and intend to vigorously defend against the plaintiff’s appeal. However, as with any litigation proceeding, we cannot predict with certainty the eventual outcome of the litigation. If the Court of Appeals reverses the District Court’s decision and we are not successful in our defense of such claims, we could be forced to make significant payments to the plaintiffs, and such payments could have a material adverse effect on our business, financial condition, results of operations and cash flows to the extent such payments are not covered by our insurance carriers. Even if our defense against such claims is successful, the litigation could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. This lawsuit has been tendered to our insurance carriers.

We enter into indemnification provisions under our agreements with other companies in our ordinary course of business, typically with business partners, contractors, clinical sites and suppliers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or the use of our product candidates. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. The estimated fair value of the indemnification provisions of these agreements is minimal as of June 30, 2006, and accordingly, we have no corresponding liabilities recorded as of June 30, 2006.

7. Related Party Transaction

Marvin E. Jaffe, M.D.

Dr. Jaffe has served as a member of our Board of Directors since 1994. On March 11, 2006, Dr. Jaffe tendered his resignation as a director of the Company effective immediately prior to our 2006 annual meeting of stockholders and notified the Board that he did not intend to stand for reelection. As a result of Dr. Jaffe’s resignation as a director, on May 10, 2006, we entered into a consulting agreement with Dr. Jaffe in order to allow us to retain the benefit of Dr. Jaffe’s knowledge and expertise regarding the Company’s business and the potential clinical development and commercialization strategies for our products (the “Jaffe Consulting Agreement”). Pursuant to the Jaffe Consulting Agreement, Dr. Jaffe has agreed to provide up to 10 hours of consulting service per month as and when requested from time to time by the Company. In connection with the performance of his consulting services, we granted Dr. Jaffe a nonqualified stock option under the Company’s 2000 Stock Incentive Compensation Plan to purchase 20,000 shares of common stock at an exercise price equal to $2.94 per share, which equals the closing sale price of a share of our common stock on the effective date of the Jaffe Consulting Agreement (as reported by the Nasdaq National Market). This option is subject to the terms and conditions of the 2000 Stock Incentive Compensation Plan and vests in eighteen equal monthly installments commencing July 1, 2006. Dr. Jaffe is not entitled to any additional compensation or benefits in connection with the performance of his consulting services. The term of the Jaffe Consulting Agreement is from May 10, 2006 to December 31, 2007; provided that it will automatically terminate upon the occurrence of one or more events constituting just cause (as defined in the agreement).

Michael E. Hart

Pursuant to the Separation Agreement with Mr. Hart (as discussed in Note 5) and as a result of Mr. Hart’s resignation as a director, on May 10, 2006, we entered into a consulting agreement with Mr. Hart in order to allow us to retain the benefit of Mr. Hart’s historical knowledge regarding the Company’s operations and corporate development strategies (the “Hart Consulting Agreement”). Pursuant to the Hart Consulting Agreement, Mr. Hart has agreed to provide an average of at least 10 hours of consulting services per month as and when requested from time to time by the Company. Mr. Hart is not entitled to any compensation or benefits in connection with the performance of his consulting services, except for those payments and benefits being provided to him under the Separation Agreement. The term of the Hart Consulting Agreement is from May 10, 2006 to December 31, 2007; provided that it will automatically terminate upon the occurrence of one or more events constituting just cause (as defined in the agreement).

8. Recently Issued Accounting Pronouncement

In February 2006, the Financial Accounting Standards Board issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which amends SFAS No. 133 and SFAS No. 140. SFAS 155 will be effective for the Company beginning in the first quarter of 2007. SFAS 155 permits interests in hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, to be accounted for as a single financial instrument at fair value, with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. We are assessing the impact of the adoption of SFAS 155.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements concerning our projected timelines for the performance of interim analyses, completion of enrollment and announcement of results from our ongoing clinical trials, including our Phase 3 ENRICH trial; the potential for the results of our Phase 3 ENRICH trial to support marketing approval of EFAPROXYN; our intent and projected timelines to initiate a Phase 2 clinical trial of PDX in patients with relapsed or refractory peripheral T-cell lymphoma; other statements regarding our future product development and regulatory strategies, including our intent to develop or seek regulatory approval for our product candidates in specific indications; the ability of our third-party manufacturing parties to support our requirements for drug supply; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements which are other than statements of historical fact. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our, or our industry’s results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among other things, those discussed under the caption “Risk Factors” in Part II, Item 1A of this quarterly report. 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.

Overview

Allos Therapeutics, Inc. is a biopharmaceutical company focused on developing and commercializing innovative small molecule drugs for improving the treatment of cancer. Small molecule drugs, in general, are non-protein products produced by chemical synthesis rather than biological methods. We strive to develop drugs that improve the treatment of cancer and enhance the power of current therapies. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or together with one or more potential strategic partners. Our focus is on product opportunities that leverage our internal clinical development and regulatory expertise and address important medical markets. We may also endeavor from time to time to grow our existing portfolio of product candidates through product acquisition and in-licensing efforts.

Since our inception in 1992, we have not generated any revenue from product sales and we have experienced significant net losses and negative cash flows. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative expenses. We expect to continue incurring net losses and negative cash flows 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 have three product candidates that are currently under development: EFAPROXYN (efaproxiral), PDX (pralatrexate) and RH1.

· EFAPROXYN is the first synthetic small molecule designed to sensitize hypoxic, or oxygen-deprived, areas of tumors during radiation therapy by facilitating the release of oxygen from hemoglobin, the oxygen-carrying protein contained within red blood cells, and increasing the level of oxygen in tumors. The presence of oxygen in tumors is an essential element for the effectiveness of radiation therapy. By increasing tumor oxygenation, we believe EFAPROXYN has the potential to enhance the efficacy of standard radiation therapy.

In December 2003, we submitted a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, for approval to market EFAPROXYN in the United States as an adjunct to whole brain radiation therapy, or WBRT, for the treatment of patients with brain metastases originating from breast cancer. The NDA was based on the findings from our randomized, open label Phase 3 clinical trial of EFAPROXYN in patients with brain metastases, called REACH, which demonstrated a statistically significant survival benefit in patients with brain metastases originating from breast cancer, a subgroup of patients that was not prospectively defined as an intent-to-treat subgroup. The results from the REACH trial were announced in April 2003. In May 2004, the FDA’s

Oncologic Drug Advisory Committee reviewed the NDA and voted not to recommend approval of EFAPROXYN for this indication based on the data from the REACH trial. However, in June 2004, the FDA issued an “approvable letter” in which it indicated that the NDA may be approved if we successfully complete our ongoing Phase 3 clinical trial of EFAPROXYN in patients with brain metastases originating from breast cancer and submit the results as a NDA amendment for the FDA’s review. In the letter, the FDA stated, “if the study shows effectiveness in this population (increased survival) using the pre specified analysis, and the study is otherwise satisfactory, we believe it would, together with the subset result in the [REACH trial], support approval.”

The ongoing Phase 3 trial referenced in the FDA’s approvable letter was initiated in February 2004. This pivotal Phase 3 trial, which is called ENRICH (ENhancing whole brain Radiation therapy In patients with breast Cancer and Hypoxic brain metastases), is seeking to enroll approximately 360 patients at up to 125 cancer centers across North America, Europe and South America. We currently expect to complete patient enrollment in the trial by the third quarter of 2006. The primary endpoint of the trial will measure the difference in survival between patients receiving WBRT plus supplemental oxygen, with or without EFAPROXYN. An independent Data Monitoring Committee, or DMC, will provide an expert review of cumulative data from the trial to determine, at an upcoming second interim analysis, if sufficient evidence exists to stop the trial early due to overwhelming evidence of improved survival in the EFAPROXYN arm. In March 2006, the DMC completed the first planned interim analysis of data from ENRICH and recommended that the trial continue per the protocol. This first interim review was triggered by the occurrence of 94 patient deaths and was based upon an evaluation of patients randomized through February 14, 2006. In order to protect the integrity of the trial, the results of the efficacy analysis were not made available to the Company; however, no major patient safety concerns were identified by the DMC. The DMC will perform the second interim analysis of the primary endpoint at its first scheduled meeting following the occurrence 188 patient deaths, which we currently expect to occur in the second half of 2006. We will perform the final analysis of both the primary and secondary endpoints, if necessary, following the occurrence of 281 patient deaths, which we currently expect to occur in mid 2007. A number of factors will influence the actual timing of the second interim and final analyses, including patient accrual rates and individual survival rates.

In June 2004, we filed a Marketing Authorization Application, or MAA, with the European Medicines Agency, or EMEA, for approval to market EFAPROXYN in Europe as an adjunct to WBRT for the treatment of patients with brain metastases originating from breast cancer. As with our NDA, the MAA was based on the findings from the REACH trial. On October 11, 2005, we withdrew the MAA as a result of the Rapporteurs’ Day 180 Joint Assessment Report, which concluded that the existing data package was not sufficient to support approval. Although we can provide no assurances, we believe that our ongoing ENRICH trial, if positive, together with other supporting data, should allow us to address the EMEA’s concerns regarding EFAPROXYN and provide the additional data necessary to support the filing of a new MAA and the future approval of EFAPROXYN in Europe for the treatment of patients with brain metastases originating from breast cancer.

In August 2004, the FDA awarded orphan drug status to EFAPROXYN for use as an adjunct to WBRT for the treatment of patients with brain metastases originating from breast cancer. The FDA may award orphan drug designation to drugs that target conditions affecting 200,000 or fewer patients per year in the United States and provide a significant therapeutic advantage over existing treatments. The orphan drug designation provides for marketing exclusivity in the United States for seven years following marketing approval by the FDA.

In addition to the Phase 3 ENRICH trial, we are currently enrolling patients in the following clinical trials involving EFAPROXYN:

· a Phase 1 clinical trial in patients with locally advanced non-small cell lung cancer, or NSCLC, receiving concurrent chemoradiotherapy (chemotherapy and radiation therapy administered at the same time) in combination with EFAPROXYN; and

· a Phase 1b/2 clinical trial of EFAPROXYN in patients with locally advanced cancer of the cervix receiving concurrent chemoradiotherapy.

· PDX is a 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. Certain preclinical data suggests that PDX has an enhanced potency and toxicity profile relative to methotrexate and other related DHFR inhibitors. Drugs that inhibit DHFR, such as methotrexate, were among the first antifolate chemotherapeutic agents discovered. Methotrexate remains one of the most widely applied antifolate chemotherapeutics and has been used to treat leukemia, breast, bladder, gastric, esophageal, head, and neck cancers. We believe PDX has the potential to be delivered as a single agent or in combination therapy regimens.

In December 2005, we announced the presentation of interim results from our ongoing Phase 1/2 single-agent study of PDX in patients with relapsed or refractory non-Hodgkin’s lymphoma and Hodgkin’s disease, which is currently being conducted at Memorial Sloan Kettering Cancer Center. The interim results, which were presented at the 2005 American Society of Hematology Annual Meeting, demonstrated preliminary evidence of PDX activity in patients with various subtypes of T-cell lymphoma. Notably, four of seven evaluable patients with T-cell lymphoma achieved a complete response following treatment with PDX, despite having failed multiple prior therapies. Moreover, the addition of vitamins to the treatment regimen also appeared to successfully mitigate the previously established dose limiting toxicity of stomatitis, or mouth ulcers.

Based on the interim results from the Phase 1/2 study of PDX in patients with non-Hodgkin’s lymphoma, we plan to initiate a Phase 2, non-randomized, open-label study of PDX in patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL. We currently plan to open the study for enrollment during the third quarter of 2006, and will seek to enroll 100 evaluable patients at approximately 35 cancer centers across the United States, Canada and Europe. In July 2006, we reached agreement with the FDA under the special protocol assessment, or SPA, process on the design of this pivotal Phase 2 trial. The SPA process allows for FDA evaluation of a clinical trial protocol intended to form the primary basis of an efficacy claim in support of a new drug application, and provides a binding agreement that the study design, including trial size, clinical endpoints and/or 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 this Phase 2 trial, will be adequate to demonstrate the safety and efficacy of PDX for the treatment of PTCL, or otherwise be sufficient to support FDA or any foreign regulatory approval.

In July 2006, the FDA awarded orphan drug status to PDX for the treatment of patients with T-cell lymphoma. The orphan drug designation provides for marketing exclusivity in the United States for seven years following marketing approval by the FDA.

We are also currently enrolling patients in a Phase 1 dose escalation study of PDX with vitamin B12 and folic acid supplementation in patients with previously treated advanced NSCLC. The determination of the maximum tolerated dose of PDX in combination with vitamin supplementation will be essential for further development in this indication.

· RH1 is a small molecule chemotherapeutic agent that we believe is bioactivated by the enzyme DT-diaphorase, or DTD, which is over-expressed in many tumors relative to normal tissue, including lung, colon, breast and liver tumors. Because RH1 is bioactivated in the presence of DTD, we believe it has the potential to provide targeted drug delivery to these tumor types while limiting the toxicity to normal tissue. RH1 has undergone in vivo efficacy testing by the Developmental Therapeutics Program of the National Cancer Institute and has demonstrated significant activity in both NSCLC and ovarian xenograft models.

RH1 is currently being evaluated in patients with advanced solid tumors refractory to other chemotherapy regimens in an open label, Phase 1 dose escalation study to test the safety, tolerability and pharmacokinetics of escalating doses of RH1. During the second quarter of 2006, we completed patient enrollment in this study. Once the last patient has completed treatment, the Company will evaluate results from the study to determine future development plans.

Results of Operations

Research and Development. Research and development expenses include the costs of certain personnel, basic research, nonclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, patents and licensing fees for new products.

Research and development expenses for the three months ended June 30, 2005 and 2006 were $2.6 million and $3.3 million, respectively. The $700,000 increase in research and development expenses for the three months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $169,000 increase in clinical trial costs due to increased patient enrollment in several of our clinical trials;

· $162,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006;

· $133,000 increase in personnel costs due to increases in headcount; and

· $126,000 increase in nonclinical study costs related to PDX.

Research and development expenses for the six months ended June 30, 2005 and 2006 were $5.0 million and $6.8 million, respectively. The $1.8 million increase in research and development expenses for the six months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $954,000 increase in our Phase 3 ENRICH trial costs due to increased patient enrollment;

· $313,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006;

· $238,000 increase in personnel costs due to increases in headcount; and

· $188,000 increase in nonclinical studies costs related to PDX.

For the remainder of 2006, we expect our average quarterly research and development expenses to increase moderately relative to the amount recorded for the three months ended June 30, 2006 primarily due to the following:

· an increase in licensing fees relating to a $500,000 milestone payment due in December 2006 under our license agreement for PDX;

· an increase in nonclinical study costs for PDX; and

· an increase in clinical trial costs related to our planned Phase 2 trial of PDX in patients with PTCL, which we currently plan to initiate during the third quarter of 2006. The amount and timing of the costs related to our clinical trials is difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, the rate of patient enrollment and the detailed design of future trials.

Clinical Manufacturing. Clinical manufacturing expenses include the costs of certain personnel, third party manufacturing costs for EFAPROXYN for use in clinical trials, costs associated with pre-commercial scale-up of manufacturing to support anticipated commercial requirements, and development activities for clinical trial and nonclinical studies material for PDX.

Clinical manufacturing expenses for the three months ended June 30, 2005 and 2006 were $268,000 and $391,000, respectively. The $123,000 increase in clinical manufacturing expenses for the three months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $77,000 increase in third-party manufacturing costs, primarily due to increases in our supply of PDX bulk drug substance and formulated drug product to support our requirements for future PDX clinical trials and nonclinical studies; and

· $29,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006.

Clinical manufacturing expenses for the six months ended June 30, 2005 and 2006 were $628,000 and $952,000, respectively. The $324,000 increase in clinical manufacturing expenses for the six months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $262,000 increase in third-party manufacturing costs, primarily due to increases in our supply of PDX bulk drug substance and formulated drug product to support our requirements for future PDX clinical trials and nonclinical studies; and

· $53,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006.

For the remainder of 2006, we expect our average quarterly clinical manufacturing expenses to increase moderately relative to the amount recorded for the three months ended June 30, 2006 primarily due to increases in third-party manufacturing costs for PDX.

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

Marketing, general and administrative expenses for the three months ended June 30, 2005 and 2006 were $2.6 million and $3.7 million, respectively. The $1.1 million increase in marketing, general and administrative expenses for the three months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $541,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006;

· $259,000 increase in personnel costs, mainly attributable to increases in compensation costs year over year and additional headcount;

· $131,000 increase in legal costs for general corporate matters; and

· $113,000 increase in facilities costs.

Marketing, general and administrative expenses for the six months ended June 30, 2005 and 2006 were $4.8 million and $6.7 million, respectively. The $1.9 million increase in marketing, general and administrative expenses for the six months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the following:

· $863,000 increase in non-cash stock-based compensation expense due to the adoption of accounting rules related to stock-based compensation on January 1, 2006;

· $680,000 increase in personnel costs, mainly attributable to increases in compensation costs year over year, additional headcount, and recruiting costs of $236,000 for our new President and Chief Executive Officer;

· $149,000 increase in consulting costs; and

· $94,000 increase in legal costs for general corporate matters.

For the remainder of 2006, we expect our average quarterly marketing, general and administrative expenses to remain relatively stable to the amount recorded for the three months ended June 30, 2006.

Restructuring and Separation Costs. Restructuring and separation costs for the six months ended June 30, 2005 and 2006 were $380,000 and $646,000, respectively.

In January 2005, we executed agreements to sublease approximately three-quarters of the 12,708 square feet of excess space in our corporate offices located in Westminster, Colorado. The term of each sublease agreement is through the term of our office lease, or October 31, 2008. The total rental payments to us under the sublease agreements are approximately $230,000. Because our obligations under our primary lease were in excess of the sum of the actual and expected sublease rental payments for this excess space, we recorded a lease abandonment charge of $380,086 in restructuring and separation costs during the six months ended June 30, 2005. As of June 30, 2006, the remaining liability of $159,386 relating to this lease abandonment charge is recorded in accrued restructuring and separation costs.

In January 2006, Michael E. Hart notified our Board of Directors of his intent to resign from his positions as President, Chief Executive Officer and Chief Financial Officer of the Company once a successor Chief Executive Officer was appointed. On March 3, 2006, we entered into a separation agreement with Mr. Hart to provide certain incentives for his continued employment with the Company while we conducted our search for his successor. On March 9, 2006, we appointed Paul L. Berns as our President, Chief Executive Officer and a member of the Board of Directors and Mr. Hart resigned from his positions in accordance with the terms of the separation agreement. The separation agreement with Mr. Hart was amended on March 9, 2006, and on May 10, 2006 (as so amended, the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Hart is entitled to certain payments and benefits from the Company, as further described in Note 5 to our Financial Statements included in Part I, Item 1 of this quarterly report.

Interest and Other Income, Net. Interest income, net of interest expense, for the three months ended June 30, 2005 and 2006 was $507,000 and $488,000, respectively. Interest income, net of interest expense, for the six months ended June 30, 2005 and 2006 was $717,000 and $992,000, respectively. The $275,000 increase in net interest income in the six months ended June 30, 2006 as compared to the same period in 2005 was primarily due to higher yields on United States government securities, high-grade commercial paper and corporate notes, and money market funds.

Liquidity and Capital Resources

Our cash, cash equivalents, and short-term investments in marketable securities amounted to $43.5 million at June 30, 2006. Since our inception, we have financed our operations primarily through the private and public sale of securities, which have resulted in net proceeds to us of $199.4 million through June 30, 2006. We have also generated approximately $17.4 million of net interest income since our inception from investing the net proceeds of these financings.

We have used $151.2 million of cash for operating activities from our inception through June 30, 2006. Net cash used to fund our operating activities for the six months ended June 30, 2005 and 2006 was $10.6 million and $11.6 million, respectively.

Net cash used in investing activities for the six months ended June 30, 2005 was $36.6 million and consisted primarily of purchases of investments in marketable securities, partially offset by the proceeds from maturities of investments in marketable securities. Net cash provided by investing activities for the six months ended June 30, 2006 was $14.2 million

and consisted primarily of proceeds from maturities of investments in marketable securities, partially offset by the purchase of investments in marketable securities.

Net cash provided by financing activities for the six months ended June 30, 2005 was $49.0 million and consisted of the net proceeds of the March 2005 sale of Series A Exchangeable Preferred Stock, which was exchanged for common stock in May 2005. Net cash provided by financing activities for the six months ended June 30, 2006 was $111,000 and consisted of proceeds from sales of common stock associated with stock options exercised by our employees and sales of common stock under our employee stock purchase plan.

Based upon the current status of our product development and commercialization plans, we believe that our existing cash, cash equivalents, and investments in marketable securities will be adequate to satisfy our capital needs through at least 12 months from the date of this filing. However, 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 beginning other long-term development projects involving our product candidates. These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful. Therefore, we may need to obtain additional funds from outside sources to continue research and development activities, fund operating expenses, pursue regulatory approvals and build sales and marketing capabilities, as necessary. However, our actual capital requirements will depend on many factors, including:

· the status of our product development programs;

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

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

· competing technological and market developments; and

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

Obligations and Commitments

The following table shows our contractual obligations and commitments as of June 30, 2006.

	July 1, 2006 to June 30, 2007		July 1, 2007, to June 30, 2009		July 1, 2009 to June 30, 2011		After July 1, 2011		Total
Operating lease obligations	$	760,418	$	1,078,366	$	39,554	$	—	$	1,878,338
License agreement obligations	500,000		1,000,000		500,000		—		2,000,000
Purchase obligations	2,000,000		8,500,000		10,000,000		20,000,000		40,500,000
Total obligations	$	3,260,418	$	10,578,366	$	10,539,554	$	20,000,000	$	44,378,338

Operating lease obligations represent future minimum rental commitments for non-cancelable operating leases for our facilities and certain office equipment, net of $170,000 of remaining sublease payments that we will receive on excess space in our corporate offices.

License agreement obligations represent future milestone payments under our license agreement for PDX, due upon the passage of certain time periods after the effective date of the agreement, which could be paid earlier depending on the timing of achieving a clinical development milestone.

Purchase obligations represent annual minimum purchase requirements for efaproxiral sodium from Hovione Inter Limited under our June 2005 Manufacturing Agreement, equal to $2,000,000 in 2006, $3,500,000 in 2007, $5,000,000 in 2008, and $5,000,000 in each year thereafter through the end of the term of the agreement (equal to the 7th anniversary of the date we obtain approval from the FDA to market EFAPROXYN). In the event that we do not meet these annual minimum purchase

requirements, we have the option to pay extension fees to move the annual requirements out by a total of three years. These extension fees are equal to $100,000 for a first extension, $150,000 for a second extension, and $200,000 for a third and final extension, if necessary. Purchases under this agreement are subject to fluctuations in foreign currency exchange rates. The Company and Hovione each have customary termination rights, including termination for material breach or other events relating to insolvency or bankruptcy. In addition, we may terminate the agreement at any time if we decide to discontinue development or, if approved, marketing of EFAPROXYN.

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 assumptions 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. We apply estimation methodologies consistently from period to period. The actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005. These critical accounting policies are subject to judgments and uncertainties, which affect the application of these policies. We have not made any changes in any of these critical accounting polices during the three months ended June 30, 2006.

Stock-Based Compensation

We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”) effective January 1, 2006. SFAS 123R establishes accounting for stock-based awards exchanged for employee services. Under SFAS 123R, stock-based compensation is measured at the grant date, based on the fair value of the award computed using the Black-Scholes option valuation model, and is recognized as expense over an employee’s required service period. Prior to January 1, 2006, we applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation.

We elected to adopt the modified prospective application method as provided by SFAS 123R. Accordingly, during the three and six months ended June 30, 2006, we recorded stock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since January 1, 1996, the effective date of SFAS 123. In accordance with the modified prospective method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

During the three and six months ended June 30, 2006, we recorded stock-based compensation expense of $1.2 million and $1.7 million, respectively, related to stock options, restricted stock and our Employee Stock Purchase Plan. As of June 30, 2006, the unrecorded deferred stock-based compensation expense balance related to these stock-based awards was $5.0 million and will be recognized over an estimated weighted average amortization period of 1.5 years.

Judgments and estimates must be made and used in determining the factors used in calculating the fair value of stock-based awards, including the expected forfeiture rate of our stock-based awards, the expected life of our stock-based awards, and the expected volatility of our stock price. For more information on stock-based compensation expense during the three and six months ended June 30, 2006, refer to Note 3 “Stock-Based Compensation” of the Notes to our Financial Statements included in Part I, Item 1 of this quarterly report.

The adoption of SFAS 123R on January 1, 2006 had a material impact on our net loss and net loss per share for the three and six months ended June 30, 2006. We expect that our adoption of SFAS 123R will have a material impact on our future financial statements and results of operations.

Recently Issued Accounting Pronouncement

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term and long-term 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 as of June 30, 2006 is less than three months. As of June 30, 2006, our investments in marketable securities of $36.6 million are all classified as held-to-maturity and were held in a variety of interest-bearing instruments, consisting mainly of high-grade corporate notes.

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

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer (the “Evaluating Officers”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on that evaluation, our management, including the Evaluating Officers, concluded that our disclosure controls and procedures were effective as of June 30, 2006 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Evaluating Officers, as appropriate, to allow timely decisions regarding required disclosure.

No Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended June 30, 2006 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

ITEM 1A. RISK FACTORS

An investment in our common stock is risky. Stockholders and potential investors in shares of our stock should carefully consider the following risk factors, which hereby update those risks contained in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2005, 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 have a history of net losses and an accumulated deficit, and we may never achieve or maintain revenue or profitability in the future.

We have never generated revenue from product sales and have experienced significant net losses since our inception in 1992. To date, we have financed our operations primarily through the private and public sale of securities. For the three and six months ended June 30, 2006, we had a net loss of $7.0 and $14.0 million, respectively. As of June 30, 2006, we had accumulated a deficit of $192.4 million during our development stage. We have incurred these net losses principally from costs incurred in our research and development programs and from our 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. 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 product candidates are in various stages of development and may never be fully developed in a manner suitable for commercialization. If we do not develop commercially successful products, our ability to generate revenue will be limited.

We currently have no products that are approved for commercial sale. All of our product candidates are in various stages of development, and significant research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. We do not expect to be able to market any of our product candidates, including EFAPROXYN, until at least 2008. 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 develop, receive approval for, or successfully commercialize any of our product candidates, we may be unable to generate meaningful revenue from product sales and will incur continued net losses.

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

A pharmaceutical product cannot be marketed in the United States or most other countries until it has completed a rigorous and extensive regulatory approval process. If we fail to obtain regulatory approval to market our product candidates, we will be unable to sell our products and generate revenue, which would jeopardize our ability to continue operating our business. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. We may not obtain regulatory approval for any product candidates we develop, including EFAPROXYN and PDX, or we may not obtain regulatory review of such product candidates in a timely manner. For a more 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, 2005.

If our product candidates do not 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. If we fail to obtain regulatory approval for our current or future product candidates, we will be unable to market and sell them and therefore may never generate meaningful amounts of revenue or become profitable.

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

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

We do not know when our current clinical trials, including ENRICH, will be completed, if at all. We also cannot accurately predict when other planned clinical trials, including our planned Phase 2 trial of PDX in patients with relapsed or refractory PTCL, will begin or be completed. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Other companies are conducting clinical trials and have announced plans for future trials that are seeking or likely to seek patients with the same diseases as those we are studying. Competition for patients in some cancer trials is particularly intense because of the limited number of leading specialist physicians and the geographic concentration of major clinical centers.

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

While we have negotiated a special protocol assessment with the FDA relating to our planned Phase 2 clinical trial of PDX in patients with relapsed or refractory PTCL, this agreement does not guarantee any particular outcome from regulatory review of the study or the product, including any regulatory approval.

In July 2006, we reached agreement with the FDA under the special protocol assessment, or SPA, process on the design of our planned Phase 2 trial of PDX in patients with relapsed or refractory PTCL. The SPA process allows for FDA evaluation

of a clinical trial protocol intended to form the primary basis of an efficacy claim in support of a new drug application, and provides a binding agreement that the study design, including trial size, clinical endpoints and/or 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 Phase 2 trial will be adequate to demonstrate the safety and efficacy of PDX for the treatment of PTCL, or otherwise be sufficient to support FDA or any foreign regulatory approval. Further, the SPA agreement is not binding on the FDA if public health concerns unrecognized at the time the SPA agreement is entered into become evident, other new scientific concerns regarding product safety or efficacy arise, or if we fail to comply with the agreed upon trial protocols. In addition, the SPA agreement may be changed by us or the FDA on written agreement of both parties, and the FDA retains significant latitude and discretion in interpreting the terms of the SPA agreement and the data and results from the Phase 2 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 Phase 2 trial, or whether PDX will receive any regulatory approvals as a result of the SPA agreement or the clinical trial. Therefore, despite the potential benefits of the SPA agreement, significant uncertainty remains regarding the clinical development and regulatory approval process for PDX for the treatment of PTCL.

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

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

Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances, and the FDA can request that we conduct additional clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. As a result, there can be no assurance that our ENRICH trial or Phase 2 trial of PDX in patients with relapsed or refractory PTCL, will achieve their primary 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 EFAPROXYN, PDX or any other product candidate, it would significantly increase our expenses and delay marketing of our products.

Adverse events in our clinical trials may force us to stop development of our product candidates or prevent regulatory approval 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.

Due to our reliance on contract research organizations and other third parties to conduct 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 ENRICH 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.

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

Even if we receive regulatory approvals, our product candidates may later exhibit adverse effects 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 prevent us from ever generating meaningful revenues or achieving profitability.

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

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

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

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

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

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

• the timing and outcome of our ongoing ENRICH trial;

• costs associated with the commercialization of EFAPROXYN, if approved for marketing;

• our evaluation of, and decisions with respect to, our strategic alternatives, and

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

We intend to raise additional capital in the future through arrangements with corporate partners, equity or debt financings, or from other sources. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. If adequate funds are not available to us, we will 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. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

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

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

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

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

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

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.

We have a contract with Hovione Inter Limited for the supply of EFAPROXYN bulk drug substance, and a contract with Baxter Healthcare for the supply of EFAPROXYN formulated drug product. These manufacturers are currently our only contracted sources for the production and formulation of EFAPROXYN.

Even if we obtain approval to market EFAPROXYN in one or more indications, our current or future manufacturers may be unable to accurately and reliably manufacture commercial quantities of EFAPROXYN at reasonable costs, on a timely basis and in compliance with the FDA’s current Good Manufacturing Practices. If our current or future contract manufacturers fail in any of these respects, our ability to timely complete our clinical trials, obtain required regulatory approvals and successfully commercialize EFAPROXYN will be materially and adversely affected.

Our reliance on contract manufacturers exposes us to additional risks, including:

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

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

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

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

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

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

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

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

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

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

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

· ease of use of our products;

· reimbursement and coverage policies of government and private payors such as 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 reimbursement could limit our ability to generate revenue.

Our ability to successfully commercialize our products will depend, in part, on the extent to which reimbursement for the products will be available from:

· government and health administration authorities;

· private health insurers;

· managed care programs; and

· other third-party payors.

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

Health care reform measures could adversely affect our business.

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

The FDA has designated EFAPROXYN for the treatment of brain metastases from breast cancer as an orphan drug under the Orphan Drug Act. The Orphan Drug Act provides incentives to pharmaceutical companies to develop and market drugs for rare diseases, generally by entitling the first developer that receives FDA marketing approval for an orphan drug to a seven-year exclusive marketing period in the United States for that product. In recent years, Congress has considered legislation to change the Orphan Drug Act to shorten the period of automatic market exclusivity and to grant marketing rights to simultaneous developers of a drug. If the Orphan Drug Act is amended in this manner, any approved drugs for which we have been granted exclusive marketing rights under the Orphan Drug Act will face increased competition, which may decrease the amount of revenue we may receive from these products.

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

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

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

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

We have been named as a defendant in an alleged securities class action lawsuit seeking unspecified damages relating to the issuance of allegedly false and misleading statements regarding EFAPROXYN during the period from May 29, 2003 to April 29, 2004 and subsequent declines in our stock price. On October 20, 2005, the District Court granted our motion to

dismiss the lawsuit with prejudice and entered judgment in our favor. On November 20, 2005, the plaintiff appealed the decision to the United States Court of Appeals for the Tenth Circuit. We are currently engaged in defending against these claims, which, if decided against us, could have a material adverse effect on our business, financial condition and results of operations. The costs incurred in connection with this lawsuit could be significant and may not be covered by our insurance policies. This lawsuit could also result in continued diversion of our time and attention away from business operations, which could harm our business.

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

We are a small company with 55 full-time employees, and our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions and scientists. Competition for personnel and academic collaborations is intense. In particular, our product development programs depend on our ability to attract and retain highly skilled clinical development personnel. In addition, we will need to hire additional personnel and develop additional academic collaborations as we continue to expand our research and development activities. We do not know if we will be able to attract, retain or motivate personnel or maintain our relationships with academic institutions and scientists. If we fail to negotiate additional acceptable collaborations with academic institutions and scientists, or if our existing academic collaborations were to be unsuccessful, our product development programs may be delayed.

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

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

As a publicly-traded company, we are subject to significant regulations, some of which have either only recently been adopted, including the Sarbanes Oxley Act of 2002, or are currently proposals subject to change. We cannot assure that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002 or any other regulations we could be subject to a range of consequences, including restrictions on our ability to sell equity or otherwise raise capital funds, the de-listing of our common stock from the Nasdaq National 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 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 completed or when an application for regulatory approval will be filed. Some of our estimates are included in this report. Our estimates are based on information available to us as of the date of this report and a variety of assumptions. Many of the underlying assumptions are outside of our control. If milestones are not achieved when we estimated that they would be, investors could be disappointed, and our stock price may decrease.

Warburg Pincus Private Equity VIII, L.P. (“Warburg”) controls 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. As of June 30, 2006, we have approximately 55.6 million shares of common stock outstanding. Warburg owns approximately 22.6 million shares of our common stock, or 41% of the voting power of our outstanding common stock as of June 30, 2006. As a result, Warburg is able to exercise substantial influence over any actions requiring stockholder approval. However, in connection with its purchase of the Exchangeable Preferred, Warburg entered into a standstill agreement agreeing not to pursue, for four years, certain activities the purpose or effect of which may be to change or influence the control of Allos.

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

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

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

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

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

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

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

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

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

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

Because Warburg owns a substantial percentage of our outstanding common stock, we amended the stockholder rights plan in connection with Warburg’s purchase of the Exchangeable Preferred to provide that Warburg and its affiliates will be exempt from the stockholder rights plan, unless Warburg and its affiliates become, without our prior consent, the beneficial owner of more than 44% of our common stock. Under the stockholder rights plan, our Board of Directors has express authority to amend the rights plan without stockholder approval.

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

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

· actual or anticipated results of our clinical trials;

· actual or anticipated regulatory approvals or non-approvals of our product candidates, including EFAPROXYN, 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 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.

In addition, the stock market in general, the Nasdaq National Market and the market for technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources.

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

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

We expect that our adoption of 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. Pursuant to a Registration Rights Agreement entered into between us and the purchasers of Exchangeable Preferred, beginning on March 4, 2007, the purchasers of Exchangeable Preferred will be entitled to certain registration rights with respect to the shares of common stock that were issued upon exchange of the Exchangeable Preferred.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our 2006 Annual Meeting of Stockholders on May 10, 2006. At such meeting, the following actions were voted upon:

a. Election of Directors

	For	Withheld
Stephen J. Hoffman, Ph.D., M.D.	49,621,779	651,035
Paul L. Berns	49,852,325	420,489
Michael D. Casey	49,851,665	421,149
Mark G. Edwards	49,632,516	640,298
Stewart Hen	49,641,086	631,728
Jonathan S. Leff	49,273,924	998,890
Timothy P. Lynch	49,858,768	414,046

b. Approval of an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 75,000,000 to 150,000,000.

For		Against		Abstentions
49,115,858		1,110,173		46,782

c. Ratification of the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006.

For		Against		Abstentions
50,185,625		71,160		16,029

ITEM 6. EXHIBITS

Exhibit No.	Note	Description
3.1		Amended and Restated Certificate of Incorporation.
3.2		Certificate of Designation of Series A Junior Participating Preferred Stock.
3.3		Certificate of Amendment to Restated Certificate of Incorporation.
10.1	(1)	Employment Agreement dated March 9, 2006 between Allos Therapeutics, Inc. and Paul L. Berns.
10.2	(1)	Restricted Stock Award Agreement dated March 9, 2006 between Allos Therapeutics, Inc. and Paul L. Berns.
10.3	(1)	First Amendment to Separation Agreement effective March 9, 2006 between Allos Therapeutics, Inc. and Michael E. Hart.
10.4	(2)	Second Amendment to Separation Agreement dated May 10, 2006 between the Company and Michael E. Hart.
10.5	(2)	Consulting Agreement dated May 10, 2006 between the Company and Michael E. Hart.
10.6	(2)	Consulting Agreement dated May 10, 2006 between the Company and Marvin E. Jaffe, M.D.
10.7	(3)	2006 Inducement Award Plan, including forms of Stock Option Grant Notice with Stock Option Agreement and Restricted Stock Grant Notice with Restricted Stock Grant Agreement.
10.8	(3)	Employment Agreement dated June 5, 2006 between Allos Therapeutics, Inc. and James V. Caruso.
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.

(1) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on March 14, 2006.

(2) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on May 16, 2006.

(3) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on June 6, 2006.

SIGNATURES

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

Date: August 7, 2006		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
		Corporate Controller and Treasurer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.	Note	Description
3.1		Amended and Restated Certificate of Incorporation.
3.2		Certificate of Designation of Series A Junior Participating Preferred Stock.
3.3		Certificate of Amendment to Restated Certificate of Incorporation.
10.1	(1)	Employment Agreement dated March 9, 2006 between Allos Therapeutics, Inc. and Paul L. Berns.
10.2	(1)	Restricted Stock Award Agreement dated March 9, 2006 between Allos Therapeutics, Inc. and Paul L. Berns.
10.3	(1)	First Amendment to Separation Agreement effective March 9, 2006 between Allos Therapeutics, Inc. and Michael E. Hart.
10.4	(2)	Second Amendment to Separation Agreement dated May 10, 2006 between the Company and Michael E. Hart.
10.5	(2)	Consulting Agreement dated May 10, 2006 between the Company and Michael E. Hart.
10.6	(2)	Consulting Agreement dated May 10, 2006 between the Company and Marvin E. Jaffe, M.D.
10.7	(3)	2006 Inducement Award Plan, including forms of Stock Option Grant Notice with Stock Option Agreement and Restricted Stock Grant Notice with Restricted Stock Grant Agreement.
10.8	(3)	Employment Agreement dated June 5, 2006 between Allos Therapeutics, Inc. and James V. Caruso.
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.

(1) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on March 14, 2006.

(2) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on May 16, 2006.

(3) Incorporated by reference to our Current Report on Form 8-K, as filed with the SEC on June 6, 2006.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Good

Allos Therapeutics (ALTH) Inactive 10-Q2006 Q2 Quarterly report

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