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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number

000-29815

Allos Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

11080 CirclePoint Road, Suite 200
Westminster, Colorado  80020
(303) 426-6262

(Address, including zip code, and telephone number,
including area code, of principal executive offices)

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

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

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

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 May 1, 2012, there were 106,958,412 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

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ALLOS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

NOTE:

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

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ALLOS THERAPEUTICS, INC.

BALANCE SHEETS

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

(unaudited)

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

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

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

(unaudited)

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

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ALLOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

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

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ALLOS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

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

(unaudited)

1.                 Basis of Presentation

The unaudited financial statements of Allos Therapeutics, Inc. (referred to herein as the “Company,” “Allos,” “we,” “us” or “our”) included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.  Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  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, 2011 for a broader discussion of our business and the opportunities and risks inherent in such business.

Liquidity

As of March 31, 2012, we had $93.4 million in cash, cash equivalents, and investments. Based upon the current status of our product development and commercialization plans, we believe that our cash, cash equivalents, and investments as of March 31, 2012, should be adequate to support our operations through at least the next 12 months, although there can be no assurance that this can, in fact, be accomplished.

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

We recently entered into the Spectrum Merger Agreement with Spectrum Pharmaceuticals, Inc., or Spectrum, as further discussed in Note 12, Subsequent Events.  Under the Spectrum Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger that could further adversely affect our ability to realize certain of our business strategies and our ability to achieve profitability if the Merger is not completed.  We anticipate continuing our current development programs and beginning other long-term development projects involving FOLOTYN, including the post-approval clinical studies required for FOLOTYN. These projects may require many years and substantial expenditures to complete and may ultimately be unsuccessful. In addition, we expect to incur significant costs relating to the commercialization of FOLOTYN, including costs related to our sales and marketing, medical affairs and manufacturing operations. Therefore, if the Merger is not completed, we may need to raise additional capital to support our future operations. Our actual capital requirements will depend on many factors, including:

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

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

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

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

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

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

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·                  the timing, costs and potential adverse impact on net product sales associated with entering into an Agreement and Plan of Merger, or Spectrum Merger Agreement, with Spectrum on April 4, 2012 and announcing our potential acquisition by Spectrum; and

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

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

2.                 Fair Value of Financial Instruments

Cash, Cash Equivalents and Investments

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  The carrying values of our cash equivalents and investments approximate their market values based on quoted market prices. Investments are classified as held to maturity and are carried at cost plus accrued interest.  Our cash and cash equivalents are maintained in a financial institution in amounts that, at times, may exceed federally insured limits.  The weighted average duration of the remaining time to maturity for our portfolio of investments as of March 31, 2012 was approximately six months.  As of March 31, 2012, our investments were held in a variety of interest-bearing instruments, consisting mainly of certificates of deposit.  We did not hold any derivative instruments, foreign exchange contracts, asset backed securities, mortgage backed securities, auction rate securities, or securities of issuers in bankruptcy in our investment portfolio as of March 31, 2012.

Fair Value of Financial Instruments

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

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

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

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

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of March 31, 2012.  Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities. The carrying value of our cash held in money market funds totaling $86.5 million as of March 31, 2012 are included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs.

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The carrying value of investments consisted of the following as of March 31, 2012:

The carrying value of investments consisted of the following as of December 31, 2011:

As of March 31, 2012 and December 31, 2011 there were no investments in a loss position.  Market values were determined for each individual security in the investment portfolio.  If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. Additionally, management assesses whether it intends to sell or would more-likely-than-not not be required to sell the investment before the expected recovery of the amortized cost basis.  We do not intend to sell and we do not believe that it is more likely than not that we will be required to sell our investments before recovering the cost of securities, nor do we expect not to recover the entire amortized cost basis of our investments as of March 31, 2012.  We have the ability and intent to hold our remaining investments to recover the entire amortized cost basis of the investments as of March 31, 2012.

3.                 Inventory

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

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

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

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Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  As of December 31, 2011, the reduced-cost finished goods inventory had been substantially utilized.  Had this reduced-cost inventory been capitalized, the impact to our research and development expense and cost of sales, excluding amortization expense, would not have been material in the three months ended March 31, 2012 or 2011.

Inventory consisted of:

4.                 Prepaid Expenses and Other Assets

Prepaid expenses and other assets are comprised of the following:

5.                 Intangible asset, net

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

As a result of the FDA’s approval to market FOLOTYN on September 24, 2009, we met a milestone under our license agreement, as amended, with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute, or the FOLOTYN License Agreement, discussed in Note 11, which required us to make a milestone payment of $5.8 million. We capitalized the $5.8 million payment as an intangible asset and began amortizing the asset immediately following the FDA approval of FOLOTYN. Amortization expense is being recorded on a straight line basis over the remaining expected life of the patent for FOLOTYN, which we expect to last until July 16, 2022. This includes the anticipated Hatch-Waxman extension that provides patent protection for drug compounds for a period of up to five years to compensate for time spent in development. This term is our best estimate of the life of the patent. If, however, the Hatch-Waxman extension is not granted, the intangible asset will be amortized over a shorter period. Amortization expense of $113,000 for the three months ended March 31, 2012 and 2011 was recorded as amortization of intangible asset in the Statement of Operations.  The estimated annual amortization expense for the intangible asset is approximately $454,000 per year during 2012 through 2021 and $234,000 in 2022.

The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred.  No trigger events occurred for the three months ended March 31, 2012 on the $4,658,000 of intangible asset, net.

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6.                 Accrued Liabilities

Accrued liabilities are comprised of the following:

In January 2011, we implemented a strategic reduction of our workforce by approximately 13%, or 25 employees.  Personnel reductions were primarily focused in research and development and general and administrative functions.  The restructuring was a result of our decision to prioritize our resources on the development and commercialization of FOLOTYN for the treatment of PTCL, cutaneous T-cell lymphoma, or CTCL, and other hematologic malignancies, and to manage our operating costs and expenses.  During the first quarter of 2011, we incurred total restructuring charges of approximately $570,000, of which $304,000 and $266,000 were recorded in research and development and sales, general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits.  As of December 31, 2011, all accrued termination benefits related to this restructuring had been paid.

7.                 Product Sales

Product Sales

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

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party. Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination). These distributors then resell FOLOTYN to the patients’ respective health care providers. We noted an increase in net product sales of approximately $3.2 million, or $0.03 per share of common stock, in the fourth quarter of 2011 relating to an increase in our distributors’ year-end 2011 inventory levels as compared to average inventory levels for 2011. We monitor inventory levels within our distribution channel and sales to end users, or health care providers, to determine whether deferral of sales is required. No such deferrals were recorded at March 31, 2012.  Our distributors’ inventory levels declined during the three months ended March 31, 2012 by approximately $2.0 million, resulting in lower net product sales for the three months ended March 31, 2012 of approximately $1.7 million after gross to net sales adjustments, or $0.02 per share of common stock.

Net Product Sales

Net product sales represent total gross product sales less gross to net sales adjustments.  Gross to net sales adjustments include distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales.  Distributor fees are incurred on the management of our product by distributors. These distributor fees are recorded within net product sales and are based on definitive contractual agreements. We estimate gross to net sales adjustments based upon analysis of third-party information, including information obtained from our primary distributors with respect to their inventory levels and sell-through to the distributors’ customers.  Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the

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

Product Returns

Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not contractually allowed for expired product.  Given these limited contractual return rights, the high price of FOLOTYN and the limited number of PTCL patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.  We estimated product returns for FOLOTYN based upon actual returns history within our distribution channel, which were consistent with historical trends of product returns for similar companies in the pharmaceutical industry.  The actual returns history within our distribution channel is derived from third-party information obtained from certain distributors with respect to their inventory levels and sell-through to the distributors’ customers.  We will continue to monitor the historical trend of returns, including the impacts on this trend of product expiry dates and may be required to make future adjustments to our estimates.  Through March 31, 2012, product returns have been negligible.  See activity for the three months ended March 31, 2012 and 2011 in the tables below.

Medicaid Rebates

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates.  Our estimate of utilization is based on market research and information about our expected patient population.  Through March 31, 2012, we have not had sufficient claims from states for rebates with which to update our estimate.  However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate.  We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates.  In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010.  We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% increase in the Medicaid utilization percentage within our patient population as of March 31, 2012, would result in an approximate $1.8 million reduction in cumulative net product sales.

Government Chargebacks

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual in an amount equal to our estimate of chargeback claims at the time of product sale. We do not expect the impact of the 340B Public Health Services drug discount program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA.  The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL.  We evaluate previously recorded chargebacks based on data regarding specific entities’ lack of claim activity over time.  As a result of this evaluation, during the three months ended March 31, 2012 and 2011 we recorded a reversal of government chargeback allowances related to prior period sales totaling $201,000 and $301,000, respectively.  Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

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A reconciliation of gross to net product sales for the three months ended March 31, 2012 and 2011 is as follows:

Balances and activity in the product returns, government rebates and chargebacks and distribution fees payable accounts for the three months ended March 31, 2012 and 2011 are as follows:

Major Customers and Concentration of Credit Risk

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral.  We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary.  Substantially all of our sales for the three months ended March 31, 2012 and 2011 were made in the United States.  Trade accounts receivable totaled $9.1 million and $14.8 million at March 31, 2012 and December 31, 2011, respectively.

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Cost of sales

Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product sales.  See discussion in Note 11 regarding the 8% current royalty rates under the FOLOTYN License Agreement.  Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense.  As of December 31, 2011, the reduced-cost finished goods inventory has been substantially utilized.  Had this reduced-cost inventory been capitalized, the impact to our research and development expense and cost of sales, excluding amortization expense, would not have been material in the three months ended March 31, 2012 or 2011.  We sold a portion of our finished goods that were manufactured subsequent to the FDA approval date totaling $34,000 and less than $1,000 during the three months ended March 31, 2012 and 2011, respectively, which were recorded in cost of sales, excluding amortization expense in the Statement of Operations.

8.                 Mundipharma Agreements

In May 2011, we entered into a strategic collaboration agreement with Mundipharma, or the Mundipharma Collaboration Agreement, pursuant to which we agreed to collaborate in the development of FOLOTYN according to a mutually agreed-upon development plan, as updated by the parties from time to time.  Under the Mundipharma Collaboration Agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world, or the Mundipharma territories.  We received an upfront payment of $50.0 million upon execution of the Mundipharma Collaboration Agreement and may receive potential regulatory milestone payments of up to $21.5 million and commercial progress- and sales-dependent milestone payments of up to $289.0 million.  Of the $310.5 million in total potential milestone payments, we have determined that any regulatory milestone payments that may become due upon approval of FOLOTYN by regulatory agencies other than in the European Union, or EU, and all commercial milestone payments, are contingent consideration and will be accounted for as revenue in the period in which the respective revenue recognition criteria are met.  Included in the $21.5 million of potential regulatory milestone payments is a $14.5 million milestone payment related to obtaining conditional approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the EU, which is deemed to be a substantive milestone given the ongoing regulatory services we are providing related to the underlying European Marketing Authorisation Application, or MAA, and will be accounted for as revenue in the period in which the milestone is achieved.  See Note 12, Subsequent Events, for additional information regarding the status of our MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  The remaining $296.0 million in total potential milestone payments are not deemed to be substantive for accounting purposes and will be recognized when the appropriate revenue recognition criteria have been met.  In the event Mundipharma achieves the first reimbursable commercial sale of FOLOTYN in at least three major market countries in the EU, we would receive a milestone payment from Mundipharma of $10.0 million, which is included in the $289.0 million of commercial milestone payments discussed above.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories.

Under the initial development plan for FOLOTYN mutually agreed-upon by Allos and Mundipharma, or the Development Plan, the parties have agreed to conduct and jointly fund the following:

·            all studies required by the FDA as a condition of the accelerated approval of FOLOTYN for relapsed or refractory PTCL, or the FDA Post-Approval Studies, including the ongoing and planned Phase 3 registration studies of FOLOTYN in patients with newly diagnosed PTCL and in patients with relapsed or refractory CTCL; and

·            certain clinical studies required by the European Medicines Agency, or EMA, to assess the safety and efficacy of FOLOTYN in children, or the EMA Pediatric Studies, which we previously agreed to conduct as a condition of the EMA’s acceptance of the MAA for review.

Under the Development Plan, we are assigned operational responsibility for the FDA Post-Approval Studies and Mundipharma is assigned operational responsibility for the EMA Pediatric Studies.  The Mundipharma Collaboration Agreement also allows, but does not require, the parties to conduct additional future clinical studies, which may be conducted jointly, in which case one of the parties will be assigned operational responsibility and the costs of such studies will be treated as joint development costs to be shared between the parties, or separately, in which case the party proposing such studies will be solely responsible for the conduct and costs of the studies.

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Under the Mundipharma Collaboration Agreement, Mundipharma is initially responsible for 40% of the joint development costs incurred by the parties, which increases to 50% (a) in the calendar quarter after Mundipharma receives conditional approval to market FOLOTYN for relapsed or refractory PTCL in the EU pursuant to our MAA, which approval must be received no later than December 31, 2012, or (b) if such conditional approval is not obtained, the later of (i) the calendar quarter of the first approval of FOLOTYN in the EU for relapsed or refractory PTCL (other than pursuant to clause (a) above) or first-line PTCL, and (ii) the first calendar quarter in which the development cost differential equals or exceeds $15.0 million. See Note 12, Subsequent Events, for additional information regarding the status of our MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  The “development cost differential” is defined as the cumulative amount of joint development costs that Mundipharma would have incurred if it was responsible for 50% of the joint development costs rather than its initial 40% share.  To the extent that this development cost differential does not meet or exceed $15.0 million by December 31, 2019, and if conditional approval in the EU has not been obtained, then we are required to pay Mundipharma the difference between $15.0 million and the amount of the development cost differential as of December 31, 2019.

In connection with the Mundipharma Collaboration Agreement, we entered into a separate supply agreement with Mundipharma Medical Company, an affiliate of Mundipharma, pursuant to which we have agreed to supply FOLOTYN for use in clinical trials for which Mundipharma bears operational responsibility and to support Mundipharma’s commercial requirements.  We refer to this as the Mundipharma Supply Agreement, and we refer to the Mundipharma Supply Agreement and the Mundipharma Collaboration Agreement together as the Mundipharma Agreements.

The total amount of consideration allocable to the Mundipharma Agreements is limited to the amount that is fixed or determinable other than with respect to the impact of either of the following: (a) any refund rights or other concessions to which the customer may be entitled or (b) performance bonuses to which the vendor may be entitled. Since a portion of the arrangement consideration received by the Company is subject to a contingent payment obligation relating to the development cost differential as described above, we excluded the amount of this contingent payment obligation from the arrangement consideration. As amounts related to the contingent payment obligation become nonrefundable, these amounts are added to the arrangement consideration and reallocated to the deliverables in the period in which the amounts become nonrefundable.

The total allocable Mundipharma arrangement consideration at the inception of the arrangement was as follows:

As of March 31, 2012, the development cost differential of $359,000 was included in the allocable Mundipharma arrangement consideration, and our contingent payment obligation related to the development cost differential was approximately $14,641,000 and is recorded as an other long-term liability on the Balance Sheet. We record the joint development cost reimbursements received from Mundipharma as license and other revenue in the Statement of Operations; and we record the full amount of our joint development costs as research and development expense.

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

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

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

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

·                  Clinical trial supply obligations to supply FOLOTYN for use in the EMA Pediatric Studies.

We did not include the obligation to provide clinical trial supplies for any additional future clinical studies for which Mundipharma may bear operational responsibility as a separate deliverable, as there were no such clinical studies included in the initial Development Plan at the inception of the arrangement, and no such clinical studies have been subsequently added.  Under the Mundipharma Agreements, Mundipharma has the option to either order clinical supply for these potential future clinical studies from us or obtain the supplies from other third-party manufacturers.    Further, pursuant to the Mundipharma Collaboration Agreement, we granted Mundipharma a non-exclusive right and license, with the right to sublicense, under our manufacturing know-how and patents, to manufacture FOLOTYN for use in accordance with the Mundipharma Collaboration Agreement.  Both the manufacturing license and Mundipharma’s access to all information necessary or useful for the manufacturing and testing of FOLOTYN were delivered effective upon execution of the Mundipharma Collaboration Agreement.  In addition, pursuant to the Supply Agreement, we have agreed to provide such other reasonable assistance as required to enable Mundipharma or its permitted sublicensee to manufacture FOLOTYN.  However, we have determined that this effort is an inconsequential or perfunctory performance obligation and as a result have not included this as a deliverable in the arrangement.

The supply of FOLOTYN for Mundipharma’s commercial requirements is contingent upon the receipt of regulatory approvals to commercialize FOLOTYN in the Mundipharma territories. Because our commercial supply obligation is contingent upon the receipt of future regulatory approvals, and there were no binding commitments or firm purchase orders pending for commercial supply at or near the execution of the agreement, our commercial supply obligation is deemed to be contingent and is not valued as a deliverable under the Mundipharma Agreements.  As of March 31, 2012, no clinical or commercial supply has been delivered under the Mundipharma Supply Agreement.   If Mundipharma orders the supplies from us, the pricing for this supply would equal our third-party manufacturing cost plus a pre-negotiated percentage, which we have determined is not at a significant incremental discount to market rates.

Under the Mundipharma Agreements, the parties have agreed to establish and participate on several joint committees to facilitate the governance and oversight of the parties’ activities under the agreements.  We have considered whether our participation on the joint committees may be a deliverable and determined that it was not a deliverable.  Had we considered our participation on the joint committees as a deliverable, it would not have had a material impact on our accounting for the arrangement based on our analysis of the maximum potential estimated selling price of such participation.

We allocated the Mundipharma arrangement consideration based on the percentage of the relative selling price of each unit of accounting.   The estimated selling price of each unit of accounting was as follows:

We estimated the selling price of the Licenses using the relief from royalty method income approach, which utilized estimated total FOLOTYN product sales revenue in the Mundipharma territories over the expected patent life.  We estimated the selling prices of the regulatory and research and development services using third party costs and discounted cash flows.  The estimated selling prices utilized assumptions including internal estimates of research and development personnel needed to perform the regulatory and research and development services; and estimates of expected cash outflows to third parties for services and supplies for the respective unit of accounting over the expected period that the services will be performed, which represents one year for the regulatory services and approximately through 2022 for the research and development services, as discussed further below.  We estimated the selling price of the clinical trial supply obligation using third party costs and estimates of the quantity of product required to conduct the EMA Pediatric Studies.

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The impact of a 1% change in the present value factors on the resulting allocated arrangement consideration, which consists of the upfront payment and the estimated payments for research and development services and clinical supply, less the amount of the contingent payment obligation related to the development cost differential, is as follows:

The impact of a 1% change in the present value factors on the resulting allocated arrangement consideration allocated to the clinical supply deliverable is not material.

Because delivery of the Licenses occurred upon the execution of the Mundipharma Collaboration Agreement in May 2011 and there is no general right of return, all allocated arrangement consideration related to the Licenses upon execution of the Mundipharma Collaboration Agreement and subsequent allocations is recognized as revenue in the period of the allocation.

We will perform the regulatory services under the Mundipharma Collaboration Agreement over a period of up to one year, or through May 10, 2012, with no general right of return.  Therefore, all allocated arrangement consideration related to the regulatory services will be recognized using the proportional performance method, by which revenue is recognized in proportion to the costs incurred, during the service period of up to one year.

We will perform the research and development services under the Mundipharma Collaboration Agreement over the period required to complete the jointly agreed-upon clinical development activities, which we estimate to be approximately through 2022 based on our projected clinical trial enrollment and patient treatment-related follow up time periods, with no general right of return.  Therefore, all allocated arrangement consideration related to the research and development services will be recognized as the research and development costs that are subject to reimbursement are incurred.

As of March 31, 2012, no clinical supply has been delivered under the Mundipharma Supply Agreement, therefore, there was no revenue recognized during the three months ended March 31, 2012 or 2011 related to this deliverable.

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

License and other revenue for the three months ended March 31, 2012 includes $542,000 related to the 40% joint development cost reimbursement under the Mundipharma Agreements.

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As of March 31, 2012, accounts receivable related to the Mundipharma Agreements totaled $542,000.  As of March 31, 2012, deferred amounts related to the Mundipharma Agreements consisted of:

Cost of license and other revenue in the Statement of Operations for the three months ended March 31, 2012 was $866,000 and consisted of costs incurred in connection with the regulatory services provided related to the European MAA.

9.                 Stock-Based Compensation

Stock-based compensation expense for the three months ended March 31, 2012 and 2011 has been recognized in the accompanying Statements of Operations as follows:

We did not recognize a related tax benefit during the three months ended March 31, 2012 and 2011, as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of March 31, 2012.  No stock-based compensation expense was capitalized on our Balance Sheet as of March 31, 2012 and December 31, 2011.

Stock-based compensation expense by equity award type for the three months ended March 31, 2012 and 2011 was as follows:

As of March 31, 2012, the unrecognized stock-based compensation balance and estimated weighted-average amortization period by equity award type was as follows:

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Stock Options

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

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:

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on our closing stock price of $1.48 as of March 30, 2012, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.  There were no in-the-money options exercisable as of March 31, 2012.

There were no options exercised during the three months ended March 31, 2012 and 2,500 options exercised during the three months ended March 31, 2011.  The total intrinsic value of options exercised during the three months ended March 31, 2011 was $0, determined as of the date of option exercise.  We settle employee stock option exercises with newly issued shares of common stock.  No tax benefits were realized by us in connection with these exercises during the three months ended March 31, 2012 and 2011 as we maintain net operating loss carryforwards and we have established a valuation allowance against the entire tax benefit as of March 31, 2012.

Restricted Stock Unit Awards

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

The RSU awards vest either (i) on the first anniversary of the date of grant, (ii) in equal installments on each of either the first two, three or four anniversaries of the date of grant or (iii) in a series of eight successive equal semi-annual installments over the four-year period from the date of grant, subject to continued service through such vesting dates. Upon vesting of the RSU awards, we issue unrestricted shares of our common stock.  The total fair value of shares vested during the three months ended March 31, 2012 and 2011 was $1,083,000 and $298,000, respectively

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10.          Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by giving effect to all dilutive potential common stock outstanding during the period, including stock options, restricted stock, RSU awards and shares to be issued under the Allos 2001 Employee Stock Purchase Plan, or the Company ESPP.  See further discussion in Note 12, Subsequent Events.

Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential dilutive share of common stock were anti-dilutive due to our net loss (as including such shares would decrease our basic net loss per share). Such potentially dilutive shares of common stock are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for each of the three months ended March 31, 2012 and 2011, all potentially dilutive shares of common stock have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive shares of common stock consist of the following:

11.          Commitments and Contingencies

Royalty and License Fee Commitments

In December 2002, we entered into the FOLOTYN License Agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute, under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications related to FOLOTYN and its uses.  Under the terms of the FOLOTYN License Agreement, we paid an up-front license fee of $2.0 million upon execution of the agreement and have made aggregate milestone payments of $2.5 million based on the passage of time. Additionally, in May and September 2009, we made milestone payments of $1.5 million based on the FDA accepting our New Drug Application for review and $5.8 million based on the FDA approval to market FOLOTYN, respectively.  The up-front license fee and all milestone payments under the FOLOTYN License Agreement prior to FDA approval to market FOLOTYN were recorded to research and development expense as incurred.  As discussed in Note 5, the $5.8 million milestone payment based on the FDA approval was capitalized as an intangible asset and is being amortized over the expected useful life of the composition of matter patent for FOLOTYN, which we expect to last until July 16, 2022. The only remaining potential milestone payment under the license agreement is for $3.5 million upon regulatory approval to market FOLOTYN in Europe, which, if made would be capitalized and amortized over the expected useful life of the licensed patents.

Under the terms of the FOLOTYN License Agreement, we also owe the licensors sublicense fees equal to 20% of any milestone payments received from Mundipharma.  During the year ended December 31, 2011, we paid $10.0 million of sublicense fees to the licensors.  In the event we obtain conditional approval of FOLOTYN in Europe, we would receive a potential milestone from Mundipharma of $14.5 million under the Mundipharma Collaboration Agreement, of which $5.7 million would be payable by us to the licensors under the terms of the FOLOTYN License Agreement.  See Note 12, Subsequent Events, for additional information regarding the status of our MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  The $5.7 million is comprised of the $3.5 million milestone payment discussed above and $2.2 million of sublicense fees (or 20% of $14.5 million less $3.5 million).  Upon the first reimbursable commercial sale of FOLOTYN in at least three major market countries in the EU, we would receive a milestone payment from Mundipharma of $10.0 million, of which $2.0 million would be payable by us to the licensors.

Under the terms of the FOLOTYN License Agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities.  In addition, we pay the licensors royalties based on worldwide graduated annual levels of net sales of FOLOTYN, net of actual rebates, chargebacks and returns, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur.  For purposes of the FOLOTYN License Agreement, annual worldwide sales consists of our distributor sales and annual net sales

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of FOLOTYN in the Mundipharma Territories, as reported to us under the Mundipharma Collaboration Agreement, if and when such sales occur in the Mundipharma Territories.  Royalties are 8% of annual worldwide sales up to $150.0 million; 9% of annual worldwide sales of $150.0 million through $300.0 million; and 11% of annual worldwide sales in excess of $300.0 million.  For the three months ended March 31, 2012 and 2011, our royalties were 8% of our net distributor sales.  As of March 31, 2012, accrued royalties were $0.8 million and are included in accrued liabilities on the Balance Sheet.

AMAG Merger Transaction Class Action Lawsuits

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

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

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

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

On September 1, 2011, a Verified Consolidated Amended Class Action Complaint was filed in the consolidated In re Allos Therapeutics action pending in the Delaware Court of Chancery.  The amended complaint named as defendants members of our board of directors, as well as the Company, AMAG and AMAG Merger Sub, and alleged that members of our board of directors breached their fiduciary duties to our stockholders in connection with the AMAG Merger Agreement and the disclosures related thereto, and further claimed that the Company, AMAG and AMAG Merger Sub aided and abetted those alleged breaches of fiduciary duty. The amended complaint generally alleged that the AMAG Merger Agreement involved an unfair price, a flawed sales process, preclusive deal protection devices and that the defendants agreed to the transaction to benefit themselves personally.  The amended complaint further alleged that the joint proxy statement failed to disclose material information relating to the Company’s and AMAG’s financial projections, the fairness opinions of J.P. Morgan and Morgan Stanley and the background of the proposed transaction. The amended complaint sought damages and injunctive relief, including to enjoin the acquisition of the Company by AMAG, and an award of attorneys’ and other fees and costs, and other relief.

On October 13, 2011, the Company and other defendants in the consolidated action pending in the Delaware Court of Chancery entered into a memorandum of understanding, or MOU, pursuant to which the Company and such parties agreed in principle, and subject to certain conditions, to settle that action.  The settlement contemplated by the MOU was subject to and conditioned upon consummation of the acquisition of the Company by AMAG, which condition was not satisfied.

On October 31, 2011, the Company moved to dismiss the consolidated action pending before the Delaware Court of Chancery.  No supporting memoranda have been filed, and there is no briefing schedule on this motions.

On December 13, 2011, plaintiffs’ counsel in the consolidated Delaware action filed a motion for an award of fees and expenses in connection with certain disclosures made by the Company in connection with the proposed merger with AMAG.

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On February 1, 2012, the Company filed its opposition to the motion.  Plaintiffs filed their reply on March 15, 2012.  A date for a hearing on the motion has not yet been set.

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

12.          Subsequent Events

Acquisition by Spectrum Pharmaceuticals and Status of European MAA

On April 4, 2012, we entered into the Spectrum Merger Agreement with Spectrum and Sapphire Acquisition Sub, Inc., or Spectrum Merger Sub.  Pursuant to the Spectrum Merger Agreement and upon the terms and subject to the conditions thereof, Spectrum Merger Sub commenced a tender offer, or the Offer, pursuant to an Offer to Purchase, dated April 13, 2012, to acquire all of our issued and outstanding shares of common stock, or the Shares, for consideration per share consisting of (i) an amount in cash equal to $1.82 without interest, less any applicable withholding tax, which amount is referred to as the Cash Portion, and (ii) one contingent value right, referred to as a CVR.  The Cash Portion and the CVR together are referred to as the Offer Price.  Each CVR will entitle the holder thereof to receive an additional cash payment of $0.11 if the following two milestones are met: (1) our MAA for FOLOTYN is approved by the EMA for the treatment of patients with relapsed or refractory PTCL in Europe by December 31, 2012 and (2) the first reimbursable commercial sale of FOLOTYN is achieved in at least three of the specified major markets in the EU by December 31, 2013.  In January 2012, the EMA Committee for Medicinal Products for Human Use, or CHMP, adopted an opinion recommending against approval of the MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  We submitted a request for the re-examination of the CHMP opinion in January 2012, and, on April 19, 2012, the CHMP confirmed its position and adopted a final opinion recommending against approval of the MAA.  The final opinion was based on a majority vote of the members of the CHMP, with a minority of members taking a divergent position. On the same day, the CHMP forwarded a copy of its final opinion to the European Commission, or the EC, which is the regulatory authority responsible for rendering a final decision on the MAA.  The EC has 15 days from the receipt of CHMP’s final opinion to prepare and provide to the members of the CHMP a draft decision with respect to the MAA, together with a report providing support and reasons for its decision. Within 22 days following receipt of the draft decision (or a shorter period as determined by the EC if it finds that urgent or exceptional circumstances require it), any member of the CHMP may provide their written observations on the draft decision to the EC. If the EC determines in its sole discretion that any such observations raise important new questions of a scientific or technical nature that the opinion of the CHMP has not addressed, the EC may suspend its procedures and refer the MAA back to the CHMP for further consideration. If the EC refers the MAA back to the CHMP, there is no specific timeframe defined by the EC regulations for the CHMP to address the questions raised by the EC, but in practice, the timeframe will be established by the CHMP depending upon the nature of the questions raised.  If no CHMP member provides any written observations within such 22 day period (or shorter period as determined by the EC) or the EC determines that any such written observations do not raise important new questions of a scientific or technical nature, then the EC has 15 days following the expiration of such period to adopt a final decision on the MAA.  There is no formal process for us to appeal the CHMP’s final opinion, and if the EC adopts a final decision refusing approval of the MAA, such decision would be final and binding. In the event the EC does not refer the MAA back to the CHMP, we expect that a final decision would likely be adopted by the EC in late May or early June of 2012.

In addition, pursuant to the Spectrum Merger Agreement each option to purchase Shares, each a Company Option, outstanding and unexercised immediately prior to the initial acceptance, or the Acceptance Time, for purchase by Spectrum Merger Sub of Shares tendered pursuant to the Offer (whether vested or unvested), with an exercise price less than the Cash Portion of the Offer Price, will at the Acceptance Time be converted into the right to receive (i) from us, a cash payment in an amount equal to the product of (x) the total number of Shares provided for in such Company Option and (y) the excess, if any, of (A) the Cash Portion of the Offer Price over (B) the exercise price per Share of such Company Option, which payment shall be treated as compensation and shall be net of any applicable withholding tax, and (ii) from Spectrum, a CVR for each Share provided for in such Company Option. Each Company Option with an exercise price per share equal to or in excess of the Cash Portion of the Offer Price shall be canceled upon the Acceptance Time without further consideration therefor. At the Acceptance Time, pursuant to the Spectrum Merger Agreement, each RSU award of the Company representing the right to vest in and be issued Allos common stock outstanding immediately prior to the Acceptance Time shall be converted into the right to receive (i) from us, a cash payment in an amount equal to the product of (x) the total number of Shares subject to such RSU and (y) the Cash Portion of the Offer Price, which payment shall be treated as

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compensation and shall be net of any applicable withholding tax, and (ii) from Spectrum, a CVR for each Share subject to such RSU.

Pursuant to the Spectrum Merger Agreement, we also agreed to: (i) take all action that may be necessary to cause any outstanding offer period (or similar period during which shares of the Company’s common stock may be purchased), or the Final Offering, under the Company ESPP to be terminated on the earlier to occur of (A) June 30, 2012 and (B) the date immediately following the Company’s last payroll payment date prior to the Acceptance Time, the date of such termination being referred to as the Designated Date; (ii) make any pro-rata adjustments that may be necessary to reflect the shortened Final Offering, but otherwise treat such shortened Final Offering as a fully effective and completed offering period for all purposes under the Company ESPP; and (iii) cause the exercise as of the Designated Date of each outstanding purchase right under the Company ESPP.  Pursuant to the Spectrum Merger Agreement, the Company must terminate the Company ESPP on the Designated Date and immediately following the end of the Final Offering.  Our final payroll date prior to the scheduled expiration of the Offer was April 27, 2012, and, as a result, we have taken the foregoing actions and terminated the Company ESPP as of April 28, 2012.

In the Offer, each Share validly tendered and not withdrawn will be accepted for payment by Spectrum Merger Sub in accordance with the terms of the Offer (but in no event sooner than 20 business days after the commencement of the Offer).  The Offer is scheduled to expire at 12:00 midnight, Eastern time, at the end of the day on Thursday, May 10, 2012, unless the Offer is extended.  Pursuant to the Spectrum Merger Agreement, following the consummation of the Offer, and subject to the satisfaction or written waiver of certain conditions set forth in the Spectrum Merger Agreement, Spectrum Merger Sub will be merged with and into us and we will continue as the surviving corporation.  This transaction is referred to as the Merger.  At the effective time of the Merger, all remaining outstanding Shares not tendered in the Offer (other than Shares owned by Spectrum or Spectrum Merger Sub, Shares owned by us as treasury stock or owned of record by any of our subsidiaries or Shares held by stockholders who properly exercise their appraisal rights under the Delaware General Corporate Law) will be cancelled and converted into the right to receive the Offer Price.

Spectrum Merger Sub’s obligation to accept for payment and pay for all Shares validly tendered pursuant to the Offer is subject to (i) the termination or expiration of any waiting period applicable to the consummation of the Offer and the Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, (ii) a majority of the Shares outstanding having been tendered and not withdrawn at the expiration of the Offer and (iii) other customary closing conditions.  Following the Merger, we will become a wholly-owned subsidiary of Spectrum.

The Merger has been unanimously approved by the Boards of Directors of both companies.  Additionally, Warburg Pincus Private Equity VIII, L.P., or Warburg Pincus, our largest stockholder and the owner of approximately 24% of our outstanding shares, along with our directors and certain officers, have entered into tender and voting agreements with Spectrum and Spectrum Merger Sub pursuant to which Warburg Pincus, the directors and such officers have agreed to tender all of the Shares beneficially owned by them into the Offer and to cause all the Shares beneficially owned by them to be voted, if necessary, in favor of, among other things, the adoption of the Spectrum Merger Agreement, the approval of the Merger and the other transactions contemplated by the Spectrum Merger Agreement and against, among other things, any competing acquisition proposal (and pursuant to which such stockholders have agreed to grant a proxy with respect to such voting obligations to Spectrum, Spectrum Merger Sub and certain individuals set forth in the tender and voting agreements).  Our Board of Directors has unanimously determined that the Spectrum Merger Agreement, including the Offer and the Merger, are advisable and fair to, and in the best interests of, Allos and its stockholders, and recommended that Allos stockholders accept the Offer, tender their shares to Spectrum Merger Sub pursuant to the Offer and, if a stockholders’ meeting is required by applicable law, recommended that Allos stockholders adopt the Spectrum Merger Agreement on the terms and subject to the conditions set forth therein.

The Spectrum Merger Agreement also contains customary termination provisions for us and Spectrum and provides that, in connection with the termination of the Spectrum Merger Agreement related to a competing acquisition proposal under certain specified circumstances, we may be required to pay Spectrum a termination fee of $7.5 million.

Spectrum Transaction Class Action Lawsuits

On April 9, 2012, a putative class action lawsuit captioned Radmore, et al. v. Allos Therapeutics, Inc., et al., No. 1:12-cv-00948-PAB, was filed in the United States District Court for the District of Colorado, or the Radmore Complaint. The Radmore Complaint names as defendants the Company, the members of our board of directors, as well as Spectrum. The

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plaintiffs allege that our directors breached their fiduciary duties to our stockholders in connection with the proposed merger between us and Spectrum, and were aided and abetted by us and Spectrum. The Radmore Complaint alleges that the Merger involves an unfair price, an inadequate sales process, unreasonable deal protection devices, and that the defendants entered into the transaction to benefit themselves personally. The Radmore Complaint seeks injunctive relief, including to enjoin the Merger, attorneys’ and other fees and costs, and other relief.

On April 12, 2012, a putative class action lawsuit captioned Keucher v. Berns, et al., C.A. No. 7419, was filed in the Delaware Court of Chancery, or the Keucher Complaint. The Keucher Complaint names as defendants the Company, the members of our board of directors, as well as Spectrum and Spectrum Merger Sub. The plaintiff alleges that our directors breached their fiduciary duties to our stockholders in connection with the proposed merger between us and Spectrum, and were aided and abetted by Spectrum and Spectrum Merger Sub. The Keucher Complaint alleges that the Merger involves an unfair price, an inadequate sales process, unreasonable deal protection devices and that the defendants entered into the transaction to benefit themselves personally. The Keucher Complaint seeks injunctive relief, including to enjoin the Merger, attorneys’ and other fees and costs and other relief.

On April 20, 2012, an Amended Class Action Complaint was filed in the Delaware Court of Chancery in the matter captioned Keucher v. Berns, et al., C.A. No. 7419-VCN, adding allegations that the Solicitation/Recommendation Statement on Schedule 14D-9, or the Schedule 14D-9, filed by us with the SEC on April 13, 2012, contains inadequate, incomplete and/or misleading disclosures.

On April 20, 2012, a Verified Second Amended Class Action Complaint for breach of fiduciary duty, or the In re Allos Complaint, was filed in the Delaware Court of Chancery in the matter captioned In re Allos Therapeutics, Inc. Shareholders Litigation, Consolidated C.A. No. 6714-VCN.  The In re Allos Complaint replaces the Verified Amended Class Action Complaint that had alleged that we and the members of our board of directors breached their fiduciary duties in connection with the proposed merger with AMAG.  The In re Allos Complaint names as defendants us, the members of our Board, as well as Spectrum and Spectrum Merger Sub.  The plaintiffs allege that our directors breached their fiduciary duties to our stockholders in connection with the proposed merger between Allos and Spectrum, and were aided and abetted by us, Spectrum and Spectrum Merger Sub.  The In re Allos Complaint alleges that the merger involves an unfair price, an inadequate sales process, unreasonable deal protection devices, that defendants entered into the transaction to benefit themselves personally, and that the Schedule 14D-9 filed by us with the SEC on April 13, 2012, contains inadequate, incomplete and/or misleading disclosures.  The In re Allos Complaint seeks injunctive relief, including to enjoin the merger, attorneys’ and other fees and costs, and other relief.

On April 30, 2012, an Amended Class Action Complaint was filed in the matter captioned Radmore v. Allos Therapeutics, Inc., et al., No. 1:12-cv-00948-PAB-CBS, adding allegations that the Schedule 14D-9 filed by us with the SEC on April 13, 2012, contains inadequate, incomplete and/or misleading disclosures in violation of our directors’ fiduciary duties and section 14(e) of the Securities Exchange Act of 1934.

We and other defendants believe that the allegations of all of the foregoing actions lack merit.  We and the other defendants will continue to vigorously defend these actions as long as they remain pending.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements regarding consummation of the proposed merger with Spectrum Pharmaceuticals, Inc., or Spectrum; the status and prospects of our commercialization of FOLOTYN for patients with relapsed or refractory peripheral T-cell lymphoma; our Marketing Authorisation Application, or MAA, for FOLOTYN in Europe;  our future product development and regulatory strategies, including our intent to develop or seek regulatory approval for FOLOTYN for additional indications; the status of reimbursement from third party payers; our strategic collaboration with Mundipharma International Corporation Limited, or Mundipharma, including the parties’ intent to co-develop FOLOTYN in additional indications and Mundipharma’s potential commercialization of FOLOTYN outside the United States and Canada;  the ability of our third-party manufacturers to support our requirements for drug supply; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements that are other than statements of historical fact. In some cases, these

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statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our, or our industry’s results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among other things, those discussed in Part II, Item 1A of this report under the caption “Risk Factors.” All forward-looking statements included in this report are based on information available to us as of the date hereof and we undertake no obligation to revise any forward-looking statements in order to reflect any subsequent events or circumstances. Forward-looking statements not specifically described above also may be found in these and other sections of this report. Unless otherwise noted herein, all statements herein, particularly those in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are not reflective of the impact of the proposed acquisition of Allos by Spectrum discussed herein.

Overview

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

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

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

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

Acquisition by Spectrum Pharmaceuticals

On April 4, 2012, we entered into an Agreement and Plan of Merger, or the Spectrum Merger Agreement, with Spectrum and Sapphire Acquisition Sub, Inc., or Spectrum Merger Sub.  Pursuant to the Spectrum Merger Agreement and upon the terms and subject to the conditions thereof, Spectrum Merger Sub commenced a tender offer, or the Offer, pursuant to an Offer to Purchase, dated April 13, 2012, to acquire all of our issued and outstanding shares of common stock, or the Shares, for consideration per share consisting of (i) an amount in cash equal to $1.82 without interest, less any applicable withholding tax, which amount is referred to as the Cash Portion, and (ii) one contingent value right, referred to as a CVR.  The Cash Portion and the CVR together are referred to as the Offer Price.  Each CVR will entitle the holder thereof to receive an additional cash payment of $0.11 if the following two milestones are met: (1) our MAA for FOLOTYN is approved by the European Medicines Agency, or EMA, for the treatment of patients with relapsed or refractory PTCL in Europe by December 31, 2012 and (2) the first reimbursable commercial sale of FOLOTYN is achieved in at least three of the specified major

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markets in the European Union, or EU, by December 31, 2013. In January 2012, the EMA Committee for Medicinal Products for Human Use, or CHMP, adopted an opinion recommending against approval of the MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  We submitted a request for the re-examination of the CHMP opinion in January 2012, and, on April 19, 2012, the CHMP confirmed its position and adopted a final opinion recommending against approval of the MAA.  The final opinion was based on a majority vote of the members of the CHMP, with a minority of members taking a divergent position. On the same day, the CHMP forwarded a copy of its final opinion to the European Commission, or the EC, which is the regulatory authority responsible for rendering a final decision on the MAA.  The EC has 15 days from the receipt of CHMP’s final opinion to prepare and provide to the members of the CHMP a draft decision with respect to the MAA, together with a report providing support and reasons for its decision. Within 22 days following receipt of the draft decision (or a shorter period as determined by the EC if it finds that urgent or exceptional circumstances require it), any member of the CHMP may provide their written observations on the draft decision to the EC. If the EC determines in its sole discretion that any such observations raise important new questions of a scientific or technical nature that the opinion of the CHMP has not addressed, the EC may suspend its procedures and refer the MAA back to the CHMP for further consideration. If the EC refers the MAA back to the CHMP, there is no specific timeframe defined by the EC regulations for the CHMP to address the questions raised by the EC, but in practice, the timeframe will be established by the CHMP depending upon the nature of the questions raised.  If no CHMP member provides any written observations within such 22 day period (or shorter period as determined by the EC) or the EC determines that any such written observations do not raise important new questions of a scientific or technical nature, then the EC has 15 days following the expiration of such period to adopt a final decision on the MAA.  There is no formal process for us to appeal the CHMP’s final opinion, and if the EC adopts a final decision refusing approval of the MAA, such decision would be final and binding. In the event the EC does not refer the MAA back to the CHMP, we expect that a final decision would likely be adopted by the EC in late May or early June of 2012.

In addition, pursuant to the Spectrum Merger Agreement each option to purchase Shares, each a Company Option, outstanding and unexercised immediately prior to the initial acceptance, or the Acceptance Time, for purchase by Spectrum Merger Sub of Shares tendered pursuant to the Offer (whether vested or unvested), with an exercise price less than the Cash Portion of the Offer Price, will at the Acceptance Time be converted into the right to receive (i) from us, a cash payment in an amount equal to the product of (x) the total number of Shares provided for in such Company Option and (y) the excess, if any, of (A) the Cash Portion of the Offer Price over (B) the exercise price per Share of such Company Option, which payment shall be treated as compensation and shall be net of any applicable withholding tax, and (ii) from Spectrum, a CVR for each Share provided for in such Company Option. Each Company Option with an exercise price per share equal to or in excess of the Cash Portion of the Offer Price shall be canceled upon the Acceptance Time without further consideration therefor. At the Acceptance Time, pursuant to the Spectrum Merger Agreement, each restricted stock unit of the Company representing the right to vest in and be issued Allos common stock, each an RSU, outstanding immediately prior to the Acceptance Time shall be converted into the right to receive (i) from us, a cash payment in an amount equal to the product of (x) the total number of Shares subject to such RSU and (y) the Cash Portion of the Offer Price, which payment shall be treated as compensation and shall be net of any applicable withholding tax, and (ii) from Spectrum, a CVR for each Share subject to such RSU.

Pursuant to the Spectrum Merger Agreement, we also agreed to: (i) take all action that may be necessary to cause any outstanding offer period (or similar period during which shares of the Company’s common stock may be purchased), or the Final Offering, under the Allos 2001 Employee Stock Purchase Plan, or the Company ESPP, to be terminated on the earlier to occur of (A) June 30, 2012 and (B) the date immediately following the Company’s last payroll payment date prior to the Acceptance Time, the date of such termination being referred to as the Designated Date; (ii) make any pro-rata adjustments that may be necessary to reflect the shortened Final Offering, but otherwise treat such shortened Final Offering as a fully effective and completed offering period for all purposes under the Company ESPP; and (iii) cause the exercise as of the Designated Date of each outstanding purchase right under the Company ESPP.  Pursuant to the Spectrum Merger Agreement, the Company must terminate the Company ESPP on the Designated Date and immediately following the end of the Final Offering.  Our final payroll date prior to the scheduled expiration of the Offer was April 27, 2012, and, as a result, we have taken the foregoing actions and terminated the Company ESPP as of April 28, 2012.

In the Offer, each Share validly tendered and not withdrawn will be accepted for payment by Spectrum Merger Sub in accordance with the terms of the Offer (but in no event sooner than 20 business days after the commencement of the Offer).  The Offer is scheduled to expire at 12:00 midnight, Eastern time, at the end of the day on Thursday, May 10, 2012, unless the Offer is extended.  Pursuant to the Spectrum Merger Agreement, following the consummation of the Offer, and subject to the satisfaction or written waiver of certain conditions set forth in the Spectrum Merger Agreement, Spectrum Merger Sub will be merged with and into us and we will continue as the surviving corporation.  This transaction is referred to as the Merger.

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At the effective time of the Merger, all remaining outstanding Shares not tendered in the Offer (other than Shares owned by Spectrum or Spectrum Merger Sub, Shares owned by us as treasury stock or owned of record by any of our subsidiaries or Shares held by stockholders who properly exercise their appraisal rights under the Delaware General Corporate Law) will be cancelled and converted into the right to receive the Offer Price.

Spectrum Merger Sub’s obligation to accept for payment and pay for all Shares validly tendered pursuant to the Offer is subject to (i) the termination or expiration of any waiting period applicable to the consummation of the Offer and the Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, (ii) a majority of the Shares outstanding having been tendered and not withdrawn at the expiration of the Offer and (iii) other customary closing conditions.  Following the Merger, we will become a wholly-owned subsidiary of Spectrum.

The Merger has been unanimously approved by the Boards of Directors of both companies.  Additionally, Warburg Pincus Private Equity VIII, L.P., or Warburg Pincus, our largest stockholder and the owner of approximately 24% of our outstanding shares, along with our directors and certain officers, have entered into tender and voting agreements with Spectrum and Spectrum Merger Sub pursuant to which Warburg Pincus, the directors and such officers have agreed to tender all of the Shares beneficially owned by them into the Offer and to cause all the Shares beneficially owned by them to be voted, if necessary, in favor of, among other things, the adoption of the Spectrum Merger Agreement, the approval of the Merger and the other transactions contemplated by the Spectrum Merger Agreement and against, among other things, any competing acquisition proposal (and pursuant to which such stockholders have agreed to grant a proxy with respect to such voting obligations to Spectrum, Spectrum Merger Sub and certain individuals set forth in the tender and voting agreements).  Our Board of Directors has unanimously determined that the Spectrum Merger Agreement, including the Offer and the Merger, are advisable and fair to, and in the best interests of, Allos and its stockholders, and recommended that Allos stockholders accept the Offer, tender their shares to Spectrum Merger Sub pursuant to the Offer and, if a stockholders’ meeting is required by applicable law, recommended that Allos stockholders adopt the Spectrum Merger Agreement on the terms and subject to the conditions set forth therein.

The Spectrum Merger Agreement also contains customary termination provisions for us and Spectrum and provides that, in connection with the termination of the Spectrum Merger Agreement related to a competing acquisition proposal under certain specified circumstances, we may be required to pay Spectrum a termination fee of $7.5 million.

Strategic Collaboration with Mundipharma

In May 2011, we entered into a strategic collaboration agreement with Mundipharma, or the Mundipharma Collaboration Agreement, pursuant to which we agreed to collaborate in the development of FOLOTYN according to a mutually agreed-upon development plan, as updated by the parties from time to time.  Under the Mundipharma Collaboration Agreement, we retain full commercialization rights for FOLOTYN in the United States and Canada with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world, or the Mundipharma territories.  We received an upfront payment of $50.0 million upon execution of the Mundipharma Collaboration Agreement and may receive potential regulatory milestone payments of up to $21.5 million and commercial progress- and sales-dependent milestone payments of up to $289.0 million.  We are also entitled to receive tiered double-digit royalties based on net sales of FOLOTYN within the Mundipharma territories.  Of the $50.0 million upfront payment, 20%, or $10.0 million, was paid by Allos to the licensors of FOLOTYN under the terms of our license agreement, as amended, with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute, or the FOLOTYN License Agreement.  Allos and Mundipharma will jointly fund worldwide development costs, initially on a 60:40 basis, respectively; which will change to a 50:50 basis if certain pre-defined milestones are achieved, as further discussed in “Critical Accounting Policies” below, including approval to market FOLOTYN for relapsed or refractory PTCL in the EU.  The parties’ joint development funding supports mutually agreed-upon clinical development activities, including, but not limited to, the ongoing and planned Phase 3 registration studies of FOLOTYN in patients with previously undiagnosed PTCL and in patients with relapsed or refractory cutaneous T-cell lymphoma, or CTCL.  Pursuant to a separate supply agreement with Mundipharma Medical Company, an affiliate of Mundipharma, we will supply FOLOTYN for Mundipharma’s clinical and commercial uses. We refer to this as the Mundipharma Supply Agreement, and we refer to the Mundipharma Supply Agreement and the Mundipharma Collaboration Agreement together as the Mundipharma Agreements. During the three months ended March 31, 2012, we recognized $1.6 million of license and other revenue under the Mundipharma Agreements.

We and Mundipharma are currently seeking regulatory approval to market FOLOTYN in Europe and other countries for the treatment of patients with relapsed or refractory PTCL.  In December 2010, our MAA was accepted for review by the EMA.  The MAA is based on updated clinical data from our pivotal PROPEL trial.  In January 2012, the CHMP adopted an

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opinion recommending against approval of the MAA for FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Europe.  We submitted a request for the re-examination of the CHMP opinion in January 2012, and, on April 19, 2012, the CHMP confirmed its position and adopted a final opinion recommending against approval of the MAA.  The final opinion was based on a majority vote of the members of the CHMP, with a minority of members taking a divergent position. On the same day, the CHMP forwarded a copy of its final opinion to the EC which is the regulatory authority responsible for rendering a final decision on the MAA.  The EC has 15 days from the receipt of CHMP’s final opinion to prepare and provide to the members of the CHMP a draft decision with respect to the MAA, together with a report providing support and reasons for its decision. Within 22 days following receipt of the draft decision (or a shorter period as determined by the EC if it finds that urgent or exceptional circumstances require it), any member of the CHMP may provide their written observations on the draft decision to the EC. If the EC determines in its sole discretion that any such observations raise important new questions of a scientific or technical nature that the opinion of the CHMP has not addressed, the EC may suspend its procedures and refer the MAA back to the CHMP for further consideration. If the EC refers the MAA back to the CHMP, there is no specific timeframe defined by the EC regulations for the CHMP to address the questions raised by the EC, but in practice, the timeframe will be established by the CHMP depending upon the nature of the questions raised.  If no CHMP member provides any written observations within such 22 day period (or shorter period as determined by the EC) or the EC determines that any such written observations do not raise important new questions of a scientific or technical nature, then the EC has 15 days following the expiration of such period to adopt a final decision on the MAA.  There is no formal process for us to appeal the CHMP’s final opinion, and if the EC adopts a final decision refusing approval of the MAA, such decision would be final and binding. In the event the EC does not refer the MAA back to the CHMP, we expect that a final decision would likely be adopted by the EC in late May or early June of 2012.  Mundipharma has also submitted applications seeking regulatory approval of FOLOTYN for the treatment of patients with relapsed or refractory PTCL in Australia, Israel, South Korea and Switzerland and may submit additional applications in Japan and other countries.

Development Program

The following table summarizes the target indications and clinical development status of the FOLOTYN development program:

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

We also continue to support investigators who are evaluating FOLOTYN in multiple myeloma and solid tumor indications through our ongoing collaboration with the National Comprehensive Cancer Network Oncology Research Program.

Results of Operations

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

Our ability to achieve sustained profitability is dependent on our ability, alone or with partners, to significantly increase sales of FOLOTYN for the treatment of patients with relapsed or refractory PTCL in the United States.  The amount of our future product sales is subject to significant uncertainty.  We may never generate sufficient revenue from product sales to become profitable.  We recently entered into the Spectrum Merger Agreement with Spectrum.  Under the Spectrum Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger that could further adversely affect our ability to realize certain of our business strategies and our ability to achieve profitability if the Merger is not completed.

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

If we are unable to (i) significantly increase sales of FOLOTYN, (ii) complete the Merger as anticipated or (iii) otherwise raise sufficient additional funds to support our operations, we may be required to delay, reduce the scope of our commercial operations, or forego commercial opportunities, and our business and future prospects for profitability may be harmed.

Comparison of three ended March 31, 2012 and 2011

Revenue

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

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party.  Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination).  These distributors then resell FOLOTYN to the patients’ respective health care providers.  Through March 31, 2012, product returns have been negligible.  Our distributors’ contractual return rights are limited to defective product or product that was shipped in error.  Returns are not contractually allowed for expired product.  Given these limited contractual return rights, the high price of FOLOTYN and the limited number of PTCL patients in the United States, FOLOTYN distributors and their customers generally carry limited inventory.

A reconciliation of gross to net product sales for the three months ended March 31, 2012 and 2011 are as follows: