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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission file number 0-27628



ASTEX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
  91-1841574
(IRS Employer
Identification Number)

 

 

 


4140 Dublin Blvd, Suite 200, Dublin, California
(Address of principal executive offices)


 


94568
(Zip Code)

(925) 560 - 0100
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)



        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 ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(do not check if a
smaller reporting company)
  Smaller Reporting Company o

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

        The number of shares of the registrant's Common Stock, $.001 par value, outstanding as of November 1, 2012 was 93,495,334.

   


Table of Contents

TABLE OF CONTENTS

 
   
  Page No.  

PART I

 

FINANCIAL INFORMATION

       



 


Item 1—Financial Statements (Unaudited)


 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

   
3
 

 

Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011

   
4
 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2012 and 2011

   
5
 

 

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011

   
6
 

 

Notes to Condensed Consolidated Financial Statements

   
7
 



 


Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations


 

 


19

 



 


Item 3—Quantitative and Qualitative Disclosures About Market Risk


 

 


29

 



 


Item 4—Controls and Procedures


 

 


29

 


PART II


 


OTHER INFORMATION


 

 

 

 



 


Item 1A—Risk Factors


 

 


30

 



 


Item 6—Exhibits


 

 


47

 


SIGNATURES


 

 


48

 

2


Table of Contents


ASTEX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 
  September 30,
2012
  December 31,
2011
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 26,772   $ 39,788  

Marketable securities

    103,065     86,444  

Accounts receivable

    880     5,189  

Income tax receivable

    6,174     2,963  

Prepaid expenses and other current assets

    2,146     2,186  
           

Total current assets

    139,037     136,570  

Marketable securities, non-current

    31     1,819  

Property, plant and equipment, net

    5,911     7,013  

Goodwill

    46,822     44,794  

Other intangible assets, net

    76,547     86,198  

Other assets

    1,564     554  
           

Total assets

  $ 269,912   $ 276,948  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

             

Accounts payable

  $ 7,723   $ 7,529  

Accrued compensation

    4,213     5,324  

Other accrued liabilities

    616     613  

Deferred acquisition consideration

    8,283     17,353  

Deferred tax liability

    3,496     3,342  

Deferred revenue

        509  
           

Total current liabilities

    24,331     34,670  

Warrant liability

    316     187  

Deferred acquisition consideration, non-current

    8,628     11,624  

Deferred tax liability, non-current

    4,152     9,545  

Deferred revenue, non-current

        921  
           

Total liabilities

    37,427     56,947  
           

Commitments and contingencies

             

Stockholders' equity:

             

Preferred stock, $.001 par value; 2,000,000 shares authorized; none outstanding

         

Common stock, $.001 par value; 150,000,000 shares authorized; 93,488,828 and 93,049,938 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

    93     93  

Additional paid in capital

    564,421     561,355  

Accumulated other comprehensive loss

    (979 )   (6,677 )

Accumulated deficit

    (331,050 )   (334,770 )
           

Total stockholders' equity

    232,485     220,001  
           

Total liabilities and stockholders' equity

  $ 269,912   $ 276,948  
           

   

See accompanying notes to condensed consolidated financial statements

3


Table of Contents


ASTEX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2012   2011   2012   2011  

Revenues:

                         

Royalty revenue

  $ 16,995   $ 16,638   $ 52,030   $ 45,148  

Development and license revenue

    199     308     7,068     562  
                   

Total revenues

    17,194     16,946     59,098     45,710  

Operating expenses:

                         

Research and development

    13,633     13,546     43,092     29,531  

General and administrative

    4,188     5,095     12,180     12,246  

Amortization of intangibles

    1,938     1,485     6,036     1,485  

Impairment of intangibles

    7,402         7,402      

Gains on disposition of assets and sale of products 

    (576 )       (1,276 )   (700 )
                   

Total operating expenses

    26,585     20,126     67,434     42,562  
                   

Income (loss) from operations

    (9,391 )   (3,180 )   (8,336 )   3,148  

Interest income

    50     48     136     153  

Gain on sale of investments and fixed assets

    2,591         2,583     10  

Other than temporary decline in value of investments

    (485 )       (524 )    

Other expense

    (4 )   (291 )   (31 )   (291 )
                   

Income (loss) before income taxes

    (7,239 )   (3,423 )   (6,172 )   3,020  

Income tax benefit

    5,479     2,352     9,892     2,302  
                   

Net income (loss)

  $ (1,760 ) $ (1,071 ) $ 3,720   $ 5,322  
                   

Net income (loss) per common share:

                         

Basic

  $ (0.02 ) $ (0.01 ) $ 0.04   $ 0.08  
                   

Diluted

  $ (0.02 ) $ (0.01 ) $ 0.04   $ 0.08  
                   

Weighted average shares outstanding:

                         

Basic

    93,316     86,116     93,175     69,054  
                   

Diluted

    93,316     86,116     102,335     69,809  
                   

   

See accompanying notes to condensed consolidated financial statements

4


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ASTEX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2012   2011   2012   2011  

Net income (loss)

  $ (1,760 ) $ (1,071 ) $ 3,720   $ 5,322  

Other comprehensive income:

                         

Foreign currency translation gain (loss)

    3,415     (4,282 )   4,775     (4,282 )

Net unrealized gain (loss) on available-for-sale securities

    1,159     (778 )   923     (2,374 )
                   

Comprehensive income (loss)

  $ 2,814   $ (6,131 ) $ 9,418   $ (1,334 )
                   

   

See accompanying notes to condensed consolidated financial statements

5


Table of Contents


ASTEX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
  Nine months ended
September 30,
 
 
  2012   2011  

Operating activities:

             

Net income

  $ 3,720   $ 5,322  

Adjustments to reconcile net income to net cash provided by operating activities:

             

Depreciation

    1,212     1,005  

Amortization of intangibles

    6,036     1,485  

Impairment of intangibles

    7,402      

Gain on sale of investments and fixed assets

    (2,583 )   (10 )

Stock-based compensation expense

    2,460     2,313  

Other than temporary decline in value of investments

    524      

Change in valuation of deferred acquisition consideration

    206     327  

Change in valuation of warrant liability

    129     (133 )

Recognition of gain on disposition of assets and sale of products

    (1,276 )   (700 )

Changes in operating assets and liabilities:

             

Accounts receivable

    4,539     2,998  

Income tax receivable

    (3,075 )   (954 )

Prepaid expenses and other assets

    117     408  

Restricted cash

        2,134  

Accounts payable and other accrued liabilities

    (2,623 )   (1,335 )

Deferred tax liability

    (5,771 )   (1,272 )

Deferred revenue

    (1,430 )   (562 )
           

Net cash provided by operating activities

    9,587     11,026  
           

Investing activities:

             

Purchases of marketable securities

    (132,329 )   (57,717 )

Sales and maturities of marketable securities

    120,987     59,713  

Proceeds from sale of products

    700     700  

Purchases of property and equipment

    (872 )   (629 )

Proceeds from sale of property and equipment

        37  

Acquisition of Astex Therapeutics net assets, net of cash acquired

        (269 )

Payment of deferred consideration relating to acquisition of Astex Therapeutics Limited

    (12,272 )    
           

Net cash provided by (used in) investing activities

    (23,786 )   1,835  
           

Financing activities:

             

Proceeds from issuances of common stock

    606     251  
           

Net cash provided by financing activities

    606     251  
           

Effect of foreign exchange rate changes on cash and cash equivalents

    577     (727 )

Net increase (decrease) in cash and cash equivalents

    (13,016 )   12,385  

Cash and cash equivalents at beginning of period

    39,788     25,554  
           

Cash and cash equivalents at end of period

  $ 26,772   $ 37,939  
           

Supplemental Disclosure of Non-Cash Investing Activities:

             

Fixed assets and intellectual property transferred in exchange for investment

  $ 924   $  

Common stock issued in connection with Astex Therapeutics acquisition

        95,119  

Fair value of stock options assumed in connection with Astex Therapeutics acquisition

        3,270  

Fair value of warrants assumed in connection with Astex Therapeutics acquisition

        301  

Supplemental Disclosure of Cash Flow Information:

             

Income taxes paid in cash during the period

  $   $ 39  

   

See accompanying notes to condensed consolidated financial statements

6


Table of Contents


ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

        The accompanying unaudited condensed consolidated financial statements of Astex Pharmaceuticals, Inc. ("we," "Astex" or the "Company"), have been prepared in accordance with US generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results include the results of Astex Therapeutics Limited ("ATL"), our wholly owned subsidiary based in the United Kingdom, since the acquisition date of July 20, 2011. The financial statements of ATL have been translated from their functional currency of British Pounds Sterling into US dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for operating results. Goodwill and intangible asset balances arising from the acquisition of ATL are also denominated in British Pounds Sterling and are translated into US dollars at period-end exchange rates. Translation gains and losses are included in accumulated other comprehensive income (loss) in stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations in other expense. All intercompany balances and transactions have been eliminated in consolidation. Operating results for the three or nine month periods ended September 30, 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2012.

        The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

        These unaudited financial statements should be read in conjunction with the Company's audited financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

NOTE 2. STOCK-BASED COMPENSATION

        Stock Option Plans.    We have authorized 24,000,976 shares of common stock for issuance following the grant of incentive stock options or nonstatutory stock options to employees, directors, and consultants under our stock option plans. The number of shares to be purchased, their price, and the terms of payment are determined by our Board of Directors, provided that the exercise price for incentive stock options cannot be less than the fair market value on the date of grant. The options granted generally expire ten years after the date of grant and become exercisable at such times and under such conditions as determined by the Board of Directors (generally over a four or five year period). Options that have performance-based vesting criteria become exercisable in accordance with the milestones determined by the Board of Directors.

        Employee Stock Purchase Plan.    We also have an employee stock purchase plan ("ESPP") that allows eligible employees to purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month period during the term of the ESPP. The current offering period began May 15, 2012 and is scheduled to end on November 14, 2012.

        We recognized $885,000 and $858,000, respectively, in stock-based compensation expense for the three months ended September 30, 2012 and 2011. We recognized $2,460,000 and $2,313,000,

7


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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 2. STOCK-BASED COMPENSATION (Continued)

respectively, in stock-based compensation expense for the nine months ended September 30, 2012 and 2011. These amounts have been recorded in research and development expenses or general and administrative expenses, based on the home department of our employees.

        The fair value of each stock award has been estimated on the grant date using the Black-Scholes option-pricing model based on the weighted-average assumptions noted in the following table:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2012   2011   2012   2011  

Risk-free interest rate

    1.21 %   1.47 %   1.27 %   2.01 %

Dividend yield

                 

Expected volatility

    63.14 %   59.01 %   70.44 %   58.51 %

Expected life (in years)

    6.62     6.27     6.28     5.95  

        We compute expected volatility using a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. We do not rely exclusively on implied volatility because options on our stock with remaining terms of greater than one year are not regularly traded in the market. The expected life of stock options granted is based exclusively on historical data and represents the weighted average period of time that stock options granted are expected to be outstanding. The expected life is applied to one group as a whole as we do not expect substantially different exercise or post-vesting termination behavior among our employee and director population. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The dividend yield is zero as we do not expect to pay any dividends in the foreseeable future. We currently estimate when and if performance-based options will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we consider the award to be probable of vesting, expense is recorded over the estimated service period.

        We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. We estimate forfeiture rates at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used estimated forfeiture rates of 7.47% and 7.89% for the nine month periods ended September 30, 2012 and 2011, respectively. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of a surrendered option. The forfeiture rate is re-evaluated annually and is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

8


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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 2. STOCK-BASED COMPENSATION (Continued)

        A summary of the Company's stock options as of September 30, 2012 and activity during the nine months then ended is presented below:

 
  Options
Outstanding
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 

Balance at January 1, 2012

    14,366,623   $ 3.83              

Granted

    2,305,170     1.85              

Exercised

    (415,081 )   1.35              

Forfeited

    (251,949 )   2.46              

Expired

    (507,237 )   3.84              
                         

Balance at September 30, 2012

    15,497,526   $ 3.62     5.84   $ 10,796,300  
                         

Vested or expected to vest at September 30, 2012

    14,882,686   $ 3.62     5.80   $ 10,360,500  
                         

Exercisable at September 30, 2012

    10,447,411   $ 3.78     5.14   $ 6,473,900  
                         

        The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2012 was $1.18 per option. The total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid to exercise the options) during the nine months ended September 30, 2012 was $528,000 and the total amount of cash received from exercise of these options was $560,000.

        As of September 30, 2012, there was $4,303,000 of total unrecognized compensation expense related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This expense is expected to be recognized over a weighted average period of 2.51 years.

NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

        Cash and cash equivalents include bank demand deposits, certificates of deposit, investments in debt securities with maturities of three months or less when purchased, and an interest in money market funds which invest primarily in U.S. government obligations. Investments in marketable securities consist of equity securities and corporate or government debt securities that have a readily ascertainable market value and are readily marketable. We report these investments at fair value. We designate all cash equivalents and marketable securities as available-for-sale, with unrealized gains and losses included as a component of equity.

9


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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

        The following is a summary of available-for-sale securities (in thousands):

 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  

At September 30, 2012

                         

Money market funds

  $ 1,041   $   $   $ 1,041  

U.S. corporate debt securities

    34,666     2         34,668  

Debt securities issued by U.S. government and U.S. government agencies

    89,224     22     (1 )   89,245  

Marketable equity securities

    16     15         31  
                   

Total

  $ 124,947   $ 39   $ (1 ) $ 124,985  
                   

At December 31, 2011

                         

Money market funds

  $ 4,469   $   $   $ 4,469  

U.S. corporate debt securities

    32,830         (1 )   32,829  

Debt securities issued by U.S. government and U.S. government agencies

    72,901     14     (2 )   72,913  

Marketable equity securities

    2,726         (907 )   1,819  
                   

Total

  $ 112,926   $ 14   $ (910 ) $ 112,030  
                   

        The available-for-sale securities are classified on the balance sheet as follows (in thousands):

 
  Fair Value  
 
  September 30,
2012
  December 31,
2011
 

Amounts included in cash and cash equivalents

  $ 21,889   $ 23,767  

Marketable securities, current

    103,065     86,444  

Marketable securities, non-current

    31     1,819  
           

Total

  $ 124,985   $ 112,030  
           

        At September 30, 2012, all of our debt securities were due in one year or less based on their contractual maturities.

        In the three and nine month periods ended September 30, 2012 and 2011, realized gains and losses calculated using the specific identification method were insignificant.

        We evaluate investments with unrealized losses to determine if the losses are other than temporary. In making this determination, we consider the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments' amortized cost, changes in the credit quality of the issuer, the length of time the investments have been in an unrealized loss position, and whether it is more likely than not that we will hold the investment for a period of time sufficient for a recovery of our cost basis.

        As of December 31, 2011, we held 2,384,211 shares of AVI BioPharma, Inc. ("AVI") common stock. In July 2012, AVI changed its name to Sarepta Therapeutics, Inc. ("Sarepta") and effected a six

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

for one reverse stock split. In September 2012, we sold all of our shares of Sarepta for $5,384,000, resulting in a net gain on sale, after payment of broker commissions, of $2,606,000.

Equity Investments

        Equity investments in securities without readily determinable fair value, which consist of investments in privately held companies, are carried at cost. As of December 31, 2011, we held one such non-marketable security with a carrying amount of $500,000, which has been included in other assets in the condensed consolidated balance sheets. We periodically review this investment and evaluate whether an impairment has occurred. We monitor the liquidity and financing activities of the issuer of this security and evaluate, among other factors, the financial condition and business outlook of the issuer, including key operational and cash flow metrics and current market conditions, as well as our intent and ability to retain the investment. During the quarter ended September 30, 2012, based on the current financial status and information received from the issuer, we determined that the value of our investment was impaired, and recorded an other than temporary decline in value of $485,000.

        During the quarter ended September 30, 2012, we acquired an investment of 681,632 shares of Series A preferred stock, representing less than 20% ownership, of a privately held company valued at $2.20 per share, for a total investment of $1,500,000. This amount is included in other assets in the condensed consolidated balance sheets. In exchange for acquisition of these shares, we contributed fixed assets and other intellectual property from our Utah laboratory location with a net book value of $924,000, resulting in the recognition of a gain on disposition of assets of $576,000.

NOTE 4. FAIR VALUE MEASUREMENTS

        Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following three levels of inputs may be used to measure fair value under the fair value hierarchy:

    Level 1—Quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

    Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

        If the inputs used to measure the financial assets and liabilities fall within more than one of the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

        As of September 30, 2012, we held $124,985,000 of cash equivalents and marketable securities consisting of equity securities, high quality marketable debt instruments of the U.S. government and U.S. government agencies, commercial paper, and a money market fund. We have adopted an investment policy and established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. All investment securities are issued by or

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

guaranteed by the U.S. government and its federal agencies or have a credit rating of at least long-term of A or short-term of A1/P1 as determined by Moody's Investors Service and/or Standard & Poor's. We do not have any direct investments in auction-rate securities or securities that are collateralized by assets that include mortgages or subprime debt.

        The fair value measurements of our financial assets and liabilities are identified at the following levels within the fair value hierarchy (in thousands):

 
  Fair Value Measurements Using    
 
 
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  

At September 30, 2012

                         

Financial assets carried at fair value:

                         

Money market funds

  $   $ 1,041       $ 1,041  

Commercial paper

        26,747         26,747  

Corporate notes

        7,921         7,921  

U.S. government and U.S government agency notes

        89,245         89,245  

Equity securities

    31             31  
                   

Total

  $ 31   $ 124,954       $ 124,985  
                   

Financial liabilities carried at fair value:

                         

Deferred acquisition consideration

          $ 16,911   $ 16,911  

Warrant liability

            316     316  
                   

Total

          $ 17,227   $ 17,227  
                   

At December 31, 2011

                         

Financial assets carried at fair value:

                         

Money market funds

  $   $ 4,469       $ 4,469  

Commercial paper

        31,394         31,394  

Corporate notes

        1,435         1,435  

U.S. government and U.S government agency notes

        72,913         72,913  

Equity securities

    1,819             1,819  
                   

Total

  $ 1,819   $ 110,211       $ 112,030  
                   

Financial liabilities carried at fair value:

                         

Deferred acquisition consideration

          $ 28,977   $ 28,977  

Warrant liability

            187     187  
                   

Total

          $ 29,164   $ 29,164  
                   

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

        The Company's securities consisting of money market funds, commercial paper, corporate notes, and U.S. government and U.S. government agency notes are classified as Level 2 as they are valued using multi-dimensional relational pricing models that use observable market inputs from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data. Not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. In addition, market indicators, industry, and other economic events are monitored and may serve as a trigger to acquire further corroborating market data. There were no transfers between Level 1 and Level 2 categories during the nine months ended September 30, 2012 and 2011, respectively.

        The following table provides reconciliations of financial liabilities measured at fair value using significant unobservable inputs (Level 3)(in thousands):

 
  Deferred
Acquisition
Consideration
  Warrant
Liability
 

Balances at December 31, 2011

  $ 28,977   $ 187  

Installments payment of deferred consideration

    (12,272 )    

Change in fair value

    206     129  
           

Balances at September 30, 2012

  $ 16,911   $ 316  
           

        Significant inputs and assumptions used to estimate the fair values of the deferred acquisition consideration are discussed in Note 5. The change in fair value of the deferred acquisition consideration is included in general and administrative expenses on the accompanying statement of operations for the nine months ended September 30, 2012.

        The fair value of warrants is estimated using the Black-Scholes option-pricing model based on the assumptions noted in the following table:

 
  Fair Value  
 
  September 30,
2012
  December 31,
2011
 

Risk-free interest rate

    1.21 %   1.32 %

Dividend yield

         

Expected volatility

    63.48 %   69.18 %

Expected life (in years)

    5.00     5.75  

        We compute expected volatility using historical volatility of our common stock based on the period of time corresponding to the expected life of the warrants. The expected life of the warrants is estimated to equal their remaining contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement that is commensurate with the expected life assumption. The dividend yield is zero as we do not expect to pay any dividends in the foreseeable future. The change in fair value of the warrant liability is included in other expense on the accompanying statement of operations for the nine months ended September 30, 2012.

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 5. ACQUISITION OF ASTEX THERAPEUTICS LIMITED

        On July 20, 2011, we completed the acquisition of all of the outstanding shares of ATL, a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. Pursuant to the acquisition, we paid approximately $24.9 million in cash and issued 32.4 million shares of Astex common stock (representing approximately 35% of the issued and outstanding stock of Astex as of the closing of the transaction after giving effect to the issuance of such shares) to the securityholders of ATL.

        In addition, we agreed to pay deferred consideration of $30 million in stock, cash, or a combination of stock and cash, to be determined at the discretion of the Company. Deferred consideration is payable in semi-annual installments whose amounts will be determined based on the amounts of the contingent payments ATL has received and will receive under its collaboration arrangements during the period from January 1, 2011 through January 20, 2014. While the timing of the deferred consideration payments can vary, the aggregate amount of deferred consideration is fixed and will be paid no later than 30 months after the closing of the acquisition (January 2014), with a minimum of $15 million payable no later than the 18 month anniversary of the closing of the acquisition (January 2013). Deferred consideration is accounted for as a liability at fair value. We determine the fair value of the deferred consideration liability as the expected present value of future semi-annual installments, discounted at our incremental borrowing rate of five per cent. The amount of the future semi-annual installments reflects our best estimates of the probability and timing of collaboration payments to be received. In February 2012, we paid the initial installment of deferred consideration in the amount of $10,012,000 in cash, and paid the second installment of $2,260,000 in cash in August 2012.

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

        Changes in the carrying amount of goodwill were as follows (in thousands):

Balance at December 31, 2011

  $ 44,794  

Impact of translation to current exchange rate

    2,028  
       

Balance at September 30, 2012

  $ 46,822  
       

        All of our intangible assets as of September 30, 2012 were recorded in connection with the acquisition of ATL in July 2011. Intangible assets with finite useful lives are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. We amortize the finite lived intangible assets using the straight-line method, which approximates the pattern in which we expect to derive the benefits from the use of these assets. Intangible assets related to the developed technology are being amortized over seven years and the non-active collaboration agreements are being amortized over five years. The accumulated amortization of the developed technology and non-active collaboration agreements was $3,057,000 and $6,235,000, respectively, at September 30, 2012.

        Intangible assets related to in-process research and development projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. Intangible assets with finite useful lives are related to acquired developed technology and acquired rights in non-active collaboration agreements. During the quarter ended September 30, 2012, one of our collaboration partners ceased development of three research and development projects, which resulted in the recognition of an impairment charge of $7,402,000.

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 7. LICENSE AGREEMENT WITH MGI PHARMA, INC./EISAI CORPORATION

        In August 2004, we entered into a license agreement with MGI PHARMA, Inc., a Minnesota corporation ("MGI") relating to Dacogen® (decitabine) for Injection, an anti-cancer therapeutic. Pursuant to the terms of the license agreement, MGI received exclusive worldwide rights to the development, commercialization and distribution of Dacogen for all indications. We are entitled to royalties from MGI on all sales of licensed product worldwide.

        In May 2006, the United States Food and Drug Administration ("FDA") approved Dacogen for the treatment of patients with myelodysplastic syndromes ("MDS") and MGI commenced commercial sales of Dacogen in the United States. In July 2006, MGI executed an agreement to sublicense Dacogen to Janssen-Cilag, a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. MGI was acquired by Eisai Corporation of North America ("Eisai") in January 2008.

        Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. We recognize royalty revenue when we receive the royalty statement from Eisai, due 45 days after the end of each calendar quarter, because we do not have sufficient ability to accurately estimate Dacogen sales prior to that time. Details of Dacogen sales and related royalty revenues were as follows (dollars in thousands):

 
  Three months ended
September 30,
  Increase (Decrease)   Nine months ended
September 30,
  Increase (Decrease)  
 
  2012   2011   Dollar   Percent   2012   2011   Dollar   Percent  

Net product sales:

                                                 

North America

  $ 55,751   $ 60,180   $ (4,429 )   (7.4 )% $ 168,837   $ 155,255   $ 13,582     8.7 %

Rest of the world

    15,255     10,689     4,566     42.7     41,749     31,861     9,888     31.0  
                                   

Total

  $ 71,006   $ 70,869   $ 137     0.2 % $ 210,586   $ 187,116   $ 23,470     12.5 %
                                   

Royalty Revenue

  $ 16,995   $ 16,638   $ 357     2.1 % $ 52,030   $ 45,148   $ 6,882     15.2 %
                                   

NOTE 8. AGREEMENTS WITH GLAXOSMITHKLINE

        In October 2009, we entered into agreements with GlaxoSmithKline ("GSK") under which we were to collaborate with GSK over a period of five years to discover and develop specific epigenetic therapeutics. The initial total deferred revenue related to GSK of $2,545,000 was being recognized ratably over five years, the expected term of our substantive performance obligations under the collaboration.

        In January 2012, we entered into an Asset Transfer Agreement (the "Transfer Agreement") with GSK. Under the terms of the Transfer Agreement, we terminated our license agreement and transferred certain existing research work and assets generated under the epigenetic collaboration and licensing rights to GSK. We have no further obligation to conduct additional research work on the program. GSK will make one-time, non-refundable payments to us upon the achievement of the first transferred licensed compound to reach defined milestones as described in the Transfer Agreement and will also pay us royalties upon certain sales from the transferred assets, if any. We recognized the

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 8. AGREEMENTS WITH GLAXOSMITHKLINE (Continued)

remaining balance of deferred revenue of $1,430,000 related to this agreement as development and license revenue in the quarter ended March 31, 2012.

NOTE 9. ASSET ACQUISITION AGREEMENTS WITH MAYNE PHARMA/HOSPIRA

        In August 2006, we closed a transaction with Mayne Pharma (USA), Inc. ("Mayne"), pursuant to which Mayne acquired the North American rights to Nipent® and our SurfaceSafe® cleaning system. Mayne was acquired by Hospira, Inc. in February 2007. In April 2007, we closed another transaction with Mayne/Hospira completing the sale of the remaining worldwide rights for Nipent for total consideration of up to $8.3 million. From the sale of the remaining worldwide rights we received an initial up-front payment of $3.75 million, and the balance of the purchase price was guaranteed and payable in five installments over a five year period on the anniversary dates of the closing date.

        Due to the Company's determination that the Nipent operations sold to Mayne/Hospira did not represent a separate component of our Company and our continuing involvement with the Nipent operations, resulting from entering into related agreements and the related additional obligations, we have reflected activities related to the Nipent and SurfaceSafe businesses in operating activities for all periods presented.

        During each of the nine month periods ended September 30, 2012 and 2011, we received $700,000, representing the fourth and fifth installment payments from Mayne/Hospira related to the sale of the remaining worldwide Nipent rights. These amounts were recorded as gain on sale of products. No further payments are expected under this transaction in future periods.

NOTE 10. BASIC AND DILUTED NET INCOME PER SHARE

        Basic net income per share is calculated by dividing the net income by the weighted-average number of common shares outstanding for the period, without consideration of potential common shares. Diluted net income per share is computed by dividing the net income, as adjusted for the impact of assuming payment of deferred acquisition consideration in stock, by the weighted-average number of common shares outstanding for the period and dilutive potential common shares for the period determined using the treasury-stock method. For purposes of this calculation, options and warrants to purchase stock as well deferred acquisition consideration that may be paid in stock are considered to be potential common shares and are only included in the calculation of diluted net income per share when their effect is dilutive.

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 10. BASIC AND DILUTED NET INCOME PER SHARE (Continued)

        The following table is a reconciliation of the denominator used in the calculation of basic and diluted earnings per share (in thousands):

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2012   2011   2012   2011  

Weighted-average common shares outstanding used in calculation of basic earnings per share

    93,316     86,116     93,175     69,054  

Dilutive stock options

            878     755  

Shares potentially issuable as deferred acquisition consideration

            8,282      
                   

Weighted-average common shares outstanding used in calculation of diluted earnings per share

    93,316     86,116     102,335     69,809  
                   

Weighted-average outstanding stock options and warrants not included in diluted net income per share calculation as they had an antidilutive effect

    15,682     14,877     12,114     9,764  
                   

        In the calculation of diluted earnings per share for the nine month period ended September 30, 2012, the numerator is comprised of the net income for the period adjusted by the change in value of the deferred acquisition consideration payable for the period, as the diluted calculation assumes the shares potentially issuable as deferred acquisition consideration would be outstanding from the date of the acquisition of ATL. The change in deferred acquisition consideration, recorded in general and administrative expenses, was $206,000 for the nine months ended September 30, 2012.

NOTE 11. INCOME TAXES

        We recorded a tax benefit of $9,892,000 for the nine months ended September 30, 2012, compared to a tax benefit of $2,302,000 for the nine months ended September 30, 2011. The tax benefits are related to refundable UK research and development tax credits, which are included in income taxes receivable on the accompanying balance sheet, benefits related to amortization of acquired intangibles related to our ATL acquisition that reduced our deferred tax liabilities, and utilization of net operating loss carryforwards. The 2012 tax benefit also reflects the results of changes in UK tax rates.

        Utilization of our net operating loss carryforwards are subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation will result in the expiration of the net operating losses before utilization. The Company's deferred tax assets have been adjusted for the expected limitation.

        We have no unrecognized tax benefits as of September 30, 2012. Our policy is to recognize interest and penalties related to income taxes as a component of income tax expense and there have been no such interest and penalties recorded for any of the periods presented. We are subject to income tax examinations for U.S. federal and state income taxes from 1997 forward due to net operating losses in tax years 1995 through 2009. We are subject to tax examinations in the UK from 2010 forward. We do

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ASTEX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012

(Unaudited)

NOTE 11. INCOME TAXES (Continued)

not anticipate that our total unrecognized tax benefits will significantly change prior to September 30, 2013.

NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS

        In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04 relating to fair value measurements. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of this amendment did not have a material impact on our results of operations, cash flows, or financial position.

        In June 2011, the FASB issued ASU 2011-05 on the presentation of comprehensive income, which amends current comprehensive income guidance. This amendment requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of the provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

        In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment. Under the amendment, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

        In July 2012, the FASB modified existing rules to allow entities to use a qualitative approach to test indefinite-lived intangible asset for impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. This guidance will be effective in 2013, but early adoption is permitted. Adoption of this standard will not have a material impact on our results of operations, cash flows, or financial position.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should read the following discussion together with our consolidated financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. Our disclosure and analysis in this section of the report also contain forward-looking statements. When we use the words "anticipate," "estimate," "project," "intend," "expect," "plan," "believe," "should," "likely" and similar expressions, we are making forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these statements include statements such as: our estimates about profitability or losses; the percentage and amount of royalties we expect to earn on Dacogen sales under our agreement with Eisai; our forecasts regarding our operating expenses; our expectations about the timing of regulatory reviews; and our statements regarding the sufficiency of our cash to meet our operating needs. Our actual results could differ materially from those predicted in the forward-looking statements as a result of risks and uncertainties including, but not limited to: the commercial success of Dacogen; the approval by regulatory agencies of expanded applications for Dacogen; delays and risks associated with conducting and managing our clinical trials; developing products and obtaining regulatory approval; our ability to launch and commercialize products; the stability of our stock price for purposes of measuring impairment of goodwill; our ability to establish and maintain collaborative relationships; competition; our ability to obtain funding; our ability to protect our intellectual property; our dependence on third party suppliers; risks associated with the hiring and loss of key personnel; and adverse changes in the specific markets for our products. Certain unknown or immaterial risks and uncertainties can also affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and you should not rely on these forward-looking statements. For a discussion of the known and material risks that could affect our actual results, please see the "Risk Factors" section of this report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review the Risk Factors section as well as other reports or documents we file from time to time with the Securities and Exchange Commission.

Overview

        We are a pharmaceutical company dedicated primarily to the discovery and development of novel small molecule therapeutics with a focus on oncology. We believe we are developing a proprietary pipeline of novel medicines for partnership with leading pharmaceutical companies. We believe we are a leader in the application of fragment-based drug discovery and development of small-molecule therapeutics. Fragment-based drug discovery is considered by many in our sector to be one of the most important advances in discovery chemistry in the last 20 years.

        On July 20, 2011, we completed the acquisition of all of the outstanding shares of Astex Therapeutics Limited ("ATL"), a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. We agreed to pay deferred consideration of $30 million in stock, cash, or a combination of stock and cash, to be determined at the discretion of the Company, no later than 30 months after the closing of the acquisition (January 2014). We made the first payment of $10 million in cash in February 2012 and paid the second installment of $2.2 million in cash in August 2012.

        ATL discovers and develops novel small molecule therapeutics. Using its fragment-based drug discovery platform, Pyramid™, ATL has built a pipeline of molecularly-targeted drugs for large pharmaceutical partners and internal development that are at various stages of clinical, pre-clinical and early discovery development.

        Our founding strategy was to in-license late-stage clinical products and commercialize these products by executing selective developmental and commercialization strategies that might allow these products to come into the market and be utilized by the widest possible patient populations. However,

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the competition for late-stage compounds that can be obtained through licensure or acquisition, that have shown initial efficacy in humans, has increased significantly with most major pharmaceutical companies and emerging biotechnology companies taking positions in this market. We believe that our current strategy attempts to mitigate the competitive risk of in-licensure and positions us to out-license selective products to our licensing competitors or other pharmaceutical companies. Our primary objective is to become a leading developer and seller or licensor of medicines for patients suffering from cancer.

        We currently receive development and license revenue from partnered programs and royalty revenues relating to sales of Dacogen® (decitabine) for Injection, a product approved by the FDA for the treatment of patients with myelodysplastic syndrome ("MDS"), which is licensed to Eisai. We are entitled to receive a royalty on worldwide net sales of Dacogen starting at 20% and escalating to a maximum of 30%. We recognize royalty revenue when the royalty statement is received from Eisai because we do not have sufficient ability to accurately estimate Dacogen sales prior to that time. In 2006, Eisai executed an agreement to sublicense Dacogen to Cilag Gmbh International ("Cilag"), a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while Eisai retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. As a result of both the original agreement with Eisai and the sublicense with Cilag, we may receive up to $17.5 million in future contingent payments dependent upon achievements for Dacogen globally. In September 2012, the European Commission approved the marketing authorization for Dacogen for the treatment of adult patients (age 65 years and above) with newly diagnosed de novo or secondary Acute Myeloid Leukemia ("AML"), according to the World Health Organization classification, who are not candidates for standard induction chemotherapy. Dacogen was also granted a 10-year Orphan Drug designation in Europe for the treatment of elderly AML. In early October 2012, we received a $5 million payment from Eisai for the first commercial sale of Dacogen in the EU, which will be reflected as revenue during the fourth quarter of 2012.

        All of our current products, other than Dacogen, are in the development or clinical trial stage, and will require substantial additional investments in research and development, clinical trials, regulatory and sales and marketing activities to commercialize these product candidates. Conducting clinical trials is a lengthy, time-consuming, and expensive process involving inherent uncertainties and risks, and our studies may be insufficient to demonstrate safety and efficacy to support FDA approval of any of our product candidates.

        As a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $331.1 million through September 30, 2012, and have not consistently generated enough funds through our operations to support our business. Although we were profitable in the years ended December 31, 2011 and 2010, as a result of our acquisition of ATL we expect to have operating losses over the next few years and we may never achieve sustained profitability.

        Ultimately, our ability to sustain profitability will depend upon a variety of factors, including seeking and receiving regulatory approvals of our products, the timing of the introduction and market acceptance of our products and competing products, Eisai's success in selling Dacogen, the success of our various collaborative, research and license arrangements, the launch of new products and our ability to control our ongoing costs and operating expenses. If our drug discovery and research efforts are not successful, or if the results from our clinical trials are not positive and do not support further development or approval, we may not be able to get sufficient funding to continue our trials or conduct new trials, and we would be forced to scale down or cease our business operations. Moreover, if our products are not approved or commercially accepted we will remain unprofitable for longer than we

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currently anticipate. As a result, we might be forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Critical Accounting Policies

        Our management discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and reported disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation of investments and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Our significant accounting policies are more fully disclosed in Note 1 to our consolidated financial statements included in our 2011 Annual Report on Form 10-K. However, some of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

    Stock-Based Compensation

        We account for stock-based compensation at the fair value estimated on the measurement date using the Black-Scholes option-pricing model based on assumptions for volatility, risk-free interest rates, expected life of the option, and dividends (if any). Expected volatility is determined based on a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. The expected life of our stock options is based on our historical data and represents the period of time that stock options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption.

        We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest, including awards that vest based on certain performance criteria. We estimate forfeitures at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of the surrendered option. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

        As of September 30, 2012, there was $4.3 million of total unrecognized compensation cost related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This cost is expected to be recognized over a weighted average period of 2.51 years.

    Revenue Recognition

        Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. During the nine month period ended September 30, 2012, we recorded royalty revenue of $52.0 million. Because we do not

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have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statement from Eisai. In accordance with our license agreement with Eisai, we are entitled to receive 50% of any payments Eisai receives as a result of any sublicenses.

        In January 2012, we entered into an Asset Transfer Agreement with GSK. Under the terms of the Transfer Agreement, we terminated our license agreement and transferred certain existing research work and assets generated under the epigenetic collaboration and grant licensing rights to GSK. We have no further obligation to conduct additional research work on the program. GSK will make one-time, non-refundable payments to us upon the achievement of the first transferred licensed compound to reach defined milestones as described in the Transfer Agreement and will also pay us royalties upon certain sales from the transferred assets, if any. We recognized the remaining balance of deferred revenue of $1.4 million at December 31, 2011 related to this agreement as development and license revenue in the nine months ended September 30, 2012.

        Revenues associated with substantive, at-risk milestones pursuant to ATL's collaborative agreements will be recognized upon achievement of the milestones through option exercise by the collaboration partner. We consider a milestone to be substantive at the inception of the arrangement if it is (a) commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (b) it relates solely to past performance, and (c) it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent future amounts receivable in connection with future events specified in the collaboration agreement that are not considered milestones will be recognized as revenue when payments are earned from our collaborators through completion of any underlying performance obligations, the amounts are fixed or determinable, and collectibility is reasonably assured. In June 2012, Janssen Pharmaceutica NV received clearance to commence a Phase I clinical trial of a Fibroblast Growth Factor Receptor ("FGFR") kinase inhibitor from a collaborative, cancer drug discovery program with ATL. The regulatory clearance required to take the compound into Phase I triggered a payment to us of £3.5 million (US$5.4 million). We are also eligible to receive further payments during clinical development and royalties on commercialization of products derived from the collaboration.

    Intangible Assets and Goodwill

        The fair value of the identified intangible assets recorded in the acquisition of ATL was estimated by using income or cost replacement approaches. The acquisition of ATL also created goodwill as the purchase price exceeded the fair value of the identifiable assets acquired net of the liabilities assumed. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years, the estimated useful lives of the assets. The in-process research and development and trademark intangibles, as well as the goodwill, are deemed to have indefinite lives. The indefinite lived intangible assets will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present) until the completion or abandonment of the associated research and development efforts. During the quarter ended September 30, 2012, one of our collaboration partners ceased development of three research and development projects, which resulted in the recording of an impairment charge of $7.4 million.

    Impairment of Investments in Financial Instruments

        Investments in financial instruments are carried at fair value based on quoted market prices, with unrealized gains and losses included in accumulated other comprehensive income or loss in stockholders' equity. Our investment portfolio includes equity securities that could subject us to material equity market risk and corporate and U.S. government (or U.S. governmental agency) obligations that subject us to varying levels of credit risk. An other-than-temporary decline in fair value

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of a financial instrument will be subject to a write-down resulting in a charge against earnings. The determination of whether a decline in fair value is other-than-temporary requires significant judgment, and could have a material impact on our balance sheet and results of operations. Our management reviews the securities within our portfolio for other than temporary declines in value on a regular basis. The prices of some of our marketable equity securities are subject to considerable volatility.

        Equity investments in securities without readily determinable fair value, which consist of investments in privately held companies, are carried at cost. As of December 31, 2011, we held one such non-marketable security with a carrying amount of $500,000, which has been included in other assets in the condensed consolidated balance sheets. We periodically review this investment and evaluate whether an impairment has occurred. We monitor the liquidity and financing activities of the issuer of this security and evaluate, among other factors, the financial condition and business outlook of the issuer, including key operational and cash flow metrics and current market conditions, as well as our intent and ability to retain the investment. During the quarter ended September 30, 2012, based on the current financial status and information received from the issuer, we determined that the value of our investment was impaired, and recorded an other than temporary decline in value of $485,000.

Recent Accounting Pronouncements

        In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04 relating to fair value measurements. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of this amendment did not have a material impact on our results of operations, cash flows, or financial position.

        In June 2011, the FASB issued ASU 2011-05 on the presentation of comprehensive income, which amends current comprehensive income guidance. This amendment requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of the provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

        In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment. Under the amendment, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of this guidance is not expected to have a material impact on our results of operations, cash flows, and financial position.

        In July 2012, the FASB modified existing rules to allow entities to use a qualitative approach to test indefinite-lived intangible asset for impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. This guidance will be effective in 2013, but early adoption is permitted. Adoption of this standard will not have a material impact on our results of operations, cash flows, or financial position.

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Results of Operations

Three months ended September 30, 2012 compared to three months ended September 30, 2011:

        Operating results for the three months ended September 30, 2011 include the consolidated results of ATL since the acquisition date of July 20, 2011.

 
  Three months ended
September 30,
  Change  
Revenues
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Royalty revenue

  $ 16,995   $ 16,638   $ 357     2.15 %

Development and license revenue

    199     308     (109 )   (35.39 )

        The increase in royalty revenue from 2011 to 2012 is due to higher Dacogen product sales as reported by Eisai. Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statements from Eisai. Therefore, royalty revenues recognized in the third quarters of 2011 and 2012 relate to worldwide Dacogen sales for the second quarters of 2011 and 2012, respectively.

        Development and license revenue in 2011 related to the recognition of upfront payments received in connection with collaboration agreements with GSK. The upfront payment received was being recognized ratably over five years. Development and license revenue in 2012 represents recognition of revenue from a collaboration agreement relating to achievement of a defined patient enrollment threshold.

 
  Three months ended
September 30,
  Change  
Operating expenses
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Research and development

  $ 13,633   $ 13,546   $ 87     0.64 %

General and administrative

    4,188     5,095     (907 )   (17.80 )

Amortization of intangibles

    1,938     1,485     453     30.51  

Impairment of intangibles

    7,402         7,402      

Gain on disposition of assets and sale of products

    (576 )       (576 )    

        The increase in research and development expenses was primarily due to higher drug discovery, product development, and clinical trial programs costs associated with SGI-110 and AT13387, offset by declines in costs due to the closure of our Pleasanton and Utah laboratories. We expect that research and development expenses for 2012 will continue to increase over the prior year reflecting the operational impact of the acquisition of ATL and increased clinical trial activity related to our various clinical trial programs.

        The decline in general and administrative expenses from 2011 to 2012 relates primarily to transaction costs recorded in 2011 related to the acquisition of ATL in July 2011.

        Amortization of intangibles relates to the intangible assets that were part of the acquisition of ATL in July 2011. Definite-lived intangible assets are being amortized over their estimated useful lives. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years.

        Our indefinite lived intangible assets are not amortized but instead are tested for impairment at least annually (or more frequently if certain indicators are present) until the completion or

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abandonment of the associated research and development efforts. During the quarter ended September 30, 2012, one of our collaboration partners ceased development of three research and development projects, which resulted in the recording of an impairment charge of $7,402,000.

        During the three months ended September 30, 2012 we acquired an investment of 681,632 shares of Series A preferred stock, representing less than 20% ownership, of a privately held company valued at $2.20 per share, for a total investment of $1,500,000. In exchange for acquisition of these shares, we contributed fixed assets and other intellectual property from our Utah laboratory location with a net book value of $924,000, resulting in the recording of a gain on disposition of assets of $576,000.

 
  Three months ended
September 30,
  Change  
Other income (expense)
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Interest income

  $ 50   $ 48   $ 2     4.17 %

Gain on sale of investments and fixed assets

    2,591         2,591      

Other than temporary decline in value of investments

    (485 )       (485 )    

Other expense

    (4 )   (291 )   287     (98.63 )

Income tax benefit

    5,479     2,352     3,127     132.95  

        Gain on sale of investments and fixed assets primarily represents the net gain on sale of our shares of Sarepta Therapeutics, Inc. (formerly AVI BioPharma, Inc.).

        Other than temporary decline in value of investments relates to the write down in value of our equity investment in a privately held company. This investment had been carried at cost and we periodically reviewed the investment and evaluated whether an impairment in value had occurred. During the quarter ended September 30, 2012, based on the current financial status and information received from the issuer, we determined that the value of our investment was impaired, and recorded an other than temporary decline in value of $485,000.

        Other expense for the three months ended September 30, 2012 represents foreign currency transaction gains of $117,000, offset by change in warrant valuation of $121,000. Other income (expense) for the three months ended September 30, 2011 includes foreign currency transaction losses of $424,000 incurred upon the payment of the cash purchase consideration to the ATL securityholders, partially offset by a decline of $133,000 in the value of the warrant liability assumed in the acquisition of ATL.

        The 2012 and 2011 income tax benefits primarily relate to refundable UK research and development tax credits related to ATL and the recognition of tax benefits associated with the amortization of deferred tax liabilities resulting from the acquisition of ATL. The 2012 tax benefit also reflects the results of changes in UK tax rates.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011:

        Operating results for the nine months ended September 30, 2011 include the consolidated results of ATL since the acquisition date of July 20, 2011.

 
  Nine months ended
September 30,
  Change  
Revenues
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Royalty revenue

  $ 52,030   $ 45,148   $ 6,882     15.24 %

Development and license revenue

    7,068     562     6,506     1,158  

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        The increase in royalty revenue from 2011 to 2012 is due to higher Dacogen product sales as reported by Eisai. Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statements from Eisai.

        Development and license revenue in 2011 related to the recognition of upfront payments received in connection with collaboration agreements with GSK. The upfront payment received was being recognized ratably over five years. In January 2012, we terminated our license agreement and transferred certain existing research work and assets generated under the epigenetic collaboration and grant licensing rights to GSK. We recognized the remaining balance of deferred revenue of $1,430,000 related to this agreement as development and license revenue in the nine months ended September 30, 2012. Development and license revenue in 2012 also includes recognition of $5,439,000 relating to a collaboration agreement with Janssen Pharmaceutica NV, triggered upon clearance to commence a Phase I clinical trial of an FGFR kinase inhibitor, and recognition of $199,000 in revenue from a collaboration agreement relating to achievement of a defined patient enrollment threshold.

 
  Nine months ended
September 30,
  Change  
Operating expenses
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Research and development

  $ 43,092   $ 29,531   $ 20,067     67.95 %

General and administrative

    12,180     12,246     (66 )   (0.54 )

Amortization of intangibles

    6,036     1,485     4,551     306.46  

Impairment of intangibles

    7,402         7,402      

Gain on disposition of assets and sale of products

    (1,276 )   (700 )   576     82.29  

        The increase in research and development expenses was primarily due to higher drug discovery, product development, and clinical trial programs costs associated with SGI-110 and AT13387, offset by declines in costs due to the closure of our Pleasanton and Utah laboratories. We expect that research and development expenses for 2012 will continue to increase over the prior year reflecting the operational impact of the acquisition of ATL on July 20, 2011, and increased clinical trial activity related to our various clinical trial programs.

        The decline in general and administrative expenses from 2011 to 2012 relates primarily to increased salaries and benefits, rent, and facility costs related costs at our UK based subsidiary acquired in July 2011, offset by declines in acquisition related costs incurred in 2011.

        Amortization of intangibles relates to the intangible assets that were part of the acquisition of ATL in July 2011. Definite-lived intangible assets are being amortized over their estimated useful lives. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years.

        Our indefinite lived intangible assets are not amortized but instead are tested for impairment at least annually (or more frequently if certain indicators are present) until the completion or abandonment of the associated research and development efforts. During the nine months ended September 30, 2012, one of our collaboration partners ceased development of three research and development projects, which resulted in the recording of an impairment charge of $7,402,000.

        During the nine months ended September 30, 2012 we acquired an investment of 681,632 shares of Series A preferred stock, representing less than 20% ownership, of a privately held company valued at $2.20 per share, for a total investment of $1,500,000. In exchange for acquisition of these shares, we contributed fixed assets and other intellectual property from our Utah laboratory location with a net

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book value of $924,000, resulting in the recording of a gain on disposition of assets of $576,000. The remaining gain on sale for the nine months ended September 30, 2012 relates to the receipt of $700,000 from Mayne/Hospira relating to the sale of the worldwide rights to Nipent during 2007, and the same amount was received in the nine months ended September 30, 2011. No further payments from this transaction are anticipated in the future.

 
  Nine months ended
September 30,
  Change  
Other income (expense)
  2012   2011   Dollar   Percent  
 
  (Dollars in thousands)
   
 

Interest income

  $ 136   $ 153   $ (17 )   (11.11 )%

Gain on sale of investments and fixed assets

    2,583     10     2,573     25,730  

Other than temporary decline in value of investments

    (524 )       524      

Other expense

    (31 )   (291 )   (260 )   (89.35 )

Income tax benefit

    9,892     2,302     7,590     329.71  

        Gain on sale of investments and fixed assets primarily represents the net gain on sale of our shares of Sarepta Therapeutics, Inc. (formerly AVI BioPharma, Inc.).

        Other than temporary decline in value of investments relates primarily to the write down in value of our equity investment in a privately held company. This investment had been carried at cost and we periodically reviewed the investment and evaluated whether an impairment in value had occurred. During the quarter ended September 30, 2012, based on the current financial status and information received from the issuer, we determined that the value of our investment was impaired, and recorded an other than temporary decline in value of $485,000.

        Other expense for the nine months ended September 30, 2012 represents increases in the value of our warrant liability of $129,000, offset by foreign currency transaction gains of $96,000. Other income (expenses) for the nine months ended September 30, 2011 includes foreign currency transaction losses of $424,000 incurred upon the payment of the cash purchase consideration to the ATL securityholders, offset by a decline of $133,000 in the value of the warrant liability assumed in the acquisition of ATL.

        The 2012 and 2011 income tax benefits primarily include foreign refundable UK research and development tax credits related to ATL and the recognition of tax benefits associated with the amortization of deferred tax liabilities resulting from the acquisition of ATL on July 20, 2011. The 2012 tax benefit also reflects the results of changes in UK tax rates.

Liquidity and Capital Resources

        Our cash, cash equivalents, and marketable securities totaled $129.9 million at September 30, 2012 compared to $128.1 million at December 31, 2011.

        Net cash provided by operating activities was $9,587,000 for the nine months ended September 30, 2012, and consisted primarily of the net income of $3,720,000 plus amortization of intangibles of $6,036,000, impairment of intangibles of $7,402,000, stock-based compensation expense of $2,460,000, depreciation of $1,212,000, and decrease in accounts receivable of $4,539,000, partially offset by an increase in income tax receivable of $3,075,000, decreases in accounts payable and other accrued liabilities of $2,623,000, deferred tax liability of $5,771,000, deferred revenue of $1,430,000, gain on disposition of assets of $576,000, and the deductions of $700,000 gain on sale of products and $2,606,000 gain on sale of investments that represent investing activities. Net cash provided by operating activities was $11,026,000 for the nine months ended September 30, 2011, and consisted primarily of the net income of $5,322,000 plus stock based compensation expense of $2,313,000, depreciation of $1,005,000, amortization of intangibles of $1,485,000, decrease in accounts receivable of $2,998,000, and the release of our restricted cash of $2,134,000 due to the expiration of the underlying

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lease term and related collateral requirement, partially offset by the deduction of a $700,000 gain on sale of products that represents an investing activity, decrease in accounts payable and other liabilities of $1,335,000, decrease in deferred tax liability of $1,272,000, and an increase in income tax receivable of $954,000.

        Net cash used in investing activities was $23,786,000 for the nine months ended September 30, 2012 and consisted primarily of $132,329,000 for purchases of marketable securities and $12,272,000 for the deferred consideration payments relating to the acquisition of ATL, offset by $120,987,000 in proceeds from sales and maturities of marketable securities and investments. Net cash provided by investing activities was $1,835,000 for the nine months ended September 30, 2011 and primarily consisted of $59,713,000 in proceeds from sales and maturities of marketable securities and $700,000 in proceeds from Hospira/Mayne representing gain on sale of products, partially offset by $57,717,000 for purchases of marketable securities, $269,000 in cash payments for the acquisition of ATL net of cash received, and $629,000 for purchases of property and equipment.

        Net cash provided by financing activities was $606,000 and $251,000 in the nine months ended September 30, 2012 and September 30, 2011, respectively, and consisted in both periods of proceeds from the exercise of stock options.

        We have financed our operations primarily through the issuance of equity and debt securities and the receipt of royalties, payments in connection with collaborative agreements, and the sale of products. We believe that our current cash, cash equivalents, and short-term marketable securities will satisfy our cash requirements through 2013. However, we may decide, if necessary, to consider additional financing options, including the sale of additional shares of stock in a public or private offering and/or exploring marketing partnership opportunities for existing or newly acquired licensed products and development activities.

        In addition to the contractual obligations disclosed in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2011, we have a $6.8 million future contingent payment due to the former Montigen stockholders, which we would be contractually obligated to pay in shares of our common stock, but may pay partially in cash. Related to our acquisition of ATL in July 2011, we agreed to pay total deferred consideration of $30 million, payable in semi-annual installments whose amounts will be determined based on the amounts of the contingent milestone payments ATL has received and will receive under its collaboration arrangements during the period from January 2011 through January 2014. While the timing of the deferred consideration payments can vary, the aggregate amount of deferred consideration is fixed and will be paid no later than 30 months after the closing of the acquisition (January 2014), with a minimum of $15 million payable no later than the 18 month anniversary of the closing of the acquisition (January 2013). We made the first payment of $10.0 million in early February 2012, and paid the second installment of $2.2 million in cash in August 2012.

        We believe that our need for additional funding will increase in the future and that our continued ability to raise funds from external sources will be critical to our success. We continue to actively consider future contractual arrangements that would require significant financial commitments. If we experience currently unanticipated cash requirements, we could require additional capital much sooner than presently anticipated. We may raise money by the sale of our equity securities or debt. However, given uncertain market conditions and the volatility of our stock price, we may not be able to sell our securities in public offerings or private placements at prices and on terms that are favorable to us, if at all. We may also choose to obtain funding through licensing and other contractual agreements. Such arrangements may require us to relinquish rights to our technologies, products or marketing territories, or to grant licenses on terms that are not favorable to us. If we fail to obtain adequate funding in a timely manner, or at all, we will be forced to scale back our product development activities or our

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operations in a manner that will ensure we can discharge our obligations as they come due in the ordinary course of business.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

        Due to the short-term nature of our interest bearing assets, which consist primarily of certificates of deposit, United States corporate obligations, United States government and government agency obligations, and other short term liquid deposits in the UK, we believe that our exposure to interest rate market risk would not significantly affect our operations.

        Our investment policy is to manage our marketable debt securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio. Our marketable debt securities portfolio is primarily invested in securities with maturities of under one year and a minimum investment grade rating of A1/P1 as determined by Moody's Investors Service and/or Standard & Poor's to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable debt securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were to be sold prior to maturity.

Foreign Currency Risk

        As a result of our acquisition of ATL, our operations in the UK enter into revenue arrangements and make purchases in a number of overseas territories, and therefore has transactional currency exposures. Such exposures arise from transactions made in currencies other than the functional currency of British Pounds Sterling.

Item 4.    Controls and Procedures

(a)   Evaluation of disclosure controls and procedures.

        As of September 30, 2012, our management evaluated, with the participation of our chief executive officer and our chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)   Changes in internal control over financial reporting.

        There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ASTEX PHARMACEUTICALS, INC.
PART II—OTHER INFORMATION

Item 1A.    Risk Factors

        The following section lists some, but not all, of the risks and uncertainties that may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider these risks in evaluating our company and business. Our business operations may be impaired if any of the following risks actually occur, and by additional risks and uncertainties that we do not know of or that we currently consider immaterial. In such case, the trading price of our common stock could decline.

        This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this report.

        Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. The descriptions below include any material changes to and supersede the descriptions of the risk factors affecting our business previously disclosed in "Part I, Item IA. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011.

Risks Related to Our Financial Condition and Common Stock

Our revenues substantially come from royalties from the sale of Dacogen. If Dacogen does not continue to be commercially successful, our future revenues would be limited and our business would be harmed.

        Dacogen is approved in the United States and has been granted Orphan Drug exclusivity by the FDA through May 2013, with potential extension to November 2013 with additional regulatory filings by Eisai. Once the Orphan Drug exclusivity period ends, Dacogen may be susceptible to generic competition by other pharmaceutical companies. Generic market entry typically causes sales of the trade name drug to decline rapidly. If Eisai's sales of Dacogen decrease, our royalty revenue will decrease commensurately, and we cannot be assured that Eisai will commit the resources to expand sales of Dacogen. Currently, the royalty revenue we receive from Eisai is our primary source of revenue, and we are dependent on Dacogen royalty revenue to fund our operations. In the event of a meaningful generic market entry or a reduction of resources for sales of Dacogen, our revenues could decrease significantly and rapidly, which would have a debilitating impact on our ability to operate our business on an ongoing basis.

        Dacogen is approved for the treatment of MDS in the United States and 30 smaller countries globally, but is not yet approved in Europe or Japan. In July 2006, Eisai sublicensed Dacogen to Cilag, giving Cilag responsibility for conducting regulatory activities related to Dacogen and granting it exclusive development and commercialization rights in Europe and all territories outside North America. We received 50% of the $10 million upfront payment and, as a result of both the original agreement with Eisai and the sublicense with Cilag, may receive up to $17.5 million in future contingent payments upon achievement of global regulatory and sales targets.

        During 2010, Eisai completed a randomized Phase III clinical trial of Dacogen in elderly patients with AML and although the primary endpoint of the study was not met, Eisai filed a supplemental marketing application with the FDA. On March 6, 2012, the FDA declined to approve the application because the pre-specified analysis of the primary endpoint in the study did not demonstrate statistically significant superiority of Dacogen over the control arm. A separate Marketing Authorization Application was submitted to the European Medicines Agency in May 2011 by Cilag for Dacogen in the treatment of patients with AML. In September 2012, the European Commission approved the

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marketing authorization for Dacogen for the treatment of adult patients (age 65 years and above) with newly diagnosed de novo or secondary AML, according to the World Health Organization classification, who are not candidates for standard induction chemotherapy. Dacogen was also granted a 10-year Orphan Drug designation in Europe for the treatment of elderly AML.

Our license agreement with Eisai may not produce the full financial benefits that we are anticipating, which could cause our business to suffer.

        We expect to record development and license revenue from contingent payments to be made to us by Eisai upon the achievement of regulatory and commercialization events. However, we may never receive such payments because the events may never occur, either because of failure to secure additional regulatory approvals of Dacogen, or due to Eisai's or Cilag's inability to expend the resources to grow or commence sales of Dacogen as prescribed by the license agreement. In addition, the license agreement provides that Eisai will pay us (i) a certain portion of revenues payable to Eisai as a result of Eisai sublicensing the rights to market, sell and/or distribute Dacogen, to the extent such revenues are in excess of the contingent payments already due to us under our agreement with Eisai, and (ii) a 20% royalty increasing to a maximum of 30% on annual worldwide net sales of Dacogen. We cannot guarantee that we will receive these payments, and we cannot be assured that Eisai will commit the resources to expand sales of Dacogen in North America, or that Cilag will commit the resources to successfully commercialize the drug in Europe, Japan, and elsewhere, or that either company will be successful in doing so. Because we are heavily reliant on royalties and contingent payments relating to Dacogen to fund our operations, the failure to receive the contingent payments and/or royalty revenue from sales of Dacogen would cause our business to suffer.

Our collaborative relationships may not produce the financial benefits that we are anticipating, which would cause our business to suffer.

        Part of our strategy is to partner with, or out-license selective products to, other pharmaceutical companies in order to mitigate the cost of developing a drug through late-stage clinical trials to commercialization. There can be no guarantee that we will be able to establish such partnerships, nor can there be any guarantee that any of the products developed under such partnerships will be approved for sale by regulatory authorities or successful in the clinic or the market. If our partners do not successfully develop our products and obtain regulatory approvals, then we will not be able to earn future revenue from these collaborative relationships.

We have a history of operating losses and we may incur losses for the foreseeable future.

        Since inception, we have funded our research and development activities primarily from private placements and public offerings of our securities, milestone and other payments from collaborators, sales of our products, and royalty revenue on sales of Dacogen. As a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $331.1 million through September 30, 2012, and have not consistently generated enough funds through our operations to support our business. Although we were profitable in the years ended December 31, 2011 and 2010, as a result of our acquisition of ATL we expect to have operating losses over the next few years and we may never achieve sustained profitability.

        Whether we achieve sustained profitability depends primarily on the following factors:

    successful sales of Dacogen in North America by Eisai;

    successful commercialization of Dacogen in Europe by Cilag;

    obtaining additional regulatory approvals outside of North America and the successful commercialization of Dacogen outside of North America by Cilag;

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    limiting or preventing delays in production of Dacogen;

    the success of our joint development programs with GSK and our other collaborative partners and whether our partners exercise their options to further develop and commercialize any of the compounds resulting from the respective joint development efforts;

    our ability to discover and develop additional novel therapeutics that might advance through our internal clinical development infrastructure;

    our ability to leverage the Pyramid drug development platform for commercially viable drugs;

    our research and development efforts, including the timing and costs of clinical trials;

    our ability to successfully integrate the ATL research and development and management teams;

    our competition's ability to develop and bring to market competing products;

    our ability to control costs and expenses associated with the discovery, development, and manufacturing of our novel compounds, as well as general and administrative costs related to conducting our business; and

    costs and expenses associated with entering into and performing under licensing, joint development, and other collaborative agreements.

        Our products and product candidates, even if successfully developed and approved, may not generate sufficient or sustainable revenues to enable us to achieve or sustain profitability.

There are inherent challenges and significant upfront costs that result from our increased reliance on the Pyramid drug discovery platform, and if we fail to overcome these challenges or incur development costs that do not result in meaningful commercial drug sales, our business will be negatively impacted.

        As a result of the business combination with ATL in July 2011, we are still integrating ATL's drug discovery platform, Pyramid, into our business. Pyramid is a fragment-chemistry based drug discovery platform used to identify and develop new medicines, primarily for the treatment of cancer and infectious diseases.

        Pyramid defines a process by which a range of high throughput biophysical and computational techniques are used to experimentally characterize the interactions of very low molecular weight compounds (fragments) with their target proteins. Although we believe there are many advantages of a fragment-based approach to drug discovery, there are significant technical challenges to overcome for the approach to be used effectively. The fundamental challenge is one of detection. Because fragments are so small, they have fewer interactions with target proteins than larger, more complex compounds. This means the fragments will bind to their targets with very low affinity. Conventional screening systems based on bioassays are designed to detect binding that occurs at higher affinities than is typically observed with fragments. As such, fragments cannot be detected using conventional screening methods. As a result, a fundamental challenge in fragment-based drug discovery is the development of efficient screening systems that can detect the binding of fragments. The Pyramid drug discovery platform addresses limitations in conventional high throughput screening and other forms of fragment-based screening through technologically sophisticated equipment that requires significant capital investment and upkeep and highly-trained chemists and scientists to analyze resulting data. While we believe this approach will provide us with more meaningful leads in developing commercially viable drugs, it is a scientifically rigorous method that involves a significant investment of resources. If commercially viable drugs are not developed through this process, we will have invested significant resources without revenues to at least offset our costs, and our business will suffer.

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We will require additional funding to expand our product pipeline, either developed internally or through acquisitions, and commercialize new drugs, and if we are unable to raise the necessary capital or to do so on acceptable terms, our planned expansion and continued chances of survival could be harmed.

        We will continue to spend substantial resources on expanding our product pipeline, developing future products, and conducting research and development, including clinical trials for our product candidates. We also monitor the possibility of expanding our product pipeline and development capabilities through strategic acquisitions. Based on our currently forecasted product development activities, we anticipate that our capital resources will be adequate to fund operations and capital expenditures through at least the end of 2013. However, if we experience unanticipated cash requirements during this period, we could require additional funds much sooner. We may raise money by the sale of our equity securities or debt through a shelf registration statement, or the exercise of outstanding stock options by the holders of such options. However, given uncertain market conditions and the volatility of our stock price, we may not be able to sell our securities in public offerings or private placements at prices and/or on terms that are favorable to us, if at all. Also, the dilutive effect of additional financings could adversely affect our per share results.

        We may also choose to obtain funding through licensing and other contractual agreements. For example, we licensed the worldwide rights to the development, commercialization and distribution of Dacogen to Eisai. Such arrangements may require us to relinquish our rights to our technologies, products or marketing territories, or to grant licenses on terms that are not favorable to us. If we fail to obtain adequate funding in a timely manner, or at all, we will be forced to scale back our product development activities, or be forced to cease our operations.

We may fail to realize some or all of the anticipated benefits of the business combination with ATL, which may adversely affect the value of our common stock.

        The success of the integration of ATL will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining ATL into our operations. To realize these anticipated benefits and cost savings, we must successfully combine the acquired business with our legacy operations and integrate our respective operations, technologies and personnel, which is particularly challenging given the geographic and cultural differences between the personnel and facilities based in the UK and on the US west coast. If we are not able to achieve these objectives within the anticipated time frame or at all, the anticipated benefits and cost savings of the acquisition may not be realized fully or at all or may take longer to realize than expected, and the value of our common stock may be adversely affected. In addition, the overall integration of the businesses is a complex, time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt our operations.

        It is possible that the integration process could adversely affect our ability to maintain our research and development operations, result in the loss of key employees and other senior management, or to otherwise achieve the anticipated benefits of the acquisition.

        Specifically, risks in integrating ATL into our operations in order to realize the anticipated benefits of the acquisition include, among other factors:

    failure to effectively coordinate research and drug candidate development efforts to communicate our product capabilities and expected product roadmap;

    failure to compete effectively against companies already serving the broader market opportunities expected to be available to us and our potential expanded drug offerings;

    coordinating research and development activities to enhance the introduction of new drug development methodologies and drug discovery platforms acquired in the acquisition;

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    failure to successfully integrate and harmonize financial reporting and information technology systems of the two companies;

    retaining ATL's relationships with pharmaceutical company partners;

    integrating a senior management team as well as integrating members from both companies on the board of directors of Astex Pharmaceuticals;

    coordinating operations across time zones and continents;

    retaining and integrating key employees from ATL;

    managing effectively the diversion of management's attention from business matters to integration issues;

    combining research and development capabilities effectively and quickly;

    integrating partnership efforts so that new partners acquired can easily do business with us;

    transitioning all facilities to a common information technology environment; and

    combining our business culture in the US with the business culture of the UK operation.

        In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual cost synergies, if achieved at all, may be lower than we expect and may take longer to achieve than anticipated. If we are not able to adequately address these challenges, we may be unable to successfully integrate the operations of the business acquired from ATL into our own, or to realize the anticipated benefits of the integration. The anticipated benefits and synergies assume a successful integration and are based on projections, which are inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits and synergies may not be achieved.

        An inability to realize the full extent of, or any of, the anticipated benefits of the acquisition, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of the shares of our common stock. Some examples of how we may not realize anticipated benefits include the risk of the following:

    cost of development programs may be higher than forecasted;

    forecasted contingent payments from collaborations may not be received as anticipated; and

    exchange rate risk associated with any existing or anticipated cash denominated in another currency may reduce the expected value actually received from the UK when translated from British Pounds Sterling.

We have incurred significant costs related to the acquisition of ATL and expect to incur more as integration plans continue. If we are unable to offset the costs of the acquisition through realization of efficiencies, our bottom line will suffer.

        We have incurred a number of non-recurring costs associated with combining the operations of ATL with our own business. The substantial majority of non-recurring expenses have been comprised of costs related to the execution of the acquisition, facilities and systems consolidation costs and employment-related costs. We have also incurred fees and costs related to formulating integration plans. Additional unanticipated costs may be incurred in the integration of the businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental acquisition and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.

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Sales by former ATL securityholders of shares of our common stock acquired in the acquisition could cause our stock price to decrease.

        The sale of shares of common stock that certain former ATL securityholders received in the acquisition were restricted by the terms of a lock-up agreement with us, but these shareholders were able to sell all shares eight months after the closing date, which date was March 20, 2012. The sale of a substantial number of shares of common stock by former ATL securityholders or by our other stockholders within a short period of time could cause our stock price to decrease, and make it more difficult for us to raise funds through future offerings of common stock.

Our stockholder base experienced dilution of their percentage ownership of our common stock and could be further diluted within the next 12 months.

        As a result of the acquisition of ATL, we issued new shares of common stock to certain former ATL securityholders, representing approximately 35% of the total outstanding voting power of all our stockholders following the closing. The issuance of these shares caused our stockholders at the time of the acquisition to experience immediate and significant dilution in their percentage ownership of our outstanding common stock. Although we elected to pay the first $12 million of deferred consideration in cash in 2012, our stockholders may experience additional dilution in the event that our Audit Committee determines to pay some or all of the remaining $18 million in deferred consideration in the form of shares of our common stock. We also assumed certain outstanding options and warrants of ATL in the acquisition; if these options or warrants are exercised, our stockholders will suffer additional dilution.

As a result of the acquisition of ATL, certain former ATL securityholders hold over a third of our outstanding common stock, which could limit the influence of our other stockholders over the election of directors and other significant corporate actions or discourage third parties from proposing a change in our control.

        As of the closing of the acquisition, certain former ATL securityholders, as a group comprised of approximately 13 entities (counting any affiliated shareholders as one entity) who previously held preferred shares in ATL, owned approximately 35% of the total outstanding shares of our common stock, and have designated four of the members serving on our nine-member board of directors. Accordingly, as a group, if the former ATL stockholders do not sell their shares received in the acquisition, they will be able to exert significant influence over the outcome of a range of corporate matters, including significant corporate transactions requiring a stockholder vote, such as a merger or a sale of the combined company or its assets. This potential concentration of ownership and influence in management and board decision-making could also harm the price of our common stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our common stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of the company. If any of the deferred consideration that has not already been paid is paid in shares of our common stock, although the size of the group of former ATL securityholders holding our shares would increase (due to the distribution of deferred consideration shares to ordinary shareholders as well as preferred shareholders), the expanded group would hold an even greater percentage of the outstanding post-closing stock of Astex Pharmaceuticals, thereby exacerbating the risk of concentrated ownership.

        Furthermore, the ownership position of the former ATL securityholders could discourage a third party from proposing a change of control or other strategic transaction. As a result, our common stock could trade at prices that do not reflect a "control premium" to the same extent as do the stocks of similarly situated companies that do not have a group of stockholders with an ownership interest as large as the former ATL stockholders' collective ownership interest.

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We have significant goodwill and other intangible assets. Consequently, potential impairment of goodwill and other intangibles may significantly impact our financial position and results of operations.

        Goodwill and other intangibles, most of which was recorded as a result of the acquisition of ATL, represent a significant portion of our assets. Goodwill and other intangible assets with indefinite lives are subject to impairment analysis at least on an annual basis. Additionally, goodwill and other intangible assets are subject to impairment analysis if events or changes in circumstances indicate that impairment may have occurred. Events giving rise to impairment of goodwill or other intangible assets are an inherent risk in the biotechnology industry and cannot be predicted. Impairment could also arise as a result of general economic or industry-wide conditions which could reduce the market price of our common stock and the fair value of the Company as a whole. As a result of the significance of goodwill and other intangible assets, our financial position and results of operations in future periods could be negatively impacted should impairment of our goodwill or other intangible assets occur.

        Intangible assets related to in-process research and development projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. Intangible assets with finite useful lives are related to acquired developed technology and acquired rights in non-active collaboration agreements. During the nine months ended September 30, 2012, one of our collaboration partners ceased development of three research and development projects, which resulted in the recording of an impairment charge of $7,402,000.

Product Development and Regulatory Risks

Our product candidates will require significant additional development.

        Many of our product candidates are in the development, rather than the clinical trial stage. However, we must significantly develop all of our product candidates before we can market them, or before they will become desirable for partnering or licensing. Although we believe that our pre-clinical and pilot clinical studies support further development of these product candidates, the results we have obtained to date do not necessarily indicate what results further testing would yield, including expanded controlled human clinical testing. All of the product candidates that we are currently developing will require extensive large scale clinical testing before we or our licensing partners can submit any regulatory application for their commercial use.

Our product development efforts may ultimately fail.

        Our product candidates are subject to the risks of failure inherent in the development of pharmaceutical products. These risks include the following:

    some of our product candidates may be found to be unsafe or ineffective, or may fail to receive the necessary regulatory clearances in a timely manner, if at all;

    even if safe and effective, our product candidates may be difficult to manufacture on a large scale or may be uneconomical to market;

    the proprietary rights of third parties may preclude us from marketing such products; and

    third parties may market more effective or less costly products for treatment of the same diseases.

        As a result, we cannot be certain that any of our products will be successfully developed, be submitted to regulatory authorities for approval, or receive required governmental approvals on a timely basis, become commercially viable or achieve market acceptance.

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Before we or our licensing partners can seek regulatory approval of any of our product candidates, we must complete large scale clinical trials, which are expensive and have uncertain outcomes. If we do not develop drugs that are ultimately approved by regulators and then become commercially successfully, we will not recoup our investments and our business will suffer.

        All of our product candidates will require the commitment of substantial resources and regulatory approval. Before seeking or obtaining regulatory approvals for the commercial sale of any of our product candidates, we or our licensing partners must demonstrate through substantial evidence and through clinical trials that our product candidates are safe and effective for use in humans for the particular indications we are studying.

        We have a portfolio of cancer drugs in various stages of early development. We are currently conducting clinical trials on our products AT13387, SGI-110, AT7519, and AT9283. We also expect to commence other new clinical trials from time to time in the course of our business as our product development work continues. Conducting clinical trials is a lengthy, time consuming and expensive process and the results are inherently uncertain. We have incurred and will continue to incur substantial expense for, and we have devoted and expect to continue to devote a significant amount of time to, non-clinical testing and clinical trials. However, regulatory authorities may not permit us to complete existing or undertake any additional clinical trials for our product candidates. If we are unable to complete our existing clinical trials or undertake additional clinical trials, our business will be severely harmed and the price of our stock will likely decline.

        We also have ongoing research and non-clinical projects that may lead to product candidates, but we have not submitted to regulatory authorities a request to begin clinical testing, nor have we begun clinical trials for these projects. If we do not successfully complete our non-clinical trials, we might not be able to commence clinical trials as planned.

Our clinical trials may be delayed or terminated, which would prevent us or our licensing partners from seeking necessary regulatory approvals, making our products unmarketable.

        Completion of clinical trials may take several years or more. The length of a clinical trial varies substantially according to the type, complexity, novelty and intended use of the product candidate. The length of time and complexity of these studies make regulatory approval unpredictable. The commencement and rate of completion of our clinical trials or those of our licensing partners may be delayed by many factors, including:

    ineffectiveness of the study compound, or perceptions by physicians that the compound is not effective for a particular indication;

    inability to manufacture sufficient quantities of compounds for use in clinical trials;

    inability to obtain FDA approval of our clinical trial protocols;

    inability to successfully identify, contract, and qualify new clinical sites;

    slower than expected rate of patient recruitment;

    inability to adequately follow patients after treatment;

    difficulty in managing multiple clinical sites;

    unforeseen safety issues;

    lack of efficacy demonstrated during the clinical trials; or

    governmental or regulatory delays.

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        If we or our licensing partners are unable to achieve a satisfactory rate of completion of our clinical trials, our business will be significantly harmed.

We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in compliance with regulatory requirements, and then would have no opportunity to recoup or investment.

        Clinical trials must be conducted in accordance with strictly enforced laws and regulations of the FDA and other regulatory authorities, and are subject to continuous oversight by these authorities, and institutional review boards and ethical committees. We outsource certain aspects of our research and development activities to contract research organizations ("CROs"). We have agreements with these CROs for certain of our clinical programs. We and our CROs are required to comply with good clinical practice ("GCP") regulations and guidelines for all of our products in clinical development. GCPs are enforced by regulatory authorities through periodic, unannounced inspections of study sponsors, principal investigators, and study sites. If our CROs or we fail to comply with applicable GCPs, the clinical data generated in our studies may be deemed unreliable and regulatory authorities may require us to perform additional studies before approving our applications. Our non-clinical safety studies must be conducted according to good laboratory practice regulations. In addition, our clinical trials must be conducted with product candidates produced under current good manufacturing practice regulations, and may require a large number of test subjects. Failure to comply with these regulations may require us to repeat clinical studies, which would delay the regulatory approval process and add significant costs to our operations.

We may be required to suspend, repeat or terminate our clinical trials if later trial results fail to demonstrate safety and efficacy, or if the results are negative or inconclusive.

        Clinical trials may be suspended at any time if we, ethics committees, or the FDA believe the patients participating in our studies are exposed to unacceptable health risks or if we, ethics committees, or the FDA find deficiencies in the conduct of these trials. Adverse drug events during a clinical trial could cause us to terminate or repeat a clinical trial. In 2010, we terminated clinical trials for SGI-1776 due to safety concerns.

        We may encounter other problems and failures in studies that would cause us, ethics committees, or the FDA to delay or suspend the studies. Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials.

        Negative or inconclusive results during a clinical trial could cause us to terminate or repeat a clinical trial. The potential failures would delay development of our product candidates, hinder our ability to conduct related non-clinical testing and clinical trials and further delay the commencement of the regulatory approval process. Further, the failures or perceived failures in our clinical trials would delay our product development and the regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration and partnership relationships and negatively affect our reputation and competitive position in the pharmaceutical industry. Finally, if we are required to conduct other clinical trials for the product candidates, the additional trials would require substantial funding and time, and we may be unable to obtain funding to conduct such clinical trials. As a result, we may expend significant time and expense in drug development for drugs that never become commercially viable.

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Our or our licensing partners' failure to obtain regulatory approvals to market our product candidates in foreign countries and delays caused by government regulation would adversely affect our anticipated revenues.

        Sales of our products in foreign jurisdictions will be subject to separate regulatory requirements and marketing approvals. Approval in the United States, or in any one foreign jurisdiction, does not ensure approval in any other jurisdiction. The process of obtaining foreign approvals may result in significant delays, difficulties and expenses for us, and may require additional clinical trials. Although many of the regulations applicable to our products in these foreign countries are similar to those promulgated by the FDA, many of these requirements also vary widely from country to country, which could delay the introduction of our products in those countries. Failure to comply with these regulatory requirements or to obtain required approvals would impair our ability to commercialize or receive royalty revenues for our products in foreign markets.

        Even if regulatory approval of our products is obtained, later discovery of previously unknown problems may result in restrictions of a product, including withdrawal of that product from the market. Further, governmental approval may subject us to ongoing requirements for post-marketing studies. For example, despite receipt of governmental approval, the facilities of our third-party manufacturers are still subject to unannounced inspections by the FDA and must continue to comply with good manufacturing practices and other regulations. These regulations govern all areas of production, record keeping, personnel and quality control. If we or our third-party manufacturers fail to comply with any of the manufacturing regulations, we may be subject to, among other things, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution.

Changes in U.S. and foreign laws and regulations may delay product development and adversely affect our revenues and our operations

        We could become subject to new government laws and regulations, such as (i) changes in the FDA and foreign regulatory approval processes that may cause delays in approving, or preventing the approval of, our products, (ii) changes in intellectual property laws that make it more difficult for us to protect and enforce our proprietary rights, (iii) changes in GCP regulations and guidelines for products in clinical development that create more burdensome requirements and add costs to our operations. Changes in foreign regulations could also result in failure to secure regulatory approval of Dacogen in Europe or Japan and our future revenues from royalty payments from sales of Dacogen in those territories would decrease and ultimately cease. Any legal or regulatory changes could negatively affect our business, our operating results and the financial condition of our company.

If we are unable to comply with environmental laws and regulations, our business may be harmed.

        We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We currently maintain a supply of biohazardous materials at some of our facilities. We believe our safety procedures for these materials comply with all applicable environmental laws and regulations, and we carry what we believe to be adequate insurance coverage for the size of our business. However, we cannot entirely eliminate the risk of accidental contamination or injury from these materials. If an accident or environmental discharge occurs, we could be held liable for any resulting damages, which could exceed our insurance coverage and financial resources.

        We currently outsource certain of our research and development programs involving the controlled use of biohazardous materials. We believe our collaborators have in place safety procedures for these materials that comply with governmental standards. Nevertheless, if an accident does occur, our research and product development will be negatively affected.

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Additional Risks Associated with Our Business

If the third-party manufacturers upon whom we rely fail to produce our clinical trial products in the volumes that we require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the delivery of our products to clinical trial sites.

        Because we have no manufacturing facilities, we rely on third parties for manufacturing activities related to all of our product candidates. As we develop new products, we must establish and maintain relationships with manufacturers to produce and package sufficient supplies of our finished pharmaceutical products for use in clinical trials. Reliance on third party manufacturing presents the following risks:

    delays in scale-up to quantities needed for multiple clinical trials, or failure to (a) manufacture such quantities to our specifications or (b) deliver such quantities on the dates we require, which could cause delay or suspension of clinical trials, regulatory submissions and commercialization of our products;

    potential relinquishment or sharing of intellectual property rights to any improvements in the manufacturing processes or new manufacturing processes for our products; and

    unannounced ongoing inspections by the FDA and corresponding state agencies for compliance with GMPs, regulations and foreign standards, and failure to comply with any of these regulations and standards may subject us to, among other things, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution.

        Any of these factors could delay clinical trials or commercialization of our product candidates under development, and entail higher costs, all of which would have a negative impact on our revenues and business.

Our business may be harmed if the manufacture of our products is interrupted or discontinued.

        We may be unable to maintain our relationships with our third-party manufacturers. If we need to replace or seek new manufacturing arrangements, we may have difficulty locating and entering into arrangements with qualified contract manufacturers on acceptable terms, if at all. We are aware of only a limited number of companies on a worldwide basis who operate manufacturing facilities in which our products can be manufactured to our specifications and in compliance with GMPs. It could take several months, or significantly longer, for a new contract manufacturing facility to obtain FDA approval and to develop substantially equivalent processes for the production of our product candidates. We may not be able to contract with any of these companies on acceptable terms, if at all.

If our suppliers cannot provide the components we require, our future product sales and revenue could be harmed.

        We rely on third-party suppliers to provide us with numerous components used in our products under development. Relying on third-party suppliers makes us vulnerable to component failures and interruptions in supply, either of which could impair our ability to conduct clinical trials on a timely basis. Using third-party suppliers makes it difficult and sometimes impossible for us to maintain quality control, manage inventory and production schedules and control production costs. Vendor lead times to supply us with ordered components vary significantly and can exceed six months or more. We cannot be sure that our suppliers will furnish us with required components when we need them, either now or as we expand our need for manufacturing capacity. These factors could make it difficult for us to effectively and efficiently manufacture our products, and could adversely impact our clinical trials, product development and future sales of our products.

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        Some suppliers may be our only source for a particular component, which would make us vulnerable to cost increases and supply interruptions. We generally rely on one manufacturer for each product.

        Vendors may decide to limit or eliminate sales of certain products to the medical industry due to product liability or other concerns. In the event one of our sole source suppliers decides not to manufacture the component, goes out of business, or decides to cut off our supply, we may be unable to locate replacement supply sources, or the sources that we may locate may not provide us with similar reliability or pricing and our business could suffer. If we cannot obtain a necessary component, we may need to find, test and obtain regulatory approval for a replacement component, produce the component or redesign the related product, which would cause significant delay and could increase our manufacturing costs. Any of these events could adversely impact our future sales and results of operations.

If we are not able to maintain and successfully establish new collaborative and licensing arrangements with third parties, our product development and business will be harmed.

        Our business model is based on establishing collaborative relationships with other parties both to license compounds upon which our products and technologies are based and to manufacture our products or our collaborators' products. It is critical that we gain access to compounds and technologies to license for further development. Due to the expense of the drug approval process we must have relationships with established pharmaceutical companies to offset some of our development costs in exchange for a combination of development, marketing and distribution rights.

        From time to time we enter into discussions with various companies regarding the establishment of new collaborations. If we are not successful in establishing new partners for our product candidates, we may not be able to pursue further development of such product candidates and/or may have to reduce or cease our current development programs, which would materially harm our business. Even if we are successful in establishing new collaborations, they are subject to numerous risks and uncertainties including:

    our ability to negotiate acceptable collaborative arrangements;

    the collaboration making us less attractive to potential acquirers;

    freedom of our collaborative partners to pursue alternative technologies either on their own or with others, including our competitors, for the diseases targeted by our programs and products;

    the potential failure of our partners to fulfill their contractual obligations or their decision to terminate our relationships, in which event we may be required to seek other partners, or expend substantial resources to pursue these activities independently; and

    our ability to manage, interact and coordinate our timelines and objectives with our collaborative partners may not be successful.

        In addition, our collaborators may undergo business combinations, which could have the effect of making the collaboration with us less attractive to them for a number of reasons. For example, if an existing collaborator purchases a company that is one of our competitors, that company may be less willing to continue its collaboration with us. A company that has a strategy of purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us. Moreover, disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time consuming and expensive

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litigation or arbitration. Any such delays or termination would impede our ability to develop and sell our products and have a negative impact on our business.

Our collaborative relationships with third parties could cause us to expend significant funds on development costs with no assurance of financial return.

        From time to time we enter into collaborative relationships with third parties to discover, develop and market products, such as our relationship with Novartis. These relationships require substantial financial commitments from us, and at the same time the product developments are subject to the same regulatory requirements, risks and uncertainties associated with the development of our other product candidates. The compounds that are the subject of these collaborative agreements may prove to be ineffective, may fail to receive regulatory approvals, may be unprotectable by patents or other intellectual property rights, or may not be otherwise commercially viable. If these collaborative relationships are not successful, our product developments will be adversely affected, and our investments and efforts devoted to the product developments will be wasted.

Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect these rights in the United States or abroad.

        The success of our operations depends in part on our ability to obtain patents, protect trade secrets, operate without infringing the proprietary rights of others and enforce our proprietary rights against accused infringers.

        We actively pursue a policy of seeking patent protection when applicable for our proprietary products and technologies, whether they are developed in-house or acquired from third parties. We attempt to protect our intellectual property position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. To date, we have ownership of, or acquired licenses to, numerous patents covering various aspects of our proprietary drugs and technologies. In addition, we are prosecuting a number of patent applications for new drug candidates that we are actively developing at this time.

        We also have patents, licenses to patents, and pending patent applications in Europe, Australia, Japan, Canada, China and Israel among other countries. Limitations on patent protection, and the differences in what constitutes patentable subject matter, may limit the protection we have on patents issued or licensed to us in these countries. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws in the United States. In determining whether or not to seek patent protection or to license any patent in a foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential and profitability, the scope of patent protection afforded by the law of the jurisdiction and its enforceability, and the nature of terms with any potential licensees. Failure to obtain adequate patent protection for our proprietary drugs and technology would impair our ability to be commercially competitive in these markets.

        The pharmaceutical industry is characterized by a large number of patent filings involving complex legal and factual questions, and therefore we cannot predict with certainty whether our patents will be enforced effectively. Competitors may have filed applications for, or been issued patents on, products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests which may have been issued to others. In addition, third parties may challenge, invalidate or circumvent any of our patents. Thus, any patents that we own or license from third parties may not provide adequate protection against competitors, if at all. Our pending patent applications and those we may file in the future, or those we may license from third parties, may not result in patents being issued with adequate claim scope, if at all.

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        In addition to pursuing patent protection in appropriate instances, we also rely on trade secret protection or regulatory marketing exclusivity for unpatented proprietary technology. However, trade secrets are difficult to protect. Our trade secrets or those of our collaborators may become known or may be independently discovered by others. Furthermore, regulatory marketing exclusivity is for a limited time period, which may not be an adequate period for our business interests.

        In the pharmaceutical industry there has been, and we believe that there will continue to be, significant litigation regarding patent and other intellectual property rights. Claims may be brought against us in the future based on patents held by others. These persons could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product. If we become involved in litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If a lawsuit against us is successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product. We cannot assure you that we would prevail in a lawsuit filed against us or that we could obtain any licenses required under any patents on acceptable terms, if at all.

        Our proprietary products are dependent upon compliance with other licenses and agreements. These licenses and agreements require us to make royalty and other payments, reasonably exploit the underlying technology of the applicable patents, and comply with regulatory filings. If we fail to comply with these licenses and agreements, we could lose the underlying rights to one or more of these potential products, which would adversely affect our product development and harm our business.

If we fail to compete effectively against other pharmaceutical companies, our business will suffer.

        The pharmaceutical industry in general and the oncology sector in particular is highly competitive and subject to significant and rapid technological change. There are many companies, both public and private, including well-known pharmaceutical companies that are engaged in the discovery and development of products for some of the oncology indications that we are pursuing. Some of our competitors and probable competitors include ArQule, Inc., Array BioPharma, Crystal Genomics, Exelixis, Infinity Pharmaceuticals, Daiichi Sankyo Group, Vertex Pharmaceuticals, Sanofi, Bristol-Myers Squibb Company, Celgene Corporation, Eli Lilly & Co., GSK, Novartis AG, Pfizer, Synta Pharmaceuticals, and others.

        Many of our competitors have substantially greater financial, research and development, and manufacturing resources than we do and may represent substantial long-term competition for us. Some of our competitors have received regulatory approval for products or are developing or testing product candidates that compete directly with our product candidates. For example, Dacogen faces competition from 5-aza-cytidine and other drugs in development to treat MDS, and AT13387, an Hsp90 inhibitor, faces competition from several other drugs being developed in this area of treatment. We also expect that there will be other compounds that will emerge as competition to investigational drugs progressing through our discovery pipeline.

        Many of these competitors, either alone or together with their customers and partners, have significantly greater experience than we do in discovering products, undertaking non-clinical testing and clinical trials, obtaining FDA and other regulatory approvals, and manufacturing and marketing products. Accordingly, our competitors may succeed in obtaining patent protection and market exclusivity, receiving FDA or foreign marketing approval or commercializing products before we do. If we elect to commence commercial product sales of our product candidates, we could be at a disadvantage relative to many companies with greater marketing and manufacturing capabilities, in areas that we may have limited or no experience.

        Factors affecting competition in the pharmaceutical industry vary depending on the extent to which competitors are able to achieve an advantage based on superior differentiation of their products, greater institutional knowledge, or depth of resources. If we are able to establish and maintain a

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competitive advantage based on the ability of Pyramid to discover new drug candidates more effectively and against targets not accessible by many competitors, our advantage will likely depend primarily on the ability of our Pyramid technology to make accurate predictions about the effectiveness and safety of our drug candidates as well as our ability to effectively and rapidly develop investigational drugs.

        Extensive research and development efforts and rapid technological progress characterize the industry in which we compete. Although we believe that our proprietary drug discovery capabilities afford us a competitive advantage relative to other discovery and development companies competing in oncology, we expect competitive intensity in this pharmaceutical segment to continue and increase over time. Discoveries by others may render our drug discovery platforms and our current and potential products noncompetitive. Our competitive position also depends on our ability to attract and retain qualified scientific and other personnel at all our geographic locations, develop effective proprietary products, implement development plans, obtain patent protection and secure adequate capital resources.

The pharmaceutical industry in general and the oncology sector in particular is subject to significant and rapid technological change. Developments by competitors may render our product candidates or technologies obsolete or non-competitive.

        Our competitors may succeed in developing technologies or products that are more effective than ours. Additionally, our products that are under patent protection face intense competition from competitors' proprietary products. This competition may increase as new products enter the market.

        A number of our competitors have substantially more capital, research and development, regulatory, manufacturing, marketing, human and other resources and experience than we have. As a result, our competitors may:

    develop products that are more effective or less costly than any of our current or future products or that render our products obsolete;

    produce and market their products more successfully than we do;

    establish superior proprietary positions; or

    obtain FDA or foreign regulatory approval for labeling claims that are more favorable than those for our products.

        We will also face increasing competition from lower-cost generic products after market exclusivity or patents on our proprietary products expire. Loss of patent protection typically leads to a rapid decline in sales for that product and could affect our future results. As new products enter the market, our products may become obsolete or our competitors' products may be more effective or more effectively marketed and sold than our products. Technological advances, competitive forces and loss of intellectual property protection rights for our products may render our products obsolete.

We may be subject to product liability lawsuits and our insurance may be inadequate to cover damages.

        Clinical trials and commercial use of our current and potential products may expose us to liability claims from the use or sale of these products. Consumers, healthcare providers, pharmaceutical companies and others selling such products might make claims of this kind. We may experience financial losses in the future due to product liability claims. We have obtained limited product liability insurance coverage for our products and clinical trials, under which the coverage limits are $10 million per occurrence and $10 million in the aggregate. We do not know whether this coverage will be adequate to protect us in the event of a claim. We may not be able to obtain or maintain insurance coverage in the future at a reasonable cost or in sufficient amounts to protect us against losses. If third parties bring a successful product liability claim or series of claims against us for uninsured liabilities or

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in excess of insured liabilities, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected.

If we are unable to attract and retain additional, highly skilled personnel required for the expansion of our activities, our business will suffer.

        Our success is dependent on key personnel, including members of our senior management and scientific staff at all our geographic locations. If any of our executive officers decide to leave and we cannot locate a qualified replacement in time to allow a smooth transition, our business may be adversely affected. To successfully expand our operations, we will need to attract and retain additional highly skilled individuals, particularly in the areas of clinical administration, non-clinical and development research, manufacturing and finance. We compete with other companies for the services of existing and potential employees; however, to the extent these employees favor larger, more established employers, we may be at a disadvantage.

Earthquake or other natural or man-made disasters and business interruptions could adversely affect our business.

        Our operations are vulnerable to interruption by fire, power loss, floods, telecommunications failure and other events beyond our control. In addition, our operations in California are susceptible to disruption as a result of natural disasters such as earthquakes. So far we have never experienced any significant disruption of our operations as a result of earthquakes, other natural disasters, or any man-made disasters. Although we have a contingency recovery plan, any significant business interruption could cause delays in our drug development and future revenue and harm our business.

Our systems face certain risks, including cybersecurity and data leakage risks that could disrupt our operations and harm our operating results.

        We are increasingly dependent on information technology systems and infrastructure for the operation of our business. Any significant breakdown, invasion, destruction or interruption of these systems could negatively impact our operating results and financial condition. Data privacy breaches by employees and others who access our systems may pose a risk that sensitive data, such as our proprietary and confidential information, may be exposed to unauthorized persons or to the public. Our network security and data recovery measures may not be adequate to protect against computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems.

Provisions in our certificate of incorporation, bylaws and applicable Delaware law may prevent or discourage third parties or stockholders from attempting to replace our management.

        Anti-takeover provisions of our certificate of incorporation and bylaws make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

    authorization of the issuance of up to 2,000,000 shares of our preferred stock;

    elimination of cumulative voting; and

    elimination of stockholder action by written consent.

        Our bylaws establish procedures, including notice procedures, with regard to the nomination, other than by or at the direction of our board of directors, of candidates for election as directors or for stockholder proposals to be submitted at stockholder meetings.

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        We are also subject to Section 203 of the Delaware General Corporation Law, an anti-takeover provision. In general, Section 203 of the Delaware General Corporation Law prevents a stockholder owning 15% or more of a corporation's outstanding voting stock from engaging in business combinations with a Delaware corporation for three years following the date the stockholder acquired 15% or more of a corporation's outstanding voting stock. This restriction is subject to exceptions, including the approval of the board of directors and of the holders of at least two-thirds of the outstanding shares of voting stock not owned by the interested stockholder.

        We believe that the benefits of increased protection of our potential ability to negotiate with the proponents of unfriendly or unsolicited proposals to acquire or restructure us outweigh the disadvantages of discouraging those proposals because, among other things, negotiation of those proposals could result in an improvement of their terms. Nevertheless, these provisions are expected to discourage different types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to first negotiate with us, and may have the effect of preventing or discouraging third parties or stockholders from attempting to replace our management.

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Item 6.    Exhibits

Exhibit
No.
  Description of Document
31.1   Certification of Chief Executive Officer under Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer under Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema Document*

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document*

*
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

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

            ASTEX PHARMACEUTICALS, INC.

Date:

 

November 9, 2012


 

 

 

By:

 

/s/ JAMES S.J. MANUSO  
James S.J. Manuso, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

By:

 

/s/ MICHAEL MOLKENTIN

Michael Molkentin
Chief Financial Officer
(Principal Financial and Accounting Officer)

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