Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

 

¨ 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: 001-35006

 

 

SPECTRUM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   93-0979187

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

11500 South Eastern Avenue, Suite 240

Henderson, Nevada

  89052
(Address of principal executive offices)   (Zip Code)

(702) 835-6300

(Registrant’s telephone number, including area code)

 

 

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

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  x    No  ¨

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

 

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

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

As of August 5, 2013, 63,307,719 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

INDEX

 

         Page  
PART I   FINANCIAL INFORMATION   
ITEM 1.  

FINANCIAL STATEMENTS (unaudited)

  
 

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

     3   
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012

     4   
 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2013 and 2012

     5   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

     6   
 

Notes to Condensed Consolidated Financial Statements

     7   
ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     33   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     42   
ITEM 4.  

CONTROLS AND PROCEDURES

     42   
PART II   OTHER INFORMATION   
ITEM 1.  

LEGAL PROCEEDINGS

     43   
ITEM 1A.  

RISK FACTORS

     44   
ITEM 6.  

EXHIBITS

     45   
 

SIGNATURES

     46   

Item 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

     June 30,
2013
    December 31,
2012
 

ASSETS

    

Current Assets:

    

Cash and equivalents

   $ 121,103      $ 139,698   

Marketable securities

     3,312        3,310   

Accounts receivable, net of allowance for doubtful accounts of $239 and $228, respectively

     52,379        92,169   

Inventories, net

     15,312        14,478   

Prepaid expenses and other current assets

     7,149        2,745   

Tax asset

     13,785        12,473   
  

 

 

   

 

 

 

Total current assets

     213,040        264,873   

Property and equipment, net

     2,004        2,548   

Intangible assets, net

     203,017        202,311   

Goodwill

     28,940        28,973   

Other assets

     13,568        7,569   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 460,569      $ 506,274   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts payable and other accrued obligations

   $ 85,249      $ 95,297   

Accrued compensation and related expenses

     4,363        4,835   

Deferred revenue

     2,000        12,300   

Deferred development costs

     3,251        856   

Accrued drug development costs

     12,896        15,109   
  

 

 

   

 

 

 

Total current liabilities

     107,759        128,397   

Deferred revenue and other credits—less current portion

     3,680        2,937   

Deferred development costs, less current portion

     15,400        11,377   

Deferred payment contingency

     —          2,287   

Other long-term obligations

     6,130        1,430   

Revolving line of credit

     50,000        75,000   
  

 

 

   

 

 

 

Total liabilities

     182,969        221,428   

Commitments and contingencies

    

Stockholders’ Equity:

    

Preferred stock, $0.001 par value; 5,000,000 shares authorized:

    

Series B junior participating preferred stock, $0.001 par value; 1,500,000 shares authorized; no shares issued and outstanding

     —          —     

Series E convertible voting preferred stock, $0.001 par value and $10,000 stated value; 2,000 shares authorized; 20 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively (aggregate liquidation value of $240)

     123        123   

Common stock, $0.001 par value; 175,000,000 shares authorized; 60,284,571 and 60,026,675 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     60        60   

Additional paid-in capital

     468,653        463,710   

Accumulated other comprehensive gain

     1,050        273   

Accumulated deficit

     (192,286     (179,320
  

 

 

   

 

 

 

Total stockholders’ equity

     277,600        284,846   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 460,569      $ 506,274   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Product sales, net

   $ 32,213      $ 65,627      $ 61,559      $ 122,411   

License and contract revenue

     1,019        3,075        10,340        6,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 33,232      $ 68,702      $ 71,899      $ 128,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Cost of product sales (excludes amortization of purchased intangible assets)

     7,268        11,574        14,050        20,247   

Selling, general and administrative

     22,629        23,347        44,976        41,609   

Research and development

     10,501        9,583        22,482        18,474   

Amortization and impairment of purchased intangibles

     3,372        1,636        5,740        2,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     43,770        46,140        87,248        82,896   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (10,538     22,562        (15,349     45,665   

Other income (expense), net

     (163     (1,507     (1,481     (1,369
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (10,701     21,055        (16,830     44,296   

Benefit (provision) for income taxes

     524        (2,985     3,864        20,316   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (10,177   $ 18,070      $ (12,966   $ 64,612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

        

Basic

   $ (0.17   $ 0.31      $ (0.22   $ 1.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.17   $ 0.29      $ (0.22   $ 1.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     58,977,295        58,763,700        58,995,735        58,617,530   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     58,977,295        63,387,003        58,995,735        63,666,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net (loss) income

   $ (10,177   $ 18,070      $ (12,966   $ 64,612   

Other comprehensive (loss) income, net of tax:

        

Unrealized gain (loss) on securities

     99        (369     967        (301

Foreign currency translation adjustment

     57        3        171        3   

Income tax

     (37     —          (361     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

     119        (366     777        (298

Total comprehensive (loss) income

   $ (10,058   $ 17,704      $ (12,189   $ 64,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Six Months Ended
June  30,
 
     2013     2012  

Cash Flows From Operating Activities:

    

Net (loss) income

   $ (12,966   $ 64,612   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Amortization of deferred revenue

     (10,300     (6,150

Depreciation and amortization

     6,618        4,043   

Stock-based compensation

     5,671        6,097   

Deferred income tax benefit

     (6,039     (31,493

Provision (recovery) for bad debt

     44        (31

Provision for inventory obsolescence

     1,041        437   

Change in fair value of Allos deferred development costs and deferred payment contingency

     (2,869     —     

Impairment of intangible assets

     1,023        —     

Foreign currency remeasurement loss

     654        1,354   

Excess tax benefits from share-based compensation

     —          (2,181

Changes in operating assets and liabilities:

    

Accounts receivable, net

     39,746        (33,105

Inventories, net

     (1,875     2,639   

Prepaid expenses and other assets

     (5,691     (950

Accounts payable and other accrued obligations

     (9,671     36,409   

Accrued compensation and related expenses

     (472     1,717   

Accrued drug development costs

     (2,213     932   

Deferred revenue and other credits

     743        619   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,444        44,949   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Sales and maturities of marketable securities

     —          57,797   

Purchases of marketable securities

     —          (11,944

Acquisition of Melphalan license

     (3,000     —     

Purchases of property and equipment

     (127     (302

Purchases of available for sale securities

     —          (622

Acquisition of ZEVALIN Rights

     —          (25,435
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (3,127     19,494   
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Proceeds from issuance of common stock from stock option exercises

     1,137        2,523   

Proceeds from contributions to ESPP

     197        372   

Payments to acquire treasury stock

     (1,652     (317

Repurchase of shares to satisfy minimum tax withholding for restricted stock vesting

     (410     (326

Proceeds from Munidpharma collaboration amendment

     7,000        —     

Proceeds from revolving line of credit

     100,000        —     

Repayment of revolving line of credit

     (125,000     —     

Repayment of capital leases

     —          (9

Excess tax benefits from share-based compensation

     —          2,181   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (18,728     4,424   
  

 

 

   

 

 

 

Effect of exchange rates on cash

     (184     85   

Net (decrease) increase in cash and cash equivalents

     (18,595     68,952   

Cash and cash equivalents—beginning of period

     139,698        121,202   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 121,103      $ 190,154   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Melphalan license included in intangible assets and other long term obligations

   $ 4,700      $ —     
  

 

 

   

 

 

 

Inventory liability assumed in acquisition

   $ —        $ 580   
  

 

 

   

 

 

 

Retirement of treasury shares

   $ 1,652      $ —     
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Business and Basis of Presentation

Business

Spectrum Pharmaceuticals, Inc. (“Spectrum”, the “Company”, “we”, “our”, or “us”) is a biotechnology company with fully integrated commercial and drug development operations, with a primary focus in oncology and hematology. Our strategy is comprised of acquiring, developing and commercializing a broad and diverse pipeline of late-stage clinical and commercial products. We currently market three oncology drugs—FUSILEV® (levoleucovorin) for injection in the U.S., ZEVALIN® (ibritumomab tiuxetan) injection for intravenous use, for which we have worldwide rights and FOLOTYN® a folate analogue metabolic inhibitor designed to accumulate preferentially in cancer cells. We also have a diversified pipeline of product candidates in advanced-stage Phase 2 and Phase 3 studies. We have assembled an integrated in-house scientific team, including formulation development, clinical development, medical research, regulatory affairs, biostatistics and data management, and have established a commercial infrastructure for the marketing of our drug products. We also leverage the expertise of our worldwide partners to assist in the execution of our strategy.

Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting. We have condensed or omitted certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. On April 1, 2012, Spectrum acquired the licensing rights to market ZEVALIN (the “ZEVALIN Rights”) outside of the U.S. On September 5, 2012, Spectrum acquired Allos Therapeutics, Inc. (“Allos”). Commencing April 1, 2012 and September 5, 2012, respectively, our financial statements include the assets, liabilities, operating results and cash flows of the ZEVALIN Rights and Allos.

The condensed consolidated financial statements include our accounts and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The unaudited condensed consolidated financial statements reflect all adjustments, which are normal and recurring, that are, in the opinion of management, necessary to fairly state the financial position as of June 30, 2013 and the results of operations and cash flows for the related interim periods ended June 30, 2013 and 2012. The results of operations and trends for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any other periods. The unaudited financial statements included in this quarterly report should be read in conjunction with our audited financial statements for the year ended December 31, 2012, included in the Annual Report on Form 10-K filed with the SEC.

Significant Accounting Policies

The accounting policies followed by us and other information are contained in the notes to the Company’s audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed on February 28, 2013 with the SEC. We have not changed our significant accounting policies as of June 30, 2013. You should read this Quarterly Report on Form 10-Q in connection with the information contained in our Annual Report on Form 10-K filed on February 28, 2013.

Variable Interest Entity

Our Canadian affiliate, Spectrum Pharma Canada, is owned 50% by us and was organized in Quebec, Canada in January 2008. We fund 100% of the expenditures and, as a result, we are the party with the controlling financial interest. We are the primary beneficiary of Spectrum Pharma Canada, which is determined to be a variable interest entity. As a result of this characterization, it is consolidated in our financial statements as though it is a wholly-owned subsidiary. We have eliminated all significant intercompany balances and transactions among the consolidated entities from the condensed consolidated financial statements.

Segment and Geographic Information

We operate in one reportable segment: acquiring, developing and commercializing prescription drug products. We evaluate all revenues by product in the aggregate given the similarity of product, production processes, customers, distribution methods and regulatory environment. Accordingly, we report the accompanying condensed consolidated financial statements in the aggregate, including all of our activities in one reportable segment.

 

7


Table of Contents

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent obligations in the financial statements and accompanying notes. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates.

On an ongoing basis, we evaluate our estimates, including those related to deferred revenue recognition periods, inventories, the impairment of investments, the impairment of goodwill and long-lived assets, contingencies, accrued clinical trial expenses, stock-based compensation, and ongoing litigation, among other estimates. We base our estimates on historical experience and on other assumptions that management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.

Revenue Recognition

Revenue from product sales is recognized upon shipment of product when title and risk of loss have transferred to the customer. We sell our products to wholesalers and distributors of oncology products and directly to the end user, directly or through Group Purchasing Organizations or GPO’s (e.g., certain hospitals or hospital systems and clinics with whom we have entered into a direct purchase agreement). Our wholesalers and distributors purchase our products and sell the products directly to end users, which include, but are not limited to, hospitals, clinics, medical facilities, managed care facilities and private oncology based practices. Revenue from product sales is recognized upon shipment of product when title and risk of loss have transferred to the customer, and the following additional criteria are met:

 

  (i) the price is substantially fixed and determinable;

 

  (ii) our customer has economic substance apart from that provided by us;

 

  (iii) our customer’s obligation to pay us is not contingent on resale of the product;

 

  (iv) we do not have significant obligations for future performance to directly bring about the resale of our product; and

 

  (v) we have a reasonable basis to estimate future returns.

Generally revenue is recognized when all four of the following criteria are met:

 

  (i) persuasive evidence that an arrangement exists;

 

  (ii) delivery of the products has occurred, or services have been rendered;

 

  (iii) the selling price is both fixed and determinable; and

 

  (iv) collectability is reasonably assured.

We calculate a provision for estimated product returns, sales discounts, rebates, chargebacks and distribution and data fees are established as a reduction of gross product sales at the time such revenues are recognized. Thus, revenue is recorded, net of such estimated provisions. We state the related accounts receivable at net realizable value, with any allowance for doubtful accounts charged to general operating expenses. If revenue from sales is not reasonably determinable due to provisions for estimates, promotional adjustments, price adjustments, returns or any other potential adjustments, we defer the revenue and recognize revenue when the estimates are reasonably determinable, even if the monies for the gross sales have been received.

We utilize a third-party logistics company to store and distribute FUSILEV. The same third party logistics company also stores and ships in the U.S. ZEVALIN kits containing the CD20 MAB.

During 2009, we changed the supply and distribution model for ZEVALIN in the U.S. Previously, we sold ZEVALIN kits containing the CD20 MAB to radiopharmacies, who in turn ordered the radioactive isotope (Y-90 or In-111) separately and radiolabeled (or attached) the radioactive isotope to the CD20 MAB. The radiopharmacy then sold the end user product to the consumer. Under the current model in the U.S. we do not sell the ZEVALIN kits containing the CD20 MAB to the radiopharmacies, but instead contract with them, as a fee-for-service, to radiolabel the individual components of the CD20 MAB to the radioactive isotope, and then, also under a fee-for-service arrangement, have them distribute the end use product to the end user; the clinics, hospitals or other medical settings. In this regard, we now sell the CD20 MAB together with the radioactive isotope in the U.S. as the end user product. In November 2011, we received FDA approval to remove the bioscan and starting in January 2012 we are no longer supplying the imaging kit (In-111) in the U.S. which was formerly used for the bioscan.

Beginning in the second quarter of 2013, we terminated our transition services agreement with Bayer Pharma AG and transitioned to a sales distribution model in Europe. Sales of ZEVALIN to certain new customers will be recognized on a cash basis until collectability is reasonably assured.

 

8


Table of Contents

Product Returns Allowances

Customers are typically permitted to return products within thirty days after shipment, if incorrectly shipped or not ordered, and six months after the expiration of product dating for FUSILEV, subject to certain restocking fees and preauthorization requirements, as applicable. The returned product is destroyed if it is damaged, quality is compromised or past its expiration date. In general, returned product is not resold. As of each balance sheet date, we estimate potential returns, based on several factors, including: inventory held by distributors, sell through data of distributor sales to end users, customer and end-user ordering and re-ordering patterns, aging of accounts receivables, rates of returns for directly substitutable products and pharmaceutical products for the treatment of therapeutic areas similar to indications served by our products, shelf life of our products, historical rates of actual returns and based on experience of our management with selling similar oncology products. We record an allowance for future returns by reducing product sales and crediting a reserve for returns to increase other accrued obligations at the time of the product sales. No returns reserve is recorded for ZEVALIN since in the U.S. we invoice our end user customers and recognize revenues only when a patient is treated with ZEVALIN and for Ex. U.S. we invoice upon delivery. FOLOTYN returns are limited to defective product or product that was shipped in error.

Government Chargebacks

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by reducing revenue and establishing an accrual in an amount equal to our estimate of chargeback claims at the time of product sale. We also evaluate the adequacy of previously recorded chargebacks based on data regarding specific entities claims activity over time to adjust current period chargebacks for these same distributors. Due to estimates and assumptions inherent in determining the amount of government chargebacks, the time lag to receive information from distributors, the actual amount of claims for chargebacks may be materially different from our estimates, at which time we would adjust our reserves accordingly.

Discounts

Discounts (generally prompt payment discounts) are accrued at the end of every reporting period based on the gross sales made to customers during the period and based on their terms of trade for a product. We generally review the terms of the contracts, specifically price and discount structures, and payment terms between the customer and us to estimate the discount accrual.

Rebates

Customer rebates are estimated at every period end, based on direct purchases, depending on whether any rebates have been offered based on definitive contractual agreements. The rebates are recognized when products are purchased and a periodic credit is given.

Medicaid Rebates

Our products are subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue in the same period the related sale is recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. Our estimate of utilization is based on historical claims and supplemented by management’s judgment with respect to many factors, including changes in sales trends, an evaluation of current laws and regulations and product pricing. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Commencing in the second quarter of 2013, we refined our methodology to estimate rebate claims remaining in channel inventory which resulted in a $1.0 million increase in the Medicaid rebate accrual at June 30, 2013 and corresponding increase to net loss for the three and six months ended June 30, 2013. Additionally, there is a time lag between the date we determine the estimated liability and when we actually pay the liability. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.

Distribution and Data Fees

Distribution and data fees are paid to authorized wholesalers and specialty distributors of FUSILEV and FOLOTYN as a percentage of WAC for products sold which is a reduction of revenue in the same period the related sale is recorded. The services provided include contract administration, inventory management, product sales reporting by customer and returns for clinics and hospitals. We accrue distribution and data fees based on a percentage of FUSILEV and FOLOTYN revenues that are set and governed by distribution agreements.

 

9


Table of Contents

Accounts Receivable

We also state the related accounts receivable at net realizable value, with any allowance for doubtful accounts charged to general operating expenses. If revenue from sales is not reasonably determinable due to provisions for estimates, promotional adjustments, price adjustments, returns or any other potential adjustments, we defer the revenue and recognize revenue when the estimates are reasonably determinable, even if the monies for the gross sales have been received.

Milestone Payments

Milestone payments under collaborative arrangements are triggered either by the results of our research and development efforts or by specified sales results by a third-party collaborator. Milestones related to our development-based activities may include initiation of various phases of clinical trials, successful completion of a phase of development or results from a clinical trial, acceptance of a New Drug Application by the FDA or an equivalent filing with an equivalent regulatory agency in another territory, or regulatory approval by the FDA or by an equivalent regulatory agency in another territory. Due to the uncertainty involved in meeting these development-based milestones, the development-based milestones are considered to be substantial (i.e. not just achieved through passage of time) at the inception of the collaboration agreement. In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. Our involvement is necessary to the achievement of development-based milestones. We would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. These sales-based milestones would be achieved after the completion of our development activities. We would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone. In addition, upon the achievement of either development-based or sales-based milestone events, we have no future performance obligations related to any milestone payments.

License Fees

We recognize license fees based on the facts and circumstances of each contractual agreement. In general, we recognize income upon the signing of a contractual agreement that grants rights to products or technology to a third party if we have no further obligation to provide products or services to the third party after entering into the contract.

Research and Development

Research and development expenses include salaries and benefits, clinical trial and related manufacturing costs, contract and other outside service fees, and facilities and overhead costs related to our research and development efforts. Research and development expenses also consist of costs incurred for proprietary and collaborative research and development and include activities such as product registries and investigator-sponsored trials. Research and development costs are expensed as incurred. In certain instances, we enter into agreements with third parties for research and development activities, where we may prepay fees for services at the initiation of the contract. We record such prepayment as a prepaid asset and charge research and development expense over the period of time the contracted research and development services are performed. Other types of arrangements with third parties may be fixed fee or fee for service, and may include monthly payments or payments upon the completion of milestones or receipt of deliverables.

As of each balance sheet date, we review purchase commitments and accrue drug development expenses based on factors such as estimates of work performed, patient enrollment, completion of patient studies and other events. We maintain regular communication with our vendors, including our clinical sites, and gauge the reasonableness of estimates provided. However, actual clinical trial costs may differ materially from estimated clinical trial costs and are adjusted for in the period in which they become known.

Goodwill and Intangible Assets

Goodwill represents the excess of acquisition cost over the fair value of the net assets of the acquired businesses. Goodwill has an indefinite useful life and is not amortized, but instead tested for impairment annually unless there are interim impairment indicators. We perform our annual evaluation as of October 1 each year.

Intangible assets are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. Our policy is to identify and record impairment losses, if necessary, on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. It is our policy to expense costs as incurred in connection with the renewal or extension of its intangible assets.

We acquired 50% of the rights in RIT in December 2008 and the remaining 50% in March 2009. The purchase price for the acquisition of ZEVALIN rights was allocated to identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date which is being amortized over its useful life of 10 years. Such a valuation requires significant estimates and assumptions including but not limited to: determining the timing and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product sales resulting from in-process projects, and developing appropriate discount rates and probability rates by project. We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions.

 

10


Table of Contents

Identifiable intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives, ranging from 1 to 10 years.

We acquired all of the oncology drug assets of Targent in April 2006. As part of the consideration for the purchase of these assets, we agreed to pay milestone payments to Targent upon the achievement of certain regulatory events as well as for certain sales levels for FUSILEV within a calendar year. During 2011, we capitalized $16.8 million associated with the achievement of these milestones which are being amortized to cost of product sales sold on a straight-line basis over the estimated useful life of 8.7 years.

On April 1, 2012, we acquired the licensing rights to market ZEVALIN outside of the U.S. (ZEVALIN Rights) from Bayer Pharma AG or Bayer. The process for estimating the fair values of these identifiable intangible assets involved the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. These identified intangible assets are being amortized over the estimated useful life of 10 years.

We acquired Allos on September 5, 2012, and recorded intangible assets related to license and distribution rights and in-process research and development. The license and distribution rights are amortized over the expected patent life of 10 years. The fair value of the acquired in-process research and development and license and distribution agreement intangible assets was estimated using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value considered our estimates of future incremental earnings that may be achieved by the intangible assets.

With respect to the acquisition we believe the fair values assigned to the assets acquired and liabilities assumed were based upon reasonable assumptions. Our allocation of the purchase price was largely dependent on discounted cash flow analyses of projects and products of Allos. We cannot provide assurance that the underlying assumptions used to forecast the cash flows or the timely and successful completion of such projects will materialize as we estimated. For these reasons, among others, our actual results may vary significantly from the estimated results.

On March 8, 2013, we acquired the global development and commercialization rights to Captisol-enabled®, propylene glycol-free (PG-free) melphalan and capitalized $7.7 million associated with the in process research and development.

On May 29, 2013, we amended our agreement with Mundipharma (see Notes 6 and 10).

We evaluate the recoverability of indefinite and definite intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to the following:

 

  (i) a significant decrease in the market value of an asset;

 

  (ii) a significant adverse change in the extent or manner in which an asset is used; or

 

  (iii) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.

We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. We recorded an impairment loss of $1.0 million during the three and six months ended June 30, 2013 related to the amendment of the Mundipharma agreement in May 2013. There were no other impairment losses recorded during the quarters ended June 30, 2013 or 2012.

Acquisitions and Collaborations

For all in-licensed products, we perform an analysis to determine whether we hold a variable interest or interests that give us a controlling financial interest in a variable interest entity. On the basis of our interpretations and conclusions, we determine whether the acquisition falls under the purview of variable interest entity accounting and if so, consider the necessity to consolidate the acquisition. As of June 30, 2013, we determined there were no variable interest entities required to be consolidated other than our Canadian affiliate, Spectrum Pharma Canada.

We also perform an analysis to determine if the inputs and/or processes acquired in an acquisition qualify as a business. On the basis of our interpretations and conclusions, we determine if the in-licensed products qualify as a business and whether to account for such products as a business combination or an asset acquisition. The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets, because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination. The excess of the purchase price over the fair value of the net assets acquired can only be recognized as goodwill in a business combination.

 

11


Table of Contents

Foreign Currency Translation

We translate the assets and liabilities of our foreign subsidiaries stated in local functional currencies to US dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. Gains and losses from the translation of financial statements denominated in foreign currencies are included as a separate component of accumulated other comprehensive income (loss) in the statement of comprehensive income (loss).

We record foreign currency transactions at the exchange rate prevailing at the date of the transaction with resultant gains and losses being included in results of operations. Foreign currency transaction gains and losses have not been significant for any period presented.

Comprehensive Income (Loss)

Comprehensive income (loss) is calculated in accordance with authoritative guidance which requires the disclosure of all components of comprehensive income, including net income (loss) and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. Our accumulated other comprehensive income (loss) at June 30, 2013 and 2012, respectively consisted primarily of foreign currency translation adjustments and net unrealized gains/losses on investments in marketable securities as of that date.

Recently Adopted Accounting Standards

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update that requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance became effective for reporting periods beginning after December 15, 2012, with early adoption permitted. We adopted the provisions of the guidance in the first quarter of 2013 and had no significant reclassifications out of accumulated other comprehensive income to net loss during the six months ended June 30, 2013.

In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. This guidance became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted the provisions of the guidance in the first quarter of 2013. The adoption did not have a material impact on our consolidated financial statements.

New Accounting Standards Not Yet Adopted

In March 2013, the FASB issued an accounting standards update that provides guidance on the accounting for the cumulative translation adjustment (the “CTA”) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. Under this guidance, an entity should recognize the CTA in earnings based on meeting certain criteria, including when it ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity or upon a sale or transfer that results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resides. This guidance will be effective for fiscal years beginning on or after December 15, 2013, which will be our fiscal year 2014, with early adoption permitted. We currently do not expect the adoption of the guidance will have a material impact on our consolidated financial statements.

Basic and Diluted Earnings (Loss) per Share

We calculate basic and diluted net income (loss) per share using the weighted average number of common shares outstanding during the periods presented, and adjust the amount of net income (loss) used in this calculation for preferred stock dividends (if any) declared during the period. In periods of a net loss position, basic and diluted loss per share are the same. For the diluted earnings per share calculation, we adjust the weighted average number of common shares outstanding to include dilutive stock options, warrants and other common stock equivalents outstanding during the period.

 

12


Table of Contents
     Net Loss     Weighted-
Average
Shares
Outstanding
(Denominator)
     Loss
Per
Share
 
(in thousands, except share and per share data)                    

Three Months Ended June 30, 2013

       

Basic and diluted loss per share:

   $ (10,177     58,977,295       $ (0.17
  

 

 

      

 

 

 

The following table sets forth the number of shares excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive:

 

     June 30, 2013  

Preferred shares

     40,000   

Options

     2,412,230   

Incremental shares assumed issued on exercise of in the money warrants

     115,249   

Unvested restricted stock

     1,102,654   
  

 

 

 
     3,670,133   
  

 

 

 

 

(in thousands, except share and per share data)    Net Income      Weighted-
Average
Shares
Outstanding
(Denominator)
     Earnings
Per
Share
 

Three Months Ended June 30, 2012

        

Basic earnings per share:

   $ 18,070         58,763,700       $ 0.31   
        

 

 

 

Diluted earnings per share:

        

Dilutive preferred shares

        40,000      

Dilutive options

        4,069,118      

Incremental shares assumed issued on exercise of in the money warrants

        251,578      

Unvested restricted stock

        262,607      
  

 

 

    

 

 

    

Diluted earnings per share

   $  18,070         63,387,003       $  0.29   
  

 

 

    

 

 

    

 

 

 

Potentially dilutive securities not included above since they were antidilutive:

        

Antidilutive options excluded from the calculation

        301,708      

 

(in thousands, except share and per share data)    Net Income     Weighted-
Average
Shares
Outstanding
(Denominator)
     Earnings
Per
Share
 

Six Months Ended June 30, 2013

       

Basic earnings per share:

   $ (12,966     58,995,735       $ (0.22
       

 

 

 

The following table sets forth the number of shares excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive:

 

     June 30, 2013  

Preferred shares

     40,000   

Options

     3,211,911   

Incremental shares assumed issued on exercise of in the money warrants

     173,031   

Unvested restricted stock

     1,102,654   
  

 

 

 
     4,527,596   
  

 

 

 

 

13


Table of Contents
(in thousands, except share and per share data)    Net Income      Weighted-
Average
Shares
Outstanding
(Denominator)
     Earnings
Per
Share
 

Six Months Ended June 30, 2012

        

Basic earnings per share:

   $ 64,612         58,617,530       $ 1.10   
        

 

 

 

Diluted earnings per share:

        

Dilutive preferred shares

        40,000      

Dilutive options

        4,483,596      

Incremental shares assumed issued on exercise of in the money warrants

        269,403      

Unvested restricted stock

        256,017      
  

 

 

    

 

 

    

Diluted earnings per share

   $ 64,612         63,666,546       $ 1.01   
  

 

 

    

 

 

    

 

 

 

Potentially dilutive securities not included above since they were antidilutive:

        

Antidilutive options excluded from the calculation

        155,750      

 

2. Acquisitions

Acquisition of Rights to Captisol-Enabled® Melphalan

On March 8, 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled®, propylene glycol-free melphalan from CyDex Pharmaceuticals, Inc. a wholly-owned subsidiary of Ligand Pharmaceuticals Incorporated (“Ligand”). The Captisol-enabled melphalan product candidate is currently in a pivotal trial being conducted by Ligand for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma. Pursuant to the license agreement, Spectrum assumed the responsibility for the ongoing clinical and regulatory development of the program going forward. Under the agreement, Ligand received a license fee of $3.0 million on April 1, 2013 and is eligible to receive milestone payments upon achievement of certain regulatory and net sales thresholds, as well as royalties upon successful commercialization based on a percentage of net sales of the licensed products in all territories.

We accounted for the acquisition of the rights as a business combination using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be recorded on the balance sheet regardless of the likelihood of success of the related product or technology. The process for estimating the fair values of identifiable intangible assets involves the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related transaction costs expensed for the three months ended March 31, 2013 were approximately $15,000. There were no corresponding expenses for the three months ended June 30, 2013.

Consideration Transferred

The acquisition-date fair value of the consideration transferred consisted of the following items ($ in 000’s):

 

Cash consideration

   $ 3,000   

Liability assumed—contingent consideration

     4,700  
  

 

 

 

Total purchase consideration

   $ 7,700  
  

 

 

 

Fair Value Estimate of Asset Acquired and Liability Assumed

The total purchase consideration is allocated to the acquisition of the net tangible and intangible assets based on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired is as follows ($ in 000’s):

 

In-process research and development—Captisol-enabled®, propylene glycol-free melphalan rights

   $ 7,700   
  

 

 

 

 

14


Table of Contents

Acquired in-process research and development (“IPR&D) is an intangible asset classified as an indefinite-lived asset until the completion or abandonment of the associated R&D effort, and will be amortized over an estimated useful life to be determined at the date the project is completed. Intangible IPR&D is not amortized during the period that it is considered indefinite-lived but rather tested for impairment.

We estimated the fair value of the in-process research and development using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value estimate took into account our estimates of future incremental earnings that may be achieved upon regulatory approval, promotion and distribution associated with the rights, and included estimated cash flows of approximately 10 years and a discount rate of approximately 25%.

The fair value of the contingent consideration liability assumed was determined using the probability of success and the discounted cash flow method of the income approach assuming the U.S. Food and Drug Administration, or FDA, approval of Captisol-enabled® melphalan is will occur on or about December 31, 2015. Upon receipt of regulatory approval, Spectrum will be obligated to make a milestone payment to Ligand.

We do not consider the acquisition of the global development and commercialization rights to Captisol-enabled®, propylene glycol-free melphalan to be a material business combination and, therefore, have not disclosed the pro forma results of operations as required for material business combinations.

Allos Acquisition

Spectrum acquired Allos Therapeutics, Inc. on September 5, 2012 as discussed further in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 27, 2013. The results of operations of the Allos acquisition are included in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2012. The pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. The following unaudited pro forma results of operations for the three and six months ended June 30, 2012 assume the Allos acquisition had occurred on January 1, 2012 ($ in 000’s):

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 

Total revenues

   $ 82,174       $ 153,367   

Income from operations

   $ 19,758       $ 30,860   

Net income

   $ 13,259       $ 47,364   

Basic net income per share

   $ 0.23       $ 0.81   

Diluted net income per share

   $ 0.21       $ 0.74   

 

3. Cash, Equivalents and Marketable Securities

As of June 30, 2013, we held substantially all of our cash, equivalents and marketable securities at major financial institutions, which must invest our funds in accordance with our investment policy with the principal objectives of such policy being preservation of capital, fulfillment of liquidity needs and above market returns commensurate with preservation of capital. Our investment policy also requires that investments in marketable securities be in only highly rated instruments, which are primarily US treasury bills or US treasury backed securities, with limitations on investing in securities of any single issuer. We maintain cash balances in excess of federally insured limits in reputable financial institutions. To a limited degree, the Federal Deposit Insurance Corporation and third parties insure these investments. However, these investments are not insured against the possibility of a complete loss of earnings or principal and are inherently subject to the credit risk related to the continued credit worthiness of the underlying issuer and general credit market risks. We manage such risks on our portfolio by investing in highly liquid, highly rated instruments and limit investing in long-term maturity instruments.

 

15


Table of Contents

Cash, equivalents and marketable securities, including long term bank certificates of deposits, and investments totaled $127.9 million and $145.5 million as of June 30, 2013 and December 31, 2012, respectively. Long term bank certificates of deposit include a $250,000 restricted certificate of deposit that collateralizes tenant improvement obligations to the lessor of our principal offices. The following is a summary of such investments (in 000’s):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
fair
Value
     Cash      Marketable Security  
                  Current      Long
Term
 

June 30, 2013

                 

Cash and equivalents

   $ 121,103       $ —         $ —         $ 121,103       $ 121,103       $ —         $ —     

Bank CDs (including restricted certificate of deposit of $250)

     252         —           —           252         —           252         —     

Money market currency funds

     3,060         —           —           3,060         —           3,060         —     

Other securities (included in other assets)

     1,747         1,702        —           3,449         —           —           3,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 126,162       $ 1,702       $ —         $ 127,864       $ 121,103       $ 3,312       $ 3,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

Cash and equivalents

   $ 139,698       $ —         $ —         $ 139,698       $ 139,698       $ —         $ —     

Bank CDs (including restricted certificate of deposit of $250)

     987         —           —           987         —           987         —     

Money market currency funds

     2,323         —           —           2,323         —           2,323         —     

Other securities (included in other assets)

     1,747         733        —           2,480         —           —           2,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 144,755       $ 733      $ —         $ 145,488       $ 139,698       $ 3,310       $ 2,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2013, none of the securities had been in a continuous unrealized loss position longer than one year.

 

4. Fair Value Measurements

We measure fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include the following:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. These inputs include quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; 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 are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in the assessment of fair value. Cash equivalents consist of certificates of deposit and are valued at cost, which approximates fair value due to the short-term maturities of these instruments. Marketable securities consist of certificates of deposit, US Government Treasury bills, US treasury-backed securities and corporate deposits, which are stated at fair value as it approximates carrying value due to the short term maturities of these instruments.

The fair value of the deferred development cost liability and the deferred payment contingency was valued using the discounted cash flow method of the income approach. The unobservable inputs in the valuation models that have the most significant effect on the fair value of our deferred development cost liability and deferred payment contingency are the determination of the present value factors for future cash flows. The assumptions included internal estimates of research and development personnel needed to perform the research and development services; and estimates of expected cash outflows to third parties for services and supplies over the expected period that the services will be performed, approximately through 2022 for the research and development obligations. We determined the present value factor to be a weighted-average cost of capital of approximately 11.0% in 2013 and 2012.

 

16


Table of Contents

The fair value of the other long-term liability was classified as Level 3 and valued using the probability of success and the discounted cash flow method of the income approach assuming the FDA approval of Captisol-enabled® melphalan will occur on or about December 31, 2015.

A majority of our financial assets have been classified as Level 2. These assets have been initially valued at the transaction price and subsequently valued utilizing third party pricing services. The pricing services use many observable market inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. We validate the prices provided by our third party pricing services by understanding the models used, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming those securities trade in active markets.

We did not elect the fair value option, as allowed, to account for financial assets and liabilities that were not previously carried at fair value. Therefore, material financial assets and liabilities that are not carried at fair value, such as trade accounts receivable and payable, are reported at their historical carrying values.

The fair value of the deferred development costs and deferred payment contingency are measured at the end of each reporting period using Level 3 inputs. The significant unobservable assumptions we use include the determination of present value factors for future cash flows.

The carrying values of our cash and cash equivalents, marketable securities, other securities and common stock warrants, carried at fair value as of June 30, 2013 are classified in the table below in one of the three categories of the fair value hierarchy described below:

 

     Fair Value Measurements
($ in ‘000’s)
 
     Level 1      Level 2      Level 3      Total  

June 30, 2013

           

Assets:

           

Cash and equivalents

   $ 121,103       $ —         $ —         $ 121,103   

Bank CDs (including restricted certificate of deposit of $250)

     —           252         —           252   

Money market currency funds

     —           3,060         —           3,060   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and equivalents, and marketable securities and investments

     121,103         3,312         —           124,415   

Deferred compensation investments, including life insurance cash surrender value

     —           4,311         —           4,311   

Other securities

     3,449         —           —           3,449   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 124,552       $ 7,623       $ —         $ 132,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred executive compensation liability

     —           3,206         —           3,206   

Deferred development costs

     —           —           18,651        18,651   

Melphalan license contingent consideration

     —           —           4,700        4,700   

Contingent value right

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 3,206       $ 23,351      $ 26,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following summarizes the activity of Level 3 inputs measured on a recurring basis:

 

     Fair Value Measurements of 1
Unobservable Inputs (Level 3)
($ in 000’s)
 

Balance at December 31, 2011

   $ —     

Transfers in / (out) of Level 3:

  

Deferred development costs

     12,233   

Deferred payment contingency

     2,287   

Contingent right value

     —     
  

 

 

 

Balance at December 31, 2012

     14,520  

Transfers in / (out) of Level 3:

  

Other long term liabilities

     4,700   

Deferred development costs

     6,418   

Deferred payment contingency

     (2,287
  

 

 

 

Balance at June 30, 2013

   $ 23,351  
  

 

 

 

 

5. Revolving Line of Credit

In connection with the Allos Acquisition, we entered into a credit agreement on September 5, 2012, or Credit Agreement, with Bank of America, N.A, as the administrative agent and Wells Fargo Bank, N.A, as an initial lender. The Credit Agreement provides us with a committed $75 million revolving line of credit facility, or Credit Facility. We may increase the Credit Facility up to $125 million, subject to meeting certain customary conditions and obtaining commitments for such increase from the lenders. The Credit Facility expires on September 5, 2014.

The Credit Facility bears interest, at our election, at a rate equal to the London Interbank Offer Rate, or LIBOR rate, or the base rate, plus an applicable margin (4.25% at June 30, 2013). The applicable margin is as follows:

 

   

if the consolidated leverage ratio as of the last test date is less than 0.5:1.0, 1.75% per annum (for LIBOR rate loans) or 0.75% (for base rate loans);

 

   

if the consolidated leverage ratio as of the last test date is greater than 0.5:1.0 but less than 1.0:1.0, 2.00% per annum (for LIBOR rate loans) or 1.00% (for base rate loans); and

 

   

if the consolidated leverage ratio as of the last test date is greater than 1.0:1.0, 2.25% per annum (for LIBOR rate loans) or 1.00% (for base rate loans).

The base rate is subject to a floor that is 100 basis points above the LIBOR rate. The LIBOR rate does not include a floor and, with respect to it, interest periods of 1, 2, 3 and 6 months may be selected. Related interest expense was $572,000 for the six months ended June 30, 2013.

We incurred $976,000 in related loan costs and fees, which were deferred and will be amortized using the effective interest method over 24 months, the term of the Credit Facility. Amortization expense included in interest expense in the accompanying condensed consolidated statements of operations was $244,000 and $0 for the six months ended June 30, 2013 and 2012.

An unused line fee is payable quarterly in an amount ranging from 0.375 to 0.625% of the sum of the average daily unused portion of the facilities during any quarter based upon consolidated leverage ratio as at the last test date. A customary fee is also payable to the administrative agent on an annual basis in advance. Related interest expense for the unused line fee was $118,000 for the six months ended June 30, 2013.

The direct and indirect domestic subsidiaries of the Company, including Allos, as a new wholly-owned subsidiary, guaranty our obligations under the Credit Facility.

The Credit Agreement includes the following quarterly financial covenants:

 

   

The Company may not permit the consolidated interest coverage ratio of the Company and its subsidiaries as of the end of any fiscal quarter to be less than 3.00 to 1.00;

 

   

The Company may not permit the consolidated leverage ratio at any time set forth below to be greater than the ratio set forth below opposite such period:

 

Measurement Period Ending

   Maximum
Consolidated
Leverage Ratio

Closing Date through September 30, 2012

   2.00 to 1.00

December 31, 2012 and each fiscal quarter thereafter

   1.50 to 1.00

 

   

The Company may not permit the ratio of (i) the sum of (A) unencumbered cash and cash equivalents of the Company and its subsidiaries on a consolidated basis, plus (B) net accounts receivable of the Company and its subsidiaries on a consolidated basis, to (ii) consolidated funded indebtedness as of the end of any fiscal quarter to be less than 2.00 to 1.00.

 

18


Table of Contents

In addition, the Credit Agreement includes certain negative covenants that, subject to exceptions, limit our ability to, among other things incur additional indebtedness, engage in future mergers, consolidations, liquidations and dissolutions, sell assets, pay dividends and distributions on or repurchase capital stock, and enter into or amend other material agreements. The Credit Agreement also includes certain customary representations and warranties, affirmative covenants and events of default, which are set forth in more detail in the Credit Agreement.

On the closing date of September 5, 2012, we drew $50 million on the Credit Facility and used the proceeds to pay a portion of the purchase price for Allos. At June 30, 2013, $50 million was outstanding on the Credit Facility and there was $25 million available to borrow. At June 30, 2013, we were in compliance with all financial covenants. In July 2013, we repaid $25 million of the then outstanding balance.

Additional revolving loans may be drawn and all revolving loans may be repaid and re-borrowed from time to time in an amount not to exceed the total commitment amount. Any such loan proceeds may be used for working capital and other general corporate purposes for us or our subsidiaries.

Amendment to Credit Agreement

On July 16, 2013, we entered into an amendment to the Credit Agreement dated as of September 5, 2012 with Bank of America, N.A., in its capacity as administrative agent for the lenders and other parties signatory thereto, to, among other things, permit the acquisition of Talon Therapeutics, Inc., reduce the maximum aggregate borrowing amount under the revolving line of credit to $50 million, and to revise the interest rate on borrowings under the revolving line of credit.

 

6. Intangible Assets and Goodwill

Intangible assets consist of the following ($ in 000’s):

 

     June 30, 2013  
     Gross
Amount
     Accumulated
Amortization
    Foreign
Currency
Translation
    Impairment     Net
Amount
     Weighted
Average
Amortization
Period (years)
 

ZEVALIN intangibles—US

   $ 41,900       $ (21,595   $ —        $ —        $ 20,305         5.5   

ZEVALIN intangibles—Ex. US

     23,490         (3,604     (663     —          19,223         8.8   

FUSILEV intangibles

     16,778         (3,966     —          —          12,812         6.5   

FOLOTYN license with Mundipharma

     27,900         (2,300     —          (1,023     24,577         9.3   

FOLOTYN distribution rights—US & Canada

     118,400         —          —          —          118,400         n/a   

Melphalan license with CyDex Pharmaceuticals

     7,700         —          —          —          7,700         n/a   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

Total intangible assets

   $ 236,168       $ (31,465   $ (663     (1,023   $ 203,017      
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

On May 29, 2013 the Company and Mundipharma entered into an amendment to their collaboration agreement in order to modify the scope of the Mundipharma licensed territories and the respective development obligations of the parties. As a result of the amendment, Europe and Turkey were excluded from Mundipharma’s commercialization territory, and royalty and milestone rates were modified. The modification of the Company’s associated royalty and milestone rights constituted a change in the contractual provisions under which the Company measured its original acquired intangible asset (FOTOLYN license) with Mundipharma. The Company determined that an impairment of the Mundipharma intangible asset of $1.0 million resulted from the amendment and is recorded in the amortization and impairment of purchased intangibles in the accompanying statement of operations.

During the six months ended June 30, 2013, ZEVALIN and FOLOTYN intangible amortization of $3.3 million and $1.4 million, respectively, is included in amortization of purchased intangibles. In addition, during the six months ended June 30, 2013, $986,000 is included in cost of product sales related to FUSILEV milestones.

 

19


Table of Contents

Goodwill

Goodwill includes the following:

 

     June 30,
2013
    December 31,
2012
 
     ($ in ‘000’s)  

Acquisition of Zevalin Rights

   $ 2,525      $ 2,525   

Acquisition of Allos

     26,485        26,485   

Foreign exchange translation effects

     (70     (37
  

 

 

   

 

 

 
   $ 28,940      $ 28,973   
  

 

 

   

 

 

 

 

7. Inventories

Inventories, net of allowances consisted of the following:

 

     June 30,
2013
     December 31,
2012
 
     ($ in ‘000’s)  

Raw materials

   $ 1,580       $ 887   

Work-in-process

     4,150         7,302   

Finished goods

     9,582         6,289   
  

 

 

    

 

 

 
   $ 15,312       $ 14,478   
  

 

 

    

 

 

 

We continually review product inventories on hand, evaluating inventory levels relative to product demand, remaining shelf life, future marketing plans and other factors, and record reserves for obsolete and slow-moving inventories for amounts which we may not realize.

 

8. Accounts payable and accrued obligations

Accounts payable and other accrued obligations consisted of the following:

 

     June 30,
2013
     December 31,
2012
 
     ($ in ‘000’s)  

Trade payables

   $ 32,972       $ 34,352   

Allowance for rebates

     20,683         11,023   

Accrued product royalty

     9,292         12,275   

Allowance for returns

     2,650         5,056   

Accrued data and distribution fees

     4,459         8,449   

Accrued GPO administrative fees

     2,672         2,650   

Inventory management fee

     1,690         3,050   

Accrued income taxes

     —           470   

Allowance for chargebacks

     9,372         15,153   

Other accrued obligations

     1,459         2.819   
  

 

 

    

 

 

 
   $ 85,249       $ 95,297   
  

 

 

    

 

 

 

 

9. Income Taxes

On an interim basis, we estimate that the anticipated annual effective tax rate for the provision for income taxes would be 19.6%. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions where the we conduct business.

Our provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and includes a review of all available positive and negative evidence.

 

20


Table of Contents

Based on the weight of both positive and negative evidence, we concluded that it is more likely than not that the domestic net deferred tax assets would be realized, and therefore, we released our domestic valuation allowance during the quarter ended March 31, 2012. We released approximately $23 million as part of the projected annual effective tax rate and released the remaining $24 million of the domestic valuation allowance as a discrete item in the quarter ended March 31, 2012. We maintain a valuation allowance against our foreign net deferred tax assets as we continue to conclude it not more likely than not that the foreign net deferred tax assets will be realized. We also maintain a partial valuation allowance against the domestic deferred tax assets acquired in the Allos business combination due to the fact that a substantial portion of Allos’ deferred tax liabilities relate to indefinite lived In Process Research & Development costs which are not considered a source of income to support the realization of Allos’ deferred tax assets. Realization of the balance of Allos’ deferred tax assets continue to be primarily supported through our income projections.

We recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.

We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

 

10. Mundipharma Agreements

As the result of Allos becoming our wholly owned subsidiary effective September 5, 2012, on a consolidated basis we assumed obligations under a strategic collaboration agreement with Mundipharma, or the Mundipharma Collaboration Agreement, pursuant to which we agreed to collaborate in the development of FOLOTYN according to a mutually agreed-upon development plan, as updated by the parties from time to time. Under the Mundipharma Collaboration Agreement, we retained full commercialization rights for FOLOTYN in the United States and Canada with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world, or the Mundipharma territories.

On May 29, 2013 the Company and Mundipharma entered into an amendment to amend and restate the Collaboration Agreement, referred to as the Amended Collaboration Agreement in order to modify the scope of the licensed territory and the respective development obligations of the parties. As a result of the Amended Collaboration Agreement, Europe and Turkey were excluded from Mundipharma’s commercialization territory, and royalty and milestone rates were modified. In addition, the Company received $7.0 million from Mundipharma. All other terms and conditions remained unchanged from the original collaboration agreement.

Pursuant to the Amended Collaboration Agreement, we may receive potential regulatory milestone payments of up to $16 million and commercial progress- and sales-dependent milestone payments of up to $107 million. All of these remaining potential milestone payments are not deemed to be substantive for accounting purposes and will be recognized when the appropriate revenue recognition criteria have been met. We will also receive tiered double digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories consistent with the terms of the original Collaboration Agreement.

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

As part of the original Collaboration Agreement, we were obligated to perform research and development services related to jointly agreed-upon clinical development activities through approximately 2022, with cost sharing as discussed below. The Company recorded the fair value of the related deferred development cost obligation of $12.3 as of September 5, 2012, using the discounted cash flow method of the income approach.

In connection with the Amended Collaboration Agreement, the Company determined that the entire $7.0 million development payment from Mundipharma is allocable as arrangement consideration related to the research and development services obligation described above, resulting in an aggregate development cost liability of $18.7 million at June 30, 2013. The development cost liability includes assumptions about internal estimates of research and development personnel needed to perform the research and development services; and estimates of expected cash outflows to third parties for services and supplies for our projected clinical trial enrollment and patient treatment-related follow up time periods through approximately 2031. As with the Company’s previous accounting for the development cost liability, the Company will reevaluate the measurement of this liability at each subsequent reporting date and record the change in measurement to research and development expense.

 

21


Table of Contents

Under the original Collaboration Agreement, Mundipharma was initially responsible for 40% of the joint development costs incurred by the parties, which increased to 50% upon the later of (i) the calendar quarter of the first approval of FOLOTYN in the EU for relapsed or refractory PTCL or first-line PTCL, and (ii) the first calendar quarter in which the development cost differential equals or exceeds $15.0 million. The “development cost differential” was defined as the cumulative amount of joint development costs that Mundipharma would have incurred if it was responsible for 50% of the joint development costs rather than its initial 40% share. To the extent that this development cost differential did not meet or exceed $15.0 million by December 31, 2019, then the Company was obligated to pay Mundipharma the difference between $15.0 million and the amount of the development cost differential as of December 31, 2019. The Company recorded the joint development cost reimbursements received from Mundipharma as research and development in the statement of operations; and we record the full amount of our joint development costs as research and development expense. Research and development for the three and six months ended June 30, 2013 included $268,000 and $589,000, respectively, related to the 40% joint development cost reimbursement under the original Collaboration Agreement.

The Amended Collaboration Agreement eliminated the development cost differential computation requirement. Prospectively, the Company and Mundipharma will bear their own development costs. The Amended Collaboration Agreement required Spectrum to compute the remaining development cost differential amount which was $12,099 as of May 31, 2013. The Company determined that the remaining development cost differential liability pursuant to the Amended Collaboration Agreement was $18.7 million which is included in the Company’s balance sheet at June 30, 2013. As a result of the amendment, Spectrum reevaluated the fair value measurement of the related contingent payment obligation and determined that its fair value was zero, as no remaining contingent obligation remained at May 29, 2013. Therefore, the Company recorded the difference between the carrying value and the new fair value of the related contingent payment obligation of $2.4 million at May 29, 2013 to research and development expense in the accompanying statement of operations.

As of June 30, 2013, accounts receivable related to the Mundipharma Agreements totaled $24,000. As of June 30, 2013 and December 31, 2012, deferred amounts related to the Mundipharma Agreements consisted of ($ in 000’s):

 

     June 30,
2013
     December 31,
2012
 

Deferred development cost liability

   $ 3,251       $ 856   
  

 

 

    

 

 

 

Deferred development cost liability, less current portion

     15,400         11,377   

Deferred payment contingency

     —           2,287   
  

 

 

    

 

 

 
   $ 18,651       $ 14,520   
  

 

 

    

 

 

 

 

11. Commitments and Contingencies

Facility Lease

We sublease our principal executive office in Henderson, Nevada under a non cancelable operating lease expiring April 30, 2014. We also lease our research and development facility in Irvine, California under a non cancelable operating lease expiring June 30, 2016. Each lease agreement contains certain scheduled rent increases which are accounted for on a straight-line basis.

As part of our Irvine facility lease renewal in 2009, the landlord agreed to contribute up to approximately $1.5 million toward the cost of tenant improvements. The tenant improvements were completed in 2010 at an aggregate cost of approximately $1.4 million, of which, $451,000 is being financed. This landlord contribution is being amortized on a straight-line basis over the term of the lease as a reduction to rent expense. We also lease small administrative offices in Colorado, New Jersey, Westlake Village (California), Tokyo, Japan and Mumbai, India.

Licensing Agreements

We are developing almost all of our drug candidates pursuant to license agreements that provide us with rights in certain territories, among other things, to develop, sublicense, manufacture and sell the drugs. We are generally required to use commercially reasonable efforts to develop the drugs, and are generally responsible for all development, patent filing and maintenance, sales and marketing and liability insurance costs, and are generally contingently obligated to make milestone payments to the licensors if we successfully reach development and regulatory milestones specified in the license agreements. In addition, we are obligated to pay royalties and, in some cases, milestone payments based on net sales, if any, after marketing approval is obtained from regulatory authorities.

 

22


Table of Contents

The potential contingent development and regulatory milestone obligations under all of our licensing agreements are generally tied to progress through the various regulatory authorities’ approval process, which approval significantly depends on positive clinical trial results. The following items are typical of such milestone events: conclusion of Phase 2 or commencement of Phase 3 clinical trials; filing of new drug applications in each of the United States, Europe and Japan; and approvals from each of the regulatory agencies in those jurisdictions.

ZEVALIN licensing and development in the United States

In December 2008, we acquired rights to commercialize and develop ZEVALIN in the United States as the result of a transaction with Cell Therapeutics, Inc. (“CTI”). Pursuant to the transfer of the ZEVALIN assets from CTI to a joint venture, RIT Oncology LLC (“RIT”), in December 2008, RIT assumed certain agreements with various third parties related to ZEVALIN intellectual property. These currently effective agreements relate to the manufacture, use and sale of ZEVALIN in the United States and include (i) a license from Biogen, Idec, Inc. (“Biogen”) (ii) a license-back to Biogen for limited uses including fulfillment of a supply obligation to CTI, (iii) a sublicense from Biogen to certain ZEVALIN patents held by Genentech, Inc., (iv) a sublicense from Biogen to certain ZEVALIN patents held by GlaxoSmithKline and Glaxo Group Limited, and (v) a sublicense from Biogen to certain ZEVALIN patents held by Corixa Corporation, Coulter Pharmaceutical, Inc., The Regents of the University of Michigan and GlaxoSmithKline.

In accordance with the terms of such agreements, RIT is required to meet specified payment obligations including a commercial milestone payment to Corixa Corporation of $5.0 million based on ZEVALIN sales in the United States, which has not been met as of June 30, 2013, as well as U.S. net sales-based royalties of low to mid-single digits to Genentech, Inc. and mid-single digits to Corixa Corporation. Such agreements generally continue until the last to expire of the licensed patents unless earlier terminated in accordance with the terms of the agreement for bankruptcy or material breaches that remain uncured. The patents that are subject to the agreements expire between 2014 and 2019.

Asset Purchase Agreement between CTI and Biogen, ZEVALIN U.S.

In connection with the joint venture arrangement with CTI, we entered into an amendment to the original asset purchase agreement between CTI and Biogen, referred to as the CTI/Biogen Agreement, modifying future milestone payments. Pursuant to the terms of the agreement, as amended, (i) upon the achievement of the specified FDA approval milestone, which was achieved in 2009, RIT (as successor to CTI) paid Biogen an additional amount of $5.5 million, (ii) RIT may be required to make an additional $10.0 million milestone payment upon the achievement of an additional FDA approval milestone, and (iii) RIT is required to make yearly royalty payments determined as a mid-single to mid-teen digits percentage of yearly net sales for the preceding year, increasing with the passage of time, with specific rates subject to confidential treatment pursuant to an order by the SEC. The agreement has an indefinite term and is no longer subject to termination; provided, however, that the royalty obligations automatically terminate upon the latest to occur of expiration of the subject patents, the sale by a third party of a biosimilar product in the U.S. or December 31, 2015. CTI’s rights and obligations, including its payment obligations to Biogen for royalties on net sales of ZEVALIN and an additional regulatory milestone payment, under both the CTI/Biogen Agreement and the amendment were assigned to and assumed by RIT in connection with the closing of the joint venture transaction.

Supply Agreement between Biogen and CTI, ZEVALIN U.S.

In connection with the joint venture arrangement with CTI, we entered into an amendment to the original supply agreement between Biogen and CTI, referred to as the CTI/Biogen Supply Agreement, modifying certain of the pricing and manufacturing technology transfer terms contained in the CTI/Biogen Supply Agreement and also providing that the term of the agreement may be shortened in some instances in the event of a mid-term manufacturing technology transfer. There are no milestone or royalty payments required pursuant to this agreement. The term of the agreement is until the manufacturing technology transfer is complete. Either party may generally terminate this agreement due to a bankruptcy of the other party or due to such other party’s material noncompliance with the agreement or certain other related agreements. CTI’s rights and obligations, including its payment obligations to Biogen, under both the CTI/Biogen Supply Agreement and the amendment were assigned to and assumed by RIT in connection with the closing of the joint venture transaction.

License and Asset Purchase Agreement with Bayer Pharma, ZEVALIN Ex—U.S.

On April 1, 2012, through a subsidiary, Spectrum Pharmaceuticals Cayman, L.P., we completed the acquisition of licensing rights to market ZEVALIN outside of the U.S., referred to as the ZEVALIN Ex-US Rights, from Bayer Pharma AG, or Bayer. Pursuant to the terms of the agreement, Spectrum acquired all rights including marketing, selling, intellectual property and access to existing inventory of ZEVALIN from Bayer. We currently market ZEVALIN in the U.S. and this agreement expands our commercial efforts to the rest of the world. ZEVALIN is currently approved in more than 40 countries outside the U.S. for the treatment of B-cell non-Hodgkin lymphoma, including countries in Europe, Latin America and Asia. In consideration for the rights granted under the

 

23


Table of Contents

agreement, concurrent with the closing, Spectrum paid Bayer a one-time fee of Euro 19 million or approximately USD $25.4 million, and will pay Bayer royalties based on a mid-teen digits percentage of net sales of the licensed products in all territories worldwide except the U.S., with specific rates subject to confidential treatment pursuant to an order by the SEC. Under the agreement, we also acquired access to existing inventory of ZEVALIN and concurrent with the closing, entered into certain ancillary agreements including but not limited to a transition services agreement to transition the business. Unless earlier terminated, the term of the agreement continues until the expiration of our royalty payment obligations which, in turn, run until the last-to-expire patent covering the sale of a licensed product in the relevant country or fifteen (15) years from the date of first commercial sale of the licensed product in such country, whichever is longer. This agreement may be terminated in the event of a material default, which is defined to include: (i) our failure to timely pay royalty payments under this agreement or payments under certain related agreements; (ii) our insolvency; and (iii) our breach and the resulting termination of an Amended and Restated License Agreement between Biogen and Bayer, dated as of January 16, 2012.

Amended and Restated License Agreement with Merck & Cie AG, FUSILEV.

In May 2006, we amended and restated a license agreement with Merck & Cie AG, a Swiss corporation, which we assumed in connection with the acquisition of the assets of Targent. Pursuant to the license agreement with Merck & Cie, we obtained the exclusive license to use regulatory filings related to FUSILEV and a non-exclusive license under certain patents and know-how related to FUSILEV to develop, make, and have made, use, sell and have sold FUSILEV in the field of oncology in North America. In addition, we have the right of first opportunity to negotiate an exclusive license to manufacture, have manufactured, use and sell FUSILEV products outside the field of oncology in North America. Also, under the terms of the license agreement, we paid Merck & Cie $100,000 for the achievement of FDA approval of an injectable form of FUSILEV. Merck & Cie is also eligible to receive a $200,000 payment upon achievement of FDA approval of an oral form of FUSILEV, in addition to royalties in the mid-single digits based on a percentage of net sales. The term of the license agreement is determined on a product-by-product and country-by-country basis until royalties are no longer owed under the license agreement. The license agreement expires in its entirety after the date that we no longer owe any royalties to Merck & Cie. We have the unilateral right to terminate the license agreement, in its entirety or on a product-by-product or country-by-country basis, at any time for any reason and either party may terminate the license agreement due to material breach of the terms of the license agreement by or insolvency of the other party.

Asset Purchase Agreement with Targent, Inc., FUSILEV

In March 2006, we entered into an Asset Purchase Agreement with Targent, Inc. (“Targent”). As part of the consideration for the purchase of certain assets, we agreed to pay milestone payments to Targent upon the achievement of certain regulatory events as well as for certain sales levels for FUSILEV within a calendar year. In connection with the achievement of the FDA approval milestone in April 2011, we issued an aggregate of 733,715 shares of common stock to certain of Targent’s stockholders, as directed by Targent. We capitalized $6.3 million associated with this milestone as intangible assets during 2011 which is being amortized over the estimated useful life of 8.7 years.

In addition, in connection with the achievement of the first sales milestone of $40 million in May 2011 we issued 577,367 shares of common stock to certain of Targent’s stockholders (which was equivalent value to approximately $5 million in cash), as directed by Targent. In September 2011, we achieved the second and final sales milestone of $100 million and paid $5 million in cash for an aggregate with the first sales milestone of $10.0 million. We capitalized the $10.0 million associated with these milestones as intangible assets. These intangible assets are being amortized over the estimated useful life of 8.6 years. As of December 2011, we have met all of the contractual milestones related to FUSILEV.

License Agreement with Sloan-Kettering Institute, SRI International and Southern Research Institute, FOLOTYN

In December 2002, Allos entered into the FOLOTYN License Agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute. As a result of Allos becoming our wholly owned subsidiary effective September 5, 2012, on a consolidated basis we are bound by the FOLOTYN License Agreement under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications related to FOLOTYN and its uses. Under the terms of the FOLOTYN License Agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we pay the licensors royalties based on worldwide graduated annual levels of net sales of FOLOTYN, net of actual rebates, chargebacks and returns, or distributor sales, which may be different than our net product revenue recognized in accordance with U.S. generally accepted accounting principles, or GAAP, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. For purposes of the FOLOTYN License Agreement, annual worldwide sales consists of our distributor sales and annual net sales of FOLOTYN in the Mundipharma Territories, as reported to us under the Mundipharma Collaboration

 

24


Table of Contents

Agreement, if and when such sales occur in the Mundipharma Territories. Royalties are 8% of annual worldwide sales up to $150.0 million; 9% of annual worldwide sales of $150.0 million through $300.0 million; and 11% of annual worldwide sales in excess of $300.0 million. For the six months ended June 30, 2013, our royalties were 8% of our net distributor sales. As of June 30, 2013, accrued royalties were $1.2 million and are included in accounts payable and accrued obligations on the consolidated balance sheet.

License Agreement with Cydex Pharmaceuticals, Inc., Captisol-enabled, Propyleneglycol-free Melphalan

See Note 2 above.

Exclusive Development and Commercialization Collaboration Agreement with Allergan, apaziquone

In October 2008, we signed an exclusive development and commercialization collaboration agreement with Allergan for apaziquone. Pursuant to the terms of the agreement, Allergan paid us an up-front non-refundable $41.5 million at closing and is obligated to make additional payments based on the achievement of certain development, regulatory and commercialization milestones. Under the terms of the original agreement, we were entitled to payment of $57.5 million and $245 million upon achievement of certain regulatory and commercialization milestones, respectively, of which $1.5 million has been achieved following completion of enrollment in clinical trials, per the terms of the license, development, supply and distribution agreement. Also, Allergan agreed to pay us tiered royalties starting in the mid-teens based on a percentage of net sales of apaziquone outside of the U.S. and Asia, which specific rates are subject to confidential treatment pursuant to an order by the SEC.

On January 29, 2013, we entered into a second amendment to the license, development, supply and distribution agreement with Allergan to amend the agreement and reacquire the rights originally licensed to Allergan in the U.S. Europe and other territories in exchange for a tiered single digit royalty on certain products containing Apaziquone, and relieved Allergan of its obligations for development, commercialization and other activities. As a result of the second amendment to the agreement with Allergan, Allergan has no remaining obligations to the Company and Spectrum has no remaining performance obligations to Allergan. However, the Company is obligated to pay Allergan a tiered single-digit royalty not to exceed mid-single digits based upon the net sales, when and if earned, of certain products containing Apaziquone in specified territories. Additionally, the Company is obligated to pay any royalties or other payments due to licensors of the Licensed Intellectual Property (as defined in the agreement) as well as to provide indemnification of Allergan for claims arising from the manufacture, development or commercialization of pharmaceutical products containing Apaziquone by the Company. We recognized $8.3 million, the remaining balance of deferred revenue related to this agreement, during the three months ended March 31, 2013 and six months ended June 30, 2013.

Collaboration Agreement with Nippon Kayaku Co. LTD., apaziquone

In November 2009, we entered into a collaboration agreement with Nippon Kayaku Co., LTD. (“Nippon Kayaku”) for the development and commercialization of apaziquone in Asia, except North and South Korea (the “Nippon Kayaku Territory”). In addition, Nippon Kayaku received exclusive rights to apaziquone for the treatment of non muscle invasive bladder cancer in Asia (other than North and South Korea), including Japan and China. Nippon Kayaku will conduct apaziquone clinical trials in the Nippon Kayaku Territory pursuant to a development plan. Further, Nippon Kayaku will be responsible for all expenses relating to the development and commercialization of apaziquone in the Nippon Kayaku Territory.

Pursuant to the terms of this agreement, Nippon Kayaku paid Spectrum an upfront fee of $15 million and is obligated to make additional payments based on the achievement of certain development, regulatory and commercialization milestones. Under the terms of the agreement, we are entitled to payment of $10 million and $126 million upon achievement of certain regulatory and commercialization milestones, respectively. Also, Nippon Kayaku has agreed to pay Spectrum royalties based on a percentage of net sales of the subject products in the defined territory in the mid-teen digits, which specific royalty rates are subject to confidential treatment pursuant to an order by the SEC. The agreement will remain in effect, on a country-by-country basis, until the expiration of the obligation of Nippon Kayaku to pay royalties on sales of the subject products in such country. Nippon Kayaku may terminate the agreement at its election upon nine months notice to Spectrum. Additionally, either party may terminate the agreement for an uncured material breach by the other party.

Our license agreement with Nippon Kayaku provides for payments to us upon the achievement of development milestones, such as the completion of clinical trials or regulatory submissions, approvals by health authorities, and commercial launches of drug candidates. Given the challenges inherent in developing and obtaining approval for drug products and in achieving commercial launches, there was substantial uncertainty whether any such milestones would be achieved at the time of execution of such license agreement. In addition, we continue to evaluate whether the development milestones, none of which have been achieved to date, meet the remaining criteria to be considered substantive. As a result of our analysis, we consider our development milestones under the Nippon Kayaku license agreement to be substantive and, accordingly, we expect to recognize as revenue future payments received from such milestones only if and as each milestone is achieved.

Licensing and Collaboration Agreement with TopoTarget, belinostat

In February 2010, we entered into a licensing and collaboration agreement with TopoTarget, for the development and commercialization of belinostat, pursuant to which we agreed to collaboration for the development and commercialization of

 

25


Table of Contents

belinostat. The agreement provides that we have the exclusive right to make, develop and commercialize belinostat in North America and India, with an option for China. The agreement also grants TopoTarget a co-promote option if and only if we do not maintain a minimum number (subject to adjustment for certain events outside of our control) of field personnel (as defined in the agreement) for a certain number of years post-approval of the PTCL indication.

Under the terms of the agreement, all development, including studies, will be conducted under a joint development plan and in accordance with a mutually agreed upon target product profile provided that we have final decision-making authority for all developmental activities in North America and India (and China upon exercise of the option for China) and TopoTarget has final decision-making authority for all developmental activities in all other jurisdictions. We have agreed to assume all responsibility for and future costs of the ongoing registrational PTCL trial. We and TopoTarget will conduct future planned clinical trials pursuant to the joint development plan, of which we will fund 70% of the development costs and TopoTarget will fund 30% of the development costs. We and TopoTarget will each pay 50% of the costs for chemical, pharmaceutical and other process development related to the manufacturing of the product that are incurred with a mutually agreed upon budget in the joint development plan. TopoTarget is responsible for supplying us with both clinical and commercial product.

Pursuant to the terms of this agreement, Spectrum paid TopoTarget an upfront fee of $30 million. In addition, on the successful achievement of certain development, regulatory and sales milestones, none of which have been achieved to date, Spectrum is obligated to issue one million (1,000,000) shares of its common stock (subject to certain resale conditions) and pay TopoTarget up to $313 million. Also, Spectrum will pay TopoTarget royalties in the mid-teen digits based on net sales of the subject product in the defined territory, which specific royalty rates are subject to confidential treatment pursuant to an order by the SEC. None of such royalties have been earned or paid since inception of the agreement.

The agreement will continue until the expiration of the last royalty payment period in the last country in the defined territory with certain provisions surviving, unless earlier terminated in accordance with its terms. Spectrum may terminate the agreement at its election upon one hundred eighty (180) days notice to TopoTarget. Generally, Spectrum may also terminate immediately upon a prohibition on the use of the subject product or clinical hold by the FDA. TopoTarget may also terminate immediately in the event of a challenge (without TopoTarget’s consent) by Spectrum of the patents that cover the product. Either party may terminate the agreement upon a bankruptcy by the other party, or in the event of an uncured material breach by the other party.

Co-Development and Commercialization Agreement with Hanmi Pharmaceutical Company, SPI-2012

In late January 2012, we entered into a co-development and commercialization agreement with Hanmi Pharmaceutical Company, (“Hanmi”), for SPI-2012, formerly known as “LAPS-GCSF”, a drug for the treatment of chemotherapy induced neutropenia based on Hanmi’s proprietary LAPSCOVERY™ Technology. In consideration for the rights granted to us under the co-development and commercialization agreement with Hanmi, we paid Hanmi a fee which is included in research and development expense in the accompanying condensed consolidated financial statements because the technology has not yet achieved regulatory approval. We expect to initiate Phase 2 trials in collaboration with Hanmi in 2013. Under the terms of the agreement, we will share the costs and expenses of the study although we will have primary responsibility for them. If SPI-2012 is ultimately commercialized by us, we will have worldwide rights except for Korea, China and Japan upon payment of fees and milestone payments related to further development, regulatory approvals and sales targets.

Service Agreements

In connection with the research and development of our drug products, we have entered into contracts with numerous third party service providers, such as radio-pharmacies, distributors, clinical trial centers, clinical research organizations, data monitoring centers, and with drug formulation, development and testing laboratories. The financial terms of these agreements are varied and generally obligate us to pay in stages, depending on achievement of certain events specified in the agreements, such as contract execution, reservation of service or production capacity, actual performance of service, or the successful accrual and dosing of patients.

At each period end, we accrue for all costs of goods and services received, with such accruals based on factors such as estimates of work performed, patient enrollment, completion of patient studies and other events. We are in a position to accelerate, slow-down or discontinue any or all of the projects that we are working on at any given point in time. Should we decide to discontinue and/or slow-down the work on any project, the associated costs for those projects would be limited to the extent of the work completed. Generally, we are able to terminate these contracts due to the discontinuance of the related project(s) and thus avoid paying for the services that have not yet been rendered and our future purchase obligations would reduce accordingly.

Supply Agreements

In connection with our acquisition of ZEVALIN, RIT assumed a supply agreement with Biogen Idec Inc., or Biogen, to manufacture ZEVALIN for sale in the U.S. pursuant to which we would purchase from Biogen, and Biogen would provide to us, kits to make ZEVALIN doses for sale to end-users in the U.S. at a “cost plus” manufacturing price. In connection with our acquisition of Captisol-enabled melphalan, we entered into a supply agreement with Ligand pursuant to which, subject to certain exceptions, we agreed to purchase our requirements of Captisol from Ligand.

 

26


Table of Contents

Employment Agreement

We have entered into an employment agreement with Dr. Rajesh C. Shrotriya, our Chairman, President and Chief Executive Officer, which expires January 2, 2014. The employment agreement automatically renews for subsequent one-year calendar terms unless either party gives written notice of such party’s intent not to renew the agreement at least 90 days prior to the commencement of the new term. The employment agreement requires Dr. Shrotriya to devote his full working time and effort to our business and affairs during the term of the agreement. The employment agreement provides for a minimum annual base salary with annual increases, periodic bonuses and option grants as determined by the Compensation Committee of our Board of Directors.

Litigation

Shareholder Litigation

John Perry v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 14, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00433-LDG-CWH); Junqian Carroll v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00498-RBJ-CF); Gary Santi v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00502-LDG-CWH); William Skene v. Spectrum Pharmaceuticals, Inc. et al. (Filed April 10, 2013 in United States District Court, District of Nevada; Case Number 3:2013-cv-00175-RBJ-VPC); and Rubin v. Spectrum Pharmaceuticals, Inc. et al. (Filed April 24, 2013 in the United States District Court, District of Nevada; Case Number 3:2013-cv-00212-RCJ-VPC). These putative class actions raise substantially identical claims and allegations against defendants Spectrum Pharmaceuticals, Inc., Dr. Rajesh C. Shrotriya, Brett L. Scott, and Joseph Kenneth Keller. The alleged class period is August 8, 2012 to March 12, 2013. The lawsuits allege a violation of Section 10(b) of the Securities Exchange Act of 1934 against all defendants and control person liability, as a violation of Section 20(b) of the Securities Exchange Act of 1934, against the individual defendants. The claims purportedly stem from the Company’s March 12, 2013 press release, in which it announced that it anticipated a change in ordering patterns of FUSILEV. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints further allege that during the putative class period certain defendants made misleadingly optimistic statements about FUSILEV sales, which inflated the trading price of Company stock. The lawsuits seek relief in the form of monetary damages, costs and fees, and any other equitable or injunctive relief that the court deems appropriate. The putative class action cases have been consolidated. Plaintiffs’ counsel have filed motions for the appointment of a lead plaintiff and lead plaintiff’s legal counsel. The motions are briefed. Plaintiffs’ counsel represent that an amended complaint will be filed following the Court’s decision on lead plaintiff and lead plaintiffs’ legal counsel.

Timothy Fik v. Rajesh C. Shrotriya, et al. (Filed April 11, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00624-JCM-CWH); Christopher J. Watkins v. Rajesh C. Shrotriya, et al. (Filed April 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00684-JCM-VCF); and Stefan Muenchhagen v. Rajesh C. Shrotriya, et al. (Filed May 28, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00942-APG-PAL). These derivative complaints are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum Pharmaceuticals, Inc. against defendants Krishan K. Arora, Gilles Gagnon, Anton Gueth, Joseph Kenneth Keller, Stuart M Krassner, Luigi Lenaz, Anthony E. Maida, Brett L. Scott and Dr. Rajesh C. Shrotriya. The Fik and Watkins lawsuits allege six counts against all defendants: breach of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; unjust enrichment; abuse of control; gross mismanagement; and waste of corporate assets. The Fik and Watkins lawsuits also allege a seventh count for breach of fiduciary duties for insider selling and misappropriation of information against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida. The Muenchhagen lawsuit alleges five counts against all defendants: breach of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; abuse of control; gross mismanagement; and waste of corporate assets. The Muenchhagen lawsuit also alleges two counts against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida for unjust enrichment and for breach of fiduciary duties for insider selling and misappropriation of information. These substantially identical complaints allege that defendants knew or should have known that the Company’s statements about future FUSILEV sales were misleadingly optimistic and that these statements inflated the trading price of Company stock. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints seek compensatory damages, corporate governance reforms, restitution and disgorgement of defendants’ alleged profits, and costs and fees. The Fik and Watkins cases have been consolidated and stayed. The parties have submitted a notice to consolidate and stay the Muenchhagen case.

Hardik Kakadia v. Rajesh C. Shrotriya, et al. (Filed April 23, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-680643-B); and Joel Besner v. Rajesh C. Shrotriya, et al. (Filed May 31, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-682668-C). These derivative complaints are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum Pharmaceuticals, Inc. against defendants Krishan K. Arora, Gilles Gagnon, Anton Gueth, Joseph Kenneth Keller, Stuart M Krassner, Luigi Lenaz, Anthony E. Maida, Brett L. Scott and Dr. Rajesh C. Shrotriya. The Kakadia lawsuit alleges three counts against all defendants: breach of fiduciary duty; waste of corporate assets; and unjust enrichment. The Besner lawsuit alleges five counts against all defendants: breach

 

27


Table of Contents

of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; abuse of control; gross mismanagement; and waste of corporate assets. The Besner lawsuit also alleges two counts against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida for unjust enrichment and for breach of fiduciary duties for insider selling and misappropriation of information. The complaints similarly allege that defendants knew or should have known that the Company’s statements about future FUSILEV sales were misleadingly optimistic and that these statements inflated the trading price of Company stock. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints seek compensatory damages, corporate governance reforms, restitution and disgorgement of defendants’ alleged profits, equitable and/or injunctive relief, and costs and fees. The cases have been consolidated and stayed.

SEC Subpoena

On April 1, 2013, the Company received a subpoena from the Securities and Exchange Commission (the “SEC”) for documents pursuant to a formal order of investigation. The subpoena followed the Company’s March 12, 2013 announcement that it anticipated a change in ordering patterns of FUSILEV. The Company is cooperating with the SEC investigation. The Company cannot predict when the SEC will conclude its investigation or the outcome of the investigation.

We are involved with various legal matters arising in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. Although the ultimate resolution of these various matters cannot be determined at this time, we do not believe that such matters, individually or in the aggregate, will have a material adverse effect on our condensed consolidated results of operations, cash flows or financial condition.

 

12. Stockholder’s Equity

Treasury Stock

On August 10, 2012, our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock through August 1, 2013. The previous authorization was for up to $25 million and covered the period through December 31, 2012. As of June 30, 2013 we have purchased an aggregate of $13.6 million, or 1,338,055 shares, all of which have been retired.

Warrant Activity

We have issued warrants to purchase shares of our common stock to investors as part of financing transactions, or in connection with services rendered by consultants. Our outstanding warrants expire on varying dates through June 2015. Below is a summary of warrant activity during the six months ended June 30, 2013:

 

     Common  Stock
Warrants
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2012

     395,000       $ 5.45   

Granted

     50,000       $ 7.51   
  

 

 

    

 

 

 

Outstanding, at June 30, 2013

     445,000       $ 5.68   
  

 

 

    

 

 

 

Exercisable, at June 30, 2013

     395,000       $ 5.45   
  

 

 

    

 

 

 

 

28


Table of Contents

Share-Based Compensation

We record share-based employee compensation expense for all equity-based programs, including stock options, restricted stock grants, 401(k) plan matching and our employee stock purchase plan. Total expense recorded for the three and six month periods ended June 30, 2013 and 2012 is as shown below:

 

     Three Months Ended
June 30,
     Six months Ended
June 30,
 
     2013      2012      2013      2012  
     ($ in ‘000’s)  

Research and development

   $ 485       $ 397       $ 1,159       $ 788   

Selling, general and administrative

     2,439         2,685         4,512         5,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share based compensation expense

   $ 2,924       $ 3,082       $ 5,671       $ 6,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Options

During the three and six month period ended June 30, 2013, the Compensation Committee of our Board of Directors granted stock options at exercise prices equal to or greater than the closing price of our common stock on the trading day prior to the grant date. The weighted average grant date fair value of stock options granted during the six month period ended June 30, 2013 and 2012 were estimated at approximately $8.71 and $7.57, respectively using the Black-Scholes option pricing model with the following assumptions:

 

     Six-months ended June 30,  
     2013     2012  

Divided yield

     0.00     0.00

Expected volatility

     69.5     72.1

Risk free interest rate

     0.35     0.40

Expected life (years)

     4.95        4.50   

Share based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied a forfeiture rate to unvested awards for the purpose of calculating the compensation cost. These estimates will be reversed in future periods if actual forfeitures differ from our estimates.

During the three and six months ended June 30, 2013, our share-based charge in connection with the expensing of stock options was approximately $1.6 million and $3.0 million, respectively. During the three and six months ended June 30, 2012, our share-based compensation in connection with the expensing of stock options was approximately $1.3 million and $2.6 million, respectively.

As of June 30, 2013, there was approximately $12.2 million of unrecognized stock-based compensation cost related to stock options which we expect to recognize over a weighted average period of approximately 2.41 years.

Restricted Stock

The fair value of restricted stock awards is the grant date closing market price of our common stock, and is charged to expense over the period of vesting. These awards are subject to forfeiture to the extent that the recipient’s service is terminated prior to the shares becoming vested.

During the three and six month periods ended June 30, 2013, the share-based charge in connection with the expensing of restricted stock awards was approximately $1.1 million and $2.0 million, respectively. During the three and six month periods ended June 30, 2012, the share-based compensation in connection with the expensing of restricted stock awards was approximately $1.3 million and $2.5 million, respectively.

As of June 30, 2013, there was approximately $6.7 million of unrecognized share-based compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted average period of approximately 2.67 years.

401(k) Plan Matching Contribution

During the six month period ended June 30, 2013, we issued 50,970 shares of common stock as our matching contribution of approximately $446,000 for 401(k) contributions made by our employees. During the six month period ended June 30, 2012, we issued 26,154 shares of common stock as our matching contribution of approximately $333,500 for 401(k) contributions made by our employees.

 

29


Table of Contents

Employee Stock Purchase Plan

Effective July 2009, we adopted the 2009 Employee Stock Purchase Plan (“Purchase Plan”). The Purchase Plan provides our eligible employees with an incentive by providing a method whereby they may voluntarily purchase shares of our common stock upon terms described in the Purchase Plan. The Purchase Plan is designed to be operated on the basis of six consecutive month offering periods commencing January 1 and July 1 of each year. The Purchase Plan provides that eligible employees may authorize payroll deductions to purchase shares of our common stock at 85% of the fair market value of common stock on the first or last day of the applicable purchase period. A participant may purchase a maximum of 50,000 shares of common stock during a 6-month offering period, not to exceed $25,000 worth of stock on the offering date during each plan year. The Purchase Plan terminates in 2019.

A total of 5,000,000 shares of common stock are authorized for issuance under the Purchase Plan, and as of June 30, 2013, 420,046 shares have been issued under the Purchase Plan.

Common Stock Reserved for Future Issuances

As of June 30, 2013, approximately 16.3 million shares of our common stock, when fully vested, were issuable upon conversion or exercise of rights granted under prior financing arrangements, stock options and warrants, as follows:

 

Conversion of Series E preferred shares

     40,000   

Exercise of stock options

     10,932,574   

Exercise of warrants

     445,000   

Employee stock purchase plan shares reserved for issuance

     4,579,954   

Long-term retention and management incentive plan shares reserved for issuance

     346,500   
  

 

 

 

Total shares of common stock reserved for future issuances

     16,344,028   
  

 

 

 

 

13. Deferred Compensation Plan

On September 2, 2011, the Board of Directors approved the Spectrum Pharmaceuticals, Inc. Deferred Compensation Plan (the “Plan”). The Plan is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended. The Plan is administered by the Compensation Committee of the board of directors, or a designee or designees of the Compensation Committee. The Plan is intended to be an unfunded plan which is maintained primarily to provide deferred compensation benefits for a select group of our employees including management, as selected by the Plan administrator (the “Participants”). Under the Plan, we provide the Participants with the opportunity to make annual elections to defer up to a specified amount or percentage of their eligible cash compensation, as established by the Plan administrator, and we have the option to make discretionary contributions. At June 30, 2013, deferrals and contributions totaling $3.2 million are included in other accrued obligations in the accompanying condensed consolidated balance sheet.

 

14. Gross to Net Product Sales

A reconciliation of gross to net product sales for the three and six months ended June 30, 2013 and 2012 is as follows:

 

     Three Months Ended
June 30,
    Six months Ended
June 30,
 
     2013     2012     2013     2012  
     ($ in ‘000’s)  

Gross product sales

   $ 57,521      $ 105,442      $ 100,494      $ 187,271   

Government rebates and chargebacks

     (20,364     (29,824     (31,083     (49,273

Data, distribution and GPO fees

     (5,704     (9,542     (10,046     (13,470

Prompt pay discount

     (13     (1,447     (105     (2,606

Product returns allowance

     774        998        2,299        491   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales

   $ 32,212      $ 65,627      $ 61,559      $ 122,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents
15. Subsequent Event

Talon Therapeutics Acquisition

On July 16, 2013, the Company entered into a Securities Purchase Agreement with Eagle Acquisition Merger Sub, Inc., a wholly-owned subsidiary of our company which we refer to herein as Acquisition Sub, and certain stockholders of Talon Therapeutics, Inc., or Talon, whereby, on July 17, 2013, Acquisition Sub purchased all of the shares of common stock of Talon owned by such stockholders, which represented approximately 89% of the outstanding shares of common stock of Talon. On July 16, 2013, we also entered into a Stock Purchase Agreement with Acquisition Sub and Talon, whereby, on July 17, 2013, Acquisition Sub purchased additional shares of common stock from Talon, resulting in Acquisition Sub’s ownership of over 90% of the then outstanding shares of Talon’s common stock. On July 17, 2013, Acquisition Sub consummated a “short form” merger with Talon in accordance with Delaware law in which Acquisition Sub merged with and into Talon, with Talon remaining as the surviving corporation and a wholly-owned subsidiary of the Company. Through the acquisition of Talon, we will gain worldwide rights to Marqibo, an FDA-approved drug that we believe complements our other hematology and oncology products.

In connection with the closing of the acquisition, Spectrum will pay Talon stockholders purchase consideration comprising of an aggregate upfront cash consideration of approximately $11.3 million and issued 3 million shares of its common stock (valued at $8.77 on NASDAQ on July 16, 2013 or approximately $26.3 million) in exchange for the cancellation of all of the outstanding indebtedness under Talon’s credit facility. Talon stockholders will also receive contingent value rights (CVRs) in an aggregate of up to $195.0 million in future cash payments from Spectrum upon the achievement of certain one-time sales-based milestones for Marqibo® and an approval-based milestone for Menadione Topical Lotion upon satisfaction of the following specific milestones, of which there is no assurance that any may be achieved:

 

   

$5,000,000 upon the achievement of net sales of Marqibo (vincristine sulfate liposome injection) in excess of $30,000,000 in any calendar year;

 

   

$10,000,000 upon the achievement of net sales of Marqibo in excess of $60,000,000 in any calendar year

 

   

$25,000,000 upon the achievement of net sales of Marqibo in excess of $100,000,000 in any calendar year

 

   

$50,000,000 upon the achievement of net sales of Marqibo in excess of $200,000,000 in any calendar year

 

   

$100,000,000 upon the achievement of net sales of Marqibo in excess of $400,000,000 in any calendar year

 

   

$5,000,000 upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

The CVRs have an estimated fair value of $6.5 million on the date of the acquisition and will not be publicly traded. The Company also entered into a Registration Rights Agreement pursuant to which we filed a registration statement for purpose of registering for resale under the Securities Act of all the shares of our common stock issued in connection with the cancellation of the indebtedness.

Consideration Transferred

The Talon acquisition purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the acquisition date. The following table summarizes the purchase price ($ in 000’s):

 

Cash consideration

   $ 11.3   

Contingent value right

     6.5   

Spectrum shares of common stock

     26.3   
  

 

 

 

Total purchase consideration

   $ 44.1   
  

 

 

 

 

31


Table of Contents

Fair Value Estimate of Assets Acquired and Liabilities Assumed

Under the purchase method of accounting, the total purchase consideration is allocated to Talon net tangible and intangible assets based on the preliminary estimated fair values as of the closing date. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was allocated to goodwill. The goodwill acquired is not deductible for tax purposes. The following table summarizes the fair value of the net assets acquired as of July 17, 2013 ($ in 000’s):

 

Cash and equivalents

   $ 131   

Inventory

     611   

Prepaid expenses and other current assets

     602   

Property and equipment

     30   

Identifiable intangible assets

     46,300   

Goodwill

     20,606   
  

 

 

 

Total assets acquired

     68,280   

Accounts payable & accrued liabilities

     6,870   

Contingent value rights

     6,500   

Deferred tax liability

     17,300   
  

 

 

 

Total liabilities assumed

     30,670   

Net assets acquired

   $ 37,610   
  

 

 

 

The acquired intangible assets consisted of in-process research and development for Marqibo for treatment of acute lymphoblastic leukemia (“ALL”) and Marqibo for treatment of non-Hodgkin’s lymphoma (“NHL”) as follows in the table below ($ in 000’s):

 

     Value of
Intangible
Assets
Acquired
     Weighted-Average
Amortization
Period
 

In-process research and development—Marqibo for ALL

   $ 27,800             (1)

In-process research and development—Marqibo for NHL

     18,500             (1)
  

 

 

    

Total identifiable intangible assets

   $ 46,300     
  

 

 

    

 

(1) Acquired in-process research and development (“IPR&D”) is an intangible asset classified as an indefinite-lived until the completion or abandonment of the associated R&D effort, and will be amortized over an estimated useful life to be determined at the date the project is completed. Intangible IPR&D is not amortized during the period that it is considered indefinite-lived but rather tested for impairment.

Purchase price adjustments recorded subsequent to the closing date of July 17, 2013 will affect the recorded amount of goodwill.

The fair value of the acquired in-process research and development intangible assets was estimated using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value considered our estimates of future incremental earnings that may be achieved by the intangible assets.

Goodwill is calculated as the excess of the purchase consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Talon includes benefits that the Company believes will result from combining the operations of Talon with the operations of Spectrum and any intangible assets that do not qualify for separate recognition. The Talon acquisition will also allow us to gain additional expertise and intellectual property for the next generation of anti-cancer therapeutics, an expanded and complimentary product mix, and an assembled sales force, which we believe supports the amount of goodwill recognized. Goodwill is not amortized and is not deductible for tax purposes.

Deferred tax liability reflects taxes associated with the acquired in-process research and development assets recognized as part of the acquisition.

With respect to the acquisition discussed above, we believe the preliminary fair values assigned to the assets acquired and liabilities assumed were based upon reasonable assumptions. Actual adjustments will be based on analyses of fair values of identifiable intangible assets, which will be completed after Spectrum obtains a final third-party valuation, performs its own assessments and reviews all available data. The fair value estimates for the purchase price allocation may change if additional information becomes available and could have a material impact.

Proforma information for March 31, 2013 (the last period Talon reported earnings on Form 10-Q) and December 31, 2012 was filed on Form 8K-A on August 6, 2013. There are no Talon revenues and earnings included in the results of the Company for the three and six month period ending June 30, 2013.

 

32


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

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding our future product development activities and costs, the revenue potential (licensing, royalty and sales) of our products and product candidates, the success, safety and efficacy of our drug products, revenues, development timelines, product acquisitions, liquidity and capital resources and trends, and other statements containing forward-looking words, such as, “believes,” “may,” “could,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” “continues,” or the negative thereof or variation thereon or similar terminology (although not all forward-looking statements contain these words). Such forward-looking statements are based on the reasonable beliefs of our management as well as assumptions made by and information currently available to our management. Readers should not put undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified; therefore, our actual results may differ materially from those described in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our periodic reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q, and the following factors:

 

   

our ability to successfully develop, obtain regulatory approval for and market our products;

 

   

our ability to continue to grow sales revenue of our marketed products;

 

   

risks associated with doing business internationally;

 

   

our ability to generate and maintain sufficient cash resources to fund our business;

 

   

our ability to enter into strategic alliances with partners for manufacturing, development and commercialization;

 

   

efforts of our development partners;

 

   

the ability of our manufacturing partners to meet our timelines;

 

   

the ability to timely deliver product supplies to our customers;

 

   

our ability to identify new product candidates and to successfully integrate those product candidates into our operations;

 

   

the timing and/or results of pending or future clinical trials, and our reliance on contract research organizations;

 

   

our ability to protect our intellectual property rights;

 

   

competition in the marketplace for our drugs;

 

   

delay in approval of our products or new indications for our products by the U.S. Food and Drug Administration, or the FDA;

 

   

actions by the FDA and other regulatory agencies, including international agencies;

 

   

securing positive reimbursement for our products;

 

   

the impact of any product liability, or other litigation to which we are, or may become a party;

 

   

the impact of legislative or regulatory reform of the healthcare industry and the impact of recently enacted healthcare reform legislation;

 

   

the availability and price of acceptable raw materials and components from third-party suppliers, and their ability to meet our demands;

 

   

our ability, and that of our suppliers, development partners, and manufacturing partners, to comply with laws, regulations and standards, and the application and interpretation of those laws, regulations and standards, that govern or affect the pharmaceutical and biotechnology industries, the non-compliance with which may delay or prevent the development, manufacturing, regulatory approvals and sale of our products;

 

   

defending against claims relating to improper handling, storage or disposal of hazardous chemical, radioactive or biological materials which could be time consuming and expensive;

 

   

our ability to maintain the services of our key executives and technical and sales and marketing personnel;

 

   

the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals; and

 

   

demand and market acceptance for our approved products.

 

33


Table of Contents

We do not plan to update any such forward-looking statements and expressly disclaim any duty to update the information contained in this report except as required by law.

You should read the following discussion of our financial condition and results of our operations in conjunction with the condensed consolidated financial statements and the notes to those financial statements included in Item I of Part 1 of this quarterly report and our audited consolidated financial statements and related notes for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC.

Business Outlook

We are a biotechnology company with fully integrated commercial and drug development operations with a primary focus in hematology and oncology. Our strategy is comprised of acquiring, developing and commercializing a broad and diverse pipeline of late-stage clinical and commercial products. In the United States, or the U.S., we market three oncology drugs, FUSILEV®, FOLOTYN® and ZEVALIN®, and also market ZEVALIN outside of the U.S. We have two drugs, apaziquone and belinostat, in late stage development along with a diversified pipeline of novel drug candidates. We have assembled an integrated in-house scientific team, including formulation development, clinical development, medical affairs, regulatory affairs, biostatistics and data management, and have established a commercial infrastructure for the marketing of our drug products. We also leverage the expertise of our worldwide partners to assist in the execution of our strategy. Apaziquone was studied in two large Phase 3 clinical trials for non-muscle invasive bladder cancer, or NMIBC, and is under strategic collaborations with Nippon Kayaku Co. Ltd., or Nippon Kayaku, and Handok Pharmaceuticals Co. Ltd., or Handok. Belinostat, is being studied in multiple indications including a Phase 2 registrational trial for relapsed or refractory peripheral T-cell lymphoma, or PTCL, and is under a strategic collaboration with TopoTarget A/S, or TopoTarget. FOLOTYN is being further developed under a collaboration agreement with Mundipharma International Corporation Limited, or Mundipharma.

Our business strategy is comprised of the following initiatives:

 

   

Maximizing the growth potential of our marketed drugs, FUSILEV, FOLOTYN and ZEVALIN. Our near-term outlook largely depends on sales and marketing successes for our three marketed drugs. For FUSILEV, we are working to expand usage in colorectal cancer. We launched FUSILEV in August 2008 and we were able to benefit from broad utilization in community clinics and hospitals and recognized a dramatic increase in sales beginning in the second half of 2010 due to a shortage of generic leucovorin. We cannot predict the duration and extent of shortages of generic leucovorin supplies, which may occur from time to time, or the extent of the impact varying generic leucovorin supplies may ultimately have on FUSILEV utilization. In April of 2011, we received two FDA approvals for FUSILEV. The first FDA approval was for the use of FUSILEV in combination with 5-fluorouracil in the palliative treatment of patients with advanced metastatic colorectal cancer. The second FDA approval was for a “Ready-To-Use” formulation, or RTU, of FUSILEV. We are now actively engaged in marketing FUSILEV for use in advanced metastatic colorectal cancer.

We added FOLOTYN to our commercial drug portfolio with the acquisition of Allos Therapeutics, Inc., or Allos, in September 2012. FOLOTYN is a folate analogue metabolic inhibitor designed to accumulate preferentially in cancer cells. FOLOTYN targets the inhibition of dihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway, thereby interfering with DNA and RNA synthesis and triggering cancer cell death. FOLOTYN can be delivered as a single agent, for which we currently have approval in the United States for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, and has the potential to be used in combination therapy regimens. We believe that FOLOTYN’s unique mechanism of action offers us the ability to target the drug for development in a variety of hematological malignancies and solid tumor indications, and for autoimmune diseases as well. FOLOTYN has been available for commercial sale in the United States since October 2009.

For ZEVALIN, we continue to work on growing the ZEVALIN brand and are working to expand indications for use beyond follicular non-Hodkins lymphoma through additional trials. Effective April 2, 2012, with the acquisition of licensing rights from Bayer Pharma AG, we began the sales of ZEVALIN outside of the U.S. We have initiated and continue to build appropriate infrastructure and additional initiatives to facilitate broad customer reach and to address other market requirements, as appropriate, to expand utilization. We have formed a dedicated commercial organization comprised of highly experienced and motivated sales representatives, account managers, and a complement of other support marketing personnel to manage the sales and marketing of these drugs. In addition, our scientific department supports field activities through various MDs, PhDs and other medical science liaison personnel.

 

   

Optimizing our development portfolio and maximizing the asset values of its components. While over the recent few years, we have evolved from a development-stage to a commercial-stage pharmaceutical company, we have maintained a highly focused development portfolio. Our strategy with regard to our development portfolio is to focus on late-stage drugs and to develop them safely and expeditiously to the point of regulatory approval. We plan to develop some of these drugs ourselves or with our subsidiaries and affiliates, or secure collaborations with third parties such that we are able to suitably monetize these assets. We have assembled a drug development infrastructure that is comprised of highly experienced and

 

34


Table of Contents
 

motivated MDs, PhDs, clinical research associates and a complement of other support personnel to develop these drugs. In April 2012, we announced that the single instillation Phase 3 clinical trials for apaziquone did not meet their primary endpoint, however, the pooled data from the studies did show a statistically significant treatment effect. A meeting with the FDA was held in December 2012 to discuss the results from these clinical trials. Based on the discussions with the FDA, we understand that the FDA can accept the NDA filing with the current Phase III data and will likely convene an Advisory Committee meeting. Further, based on discussions with the FDA, we have agreed to conduct one additional Phase III study following consultation with the FDA on its design.

With regard to our anti-cancer drug belinostat, a novel HDAC inhibitor, we have to date opened more than 100 international sites in the study of relapsed refractory peripheral T Cell Lymphoma. We completed enrollment in this trial in September 2011, announced top line results in December 2012 and expect to file a NDA in 2013.

We have several other compounds in earlier stages of development in our portfolio. Based upon a criteria-based portfolio review, we are in the process of streamlining our pipeline drugs, allowing for greater focus and integration of our development and commercial goals.

 

   

Expanding our pipeline of development stage and commercial drugs through business development activities. It is our goal to identify new strategic opportunities that will create strong synergies with our currently marketed drugs and identify and pursue partnerships for out-licensing certain of our drugs in development. To this end, we will continue to explore strategic collaborations as these relate to drugs that are either in clinical trials or are currently on the market. We believe that such opportunistic collaborations will provide synergies with respect to how we deploy our internal resources. In this regard, we intend to identify and secure drugs that have significant growth potential either through enhanced marketing and sales efforts or through pursuit of additional clinical development. As a result of our business development activities, we announced in March 2013 that we had gained global development and commercialization rights to Ligand Pharmaceuticals’ Captisol-enabled®, propylene glycol-free (PG-free) melphalan. Captisol-enabled melphalan is currently in a pivotal trial for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma. We also announced the acquisition of Talon Therapeutics, Inc. as of July 17, 2013. Through this acquisition, we gained worldwide rights to Marqibo® (vincristine sulfate liposome injection) and Menadione Topical Lotion as described below.

 

   

Managing our financial resources effectively. We remain committed to fiscal discipline, a policy which has allowed us to become well capitalized among our peers, despite a very challenging capital markets environment beginning in 2009 and continuing through 2013. This policy includes the pursuit of dilutive and non-dilutive funding options, prudent expense management, and the achievement of critical synergies within our operations in order to maintain a reasonable burn rate. Even with the continued build-up in operational infrastructure to facilitate the marketing of our three commercial drugs, we intend to be fiscally prudent in any expansion we undertake.

In terms of revenue generation, we rely on sales from currently marketed drugs and intend to pursue out-licensing of select pipeline drugs in select territories, as discussed above. When appropriate, we may pursue other sources of financing, including dilutive and non-dilutive financing alternatives. While we are currently focused on advancing our key drug development programs, we anticipate that we will make regular determinations as to which other programs, if any, to pursue and how much funding to direct to each program on an ongoing basis, based on clinical success and commercial potential, including termination of our existing development programs, especially if we do not expect value to be realized from continued development.

 

   

Further enhancing the organizational structure to meet our corporate objectives. We have highly experienced staff in pharmaceutical operations, clinical development, regulatory and commercial functions who previously held positions at both small to mid-size biotech companies, as well as large pharmaceutical companies. We have strengthened the ranks of our management team, and will continue to pursue talent on an opportunistic basis. Finally, we remain committed to running a lean and efficient organization, while effectively leveraging our critical resources.

Financial Condition

Liquidity and Capital Resources

Our cumulative losses, since inception in 1987 through June 30, 2013, are approximately $193.3 million. We remain dependent upon revenues from our three commercial drugs, specifically FUSILEV, FOLOTYN and ZEVALIN. Our long-term strategy is to continue to generate profits from the sale and licensing of our drug products.

While we believe that the approximately $127.9 million in cash, equivalents and investments, which includes long term marketable securities we had available on June 30, 2013 will allow us to fund our current planned operations for at least the next twelve to eighteen months, we may seek to obtain additional capital through the sale of debt or equity securities, if necessary, especially in conjunction with opportunistic acquisitions or licensing arrangements. We may be unable to obtain such additional capital when needed, or on terms favorable to us or our stockholders, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity

 

35


Table of Contents

securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, the terms of such securities may place restrictions on our ability to operate our business. If and when appropriate, just as we have done in the past, we may pursue non-dilutive financing alternatives as well. On September 5, 2012, we entered into a credit agreement with Bank of America and Wells Fargo Bank for a $75.0 million revolving line of credit, which was reduced to $50 million on July 16, 2013 in connection with our acquisition of Talon and which can be increased up to $100.0 million, subject to meeting certain customary conditions and obtaining commitments for such increase from the lenders (See Note 5). As of June 30, 2013, $50.0 million has been drawn down on the revolving line of credit and we were in compliance with all financial covenants.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $3.4 million for the six months ended June 30, 2013, which includes a net loss in the period of $13.0 million adjusted for net non-cash credits of $3.4 million, of which $8.3 million of the $10.3 million of amortization of deferred revenue relates to the amendment of our collaboration agreement with Allergan, $6.0 million for a deferred income tax benefit offset by $6.6 million of depreciation and amortization, $5.7 million for stock-based compensation, $654,000 for foreign currency translation and $1.0 million for the provision for inventory obsolescence. These non-cash items were offset primarily by provisions for cash by a $39.7 million decrease in accounts receivable and a $12.3 million reduction in accounts payable and accrued obligations both of which were due to timing.

Net Cash Used in Investing Activities

Net cash used in investing activities of $3.1 million in the first six months of 2013 was due to the $3.0 million payment for the Melphalan license as described in Note 2 and the $127,000 purchase of property and equipment.

Net Cash (Used In) Provided By Financing Activities

Net cash (used in) provided by financing activities of $18.7 million for the six months ended June 30, 2013, primarily relates to the $25.0 million net repayment of the line of credit, $1.7 million purchase of treasury stock which was retired, the $410,000 repurchase of shares to satisfy minimum tax withholding for the vesting of restricted stock which was partially offset by $7.0 million in proceeds as a result of the Munidpharma contract amendment and $1.1 million in proceeds from the issuance of common stock as a result of the exercise of stock options.

Results of Operations

Three months ended June 30, 2013 and 2012

Total Revenues. A summary of our total revenues is as follows:

 

     Three months ended June 30,      $ Change     % Change  
     2013      2012       
     ($ in millions)               

Product sales, net:

          

FUSILEV

   $ 12.9       $ 56.6       $ (43.7     (77.3 )% 

FOLOTYN

     12.5         —           12.5        n/a   

ZEVALIN

     6.8         9.0         (2.2     (24.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 32.2       $ 65.6       $ (33.4     (50.9 )% 

License and contract revenue

     1.0         3.1         2.1        (63.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 33.2       $ 68.7       $ (35.5     (51.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

FUSILEV revenues decreased for the three months ended June 30, 2013 compared to the same period in 2012, primarily due to a change in buying patterns of wholesalers, a lower net price and to a lesser extent a decrease in underlying demand. Government rebates and chargebacks as a percentage of gross sales increased by 7.1% as compared to the same period in 2012 which was driven primarily by a change in customer mix and to a lesser extent a refinement to our methodology to estimate rebate claims remaining in channel inventory. The Company does not expect that this level of government rebates and chargebacks will continue in the second half of the year. For the three months ended June 30, 2013, we reduced the FUSILEV product returns reserve by $646,000. Actual product returns for the three months ended June 30, 2013 were less than estimated returns which resulted in a reduction to our estimated return rate for products which may be eligible for return. ZEVALIN revenues for the three months ended June 30, 2013 were 24.5% less than the same period in 2012. Beginning in the second quarter of 2013, we terminated the Bayer transition services agreement and transitioned to a sales distribution model in Europe which we expect may negatively impact sales until this transition is complete.

 

36


Table of Contents

Gross product revenues are reduced by estimated provisions for product returns, sales discounts and rebates, distribution and data fees, and estimates for chargeback’s established at the time revenues are recognized to arrive at product sales, net. Management considers various factors in determination of such provisions, which are described more in detail below. Product sales, net may vary from quarter to quarter based on customer mix and whether said customers are entitled to government mandated pricing which will be reflected in chargeback deductions from revenue.

During the three months ended June 30, 2013 and 2012, licensing revenues decreased $2.1 million due to the amendment of the Allergan agreement and reacquisition of licensing rights as described in Note 11 in the condensed consolidated financial statements.

Operating Costs and Expenses

Our operating costs and expenses are summarized in the following table:

 

     Three months ended June 30,     $ Change     % Change  
     2013     2012      
     ($ in millions)              

Operating costs and expenses:

        

Cost of product sales (excludes amortization of purchased intangibles)

   $ 7.3      $ 11.6      $ (4.3     (37.2 )% 

Selling, general and administrative

     22.6        23.3        (0.7     (3.1 )% 

Research and development

     10.5        9.6        0.9        9.6

Amortization and impairment of purchased intangible assets

     3.4        1.6        1.8        106.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 43.8      $ 46.1      $ (2.3     (5.1 )% 

Other income (expense), net

     (0.2     (1.5     1.3        (89.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Product Sales. The overall decrease in total cost of sales relates primarily to a decrease in product revenues which was partially offset by an increase of $58,000 for inventory reserves.

Selling, General and Administrative. Selling, general and administrative expenses decreased primarily due to:

 

   

$1.0 million increase in marketing expenses, of which $632,000 to promote FOLOTYN and $383,000 to promote ZEVALIN outside the U.S.

 

   

$1.0 million increase in professional fees which include legal fees for patents and trademarks, audit and tax services.

 

   

$686,000 increase in legal and professional fees related to the Talon acquisition.

 

   

$496,000 increase in commercial costs related to sales of ZEVALIN outside the U.S.

 

   

$436,000 increase in legal and professional fees related to the shareholder lawsuit and patent litigation.

 

   

$213,000 increase in computer software and services.

 

   

$146,000 increase in rent and utilities due to the addition of the Japan, Colorado, New Jersey and Westlake Village (California) offices.

These increases were partially offset by:

 

   

$3.2 million reduction in legal and professional fees related to the Allos tender offer and the Bayer agreement licensing rights to market ZEVALIN outside the U.S.

Research and Development. Research and development expenses increased as a result of the inclusion of Allos in the financial statements and is primarily due to:

 

   

$1.8 million decrease in the reimbursement of expenses compared to the same period in 2012 primarily due to the amendment of the Allergan agreement in the first quarter of 2013.

 

   

$539,000 increase in continuing medical education grants.

 

   

$710,000 increase in consulting, compensation and associated benefits.

These increases were partially offset by:

 

   

$2.4 million write off of deferred payment contingency as a result of the amendment to the Mundipharma agreement.

 

37


Table of Contents

Amortization and Impairment of Purchased Intangibles. The non-cash amortization and impairment of purchased intangibles increased $1.8 million during the three months ended June 30, 2013, of which, $1.0 million is due to the impairment of the Allos intangible as a result of the Mundipharma contract amendment in May 2013. The remaining amount is due to the amortization of intangibles from the acquisition of ZEVALIN Ex. U.S. Rights and the amortization of intangibles recognized from the acquisition of Allos.

Other Income (Expense), net. Other net income (expense), net increased primarily due to a $505,000 increase in interest expense in connection with the revolving line of credit which was partially offset by foreign currency gains. In the current economic environment, our principal investment objective is preservation of capital. Accordingly, for the foreseeable future we expect to earn minimal interest yields on our investments, until such time as the credit markets recover.

 

     Three months ended June 30,     $ Change      % Change  
     2013      2012       
     ($ in millions)               

Benefit (provision) for income taxes

     0.5         (3.0     3.5         (117.6 %) 
  

 

 

    

 

 

   

 

 

    

 

 

 

Benefit (Provision) for Income Taxes. As a result of our year-to-date operating loss, we recorded a benefit for income taxes of $524,000 for the three months ended June 30, 2013. For the three months ended June 30, 2012, we recorded a provision of $3.0 million primarily as a result of generating $21.0 million in operating profits. The release of the valuation allowance in 2012 was due to a change in judgment regarding the expected realization of our domestic deferred tax assets after considering positive and negative evidence which existed as of the quarter ended March 31, 2012.

We maintain a valuation allowance against our foreign net deferred tax assets as we continue to conclude it is not more likely than not that the foreign net deferred tax assets will be realized. We also maintain a partial valuation allowance against the domestic deferred tax assets acquired in the Allos business combination due to the fact that a substantial portion of Allos’ deferred tax liabilities relate to indefinite lived In Process Research & Development costs which were not considered a source of income to support the realization of Allos’ deferred tax assets. Realization of the balance of Allos’ deferred tax assets continue to be primarily supported through our income projections.

Our effective tax before discrete items was approximately 4.6% and 35.0% for the three months ended June 30, 2013 and 2012, respectively. The effective tax rate for 2013 is below the statutory rate principally as a result of losses in foreign jurisdictions for which no benefit can be realized and deductions that are permanently disallowed for tax purposes.

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and retroactively reinstated the U.S. R&D tax credit to January 1, 2012. During the quarter ended March 31, 2013 we recognized $596,000 as a discrete tax benefit due to the retroactive reinstatement of the U.S. R&D tax credit for 2012.

Six months ended June 30, 2013 and 2012

Total Revenues. A summary of our total revenues is as follows:

 

     Six months ended June 30,      $ Change     % Change  
     2013      2012       
     ($ in millions)               

Product sales, net:

          

FUSILEV

   $ 24.7       $ 107.8       $ (83.1     (77.1 )% 

FOLOTYN

     22.5         —           22.5        n/a   

ZEVALIN

     14.4         14.6         (0.2     (1.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 61.6       $ 122.4       $ (60.8     (49.7 )% 

License and contract revenue

     10.3         6.2         4.1        68.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 71.9       $ 128.6       $ (56.7     (44.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

FUSILEV revenues decreased for the six months ended June 30, 2013 compared to the same period in 2012, primarily due to a change in buying patterns of wholesalers, a lower net price partially offset by an increase in the underlying demand. Government rebates and chargebacks as a percentage of gross sales increased by 4.6% as compared to the same period in 2012 which was driven primarily by a change in customer mix and to a lesser extent a refinement to our methodology to estimate rebate claims remaining in channel inventory. The Company does not expect that this level of government rebates and chargebacks will continue in the

 

38


Table of Contents

second half of the year. For the six months ended June 30, 2013, we reduced the FUSILEV product returns reserve by $2.1 million. Actual product returns through June 30, 2013 were less than estimated returns which resulted in a reduction to our estimated sales return rate for products which may be eligible for return. ZEVALIN revenues for the six months ended June 30, 2013 were consistent with the same period in 2012. Beginning in the second quarter of 2013, we terminated the Bayer transition services agreement and transitioned to a sales distribution model in Europe which may negatively impact sales until this transition is complete.

Gross product revenues are reduced by estimated provisions for product returns, sales discounts and rebates, distribution and data fees, and estimates for chargeback’s established at the time revenues are recognized to arrive at product sales, net. Management considers various factors in determination of such provisions, which are described more in detail below. Product sales, net may vary from quarter to quarter based on customer mix and whether said customers are entitled to government mandated pricing which will be reflected in chargeback deductions from revenue.

During the six months ended June 30, 2013 and 2012, we also recognized approximately $10.3 million and $6.2 million of licensing revenues from the amortization of a $41.5 million upfront payment we received from Allergan in 2008, and $16.0 million upfront payment we received from Nippon Kayaku and Handok in the first quarter of 2010. Of the approximately $10.3 million recognized in 2013, we recognized $8.3 million of licensing revenues from Allergan in connection with the amendment of the agreement and reacquisition of licensing rights as described in Note 11 to the condensed consolidated financial statements.

Operating Costs and Expenses

Our operating costs and expenses are summarized in the following table:

 

     Six months ended June 30,     $ Change     % Change  
     2013     2012      
     ($ in millions)              

Operating costs and expenses:

        

Cost of product sales (excludes amortization of purchased intangibles)

   $ 14.0      $ 20.2      $ (6.2     (30.6 )% 

Selling, general and administrative

     45.0        41.6        3.4        8.1

Research and development

     22.5        18.5        4.0        21.7

Amortization and impairment of purchased intangible assets

     5.7        2.6        3.1        123.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 87.2      $ 82.9      $ 4.3        5.2

Other income (expense), net

     (1.5     (1.4     (0.1     (8.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Product Sales. The overall decrease in total cost of sales relates primarily to a decrease in product revenues which was partially offset by an increase of $604,000 for excess inventory.

Selling, General and Administrative. Selling, general and administrative expenses increased as a result of the inclusion of Allos in the financial statements and is primarily due to:

 

   

$1.1 million increase in compensation and associated benefits, which is mainly attributable to general and administrative expenses as a result of the addition of higher level management and the inclusion of personnel for Allos and personnel in Japan, and also includes a $363,000 increase in recruitment fees.

 

   

$1.1 million increase in commercial costs related to sales of ZEVALIN outside the U.S.

 

   

$1.6 million increase in marketing expenses to promote FOLOTYN.

 

   

$1.7 million increase in professional fees which include legal for patents and trademarks, audit and tax services.

 

   

$1.2 million increase in legal and professional fees related to the shareholder lawsuit and patent litigation.

 

   

$686,000 increase in legal and professional fees related to the Talon acquisition.

 

   

$518,000 increase in computer software and services.

 

   

$374,000 increase in rent and utilities due to the addition of the Japan, Colorado, New Jersey and Westlake Village (California) offices.

 

39


Table of Contents

These increases were partially offset by:

 

   

$797,000 decrease in non-cash stock compensation expense primarily related to the management incentive plan expenses.

 

   

$4.1 million reduction in legal and professional fees related to the Allos tender offer and the Bayer agreement licensing rights to market ZEVALIN outside the U.S.

We expect that sales and marketing activities, and therefore, selling, general and administrative expenses will remain approximately the same over the remainder of 2013.

Research and Development. Research and development expenses increased as a result of the inclusion of Allos in the financial statements and is primarily due to:

 

   

$4.9 million decrease in the reimbursement of expenses compared to the same period in 2012 primarily due to the amendment of the Allergan agreement in the first quarter of 2013.

 

   

$543,000 increase in continuing medical education grants

 

   

$1.1 million increase in consulting, compensation and associated benefits

These increases were partially offset by:

 

   

$2.4 million write off of deferred payment contingency as a result of the amendment to the Mundipharma agreement.

We expect research and development expenses to remain approximately the same for the remainder of the 2013, excluding the cost of in-licensing or acquisitions of additional drugs, if any.

Amortization and Impairment of Purchased Intangibles. The non-cash amortization and impairment of purchased intangibles increased $3.2 million during the six months ended June 30, 2013, of which $1.0 million is due to the impairment of the Allos intangible as a result of the Mundipharma contract amendment in May 2013. The remaining amount is due to the amortization of intangibles from the acquisition of ZEVALIN Ex. U.S. Rights and the amortization of intangibles recognized from the acquisition of Allos.

Other Income (Expense), net. Other net income (expense), net increased primarily due to a $928,000 increase in interest expense in connection with the revolving line of credit which was partially offset by a decrease in foreign currency losses. In the current economic environment, our principal investment objective is preservation of capital. Accordingly, for the foreseeable future we expect to earn minimal interest yields on our investments, until such time as the credit markets recover.

 

     Six months ended June 30,                
     2013      2012      $ Change      % Change  
     ($ in millions)                

Benefit for income taxes

     3.9         20.3         16.4         (81.0 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit for Income Taxes. As a result of our year-to-date operating loss, we recorded a benefit for income taxes of $3.9 million for the six months ended June 30, 2013. For the six months ended June 30, 2012, we recorded a tax benefit of $20.3 million primarily as a result of the releasing $24 million of valuation allowance on domestic deferred tax assets as of January 1, 2012 as a discrete tax adjustment.

The release of the valuation allowance in 2012 was due to a change in judgment regarding the expected realization of our domestic deferred tax assets after considering positive and negative evidence which existed as of the quarter ended March 31, 2012. We maintain a valuation allowance against our foreign net deferred tax assets as we continue to conclude it is not more likely than not that the foreign net deferred tax assets will be realized. We also maintain a partial valuation allowance against the domestic deferred tax assets acquired in the Allos business combination due to the fact that a substantial portion of Allos’ deferred tax liabilities relate to indefinite lived In Process Research & Development costs which were not considered a source of income to support the realization of Allos’ deferred tax assets. Realization of the balance of Allos’ deferred tax assets continue to be primarily supported through our income projections.

Our effective tax rate before discrete items was approximately 19.6% and 20.8% for the six months ended June 30, 2013 and 2012, respectively. The effective tax rate for 2013 is below the statutory rate principally as a result of losses in foreign jurisdictions for which no benefit can be realized and deductions that are permanently disallowed for tax purposes. The lower effective tax rate in 2012 is principally due to the tax benefit realized as a result of the release of a portion of our domestic valuation allowance as of January 1, 2012 against 2012 earnings.

 

40


Table of Contents

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and retroactively reinstated the U.S. R&D tax credit to January 1, 2012. During the six months ended June 30, 2013 we recognized $596,000 as a discrete tax benefit due to the retroactive reinstatement of the U.S. R&D tax credit for 2012.

Nature of Each Accrual That Reduces Gross Revenue to Net Revenue

Provisions for government rebates, commercial rebates, chargebacks, data and distribution product returns, sales discounts and rebates and estimates for chargebacks are established as a reduction of product sales revenue at the time revenues are recognized. We consider various factors in determining such provisions. Such estimated amounts are deducted from our gross sales to determine our net revenues. Provisions for rebates, chargebacks, data and distribution fees, GPO fees, prompt pay discount and returns are classified as part of our accrued obligations. Changes in our estimates, if any, are recorded in the statements of operations in the period the change is determined. If we materially over or under estimate the amount, there could be a material impact on our condensed consolidated financial statements.

For the six months ended June 30, 2013 and 2012, the following is a roll forward of the reductions to revenue:

 

     Rebates
and
Chargebacks
    Data and
Distribution
and GPO
Fees
    Prompt
Pay
Discount
    Returns     Total  
           ($ in ‘000’s)  

Period ended June 30, 2013:

          

Balances at beginning of the period

   $ 26,176      $ 14,149      $ 1,451      $ 5,056      $ 46,832   

Add: provisions (recovery):

     31,083        10,046        105        (2,299     38,935   

Less: Credits or actual allowances:

     (27,204     (15,374     (1,221     (107     (43,906
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at the close of the period

   $ 30,055      $ 8,821      $ 335      $ 2,650      $ 41,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period ended June 30, 2012:

          

Balances at beginning of period

   $ 9,064      $ 9,808      $ 992      $ 4,000      $ 23,864   

Add: provisions (recovery):

     49,273        13,470        2,606        (491     64,858   

Less: Credits or actual allowances:

     (31,755     (9,615     (2,420 )     (9     (43,799
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at the close of the period

   $ 26,582      $ 13,663      $ 1,178      $ 3,500      $ 44,923   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recorded as reductions to revenue on our condensed consolidated balance sheets for 2013 and 2012 are reflected in the table above. The basis and methods of estimating these reductions, used by management, are more fully described in “Critical Accounting Policies, Estimates and Assumptions” in our Annual Report on Form 10-K for the year ended December 31, 2012.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in material off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

   

Revenue recognition

 

   

Fair value of acquired assets

 

   

Research and development

 

   

Fair value measurements

 

   

Amortization and impairment of intangible assets

 

   

Share-based compensation

During the three months ended June 30, 2013, there were no significant changes in our critical accounting policies and estimates. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 for a more complete discussion of our critical accounting policies and estimates.

 

41


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates.

The primary objective of our investment activities is to preserve capital, while at the same time maximizing yields without significantly increasing risk. We do not utilize hedging contracts or similar instruments.

We are exposed to certain market risks. Our primary exposures relate to (1) interest rate risk on our investment portfolio, (2) credit risk of the companies’ bonds in which we invest, (3) interest rate risk on borrowings under the Credit Facility, (4) general credit market risks as have existed since late 2007 and (5) the financial viability of the institutions which hold our capital and through which we have invested our funds. We manage such risks on our investment portfolio by investing in highly liquid, highly rated instruments and not investing in long-term maturity instruments.

In response to the dislocation in the credit markets since the latter part of 2007, in early 2008 we converted substantially all of our investments, including all of our market auction debt securities, into highly liquid and safe instruments. Our investments, as of June 30, 2013 and 2012, were primarily in money market accounts, short-term corporate bonds, certificates of deposit, U.S. Treasury bills and U.S. Treasury-backed securities. We believe the financial institutions through which we have invested our funds are strong and well capitalized and our instruments are held in accounts segregated from the assets of the institutions. However, due to the current extremely volatile financial and credit markets and liquidity crunch faced by many banking institutions, the financial viability of these institutions, and the safety and liquidity of our funds are being constantly monitored. Because of our ability to generally redeem these investments at par on short notice and without penalty, we believe that changes in interest rates would have an immaterial effect on the fair value of these investments. If a 10% change in interest rates were to have occurred on June 30, 2013 or 2012, any decline in the fair value of our investments or increase in our obligations under our credit agreement (described below) would not be material in the context of our condensed consolidated financial statements. In addition, we are exposed to certain market risks associated with credit ratings of corporations whose corporate bonds we may purchase from time to time. If these companies were to experience a significant detrimental change in their credit ratings, the fair market value of such corporate bonds may significantly decrease. If these companies were to default on these corporate bonds, we may lose part or all of our principal. We believe that we effectively manage this market risk by diversifying our investments and investing in highly rated securities.

In addition, we are exposed to foreign currency exchange rate fluctuations relating to payments we make to vendors, suppliers and license partners using foreign currencies.

In connection with our acquisition of Allos Therapeutics, Inc. in September 2012, we entered into a credit agreement with Bank of America, N.A. as the administrative agent and Wells Fargo Bank, N.A. as an initial lender for a $75 million revolving line of credit. This line of credit was reduced to $50 million on July 16, 2013 in connection with our acquisition of Talon Therapeutics. Inc. and can be increased to $100 million, subject to meeting certain customary conditions and obtaining commitments for such increase from our lenders. The credit agreement contains certain financial covenants and expires on September 5, 2014.

 

ITEM 4. CONTROLS AND PROCEDURES

We have established disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Acting Chief Financial Officer (our principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.

As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2013, the end of the period covered by this quarterly report. Based on the foregoing, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective.

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

42


Table of Contents

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls.

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Shareholder Litigation

John Perry v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 14, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00433-LDG-CWH); Junqian Carroll v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00498-RBJ-CF); Gary Santi v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00502-LDG-CWH); William Skene v. Spectrum Pharmaceuticals, Inc. et al. (Filed April 10, 2013 in United States District Court, District of Nevada; Case Number 3:2013-cv-00175-RBJ-VPC); and Rubin v. Spectrum Pharmaceuticals, Inc. et al. (Filed April 24, 2013 in the United States District Court, District of Nevada; Case Number 3:2013-cv-00212-RCJ-VPC). These putative class actions raise substantially identical claims and allegations against defendants Spectrum Pharmaceuticals, Inc., Dr. Rajesh C. Shrotriya, Brett L. Scott, and Joseph Kenneth Keller. The alleged class period is August 8, 2012 to March 12, 2013. The lawsuits allege a violation of Section 10(b) of the Securities Exchange Act of 1934 against all defendants and control person liability, as a violation of Section 20(b) of the Securities Exchange Act of 1934, against the individual defendants. The claims purportedly stem from the Company’s March 12, 2013 press release, in which it announced that it anticipated a change in ordering patterns of FUSILEV. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints further allege that during the putative class period certain defendants made misleadingly optimistic statements about FUSILEV sales, which inflated the trading price of Company stock. The lawsuits seek relief in the form of monetary damages, costs and fees, and any other equitable or injunctive relief that the court deems appropriate. The putative class action cases have been consolidated. Plaintiffs’ counsel have filed motions for the appointment of a lead plaintiff and lead plaintiff’s legal counsel. The motions are briefed. Plaintiffs’ counsel represent that an amended complaint will be filed following the Court’s decision on lead plaintiff and lead plaintiffs’ legal counsel.

Timothy Fik v. Rajesh C. Shrotriya, et al. (Filed April 11, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00624-JCM-CWH); Christopher J. Watkins v. Rajesh C. Shrotriya, et al. (Filed April 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00684-JCM-VCF); and Stefan Muenchhagen v. Rajesh C. Shrotriya, et al. (Filed May 28, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00942-APG-PAL). These derivative complaints are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum Pharmaceuticals, Inc. against defendants Krishan K. Arora, Gilles Gagnon, Anton Gueth, Joseph Kenneth Keller, Stuart M Krassner, Luigi Lenaz, Anthony E. Maida, Brett L. Scott and Dr. Rajesh C. Shrotriya. The Fik and Watkins lawsuits allege six counts against all defendants: breach of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; unjust enrichment; abuse of control; gross mismanagement; and waste of corporate assets. The Fik and Watkins lawsuits also allege a seventh count for breach of fiduciary duties for insider selling and misappropriation of information against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida. The Muenchhagen lawsuit alleges five counts against all defendants: breach of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; abuse of control; gross mismanagement; and waste of corporate assets. The Muenchhagen lawsuit also alleges two counts against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida for unjust enrichment and for breach of fiduciary duties for insider selling and misappropriation of information. These substantially identical complaints allege that defendants knew or should have known that the Company’s statements about future FUSILEV sales were misleadingly optimistic and that these statements inflated the trading price of Company stock. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints seek compensatory damages, corporate governance reforms, restitution and disgorgement of defendants’ alleged profits, and costs and fees. The Fik and Watkins cases have been consolidated and stayed. The parties have submitted a notice to consolidate and stay the Muenchhagen case.

Hardik Kakadia v. Rajesh C. Shrotriya, et al. (Filed April 23, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-680643-B); and Joel Besner v. Rajesh C. Shrotriya, et al. (Filed May 31, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-682668-C). These derivative complaints are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum Pharmaceuticals, Inc. against

 

43


Table of Contents

defendants Krishan K. Arora, Gilles Gagnon, Anton Gueth, Joseph Kenneth Keller, Stuart M Krassner, Luigi Lenaz, Anthony E. Maida, Brett L. Scott and Dr. Rajesh C. Shrotriya. The Kakadia lawsuit alleges three counts against all defendants: breach of fiduciary duty; waste of corporate assets; and unjust enrichment. The Besner lawsuit alleges five counts against all defendants: breach of fiduciary duty for disseminating false and misleading information; breach of fiduciary duty for failing to properly oversee and manage the company; abuse of control; gross mismanagement; and waste of corporate assets. The Besner lawsuit also alleges two counts against defendants Dr. Raj Shrotriya, Brett Scott, and Anthony Maida for unjust enrichment and for breach of fiduciary duties for insider selling and misappropriation of information. The complaints similarly allege that defendants knew or should have known that the Company’s statements about future FUSILEV sales were misleadingly optimistic and that these statements inflated the trading price of Company stock. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints seek compensatory damages, corporate governance reforms, restitution and disgorgement of defendants’ alleged profits, equitable and/or injunctive relief, and costs and fees. The cases have been consolidated and stayed.

SEC Subpoena

On April 1, 2013, the Company received a subpoena from the Securities and Exchange Commission (the “SEC”) for documents pursuant to a formal order of investigation. The subpoena followed the Company’s March 12, 2013 announcement that it anticipated a change in ordering patterns of FUSILEV. The Company is cooperating with the SEC investigation. The Company cannot predict when the SEC will conclude its investigation or the outcome of the investigation.

We are involved with various legal matters arising in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. Although the ultimate resolution of these various matters cannot be determined at this time, we do not believe that such matters, individually or in the aggregate, will have a material adverse effect on our condensed consolidated results of operations, cash flows or financial condition.

 

ITEM 1A. RISK FACTORS

The risks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all of the risks that we face. Our business, financial condition and results of operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial. There have been no material changes to the “Risk Factors” section included in our 2012 Annual Report.

 

44


Table of Contents
ITEM 6. EXHIBITS

 

Exhibit
Number

  

Description

  10.1+   

Amended and Restated License, Development and Commercialization Agreement dated as of May 29, 2013, by and between Allos Therapeutics, Inc. and Mundipharma International Corporation Limited. Confidential portions omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934 as amended.

  10.2+   

Amended and Restated Supply Agreement dated as of May 29, 2013, by and between Allos Therapeutics, Inc. and Mundipharma Medical Company. Confidential portions omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.

  31.1+   

Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  31.2+   

Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  32.1*    Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
  32.2*    Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
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.

 

+ Filed herewith.
* Furnished herewith.

 

45


Table of Contents

SIGNATURES

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

 

    SPECTRUM PHARMACEUTICALS, INC.
Date: August 9, 2013     By:  

/s/ Kurt A. Gustafson

      Kurt A. Gustafson
      Executive Vice President and Chief Financial Officer
      (Authorized Signatory and Principal Financial and Accounting Officer)

 

46


Table of Contents

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description

  10.1+   

Amended and Restated License, Development and Commercialization Agreement dated as of May 29, 2013, by and between Allos Therapeutics, Inc. and Mundipharma International Corporation Limited. Confidential portions omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934 as amended.

  10.2+   

Amended and Restated Supply Agreement dated as of May 29, 2013, by and between Allos Therapeutics, Inc. and Mundipharma Medical Company. Confidential portions omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.

  31.1+   

Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  31.2+   

Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  32.1*    Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
  32.2*    Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
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.

 

+ Filed herewith.
* Furnished herewith.

 

47

EX-10.1

Exhibit 10.1

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT MARKED WITH [***] HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT, AS AMENDED.

 

 

EXECUTION VERSION

AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION

AGREEMENT

by and between

ALLOS THERAPEUTICS, INC.,

a Delaware corporation

and

MUNDIPHARMA INTERNATIONAL CORPORATION LIMITED,

a Bermuda corporation


TABLE OF CONTENTS

 

     Page  

ARTICLE 1 DEFINITIONS

     2   

ARTICLE 2 LICENSES

     16   

2.1 Licenses to Mundipharma

     16   

2.2 License to Allos

     19   

2.3 Negative Covenant

     20   

2.4 No Implied Licenses

     20   

ARTICLE 3 GOVERNANCE

     20   

3.1 Joint Product Committee

     20   

3.2 Joint Manufacturing Committee

     23   

3.3 Good Faith

     23   

3.4 Scope of Governance

     23   

ARTICLE 4 PRODUCT DEVELOPMENT

     23   

4.1 Overview

     23   

4.2 Development Plan

     24   

4.3 Omitted

     25   

4.4 Future Development Activities

     25   

4.5 Development Costs

     29   

4.6 Diligence

     29   

4.7 Investigator Sponsored Studies

     29   

4.8 Data Exchange and Use

     30   

4.9 Development Reports

     30   

4.10 Development Records

     31   

4.11 Compliance with Laws

     31   

4.12 Allos’ Other Licensees

     31   

ARTICLE 5 REGULATORY MATTERS

     31   

5.1 Regulatory Responsibilities in the Licensed Territory

     31   

5.2 Regulatory Responsibilities in the Allos Territory

     33   

5.3 Regulatory Costs

     34   

5.4 Rights of Reference to Regulatory Materials

     34   

5.5 No Harmful Actions

     35   

5.6 Notification of Threatened Action

     35   

5.7 Adverse Event Reporting and Safety Data Exchange

     35   

5.8 Remedial Actions

     35   

 

i


TABLE OF CONTENTS

(Continued)

 

     Page  

ARTICLE 6 COMMERCIALIZATION

     36   

6.1 Overview of Commercialization in the Licensed Territory

     36   

6.2 Commercialization Plan for Licensed Territory

     36   

6.3 Pricing

     37   

6.4 Pricing Approval

     37   

6.5 Reimbursement Approval

     37   

6.6 Commercial Diligence

     37   

6.7 Cross-Territorial Restrictions

     38   

6.8 Territorial Coordination

     39   

6.9 Reports

     40   

ARTICLE 7 COMPENSATION

     40   

7.1 Upfront Payment

     40   

7.2 Reimbursement of Joint Development Costs

     40   

7.3 Milestone Payments

     41   

7.4 Royalties

     42   

7.5 Blocked Currency

     44   

7.6 Foreign Exchange

     44   

7.7 Payment Method; Late Payments

     45   

7.8 Records

     45   

7.9 Audits

     45   

7.10 Taxes

     46   

ARTICLE 8 INTELLECTUAL PROPERTY MATTERS

     47   

8.1 Ownership of Inventions

     47   

8.2 Disclosure of Inventions; Patent Strategy Consultation

     48   

8.3 Prosecution of Patents

     48   

8.4 Patent Enforcement in the Licensed Territory

     49   

8.5 Patent Enforcement in the Allos Territory

     50   

8.6 PDX Patents

     51   

8.7 Infringement of Third Party Rights in the Licensed Territory

     51   

8.8 Patent Marking

     52   

8.9 Trademark Matters

     52   

ARTICLE 9 REPRESENTATIONS AND WARRANTIES; COVENANTS

     56   

9.1 Mutual Representations and Warranties

     56   

9.2 Additional Representations and Warranties of Allos

     57   

 

ii


TABLE OF CONTENTS

(Continued)

 

     Page  

9.3 Additional Representations and Warranties of Mundipharma

     61   

9.4 Covenants

     61   

9.5 No Other Representations or Warranties

     63   

ARTICLE 10 INDEMNIFICATION

     63   

10.1 Indemnification by Allos

     63   

10.2 Indemnification by Mundipharma

     63   

10.3 Shared Claims

     64   

10.4 Indemnification Procedures

     64   

10.5 Limitation of Liability

     65   

10.6 Insurance

     65   

ARTICLE 11 CONFIDENTIALITY

     65   

11.1 Confidentiality

     65   

11.2 Authorized Disclosure

     66   

11.3 Technical Publication

     66   

11.4 Publicity; Terms of Agreement

     67   

11.5 Prior Confidentiality Agreements

     68   

11.6 Return of Confidential Information

     68   

11.7 Unauthorized Use

     68   

11.8 Exclusive Property

     68   

ARTICLE 12 TERM AND TERMINATION

     69   

12.1 Term

     69   

12.2 Termination for Breach

     69   

12.3 Termination for Patent Challenge

     69   

12.4 Unilateral Termination by Mundipharma

     69   

12.5 Termination for Bankruptcy

     71   

12.6 Effect of Termination

     72   

12.7 Survival

     75   

ARTICLE 13 DISPUTE RESOLUTION

     76   

13.1 Arbitration

     76   

13.2 Referred from JPC

     76   

13.3 Equitable Relief

     77   

13.4 Governing Law

     77   

13.5 Patent and Trademark Disputes

     77   

 

iii


TABLE OF CONTENTS

(Continued)

 

     Page  

ARTICLE 14 MISCELLANEOUS

     77   

14.1 Entire Agreement; Amendment

     77   

14.2 Force Majeure

     78   

14.3 Notices

     78   

14.4 No Strict Construction; Interpretation; Headings

     79   

14.5 Assignment

     80   

14.6 Performance by Affiliates

     80   

14.7 Further Actions

     80   

14.8 Severability

     80   

14.9 No Waiver

     80   

14.10 Independent Contractors

     80   

14.11 English Language

     81   

14.12 Counterparts

     81   

14.13 Non-Solicitation of Employees

     81   

14.14 Expenses

     81   

14.15 Intellectual Property

     81   

14.16 Modification of Licensed Territory

     81   

14.17 Switzerland Option

     82   

14.18 Amendment and Restatement

     82   

 

iv


AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION

AGREEMENT

This AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (this “Agreement”) is entered into as of May 29, 2013 (the “Effective Date”) by and between ALLOS THERAPEUTICS, INC., a Delaware corporation having a place of business at 11080 Circle Point Road, Suite 430, Westminster, Colorado 80020, U.S. (“Allos”), and MUNDIPHARMA INTERNATIONAL CORPORATION LIMITED, a Bermuda corporation having a place of business at Mundipharma House, 14 Par-la-Ville Road, P.O. Box HM 2332, Hamilton HM JX, Bermuda (“Mundipharma”). Allos and Mundipharma are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.

RECITALS

WHEREAS, Allos has rights to a proprietary anti-folate product known as pralatrexate (tradename Folotyn), which has received an accelerated regulatory approval in the U.S. for treatment of patients with relapsed or refractory peripheral T-cell lymphoma and for which a drug approval application has been submitted to the European Medicines Agency for treatment of patients with relapsed or refractory peripheral T-cell lymphoma;

WHEREAS, Mundipharma possesses resources and expertise in the development, manufacture, marketing and commercialization of pharmaceutical products;

WHEREAS, Allos and Mundipharma entered into that certain License, Development and Commercialization Agreement, dated as of May 10, 2011 (the “Original Agreement”), pursuant to which Allos and Mundipharma agreed to collaborate to pursue regulatory approval of Folotyn for relapsed or refractory peripheral T-cell lymphoma by the EMA, and in other countries in the Licensed Territory, and to collaborate in the development of Folotyn in other Oncology Indications, all pursuant to a mutually agreed development plan, with Mundipharma having exclusive rights to develop and commercialize Folotyn for all indications in the Licensed Territory, and Allos retaining all other Folotyn commercialization rights, all on the terms and conditions set forth herein;

WHEREAS, Mundipharma or its designee and Allos also entered into a separate Supply Agreement, dated as of May 10, 2011, as amended and restated as of the date hereof (the “Supply Agreement”), pursuant to which Mundipharma or its designee agreed to purchase its requirements of Folotyn from Allos and Allos agreed to supply Folotyn to Mundipharma or its designee on the terms and conditions set forth therein; and

WHEREAS, the Parties desire to amend and restate the Original Agreement in order to modify the scope of the Licensed Territory and the respective Development obligations of the Parties, as more particularly set forth herein.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and conditions contained in this Agreement, the Parties hereby agree as follows:


ARTICLE 1

DEFINITIONS

1.1 Omitted.

1.2 “Acquiror” has the meaning set forth in Section 14.5.

1.3 “Active Pharmaceutical Ingredient” or “API” means [***].

1.4 “Additional Study” has the meaning set forth in Section 4.4(b).

1.5 Omitted.

1.6 “Affiliate” means, with respect to either Party, any person, firm, trust, corporation, partnership or other entity or combination thereof that directly or indirectly controls, is controlled by or is under common control with such Party; the term “control” (including, with correlative meaning, the terms “controlled by” or “under common control with”) meaning direct or indirect ownership of fifty percent (50%) or more, including ownership by trusts with substantially the same beneficial interests, of the voting and equity rights of such person, firm, trust, corporation, partnership or other entity or combination thereof, or the power to direct the management of such person, firm, trust, corporation, partnership or other entity or combination thereof.

1.7 Omitted.

1.8 “Allos-Facilitated ISS” means an ISS that Allos authorizes or facilitates in accordance with Section 4.7.

1.9 “Allos Indemnitees” has the meaning set forth in Section 10.2.

1.10 “Allos ISS Technology” means (a) all Information that (i) is necessary or useful for the Development or Commercialization of a Product in the Field, (ii) is Controlled by Allos or its Affiliates during the Term, and (iii) arises from an Allos-Facilitated ISS, and (b) any Patent (other than a Joint Patent) that (x) claims the Product or the API or the manufacture or use in the Field of the Product or the API, (y) is Controlled by Allos or its Affiliates during the Term, and (z) claims an invention arising from an Allos-Facilitated ISS; provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Allos after the Effective Date due to a Change of Control of Allos, except to the extent such Third Party’s Information or Patents are Controlled by Allos (or its Acquiror) or any of its other Affiliates and are necessary for the Development or Commercialization of the Product and are utilized in respect of the Product or the API in the Allos Territory.

1.11 “Allos Know-How” means all Information that (a) is necessary or useful for the Development or Commercialization of a Product in the Field but is not directed to the manufacture of a Product and (b) (i) is Controlled by Allos or its Affiliates as of the Effective Date or (ii) is Controlled by Allos or its Affiliates during the Term and arises from a Shared Study (including any Incremental Study that becomes an Additional Study upon Mundipharma’s exercise of the Opt-In

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

2


Right under Section 4.4(c)(v)); provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Allos after the Original Effective Date due to a Change of Control of Allos, except to the extent such Third Party’s Information is Controlled by Allos (or its Acquiror) or any of its other Affiliates and is necessary for the Development or Commercialization of the Product and is utilized in respect of the Product or the API in the Allos Territory; and provided further that, “Allos Know-How” excludes (x) Information arising from any Incremental Study (with respect to which Mundipharma does not exercise its Opt-In Right under Section 4.4(c)(v)) or Investigator-Sponsored Study, and (y) Allos Manufacturing Know-How.

1.12 “Allos Manufacturing Know-How” means all Information that is necessary or useful for the manufacture and quality testing of a Product in the Field and is Controlled by Allos or its Affiliates as of the Effective Date or during the Term; provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Allos after the Original Effective Date due to a Change of Control of Allos, except to the extent such Third Party’s Information is Controlled by Allos (or its Acquiror) or any of its other Affiliates and is necessary for the manufacture of, and is utilized by or on behalf of Allos in respect of, the Product or the API in the Allos Territory or the Licensed Territory.

1.13 “Allos Patent” means any Patent (other than a Joint Patent) that (a) claims the Product or the API or the manufacture or use in the Field of the Product or the API and (b) (i) is Controlled by Allos or its Affiliates during the Term, (ii) is Controlled by Allos or its Affiliates on or after the Original Effective Date and claims priority to a Patent Controlled by Allos or its Affiliates as of the Original Effective Date, or (iii) is Controlled by Allos or its Affiliates during the Term and claims an invention arising from a Shared Study (including any Incremental Study that becomes an Additional Study upon Mundipharma’s exercise of the Opt-In Right under Section 4.4(c)(v)); provided, each Allos Patent in existence on the Original Effective Date is set forth in Schedule 1 hereto; and provided further that (i) the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Allos after the Original Effective Date due to a Change of Control of Allos, except to the extent such Third Party’s Patents are Controlled by Allos (or its Acquiror) or any of its other Affiliates and are necessary for the Development, Commercialization or manufacture of the Product and are utilized in respect of the Product or the API in the Allos Territory and (ii) “Allos Patent” excludes any Patent that claims an invention arising from an Incremental Study (with respect to which Mundipharma does not exercise its Opt-In Right under Section 4.4(c)(v)) or Investigator-Sponsored Study.

1.14 “Allos Payment-Allos Withholding Tax Action” has the meaning set forth in Section 7.10(d)(i).

1.15 “Allos Payment-Mundipharma Withholding Tax Action” has the meaning set forth in Section 7.10(d)(ii).

1.16 Allos Prosecuted Patents has the meaning set forth in Section 8.3(a).

1.16A “Allos Required Study” means those clinical trials and/or studies set forth on the Allos Required Studies Schedule with the scope and manner of conducting such clinical trials and/or studies being that required by FDA for Regulatory Approval in the U.S. as of the Effective Date.

 

3


1.16B “Allos Required Studies Schedule” means the schedule containing those clinical trials and/or studies, which Allos is required to conduct in order to maintain its U.S. Regulatory Approvals, which is set forth in the Second Letter Agreement and as may be amended from time to time to, among other things, remove the clinical trials and/or studies that (a) are no longer required by the FDA for Regulatory Approval or maintenance of Regulatory Approval in the U.S., or (b) for Material Impact or Safety Reason.

1.17 “Allos Share” means sixty percent (60%).

1.18 Omitted.

1.19 “Allos Studies” has the meaning set forth in Section 4.2(b).

1.20 “Allos Technology” means the Allos Know-How, Allos Patents and Allos’ interest in Joint Patents.

1.21 “Allos Territory” means the U.S., Canada, the European Countries and Turkey and (i) any country(ies) that is/are removed from the Licensed Territory and transferred to Allos Territory in accordance with Section 6.6(b), and (ii) Switzerland, upon the exercise by Allos of the Switzerland Option.

1.22 “Allos Territory Infringement” has the meaning set forth in Section 8.5(a).

1.23 “Amended Development Plan” has the meaning set forth in Section 4.2(b).

1.24 Omitted.

1.25 “Bankruptcy Code” means, as applicable, the U.S. Bankruptcy Code, as amended from time to time, and the rules and regulations and guidelines promulgated thereunder or the bankruptcy laws of any Governmental Authority, as amended from time to time, and the rules and regulations and guidelines promulgated thereunder.

1.26 “Breaching Party” has the meaning set forth in Section 12.2.

1.27 “Bulk Product” has the meaning set forth in the Supply Agreement.

1.28 “Canada” means Canada, including all possessions and territories thereof.

1.29 “Change of Control” means, with respect to either Party, (i) the sale of all or substantially all of such Party’s assets or business relating to this Agreement; (ii) a merger, consolidation, share exchange or other similar transaction involving such Party and any Third Party which results in the holders of the outstanding voting securities of such Party immediately prior to such merger, consolidation, share exchange or other similar transaction ceasing to hold more than fifty percent (50%) of the combined voting power of the surviving, purchasing or continuing entity immediately after such merger, consolidation, share exchange or other similar transaction, or (iii) the acquisition by a person or entity, or group of persons or entities acting in concert, of more than fifty percent (50%) of the outstanding voting equity securities of such Party; in all cases of clauses (i)-(iii), where such transaction is to be entered into with any person or group of persons other than the other Party or its Affiliates.

1.30 “Claims” has the meaning set forth in Section 10.1.

 

4


1.31 “Clinical Proof of Concept” means availability of human clinical data confirming that the concept of a new Indication is feasible and that further investigation is reasonably likely to be capable of Drug Approval and Commercialization; provided, such data, with respect to new Indications, shall include efficacy and safety data from a Phase 1 Study, Phase 1/2 study and/or Phase 2 Study, or, with respect to new formulations or routes of administration, shall include pharmacokinetic data from Phase 1 Studies.

1.32 “CMC Information” means Information related to the chemistry, manufacturing and controls of the Product, as specified by the FDA, EMA and other applicable Regulatory Authorities.

1.33 “Commercialization, with a correlative meaning for “Commercialize” and “Commercializing”, means all activities undertaken before and after obtaining Regulatory Approvals relating specifically to the pre-launch, launch, promotion, detailing, medical education and medical liaison activities, marketing, pricing, reimbursement, sale and distribution of the Product, including strategic marketing, sales force detailing, advertising, medical education and liaison, and market and Product support, and all customer support, Product distribution, invoicing and sales activities; provided, however, “Commercialization” shall exclude any activities relating to the manufacture of the Product.

1.34 “Commercialization Plan” has the meaning set forth in Section 6.2(a).

1.35 Omitted.

1.36 “Conducting Party” has the meaning set forth in Section 4.4(c)(i).

1.37 “Confidential Information” of a Party means any and all Information of such Party or its Affiliates that is disclosed by such Party or its Affiliates to the other Party or its Affiliates under this Agreement or the Supply Agreement, whether in oral, written, graphic, or electronic form.

1.38 “Consent” means the consent and agreement among Allos, the PDX Licensor and Mundipharma, dated as of the Original Effective Date.

1.39 “Control” means, with respect to any material, Information, or intellectual property right, that a Party (a) owns or (b) has a license (other than a license granted to such Party under this Agreement) to such material, Information, or intellectual property right, and in each case, has the ability to grant to the other Party access, a license or a sublicense (as applicable) to the foregoing on the terms and conditions set forth in this Agreement without violating the terms of any then-existing agreement or other arrangement with any Third Party.

1.40 Omitted.

1.41 “Current Third Party Manufacturer” means [***] (each as defined in the Supply Agreement).

1.42 “Default Notice” has the meaning set forth in Section 12.2.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

5


1.43 “Develop” or “Development” means all activities relating to preparing and conducting non-clinical studies, clinical studies, and regulatory activities (e.g., preparation of regulatory applications) that are necessary or useful to obtain and maintain Drug Approval of the Product.

1.44 Omitted.

1.45 “Development Plan” has the meaning set forth in Section 4.2(a).

1.46 “Dollars” means U.S. dollars, and “$” shall be interpreted accordingly.

1.47 “Drug Approval” means an approval granted by the appropriate Regulatory Authority to market the Product in the Field in any particular jurisdiction in the Licensed Territory.

1.48 “Drug Approval Application” or “DAA” means an application to the appropriate Regulatory Authority for approval to market the Product in the Field in any particular jurisdiction in the Licensed Territory.

1.49 “eCTD” has the meaning set forth in Section 5.1(c).

1.50 Omitted.

1.51 “EMA” means the European Medicines Agency or any successor entity.

1.52 “European Countries” means Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Monaco, Montenegro, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

1.53 Omitted.

1.54 Omitted.

1.55 Omitted.

1.56 “Executive Officers” has the meaning set forth in Section 3.1(d).

1.57 “Existing Studies” has the meaning set forth in Section 4.2(b).

1.58 “Expert” has the meaning set forth in Section 6.6(b).

1.59 “FD&C Act” means the U.S. Federal Food, Drug and Cosmetic Act, as amended.

1.60 “FDA” means the U.S. Food and Drug Administration or any successor entity.

1.61 “Field” means the diagnosis or treatment of [***].

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

6


1.62 Omitted.

1.63 Omitted.

1.64 “First Commercial Sale” means, with respect to a particular Product, the first sale to a Third Party of such Product in a given regulatory jurisdiction after Drug Approval has been obtained in such jurisdiction.

1.65 “First Confidentiality Agreement” means the confidentiality agreement between Allos and Mundipharma dated [***].

1.66 Omitted.

1.67 Omitted.

1.68 “First Line PTCL” means treatment of previously undiagnosed PTCL patients or treatment of previously undiagnosed PTCL patients who achieved an objective response following initial treatment with CHOP-based chemotherapy, where “PTCL” for this purpose is defined by the population included in the PDX-017 study or any subsets of such population.

1.69 “First Reimbursable Commercial Sale” means, with respect to a particular Product, the first sale to a Third Party of such Product in a given regulatory jurisdiction after all relevant Regulatory Approvals have been obtained in such jurisdiction.

1.69A “FTE” means the equivalent of the work of one or more full time qualified individuals (e.g., having the requisite education and/or skills in the appropriate scientific or technical discipline to fulfill Mundipharma’s obligations under this Agreement) at Mundipharma or its Affiliates who spend time and effort on a specific project or task in connection with the registration and maintenance of any Regulatory Approvals for the Product in the Field in Switzerland, as measured by Mundipharma’s time allocation practices.

1.70 “Generic Product” means any pharmaceutical product in a particular regulatory jurisdiction that (a) contains the same active pharmaceutical ingredients as the Product; (b) is bioequivalent to the Product as determined by the applicable Regulatory Authority in such jurisdiction; (c) has one or more Regulatory Authority-approved Indications in such jurisdiction equivalent to the Regulatory Authority-approved Indication for the Product in such jurisdiction; and (d) is sold in such jurisdiction by a Third Party that is not a Sublicensee of Mundipharma or its Affiliates, and is not otherwise authorized by Mundipharma or any of its Affiliates, Sublicensees or distributors to sell such product.

1.71 “Good Clinical Practices” or “GCP” means the then-current standards, practices and procedures promulgated or endorsed by the FDA as set forth in the guidelines entitled “Guidance for Industry E6 Good Clinical Practice: Consolidated Guidance,” including related regulatory requirements imposed by the FDA and comparable regulatory standards, practices and procedures promulgated by the EMA or other Regulatory Authority applicable to the Licensed Territory and/or the Allos Territory, as such standards, practices and procedures may be updated from time to time, including applicable quality guidelines promulgated under the ICH.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

7


1.72 “Good Laboratory Practices” or “GLP” means the then-current good laboratory practice standards promulgated or endorsed by the FDA as defined in 21 C.F.R. Part 58, and comparable regulatory standards promulgated by the EMA or other Regulatory Authority applicable to the Licensed Territory and/or the Allos Territory, as such standards may be updated from time to time, including applicable quality guidelines promulgated under the ICH.

1.73 “Good Manufacturing Practices” or “GMP” means the standards relating to current Good Manufacturing Practices for fine chemicals, API, intermediates, bulk products or finished pharmaceutical products set forth in (i) 21 U.S.C. 351(a)(2)(B), in FDA regulations at 21 C.F.R. Parts 210 and 211 and in The Rules Governing Medicinal Products in the European Community, Volume IV, Good Manufacturing Practice for Medicinal Products, or (ii) the ICH Guidelines relating to the manufacture of API and finished pharmaceuticals, as such standards may be updated from time to time, including applicable quality guidelines promulgated under the ICH.

1.74 “Governmental Authority” means any multi-national, federal, state, local, municipal, provincial or other governmental authority of any nature (including any governmental division, prefecture, subdivision, department, agency, bureau, branch, office, commission, council, court or other tribunal).

1.75 “Health Canada” means the Canadian federal government agency responsible for the administration of, inter alia, the Canada Food and Drugs Act, or any successor agency with responsibilities comparable to those of Health Canada.

1.76 “ICH” means the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use.

1.77 “ICH Guidelines” means the guidelines of the ICH.

1.78 “Incremental Study” has the meaning set forth in Section 4.4(c)(i).

1.79 “Indemnified Party” has the meaning set forth in Section 10.4.

1.80 “Indemnifying Party” has the meaning set forth in Section 10.4.

1.81 “Indication” means any disease or condition that can be diagnosed or treated.

1.82 “Information” means any data, results, technology, business or financial information or information of any type whatsoever, in any tangible or intangible form, including know-how, trade secrets, practices, techniques, methods, processes, inventions, developments, specifications, formulations, formulae, materials or compositions of matter of any type or kind (patentable or otherwise), software, algorithms, marketing reports, expertise, technology, test data (including pharmacological, biological, chemical, biochemical, clinical test data and data resulting from non-clinical studies), CMC information, stability data and other study data and procedures.

1.82A “Initial Development Plan” has the meaning set forth in Section 4.2(b).

1.83 “Investigator-Sponsored Study” or “ISS” means a clinical trial on the Product in the Field wherein a Third Party that is not a sublicensee or subcontractor of either Party holds the investigational new drug application or equivalent thereof (if any) for such trial and is solely responsible for all aspects of the trial, including: trial design; ensuring appropriate institutional and

 

8


regulatory approval; conducting such trial, including responsibility for ensuring appropriate medical safeguards, medical monitoring and medical supervision; analysis and interpretation of the results of such trial; and communication (e.g., publications) of the results of such trial; provided, if either Party has any responsibility for any of the foregoing, then such trial shall not be considered an Investigator-Sponsored Study.

1.84 “JAMS Rules” has the meaning set forth in Section 13.1.

1.85 “Japan Milestones” has the meaning set forth in Section 4.6.

1.86 “Japan Milestone Default Notice” has the meaning set forth in Section 12.4A.

1.87 “Joint Development Costs” means all costs reasonably incurred by or on behalf of either Party after the Original Effective Date, including out-of-pocket costs actually incurred by each Party, [***], all as calculated in accordance with U.S. generally accepted accounting principles consistently applied or international financial reporting standards, as applicable, that are reasonably and directly allocable to such Party’s performance of its obligations under this Agreement with respect to any Shared Study (other than an Allos Study), to the extent that such costs do not exceed [***] of the budget therefor as specified in the Initial Development Plan; provided, however, “Joint Development Costs” shall specifically exclude (i) all internal costs, and (ii) any and all costs associated with preparing and filing any and all Regulatory Materials and communicating with any Regulatory Authorities, in each case for the purpose of obtaining and maintaining Regulatory Approval.

1.88 “Joint Inventions” has the meaning set forth in Section 8.1.

1.89 “Joint Manufacturing Committee” or “JMC” has the meaning set forth in Section 3.2.

1.90 “Joint Patents” has the meaning set forth in Section 8.1.

1.91 “Joint Product Committee” or “JPC” has the meaning set forth in Section 3.1.

1.92 “Knowledge” means, with respect to the Party to which such term is attributed, (i) the actual knowledge of: (a) for Allos: [***]; and (b) for Mundipharma, the following executives of Mundipharma or its Affiliates: [***], or (ii) the knowledge that any of the foregoing individuals reasonably should have gained through operating in the ordinary course of business with a level of efforts and resources consistent with the business practices of a similarly sized company with a similarly sized infrastructure to support and carry out its operations.

1.93 “Laws” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, domestic or foreign.

1.94 “Lead Indication” means the treatment of adult patients with relapsed or refractory PTCL, where “PTCL” for this purpose is defined by the population included in the “PROPEL” study (PDX-008) or any subset(s) of such population.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

9


1.95 “Letter Agreement” means the letter agreement between Allos and Mundipharma, dated as of the Original Effective Date, in respect of (i) the Initial Development Plan and (ii) Allos’ registered domain names.

1.96 “Licensed Marks” has the meaning set forth in Section 8.9(a).

1.97 “Licensed Territory” means all countries of the world excluding those in the Allos Territory.

1.98 “Licensed Territory Infringement” has the meaning set forth in Section 8.4(a).

1.99 “Major Market Countries” means [***].

1.100 “Material Impact” means, with respect to a Party, a material adverse impact on the regulatory status or the commercial sales of the Product in such Party’s applicable territory.

1.101 “MMCO” means Mundipharma Medical Company, a partnership organized under the laws of Bermuda, and an Affiliate of Mundipharma.

1.102 “Mundipharma-Facilitated ISS” means an ISS that Mundipharma authorizes or facilitates in accordance with Section 4.7.

1.103 “Mundipharma Indemnitees” has the meaning set forth in Section 10.1.

1.104 “Mundipharma ISS Technology” means (a) all Information that (i) is necessary or useful for the Development or Commercialization of a Product in the Field, (ii) is Controlled by Mundipharma or its Affiliates during the Term, and (iii) arises from a Mundipharma-Facilitated ISS, and (b) any Patent (other than a Joint Patent) that (x) claims the Product or the API or the manufacture or use in the Field of the Product or the API, (y) is Controlled by Mundipharma or its Affiliates during the Term, and (z) claims an invention arising from a Mundipharma-Facilitated ISS; provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Mundipharma after the Effective Date due to a Change of Control of Mundipharma, except to the extent such Third Party’s Information or Patents are Controlled by Mundipharma (or its Acquiror) or any of its other Affiliates and are necessary for the Development or Commercialization of the Product and are utilized in respect of the Product or the API in the Licensed Territory.

1.105 “Mundipharma Know-How” means all Information that (a) is necessary or useful for the Development or Commercialization of a Product in the Field and (b) is Controlled by Mundipharma or its Affiliates during the Term and arises from a Shared Study (including any Incremental Study that becomes an Additional Study upon Allos’ exercise of the Opt-In Right under Section 4.4(c)(v)); provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Mundipharma after the Original Effective Date due to a Change of Control of Mundipharma, except to the extent such Third Party’s Information is Controlled by Mundipharma (or its Acquiror) or any of its other Affiliates and is necessary for the Development or Commercialization of the Product and is utilized in respect of the Product or the API in the Licensed Territory; and provided further that “Mundipharma Know-How” excludes Information arising from any Incremental Study (with respect to which Allos does not exercise its Opt-In Right under Section 4.4(c)(v)) or Investigator-Sponsored Study.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

10


1.106 “Mundipharma Patent” means any Patent (other than a Joint Patent) that (a) claims the Product or the API or the manufacture or use in the Field of the Product or the API and (b) is Controlled by Mundipharma or its Affiliates during the Term and claims an invention arising from a Shared Study (including any Incremental Study that becomes an Additional Study upon Allos’ exercise of the Opt-In Right under Section 4.4(c)(v)); provided, the use of “Affiliate” in this definition shall exclude any Third Party that becomes an Affiliate of Mundipharma after the Original Effective Date due to a Change of Control of Mundipharma, except to the extent such Third Party’s Patents are Controlled by Mundipharma (or its Acquiror) or any of its other Affiliates and are necessary for the Development or Commercialization of the Product and are utilized in respect of the Product or the API in the Licensed Territory; and provided further that “Mundipharma Patent” excludes any Patent that claims an invention arising from any Incremental Study (with respect to which Allos does not exercise its Opt-In Right under Section 4.4(c)(v)) or Investigator-Sponsored Study.

1.107 “Mundipharma Payment-Allos Withholding Tax Action” has the meaning set forth in Section 7.10(c)(ii).

1.108 “Mundipharma Payment-Mundipharma Withholding Tax Action” has the meaning set forth in Section 7.10(c)(i).

1.109 “Mundipharma Share” means forty percent (40%).

1.110 “Mundipharma Sublicense Agreement” has the meaning set forth in Section 2.1(f)(ii).

1.111 “Mundipharma Technology” means the Mundipharma Know-How, Mundipharma Patents and Mundipharma’s interest in Joint Patents.

1.111A “Mundipharma Total Switzerland Costs” means the actual out-of-pocket and FTE costs and expenses incurred by Mundipharma in connection with registering and maintaining any Regulatory Approvals for the Product in the Field in Switzerland.

1.112 “Net Sales” means, with respect to any Product, the total amount invoiced by Mundipharma, its Affiliates or Sublicensees to each Third Party receiving Product in an arms length transaction, less: (a) [***]; (b) [***]; (c) [***]; and (d) [***].

For purposes of this definition of “Net Sales”, if Mundipharma, its Affiliate or sublicensee sells a Product in the form of a combination product containing one or more active ingredients in addition to Product, “Net Sales” for such combination product will be calculated by multiplying actual Net Sales thereof by the fraction A/(A+B) where A is the invoice price of the Product if sold separately, and B is the total invoice price of the other active ingredient or ingredients in the combination, if sold separately. If, on a country-by-country basis, the other active ingredient or ingredients in the combination are not sold separately in said country, “Net Sales” shall be calculated by multiplying

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

11


actual Net Sales thereof by the fraction A/C where A is the invoice price of the Product if sold separately, and C is the invoice price of the combination product. If, on a country-by-country basis, the Product is not sold separately in said country, “Net Sales” shall be determined by the Parties in good faith on the basis of the fair market value of the Product. With respect to any transfer of any Product in a given country for any substantive consideration other than monetary consideration on arms length terms, for purposes of calculating “Net Sales” under this Agreement, such Product shall be deemed to be sold exclusively for money at the average Net Sales price charged to Third Parties for cash sales in such country during the applicable reporting period (or if there were only de minimus cash sales in such country, at the fair market value as determined by comparable markets).

1.113 “New Compound” means (i) any active pharmaceutical ingredient other than the API, or (ii) any pharmaceutical product containing an active pharmaceutical ingredient other than the API (excluding any combination product containing the API).

1.114 “New Form” means a form of API (as defined in this Agreement) or Product that is different from API (as defined in the Supply Agreement) or Bulk Product, respectively.

1.115 “Non-Breaching Party” has the meaning set forth in Section 12.2.

1.116 “Non-Conducting Party” has the meaning set forth in Section 4.4(c)(i).

1.117 “Non-Governmental Authority” means any public body (including the National Institute of Clinical Excellence and the Scottish Medicines Consortium in the U.K.; the Institute for Quality and Efficiency in Healthcare in Germany; the Technical Scientific Commission in Italy; the Directorate of Pharmacy and Healthcare Products in Spain; and the National Union of Health Insurance Funds and the National Authority of Health in France) or non-Governmental Authority (including “Sick Funds” in Germany) with the authority to control, approve, recommend or otherwise determine pricing and reimbursement of pharmaceutical products, including those with authority to enter into risk sharing schemes and/or to impose retroactive price reductions, discounts, or rebates.

1.118 “Non-Oncology Indication” means any Indication that is not an Oncology Indication.

1.119 “Oncology Indication” means any Indication in the field of oncology, as defined by the American Cancer Society, including all Indications listed in Exhibit A.

1.120 “Opt-In Estimate” has the meaning set forth in Section 4.4(c)(v).

1.121 “Opt-In Option Date” has the meaning set forth in Section 4.4(c)(v).

1.122 “Opt-In Payment” has the meaning set forth in Section 4.4(c)(v).

1.123 “Opt-In Right” has the meaning set forth in Section 4.4(c)(v).

1.123A “Original Effective Date” means May 10, 2011.

1.124 “Other Committees” has the meaning set forth in Section 3.1(a)(xvi).

 

12


1.125 “Patents” means (a) pending patent applications, issued patents, utility models and designs; (b) reissues, substitutions, confirmations, registrations, validations, re-examinations, additions, continuations, continued prosecution applications, continuations-in-part, or divisions of or to any of the foregoing; (c) any other patent application claiming priority to any of the foregoing anywhere in the world; and (d) extension, renewal or restoration of any of the foregoing by existing or future extension, renewal or restoration mechanisms, including supplementary protection certificates or the equivalent thereof.

1.126 “Payee” has the meaning set forth in Section 7.7.

1.127 “PDX Breach” has the meaning set forth in Section 12.4(c)(i).

1.128 “PDX License Agreement” means the License Agreement dated as of December 23, 2002 by and among Allos, SRI International, Sloan-Kettering Institute for Cancer Research and Southern Research Institute, as amended.

1.129 “PDX Licensor” means, collectively, SRI International, Sloan-Kettering Institute for Cancer Research and Southern Research Institute, and any successors thereto.

1.130 “PDX Patents” means the Allos Patents licensed by Allos from the PDX Licensor under the PDX License Agreement, which Patents in existence on the Original Effective Date are shown in Schedule 1 with the PDX Licensor listed as the “Registered Proprietor”.

1.131 “Pediatric Studies” has the meaning set forth in Section 4.2(b).

1.132 “Percentage Market Penetration” means the percentage obtained by dividing [***] by the [***].

1.133 “Percentage Price Reduction” means the percentage by which [***] is reduced, as compared to the [***], as a result of (x) [***] or (y) [***].

1.134 “Pharmacovigilance Agreement” has the meaning set forth in Section 5.7.

1.135 “Phase 1 Study” means a human clinical trial of the Product with the endpoint of determining initial tolerance, safety or pharmacokinetic information in single dose, single ascending dose, multiple dose and/or multiple ascending dose regimens, as described in 21 C.F.R. § 312.21(a) (or its successor regulation) or the equivalent thereof in any jurisdiction outside the U.S.

1.136 “Phase 2 Study” means a human clinical trial of the Product, the principal purpose of which is a preliminary determination of safety and efficacy in the target patient population over a range of doses and dose regimens, as described in 21 C.F.R. § 312.21(b) (or its successor regulation) or the equivalent thereof in any jurisdiction outside the U.S.

1.137 “Pricing Approval” means the governmental approval, agreement, determination or decision establishing prices for the Product that can be charged in regulatory jurisdictions where the applicable Governmental Authorities approve or determine the price of pharmaceutical products.

1.138 “Primary Agreement” has the meaning set forth in Section 9.2(u).

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

13


1.139 “Product” means any pharmaceutical product containing the API, [***], or any improvement made by Allos or Mundipharma to the API, [***] developed by Allos or Mundipharma pursuant to the terms of this Agreement; provided, however, that notwithstanding the foregoing, except as provided in Section 9.4(m), Mundipharma shall have no rights or licenses under this Agreement in or to any New Compound that is Controlled by Allos or its Affiliates.

1.140 “Proposed Study” has the meaning set forth in Section 4.4(a).

1.141 “PSURs” has the meaning set forth in Section 5.1(b).

1.142 “PTCL” means peripheral T-cell lymphoma.

1.143 “Publication” has the meaning set forth in Section 11.3.

1.144 “Reasonably Diligent Efforts” means, with respect to a Party’s obligations under this Agreement, the carrying out of such obligations with a level of efforts and resources consistent with the commercially reasonable practices of a similarly sized company [***]; provided, “Reasonably Diligent Efforts” shall (i) [***]; and (ii) require that the Party: (a) [***], (b) [***]; and provided further, that “Reasonably Diligent Efforts” (i) with respect to [***], requires that [***], or (ii) [***].

1.145 “Regulatory Approval” means (i) Drug Approval and all other approvals necessary for the commercial sale of the Product in a given country or regulatory jurisdiction; (ii) Pricing Approval (but only in those countries or regulatory jurisdictions where Pricing Approval is required by applicable Law for commercial sale); and (iii) Reimbursement Approval, but only in those countries or regulatory jurisdictions where Reimbursement Approval is required for the price paid for the Product to be reimbursed by a Governmental Authority or a Non-Governmental Authority with the authority to approve reimbursement.

1.146 “Regulatory Authority” means, in a particular country or jurisdiction, any applicable Governmental Authority or Non-Governmental Authority involved in granting Regulatory Approval in such country or jurisdiction.

1.147 “Regulatory Materials” means regulatory applications, submissions, notifications, communications, correspondence, registrations, drug approvals and/or other filings made to, received from or otherwise conducted with a Regulatory Authority in order to Develop, manufacture, market, sell or otherwise Commercialize the Product in a particular country or jurisdiction.

1.148 “Regulatory Plan” means a plan regarding the timing and approach to preparing, submitting or reviewing Regulatory Materials and obtaining and maintaining Drug Approval in the Licensed Territory.

1.149 “Reimbursement Approval” means the approval, agreement, determination or decision recommending or approving the Product for use and/or establishing the prices for the Product that can be reimbursed in regulatory jurisdictions where the applicable Governmental Authority or Non-Governmental Authority approves, determines or recommends the reimbursement or use of pharmaceutical products.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

14


1.150 “Related Study” has the meaning set forth in Section 4.4(d).

1.151 “Remedial Action” has the meaning set forth in Section 5.8.

1.151A “Required Additional Study Election” has the meaning set forth in Section 5.2(d).

1.152 “Royalty Term” has the meaning set forth in Section 7.4(b).

1.153 “Safety Reason” has the meaning set forth in Section 13.2(a).

1.154 “SEC” has the meaning set forth in Section 11.4(d).

1.155 Omitted.

1.156 Omitted.

1.157 “Second Confidentiality Agreement” means the confidentiality agreement between Allos and Mundipharma Pharmaceuticals Inc. dated [***].

1.158 “Second Letter Agreement” means the letter agreement between Allos and Mundipharma, dated [***].

1.159 Omitted.

1.160 Omitted.

1.161 “Shared Claims” has the meaning set forth in Section 10.3.

1.162 “Shared Costs” has the meaning set forth in Section 10.3.

1.163 “Shared Study” means any of the Existing Studies (including Allos Studies and Pediatric Studies) or Additional Studies.

1.164 “Sole Inventions” has the meaning set forth in Section 8.1.

1.165 “Sublicense Revenue” means [***], but excluding sums received: (a) [***], (b) [***]; (c) [***]; (d) [***]; (e) [***]; (f) [***]; or (g) [***]; provided, however, [***], then for purposes of calculating Sublicense Revenue arising from [***].

1.166 “Sublicensee” has the meaning set forth in Section 2.1(f)(ii).

1.167 “Supply Agreement” has the meaning set forth in the Recitals.

1.167A “Switzerland Option” has the meaning set forth in Section 14.17.

1.168 “Technical Agreement” has the meaning set forth in the Supply Agreement.

1.169 “Term” has the meaning set forth in Section 12.1.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

15


1.170 “Third Party” means any entity other than Allos or Mundipharma or an Affiliate of either of them.

1.171 “Third Party Claim” has the meaning set forth in Section 8.7.

1.172 “Transferred Countries” has the meaning set forth in Section 14.16.

1.173 “Transition Date” means [***].

1.174 “U.S.” means the United States of America, including all possessions and territories thereof.

ARTICLE 2

LICENSES

2.1 Licenses to Mundipharma.

(a) Development License to Mundipharma. Subject to the terms and conditions of this Agreement, Allos hereby grants to Mundipharma an exclusive (even as to Allos except as provided in Section 2.1(e)), milestone-bearing right and license, with the right to sublicense solely as provided in Section 2.1(f), under the Allos Technology and the Allos ISS Technology, to Develop the Product in the Field in accordance with the Development Plan and for the purpose of obtaining or maintaining Regulatory Approvals in the Field in the Licensed Territory or otherwise exercising Mundipharma’s rights or performing Mundipharma’s obligations under the Development Plan (including for the purpose of conducting any Additional Study pursuant to Section 4.4(a) or (b) or proceeding with an Incremental Study pursuant to Section 4.4(c) in the Licensed Territory or the Allos Territory). For clarity, the foregoing license does not include a right for Mundipharma to manufacture or have manufactured Products for use in Development, and Mundipharma’s and its designees’ only rights under the Allos Technology to manufacture or have manufactured Products are as expressly set forth in Section 2.1(c) and in the Supply Agreement. For further clarity, the foregoing license does not include a right for Mundipharma to make or have made any derivatives of the API. If Mundipharma wishes to make any such derivatives, it shall inform Allos in writing and shall refrain from making or having made any such derivatives of the API unless and until it receives Allos’ prior written consent.

(b) Commercial License to Mundipharma. Subject to the terms and conditions of this Agreement, Allos hereby grants to Mundipharma an exclusive (even as to Allos except as provided in Section 2.1(e)), milestone- and royalty-bearing right and license, with the right to sublicense solely as provided in Section 2.1(f), under the Allos Technology and the Allos ISS Technology, to use, sell, offer for sale, import, export, distribute, warehouse, market, promote, apply for and submit applications for Pricing Approval and Reimbursement Approval, and otherwise Commercialize Products in the Field in the Licensed Territory. For clarity, the foregoing license does not include a right for Mundipharma to manufacture or have manufactured Products for use in Commercialization, and Mundipharma’s and its designees’ only rights under the Allos Technology to manufacture or have manufactured Products are as expressly set forth in Section 2.1(c) and in the Supply Agreement.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

16


(c) Manufacturing Licenses.

(i) With Respect to Bulk Product. Subject to the terms and conditions of this Agreement and the Supply Agreement, Allos hereby grants to Mundipharma a non-exclusive, royalty-free limited right and license, with the right to sublicense in accordance with Section 2.1(f) to its Affiliates or, with the prior written consent of Allos to a Third Party manufacturer (which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that with respect to a sublicense to the Current Third Party Manufacturer of Bulk Product, the terms of Section 2.1(f)(i) shall govern), under the Allos Manufacturing Know-How and Allos Patents, to manufacture Bulk Product solely for use in accordance with this Agreement.

(ii) With Respect to API (as defined in the Supply Agreement). Subject to the terms and conditions of this Agreement and the Supply Agreement, Allos hereby grants to Mundipharma a non-exclusive, royalty-free limited right and license, with the right to sublicense in accordance with Section 2.1(f) to its Affiliates or, with the prior written consent of Allos to a Third Party manufacturer (which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that with respect to a sublicense to the Current Third Party Manufacturers of API (as defined in the Supply Agreement), the terms of Section 2.1(f)(i) shall govern), under the Allos Manufacturing Know-How and Allos Patents, to manufacture API (as defined in the Supply Agreement) solely for use in non-clinical studies in accordance with this Agreement and for use by Mundipharma or its Affiliates or permitted Third Party manufacturers in manufacturing Bulk Product in accordance with Section 2.1(c)(i).

(d) PDX License Agreement. The licenses granted to Mundipharma in Sections 2.1(a), 2.1(b) and 2.1(c) include sublicenses under Allos Technology licensed to Allos under the PDX License Agreement. The licenses granted to Mundipharma in Sections 2.1(a), 2.1(b) and 2.1(c) are subject to the license rights and restrictions associated with such rights under the PDX License Agreement, in each case to the extent applicable to the rights granted to Mundipharma hereunder.

(e) Allos Retained Rights. Notwithstanding the exclusive rights granted to Mundipharma in Sections 2.1(a) and 2.1(b) and without limiting the generality of Section 2.4, Allos retains the right to practice the Allos Technology to: (i) Develop the Product in the Field in accordance with the Allos Required Studies Schedule and for the purpose of exercising Allos’ rights or performing Allos’ obligations under the Allos Required Studies Schedule (including for the purpose of conducting any Additional Study pursuant to Section 4.4(a) or (b) or proceeding with an Incremental Study pursuant to Section 4.4(c)) in the Licensed Territory or the Allos Territory; (ii) Develop the Product for the purpose of obtaining or maintaining Regulatory Approval in the Allos Territory; (iii) use, sell, offer for sale, import, export, distribute, warehouse, market, promote, apply for and submit applications for Pricing Approval and Reimbursement Approval, and otherwise Commercialize Products in the Field in the Allos Territory; (iv) manufacture or have manufactured Products anywhere in the world; and (v) practice and license the Allos Technology in the Field in the Allos Territory.

 

17


(f) Sublicense Rights.

(i) Mundipharma shall have the right to grant sublicenses (i) of the licenses granted in Sections 2.1(a), 2.1(b) and 2.1(c) or (ii) to sell Products in the Licensed Territory in the Field, in each case without the prior approval of Allos, only to (A) its Affiliates, provided that such sublicense shall automatically terminate if such person, corporation, partnership or entity ceases to be an Affiliate of Mundipharma, and (B) Third Party subcontractors that are performing part of Mundipharma’s obligations under this Agreement (excluding any Third Party manufacturers), and in each case provided that Mundipharma shall at all times sell, offer for sale, import, export and otherwise Commercialize the Product in Mundipharma’s or its Affiliate’s name. Mundipharma shall not grant any sublicenses (i) of the licenses granted in Sections 2.1(a), 2.1(b) and 2.1(c), or (ii) any rights to sell the Product in the Field in the Licensed Territory, to any Third Party (including any Third Party manufacturer but excluding any non-manufacturing Third Party subcontractors as permitted in the preceding sentence) without the prior approval of Allos, which approval shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, the Parties agree it would be reasonable for Allos to withhold consent [***], unless, at the time such consent is requested, (i) [***], and (ii) [***]. Mundipharma shall be solely responsible for all of its Sublicensees’, subcontractors’, agents’ and distributors’ activities and any and all failures by its Sublicensees, subcontractors, agents or distributors to comply with the terms of this Agreement.

(ii) Mundipharma shall, within [***] after granting any sublicense under Sections 2.1(a), 2.1(b) or 2.1(c) above, or rights to sell the Product in the Field in the Licensed Territory to a Third Party, notify Allos of the grant of such sublicense to a Third Party and provide Allos with a true and complete copy of the agreement (a Mundipharma Sublicense Agreement”) between Mundipharma and such Third Party (the “Sublicensee”), pursuant to which such sublicense or rights were granted. Each Mundipharma Sublicense Agreement shall be consistent with the terms and conditions of this Agreement and shall include the following additional terms and conditions:

(A) No Mundipharma Sublicense Agreement shall obligate (or purport to obligate) Allos without Allos’ express written consent;

(B) the Sublicensee shall provide Mundipharma with all Information, Regulatory Materials and other documentation necessary for Mundipharma to comply with its obligations under this Agreement, including payment and reporting obligations hereunder, and shall include audit provisions substantially similar to those contained in this Agreement;

(C) the Sublicensee shall be bound by non-use and non-disclosure obligations no less stringent than those set forth in this Agreement;

(D) the Sublicensee shall not have any right to grant sublicenses to the Allos Technology or the Mundipharma Technology;

(E) the Sublicensee shall not have any right to prosecute or maintain any Allos Patents, Joint Patents or Mundipharma Patents; and

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

18


(F) Mundipharma or, with prior written notice to Allos, its designated Affiliate shall own and Control all Information and Patents relating to the Product or the API made and all Regulatory Materials prepared or filed by the Sublicensee in the course of conducting its activities under the Mundipharma Sublicense Agreement. Such designated Affiliate of Mundipharma shall be subject to all applicable covenants, obligations, representations and warranties of Mundipharma under this Agreement.

(iii) With respect to any Mundipharma Sublicense Agreement that includes a sublicense under Allos Technology licensed to Allos under the PDX License Agreement:

(A) Allos shall be permitted to provide SRI International, Sloan-Kettering Institute for Cancer Research and Southern Research Institute, with a copy of such Mundipharma Sublicense Agreement; and

(B) the Sublicensee’s rights shall be subject to the license rights and restrictions associated with such rights under the PDX License Agreement, in each case to the extent applicable to the rights granted to the Sublicensee.

(iv) Mundipharma shall pay to Allos [***] of all Sublicense Revenue within [***] after the end of the calendar quarter in which Mundipharma receives such Sublicense Revenue from a Third Party.

(g) Limited Incremental Study License to Mundipharma. Subject to the terms and conditions of this Agreement, Allos hereby grants to Mundipharma a non-exclusive, fully paid, royalty-free limited right and license under any Patent Controlled by Allos during the Term that claims the Product or the API or the manufacture or use in the Field of the Product or the API (other than an Allos Patent, Joint Patent or Patent within the Allos ISS Technology), to the extent necessary for the Development of Product in accordance with the Development Plan (in the Allos Territory or the Licensed Territory) or for the Commercialization of the Product in the Field in the Licensed Territory.

2.2 License to Allos.

(a) Subject to the terms and conditions of this Agreement, Mundipharma hereby grants to Allos (i) a co-exclusive, fully paid, royalty-free right and license (with the right to grant sublicenses) under the Mundipharma Technology and the Mundipharma ISS Technology, to Develop Products in the Field in accordance with the Allos Required Studies Schedule or to otherwise exercise Allos’ rights or perform Allos’ obligations under the Allos Required Studies Schedule (including for the purpose of conducting any Additional Study pursuant to Section 4.4(a) or (b) or proceeding with an Incremental Study pursuant to Section 4.4(c) in the Licensed Territory or the Allos Territory); and (ii) an exclusive (even as to Mundipharma), fully paid, royalty-free right and license (with the right to grant sublicenses), under the Mundipharma Technology and the Mundipharma ISS Technology, to (A) Develop Products in the Field for the purpose of obtaining or maintaining Regulatory Approval in the Allos Territory, and (B) use, sell, offer for sale, import, distribute, warehouse, market, promote, apply for and submit applications for Pricing Approval and Reimbursement Approval, and otherwise Commercialize Products in the Field in the Allos Territory.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

19


Notwithstanding the exclusive rights granted to Allos in this Section 2.2 and without limiting the generality of Section 2.4, Mundipharma retains the right to practice the Mundipharma Technology for the purpose of performing Mundipharma’s obligations with respect to Shared Studies.

(b) Limited Incremental Study License to Allos. Subject to the terms and conditions of this Agreement, Mundipharma hereby grants to Allos a non-exclusive, fully paid, royalty-free limited right and license under any Patent Controlled by Mundipharma that claims the Product or the API or the manufacture or use in the Field of the Product or the API (other than a Mundipharma Patent, Joint Patent or Patent within the Mundipharma ISS Technology) to the extent necessary for the Development of Product in accordance with the Allos Required Studies Schedule (in the Allos Territory or the Licensed Territory) or for the Commercialization of the Product in the Field in the Allos Territory.

(c) Manufacturing License to Allos. Subject to the terms and conditions of this Agreement, Mundipharma hereby grants to Allos a non-exclusive, fully paid, royalty-free, irrevocable limited right and license (with the right to grant sublicenses), under Information or inventions made, conceived, obtained or generated by or on behalf of Mundipharma or any of its Affiliates or Third Party manufacturers in the course of manufacturing Product or API or any components thereof and any Patents claiming such Information or invention, to manufacture and have manufactured API and Product. Mundipharma shall use reasonable best efforts to promptly disclose to Allos all Information and inventions made, conceived, obtained or generated by or on behalf of Mundipharma or any of its Affiliates or Third Party manufacturers in the course of manufacturing Product or API or any components thereof.

2.3 Negative Covenant. Mundipharma covenants that it will not, and will not permit any of its Affiliates or Sublicensees to, use or practice any Allos Technology or Allos ISS Technology outside the scope of the licenses granted to it under Sections 2.1(a), 2.1(b) and 2.1(c). Allos covenants that it will not, and will not permit any of its Affiliates or sublicensees to, use or practice any Mundipharma Technology or Mundipharma ISS Technology outside the scope of the licenses granted to it under Section 2.2.

2.4 No Implied Licenses. Except as explicitly set forth in this Agreement, neither Party shall be deemed by estoppel or implication to have granted the other Party any license or other right to any intellectual property of such Party.

ARTICLE 3

GOVERNANCE

3.1 Joint Product Committee.

(a) Formation and Role. Within [***] after the Effective Date, the Parties will establish a joint product committee (the “Joint Product Committee” or “JPC”) for the overall oversight and coordination of the Parties’ activities under this Agreement and for overseeing (i) the Development of the Product in the Field in the Licensed Territory, and (ii) the Commercialization of the Product in the Field in the Licensed Territory. The role of the JPC shall be:

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

20


(i) to review, discuss and approve the overall strategy for the Development and Drug Approval of the Product in the Field in the Licensed Territory;

(ii) to review and discuss the overall performance of the Parties pursuant to this Agreement and to compare performance of the objectives outlined in the Development Plan and the Allos Required Studies Schedule to the diligence obligations set forth in Sections 4.6 and 5.2(d);

(iii) to oversee the Development of the Product in the Field in the Licensed Territory;

(iv) to review, discuss, prepare and approve amendments to the Development Plan, including the budget for each Development activity and the design of each clinical trial or other study included or proposed to be included in the Development Plan pursuant to Section 4.4, and to review, discuss, prepare and approve amendments to the Regulatory Plan;

(v) to agree on the requirements for Drug Approval and review and discuss overall strategy for Pricing Approval and Reimbursement Approval of the Product in the Field in the Licensed Territory;

(vi) to establish general guidelines for Investigator-Sponsored Studies with respect to a Product in the Field which, if complied with by a particular ISS, will allow a Party to authorize or facilitate such ISS on prior notice to the JPC but without the need for obtaining the other Party’s approval;

(vii) to review any disputes between the Parties regarding a potential Material Impact of an ISS that does not comply with the general guidelines established by the JPC;

(viii) to discuss the Parties’ activities with respect to the Product in the Field in the Licensed Territory in conjunction with Allos’ and its licensees’ activities with respect to the Product in the Field in the Allos Territory;

(ix) to review, discuss and coordinate the Parties’ scientific presentation and publication strategy relating to Products in the Field in the Licensed Territory;

(x) to discuss the Parties’ respective Development activities in the Field as between the Licensed Territory and the Allos Territory, including Incremental Studies;

(xi) to review and discuss the Commercialization Plan, as well as any amendments thereto;

(xii) to discuss the Parties’ respective Commercialization activities in and as between the Licensed Territory and the Allos Territory;

(xiii) to oversee implementation of the Commercialization Plan;

(xiv) to review any [***] after receipt of Regulatory Approval;

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

21


(xv) to review, discuss and coordinate the Parties’ attendance, Product messaging and presentations (including “poster-board” presentations and industry booths) at international seminars and conferences at which the Product is being discussed;

(xvi) to direct and oversee the JMC and any other operating committee (the “Other Committees”) established by the JPC, on all significant issues that fall within the purview of such committees;

(xvii) to appoint Other Committees, consisting of equal numbers of appropriately qualified members appointed by each Party, from time to time as it deems fit;

(xviii) to attempt to resolve, in a timely manner, issues presented to it by, and disputes within, the JMC and Other Committees;

(xix) to facilitate the flow of Information between the Parties with respect to the Development of, obtaining Drug Approval for, and the Commercialization of, Products in the Field; and

(xx) perform such other functions as appropriate to further the purposes of this Agreement, as expressly set forth in this Agreement or as mutually determined by the Parties in writing.

The JPC shall have only the powers expressly assigned to it in this Section 3.1 and elsewhere in this Agreement. The JPC shall have no power to interpret, amend, modify, or waive compliance with this Agreement.

(b) Members. Each Party shall initially appoint two (2) representatives to the JPC, each of whom will be an officer or employee of such Party having sufficient seniority within the applicable Party to make decisions arising within the scope of the JPC’s responsibilities. The JPC may change its size from time to time by mutual consent of its members and each Party may replace its representatives at any time upon written notice to the other Party; provided, however, that the JPC will at all times consist of equal numbers of members appointed by each Party. In the event a JPC representative from either Party is unable to attend or participate in a meeting of the JPC, the Party who designated such representative may designate an appropriately qualified substitute representative for the meeting, in its sole discretion. The JPC shall have a chairperson, who shall be elected, on an annual basis, alternatively by Allos or Mundipharma. The initial chairperson shall be selected by Allos. The role of the chairperson shall be to convene and preside at all meetings of the JPC and to ensure the preparation of meeting minutes, but the chairperson shall have no additional powers or rights beyond those held by other JPC representatives.

(c) Meetings. The JPC shall meet at least two (2) times per calendar year during the Term unless the Parties mutually agree in writing to a different frequency for such meetings. Either Party may also call a special meeting of the JPC (by videoconference or teleconference) upon at least [***] prior written notice to the other Party in the event such Party reasonably believes that a significant matter must be addressed prior to the next regularly scheduled meeting, and such Party shall provide the JPC no later than [***] prior to the special meeting with materials reasonably

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

22


adequate to enable an informed decision to be made by its members. The JPC may meet in person, by videoconference or by teleconference. Each Party shall be responsible for its own expenses relating to such meetings. As appropriate, other employee representatives or agents of the Parties may attend JPC meetings as non-voting observers and/or presenters. The chairperson of the JPC shall be responsible for preparing reasonably detailed written minutes of all JPC meetings that reflect and include all material decisions made at such meetings. The JPC chairperson shall send draft meeting minutes to each member of the JPC for review and approval within ten (10) business days after each JPC meeting. Such minutes shall be deemed approved unless one or more members of the JPC objects to the accuracy of such minutes within ten (10) business days of receipt.

(d) Decision Making. Actions to be taken by the JPC shall be taken only following unanimous vote, with each Party having one (1) vote representing the views of its members. If the JPC fails to reach unanimous agreement on a matter before it for decision for a period in excess of [***], either Party may submit the matter in writing to the other, and the Parties shall refer such dispute to the Chief Executive Officer or other designee of Allos and the General Manager of Mundipharma (or their respective designees) (the “Executive Officers”) for resolution in accordance with the decision-making procedures described in Section 13.2; provided, however, that the following disputes shall not be submitted to the Executive Officers for resolution and instead shall be decided as follows: (i) for any dispute regarding [***], the JPC members for [***]; (ii) for any dispute regarding the [***], the JPC members for [***]; (iii) for any dispute regarding [***], the JPC members for [***]; and (iv) for any dispute regarding [***].

3.2 Joint Manufacturing Committee. A joint manufacturing committee (the “Joint Manufacturing Committee” or “JMC”) will be established pursuant to the Supply Agreement. The roles and responsibilities of the JMC shall be as specified in the Supply Agreement.

3.3 Good Faith. In conducting themselves on any committees, all representatives of both Parties shall consider diligently, reasonably and in good faith all input received from the other Party, and shall use Reasonably Diligent Efforts to reach consensus on all matters before them. In exercising any decision-making authority granted to it under this Article 3, each Party shall conduct its discussions in good faith. Notwithstanding anything to the contrary in this Agreement, neither Party nor any of their respective Affiliates shall be required to take, or shall be penalized for not taking, any action that is not in compliance with such Party’s ethical business practices and policies or that such Party reasonably believes is not in compliance with applicable Laws.

3.4 Scope of Governance. The Parties agree not to share or discuss any strategic or commercially sensitive information beyond the scope of the collaboration contemplated by this Agreement.

ARTICLE 4

PRODUCT DEVELOPMENT

4.1 Overview. The Parties desire and intend to collaborate with respect to the Development of the Product in the Field, as and to the extent set forth in this Agreement. As described in more detail in this Article 4 (with respect to the non-clinical and clinical aspects of

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

23


Development) and Article 5 (with respect to the regulatory aspects of Development), the Parties have already agreed that certain Development activities for the Product in the Field, up to and including the Effective Date, pursuant to the Original Agreement, were to be jointly funded and others were to be solely funded by Allos. The Parties have also agreed upon a mechanism for proposing new studies in the Field and determining whether the Parties wish to jointly fund such studies or if one of the Parties may conduct such study without funding from the other Party.

4.2 Development Plan.

(a) General. Development of the Product with respect to the Field shall be conducted pursuant to a comprehensive written development plan (the “Development Plan”), which shall specify all Development activities for the Product in the Field by Mundipharma, regardless of whether such activities are jointly funded by the Parties or funded by just one of the Parties, and shall include a detailed timeline for performing those activities necessary to obtain Regulatory Approval in the Field in each country in the Licensed Territory (such timeline, the “Regulatory Plan”). For each Development activity specified in the Development Plan, the Development Plan shall specify the timeline for initiating and completing such activity, and the budget for such activity. For each clinical trial specified in the Development Plan, the Development Plan shall specify the planned accrual for such trial, the sites at which the trial will be conducted and the lead investigator(s) for such trial. For clarity, the Initial Development Plan and the Amended Development Plan shall each be considered iterations of the Development Plan, it being understood that neither party shall be obligated to perform trials and/or studies set forth in the Initial Development Plan that are not included in the Amended Development Plan or the Allos Required Studies Schedule.

(b) Initial Development Plan; Amended Development Plan. The Parties agreed upon an initial development plan, which was set forth in the Letter Agreement (the “Initial Development Plan”). The studies set forth in Exhibit 1 to the Initial Development Plan, as amended from time to time (the “Existing Studies”) included: (i) studies that were being conducted by or on behalf of Allos as of the Original Effective Date; (ii) activities that had not been initiated as of the Original Effective Date but were needed to generate Information that was required by the FDA as a condition of the Product’s Regulatory Approval in the U.S. for the Lead Indication; (iii) certain medical affairs, and clinical and non-clinical studies that were identified in Exhibit 1 to the Initial Development Plan, as amended from time to time, as “Allos Studies”; and (iv) those pediatric studies (and associated preclinical and CMC requirements) required by the EMA with respect to the Product in the Field (the “Pediatric Studies”). The Initial Development Plan identified the Party with operational responsibility for the activities that formed a part of the Existing Studies. Each Party shall be responsible for such Party’s share (i.e., the Allos Share or the Mundipharma Share, as applicable) of the costs associated with the Existing Studies incurred before the Transition Date, pursuant to the Original Agreement, except that Allos shall be solely responsible for all costs incurred before the Transition Date, pursuant to the Original Agreement, with respect to the conduct of all Allos Studies. After the Transition Date, (i) no Development activities for the Product in the Field will be jointly funded (except for an Additional Study pursuant to Section 4.4(b)), (ii) the cost of the Existing Studies (including any Existing Study relating to First Line PTCL Indications) will be solely funded by Allos, (iii) any Development activities for the Product in the Field in the Licensed Territory conducted by Mundipharma will be solely funded by Mundipharma (except for an Additional Study pursuant to Section 4.4(b)), and (iv) any Incremental Studies pursuant to Section 4.4(c) shall be borne by the Party conducting such study. For clarity, after the Transition Date, (i) neither Party shall have any Joint Development Cost payment obligations to the other Party, except as set forth in Section 7.2, and (ii) each Party, in addition to the Development activities

 

24


referenced in subsection (iii) of this Section 4.2(b), shall continue to rely on its right of access to data pursuant to Section 4.8, and right of reference to Regulatory Materials pursuant to Section 5.4, for the purpose of Developing and Commercializing the Product in the Field in such Party’s territory. In connection with this amendment and restatement of the Original Agreement, the Parties have agreed upon an amended Development Plan, which is set forth in the Second Letter Agreement (the “Amended Development Plan”).

(c) Amendments. The JPC shall periodically review and approve, and, as required or requested by Mundipharma, prepare an amendment to the then-current Development Plan. Such amended Development Plan shall reflect any changes (including additions) to the Development of the Product in the Field by Mundipharma. Once approved by the JPC, the amended Development Plan shall become effective and supersede the previous Development Plan as of the date of such approval. Promptly after the Parties agree to conduct an Additional Study proposed by Mundipharma pursuant to Section 4.4(b), or Mundipharma decides to proceed with an Incremental Study pursuant to Section 4.4(c), the JPC shall prepare, review and approve an amendment to the Development Plan that adds such Additional Study or Incremental Study to the Development Plan.

(d) Performance. Each Party shall use Reasonably Diligent Efforts to conduct the Development activities allocated to such Party in the Development Plan or the Allos Required Studies Schedule, as applicable, in a timely and effective manner. Each Party shall conduct its activities under the Development Plan or the Allos Required Studies Schedule, as applicable, in a good scientific manner and comply in all material respects with all applicable Laws.

4.3 Omitted.

4.4 Future Development Activities.

(a) Proposed Study. If either Party wishes to conduct and/or fund any additional Development activities in the Field (including company-sponsored studies to explore the utility of the Product in the Field and/or to expand the label of the Product in such Party’s territory to include additional Indications and also including testing one or more New Forms) that are not already set forth in the Development Plan or the Allos Required Studies Schedule (each of the foregoing activities, a “Proposed Study”), the proposing Party shall present to the other Party’s representatives on the JPC the proposed design and timeline for such Proposed Study and the proposed budget for such Proposed Study. The JPC shall discuss such Proposed Study at its next meeting, whether regularly scheduled or specially requested under Section 3.1(c), and the proposing Party shall provide, within [***] after such JPC meeting (or such longer period of time as agreed upon in writing by the Parties), any additional information reasonably requested by the other Party’s JPC representatives prior to or during such JPC meeting.

(b) Additional Study. If within [***] after the JPC meeting at which a particular Proposed Study is discussed (or such longer period of time as agreed upon in writing by the Parties) (i) the other Party notifies the proposing Party in writing that the other Party wishes to cooperate in such Proposed Study, and any Related Studies contemplated at such time, on the terms (including design, budget and timeline) proposed by the proposing Party or (ii) the Parties agree in writing upon the terms (including design, budget, timeline and rights and obligations upon wind-down or

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

25


termination) under which they will cooperate in such Proposed Study, then it will be deemed an “Additional Study.” If such Additional Study is proposed by Mundipharma, the Development Plan shall be amended pursuant to Section 4.2(c) to include such Additional Study. The Parties shall have the diligence obligations with respect to such Additional Study as provided in Section 4.2(d). The Parties shall share all Joint Development Costs incurred to conduct such Additional Study in accordance with the applicable budget and in the proportions mutually agreed by the Parties. All Information resulting from such Additional Study will be available for use by each Party with respect to the Development and Commercialization of the Product in the Field in its respective territory in accordance with the licenses and rights granted or retained under Article 2 of this Agreement.

(c) Incremental Studies.

(i) If all information reasonably requested by the non-proposing Party has been provided by the proposing Party and by the [***] after the JPC meeting at which a particular Proposed Study is discussed (or such longer period of time as agreed upon in writing by the Parties) under Section 4.4(b): (x) (1) the other Party has not notified the proposing Party in writing that the other Party wishes to cooperate in such Proposed Study on the terms (including design, budget and timeline) proposed by the proposing Party, or (2) the Parties have not agreed in writing upon the terms (including design, budget and timeline) under which they will cooperate in such Proposed Study, and (y) if Mundipharma is the proposing Party, Allos has not notified Mundipharma that it believes that such Proposed Study is substantially likely to create a Material Impact, then such Proposed Study will be deemed an “Incremental Study”, the proposing Party shall be deemed the “Conducting Party” with respect to such Incremental Study, the other Party shall be deemed the “Non-Conducting Party” with respect to such Incremental Study and, unless the Conducting Party notifies the JPC that it does not wish to proceed with such Incremental Study, (A) if Mundipharma is the Conducting Party, the Development Plan shall be amended pursuant to Section 4.2(c) to include an Incremental Study and to specify Mundipharma as solely responsible for the conduct and costs of such Incremental Study, and (B) if Allos is the Conducting Party, Allos shall be solely responsible for the conduct and costs of such Incremental Study. The Non-Conducting Party shall not be responsible for any costs, including milestones, unless such Non-Conducting Party opts-in to such Incremental Study pursuant to Section 4.4(c)(v). Mundipharma as the Conducting Party may proceed with an Incremental Study only after an amendment to the Development Plan. If Allos believes that a Proposed Study is substantially likely to create a Material Impact and Mundipharma disputes whether such belief is reasonable, the JPC shall discuss and decide whether such belief is reasonable. The Proposed Study shall be deemed an Incremental Study if the JPC decides that Allos’ belief is not reasonable. If the JPC agrees that Allos’ belief is reasonable, then Mundipharma shall not proceed with the Proposed Study. If the JPC cannot agree whether Allos’ belief is reasonable, then such dispute shall be handled in accordance with Section 13.2.

(ii) Notwithstanding each Party’s exclusive commercial rights to its respective territory, Mundipharma shall have the right to conduct an Incremental Study in patients in the Allos Territory (subject to Section 4.4(c)(i) above), and Allos shall have the right to conduct an Incremental Study in patients in the Licensed Territory.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

26


(iii) The Conducting Party shall promptly inform the JPC of any material changes it wishes to make to an Incremental Study, including the budget therefor, and, if Mundipharma is the Conducting Party, the Development Plan shall be amended to address them unless, Allos believes that the amendment is substantially likely to have a Material Impact, in which case the JPC shall review such amendment and approve it only if the JPC decides that Allos’ belief is not reasonable. If the JPC agrees that Allos’ belief is reasonable, Mundipharma shall proceed without such material changes. If the JPC cannot agree whether Allos’ belief is reasonable, then such dispute shall be handled in accordance with Section 13.2. The Conducting Party may suspend or terminate an Incremental Study without obtaining approval from the JPC if there is a Safety Reason or such suspension or termination is required by a Regulatory Authority or investigational review board; provided, the Conducting Party shall promptly notify the JPC of any such suspension or termination.

(iv) Promptly following the availability of interim data from or completion of an Incremental Study, the Conducting Party shall deliver to the JPC the top-line data summary from such Incremental Study. The Non-Conducting Party will have no rights to use any Information resulting from such Incremental Study in any filings with Regulatory Authorities, for Commercialization in its territory, or otherwise, provided, however, that the Non-Conducting Party may file required safety information with the applicable Regulatory Authorities in its territory in accordance with Section 4.8(b) and refer to the Regulatory Materials in accordance with Section 5.4.

(v) Opt-In.

(A) Within [***] of the Conducting Party having obtained final results in an Incremental Study establishing Clinical Proof of Concept, such Conducting Party shall deliver to the Non-Conducting Party the top-line data summary from such Incremental Study (the delivery date of such top-line data summary, the “Opt-In Option Date”), and the Non-Conducting Party with respect to such Incremental Study shall have the right (the “Opt-In Right”) to convert such Incremental Study to an Additional Study by (1) making a payment to the Conducting Party of a mutually agreeable amount as Non-Conducting Party’s share of the development costs already incurred by the Conducting Party (which amount shall take into account the cost incurred by the Conducting Party to perform such Incremental Study and an appropriate premium to be paid by the Non-Conducting Party to exercise such Opt-In Right) (such payment, the “Opt-In Payment”), and (2) agreeing with the Conducting Party upon the budget, timeline, rights and obligations upon wind-down or termination and allocation of operational responsibility for Development activities, if any, to be performed with respect to such Incremental Study and all Related Studies after the exercise of such Opt-In Right and committing to pay its mutually agreed share of Joint Development Costs incurred with respect to such Incremental Study and Related Studies after the exercise of such Opt-In Right.

(B) If the Non-Conducting Party with respect to such Incremental Study is considering exercising its Opt-In Right with respect to such Incremental Study, it shall, no later than [***] after the Opt-In Option Date, notify the Conducting Party in writing and shall request that the Conducting Party provide: (1) an estimate for the Opt-In Payment (the “Opt-In Estimate”), which estimate shall be based upon the development costs already incurred by the Conducting Party with respect to such Incremental Study together with those anticipated to be incurred by the Conducting Party (as contemplated by Section 4.4(c)(v)(A)(1)), within [***] after the date of such notice (in each case, calculated as described in Section 4.4(c)(v)(A)(1)); and (2) a proposal to convert

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

27


an Incremental Study to an Additional Study, which amendment shall address the items specified in Section 4.4(c)(v)(A)(2), to the extent applicable to such Incremental Study. The Conducting Party shall provide such estimate and proposal, together with reasonable documentation of the Conducting Party’s already incurred costs, within [***] after such notice (or such longer period of time as agreed upon in writing by the Parties). The Conducting Party shall promptly answer all reasonable questions posed by, and provide all additional documents reasonably requested by, the Non-Conducting Party with respect to the Opt-In Estimate. The JPC shall discuss such proposed conversion at its next meeting, whether regularly scheduled or specifically requested under Section 3.1(c). The Conducting Party shall provide, within [***] after such JPC meeting (or such longer period of time as agreed upon in writing by the Parties), any additional information reasonably requested by the Non-Conducting Party’s JPC representatives prior to or during such JPC meeting. The Non-Conducting Party shall be deemed to have exercised its Opt-In Right with respect to such Incremental Study if, within [***] after the JPC meeting at which such proposed amendment to the Development Plan is discussed (or such longer period of time as agreed upon in writing by the Parties), the Conducting Party receives payment of the Opt-In Estimate amount and the JPC reviews and approves the proposal to convert such Incremental Study to an Additional Study, which proposal addresses the items specified in Section 4.4(c)(v)(A)(2), to the extent applicable to such Incremental Study.

(C) Upon exercise of the Opt-In Right with respect to a particular study, such study shall cease to be an Incremental Study and shall be deemed to be an Additional Study, the Parties shall share all future Joint Development Costs associated therewith as mutually agreed and the Parties shall have the diligence obligations with respect to such Additional Study as provided in Section 4.2(d).

(d) Related Studies. The agreement by the Parties to any Additional Study under this Section 4.4, whether from the outset of the study pursuant to Section 4.4(a) or (b), or through either Party’s exercise of its Opt-In Right to an Incremental Study pursuant to Section 4.4(c)(v), shall not be deemed an agreement by the Parties to cooperate in any and all related studies necessary for the implementation of such Additional Study or to obtain Drug Approval in the U.S. and all Major Market Countries in the applicable new Indication or new formulation that is the subject of such Additional Study (excluding any related studies that are required exclusively to obtain Drug Approval in the U.S. and not in any Major Market Country) (each such related study, a Related Study”). Upon the agreement by the Parties to any Additional Study under this Section 4.4, the Parties shall use good faith efforts to discuss and agree on the terms (including design, budget, timeline and rights and obligations upon wind-down or termination) under which they will cooperate in any Related Studies that may be necessary. If, after discussion, the Parties cannot agree on the terms (including design, budget, timeline and rights and obligations upon wind-down or termination) under which they will cooperate in such Related Study, (i) the conducting Party may conduct the Related Study and shall be solely responsible for such conduct and the costs of such Related Study, and (ii) the terms of Section 4.4 shall apply to any such Related Study as if such Related Study is an Incremental Study. If the Parties agree on the terms of any Related Study, the terms of Section 4.4 shall apply to any Related Study in the same manner that they apply to the Additional Study to which such Related Study relates.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

28


(e) Manufacture. With respect to any Additional Study or Incremental Study (for which either Party is the Conducting Party) that involves a New Form, the Conducting Party shall offer the Non-Conducting Party the opportunity to be the supplier of such New Form. Unless the Non-Conducting Party informs the Conducting Party that it is not interested in being, or is unable to be, the supplier of such New Form, the Parties shall negotiate in good faith and enter into a separate supply agreement that sets forth the terms and conditions under which the Non-Conducting Party will supply such New Form to the Conducting Party (in the event of an Incremental Study) or one or both Parties (in the event of an Additional Study). If the Non-Conducting Party informs the Conducting Party that it is not interested in being, or is unable to be, the supplier of such New Form, then the Non-Conducting Party shall grant to the Conducting Party a non-exclusive, royalty-free limited right and license, under the Allos Manufacturing Know-How and Allos Patents, or Mundipharma Know-How, Mundipharma-Controlled manufacturing-related Information and Mundipharma Patents, as applicable, to manufacture such New Form, with (in the event Mundipharma is the Conducting Party) the right to sublicense in accordance with Section 2.1(f) to its Affiliates or, with the prior written consent of the Non-Conducting Party, to a Third Party manufacturer (which consent shall not be unreasonably withheld, conditioned or delayed), solely for use in accordance with this Agreement.

4.5 Development Costs. The Parties shall each be responsible for their respective share (i.e., the Allos Share or the Mundipharma Share, as applicable) of all Joint Development Costs incurred up to and including the Transition Date pursuant to the Original Agreement. After the Effective Date, the Parties shall share all Joint Development Costs incurred to conduct an Additional Study in the proportions mutually agreed by the Parties. Allos shall also be responsible for all costs and expenses of the Allos Studies. The Party conducting an Incremental Study shall be solely responsible for all costs and expenses of such Incremental Study, unless the other Party exercises its Opt-In Right with respect to such study in accordance with Section 4.4(c)(v).

4.6 Diligence. Mundipharma and Allos shall each use Reasonably Diligent Efforts to Develop the Product in each country in the Licensed Territory in accordance with their respective activities under the Development Plan and the Allos Required Studies Schedule, respectively; provided, that Mundipharma shall comply with the Development milestones in Japan (the “Japan Milestones”) set forth in the Amended Development Plan.

4.7 Investigator Sponsored Studies.

(a) Before either Party authorizes or facilitates an investigator to conduct an ISS for the Product in the Field, such Party shall notify the other Party in writing, which notice shall provide a reasonably detailed description of such ISS and shall provide the other Party a reasonable opportunity to review and comment upon such ISS. Such Party shall give reasonable consideration to the other Party’s comments.

(b) If Mundipharma proposes to authorize or facilitate an investigator to conduct an ISS for the Product in the Field, Allos shall have [***] after the notice required under Section 4.7(a) is given (or such longer period of time as agreed upon in writing by the Parties) to allege that the conduct of such ISS is substantially likely to create a Material Impact and if Mundipharma disagrees with such allegation, then the JPC shall discuss and decide whether such

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

29


belief is reasonable. Mundipharma may proceed with the proposed ISS, if the JPC decides that Allos’ belief is not reasonable. If the JPC agrees that Allos’ belief is reasonable, then Mundipharma shall not proceed with the ISS. If the JPC cannot agree whether Allos’ belief is reasonable, then such dispute shall be handled in accordance with Section 13.2.

(c) ISSs shall not be included in the Development Plan or the Allos Required Studies Schedule.

(d) A Party authorizing or facilitating an ISS pursuant to this Section 4.7 shall only receive disclosure, access or a license to any Information or Patent arising from such ISS under terms that allow such Party to Control such Information or Patent, such that such Information or Patent shall be included in Allos ISS Technology if such Party is Allos or Mundipharma ISS Technology if such Party is Mundipharma. Such Party shall disclose all such Information and Patents to the other Party promptly following its receipt of disclosure of or access to such Information or Patent.

4.8 Data Exchange and Use. Upon the Effective Date, Allos shall provide Mundipharma with access, free of charge, to all Allos Know-How then in existence that constitutes pre-clinical or clinical data relating to the Product. For clarity, Allos does not have any obligation to disclose or provide access to any Information with respect to manufacture of the Product except in the event the license under Section 2.1(c) becomes effective and then only in accordance with Section 2.1(c) and the Supply Agreement. In addition to its adverse event and safety data reporting obligations pursuant to Section 5.7, each Party shall promptly provide the other Party with access to, at no additional charge:

(a) all safety, clinical and other development Information (including, if requested, raw data) associated with the conduct of the Shared Studies, as reasonably necessary or useful to support such other Party’s Development or Commercialization of the Product in the Field in accordance with this Agreement, including rights of access and reference to Regulatory Materials; and

(b) all safety Information (including, if requested, raw data) generated pursuant to any Incremental Study which the Non-Conducting Party is required by a Regulatory Authority in its territory to file with such Regulatory Authority to support safety disclosure requirements. The Non-Conducting Party shall have no rights to use any other Information arising from such Incremental Study in any filings with Regulatory Authorities in its territory (i.e., in the Allos Territory where Allos is the Non-Conducting Party and in the Licensed Territory where Mundipharma is the Non-Conducting Party) unless and until such Non-Conducting Party exercises its right, pursuant to Section 4.4(c)(v), to convert such Incremental Study to an Additional Study.

4.9 Development Reports. Each Party shall provide the JPC with written reports detailing its Development activities under this Agreement and the results of such activities at least [***] in advance of each regularly scheduled JPC meeting; provided, subject to Section 4.4(c)(iv), such reports will not include the results of any Incremental Studies for which the other Party has not exercised its Opt-In Right and made the payments required to be made under Section 4.4. The Parties shall discuss the status, progress and results of each Party’s Development activities under this Agreement at such regularly scheduled JPC meetings.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

30


4.10 Development Records. Each Party shall maintain complete, current and accurate records of all Development activities conducted by it hereunder, and all data and other Information resulting from such activities. Such records shall fully and properly reflect all work done and results achieved in the performance of the Development activities in good scientific manner appropriate for regulatory and patent purposes. Each Party shall document all non-clinical studies and clinical trials in formal written study records according to applicable Laws, including applicable national and international guidelines such as ICH, GCP and GLP. Each Party shall have the right to review and copy such records maintained by the other Party at reasonable times, and upon reasonable notice, to obtain access to the original records to the extent such Party has a license to use the Information contained in such records.

4.11 Compliance with Laws. Each Party shall conduct its activities under this Agreement in a good scientific manner and comply in all material respects with all applicable Laws, including applicable national and international guidelines such as ICH, GCP and GLP.

4.12 Allos’ Other Licensees. For clarity, if Allos grants a Third Party an exclusive license to Develop and/or Commercialize a Product in any country in the Allos Territory, then such licensee may directly exercise Allos’ rights pursuant to this Agreement with respect to such Product in such country; provided, that a licensee in a Transferred Country shall not have the right to enforce any provision of this Agreement against Mundipharma.

ARTICLE 5

REGULATORY MATTERS

5.1 Regulatory Responsibilities in the Licensed Territory.

(a) Omitted.

(b) Commencing on the Original Effective Date with respect to all countries of the Licensed Territory, Mundipharma shall use Reasonably Diligent Efforts in respect of the Product as the primary interface with and shall otherwise handle all correspondence, meetings and other interactions with the relevant Regulatory Authorities concerning regulatory activities related to the Product in the Field in the Licensed Territory, and Mundipharma shall be responsible for preparing and filing any and all Regulatory Materials for the Product in the Field in the Licensed Territory at its sole expense. Allos shall assist and cooperate at its own expense with Mundipharma in connection with the preparation and filing of such Regulatory Materials, as reasonably requested by Mundipharma, including preparation of ongoing clinical trials, study reports and Periodic Safety Update Reports (“PSURs”). Such cooperation will include promptly responding within procedural timelines set by Regulatory Authorities to any reasonable request from Mundipharma for Allos Know-How needed for the Regulatory Materials. For clarity, Allos shall not be obligated to provide Mundipharma with any Information that is not Allos Know-How.

 

31


(c) Mundipharma shall keep Allos informed at JPC meetings of regulatory developments relating to the Product in the Field in the Licensed Territory and shall promptly notify Allos in writing of any action or decision by any Regulatory Authority in the Licensed Territory regarding the Product in the Field. Mundipharma shall provide Allos for review and comment all draft Regulatory Materials (other than routine correspondence such as IND and MAA annual reports, MAA reapproval, during the investigational phase minor protocol amendments, IND amendments for new investigators or new clinical preclinical studies) at least [***] (or in the event of a shorter filing deadline, as soon as practicable) in advance of their intended date of submission to a Regulatory Authority in the Licensed Territory and shall consider in good faith any comments thereto provided by Allos. Mundipharma shall promptly notify Allos of any Regulatory Materials (other than routine correspondence such as IND and MAA annual reports, MAA reapproval, during the investigational phase minor protocol amendments, IND amendments for new investigators or new clinical preclinical studies) submitted to or received from any Regulatory Authority in the Licensed Territory and shall provide Allos with copies thereof, in electronic Common Technical Document (“eCTD”) format, where applicable, within [***] after submission or receipt. Mundipharma shall provide Allos with reasonable advance notice of all meetings, conferences and discussions scheduled with any Regulatory Authority in the Licensed Territory concerning the Product, and shall consider in good faith any input from Allos in preparing for such meetings, conferences or discussions. To the extent permitted by applicable Laws, Allos shall have the right to participate in any such meetings, conferences or discussions and Mundipharma shall facilitate such participation. If Allos elects not to participate in such meetings, conferences or discussions, Mundipharma shall provide Allos with written summaries of such meetings, conferences or discussions in English as soon as practicable after the conclusion thereof.

(d) Within [***] of the Original Effective Date, Allos provided Mundipharma, in eCTD format, with a full copy of the DAA filed by Allos and validated by the EMA on December 15, 2010.

(e) Allos shall be responsible for compiling and providing to Mundipharma the CMC Information that is required for Mundipharma to obtain and maintain Regulatory Approval of the Product in the Licensed Territory. Mundipharma shall use the CMC Information provided to it by Allos for the purpose of obtaining and maintaining Regulatory Approval of the Product in the Licensed Territory and in connection with the exercise of its license under section 2.1(c). At Mundipharma’s request, Allos shall provide reasonable assistance to Mundipharma with respect to communications with Regulatory Authorities in the Licensed Territory regarding the manufacture of the Product or the CMC Information.

(f) Unless the Parties otherwise agree in writing: (i) except as expressly contemplated by Sections 5.1(b) or 5.1(e), Allos shall not communicate with respect to the Product in the Field with any Regulatory Authority having jurisdiction in the Licensed Territory, or unless so ordered by such Regulatory Authority, in which case Allos shall provide immediate notice to Mundipharma of such order; and (ii) Allos shall not submit any Regulatory Materials or seek Regulatory Approvals for the Product in the Field in the Licensed Territory.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

32


5.2 Regulatory Responsibilities in the Allos Territory.

(a) Allos shall own all Regulatory Materials (including Regulatory Approvals) for the Product in the Allos Territory, and shall be responsible for preparing and filing any and all Regulatory Materials for the Product in the Allos Territory at its sole expense. Mundipharma shall assist and cooperate with Allos in connection with the preparation and filing of such Regulatory Materials, as reasonably requested by Allos and at Allos’ sole expense.

(b) Allos shall keep Mundipharma informed of regulatory developments relating to the Product in the Field in the Allos Territory through regular reports at the JPC meetings and shall promptly notify Mundipharma in writing of any action or decision by any Regulatory Authority in the Allos Territory relating to the Product. Allos shall provide Mundipharma for review and comment all draft Regulatory Materials (other than routine correspondence such as IND and NDA annual reports, during the investigational phase minor protocol amendments, IND amendments for new investigators or new clinical preclinical studies), at least [***] (or in the event of a shorter filing deadline, as soon as practicable) in advance of the intended date of submission to a Regulatory Authority in the Allos Territory and shall consider in good faith any comments thereto provided by Mundipharma. Allos shall promptly notify Mundipharma of any Regulatory Materials (other than routine correspondence such as IND and NDA annual reports, during the investigational phase minor protocol amendments, IND amendments for new investigators or new clinical preclinical studies) submitted to or received from any Regulatory Authorities in the Allos Territory and shall provide Mundipharma with copies thereof, in eCTD format, within [***] after submission or receipt.

(c) Unless the Parties otherwise agree in writing: (i) except as expressly contemplated by Section 5.2(a), Mundipharma shall not communicate with respect to the Product with any Regulatory Authority having jurisdiction in the Allos Territory, unless so ordered by such Regulatory Authority, in which case Mundipharma shall provide immediate notice to Allos of such order; and (ii) Mundipharma shall not submit any Regulatory Materials or seek Regulatory Approvals for the Product in the Allos Territory.

(d) Allos shall use Reasonably Diligent Efforts to maintain the existing Drug Approval for the Product in the Field in the U.S., including conducting the Allos Required Studies; provided, however, that Allos may discontinue a Allos Required Study (A) if such study is no longer required by the FDA for Drug Approval or maintenance of Drug Approval in the U.S., or (B) for Material Impact or Safety Reason. Allos may not discontinue an Allos Required Study solely as a result of Allos’ development or commercialization efforts with respect to another product in the Field in the U.S.; provided, that if Allos decides to discontinue an Allos Required Study for any reason (other than that such study is no longer required by the FDA for Drug Approval or maintenance of Drug Approval in the U.S. or for Material Impact or Safety Reason), (i) it shall provide [***] prior written notice to Mundipharma of such decision; and (ii) within [***] after receipt of such written notice from Allos, Mundipharma may elect, by sending a written notice to Allos, to reimburse Allos for its approved out-of-pocket costs and expenses incurred in connection with continuing such Allos Required Study (the “Required Additional Study Election”), as follows, and provided that such election, once made, shall be Mundipharma’s sole and exclusive remedy for Allos’ discontinuance of an Allos Required Study:

(1) Within [***] after the exercise of the Required Additional Study Election by Mundipharma, Allos will submit to Mundipharma a detailed budget showing the out-of-pocket costs and expenses that Allos expects to incur, from the date of Mundipharma’s exercise of the Required Additional Study Election onwards, in connection with the completion of the Allos Required Additional Study. Allos will also update such budget on a [***] basis.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

33


(2) Mundipharma will have the right to review and approve such costs and expenses, such approval not to be unreasonably withheld or delayed.

(3) Mundipharma agrees to reimburse Allos, on a [***] basis, for all of Allos’ pre-approved and actual out-of-pocket costs and expenses incurred from the date of Mundipharma’s exercise of the Required Additional Study Election onwards, in connection with the continuation of the Allos Required Additional Study.

(4) Within [***] following the end of each [***] after the exercise of the Required Additional Study Election by Mundipharma, Allos shall submit a report showing such costs and expenses incurred by Allos in the preceding [***].

(5) Mundipharma shall be entitled to deduct from royalties on Net Sales payable to Allos pursuant to Section 7.4(a), up to (a) [***] of any amounts reimbursed to Allos pursuant to this Section 5.2(d), if the discontinuation of the study is due to Allos’ development or commercialization efforts with respect to another product in the Field in the U.S., and (ii) [***] of any amounts reimbursed to Allos pursuant to this Section 5.2(d), if the discontinuation of the study is due to any other reason except that such study is no longer required by the FDA for Drug Approval or maintenance of Drug Approval in the U.S. or for Material Impact or Safety Reason.

(6) Mundipharma may, upon written notice to Allos, and at any time after its exercise of the Required Additional Study Election, cease reimbursing Allos for Allos’ out-of-pocket costs and expenses towards the completion of the Allos Required Additional Study. Should Mundipharma so elect to cease such reimbursement, Allos may discontinue the Allos Required Additional Study without any liability towards Mundipharma.

5.3 Regulatory Costs. Commencing on the [***] with respect to [***] shall be solely responsible for all of its costs and expenses related to the preparation, filing and maintenance of all Regulatory Materials and Regulatory Approvals for [***]. [***] shall be solely responsible for all costs and expenses related to the preparation, filing and maintenance of all Regulatory Materials and Regulatory Approvals for [***].

5.4 Rights of Reference to Regulatory Materials. Allos hereby grants to Mundipharma a right of reference to all Regulatory Materials filed by or on behalf of Allos (including by its licensees), which right of reference Mundipharma may use for the sole purpose of seeking, obtaining and maintaining Regulatory Approvals and Developing and Commercializing the Product in the Field in the Licensed Territory. Mundipharma hereby grants to Allos and Allos’ licensees in the Allos Territory a right of reference to all Regulatory Materials filed by or on behalf of Mundipharma, which right of reference Allos may use for the sole purpose of seeking, obtaining and maintaining Regulatory Approvals and Developing and Commercializing the Product in the Field in the Allos Territory. Each Party shall support the other Party, as reasonably requested by such other Party, in obtaining Regulatory Approvals in such other Party’s territory, including providing necessary documents or other materials required by applicable Laws to obtain Regulatory Approval in such territory, all in accordance with the terms and conditions of this Agreement.

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

34


5.5 No Harmful Actions.

(a) If Allos reasonably believes that Mundipharma is taking or intends to take any action with respect to the Product that is substantially likely to have a Material Impact in the Allos Territory, Allos shall give written notice to Mundipharma. If Mundipharma disputes whether Allos’ such belief is reasonable, the matter will be submitted to the JPC for its review and determination as to whether such belief is reasonable. Mundipharma shall not proceed with any such action or alternative course of action until it is approved by Allos, or the JPC in writing, as applicable. If the JPC cannot agree whether Allos’ belief is reasonable, then such dispute shall be handled in accordance with Section 13.2.

(b) If Mundipharma reasonably believes that Allos is taking or intends to take any action with respect to the Product that is substantially likely to have a Material Impact in the Licensed Territory, Mundipharma shall have the right to bring the matter to the attention of the JPC. Allos shall not proceed with any such action or alternative course of action until it is approved by the JPC in writing in accordance with Section 3.1(d). If the JPC cannot agree whether Mundipharma’s belief is reasonable, then such dispute shall be handled in accordance with Section 13.2.

5.6 Notification of Threatened Action. Each Party shall immediately notify the other Party of any information it receives regarding any threatened or pending action, inspection or communication by or from any Third Party, including a Regulatory Authority, which may affect the Development, Commercialization or regulatory status of the Product. Upon receipt of such information, the Parties shall consult with each other in an effort to arrive at a mutually acceptable procedure for taking appropriate action.

5.7 Adverse Event Reporting and Safety Data Exchange. Prior to the Effective Date, the Parties defined and finalized the actions that the Parties shall employ with respect to Products to protect patients and promote their well-being in two written pharmacovigilance agreements (the “Pharmacovigilance Agreements”). The existing Pharmacovigilance Agreement(s) shall be amended by the Parties within [***] of the Effective Date in order to align it/them with the provisions of this Agreement and the Supply Agreement. Each Party hereby agrees to comply with its respective obligations under the Pharmacovigilance Agreement(s), as amended, and to cause its Affiliates and sublicensees to comply with such obligations.

5.8 Remedial Actions. Each Party will notify the other Party immediately, and promptly confirm such notice in writing, if it obtains information indicating that the Product may be subject to any recall, corrective or other regulatory action taken by virtue of applicable Laws (a “Remedial Action”). The Parties will assist each other in gathering and evaluating such information as is necessary to determine the necessity of conducting a Remedial Action. Each Party shall, and shall ensure that its Affiliates and sublicensees will, maintain adequate records to permit the Parties to trace the manufacture, distribution and use of the Product. In the event Mundipharma determines that any Remedial Action with respect to the Product in the Field in the Licensed Territory should be commenced or is required by the applicable Regulatory Authority, Mundipharma shall have the right

 

[***]: CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.

 

35


to control and coordinate all efforts necessary to conduct such Remedial Action; provided that, with respect to any such Remedial Action that is not imposed upon Mundipharma by applicable Law or a Regulatory Authority, such Remedial Action shall have been reviewed and approved by the JPC. In the event Allos determines that any Remedial Action with respect to the Product in the Field in the Allos Territory should be commenced or is required by the applicable Regulatory Authority, Allos shall have the right, at its expense, to control and coordinate all efforts necessary to conduct such Remedial Action; provided that, with respect to any such Remedial Action that is not imposed upon Allos by applicable Law or a Regulatory Authority, such Remedial Action shall have been reviewed and approved by the JPC. If the JPC fails to approve a Remedial Action that is not imposed upon a Party by applicable Law or Regulatory Authority within [***] after such Remedial Action is presented to the JPC for review and approval, then the Parties’ Executive Officers shall, within [***] thereafter, review and approve such Remedial Action or, in the event that the Executive Officers fail to approve such Remedial Action within such time period, the Party that has the right to control and coordinate the efforts necessary to conduct such Remedial Action as provided above shall have the final decision-making authority regarding such Remedial Action notwithstanding Section 13.1 or 13.2. Notwithstanding the foregoing, any Remedial Action that relates to the manufacture and supply of the Product by Allos to Mundipharma shall be governed by the terms and conditions of the Supply Agreement.

ARTICLE 6

COMMERCIALIZATION

6.1 Overview of Commercialization in the Licensed Territory. Subject to the terms and conditions of this Article 6, as between the Parties, Mundipharma will be responsible for all aspects of the Commercialization of the Product in the Field in the Licensed Territory, including: (a) developing and executing a commercial launch and pre-launch plan, (b) negotiating with applicable Governmental Authorities regarding the price and reimbursement status of the Product; (c) marketing and promotion; (d) booking sales, and d