2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of net product sales and expenses during the reporting period. Actual results could differ from these estimates.

Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Restricted Cash

On August 22, 2008, $238,000 of cash was pledged as collateral on a letter of credit related to a lease for administrative office space and is classified as restricted cash on the Balance Sheet.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets are comprised of the following:


	December 31,
	2011		2010
Prepaid sales, marketing and medical affairs expenses	$	1,024	$	1,308
Prepaid expenses and other assets		782		650
Prepaid research and development expenses		249		222
	$	2,055	$	2,180

Research and development expenditures are charged to expense as incurred. In accordance with certain research and development agreements, we are obligated to make certain upfront payments upon execution of the agreement. We record these upfront payments as prepaid research and development expenses. Such payments are recorded to research and development expense as services are performed. We evaluate on a quarterly basis whether events and circumstances have occurred that may indicate impairment of remaining prepaid research and development expenses.

Inventory

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

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

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

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

Inventory consisted of:


	December 31,
	2011			2010
Work in process	$	417		$	254
Raw materials		148			—
Finished goods		57			38
		622			292
Less reserve		(117	)		(114	)
Total inventory	$	505		$	178


Inventory reserve activity:
	December 31,
	2011			2010
Beginning Balance	$	114		$	-
Reserve expensed to cost of sales		3			138
Inventory deductions		-			(24	)
Ending Balance	$	117		$	114

Property and Equipment

Property and equipment is recorded at cost and is depreciated using the straight-line method over estimated useful lives.

The components of property and equipment are as follows:


		December 31,					Estimated
		2011			2010		Lives
Computer hardware and software	$	3,306		$	2,614		3 years
Office furniture and equipment		1,678			1,681		3 - 7 years
Leasehold improvements		519			508		Lease term
Software projects in process		-			721
		5,503			5,524
Less accumulated depreciation and amortization		(4,027	)		(3,279	)
Property and equipment, net	$	1,476		$	2,245

We realized a loss primarily related to the disposal of certain software that was no longer in use totaling $207,000 and $152,000 for the years ended December 31, 2010 and 2009, respectively, which is recorded in Interest and other income, net on the Statement of Operations. There was no such loss for the year ended December 31, 2011.

Long-lived Assets

We review long-lived assets, including acquired product rights and property and equipment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of the assets' book value to future net undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. Fair value of our long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved. Assumptions and estimates

used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. We have not recorded any impairment losses through December 31, 2011.

Accrued liabilities

Accrued liabilities are comprised of the following:


		December 31,
		2011		2010
Accrued personnel costs	$	4,885	$	6,103
Accrued royalties, government rebates, chargebacks, returns and distribution fees		4,678		3,849
Accrued research and development expenses		2,117		2,762
Accrued sales and marketing expenses		1,997		3,536
Accrued expenses - other		2,263		1,377
	$	15,940	$	17,627

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

Fair Value of Financial Instruments

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

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

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

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

We have no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities, respectively) as of December 31, 2011. The carrying value of our cash held in money market funds totaling $82.5 million as of December 31, 2011 is included in cash and cash equivalents on our Balance Sheet and approximates market values based on quoted market prices, or Level 1 inputs. Our financial instruments include cash and cash equivalents, investments, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate their fair value due to their short maturities.

See Note 3 –"Investments" for additional details regarding our investments.

Product Sales

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

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party. Title to the product passes upon delivery to our distributors, when the risks and rewards of ownership are assumed by the distributor (freight on board destination). These distributors then resell FOLOTYN to the patients' respective health care providers. Prior to the fourth quarter of 2010, product sales to distributors were recorded as deferred revenue until the product was sold through from our distributors to patients' respective health care providers because we did not have sufficient history to be able to reasonably estimate returns. Beginning in the fourth quarter of 2010, we began recognizing revenue as product was sold to the distributors as we established a sufficient history in order to reasonably estimate returns from our distributors. Consequently, for the year ended December 31, 2010, we recognized a one time increase of $604,000 in net product sales of FOLOTYN, or $0.01 per share of common stock, representing product sales previously deferred as of December 31, 2009, net of distributor fees and estimated product returns, government rebates and chargebacks. We noted an increase in net product sales of approximately $3.2 million, or $0.03 per share of common stock, in the fourth quarter of 2011 relating to an increase in our distributors' year-end 2011 inventory levels as compared to average inventory levels for 2011.

We monitor inventory levels within our distribution channel and sales to end users, or health care providers, to determine whether deferral of sales is required. No such deferrals were recorded at December 31, 2011.

Net Product Sales

Net product sales represent total gross product sales less gross to net sales adjustments. Gross to net sales adjustments include distributor fees and estimated allowances for product returns, government rebates and chargebacks to be incurred on the selling price of FOLOTYN related to the respective product sales. Distributor fees are incurred on the management of our product by distributors. These distributor fees are recorded within net product sales and are based on definitive contractual agreements. We estimate gross to net sales adjustments based upon analysis of third-party information, including information obtained from our primary distributors with respect to their inventory levels and sell-through to the distributors' customers. Due to estimates and assumptions inherent in determining the amount of returns, rebates and chargebacks, the actual amount of returns and claims for rebates and chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities. Allowances and accruals are recorded in the same period that the related revenue is recognized.

Net product sales for the year ended December 31, 2011 include $3.0 million, or $0.03 per share of common stock, related to the sale of FOLOTYN for use in a clinical trial being conducted by an unrelated party. We cannot predict the timing or amount of such future sales, if any. Since this sale relates to product used for a clinical trial, the sale was not subject to government rebates and chargebacks and no such reserves were recorded on this sale.

Product Returns

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

Medicaid Rebates

Our product is subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. We record estimated rebates payable under governmental programs, including Medicaid, as a reduction of revenue at the time revenues are recorded. Our calculations related to these rebate accruals require estimates, including estimates of customer mix primarily based on a combination of market and clinical research, to determine which sales will be subject to rebates and the amount of such rebates. During the first quarter of 2010, we obtained additional market research and were able to refine our estimated Medicaid utilization, which resulted in a reversal of Medicaid rebate allowances related to 2009 sales totaling $208,000. Our estimate of utilization is based on market research and information about our expected patient population. Through December 31, 2011, we have not had sufficient claims from states for rebates with which to update our estimate. However, when we have sufficient claims history, we will consider such history in our estimate which could result in a change in our estimate. We also consider any legal interpretations of the applicable laws related to Medicaid and qualifying federal and state government programs and any new information regarding changes in the Medicaid programs' regulations and guidelines that would impact the amount of the rebates. In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted, which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive to January 1, 2010. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale. For reference purposes, a 10% increase in the Medicaid utilization percentage within our patient population as of December 31, 2011, would result in an approximate $1.7 million reduction in cumulative net product sales.

Government Chargebacks

Our products are subject to certain programs with federal government qualified entities whereby pricing on products is discounted below distributor list price to participating entities. These entities purchase products through distributors at the discounted price, and the distributors charge the difference between their acquisition cost and the discounted price back to us. We account for chargebacks by establishing an accrual in an amount equal to our estimate of chargeback claims at the time of product sale. We do not expect the impact of the 340B Public Health Services drug discount program expansion included in the PPACA to significantly change our estimated government chargeback accruals because drugs approved under an Orphan Drug designation were specifically excluded from the provisions of the PPACA. The FDA has awarded orphan drug status to FOLOTYN for the treatment of patients with T-cell lymphoma, which includes patients with relapsed or refractory PTCL. We evaluate previously recorded chargebacks based on data regarding specific entities' lack of claim activity over time. As a result of this evaluation, during 2011 we recorded a reversal of government chargeback allowances related to 2010 sales totaling $948,000. Due to estimates and assumptions inherent in determining the amount of government chargebacks, the actual amount of claims for chargebacks may be different from our estimates, at which time we would adjust our reserves accordingly.

Balances and activity in the deferred revenue account and a reconciliation of gross to net product sales for the years ended December 31, 2011, 2010 and 2009 are as follows:


					Years Ended
					December 31,
		2011			2010			2009

Gross product sales	$	55,390		$	40,202		$	4,206
Gross to Net Sales Adjustments
Government rebates and chargebacks		(2,955	)		(3,374	)		(501	)
Distribution fees		(1,615	)		(1,157	)		(120	)
Product returns allowance		(334	)		(444	)		—
Net product sales	$	50,486		$	35,227		$	3,585

Deferred revenue, beginning of the period				$	669		$	-
Gross product sales to distributors					39,533			4,875
Gross product sales recognized due to change in revenue
recognition methodology					(669	)		-
Gross product sales recognized related to current year					(39,533	)		(4,206	)
Deferred revenue, end of the period				$	-		$	669

Balances and activity for the components of our gross to net sales adjustments for the years ended December 31, 2011 and 2010 are as follows:


					Government
		Product			Rebates and			Distribution
		Returns			Chargebacks			Fees
Balance at December 31, 2009	$	—		$	487		$	86
Reserve for current period sales		437			3,650			1,141
Change in estimate for prior period sales		7			(276	)		16
Credits/payments made for prior period sales		—			(126	)		(84	)
Credits/payments made for current period sales		(16	)		(1,511	)		(896	)
Balance at December 31, 2010		428			2,224			263
Reserve for current period sales		570			3,903			1,615
Change in estimate for prior period sales		(236	)		(948	)		—
Credits/payments made for prior period sales		—			(432	)		(198	)
Credits/payments made for current period sales		—			(2,434	)		(1,312	)
Balance at December 31, 2011	$	762		$	2,313		$	368

Major Customers and Concentration of Credit Risk

We sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or distributors, the three largest of which are affiliates under common control of an unrelated party and are detailed below, without requiring collateral. We periodically assess the financial strength of these customers and establish allowances for anticipated losses, if necessary. Substantially all of our sales were made in the United States. Trade accounts receivable totaled $14.8 million and $12.1 million at December 31, 2011 and 2010, respectively.


	% of total trade accounts
	receivable at
	December 31,
	2011		2010
Customer A	68.8	%	53.8	%
Customer B	9.7	%	23.1	%
Customer C	20.7	%	22.3	%


	% of total gross product sales for the year ended
	December 31,
	2011		2010		2009
Customer A	54.0	%	51.2	%	51.0	%
Customer B	23.8	%	23.8	%	30.0	%
Customer C	20.9	%	24.3	%	19.0	%

Cost of sales

Cost of sales, excluding amortization expense, includes cost of product sold, royalties, inventory packaging and labeling, warehousing and shipping costs associated with FOLOTYN product sales. See discussion in Note 10 regarding the 8% current royalty rates under our license agreement with Sloan-Kettering Institute for Cancer Research, SRI International and Southern Research Institute, or the FOLOTYN License Agreement. Prior to receiving FDA approval of FOLOTYN, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense. As of December 31, 2011, the reduced-cost finished goods inventory has been substantially utilized. Had this reduced-cost inventory been capitalized, the impact to our research and development expense and cost of sales, excluding amortization expense, would not have been material in any of the three years in the period ended December 31, 2011. We sold a portion of our finished goods that were manufactured subsequent to the FDA approval date totaling $30,000 and $120,000 during the years ended December 31, 2011 and 2010, respectively, which were recorded in cost of sales, excluding amortization expense in the Statement of Operations.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in our statement of operations. Advertising costs, including promotional expenses and costs related to trade shows were $4.7 million, $5.9 million and $4.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Stock-Based Compensation

We have several stock-based compensation plans under which incentive and non-qualified stock options, restricted stock units and restricted shares may be granted, and an employee stock purchase plan. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for each vesting tranche of the award, the requisite service period (usually the vesting period). We provide an estimate of forfeitures at initial grant date.

See Note 6 –"Stock-Based Compensation Plans" for additional details regarding the impact of our stock based compensation plans on our financial statements.

Research and Development

Research and development expenditures are charged to expense as incurred. Research and development expenses include the costs of certain personnel, preclinical studies, clinical trials, regulatory affairs, biostatistical data analysis, third party manufacturing costs for development of drug materials for use in clinical trials and preclinical studies and licensing fees for our product candidates prior to FDA approval. All finished drug inventory costs associated with production activities in our third party manufacturing facilities prior to receiving FDA approval for such facilities and prior to receiving regulatory approval to market our product are expensed to research and development expenses. As of December 31, 2011, the reduced-cost finished goods inventory has been substantially utilized. We accrue research and development expenses for activity as incurred during the fiscal year and prior to receiving invoices from clinical sites and third party clinical and preclinical research organizations. We accrue external costs for clinical and preclinical studies based on an evaluation of the

following: the progress of the studies, including patient enrollment, dosing levels of patients enrolled, estimated costs to dose patients, invoices received, and contracted costs with clinical sites and third party clinical and preclinical research organizations. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual results could differ from those estimates. During the years ended December 31, 2011, 2010 and 2009, we did not have any changes in estimates that resulted in material adjustments to research and development expenses accrued in the prior period.

Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities at each year end and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets and other tax benefits are recorded when it is more likely than not that the position will be sustained upon audit. Valuation allowances have been established to reduce our net deferred tax assets to zero, as we believe that it is more likely than not that such assets will not be realized.

Net Loss Per Share

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

Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential dilutive shares of common stock were anti-dilutive due to our net loss (as including such shares would decrease our basic net loss per share). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because we reported a net loss for the years ended December 31, 2011, 2010 and 2009, all potentially dilutive shares of common stock have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive shares of common stock consist of the following:


	Years Ended December 31,
	2011	2010	2009
Common stock options	7,124,934	8,716,829	8,292,496
Unvested restricted stock units	3,571,937	2,492,078	155,479
Unvested restricted stock	—	12,500	125,000
	10,696,871	11,221,407	8,572,975

Recent Accounting Pronouncements

We reviewed recently issued accounting pronouncements and plan to adopt those that are applicable to us. We do not expect the adoption of these pronouncements to have a material impact on our financial position, results of operations or cash flows.