CURIS INC - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

Commission File Number: 000-30347

CURIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (617) 503-6500

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.    x  Yes    ¨  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  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):

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

As of October 27, 2011, there were 76,580,368 shares of the registrant’s common stock outstanding.

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CURIS, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q

INDEX

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Item 1. FINANCIAL STATEMENTS

CURIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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CURIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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CURIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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CURIS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Curis, Inc. (the “Company” or “Curis”) is a drug discovery and development company that is committed to leveraging its innovative signaling pathway drug technologies in seeking to develop next generation network-targeted cancer therapies. Curis is building upon its past experiences in targeting signaling pathways, including the Hedgehog signaling pathway, in its efforts to develop network-targeted cancer therapies. Curis conducts research programs both internally and through strategic collaborations.

The Company operates in a single reportable segment, which is the research and development of innovative cancer therapeutics. The Company expects that any successful products would be used in the health care industry and would be regulated in the United States by the U.S. Food and Drug Administration, or FDA, and in overseas markets by similar regulatory agencies.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to: development by its competitors of new or better technological innovations; dependence on key personnel; its ability to protect proprietary technology; its ability to successfully advance discovery, preclinical and clinical stage drug candidates in its internally funded programs; unproven technologies and drug development approaches; reliance on corporate collaborators and licensees to successfully research, develop and commercialize products based on the Company’s technologies; its ability to comply with FDA regulations and approval requirements; its ability to execute on its business strategies; and its ability to obtain adequate financing to fund its operations.

The Company’s future operating results will largely depend on the magnitude of payments from its current and potential future corporate collaborators and the progress of drug candidates currently in its research and development pipeline. The results of the Company’s operations will vary significantly from year to year and quarter to quarter and depend on, among other factors, the timing of its entry into new collaborations, if any, the timing of the receipt of payments from new or existing collaborators and the cost and outcome of any preclinical development or clinical trials then being conducted. The Company anticipates that existing capital resources at September 30, 2011 should enable the Company to maintain its current and planned operations into the fourth quarter of 2012, excluding any potential near-term milestones from its collaborations (see Note 5). The Company’s ability to continue funding its planned operations into and beyond the fourth quarter of 2012 is dependent upon, among other things, the success of its collaborations with Genentech and Debiopharm and receipt of additional cash payments under these collaborations, its ability to control expenses and its ability to raise additional funds through equity or debt financings, which includes the Company’s at-the-market sales agreement discussed in Note 8, new collaborations or other sources of financing. The Company may not be able to successfully enter into or continue any corporate collaborations and the timing, amount and likelihood of the Company receiving payments under such collaborations is highly uncertain. As a result, the Company cannot assure that it will attain any further revenue under any collaborations or licensing arrangements. If the Company is unable to obtain adequate financing, the Company may be required to reduce or delay spending on its research and/or development programs.

The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. These statements, however, are condensed and do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on March 8, 2011.

In the opinion of management, the unaudited financial statements contain all adjustments (all of which were considered normal and recurring) necessary for a fair statement of the Company’s financial position at September 30, 2011, the results of operations for the three- and nine-month periods ended September 30, 2011 and 2010 and cash flows for the nine-month periods ended September 30, 2011 and 2010. The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the balance sheet date. Such estimates include revenue recognition, the collectibility of receivables, the carrying value of property and equipment and intangible assets, and the value of certain investments and liabilities, including the value of its warrant liability. Actual results may differ from such estimates.

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These interim results are not necessarily indicative of results to be expected for a full year or subsequent interim periods.

The Company’s business strategy includes entering into collaborative license and development agreements with biotechnology and pharmaceutical companies for the development and commercialization of the Company’s product candidates. The terms of these agreements may provide for the Company’s licensees and collaborators to agree to make equity investments in the Company, non-refundable license fee payments, research and development funding payments, contingent cash payments based upon achievement of clinical development and regulatory objectives, and royalties on product sales if any products are successfully commercialized. For a complete discussion of the Company’s revenue recognition policy, see Note 2(c) included in its Annual Report on Form 10-K, as previously filed with the Securities and Exchange Commission on March 8, 2011.

In August 2009, the Company granted a worldwide, exclusive royalty-bearing license to develop, manufacture, market and sell its heat shock protein 90, or Hsp90, inhibitor technology to Debiopharm S.A. The Company amortized this payment over its estimated performance period for this agreement. The performance period concluded during the first quarter of 2010, resulting in the recognition by the Company of $333,000 in license fee revenue during the nine-month period ended September 30, 2010. In addition, under the terms of this agreement, in March 2010, the Company received a payment of $8,000,000 from Debiopharm upon acceptance by French regulatory authorities of Debiopharm’s clinical trial application for Hsp90 inhibitor Debio 0932, and $3,000,000 in July 2010 upon Debiopharm’s treatment of the fifth patient in its ongoing phase I clinical trial. The Company recorded $3,000,000 and $11,333,000, respectively, as revenue within “License Fees” in the Revenues section of its Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2010, respectively, because the Company has no ongoing material performance obligations under the agreement.

In September 2011, the Company’s collaborator Genentech, a member of the Roche Group, submitted a New Drug Application (“NDA”) to the U.S. Food and Drug Administration (“FDA”) seeking sales and marketing approval for vismodegib (GDC-0449, RG3616) to treat people with advanced basal cell carcinoma (“BCC”), for whom surgery is considered inappropriate. Vismodegib is a first-in-class, investigational, oral medicine designed to selectively inhibit signaling in the Hedgehog pathway and is being developed by Genentech under a collaboration agreement with the Company. The Company currently expects that the FDA will respond to Genentech’s submission in early November 2011. Provided that the FDA accepts and files for review this NDA submission, the Company will earn an $8,000,000 milestone payment from Genentech. The Company intends to recognize this payment as license revenue during the fourth quarter of 2011 because the Company does not have any further substantive performance obligations under the collaboration. If vismodegib receives FDA approval, the Company will also be entitled to receive an additional milestone payment as well as royalties on any future sales.

On February 4, 2010, the Company entered into a settlement, mutual release and termination agreement with Micromet, Inc. to resolve a claim filed by the Company relating to a June 2001 agreement associated with the Company’s single chain peptide technology between the Company and Micromet’s wholly owned subsidiary Micromet AG. Under the June 2001 agreement, Micromet AG acquired from the Company certain intellectual property assets relating to single chain antibodies, including patents and license agreements. Pursuant to the settlement agreement, Micromet has made a final payment of $4,000,000 to the Company in order to settle the dispute and discharge and terminate all future payment obligations that would have arisen under the June 2001 agreement. The Company has recorded the $4,000,000 payment within the “License fee” revenue line item in the Consolidated Statement of Operations for the nine months ended September 30, 2010. During the first quarter of 2010, the Company incurred approximately $1,526,000 in related legal fees and expenses through the settlement date. These costs are included within the “General and administrative” expense line item of the Consolidated Statement of Operations for the nine months ended September 30, 2010.

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The Company discloses fair value measurements based on a framework outlined by generally accepted accounting principles, or GAAP, which requires expanded disclosures regarding fair value measurements. GAAP also defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Financial Accounting Standards Board (“FASB”) Codification Topic 820, Fair Value Measurements and Disclosures, requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

The Company had no transfers between the three levels during the three- and nine-month periods ending September 30, 2011 and 2010. In accordance with the fair value hierarchy, the following table shows the fair value as of September 30, 2011 and December 31, 2010, of those financial assets that are measured at fair value on a recurring basis, according to the valuation techniques the Company used to determine their fair market value. No financial assets are measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010.

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The following table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3 inputs for the nine months ended September 30, 2010 and 2011:

2011 At Market Issuance Sales Agreement

On June 13, 2011, the Company entered into an At Market Issuance Sales Agreement, or ATM agreement, with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which the Company may issue and sell from time to time through MLV shares of its common stock, $0.01 par value per share, with an aggregate offering price of up to $20,000,000. Upon delivery of a placement notice and subject to the terms and conditions of the ATM agreement, MLV may sell the common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 of the Securities Act of 1933, including without limitation sales made directly on The NASDAQ Global Market, on any other existing trading market for the common stock or through a market maker. With the Company’s prior written approval, MLV may also sell the common stock by any other method permitted by law, including in privately negotiated transactions. The Company or MLV may suspend or terminate the offering of common stock upon notice and subject to other conditions. MLV will act as sales agent on a commercially reasonable best efforts basis consistent with its normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of NASDAQ. The Company will pay MLV a commission equal to 3.0% of the gross sales price per share sold. The Company has agreed

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to provide indemnification and contribution to MLV against certain civil liabilities, including liabilities under the Securities Act. Since the inception of the ATM agreement, the Company has sold 65,527 shares of common stock under the ATM agreement resulting in gross proceeds of $262,000. Total offering expenses, including MLV’s commission, incurred related to the ATM agreement through September 30, 2011 were approximately $123,000, which offset the gross proceeds.

2010 Registered Direct Offering

On January 27, 2010, the Company completed a registered direct offering of 6,449,288 units with each unit consisting of (i) one share of the Company’s common stock and (ii) one warrant to purchase 0.25 of one share of common stock at a purchase price of $2.52 per unit. The Company received net proceeds from the sale of the units, after deducting offering expenses, of approximately $14,942,000.

In connection with this offering, the Company issued warrants to purchase an aggregate of 1,612,322 shares of common stock. The warrants have an initial exercise price of $3.55 per share and a five-year term. The warrants include certain protective features for the benefit of the warrantholder, including an anti-dilution adjustment clause and a possible cash-settlement option in the event of a change of control until the later to occur of (i) two years from the date of original issuance of the warrant and (ii) the date upon which Genentech or Roche submits a new drug application (NDA) for vismodegib. Due to these terms, the warrants were deemed to be a liability and, therefore, the fair value of the warrants was recorded as a liability in the Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010. The Company estimated that the fair value of the warrants at issuance was $2,180,000 using a Black-Scholes option pricing model under various probability-weighted outcomes which take into consideration the protective, but limited, cash-settlement feature of the warrants with the following assumptions assigned to the varying outcomes: expected volatilities of 69.8% and 80%, risk free interest rates ranging from 1.42% to 2.38%, expected lives of three to five years, and no dividends.

The Company estimated that the fair value of the warrants at September 30, 2011 was $2,839,000 using this same model with the following assumptions assigned to the varying outcomes: expected volatility of 80%, risk free interest rates ranging from 0.4% to 0.5%, expected lives of three years, and no dividends. The Company estimated that the fair value of the warrants at September 30, 2010 was $1,082,000 using the following assumptions assigned to the varying outcomes: expected volatilities of 77.7% and 95.2%, risk free interest rates ranging from 0.6% to 1.1%, expected lives of three to four years and no dividends. The warrants will be revalued each reporting period with updated assumptions, and the resulting change in fair value of the warrant liability will be recognized in the Condensed Consolidated Statement of Operations and Comprehensive (Loss)/Income.

The Company recorded other income of $587,000 and other expense of $1,234,000 for the three and nine months ended September 30, 2011, respectively, and other income of $208,000 and $1,098,000 for the three and nine months ended September 30, 2010, respectively, as a result of the change in the fair value of the warrant liability. These changes are primarily due to changes in the Company’s stock price during the respective reporting periods.

Accrued liabilities consist of the following:

As of September 30, 2011, the Company had two shareholder-approved, share-based compensation plans: the 2010 Stock Incentive Plan and the 2010 Employee Stock Purchase Plan. These plans were adopted by the board of directors in April 2010 and approved by shareholders in June 2010. In the first quarter of 2010, the Company’s 2000 Stock Incentive Plan expired in accordance with its terms and its 2000 Director Stock Option Plan had no available shares remaining under the plan. No additional awards will be made under these plans, although all outstanding awards under these plans will remain in effect until they are exercised or they expire in accordance with their terms. For a

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complete discussion of the Company’s share-based compensation plans, see Note 5 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as previously filed with the Securities and Exchange Commission on March 8, 2011.

During the nine months ended September 30, 2011 and consistent with past practices, the Company’s board of directors granted options to purchase 867,000 shares of the Company’s common stock to officers and employees of the Company under the 2010 Stock Incentive Plan. These options vest over a four-year period and bear exercise prices that are equal to the closing market price of the Company’s common stock on the NASDAQ Global Market on the grant date.

During the nine months ended September 30, 2011, the Company’s board of directors also granted options to its non-employee directors to purchase 260,000 shares of common stock under the 2010 Stock Incentive Plan. Of this amount, options to purchase 235,000 shares of common stock were fully vested on the January 7, 2011 grant date and options to purchase 25,000 shares of common stock will vest over a four-year period. All of these options bear exercise prices that are equal to the closing market price of the Company’s common stock on the NASDAQ Global Market on the respective grant dates.

Employee and Director Grants

In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model. The Company calculated the Black-Scholes value of employee options awarded during the nine months ended September 30, 2011 and 2010 using the Black-Scholes valuation model based on the assumptions noted in the following table:

The expected volatility is based on the annualized daily historical volatility of the Company’s stock price through the grant date for a time period consistent with the expected term of an award. The Company believes that the historical volatility of the Company’s stock price best represents the volatility of the stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future.

The stock price volatility and expected terms utilized in the calculation involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. GAAP also requires that the Company recognize compensation expense for only the portion of options that are expected to vest. Therefore, the Company calculated an estimated annual pre-vesting forfeiture rate that is derived from historical employee termination behavior since the inception of the Company, as adjusted. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

The aggregate intrinsic value of employee options outstanding at September 30, 2011 was $14,298,000, of which $11,805,000 related to exercisable options. The weighted average grant-date fair values of stock options granted during the nine months ended September 30, 2011 and 2010 were $1.45 and $1.46, respectively. As of September 30, 2011, there was approximately $2,254,000, net of the impact of estimated forfeitures, of unrecognized compensation cost related to unvested employee and director stock option awards outstanding under the 2000 and 2010 Stock Incentive Plans that is expected to be recognized as expense over a weighted average period of 2.23 years. The intrinsic values of employee stock options exercised during the nine months ended September 30, 2011 and 2010 were $835,000 and $124,000, respectively. The total fair values of vested stock options for the nine months ended September 30, 2011 and 2010 were $1,218,000 and $2,030,000, respectively.

The Company recorded $299,000 and $1,311,000 in compensation expense for the three and nine months ended September 30, 2011, respectively, and the Company recorded $317,000 and $1,680,000 in compensation expense for the three and nine months ended September 30, 2010, respectively, related to employee and director stock option grants. Certain stock options to purchase a total of 816,500 shares of the Company’s common stock were issued to

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employees of the Company in 2008 and 2007 in which vesting was tied to a performance condition, which was achieved in March 2010. This resulted in the immediate vesting of these options and the Company recorded approximately $477,000 in additional stock compensation expense during the nine months ended September 30, 2010.

Non-Employee Grants

The Company has periodically granted stock options and unrestricted stock awards to consultants for services. During the nine months ended September 30, 2011, the Company issued options to purchase a total of 125,000 shares of common stock to the chairman of the Company’s Clinical and Scientific Advisory Board. These options were issued pursuant to the 2010 Stock Incentive Plan at an exercise price equal to the fair market value of the common stock on the dates of grant and will vest over a four-year period from the respective date of grant. Should the Company terminate the consulting agreement, any unvested options will be cancelled. All unvested non-employee options are marked-to-market, which means that as the Company’s stock price fluctuates, the related expense either increases or decreases. The Company recognized expense of $13,000 and $41,000 related to non-employee stock options for the three and nine months ended September 30, 2011, respectively. The Company recorded no expense related to non-employee stock options for the three months ended September 30, 2010 and reversed expense of $16,000 for the nine months ended September 30, 2010, as a result of a decline in the Company’s stock price during the period.

Total Stock-Based Compensation Expense

For the three and nine months ended September 30, 2011 and 2010, the Company recorded employee and non-employee stock-based compensation expense to the following line items in its Costs and Expenses section of the Consolidated Statements of Operations and Comprehensive Income (Loss):

The table below summarizes options outstanding and exercisable under the 2010 Stock Incentive Plan, the 2000 Stock Incentive Plan and the 2000 Director Stock Option Plan at September 30, 2011:

The Company applies ASC Topic 260 - Earnings per Share, which establishes standards for computing and presenting earnings per share. Basic income (loss) per common share is computed using the weighted-average number of shares outstanding during the period. Diluted income (loss) per common share is computed using the weighted-average number of shares outstanding during the period plus the incremental shares outstanding assuming the exercise of dilutive stock options, restricted stock and outstanding warrants.

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Diluted net loss per common share is the same as basic net loss per common share for the three and nine months ended September 30, 2011, as well as for the three months ended September 30, 2010, as the effect of the potential common stock equivalents is antidilutive due to the Company’s net loss position for this period. Antidilutive securities consist of stock options and warrants outstanding as of the respective reporting periods as follows:

The following summarizes the effect of dilutive securities on diluted income per common share for the nine months ended September 30, 2010:

The weighted-average diluted shares outstanding for the nine months ended September 30, 2010 excludes the dilutive effect of approximately 3,789,171 shares of common stock underlying stock options and 1,612,322 shares of common stock underlying warrants since such options and warrants have an exercise price in excess of the average market value of the Company’s common stock during the respective period.

In April 2010, the FASB issued guidance on the milestone method for revenue recognition purposes. Previously, definitive guidance on when the use of the milestone method was appropriate did not exist. This guidance provides a framework of the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance was effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this guidance on January 1, 2011 did not materially change the Company’s previous method of recognizing milestone payments and the adoption did not have a material impact on the Company’s financial statements.

In June 2011, the FASB issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of choice in presentation, the company is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. Early adoption is permitted. Other than a change in presentation, the adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in goodwill accounting standard. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the new ASU to have a material effect on its financial position, results of operations or cash flows.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes appearing elsewhere in this report.

Overview

We are a drug discovery and development company that is committed to leveraging our innovative signaling pathway drug technologies in seeking to develop next generation network-targeted cancer therapies. We are building upon our experience in modulating signaling pathways, including the Hedgehog signaling pathway, in our effort to develop network-targeted cancer therapies. We conduct our research and development programs both internally and through strategic collaborations.

Hedgehog Pathway Inhibitor Program

Vismodegib. Our most advanced program is our Hedgehog pathway inhibitor program under collaboration with Genentech, Inc., a member of the Roche Group. The lead drug candidate being developed under this program is vismodegib, a first-in-class orally-administered small molecule Hedgehog pathway inhibitor, which is also referred to as GDC-0449 and RG3616.

Vismodegib is designed to selectively inhibit signaling in the Hedgehog pathway by targeting a protein called Smoothened. The Hedgehog signaling pathway plays an important role in regulating proper growth and development in the early stages of life and becomes less active in adults. However, mutations in the pathway that reactivate Hedgehog signaling are seen in certain cancers, including basal cell carcinoma (BCC). Abnormal signaling in the Hedgehog pathway is implicated in over 90% of BCC cases.

In September 2011, Genentech submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) seeking sales and marketing approval for vismodegib to treat people with advanced BCC, which includes BCC patients for whom surgery is considered inappropriate. We currently expect that the FDA will respond to Genentech’s submission in early November 2011. Provided that the FDA accepts and files for review this NDA submission, we will earn an $8,000,000 milestone payment from Genentech. We intend to recognize this $8,000,000 payment as license revenue during the fourth quarter of 2011 because we do not have any further substantive performance obligations under the collaboration. If vismodegib receives FDA approval, we will also be entitled to receive an additional milestone payment as well as royalties on any future sales.

Genentech’s NDA application was based on positive clinical data from ERIVANCE BCC/SHH4476g, a pivotal phase II study of vismodegib in patients with advanced BCC. The study met its primary endpoint showing that vismodegib substantially shrank tumors or healed visible lesions, with observed response rates of 43% of patients in the locally advanced BCC cohort and 30% of patients in the metastatic BCC cohort as assessed by an independent review facility. The most common adverse events observed in the study (observed in greater than 20% of patients) included muscle spasms, hair loss, altered taste sensation, weight loss, fatigue, nausea, decreased appetite, and diarrhea. ERIVANCE BCC/SHH4476g is an international, single-arm, multi-center, two-cohort, open-label phase II study that enrolled 104 patients with advanced BCC, including metastatic (33) and/or locally advanced BCC (71), defined as patients whose lesions are inappropriate for surgery (inoperable, or for whom surgery would result in substantial deformity) and for which radiotherapy was unsuccessful or contraindicated. Metastatic BCC was defined as BCC that had spread to other parts of the body, including the lymph nodes, lung, bones and/or internal organs. The study was conducted at 31 sites in the United States, Australia and Europe. Study participants received 150mg vismodegib orally, once daily until disease progression or intolerable toxicity. Tumor responses for metastatic BCC were measured by RECIST criteria and for locally advanced BCC by a novel composite endpoint which included reduction of size of lesions of at least 30% in longest dimension and/or complete resolution of locally advanced BCC ulceration.

The primary endpoint of the study was objective response rate as assessed by an independent review facility, with secondary endpoints including investigator-assessed objective response rate, progression-free survival, overall survival, and duration of response in all evaluable patients, including locally advanced BCC or metastatic BCC patients. In addition, absence of residual BCC in patients was assessed by sampling biopsies in patients with locally advanced BCC. Genentech had previously reported Phase I clinical trial results in the New England Journal of Medicine in which an investigator-assessed response rate of 55% was observed in 33 patients with advanced BCC treated with vismodegib, including those with locally advanced BCC or metastatic BCC. In the pivotal Phase II trial, study investigators assessed the overall response rate

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to be 55%, with 60% in the locally advanced BCC cohort, and 46% in metastatic BCC cohort. The overall response rate in the pivotal Phase II trial as assessed by an independent review facility showed vismodegib substantially shrank tumors or healed visible lesions, with observed response rates of 43% of patients in the locally advanced BCC cohort and 30% of patients in the metastatic BCC cohort. The median duration of progression-free survival by independent review for both metastatic and locally advanced BCC patients was 9.5 months. The median duration of response by independent review was 7.6 months for both metastatic and locally advanced BCC patients. The median duration of response as assessed by study investigators was 12.9 and 7.6 months for metastatic BCC and locally advanced BCC patients, respectively. There was no residual BCC in sampling biopsies of 54% of locally advanced BCC patients. As of the November 26, 2010, data cutoff date, there were 19 (57.6%) metastatic BCC and 32 (45.1%) locally advanced BCC patients remaining on treatment. The median duration on treatment as of this date was 10 and 9.7 months for metastatic BCC and locally advanced BCC patients, respectively.

The most common adverse events observed in the study (observed in greater than 20% of patients) included muscle spasms, hair loss, altered taste sensation, weight loss, fatigue, nausea, decreased appetite, and diarrhea. Serious adverse events were observed in 26 patients (25%). Four of these patients (4%) had serious adverse events that were considered to be related to vismodegib, including one case each of: blocked bile flow from the liver (cholestasis), dehydration with loss of consciousness (syncope), pneumonia accompanied by an inability of the heart to pump enough blood (cardiac failure) and a sudden arterial blockage in the lung (pulmonary embolism). Fatal events were reported in seven patients (7%); none were considered by investigators to be related to vismodegib. In all fatalities, pre-existing risk factors and comorbid conditions were present.

The filing timeline for a European regulatory submission seeking to commercialize the drug in Europe is dependent on planned discussions with the European Medicines Agency, or EMA. Assuming that submissions are filed by Roche and accepted by the applicable regulatory agencies, we will be eligible for milestone payments upon EMA acceptance of such submission and EMA approval to commercialize vismodegib in Europe as well as royalties on any future sales of vismodegib.

Genentech is also conducting a separate phase II clinical trial of vismodegib in patients with operable nodular basal cell carcinoma, which is a less severe form of the disease and accounts for a significant percentage of the approximately two million BCCs diagnosed annually in the United States. This study was initiated by Genentech in October 2010 to test vismodegib as a single-agent therapy in approximately 50 patients with operable nodular BCC in a US-based, open label, two-cohort clinical trial. All patients will receive a 150 mg daily oral dose of vismodegib for 12 weeks. The primary outcome measure for the first cohort is the rate of complete histological clearance of target nodular BCC lesions at the time of tumor excision (which may occur up to 12 weeks following initiation of treatment) while the primary outcome measure for the second cohort is the rate of durable complete clearance of target nodular BCC lesions at the time of excision (which may occur up to 36 weeks following initiation of treatment). We expect that data will be available from this trial later this year or early in 2012. We also anticipate that Genentech will provide us with its plans for future development in operable BCC within this timeframe and we look forward to providing further updates on this in the future.

In addition to the BCC clinical trials being conducted directly by Genentech and Roche, vismodegib is also currently being tested in other cancers in trials under collaborative agreements between Genentech and either third-party investigators or the U.S. National Cancer Institute, or NCI, including in treating BCC in patients with basal cell nevus syndrome (Gorlin syndrome), medulloblastoma, sarcoma and glioblastoma multiforme, as well as in pancreatic, small cell lung, gastroesophageal junction, gastric, breast, and prostate cancers, among others.

Promising interim data from an investigator-sponsored study in basal cell nevus syndrome, or BCNS, was presented in April at the American Association for Cancer Research 2011 annual meeting. This phase II double blind, randomized placebo-controlled, two arm multicenter clinical study of vismodegib enrolled 41 BCNS patients from September 2009 to January 2011. It is designed to assess the safety and efficacy of a 150 mg dose of daily oral vismodegib versus a placebo. A Data Safety Monitoring Board, or DSMB, tasked with reviewing the unblinded results from an interim analysis of 29 patients who completed an average of six months of drug treatment, subsequently recommended to end the placebo arm of the trial due to statistically significant differences between the two groups, in order for all of the patients enrolled in the trial to receive vismodegib treatment. The DSMB’s analysis revealed that vismodegib reduced the rate of new BCCs from an average of 1.74 BCCs per month in the placebo group to 0.07 in the vismodegib group (p<0.0001). Vismodegib also reduced the size of existing BCCs (-24 cm vs. 3 cm placebo, cumulative diameter, p=0.006). Some patients achieved near complete remission with no BCC developing resistance during this period of time on trial. Observations related to vismodegib’s safety were similar to what has been reported in previous clinical studies, including grade 1-2 taste loss, muscle cramps, hair loss and weight loss when compared to placebo were common. There were two grade 3-4 adverse events observed, including one grade 3 muscle cramp and one grade 4 depression. Overall, 28% of patients taking vismodegib discontinued participation due to adverse events.

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Network-Targeted Cancer Programs

Our internal drug development efforts are focused on our network-targeted cancer programs, in which we are seeking to design single novel small molecule drug candidates that inhibit multiple signaling pathways that are believed to play roles in cancer cell proliferation. We refer to this approach as cancer network disruption. We believe that our approach of targeting multiple nodes in cancer signaling pathway networks may provide a better therapeutic effect than many of the cancer drugs currently marketed or in development since our drug candidates are being designed to disrupt multiple targets in the cancer network environment as compared to most other cancer drugs which are designed to disrupt only one target.

CUDC-101. Our lead candidate from these programs is CUDC-101, a first-in-class small molecule compound designed to simultaneously target histone deacetylase, or HDAC, epidermal growth factor receptor, or EGFR, and human epidermal growth factor receptor 2, or Her2, all of which are validated cancer targets. A significant amount of our capital resources are focused on the ongoing clinical development of this molecule. To date, we have completed a phase I dose escalation clinical trial of CUDC-101 in 25 patients with advanced, refractory solid tumors and we have completed enrollment in a phase I expansion trial to test CUDC-101 in 46 patients with specific tumor types, including breast, gastric, head and neck, liver and non-small cell lung cancers. The phase I expansion trial is designed as an open-label study in which patients are treated with CUDC-101 at the maximum tolerated dose, which was determined in the phase I dose escalation study to be 275 milligrams per meter². The primary objectives of this study are to compare the safety and tolerability of CUDC-101 in subjects with these specific advanced solid tumors when the drug is administered via one-hour intravenous infusion either on a five days per week schedule (one week on/one week off) or on a three days per week schedule (three weeks on/one week off).

The safety profile observed to-date for both dosing schedules appears to be consistent with that observed in the phase I dose escalation study. In addition, we have observed stable disease in several patients in this study. Most notably, we have observed stable disease in four patients with advanced liver cancer. Two patients have been treated with CUDC-101 for over six months, one of which remained on study for nearly one year of treatment, while two additional patients achieved stable disease for approximately four months prior to disease progression.

During the second quarter of 2011, we initiated a phase I clinical trial of CUDC-101 in advanced head and neck cancer patients whose cancer is human papilloma virus, or HPV, negative, and in August 2011 we treated the first patient in this study. The primary objective of this study is to evaluate the safety and tolerability of CUDC-101 when administered in combination with the current standard-of-care of cisplatin, a chemotherapeutic drug, and radiation. Upon determination of the maximum tolerated dose and assuming the otherwise successful completion of the phase I trial, we intend to conduct a randomized phase II two-arm clinical trial in which head and neck cancer patients will receive cisplatin and radiation plus or minus CUDC-101. The phase II study would seek to evaluate whether the addition of CUDC-101 can improve the efficacy and durability of cisplatin and radiation therapy in this patient population.

We are also working on an oral formulation of CUDC-101, which we believe has the potential to make CUDC-101 more competitive in certain cancers such as non-small cell lung cancer where patients are generally on therapy for several months and there are competing commercially available molecules that are orally administered. Pending the successful completion of ongoing formulation and preclinical development work, we intend to begin a phase I study of an oral formulation of CUDC-101 during the first half of 2012.

CUDC-907. In January 2011, we selected development candidate CUDC-907, an orally bioavailable, network-targeted small molecule that is designed to inhibit HDAC and phosphatidylinositol-3-kinase, or PI3K. Our scientists are developing CUDC-907 based on published and internally generated data demonstrating that HDAC and PI3K inhibitors have synergistic interaction against cancer cells. We believe that this synergistic mechanism of cancer signaling network disruption, which demonstrated efficacy and a favorable safety profile in a number of preclinical xenograft models, could translate into clinical advantages over single agents. Pending the successful completion of ongoing formulation and preclinical development work, we expect to file an investigational new drug application, or IND, with the FDA to test an oral formulation of CUDC-907 during the first half of 2012.

In addition to our development-stage programs, we continue to progress additional proprietary preclinical research programs and expect that we will select additional small molecule inhibitors from our preclinical portfolio in the future.

Hsp90 Program

Debio 0932. Our heat shock protein 90, or Hsp90, program is being developed by Debiopharm, a Swiss pharmaceutical development company, under an August 2009 license agreement between Curis and Debiopharm. The lead molecule under this license collaboration was designated Debio 0932 by Debiopharm. In April 2010, Debiopharm treated the first patient in a phase I clinical trial to evaluate the safety of Debio 0932 in patients suffering from advanced solid tumors. Debiopharm is finalizing this phase I dose escalation study and has indicated that it intends to initiate a phase Ib expansion study in particular tumor types in early 2012.

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Liquidity

Since our inception, we have funded our operations primarily through license fees, contingent cash payments, research and development funding from our corporate collaborators, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights. We have never been profitable and have an accumulated deficit of $738,150,000 as of September 30, 2011. We expect to incur significant operating losses for the next several years as we devote substantially all of our resources to our research and development programs. We will need to generate significant revenues to achieve profitability and do not expect to achieve profitability in the foreseeable future, if at all. We believe that near term key drivers to our success will include:

Collaboration Agreements

We are currently a party to a June 2003 collaboration with Genentech relating to our Hedgehog pathway inhibitor technologies, and an August 2009 license agreement with Debiopharm relating to our Hsp90 inhibitor technology. Our past and current collaborations have generally provided for research, development and commercialization programs to be wholly or majority-funded by our collaborators and provide us with the opportunity to receive additional contingent cash payments if specified development and regulatory approval objectives are achieved, as well as royalty payments upon the successful commercialization of any products based upon the collaborations. We are currently not receiving any research funding and we do not expect to receive such funding in the future from Genentech or Debiopharm under our current agreements with these parties. We currently expect to incur only nominal research and development costs under our collaborations with Genentech related to the maintenance of licenses. In addition, as a result of our licensing agreements with various universities, we are obligated to make payments to these university licensors when we receive certain payments from Genentech. As of September 30, 2011, we have paid an aggregate of approximately $940,000 related to ongoing agreements, of which $900,000 relates to payments that we received from Genentech. Assuming we receive the $8,000,000 milestone from Genentech upon FDA acceptance of the vismodegib NDA, we will be obligated to pay $400,000 to these licensors. We also expect to incur general and administrative costs associated with our share of intellectual property costs under our June 2003 collaboration with Genentech. We do not expect to incur any material costs related to our Hsp90 technologies under development by Debiopharm under our August 2009 license agreement with Debiopharm.

Financial Operations Overview

General. Our future operating results will largely depend on the magnitude of payments from our current and potential future corporate collaborators and the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year to year and quarter to quarter and depend on, among other factors, the timing of our entry into new collaborations, if any, the timing of the receipt of payments, if any, from new or existing collaborators and the cost and outcome of any preclinical development or clinical trials then being conducted. We anticipate that existing capital resources as of September 30, 2011 should enable us to maintain current and planned operations into the fourth quarter of 2012. Our ability to continue funding our planned operations into and beyond the fourth quarter of 2012 is dependent on future contingent payments that we may receive from Debiopharm or Genentech upon the achievement of development and regulatory approval objectives, our ability to manage our expenses and our ability to raise additional funds through additional corporate collaborations, equity or debt financings, or from other sources of financing.

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A discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional funds is set forth under “Part II, Item 1A—Risk Factors.”

Revenues. We do not expect to generate any revenues from our direct sale of products for several years, if ever. Substantially all of our revenues to date have been derived from license fees, research and development payments, and other amounts that we have received from our strategic collaborators and licensees.

We currently receive no research funding for our programs under our collaborations with Genentech and Debiopharm and we do not expect to receive such funding in the future under these collaborations. Accordingly, our only source of revenues and/or cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of clinical development and regulatory objectives, if any are met, under new collaborations or our existing collaborations with Genentech and Debiopharm, and royalty payments that are contingent upon the successful commercialization of any products based upon these collaborations.

Our ability to enter into new collaborations and our receipt of additional payments under our existing collaborations with Genentech and Debiopharm cannot be assured, nor can we predict the timing of any such arrangements or payments, as the case may be.

Research and Development. Research and development expense consists of costs incurred to discover, research and develop our drug candidates. These expenses consist primarily of: (1) salaries and related expenses for personnel including stock-based compensation expense; (2) outside service costs including clinical research organizations, medicinal chemistry and sublicense payments; and (3) the costs of supplies and reagents, consulting, and occupancy and depreciation charges. We expense research and development costs as incurred. We are currently incurring only nominal research and development expenses under our Hedgehog pathway inhibitor collaboration with Genentech related to the maintenance of third-party licenses to certain background technologies. For each contingent payment, if any, received under the Hedgehog pathway inhibitor collaboration, we would be obligated to make payments to certain third-party licensors and recognize the related expense.

Our research and development programs, both internal and under collaboration, are summarized in the following table:

In the chart above, “NDA submitted” means that Genentech filed an NDA with the FDA in September 2011 and, pending planned discussions with the EMA, will submit a regulatory filing seeking approval of vismodegib in advanced BCC in Europe. “Phase II” means that Genentech is currently treating human patients in a phase II clinical trial, the primary objective of which is a therapeutic response in the patient population. “Phase I expansion” means that we are currently treating human patients with specific tumor types in an extension of our phase I dose escalation trial, at the maximum tolerated dose from such trial, the principal purpose of which is to evaluate the safety and tolerability of the compound being

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tested. “Phase I” means that we (CUDC-101) and Debiopharm (Debio 0932) are currently treating human patients in separate phase I clinical trials, the principal purpose of which is to evaluate the safety and tolerability of the compound being tested. “Development candidate” means that from our testing in several preclinical models of human disease of various compounds from a particular compound class, we have selected a single lead candidate for potential future clinical development and are seeking to complete the relevant safety, toxicology, and other data required to submit an IND application with the FDA seeking to commence a phase I clinical trial. “Preclinical” means that we are seeking to obtain evidence of therapeutic efficacy and safety in preclinical models of human disease of one or more compounds within a particular class of drug candidates.

Because of the early stages of development of these programs, our ability and that of our collaborators and licensees to successfully complete preclinical studies and clinical trials of these drug candidates, and the timing of completion of such programs, is highly uncertain. There are numerous risks and uncertainties associated with developing drugs which may affect our and our collaborators’ future results, including:

We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from any of our drug candidates. Any failure to complete the development of our drug candidates in a timely manner could have a material adverse effect on our operations, financial position and liquidity.

A further discussion of some of the risks and uncertainties associated with completing our research and development programs on schedule, or at all, and some consequences of failing to do so, are set forth below in “Part II, Item 1A—Risk Factors.”

General and Administrative. General and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in executive, finance, accounting, business development, legal, information technology, corporate communications and human resource functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, patent and accounting services. Patent costs include certain patents covered under collaborations, a portion of which is reimbursed by collaborators and a portion of which is borne by us.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Such estimates and judgments include the assumptions underlying the valuation of our warrant liability, carrying value of property and equipment and intangible assets, revenue recognition, the collectability of receivables and the value of certain investments and liabilities. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes to the probabilities underlying the assumptions used in valuing our warrant liability could materially impact our financial statements. Actual results may differ from these estimates under different assumptions or conditions. We set forth our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2010, which is on file with the SEC. There have been no material changes at September 30, 2011.

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Recently Issued Accounting Standards

In April 2010, the FASB issued guidance on the milestone method for revenue recognition purposes. Previously, definitive guidance on when the use of the milestone method was appropriate did not exist. This guidance provides a framework of the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance was effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this guidance on January 1, 2011 did not materially change our previous method of recognizing milestone payments and the adoption did not have a material impact on our financial statements.

In June 2011, the Financial Accounting Standards Board, or FASB, issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of choice in presentation, the company is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. Early adoption is permitted. Other than a change in presentation, the adoption of this update is not expected to have a material impact on our consolidated financial statements.

In September 2011, the FASB issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in goodwill accounting standard. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not expect the new ASU to have a material effect on our financial position, results of operations or cash flows.

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Results of Operations

Three-Month Periods Ended September 30, 2011 and September 30, 2010

Revenues. Total revenues are summarized as follows:

Total revenues decreased by $3,095,000, or 95%, for the three months ended September 30, 2011 as compared to the same period in 2010, primarily related to a decrease in license fee revenues of $3,180,000. We recognized no license fee revenue under our collaborations for the three months ended September 30, 2011. During the three months ended September 30, 2010, we recorded license fee revenues of $3,000,000 which represented a contingent payment from Debiopharm upon treatment of the fifth patient in its phase I clinical trial in July 2010. Research and development revenues are limited to expenses that we incur under our collaborations, primarily Genentech, for which our collaborators are obligated to reimburse us.

Research and Development Expenses. Research and development expenses are summarized as follows:

Our research and development expenses increased by $33,000, or 1%, for the three months ended September 30, 2011 as compared to the same period in the prior year. The increase in research and development expenses is the result of a $735,000 increase in spending related to our CUDC-907 program as a result of shifting resources from our other network-targeted cancer programs, which decreased $497,000 when compared to the prior year period. CUDC-907 was selected as a development candidate in January 2011.

Further offsetting the increase in spending on our CDCU-907 program, spending on our CUDC-101 program decreased $169,000 when compared to the prior year period which is attributed to several ongoing programs. Spending related to our phase Ia and the expansion trials of CUDC-101 decreased by $929,000 for the three month period ending September 30, 2011 primarily related to decreased outside services and clinical costs consisting of formulation and manufacturing costs of clinical material, clinical research organizations and patient costs. The phase I expansion of CUDC-101 trial had only one

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remaining patient at September 30, 2011, as the trial was fully enrolled. In contrast, spending related to our phase I trial in advanced head and neck cancers initiated during the second quarter of 2011 and for an oral formulation of CUDC-101 increased by an aggregate of $761,000.

General and Administrative Expenses. General and administrative expenses are summarized as follows:

General and administrative expenses decreased by $78,000, or 4%, for the three months ended September 30, 2011 as compared to the prior year period. This decrease was primarily due to decreased consulting and professional services of $163,000. For the three months ended September 30, 2010, we incurred consulting and professional services specifically related to business development efforts used to facilitate the licensing agreement with Debiopharm due upon receipt of the $3,000,000 payment we received in July 2010 that were not incurred in the current year period. Offsetting this decrease, legal costs increased by $47,000 over the prior year period, specifically related to patent costs which includes fees related to foreign patent filings.

Change in fair value of warrant liability. In connection with our January 2010 registered direct offering, we issued warrants to purchase an aggregate of 1,612,322 shares of common stock which became exercisable as of the closing of the transaction. The warrants have an initial exercise price of $3.55 per share and have a five year term. The fair value of the warrants at the January 27, 2010 issuance and at December 31, 2010 was estimated at $2,180,000 and $1,605,000, respectively, using a Black-Scholes option pricing model under various probability-weighted outcomes which take into consideration the protective features of the warrants that include a possible cash-settlement option available to the warrantholder in the event of a change of control until the later to occur of (i) two years from the date of original issuance of the warrant and (ii) the date upon which Genentech or Roche submits an NDA for vismodegib. The fair value of the warrants was recorded as a long-term liability. The warrants will be revalued each reporting period, with the resulting gains and losses recorded as the change in fair value of warrant liability in the income statement. We estimated that the fair value of the warrants at September 30, 2011 was $2,839,000 using this same model with the following assumptions assigned to the varying outcomes: expected volatility of 80%, risk free interest rates ranging from 0.4% to 0.5%, expected lives of three years and no dividends. We recorded a gain of $587,000 for the quarter ended September 30, 2011 as a result of the decrease in the fair value of the warrant liability from June 30, 2011, primarily related to the decrease in our stock price during this period. We estimated that the fair value of these warrants as of September 30, 2010 was $1,082,000. We recorded a gain of approximately $208,000 for the three months ended September 30, 2010 as a result of the decrease in the fair value of the warrant liability from June 30, 2010.

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Nine-Month Periods Ended September 30, 2011 and September 30, 2010

Revenues. Total revenues are summarized as follows:

Total revenues decreased by $15,225,000, or 96%, for the nine months ended September 30, 2011 as compared to the same period in 2010, primarily related to a decrease in our license fee revenues of $15,356,000. During the nine months ended September 30, 2010, we recorded license fee revenues under our license agreement with Debiopharm, primarily comprised of an $8,000,000 contingent payment from Debiopharm upon acceptance by French regulatory authorities of its clinical trial application for Debio 0932 in February 2010 and a $3,000,000 contingent payment upon treatment of the fifth patient in this phase I clinical trial in July 2010. During the nine months ended September 30, 2010, we also received settlement proceeds of $4,000,000 from Micromet pursuant to a settlement, mutual release and termination agreement that we entered into with Micromet in February 2010. Research and development revenues are limited to expenses that we incur under our collaborations for which our collaborators are obligated to reimburse us.

Future contingent payments under our Genentech and Debiopharm agreements are tied to clinical and regulatory objective milestones.

Research and Development Expenses. Research and development expenses are summarized as follows: