SPECTRUM PHARMACEUTICALS INC - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2013

For the transition period from                      to                     

Commission File Number: 001-35006

SPECTRUM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(702) 835-6300

(Registrant’s telephone number, including area code)

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

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

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

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

As of November 14, 2013, 63,879,714 shares of the registrant’s common stock were outstanding.

SPECTRUM PHARMACEUTICALS, INC.

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

INDEX

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

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value amounts)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

3

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

4

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

5

SPECTRUM PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

6

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(a) Description of Business

Spectrum Pharmaceuticals, Inc. and its wholly-owned subsidiaries (“Spectrum”, the “Company”, “we”, “our”, or “us”), is a biotechnology company with fully integrated commercial and drug development operations, with a primary focus in oncology and hematology. Our strategy is comprised of acquiring, developing, and marketing a diverse pipeline of late-stage clinical and commercial products.

We currently market four drugs:

We also have a diversified pipeline of product candidates in advanced-stage Phase 2 and Phase 3 studies. We have assembled an integrated in-house scientific team, including formulation development, clinical development, medical research, regulatory affairs, biostatistics and data management, and have established a commercial infrastructure for the marketing of our drug products. We also leverage the expertise of our worldwide partners to assist in the execution of our business strategies.

(b) Basis of Presentation

The accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements include the financial position, results of operations, and cash flows of the Company, including its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

We own fifty-percent of our Canadian affiliate, Spectrum Pharma Canada (“SPC”). We fund all of the expenses of this entity, and since we are deemed to be its “primary beneficiary” (as defined under applicable GAAP), SPC is reported in our financial statements as if it were a wholly-owned subsidiary.

On April 1, 2012, we acquired the licensing rights outside of the U.S. to market ZEVALIN (the “ZEVALIN Rights”); on September 5, 2012, we acquired Allos Therapeutics, Inc. (“Allos”); and on July 17, 2013, we acquired Talon Therapeutics, Inc. (“Talon”). Our financial statements include the assets acquired, liabilities assumed, operating results and cash flows of these acquisitions, beginning with the respective acquisition date for each.

The unaudited condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature (except for the correction of certain prior period immaterial errors, as discussed in Note 2). In the opinion of management, these adjustments are necessary to fairly state our financial position as of September 30, 2013, and the results of our operations and cash flows for the three and nine months ended September 30, 2013 and 2012.

The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any other periods. The unaudited financial statements included in this Quarterly Report on Form 10-Q do not include all disclosures required by GAAP for annual periods and should be read in conjunction with our audited financial statements for the year ended December 31, 2012, included in our Annual Report on Form 10-K.

(c) Operating Segment

We have one reportable operating segment that is focused exclusively on developing and commercializing oncology and hematology drug products. For the three and nine months ended September 30, 2013 and 2012, all of our revenue and related expenses were solely attributable to these activities. Substantially all of our long-lived assets are located in the U.S.

7

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

Overview

In connection with the preparation of our accompanying Condensed Consolidated Financial Statements, we determined that our June 30, 2013 Condensed Consolidated Balance Sheet, included within our Form 10-Q for the quarter ended June 30, 2013, presented a $7.7 million overstatement within “accounts payable and other accrued obligations” and “accrued drug development costs”. However, this error had no resulting impact to our September 30, 2013 cash balance.

The components of the “accounts payable and other accrued obligations” and “accrued drug development costs” overstatement include (a) $6.7 million of excess accruals that correspond with our research and development and sales and marketing activities which accumulated from January 1, 2007 through June 30, 2013, and (b) $1.0 million of excess liabilities that were recorded as part of our business combination accounting for our 2009 acquisition of RIT Oncology, LLC. As with the $6.7 million of excess accruals, this $1.0 million did not require settlement, and was not timely identified as such.

Materiality Assessment

Our management evaluated the materiality of these errors from a qualitative and quantitative perspective, as required by applicable SEC and GAAP guidance. Based on this evaluation, our management concluded that these errors were not material to any of our previously reported quarterly or annual periods, and therefore, the amendment of previously filed reports with the SEC are not required for this matter. However, the correction of these accumulated errors would be material if corrected in full (i.e., the entire $7.7 million) within the current reporting period’s Condensed Consolidated Statements of Operations. Therefore, we have revised within this Quarterly Report on Form 10-Q, our previously reported financial information as of December 31, 2012, and for the three and nine months ended September 30, 2012 for those errors specific to each period.

In addition, our accompanying December 31, 2012 Condensed Consolidated Balance Sheet has been restated to reflect the correction of certain additional errors related to our conclusion that the indefinite-lived intangible asset acquired and recognized as part of our acquisition of Allos Therapeutics, Inc. in September 2012, as in-process research & development (IPR&D), should instead be recognized at the acquisition date as a definite-lived intangible asset. This matter is further discussed in our Form 10-Q/A, Note 1A – “Restatement of Condensed Consolidated Financial Statements” for the quarterly period ended June 30, 2013.

Financial Statement Presentation – Current and Future Periods

Our accompanying December 31, 2012 Condensed Consolidated Balance Sheet reflects the correction of the cumulative error of $7.2 million that existed through that date, as an adjustment to “accumulated deficit,” and the correction of the corresponding accounts of “deferred tax assets,” “accounts payable and other accrued obligations,” and “accrued drug development costs.” The remaining $0.5 million correction is reflected as a reduction of “selling general and administrative” and “research and development” expenses within the accompanying Condensed Consolidated Statements of Operations. This correction reduced operating expenses by $0.1 million and $0.5 million for the three and nine months ended September 30, 2013, respectively.

The prior period financial statements included within this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012, within the accompanying Condensed Consolidated Statements of Operations, and Condensed Consolidated Cash Flows reflect reductions of “selling general and administrative” and “research and development” expenses for the errors that correspond to each period.

8

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

The impact of this aggregate $7.7 million error to our previously reported 2012 annual period, and our previously reported 2013 and 2012 quarterly periods is summarized below. These amounts will be reported within our future Form 10-Q and 10-K filings, and any other SEC filing that includes financial information covering the impacted periods on this “as restated” basis:

9

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

For the three and nine months ended September 30, 2013 and 2012, the Condensed Consolidated Statements of Cash Flows were impacted by the adjustments to net income (loss) discussed above. However, its effect on the annual cash flows for these periods was limited to an increase to “net income” and a corresponding and equal change to “deferred income tax benefit,” “accounts payable and other accrued obligations,” and “accrued drug development costs”, with no resulting net impact to cash provided by operating activities.

10

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, our management evaluates its estimates, including those related to (i) revenue adjustments; (ii) the collectability of customer accounts; (iii) whether the cost of inventories can be recovered; (iv) the value of goodwill and intangible assets; (v) the realization of tax assets and estimates of tax liabilities; (vi) the likelihood of payment and value of contingent liabilities; and (vii) the potential outcome of litigation.

Such estimates are based on our management’s judgment which takes into account historical experience and various assumptions. Nonetheless, actual results may materially differ from management’s estimates. In our judgment, the accounting policies, estimates, and assumptions described below have the greatest potential impact on our preparation of the accompanying Condensed Consolidated Financial Statements:

(i)     Revenue Recognition

Product Sales: We sell our products to wholesalers and distributors. Our wholesalers and distributors purchase our products and sell the products directly to end-users, such as clinics, hospitals, and private oncology-based practices. Revenue from product sales is recognized upon shipment of product when title and risk of loss have transferred to our customer, and the following additional criteria are met:

We calculate a provision for estimated product returns, sales discounts, rebates, government chargebacks, and distribution and data fees (collectively, “gross-to-net estimates”) – the nature of which is discussed within Note 2 to our 2012 Annual Report on Form 10-K. Our gross revenue is reduced by our gross-to-net estimates. We defer revenue recognition in full if/when these estimates are not reasonably determinable at the time of sale.

License Fees: We recognize license fees based on the terms of each contractual agreement. In general, this results in periodic revenue recognition as the third-party licensee has sales for which we are entitled to a royalty, or in certain cases, a lump-sum license fee in which revenue is recognized in that period.

(ii)     Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.

(iii)     Inventories

We value inventory at the lower of the actual cost to purchase or manufacture the inventory, or the market value for such inventory. Cost is determined on the first-in, first-out method (FIFO). We regularly review inventory quantities in process and on hand, and when appropriate, record a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life.

(iv)     Goodwill and Intangible Assets

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

11

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

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

(v)     Foreign Currency Translation

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

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

(vi)     Comprehensive Income (Loss)

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

(vii)     Basic and Diluted Net Income (Loss) per Share

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

(viii)     Income Taxes

We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards. We have recorded a valuation allowance to reduce our net deferred tax assets, because we believe that, based upon a weighting of positive and negative factors, it is more likely than not that these deferred tax assets will not be realized. If we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the valuation allowance of our deferred tax assets would increase net income in the period such determination was made. In the event that we were assessed interest and/or penalties from taxing authorities, such amounts would be included in “income tax expense” within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the notice was received.

(ix)     Research and Development Costs

Research and development costs are expensed as incurred.

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(x)     Fair Value Measurements

We measure fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include the following:

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

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. These inputs include quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

“Cash and equivalents” within our accompanying Condensed Consolidated Balance Sheets consist of bank deposits and certificates of deposit. Certificates of deposit are valued at cost, which approximates fair value due to the short-term maturities of these instruments. “Marketable securities” consist of U.S. Government treasury bills, U.S. treasury-backed securities, and corporate deposits, which are stated at fair value (utilizing Level 1 inputs).

The fair value of our “deferred development cost” liability and our “deferred payment contingency” within our accompanying Condensed Consolidated Balance Sheets was valued using a model commonly referred to as the discounted income approach model. The unobservable inputs (i.e., Level 3 inputs) in this valuation model that have the most significant effect on these liabilities include (i) internal estimates of research and development personnel costs needed to perform the research and development services, (ii) estimates of expected cash outflows to third parties for services and supplies over the expected period that the services will be performed, and (iii) an appropriate discount rate for these expenditures. These inputs are reviewed for reasonableness by management on at least on a quarterly basis.

“Other long-term obligations” within our accompanying Condensed Consolidated Balance Sheets represent future amounts we may be required to pay in conjunction with various business combinations (i.e., contingent consideration) – see Note 8(a) for a discussion of CVRs granted as part of our acquisition of Talon). The fair value of the liability associated with FDA approval of Captisol-enabled^® melphalan (see Note 8(b)) is also included within “other long-term obligations”. These liabilities within our accompanying Condensed Consolidated Balance Sheets are valued using Level 3 inputs which include probabilities and assumptions related to the timing and likelihood of achievement of regulatory and sales milestones and other contractual performance conditions. These inputs are reviewed for reasonableness by management on at least a quarterly basis.

(a) Cash and Marketable Securities

As of September 30, 2013, we held substantially all of our cash, cash equivalents, and marketable securities at major financial institutions.

Our investment policy requires that investments in marketable securities be in only highly-rated instruments, which are primarily U.S. treasury bills or U.S. treasury-backed securities, with limitations on investing in securities of any single issuer. We maintain cash balances in excess of federally insured limits with reputable financial institutions. To a limited degree, the Federal Deposit Insurance Corporation and third parties insure these investments. However, these investments are not insured against the possibility of a complete loss of earnings or principal and are inherently subject to the credit risk related to the continued credit worthiness of the underlying issuer and general credit market risks. We manage such risks on our portfolio by investing in highly liquid, highly rated instruments, and limit investing in long-term maturity instruments.

13

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

Cash, equivalents and marketable securities, including long term bank certificates of deposits, and investments totaled $78.4 million and $145.5 million as of September 30, 2013 and December 31, 2012, respectively. Long term bank certificates of deposit include a $0.3 million restricted certificate of deposit that collateralizes tenant improvement obligations to the lessor of our principal offices. The following is a summary of such investments:

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

(b) Inventories

Inventories, net of allowances consisted of the following:

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(c) Intangible Assets and Goodwill

Intangible assets consist of the following:

Goodwill includes the following:

(d) Accounts payable and accrued obligations

Accounts payable and other accrued obligations consisted of the following:

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

The below table presents a gross-to-net product sales reconciliation for the three and nine months ended September 30, 2013 and 2012 is as follows:

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

16

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

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

17

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

The below table summarizes certain asset and liability fair values that are included within our accompanying Condensed Consolidated Balance Sheets, and their designations among three fair value measurement categories (as described within Note 3(x)):

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

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(a) Acquisition of Talon Therapeutics, Inc.

Talon Acquisition Overview

On July 16, 2013, we entered into a Securities Purchase Agreement with Talon Therapeutics, Inc. (“Talon”), whereby, on July 17, 2013, we purchased all of its then outstanding shares of common stock. Through the acquisition of Talon, we gained worldwide rights to Marqibo, an FDA-approved drug that we believe complements our other hematology and oncology products.

The purchase consideration comprised of (i) an aggregate upfront cash amount of $11.3 million, (ii) issuance of 3.0 million shares of our common stock, then equivalent to $26.3 million (based on a closing price of $8.77 per share on July 17, 2013), and (iii) the issuance of contingent value rights (“CVR”) valued by us of $6.5 million.

The CVR was valued using a valuation model that probability-weights expected outcomes (ranging from 0% to 100%) and discounts those amounts to their present value, using a discount rate of 25% (these represent Level 3 inputs – see Note 3(x)). The CVR has a maximum payout of $195.0 million if all sales and regulatory approval milestones are achieved, as summarized below:

Since July 17, 2013, the results of operations of the former Talon business have been included in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013. From July 17, 2013 through September 30, 2013, our revenue derived from the former Talon business was approximately $0.1 million. We had nominal earnings from the Talon business during this period.

Direct Costs of the Talon Acquisition

Our direct costs of the Talon acquisition included employee severance, banker, legal, and accounting fees which aggregated to $5.7 million. This amount is included in “selling and general expenses” within the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2013.

Consideration Transferred

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

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

Fair Value Estimate of Assets Acquired and Liabilities Assumed

Under the purchase method of accounting, the total purchase consideration is allocated to Talon net tangible and intangible assets based on the estimated fair values as of the closing date. The following table summarizes the estimated fair value of the net assets acquired as of July 17, 2013:

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

The fair value of the acquired in-process research and developed technology assets was estimated using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts.

The deferred tax liability reflects future book-to-tax differences that are associated with the acquired IPR&D assets.

We believe that the fair values assigned to the Talon assets acquired and liabilities assumed were based upon reasonable assumptions, and we expect to complete our valuation of the deferred tax liability by December 31, 2013, which would have a corresponding impact on goodwill, if adjusted. Our allocations of the purchase price are largely dependent on discounted cash flow analyses of projects and products of Talon. There can be no assurance that the underlying assumptions we used to forecast the cash flows or the regulatory approvals will occur as we have estimated, if at all.

Supplemental Pro Forma Financial Information

The following unaudited pro forma financial information is presented to reflect the results of the Company’s consolidated operations for the three and nine months ended September 30, 2013 and 2012, as if the acquisition of Talon had occurred on January 1, 2012. To reflect the combined businesses, adjustments have been made to exclude one-time transaction costs and employee severance costs that were directly associated with the Talon acquisition. These pro forma results have been prepared for informational purposes only and may not be indicative of what operating results would have been, had the acquisition actually taken place on January 1, 2012, and may not be indicative of future operating results.

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(b) Acquisition of Rights to Captisol-Enabled^® Melphalan

Overview of Acquisition of Rights to Captisol-Enabled^® Melphalan

On March 8, 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled^®, propylene glycol-free melphalan from CyDex Pharmaceuticals, Inc. a wholly-owned subsidiary of Ligand Pharmaceuticals Incorporated (“Ligand”). The Captisol-enabled melphalan product candidate is currently in a pivotal trial being conducted by Ligand for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma. We assumed full responsibility for its ongoing clinical and regulatory development program. Under the agreement, we paid Ligand a license fee of $3.0 million on April 1, 2013. We are required to pay Ligand additional amounts upon achievement of certain regulatory milestones and net sales thresholds, and royalties on net sales of licensed products in all territories.

We accounted for the acquisition of these rights as a business combination, using the acquisition method of accounting. This requires that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. Aggregate transaction costs of $15,000 are included in “selling and general expenses” within the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2013.

Consideration Transferred

The acquisition-date fair value of the consideration transferred consisted of the following items:

Fair Value Estimate of Asset Acquired and Liability Assumed

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

Acquired IPR&D is an intangible asset that is classified as indefinite-lived until the completion or abandonment of the associated R&D effort, and is subject to impairment testing. The Captisol-enabled^®, propylene glycol-free melphalan rights IPR&D will amortized over an estimated useful life to be determined at the date the project is complete.

We estimated the fair value of the in-process research and development using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value estimate took into

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

account our estimates of future incremental earnings that may be achieved upon regulatory approval, promotion, and distribution associated with the rights, and included estimated cash flows of approximately 10 years and a discount rate of approximately 25%.

The fair value of the contingent consideration liability assumed was determined using the probability of success and the discounted cash flow method of the income approach, which assumes that FDA approval of Captisol-enabled^® melphalan will occur on or about December 31, 2015. Upon receipt of FDA approval, we will be obligated to make a milestone payment to Ligand.

We do not consider this acquisition to represent a material business combination; accordingly, we have not presented pro forma results of our combined operations that are otherwise required.

(c) Allos Acquisition

We acquired Allos Therapeutics, Inc. (“Allos”) on September 5, 2012, as discussed in Note 3 to our Annual Report on Form 10-K for the year ended December 31, 2012.

In connection with the Allos acquisition, we entered into a credit agreement on September 5, 2012 with Bank of America, N.A, as the administrative agent and Wells Fargo Bank, N.A, as an initial lender, as amended July 16, 2013 (the “Credit Agreement”). The Credit Agreement provides us with a committed $50.0 million revolving line of credit facility (the “Credit Facility”). The Credit Facility expires on September 5, 2014.

The Credit Facility bears interest, at our election, at a rate equal to the London Interbank Offer Rate, or LIBOR rate, or the base rate, plus an applicable margin (2.75% to 4.25%, dependent on a defined liquidity ratio).

We incurred $1.0 million in related loan costs and fees, which were deferred and will be amortized using the effective interest method over 24 months, the term of the Credit Facility. Amortization expense included in interest expense in the accompanying condensed consolidated statements of operations was $0.5 million and $40,000 for the nine months ended September 30, 2013 and 2012, respectively.

An unused line fee is payable quarterly in an amount ranging from 0.375% to 0.625% of the sum of the average daily unused portion of the facilities during any quarter based upon consolidated leverage ratio as at the last test date. A customary fee is also payable to the administrative agent on an annual basis in advance. Related interest expense for the unused line fee was $0.1 million for the nine months ended September 30, 2013.

Our direct and indirect domestic subsidiaries guaranty our obligations under the Credit Facility. The Credit Agreement includes the following quarterly financial covenants:

In addition, the Credit Agreement includes certain negative covenants that, subject to exceptions, limit our ability to, among other things incur additional indebtedness, engage in future mergers, consolidations, liquidations and dissolutions, sell assets, pay dividends and distributions on or repurchase capital stock, and enter into or amend other material agreements. At September 30, 2013, we were in compliance with all financial covenants.

22

SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

As the result of Allos becoming our wholly-owned subsidiary, effective September 5, 2012, we assumed obligations under a strategic collaboration agreement with Mundipharma (the “Mundipharma Collaboration Agreement”). Under the Mundipharma Collaboration Agreement, we retained full commercialization rights for FOLOTYN in the U.S. and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world (the “Mundipharma Territories”).

On May 29, 2013, the Mundipharma Collaboration Agreement was amended and restated (the “Amended Munipharma Collaboration Agreement”), in order to modify the scope of the licensed territory and the respective development obligations. As a result, Europe and Turkey were excluded from Mundipharma’s commercialization territory, and royalty and milestone rates were modified. We may now also receive potential regulatory milestone payments of up to $16.0 million and commercial progress and sales-dependent milestone payments of up to $107.0 million. We will also receive tiered double- digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories consistent with the terms of the original Munidpharma Collaboration Agreement.

In connection with the Amended Munipharma Collaboration Agreement, we received a one-time $7.0 million payment from Mundipharma for certain research and development activities to be performed by us. As part of the original Mundipharma Collaboration Agreement, we were obligated to perform research and development services related to jointly agreed-upon clinical development activities through approximately 2022. We recorded the fair value of the related deferred development cost obligation of $12.3 million as of September 5, 2012, using the discounted cash flow method of the income approach. This development cost liability was determined to be $18.7 million as of September 30, 2013 (inclusive of the $7.0 million payment from Mundipharma), which includes assumptions about our estimates of personnel needed to perform these research and development services, and expected third party costs for services and supplies for our projected clinical trial enrollment and patient treatment-related follow up time periods through approximately 2031. We will assess this liability at each subsequent reporting date and record its change within research and development expense in our Condensed Consolidated Statements of Operations.

Under the original Mundipharma Collaboration Agreement, Mundipharma was initially responsible for 40% of the joint development costs incurred by the parties, which increased to 50% upon the later of (i) the calendar quarter of the first approval of FOLOTYN in the EU for relapsed or refractory PTCL, and (ii) the first calendar quarter in which the development cost differential equals or exceeds $15.0 million. The “development cost differential” was defined as the cumulative amount of joint development costs that Mundipharma would have incurred if it was responsible for 50% of the joint development costs rather than its initial 40% share. To the extent that this development cost differential did not meet or exceed $15.0 million by December 31, 2019, then we were obligated to pay Mundipharma the difference between $15.0 million and the amount of the development cost differential as of December 31, 2019.

Research and development for the three and nine months ended September 30, 2013 included $-0- and $0.6 million, respectively, related to the 40% joint development cost reimbursement under the original Mundipharma Collaboration Agreement. The Amended Mundipharma Collaboration Agreement eliminated the development cost differential computation requirement. Prospectively, we and Mundipharma will bear our own development costs.

As of September 30, 2013 and December 31, 2012, deferred amounts related to the Mundipharma Agreements consisted of:

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SPECTRUM PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(all tabular amounts presented in thousands, except share and per share, and number of years)

(Unaudited)

(a) Facility Lease

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

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

(b) Licensing Agreements, Co-Development Agreements, and Milestone Payments

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

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

(i) ZEVALIN licensing and development in the United States

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

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

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

In connection with the joint venture arrangement with CTI, we entered into an amendment to the original asset purchase agreement between CTI and Biogen, referred to as the CTI/Biogen Agreement, modifying future milestone payments. Pursuant to the terms of the agreement, as amended, (i) upon the achievement of the specified FDA approval milestone, which was achieved in 2009, RIT (as successor to CTI) paid Biogen an additional amount of $5.5 million, (ii) RIT may be required to make an additional $10.0 million milestone payment upon the achievement of an additional FDA