10-Q 1 gale-20140930x10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
________________________________
(Mark One)

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

For the quarterly period ended September 30, 2014
OR

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

For the transition period from to
Commission File Number: 001-33958
________________________________
Galena Biopharma, Inc.
(Exact name of registrant as specified in its charter)
________________________________

Delaware |  | 20-8099512
(State of incorporation) |  | (I.R.S. Employer Identification No.)

4640 SW Macadam Ave., Suite 270, Portland, OR 97239
(Address of principal executive office) (Zip code)
Registrant’s telephone number: (855) 855-4253
________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer |  | o |  | Accelerated filer |  | ý
Non-accelerated filer |  | o | (Do not check if a smaller reporting company) | Smaller reporting company |  | o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): o Yes ý No
As of October 31, 2014, Galena Biopharma, Inc. had outstanding 121,457,118 shares of common stock, $0.0001 par value per share, exclusive of treasury shares.

GALENA BIOPHARMA, INC.
FORM 10-Q — QUARTER ENDED SEPTEMBER 30, 2014
INDEX

Part No. |  | Item No. |  | Description | Page No.
I |  |  |  | FINANCIAL INFORMATION |
|  | 1 |  | Financial Statements | 2
|  |  |  | Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013 | 2
|  |  |  | Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013 | 3
|  |  |  | Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014 | 4
|  |  |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 | 5
|  |  |  | Notes to Condensed Consolidated Financial Statements (unaudited) | 6
|  | 2 |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
|  | 3 |  | Quantitative and Qualitative Disclosures About Market Risk | 34
|  | 4 |  | Controls and Procedures | 34
II |  |  |  | OTHER INFORMATION |
|  | 1 |  | Legal Proceedings | 36
|  | 6 |  | Exhibits | 37
Index to Exhibits | 37
Signatures | 38
EX-10.1 |
EX-31.1 |
EX-31.2 |
EX-32.1 |

1

PART I
ITEM 1. FINANCIAL STATEMENTS
GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)

| September 30, 2014 |  | December 31, 2013
| (Unaudited) |
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 24,647 |  |  | $ | 47,787 |
Restricted cash | 200 |  |  | 200 |
Accounts receivable | 1,435 |  |  | 3,683 |
Inventories | 450 |  |  | 386 |
Prepaid expenses | 1,789 |  |  | 1,399 |
Total current assets | 28,521 |  |  | 53,455 |
Equipment and furnishings, net | 589 |  |  | 665 |
In-process research and development | 12,864 |  |  | 12,864 |
Abstral rights, net | 14,714 |  |  | 14,979 |
Zuplenz rights | 7,663 |  |  | — |
GALE-401 rights | 9,155 |  |  | — |
Goodwill | 5,898 |  |  | 5,898 |
Deposits and other assets | 88 |  |  | 115 |
Total assets | $ | 79,492 |  |  | $ | 87,976 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 3,360 |  |  | $ | 2,660 |
Accrued expenses and other current liabilities | 15,292 |  |  | 8,667 |
Current maturities of capital lease obligations | 6 |  |  | 6 |
Fair value of warrants potentially settleable in cash | 8,765 |  |  | 48,965 |
Current portion of long-term debt | 4,163 |  |  | 2,149 |
Total current liabilities | 31,586 |  |  | 62,447 |
Capital lease obligations, net of current maturities | 17 |  |  | 26 |
Deferred tax liability | 5,053 |  |  | 5,053 |
Contingent purchase price consideration | 6,880 |  |  | 6,821 |
Long-term debt, net of current portion | 5,097 |  |  | 7,743 |
Total liabilities | 48,633 |  |  | 82,090 |
Commitments and contingencies |  |  |
Stockholders’ equity: |  |  |
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding | — |  |  | — |
Common stock, $0.0001 par value; 200,000,000 shares authorized, 122,132,118 shares issued and 121,457,118 shares outstanding at September 30, 2014; 110,100,701 shares issued and 109,425,701 shares outstanding at December 31, 2013 | 11 |  |  | 10 |
Additional paid-in capital | 242,222 |  |  | 188,600 |
Accumulated deficit | (207,525 | ) |  | (178,875 | )
Less treasury shares at cost, 675,000 shares | (3,849 | ) |  | (3,849 | )
Total stockholders’ equity | 30,859 |  |  | 5,886 |
Total liabilities and stockholders’ equity | $ | 79,492 |  |  | $ | 87,976 |

See accompanying notes to condensed consolidated financial statements.
2

Table of Contents
GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands, except share and per share data)
(Unaudited)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Net revenue | $ | 1,620 |  |  | $ | 1,170 |  |  | $ | 6,124 |  |  | $ | 1,170 |
Costs and expenses: |  |  |  |  |  |  |
Cost of revenue (excluding amortization of certain acquired intangible assets) | 247 |  |  | 258 |  |  | 925 |  |  | 258 |
Research and development | 7,243 |  |  | 3,633 |  |  | 22,082 |  |  | 13,990 |
Selling, general, and administrative | 7,268 |  |  | 4,129 |  |  | 23,698 |  |  | 8,369 |
Amortization of certain acquired intangible assets | 70 |  |  | 43 |  |  | 259 |  |  | 43 |
Total costs and expenses | 14,828 |  |  | 8,063 |  |  | 46,964 |  |  | 22,660 |
Operating loss | (13,208 | ) |  | (6,893 | ) |  | (40,840 | ) |  | (21,490 | )
Non-operating income (expense): |  |  |  |  |  |  |
Change in fair value of warrants potentially settleable in cash | 6,735 |  |  | (1,614 | ) |  | 13,174 |  |  | (7,135 | )
Interest income (expense), net | (297 | ) |  | (314 | ) |  | (925 | ) |  | (495 | )
Other income (expense) | 597 |  |  | 693 |  |  | (59 | ) |  | 881 |
Total non-operating income (expense), net | 7,035 |  |  | (1,235 | ) |  | 12,190 |  |  | (6,749 | )
Loss before income taxes | (6,173 | ) |  | (8,128 | ) |  | (28,650 | ) |  | (28,239 | )
Income tax expense (benefit) | — |  |  | 1,159 |  |  | — |  |  | (62 | )
Net loss | $ | (6,173 | ) |  | $ | (9,287 | ) |  | $ | (28,650 | ) |  | $ | (28,177 | )
Net loss per common share: |  |  |  |  |  |  |
Basic and diluted net loss per share | $ | (0.05 | ) |  | $ | (0.11 | ) |  | $ | (0.24 | ) |  | $ | (0.33 | )
Weighted-average common shares outstanding: basic and diluted | 119,038,656 |  |  | 87,319,450 |  |  | 117,767,791 |  |  | 84,678,612 |
Comprehensive loss |  |  |  |  |  |  |
Net loss | $ | (6,173 | ) |  | $ | (9,287 | ) |  | $ | (28,650 | ) |  | $ | (28,177 | )
Reclassification of unrealized gain upon sale of marketable securities | — |  |  | (841 | ) |  | — |  |  | (1,636 | )
Unrealized gain (loss) on marketable securities | — |  |  | (2,108 | ) |  | — |  |  | 1,795 |
Tax effect of reclassification of unrealized gain upon sale of marketable securities | — |  |  | 330 |  |  | — |  |  | 643 |
Tax effect of unrealized gain on marketable securities | — |  |  | 828 |  |  | — |  |  | (705 | )
Total comprehensive loss | $ | (6,173 | ) |  | $ | (11,078 | ) |  | $ | (28,650 | ) |  | $ | (28,080 | )

See accompanying notes to condensed consolidated financial statements.
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GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
(Unaudited)

| Common Stock |  | Additional Paid-In Capital |  | Accumulated Deficit |  | Treasury Stock |  | Total
| Shares Issued |  | Amount |  |  |  |  |  |  |  |
Balance at December 31, 2013 | 110,100,701 |  |  | $ | 10 |  |  | $ | 188,600 |  |  | $ | (178,875 | ) |  | $ | (3,849 | ) |  | $ | 5,886 |
Issuance of common stock for milestone payment | 3,000,000 |  |  | — |  |  | 6,840 |  |  | — |  |  | — |  |  | 6,840 |
Issuance of common stock upon exercise of warrants | 5,467,027 |  |  | 1 |  |  | 37,742 |  |  | — |  |  | — |  |  | 37,743 |
Issuance of common stock in connection with employee stock purchase plan | 114,630 |  |  | — |  |  | 263 |  |  | — |  |  | — |  |  | 263 |
Stock-based compensation for directors and employees | — |  |  | — |  |  | 4,297 |  |  | — |  |  | — |  |  | 4,297 |
Stock-based compensation for services | — |  |  | — |  |  | 138 |  |  | — |  |  | — |  |  | 138 |
Exercise of stock options | 3,449,760 |  |  | — |  |  | 4,342 |  |  | — |  |  | — |  |  | 4,342 |
Net loss | — |  |  | — |  |  | — |  |  | (28,650 | ) |  | — |  |  | (28,650 | )
Balance at September 30, 2014 | 122,132,118 |  |  | $ | 11 |  |  | $ | 242,222 |  |  | $ | (207,525 | ) |  | $ | (3,849 | ) |  | $ | 30,859 |

See accompanying notes to condensed consolidated financial statements.
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GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

| For the Nine Months Ended September 30,
| 2014 |  | 2013
Cash flows from operating activities: |  |  |
Net loss | $ | (28,650 | ) |  | $ | (28,177 | )
Adjustment to reconcile net loss to net cash used in operating activities: |  |  |
Depreciation and amortization expense | 665 |  |  | 168 |
Gain on sale of marketable securities | — |  |  | (1,392 | )
Deferred taxes | — |  |  | (63 | )
Non-cash stock-based compensation | 4,435 |  |  | 1,344 |
Change in fair value of common stock warrants | (13,174 | ) |  | 7,135 |
Change in fair value of contingent consideration | 59 |  |  | 559 |
Changes in operating assets and liabilities: |  |  |
Accounts receivable | 2,248 |  |  | (1,543 | )
Inventories | (64 | ) |  | (425 | )
Prepaid expenses and other assets | (363 | ) |  | 68 |
Accounts payable | 700 |  |  | (86 | )
Accrued expenses and other current liabilities | 2,018 |  |  | 1,975 |
Net cash used in operating activities | (32,126 | ) |  | (20,437 | )
Cash flows from investing activities: |  |  |
Change in restricted cash | — |  |  | 1 |
Cash paid for acquisition of Abstral rights | — |  |  | (10,075 | )
Cash paid for acquisition of Zuplenz rights | (3,056 | ) |  | — |
Cash paid for acquisition of GALE-401 rights | (2,315 | ) |  | — |
Proceeds from sale of marketable securities | — |  |  | 1,392 |
Cash paid for purchase of equipment and furnishings | (48 | ) |  | (554 | )
Net cash used in investing activities | (5,419 | ) |  | (9,236 | )
Cash flows from financing activities: |  |  |
Net proceeds from issuance of common stock | — |  |  | 37,520 |
Net proceeds from exercise of stock options | 4,342 |  |  | 9 |
Proceeds from exercise of warrants | 10,717 |  |  | 820 |
Proceeds from common stock issued in connection with ESPP | 263 |  |  | 69 |
Net proceeds from issuance of long-term debt | — |  |  | 9,865 |
Principle payments on long-term debt | (908 | ) |  | — |
Repayments of capital lease obligations | (9 | ) |  | (21 | )
Net cash provided by financing activities | 14,405 |  |  | 48,262 |
Net decrease in cash and cash equivalents | (23,140 | ) |  | 18,589 |
Cash and cash equivalents at the beginning of period | 47,787 |  |  | 32,807 |
Cash and cash equivalents at end of period | $ | 24,647 |  |  | $ | 51,396 |
Supplemental disclosure of cash flow information: |  |  |
Cash received during the periods for interest | $ | 13 |  |  | $ | 13 |
Cash paid during the periods for interest | $ | 632 |  |  | $ | 195 |
Supplemental disclosure of non-cash investing and financing activities: |  |  |
Future payment for Abstral rights included in accrued expenses | $ | — |  |  | $ | 5,000 |
Future obligations for Zuplenz rights included in accrued expenses | $ | 4,607 |  |  | $ | — |
Fair value of warrants issued in connection with common stock recorded as cost of equity | $ | — |  |  | $ | 8,238 |
Reclassification of warrant liabilities upon exercise | $ | 27,026 |  |  | $ | 2,070 |
Common stock issued in settlement of contingent purchase price consideration | $ | — |  |  | $ | 1,000 |
Change in fair value of marketable securities | $ | — |  |  | $ | 1,551 |

See accompanying notes to condensed consolidated financial statements.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Overview
Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “company”) is a biopharmaceutical company developing and commercializing innovative, targeted oncology therapeutics that address major medical needs across the full spectrum of cancer care. Galena’s development portfolio ranges from mid- to late-stage clinical assets, including an immunotherapy program led by NeuVax™ (nelipepimut-S) currently in an international, Phase 3 clinical trial. The Company’s commercial drugs include Abstral® (fentanyl) Sublingual Tablets and Zuplenz® (ondansetron) Oral Soluble Film. Collectively, Galena’s clinical and commercial strategy focuses on identifying and advancing therapeutic opportunities to improve cancer care, from direct treatment of the disease to the reduction of its debilitating side-effects.
Developing Novel Cancer Immunotherapies
Galena is developing peptide vaccine cancer immunotherapies, which address major patient populations of cancer survivors to prevent recurrence of their cancers. These therapies work by harnessing the patient’s own immune system to seek out and attack residual cancer cells and micro-metastases. Our peptide vaccines are delivered with the immune adjuvant, recombinant human granulocyte macrophage-colony stimulating factor (rhGM-CSF).
Our lead immunotherapy product candidate, NeuVax TM (nelipepimut-S) is the immunodominant nonapeptide derived from the extracellular domain of the HER2 protein, a well-established target for therapeutic intervention in breast and gastric carcinomas. Despite having no evidence of disease following standard of care therapy, many patients will still relapse. Increased presence of circulating tumor cells (CTCs) may be an indicator of decreased Disease Free Survival (DFS) and Overall Survival (OS), suggesting a dormancy of isolated micrometastases that over time may lead to recurrence. The nelipepimut sequence stimulates specific cytotoxic T lymphocytes (CTLs) following binding to HLA-A2 or A3 molecules on antigen presenting cells (APC) to elicit a specific and potentially robust killer CD8+ CTL response. These activated specific CTLs recognize, neutralize and destroy, through cell lysis, HER2 expressing cancer cells, including occult cancer cells and micrometastatic foci. The nelipepimut immune response can also generate CTLs to other immunogenic peptides through inter- and intra-antigenic epitope spreading. We currently have four ongoing or planned trials with NeuVax:

• | Phase 3 Ongoing: Our international, randomized, multicenter, double-blind Phase 3 PRESENT (P revention of R ecurrence in E arly-S tage, Node-Positive Breast Cancer with Low-to-Intermediate HER2 E xpression with NeuVax T reatment) study is enrolling HER2 1+ and 2+ node positive breast cancer patients who have no evidence of disease following their standard of care treatment. The trial is being run under a Special Protocol Assessment (SPA) granted by the U.S. Food and Drug Administration (FDA). Additional information on the study can be found at www.neuvax.com.

• | Phase 2b Ongoing: A randomized, multicenter, investigator-sponsored, 300 patient Phase 2b clinical trial is currently enrolling HER2 1+ and 2+, node positive, and high-risk node negative patients to study NeuVax in combination with Herceptin® (trastuzumab; Genentech/Roche) in the adjuvant setting.

• | Phase 2 Planned: A randomized, multicenter, prospective, single-blinded, placebo controlled investigator-sponsored Phase 2 trial is expected to initiate in 2014 to study NeuVax in combination with Herceptin. The trial will enroll 100 patients with a diagnosis of HER2 3+ or HER2 gene-amplified breast cancer who are HLA A2+ or HLA A3+ and are determined to be at high-risk for recurrence.

• | Phase 2 Planned: In January 2014, we partnered NeuVax with Dr. Reddy’s in India for the commercialization of NeuVax in that region. Per the agreement, Dr. Reddy’s is responsible for running a Phase 2 gastric cancer trial of NeuVax in India that is expected to initiate in early 2015.

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Our second peptide immunotherapy product candidate, GALE-301 (Folate Binding Protein, or “FBP”), is derived from a protein that is over-expressed (20-80 fold) in more than 90% of ovarian and endometrial cancers. GALE-301 is an immunogenic peptide(s) combined with rhGM-CSF that can stimulate CTLs to recognize and destroy FBP-expressing cancer cells. GALE-301 is currently in a Phase 2 trial in ovarian and endometrial cancer. Ovarian cancer is the eleventh most common cancer among women and the fifth leading cause of cancer related death among women, and the deadliest of all gynecological cancers. Initial results from the GALE-301 Phase 1 trial indicate that the agent is capable of generating a strong immune response to the FBP peptide(s), while the initial clinical data has indicated a trend in the reduction of recurrences. Top line data from the Phase 2a trial is expected to be available in the summer of 2015.
Expanding into Hematology
Our third product candidate, GALE-401 (anagrelide controlled release (CR)) was acquired on January 12, 2014. GALE-401 contains the active ingredient anagrelide, an FDA-approved product, which has been in use since the late 1990s for the treatment of patients with myeloproliferative neoplasms to lower abnormally elevated platelet levels. GALE-401 is a reformulated, controlled release version of anagrelide that is currently only given as an immediate release (IR) version. Multiple Phase 1 studies in approximately 90 healthy subjects have shown the drug to be effective at lowering platelet levels while reducing side effects. Based on a regulatory meeting with the FDA, Galena believes a 505(b)(2) regulatory filing is an acceptable pathway for GALE-401 development, with the reference drug Agrylin® (anagrelide; Shire Pharmaceuticals). GALE-401 is currently in a Phase 2 proof of concept trial expected to enroll approximately 20 patients for the treatment of thrombocytosis, or elevated platelet counts in patients with myeloproliferative neoplasms including polycythemia vera, chronic myelognenous leukemia, and essential thrombocythemia.
In the future, we may pursue selective strategic alliances and acquisitions of other cancer treatments to complement or add to our existing cancer product pipeline.
Commercial Capabilities
Galena has established an oncology commercial portfolio to support its development pipeline in a number of key strategic areas in the United States.
Our first commercial product, Abstral® (fentanyl) Sublingual Tablets, is approved for the treatment of breakthrough cancer pain (BTcP) which affects an estimated 40%-80% of all cancer patients. Abstral is approved by the FDA, as a sublingual (under the tongue) tablet for the management of breakthrough pain in patients with cancer, 18 years of age and older, who are already receiving, and who are tolerant to, opioid therapy for their persistent baseline cancer pain. The Abstral formulation delivers the analgesic power and increased bioavailability of micronized fentanyl in a sublingual tablet which is designed to dissolve under the tongue in seconds and provide relief of breakthrough pain within minutes. Abstral is a transmucosal immediate release fentanyl (TIRF) product with product class oversight by the TIRF Risk Evaluation and Mitigation Strategy (REMS) access program. Galena manufactures and markets Abstral in the United States through its commercial organization.
In July 2014 we expanded our commercial portfolio through the licensing of our second product, Zuplenz® (ondansetron) Oral Soluble Film, from MonoSol Rx, LLC (MonoSol”). Zuplenz is approved by the FDA in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). Zuplenz is also approved in pediatric patients treated with moderately emetogenic CINV. Nausea and vomiting are two of the most common side-effects experienced by patients receiving chemotherapy or radiation, as well as post-surgery patients. It is estimated that up to 90% of chemotherapy and up to 80% of radiotherapy patients will experience CINV and RINV, respectively.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Zuplenz utilizes MonoSol’s proprietary PharmFilm® technology, an oral soluble film that dissolves on the tongue in less than thirty seconds. Zuplenz eliminates the burden of swallowing pills during periods of emesis, may be advantageous for patients with oral irritation, and may increase patient adherence and the patient's ability to keep the medication down without vomiting. The active pharmaceutical ingredient in Zuplenz, ondansetron, belongs to a class of medications called serotonin 5-HT 3 receptor antagonists and works by blocking the action of serotonin, a natural substance that may cause nausea and vomiting. Ondansetron is the most widely prescribed drug in this class of anti-emetics, and used broadly across the oncology spectrum. MonoSol will exclusively manufacture Zuplenz for sale by Galena in the United States through its commercial organization.
Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements included herein have been prepared by Galena pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Unless the context otherwise indicates, references in these notes to the “company,” “we,” “us” or “our” refer (i) to Galena, our wholly owned subsidiary, Apthera, Inc., or “Apthera,” and our wholly owned subsidiary, Mills Pharmaceuticals, Inc. or "Mills."
Uses of Estimates in Preparation of Financial Statements — The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Principles of Consolidation — The consolidated financial statements include the accounts of Galena and its wholly owned subsidiaries. All material intercompany accounts have been eliminated in consolidation.
Reclassifications — Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on net loss per share.
Cash and Cash Equivalents — The company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts and demand deposits.
Restricted Cash — Restricted cash consists of certificates of deposit on hand with the company’s financial institutions as collateral for its corporate credit cards.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash equivalents, marketable securities, accounts receivable, accounts payable, and capital leases approximate their fair values due to their short-term nature and market rates of interest.
Accounts Receivable - The company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment history, published credit reports and use of credit references. Management performs analysis to evaluate accounts receivables to ensure recorded amounts reflect estimated net realizable value.
Inventories — Inventories are stated at the lower of cost or market value and are determined using the first-in, first-out ("FIFO") method. Inventories consist of Abstral work-in-process and finished goods. The company has entered into manufacturing and supply agreements for the manufacture and packing of Abstral finished goods. As of September 30, 2014, the company had inventories of $450,000, consisting of $232,000 of work-in-process and $218,000 of finished goods. As of December 31, 2013, the company had inventories of $386,000 consisting of $270,000 of work-in-process and $116,000 of finished goods.
Equipment and Furnishings — Equipment and furnishings are stated at cost and depreciated using the straight-line method based on the estimated useful lives (generally three to five years) of the related assets.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Goodwill and Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment at the reporting unit level, or more frequently if events and circumstances indicate impairment may have occurred. Factors the company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
•Significant changes in the manner of its use of acquired assets or the strategy for its overall business;
•Significant negative industry or economic trends;
•Significant decline in stock price for a sustained period; and
•Significant decline in market capitalization relative to net book value.
Goodwill and other intangible assets with indefinite lives are evaluated for impairment first by a qualitative assessment to determine the likelihood of impairment. If it is determined that impairment is more likely than not, the company will then proceed to the two step impairment test. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill for its single reporting unit and its indefinite-lived intangible assets, the company determines fair values of its goodwill using the market approach, and its indefinite-lived intangible assets using the income approach.
Intangible assets not considered indefinite-lived are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The company’s policy is to identify and record impairment losses, if necessary, on intangible assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.
The company performed its review for impairment using the qualitative assessment for both goodwill and indefinite-lived intangible assets, as well as assets not considered to be indefinite-lived, and has determined that there has been no impairment to these assets as of September 30, 2014.
Revenue Recognition - The company recognizes revenue from the sale of Abstral. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.
We sell Abstral product in the United States to wholesale pharmaceutical distributors and retail pharmacies, or our "customers," subject to rights of return. We recognize Abstral product sales at the time title transfers to our customer, and provide allowances for estimated future product returns, prompt pay discounts, wholesaler discounts, rebates, chargebacks, patient assistance program benefits and other deductions as needed. The company is required to make significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, the company will be required to make adjustments to these allowances in the future.
Returns - The company estimates future returns based on historical return information, as well as information regarding prescription information and sell-through trends, in relation to the estimated amount of product in the sales channels and product expiration dates. The allowance for returns is recorded as a reduction to revenue in the period in which the revenue is recognized, with a corresponding allowance against accounts receivable.
Prompt Pay Discounts - As an incentive for prompt payment, the company offers a cash discount to customers, which is generally 2% of gross sales. The company expects that all customers will comply with the contractual terms to earn the discount. The company records prompt pay discounts as a reduction to revenue in the period in which the revenue is recognized, with a corresponding allowance against accounts receivable.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Wholesaler Discounts - The company offers discounts on sales to wholesalers and distributors based on contractually determined rates. The company accrues the discount as a reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.
Rebates - The company participates in certain rebate programs, which provide discounted prescriptions to members of certain managed care organizations, group purchasing organizations and specialty pharmacies. Under these rebate programs, the company pays the rebates generally two to three months after the end of the quarter in which prescriptions subject to the rebate are filled. The company estimates and accrues these rebates based on current contract prices, historical and estimated future percentages of product sold to qualifying member pharmacies and estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction to revenue in the period that the related revenue is recognized, with a corresponding liability in accrued expenses and other current liabilities.
Chargebacks - The company provides discounts primarily to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid or Medicare contracts and regulations. These entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the company the difference between the current retail price and the price the entity paid for the product. The company estimates and accrues chargebacks based on estimated wholesaler inventory levels, current contract prices and historic chargeback activity. Chargebacks are recognized as a reduction of revenue in the period the related revenue is recognized, with a corresponding allowance against accounts receivable.
Patient Assistance Programs - The company offers discount card programs to patients for Abstral in which patients receive discounts on their Abstral prescriptions that are reimbursed by the company. The company estimates the total amount that will be recognized based on a percentage of actual redemption applied to inventory in the distribution and retail channel and recognizes the discount as a reduction of revenue and as an other current liability (see Note 4) in the same period the related revenue is recognized.
Acquisitions and In-Licensing — For all in-licensed products and technologies, we perform an analysis to determine whether we hold a variable interest or a controlling financial interest in a variable interest entity. On the basis of our interpretations and conclusions, we determine whether the acquisition falls under the purview of variable interest entity accounting and if so, consider the necessity to consolidate the acquisition. As of September 30, 2014, we determined there were no variable interest entities required to be consolidated.
We also perform an analysis to determine if the assets and liabilities acquired in an acquisition qualify as a "business." The excess of the purchase price over the fair value of the net assets acquired can only be recognized as goodwill in a business combination.
Contingent Purchase Price Consideration — Contingent consideration in business combinations is recorded at the estimated fair value as of the acquisition date. The fair value of the contingent consideration is re-measured at each reporting period with any adjustments in fair value included in our consolidated statement of comprehensive loss.
Patents and Patent Application Costs — Although the company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are, therefore, expensed as incurred.
Share-based Compensation — The company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, non-employee directors, and consultants, including stock options and warrants. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
For stock options and warrants granted as consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50 (“ASC 505-50”), “ Equity Based Payments to Non- Employees.” Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period is adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.
Research and Development Expenses — Research and development costs are expensed as incurred. Included in research and development costs are wages, benefits and other operating costs, facilities, supplies, external services and overhead related to our research and development departments, and clinical trial expenses.
Clinical trial expenses include direct costs associated with contract research organizations (CROs), as well as patient-related costs at sites at which our trials are being conducted.
Direct costs associated with our CROs are generally payable on a time and materials basis, or when certain enrollment and monitoring milestones are achieved. Expense related to a milestone is recognized in the period in which the milestone is achieved or in which we determine that it is more likely than not that it will be achieved.
The invoicing from clinical trial sites can lag several months. We accrue these site costs based on our estimate of upfront set-up costs upon the screening of the first patient at each site, and the patient related costs based on our knowledge of patient enrollment status at each site.
Income Taxes — The company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the company’s income tax provision or benefit. The recognition and measurement of benefits related to the company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the company’s assumptions or changes in the company’s assumptions in future periods are recorded in the period they become known.
There was no income tax expense or benefit for the three and nine months ended September 30, 2014. For the three months ended September 30, 2013, we recognized income tax expense of $1,159,000. This expense offsets the tax impact related to the unrealized loss on our marketable securities, which is presented as other comprehensive income, net of tax, on our condensed consolidated statement of comprehensive loss. For the nine months ended September 30, 2013, we recognized an income tax benefit of 62,000, which offset the tax impact related to the unrealized gain on our marketable securities. We continue to maintain a full valuation allowance against our net deferred tax assets.
Concentrations of Credit Risk — Financial instruments that potentially subject the company to significant concentrations of credit risk consist principally of cash and cash equivalents. The company maintains cash balances in several accounts with two banks, which at times are in excess of federally insured limits. As of September 30, 2014, the company’s cash equivalents were invested in money market mutual funds. The company’s investment policy does not allow investment in any debt securities rated less than “investment grade” by national ratings services. The company has not experienced any losses on its deposits of cash and cash equivalents. The company maintains significant cash and cash equivalents at two financial institutions that are in excess of federally insured limits.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Comprehensive Loss — Comprehensive loss consists of our net loss and other comprehensive income related to the unrealized gain (loss), net of tax, on our marketable securities, which are classified as available-for-sale. The value of the marketable securities held by the company at September 30, 2013 was approximately $5,786,000, based on quoted market prices of the securities. The company fully liquidated its position in marketable securities during the year ended December 31, 2013, and held no marketable securities as of September 30, 2014.
2. Business Combinations
On July 17, 2014 the Company entered into a definitive license and supply agreement with MonoSol Rx, LLC (MonoSol) for the U.S. commercial rights to Zuplenz® (ondansetron) Oral Soluble Film (Zuplenz), an FDA approved product. The transaction was accounted for as a business combination under the acquisition method of accounting based on Accounting Standards Codification 805, "Business Combinations." Accordingly, the assets acquired and liabilities assumed were recorded at fair value. As of the issuance date of the condensed consolidated financial statements for the quarter ended September 30, 2014, the Company had not finalized the valuation of the acquired assets and liabilities for the transaction.
The following table summarizes the purchase price consideration and allocation of purchase price:

|  | Total Acquisition Date Fair Value
Purchase price consideration: |  |
Cash and cash equivalents |  | $ | 3,056 |
Common stock |  | 2,482 |
Liabilities assumed: |  |
Contingent consideration |  | 741 |
Credit memos for expiring channel inventory |  | 1,384 |
Total consideration |  | $ | 7,663 |
Asset acquired: |  |
Zuplenz rights |  | $ | 7,663 |
Goodwill |  | — |
Fair value of assets acquired |  | $ | 7,663 |

The above contingent consideration represents a risk adjusted net present value relating to cash payments on achievement of certain milestones.
3. Fair Value Measurements
The company follows ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) for the company’s financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and are re-measured and reported at fair value at least annually using a fair value hierarchy that is broken down into three levels. Level inputs are defined as follows:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The company categorized its cash equivalents as Level 1. The valuations for Level 1 were determined based on a “market approach” using quoted prices in active markets for identical assets. Valuation of these assets does not require a significant degree of judgment. The company categorized its warrants potentially settleable in cash as Level 2 inputs. The warrants are measured at market value on a recurring basis and are being marked to market each quarter-end until they are completely settled. The warrants are valued using an appropriate pricing model, using assumptions consistent with our application of ASC 718. The contingent purchase price consideration is categorized as Level 3 inputs and is measured at its estimated fair value on a recurring basis and is adjusted at each quarter-end until it is completely settled. The contingent purchase price consideration is valued based on the expected timing of milestones, the expected probability of success for each milestone and discount rates based on a corporate debt interest rate index publicly issued.
The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):

Description | September 30, 2014 |  | Quoted Prices In Active Markets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Unobservable Inputs (Level 3)
Assets: |  |  |  |  |  |  |
Cash equivalents | $ | 20,332 |  |  | $ | 20,332 |  |  | $ | — |  |  | $ | — |
Total assets measured and recorded at fair value | $ | 20,332 |  |  | $ | 20,332 |  |  | $ | — |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Warrants potentially settleable in cash | $ | 8,765 |  |  | $ | — |  |  | $ | 8,765 |  |  | $ | — |
Contingent purchase price consideration | 6,880 |  |  | — |  |  | — |  |  | 6,880 |
Total liabilities measured and recorded at fair value | $ | 15,645 |  |  | $ | — |  |  | $ | 8,765 |  |  | $ | 6,880 |

Description | December 31, 2013 |  | Quoted Prices In Active Markets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Unobservable Inputs (Level 3)
Assets: |  |  |  |  |  |  |
Cash equivalents | $ | 42,349 |  |  | $ | 42,349 |  |  | $ | — |  |  | $ | — |
Total assets measured and recorded at fair value | $ | 42,349 |  |  | $ | 42,349 |  |  | $ | — |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Warrants potentially settleable in cash | $ | 48,965 |  |  | $ | — |  |  | $ | 48,965 |  |  | $ | — |
Contingent purchase price consideration | 6,821 |  |  | — |  |  | — |  |  | 6,821 |
Total liabilities measured and recorded at fair value | $ | 55,786 |  |  | $ | — |  |  | $ | 48,965 |  |  | $ | 6,821 |

The company did not transfer any financial instruments into or out of Level 3 classification during the nine months ended September 30, 2014 or 2013. A reconciliation of the beginning and ending Level 3 liabilities for the nine months ended September 30, 2014 is as follows (in thousands):

| Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance, January 1, 2014 | $ | 6,821 |
Change in the estimated fair value of the contingent purchase price consideration | 59 |
Balance at September 30, 2014 | $ | 6,880 |

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The fair value of the contingent purchase price consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model. The significant unobservable assumptions include the probability of achieving each milestone, the date we expect to reach the milestone, and a determination of present value factors used to discount future expected cash outflows.
4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):

| September 30, 2014 |  | December 31, 2013
Clinical trial costs | $ | 5,601 |  |  | $ | 3,109 |
Zuplenz milestone payments | 3,222 |  |  | — |
Credit memos for expiring Zuplenz channel inventory | 1,384 |  |  | — |
Patient assistance programs and rebates | 1,969 |  |  | 2,618 |
Compensation and related benefits | 1,946 |  |  | 1,999 |
Professional fees | 919 |  |  | 713 |
Royalties | 188 |  |  | 158 |
Interest expense | 63 |  |  | 70 |
Accrued expenses and other current liabilities | $ | 15,292 |  |  | $ | 8,667 |

5. Long-term Debt
On May 8, 2013 we entered into a loan and security agreement with Oxford Finance LLC, as collateral agent, and related lenders under which we borrowed the first tranche of $10 million (the "Loan"). The Loan payment terms include 12 months of interest-only payments at the fixed coupon rate of 8.45%, followed by 30 months of amortization of principal and interest until maturity in November 2016. In connection with the Loan, we paid the lender a 1% cash facility fee and a 5.5% cash final payment and granted to the lenders seven-year warrants to purchase up to 182,186 shares of our common stock at an exercise price of $2.47, which equaled a 20-day average market price of our common stock prior to the date of the grant.
6. Legal Proceedings, Commitments and Contingencies
Legal Proceedings
Earlier this year, several purported shareholder derivative complaints were filed against our company, as nominal defendant, and certain of our officers and directors in the Circuit Court of Oregon for the County of Multnomah, the United States District Court for the District of Oregon and the Delaware Court of Chancery. On April 11, 2014, the Oregon federal derivative cases were consolidated into one action, In re Galena Biopharma, Inc. Derivative Litig., Nos. 3:14-cv-382, 3:14-cv-514, 3:14-cv-516 (D. Or.). On July 21, 2014, the Oregon state derivative cases were consolidated into one action, Fagin v. Ahn, et al., No. 140202384; Zhang v. Hillsberg, et al., No. 140403987 (Or. Cir. Ct.). On July 22, 2014, all of the Delaware derivative complaints were consolidated into one action, the matter of In re Galena Biopharma, Inc. Stockholder Derivative Litigation, Consolidated C.A. No. 9715-VCN (Del. Ch.). The various complaints allege, among other things, breaches of fiduciary duties and abuse of control by the officers and directors in connection with public statements purportedly issued by us or on our behalf and sales of our common stock by our officers and directors in January and February of this year.
Also, five purported securities class action complaints filed in the United States District Court for the District of Oregon have been consolidated into a single action, In re Galena Biopharma, Inc. Securities Litig., No. 3:14-cv-367 (D. Or.), and a lead plaintiff has been appointed. On October 31, 2014, the lead plaintiff filed a consolidated amended complaint, which alleges, among other things, that certain of our officers and directors violated the federal securities laws by making materially false and misleading statements and omissions in press releases and in filings with the SEC arising out of the same circumstances that are the subject of the derivative actions described above.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We intend to vigorously defend against the foregoing complaints. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of these matters.
In March and April 2014, we received demands (“220 Demands”) pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”) from five purported stockholders of our company to inspect certain of our books and records. Under Delaware law, a stockholder may bring an action to enforce a 220 Demand that has been rejected.
On March 18, 2014, one of the derivative lawsuit shareholders commenced an action (the “220 Action”) against us in the Delaware Court of Chancery under Section 220 (Fuhs v. Galena Biopharma, Inc., No. 9457-ML (Del. Ch.)). In the 220 Action, the plaintiff seeks to inspect our books and records described in his 220 Demand. The 220 Action was stayed prior to trial, and the shareholder has now filed a derivative complaint in the Delaware Court of Chancery. Nevertheless, we intend to vigorously defend against the 220 Action until it is dismissed.
At September 30, 2014, no material liabilities with respect to the foregoing claims have been recorded in our consolidated financial statements. We have notified our insurance carriers of the claims, and the insurers have responded by requesting additional information and by reserving their rights under the policies, including the rights to deny coverage under various policy exclusions.
We are aware that the SEC is investigating certain matters relating to the use of certain outside investor-relations professionals by us and other public companies. We have been in contact with the SEC staff through our counsel and are cooperating with the investigation.
Commitments
On January 12, 2014, we acquired exclusive worldwide license to develop and commercialize GALE‑401 (anagrelide CR), a patented, controlled-release formulation of anagrelide, through our acquisition of Mills Pharmaceuticals, LLC (“Mills”) under a unit purchase agreement. Under the terms of the unit purchase agreement, we made an up-front cash payment of $2 million to the former Mills owners and also agreed to make additional contingent payments to the former owners upon the achievement of certain development milestones relating to GALE‑401, including 2,000,000 shares of our common stock upon initiating the first clinical trial of GALE‑401 in patients with essential thrombocythemia, or “ET,” and an additional 2,000,000 shares upon initiating a Phase 3 clinical study of GALE‑401. The number of shares issuable upon the milestones is subject to increase based on a formula specified in the purchase agreement, up to a maximum of 3,000,000 shares for each milestone, in the event the five‑day average trailing closing price of our common stock (the “Average Price”) is less than $4.84 at the time the applicable milestone is achieved. Similarly, the number of shares issuable upon achievement of the milestones is subject to decrease based on such formula if the Average Price exceeds $6.84 at the time of achievement of the applicable milestone.
We achieved the milestone relating to the initiation of the first clinical trial of GALE-401 in the third quarter of 2014 and issued 3,000,000 shares of common stock to the former owners, the maximum under the unit purchase agreement as our five-day average trailing close price of our common stock was less than the low end of the collar of $4.84. We will record as an addition to the GALE-401 intangible asset the fair value of the shares delivered in payment of each milestone under the Mills unit purchase agreement. The addition to the intangible asset for the fair value of the shares will increase our additional paid-in capital by the same amount, less the par value of the milestone shares. As a result of the achievement of the initiation of the first clinical trial of GALE-401, we recorded an addition to GALE-401 asset and additional paid in capital in the amount of $6.8 million, or the fair value of the shares issued. The milestone payments will have no effect on our net loss.
On July 17, 2014, we entered into a definitive license and supply agreement with MonoSol Rx, LLC (MonoSol) for the U.S. commercial rights to Zuplenz® (ondansetron) Oral Soluble Film, an FDA approved product for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). Refer to Note 12 for details of the transaction.
7. Stockholders’ Equity
Preferred Stock — The company has authorized up to 5,000,000 shares of preferred stock, $0.0001 par value per share, for issuance. The preferred stock will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the company’s board of directors upon its issuance. To date, the company has not issued any preferred shares.
Common Stock — The company has authorized up to 200,000,000 shares of common stock, $0.0001 par value per share, for issuance.
September 2013 Underwritten Public Offering - On September 18, 2013 the company closed an underwritten public offering of 17,500,000 units at a price to the public of $2.00 per unit for gross proceeds of $35 million (the "September 2013 Offering"). Each unit consists of one share of common stock, and a warrant to purchase 0.35 of a share of common stock at an exercise price of $2.50 per share. The September 2013 Offering included an over-allotment option for the underwriters to purchase an additional 2,625,000 shares of common stock and/or warrants up to 918,750 shares of common stock. On September 23, 2013, the underwriters exercised their over-allotment option in full. The additional gross proceeds to the company as a result of the full exercise of the over-allotment option were approximately $5.2 million. The total net proceeds of the September 2013 offering, including the exercise of the over-allotment option, were $37.5 million, after deducting underwriting discounts and commissions and offering expenses payable by the company.
Shares of common stock for future issuance are reserved for as follows (in thousands):

| As of September 30, 2014
Warrants outstanding | 8,540 |
Stock options outstanding | 8,994 |
Options reserved for future issuance under the Company’s 2007 Incentive Plan | 2,484 |
Shares reserved for future issuance under the Employee Stock Purchase Plan | 642 |
Total reserved for future issuance | 20,660 |

8. Warrants
The following is a summary of warrant activity for the six months ended September 30, 2014 (in thousands):

| September 2013 Warrants |  | December 2012 Warrants |  | April 2011 Warrants |  | March 2011 Warrants |  | March 2010 Warrants |  | August 2009 Warrants |  | Consultant and Oxford Warrants |  | Total
Outstanding, January 1, 2014 | 6,442 |  |  | 4,917 |  |  | 1,158 |  |  | 176 |  |  | 290 |  |  | 978 |  |  | 889 |  |  | 14,850 |
Granted | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 300 |  |  | 300 |
Exercised | (2,469 | ) |  | (1,886 | ) |  | (543 | ) |  | — |  |  | (265 | ) |  | (62 | ) |  | (469 | ) |  | (5,694 | )
Outstanding, September 30, 2014 | 3,973 |  |  | 3,031 |  |  | 615 |  |  | 176 |  |  | 25 |  |  | — |  |  | 720 |  |  | 8,540 |
Expiration | September 2018 |  | December 2017 |  | April 2017 |  | March 2016 |  | March 2016 |  | August 2014 |  | Varies 2014-2020 |  |

Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Warrants classified as liabilities
Liability-classified warrants consist of warrants to purchase common stock issued in connection with equity financings in September 2013, December 2012, April 2011, March 2011, March 2010 and August 2009. These warrants are potentially settleable in cash and were determined not to be indexed to our common stock.
The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the condensed consolidated statement of comprehensive loss as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:

| As of September 30, 2014
| September 2013 Warrants |  | December 2012 Warrants |  | April 2011 Warrants |  | March 2011 Warrants |  | March 2010 Warrants
Strike price | $ | 2.50 |  |  | $ | 1.90 |  |  | $ | 0.65 |  |  | $ | 0.65 |  |  | $ | 2.15 |
Expected term (years) | 3.97 |  |  | 3.23 |  |  | 2.56 |  |  | 1.43 |  |  | 1.49 |
Volatility % | 74.39 | % |  | 76.97 | % |  | 78.24 | % |  | 79.41 | % |  | 79.03 | %
Risk-free rate % | 1.41 | % |  | 1.15 | % |  | 0.85 | % |  | 0.32 | % |  | 0.35 | %

| As of December 31, 2013
| September 2013 Warrants |  | December 2012 Warrants |  | April 2011 Warrants |  | March 2011 Warrants |  | March 2010 Warrants |  | August 2009 Warrants
Strike price | $ | 2.50 |  |  | $ | 1.90 |  |  | $ | 0.65 |  |  | $ | 0.65 |  |  | $ | 2.15 |  |  | $ | 4.50 |
Expected term (years) | 4.72 |  |  | 3.98 |  |  | 3.31 |  |  | 2.18 |  |  | 2.24 |  |  | 0.59 |
Volatility % | 71.97 | % |  | 71.38 | % |  | 71.71 | % |  | 73.45 | % |  | 73.36 | % |  | 66.85 | %
Risk-free rate % | 1.61 | % |  | 1.25 | % |  | 0.93 | % |  | 0.45 | % |  | 0.47 | % |  | 0.11 | %

The expected volatility assumptions are based on the company's implied volatility in combination with the implied volatilities of similar publicly traded entities. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the time of valuation. The dividend yield used in the pricing model is zero, because the company has no present intention to pay cash dividends.
The changes in fair value of the warrant liability for the nine months ended September 30, 2014 were as follows (in thousands):

| September 2013 Warrants |  | December 2012 Warrants |  | April 2011 Warrants |  | March 2011 Warrants |  | March 2010 Warrants |  | August 2009 Warrants |  | Total
Warrant liability, January 1, 2014 | $ | 22,950 |  |  | $ | 18,060 |  |  | $ | 5,069 |  |  | $ | 763 |  |  | $ | 945 |  |  | $ | 1,178 |  |  | $ | 48,965 |
Fair value of warrants exercised | (12,713 | ) |  | (10,086 | ) |  | (2,906 | ) |  | — |  |  | (1,159 | ) |  | (162 | ) |  | (27,026 | )
Change in fair value of warrants | (6,066 | ) |  | (4,605 | ) |  | (1,214 | ) |  | (505 | ) |  | 232 |  |  | (1,016 | ) |  | (13,174 | )
Warrant liability, September 30, 2014 | $ | 4,171 |  |  | $ | 3,369 |  |  | $ | 949 |  |  | $ | 258 |  |  | $ | 18 |  |  | $ | — |  |  | $ | 8,765 |

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Warrants classified as equity
Equity-classified warrants consist of warrants issued in connection with consulting services provided to us. Additionally, on May 8, 2013 as a part of our Loan financing, we granted Oxford Financial LLC warrants to purchase up to 182,186 shares of common stock at an exercise price of $2.47, which equaled to the 20-day average market price of our common stock prior to the date of the grant. The warrants were valued using the Black Scholes model as described in Note 8, below. The fair value assumptions for the grant included a volatility of 75.34%, expected term of seven years, risk free rate of 1.20%, and a dividend rate of 0.00%. The fair value of the warrants granted was $1.93 per share. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.
9. Stock-Based Compensation
Options to Purchase Shares of Common Stock — The company follows the provisions ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
For stock options and warrants granted in consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of ASC Topic 505-50. Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period is adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options and warrants are fully vested.
The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of comprehensive loss for the three months and nine months ended September 30, 2014 and 2013, respectively (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Research and development | $ | 92 |  |  | $ | 133 |  |  | $ | 439 |  |  | $ | 391 |
Selling, general, and administrative | 1,208 |  |  | 328 |  |  | 3,997 |  |  | 953 |
Total stock-based compensation | $ | 1,300 |  |  | $ | 461 |  |  | $ | 4,436 |  |  | $ | 1,344 |

The company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Risk free interest rate | 2.02 | % |  | — | % |  | 2.02 | % |  | 1.25 | %
Volatility | 79.10 | % |  | — | % |  | 79.47 | % |  | 77.66 | %
Expected lives (years) | 6.12 |  |  | 0 |  |  | 6.15 |  |  | 6.25 |
Expected dividend yield | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | %

The weighted-average fair value of options granted during the three months and nine months ended September 30, 2014 was $1.78 per share and $1.79 per share, respectively.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The company’s expected common stock price volatility assumption is based upon the company's own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the company’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero, because the company has never paid cash dividends and presently has no intention to do so. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The company has estimated an annualized forfeiture rate of 15% for options granted to its employees, 8% for options granted to senior management and zero for non-employee directors. The company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.
As of September 30, 2014, there was $5,389,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component of the company’s operating expenses over a weighted-average period of 2.67 years.
As of September 30, 2014, an aggregate of 16,500,000 shares of common stock were reserved for issuance under the company’s 2007 Incentive Plan, including 8,994,000 shares subject to outstanding common stock options granted under the plan and 2,484,000 shares available for future grants. The administrator of the plan determines the times when an option may become exercisable. Vesting periods of options granted to date have not exceeded four years. The options will expire, unless previously exercised, no later than ten years from the grant date.
The following table summarizes option activity of the company:

| Total Number of Shares (In Thousands) |  | Weighted Average Exercise Price |  | Aggregate Intrinsic Value (In Thousands)
Outstanding at January 1, 2014 | 13,159 |  |  | $ | 2.73 |  |  | $ | — |
Granted | 1,235 |  |  | 2.57 |  |  | — |
Exercised | (3,608 | ) |  | 1.31 |  |  | 13,429 |
Cancelled | (1,792 | ) |  | 2.42 |  |  | 562 |
Outstanding at September 30, 2014 | 8,994 |  |  | $ | 3.34 |  |  | $ | 1,551 |
Options exercisable at September 30, 2014 | 5,225 |  |  | $ | 3.68 |  |  | $ | 1,088 |

The aggregate intrinsic values of outstanding and exercisable options at September 30, 2014 were calculated based on the closing price of the company’s common stock as reported on The NASDAQ Capital Market on September 30, 2014 of $2.06 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the company’s common stock and the exercise price of the underlying options.
Note 10. Other Income (Expense)
Other income (expense) is summarized as follows (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Realized gain on sale of marketable securities | $ | — |  |  | $ | 814 |  |  | $ | — |  |  | $ | 1,392 |
Change in fair value of the contingent purchase price liability | 597 |  |  | (172 | ) |  | (59 | ) |  | (559 | )
Miscellaneous other income (expense) | — |  |  | 51 |  |  | — |  |  | 48 |
Total other income (expense) | $ | 597 |  |  | $ | 693 |  |  | $ | (59 | ) |  | $ | 881 |

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
11. Net Loss Per Share
The company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260 “Earnings per Share.” Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants.
The following table sets forth the potentially dilutive common shares excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive (in thousands):

| Three and Nine Months Ended September 30,
| 2014 |  | 2013
Warrants to purchase common stock | 8,540 |  |  | 18,903 |
Options to purchase common stock | 8,994 |  |  | 9,928 |
Total | 17,534 |  |  | 28,831 |

12. License Agreements
As part of its business, the company enters into licensing agreements with third parties that often require milestone and royalty payments based on the progress of the licensed assets through development and commercial stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency, and the company may be required to make royalty payments based upon a percentage of net sales of the product. The expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period.
These arrangements sometimes permit the company to unilaterally terminate development of the product and thereby avoid future contingent payments; however, the company is unlikely to cease development if the compound successfully achieves clinical testing objectives.
In conjunction with the acquisition of NeuVax TM, the company acquired rights and assumed obligations under a license agreement among Apthera and The University of Texas M. D. Anderson Cancer Center (“MDACC”) and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (“HJF”) which grants exclusive worldwide rights to a U.S. patent covering the nelipepimut-S peptide and several U.S. and foreign patents and patent applications covering methods of using the peptide as a vaccine. Under the terms of this license, we are required to pay an annual maintenance fee of $200,000, a milestone payment of $200,000 upon commencing the Phase 3 PRESENT trial of NeuVax and other clinical milestone payments, as well as royalty payments based on sales of NeuVax or other therapeutic products developed from the licensed technologies.
On March 18, 2013, we acquired Abstral® (fentanyl) Sublingual Tablets for sale and distribution in the United States from Orexo AB (ORX.ST), an emerging specialty pharmaceutical company based in Sweden. Abstral has been approved by the U.S. Food and Drug Administration (FDA) and is a transmucosal immediate-release fentanyl (TIRF) product.
Under our agreement with Orexo, we assumed responsibility for the U.S. commercialization of Abstral and for all regulatory and reporting matters in the U.S. We also agreed to establish and maintain through 2015 a specified minimum commercial field force to market, sell and distribute Abstral and to use commercially reasonable efforts to reach the specified sales milestones. Orexo is entitled to reacquire the U.S. rights to Abstral from us for no consideration if we breach our obligations to establish and maintain the requisite sales force throughout the marketing period. We expect to maintain our sales efforts beyond this date. We officially launched U.S. commercial sales of Abstral in October 2013.
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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In exchange for the U.S. rights to Abstral, (1) we paid Orexo $10 million upfront, and a $5 million milestone payment in cash in October 2013 upon the approval by the FDA of a specified U.S. manufacturer of Abstral; and (2) we agreed to pay to Orexo: (a) three one-time future cash milestone payments based on our net sales of Abstral; and (b) a low double-digit royalty on future net sales. No further milestone or royalty payments will be due after the date on which all claims of the last remaining licensed patents expire (currently 2019) or become invalidated by a governmental agency.
On January 12, 2014, we acquired worldwide rights to anagrelide controlled release (CR) formulation, which we renamed GALE-401, through our acquisition of Mills Pharmaceuticals, LLC ("Mills") (see Note 5), and Mills became a wholly owned subsidiary. GALE-401 contains the active ingredient anagrelide, an FDA-approved product that has been in use since the late 1990s for the treatment of essential thrombocythemia (ET). Mills holds an exclusive license to develop and commercialize anagrelide CR formulation, pursuant to a license agreement with BioVascular, Inc. Under the terms of the license agreement, Mills has agreed to pay BioVascular, Inc. a mid-to-low single digit royalty on net revenue from the sale of licensed products as well as future cash milestone payments based on the achievement of specified regulatory milestones. Mills is also responsible for patent prosecution and maintenance.
On July 17, 2014, we entered into a definitive license and supply agreement with MonoSol Rx, LLC (MonoSol) for the U.S. commercial rights to Zuplenz® (ondansetron) Oral Soluble Film, an FDA approved product for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). In exchange for the U.S. rights to Zuplenz, in connection with the effectiveness of the license and transfer to us of the New Drug Application (NDA) for Zuplenz, we will pay MonoSol a total of $5 million in cash and shares of our common stock. In addition to these payments, we will pay MonoSol $0.5 million upon the earlier of (a) the occurrence of a specified managed care milestone and (b) December 31, 2014, (ii) $0.25 million within 30 days after MonoSol’s payment of applicable fees relating to the notice of allowance by the United States Patent and Trademark Office of a U.S. patent with composition claims covering Zuplenz that extend beyond 2028, (iii) future cash milestone payments based on our achievement of specified “net sales” of Zuplenz, and (iv) a double-digit royalty on future “net sales.”
Under the terms of the license agreement, we assumed responsibility for the commercialization of Zuplenz and for all regulatory and reporting matters in the U.S. We also agreed in the license and supply agreement to use our best commercial efforts to begin commercializing Zuplenz in the U.S. on or before December 31, 2014 in accordance with a joint commercialization plan to be established by the company and MonoSol. We also agreed that, until net sales of Zuplenz exceed a specified minimum amount or a competing product has been approved by the FDA and is placed into the market for sale, we will maintain a specified minimum number of field sales force personnel on specified terms.
Under the license and supply agreement, MonoSol has the exclusive right to supply all of our requirements for Zuplenz, subject to certain conditions.
13. Significant Customers and Concentration of Credit Risk
The company is engaged in the business of developing and commercializing pharmaceutical products. As of September 30, 2014, the company had one active commercial product, Abstral, available in six dosing strengths, and all sales reported are in the United States.
Sales to the following customers represented 10% or more of net revenue during at least one of the periods are presented as follows:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Customer |  | 2014 |  | 2013 |  | 2014 |  | 2013
Customer A |  | 40 | % |  | 8 | % |  | 44 | % |  | 8 | %
Customer B |  | — | % |  | 64 | % |  | 16 | % |  | 64 | %
Customer C |  | 27 | % |  | 17 | % |  | 14 | % |  | 17 | %
Customer D |  | 11 | % |  | — | % |  | 5 | % |  | — | %
Customer E |  | 14 | % |  | 6 | % |  | 10 | % |  | 6 | %

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following customers represented 10% or more of total accounts receivable as of at least one of the balance sheet dates presented:

|  | September 30, 2014 |  | December 31, 2013
Customer |  | (Unaudited) |
Customer A |  | 39 | % |  | 25 | %
Customer B |  | 8 | % |  | 11 | %
Customer C |  | 25 | % |  | 1 | %
Customer D |  | 10 | % |  | — | %
Customer E |  | 12 | % |  | 54 | %

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GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Our gross revenue is affected by the timing of customer orders, which timing sometimes results in quarter-to-quarter fluctuations in gross revenue. From time to time we have offered favorable pricing and extended payment terms to new wholesale distributor customers as an incentive to place initial Abstral orders. In the second quarter of 2014, we afforded such incentives to one of our principal customers with respect to an order from which we recognized approximately $1.5 million of gross revenue (ex-manufacturer), or approximately $0.9 million of net revenue.
14. Subsequent Events
The company evaluated all events or transactions that occurred after September 30, 2014 up through the date these financial statements were issued. Other than as disclosed elsewhere in the notes to the condensed consolidated financial statements, the company did not have any material recognizable or unrecognizable subsequent events.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this section, "Galena," “we,” “our,” “ours” and “us” refer to Galena Biopharma, Inc. and its consolidated subsidiaries, Apthera, Inc., or “Apthera,” and Mills Pharmaceuticals, Inc., or "Mills."
This management’s discussion and analysis of financial condition as of September30, 2014 and results of operations for the three and nine months ended September 30, 2014 and 2013, respectively, should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2013 which was filed with the SEC on March 17, 2014.
The discussion and analysis below includes certain forward-looking statements related to the commercialization of our products in the U.S., our future financial condition and results of operations and potential for profitability, the sufficiency of our cash resources, our ability to obtain additional equity or debt financing, possible partnering or other strategic opportunities for the development of our products, as well as other statements related to the progress and timing of our product commercialization and development activities, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, which are all forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying or judgments concerning the future financial performance and other matters discussed in this document. The words “may,” “will,” “should,” “plan,” “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to connote forward-looking statements. All forward-looking statements involve certain risks, including the uncertainties and other factors described in our Annual Report on Form 10-K for the year ended December 31, 2013 and in Item 1A. of our quarterly reports on Form10-Q for the quarters ended March 31, 2014 and June 30, 2014, respectively, that could cause our actual commercialization efforts, financial condition and results of operations, and business prospects and opportunities to differ materially from these expressed in, or implied by, those forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise forward-looking statements.
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Overview
Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “company”) is a biopharmaceutical company focused on developing and commercializing innovative, targeted oncology therapeutics that address major medical needs across the full spectrum of cancer care. Galena’s development portfolio ranges from mid- to late-stage clinical assets, including a robust immunotherapy program led by NeuVax™ (nelipepimut-S) currently in an international, Phase 3 clinical trial. The Company’s commercial drugs include Abstral® (fentanyl) Sublingual Tablets and Zuplenz® (ondansetron) Oral Soluble Film. Collectively, Galena’s clinical and commercial strategy focuses on identifying and advancing therapeutic opportunities to improve cancer care, from direct treatment of the disease to the reduction of its debilitating side-effects.
Our strategy is to build value for patients and shareholders through pursuit of the following objectives:

• | Develop novel cancer immunotherapies to address unmet medical needs through the use of peptide based vaccines targeting well-established tumor antigens in the adjuvant, minimum residual disease setting, in high risk patients who are more likely to benefit from immunotherapeutic treatment. Our cancer vaccines seek to significantly decrease the risk of disease recurrence in breast cancer, gastric cancer, and endometrial and ovarian cancers.

• | Expand our pipeline by enhancing the potential clinical and geographic footprint of our development technologies. We can accomplish this through the initiation of additional clinical trials as well as through acquisition of additional development stage products in related oncology and hematology indications. We also seek to leverage valuable partnerships and collaborations, as well as investigator-sponsored trial arrangements, to maximize the scope of potential clinical and commercial opportunities in a cost effective and efficient manner.

• | Maintain commercial capabilities through our established commercial infrastructure through the sale, marketing and distribution of oncology related pharmaceutical products in the United States. This commercial strategy creates the opportunity to generate accretive cash flows to support our development programs, and also provides future leverage to support the potential commercialization of our clinical stage technologies in one of the world's largest economic markets.

The chart below summarizes the current status of our pipeline:
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Develop Novel Cancer Immunotherapies
We are developing peptide vaccine cancer immunotherapies, which address major patient populations of cancer survivors to prevent recurrence of their cancers. Our development programs are targeting unmet medical needs, addressing patients with few or no targeted therapies available to them. These therapies work by harnessing the patient’s own immune system to seek out and attack any residual cancer cells. Using peptide immunogens has many clinical advantages, including a potentially strong safety profile, as these drugs may lack the toxicities typical of most cancer therapies. They also have the potential to evoke long-lasting protection through immune system activation and convenient mode of delivery.
NeuVax™ (nelipepimut-S)
NeuVax™ (nelipepimut-S), our lead cancer immunotherapy, is being developed for the prevention of cancer recurrence in HER2 expressing cancers. NeuVax is the immunodominant nonapeptide derived from the extracellular domain of the HER2 protein, a well-established target for therapeutic intervention in breast and gastric carcinomas. The NeuVax vaccine, nelipepimut-S peptide, is combined with the immune adjuvant, recombinant human granulocyte macrophage-colony stimulating factor (rhGM-CSF) for intradermal administration. Data has shown that an increased presence of circulating tumor cells (CTCs) may predict Disease Free Survival (DFS) and Overall Survival (OS) - suggesting a dormancy of isolated micrometastases, which over time, may lead to recurrence. After binding to the HLA A2 or A3 molecules on antigen presenting cells, the nelipepimut-S sequence stimulates specific cytotoxic T lymphocyte (CTLs). These activated, specific CTLs recognize, neutralize and destroy, through cell lysis, HER2 expressing cancer cells, including occult cancer cells and micrometastatic foci. The nelipepimut immune response can also generate CTLs to other immunogenic peptides through inter- and intra-antigenic epitope spreading.
Breast Cancer: According to the National Cancer Institute, over 230,000 women in the U.S. are diagnosed with breast cancer annually. While improved diagnostics and targeted therapies have decreased breast cancer mortality in the United States, metastatic breast cancer remains incurable. Approximately 75% of breast cancer patients have tissue test positive for some increased amount of the HER2 receptor, which is associated with disease progression and decreased survival. Only approximately 20% to 30% of all breast cancer patients - those with HER2 IHC 3+ disease, or IHC 2+ and FISH positive - have an approved treatment option available. This leaves the majority of breast cancer patients with low-to-intermediate HER2 IHC 1+/2+ ineligible for therapy and without an effective treatment option to prevent cancer recurrence.
NeuVax is a targeted cancer immunotherapy. For our pivotal, Phase 3 trial NeuVax is targeting the 30,000-40,000 of the 230,000 breast cancer patients annually diagnosed in the US who are at a higher risk of their breast cancer recurring, which we refer to as “disease recurrence,” after achieving “no evidence of disease” (NED) status, (or becoming a “survivor”) with standard therapy (surgery, chemotherapy, radiation). These high-risk patients have a particular molecular signature and disease status: HER2 IHC 1+/2+ (oncoprotein associated with aggressive tumor growth), node positive (disease present in the axillary lymph nodes prior to surgery), and HLA A2/A3 (human leukocyte antigen from A2/A3 patients who have the same loci of genes who which represents approximately 65% of population). Up to 25% of resectable node-positive breast cancer patients, having no radiographic evidence of disease following surgery and adjuvant chemo/radiation therapy, still relapse within three years following diagnosis. The prognosis upon recurrence is very poor. These cancer patients presumably still had isolated, undetected tumor cells also known as circulating tumor cells which, over time, led to a recurrence of cancer, either in the breast area (local recurrence) or at a remote location (metastatic disease).
Gastric Cancer: Gastric cancer (also known as stomach cancer) is a disease in which the cells forming the inner lining of the stomach become abnormal and start to divide uncontrollably, forming a cancerous tumor mass. Cancer can develop in any of the five sections of the stomach. Symptoms and outcomes of the disease will vary depending on the location of the cancer. Stomach cancer is one of the leading causes of cancer deaths in several areas of the world, most notably Japan and other Asian countries. Annually, almost one million people will be diagnosed worldwide with stomach cancer and over 800,000 will die from the disease. More than 95% of stomach cancers are caused by adenocarcinomas, malignant cancers that originate in glandular tissues. Overexpression of the HER2 receptor occurs in approximately 20% of gastric and gastro-esophageal junction adenocarcinomas, predominantly those of the intestinal type. Overall, only approximately 20% of patients with stomach cancer live at least five years following diagnosis and new adjuvant treatments are needed to prevent disease recurrence.
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We currently have a number of ongoing or planned clinical trials designed to expand the clinical and geographical footprint of NeuVax:

• | Phase 3 Ongoing: Our Phase 3 PRESENT (P revention of R ecurrence in E arly- S tage, Node-Positive Breast Cancer with Low to Intermediate HER2 E xpression with NeuVax T reatment) study is enrolling HER2 1+ and 2+ patients under a Special Protocol Assessment (SPA) granted by the U.S. Food and Drug Administration (FDA). The multinational, multicenter, randomized, double-blinded PRESENT trial is ongoing in North America, Western and Eastern Europe, and Israel. Additional information on the study can be found at www.neuvax.com.

• | Phase 2b Ongoing: A randomized, multicenter, investigator-sponsored, 300 patient Phase 2b clinical trial is enrolling HER2 1+/2+ node-positive and high-risk node-negative breast cancer patients to study NeuVax in combination with Herceptin® (trastuzumab; Genentech/Roche) in the adjuvant setting.

• | Phase 2 Planned: An investigator-sponsored trial will study NeuVax in combination with Herceptin will enroll 100 HER2 3+ or HER2 gene-amplified breast cancer patients who are HLA A2+ or HLA A3+ and are determined to be at high-risk for recurrence. The trial is expected to initiate in the fourth quarter of 2014. Partial funding for this trial was awarded through the Congressionally Directed Medical Research Program (CDMRP), funded through the Department of Defense (DoD), via legislation known as the Defense Appropriations Act. The grant was given via a Breast Cancer Research Program (BCRP) Breakthrough Award given to the lead investigator for the trial.

• | Phase 2 Planned: In January 2014, we partnered NeuVax with Dr. Reddy’s in India for the commercialization of NeuVax in that region. Per the agreement, Dr. Reddy’s is responsible for running a Phase 2 gastric cancer trial of NeuVax in India that is expected to initiate in the first half of 2015.

GALE-301 (folate binding protein (FBP))
Our second immunotherapy product candidate is GALE-301, or Folate Binding Protein (FBP). GALE-301 is derived from a protein that is over-expressed (20-80 fold) in more than 90% of ovarian and endometrial cancers. GALE-301 is an immunogenic peptide and can stimulate CTLs to recognize and destroy FBP-expressing cancer cells. GALE-301 consists of the FBP peptide(s) combined with recombinant human granulocyte macrophage-colony stimulating factor (rhGM-CSF). GALE-301 is currently in a Phase 2 trial in ovarian and endometrial cancers, and will announce preliminary data in November at the Society for Immunotherapy of Cancer conference. Top line data from the Phase 2 trial is expected to be presented in the summer of 2015.
Ovarian and Endometrial Cancer: Ovarian cancer occurs in more than 22,000 patients per year in the U.S. and is the most lethal gynecologic cancer. Despite the incidence of ovarian cancer being only approximately 20% of that of breast cancer, the number of patients who die from ovarian cancer is nearly 50% of that of breast cancer. Due to the lack of specific symptoms, the majority of ovarian cancer patients are diagnosed at later stages of the disease. These patients have their tumors routinely surgically debulked to minimal residual disease, and then are treated with platinum- and/or taxane-based chemotherapy. While most patients respond to this treatment regimen and become clinically free-of-disease, the majority of these patients will relapse, and once the disease recurs, the treatment options and successes drop dramatically. Endometrial cancer is the most common gynecologic cancer and occurs in more than 46,000 women with more than 8,000 deaths in the U.S. annually. There are two basic types of endometrial cancer: endometrioid and papillary serous. The latter has a much more aggressive clinical course and the majority of these patients will die of this form of the disease.
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Expansion into Hematology
Hematology - GALE-401 (anagrelide controlled release (CR))
On January 13, 2014, we announced the acquisition of the worldwide rights to anagrelide controlled release (CR), which we renamed GALE-401, through our acquisition of Mills Pharmaceuticals, LLC. GALE-401 contains the active ingredient anagrelide, an FDA-approved product, which has been in use since the late 1990s for the treatment of patients with myeloproliferative neoplasms to lower abnormally elevated platelet levels. However, adverse events, such as nausea, diarrhea, abdominal pain, palpitations, tachycardia, and headache are associated with the currently available IR version of anagrelide, and, based on existing data, we believe it to be dose and plasma concentration dependent. Therefore, reducing the maximum concentration (C max) is hypothesized to reduce the side effects, but preserve efficacy. In Phase 1 studies in healthy volunteers, GALE-401 has been shown to significantly reduce the C max of anagrelide following oral administration. Thus, GALE-401 may reduce the peak plasma exposure to lessen the adverse events while maintaining therapeutic levels for platelet inhibition.
Multiple Phase 1 studies in approximately 90 healthy subjects have shown GALE-401 has a favorable pharmacokinetic profile (i.e. reduced C max) and appears to be well tolerated at the doses administered and to be capable of reducing platelet levels. Based on a regulatory meeting with the FDA, Galena believes a 505(b)(2) regulatory filing is an acceptable pathway for development and potential approval of GALE-401, with the reference drug Agrylin® (anagrelide; Shire Pharmaceuticals). The Phase 1 program has provided the desired PK/PD (pharmacokinetic/pharmacodynamic) profile to enable the initiation of the proof-of-concept Phase 2 trial that we initiated in the third quarter of 2014. The trial is expected to enroll approximately 20 patients in approximately 10 sites in the United States for the treatment of thrombocytosis, or elevated platelet counts in patients with myeloproliferative neoplasms including polycythemia vera, chronic myelognenous leukemia, and essential thrombocythemia. We expect to complete the trial in 2014 and present data on the Phase 2 trial in 2015. Based on discussions with the FDA, we believe that only a single Phase 3 trial would be adequate for approval.
Myeloproliferative neoplasms: Myeloproliferative neoplasms (MPNs) are a closely related group of hematological malignancies in which the bone marrow cells that produce the body's blood cells develop and function abnormally. The main myeloproliferative neoplasms are Polycythemia Vera (PV), Essential Thrombocythemia (ET), Primary Myelofibrosis (PMF), and Chronic Myelogenous Leukemia (CML), all of which are associated with high platelet counts. The MPNs are progressive blood cancers that can strike anyone at any age, and for which there is no known cure.
Commercial Capabilities
Abstral® (fentanyl) Sublingual Tablets
Our first commercial product, Abstral® (fentanyl) Sublingual Tablets, is an important treatment option for inadequately controlled breakthrough cancer pain (BTcP), which affects an estimated 40-80% of all cancer patients. Abstral is approved by the U.S. Food and Drug Administration (FDA), and is a sublingual (under the tongue) tablet for the management of breakthrough pain in patients with cancer, 18 years of age and older, who are already receiving, and who are tolerant to, opioid therapy for their persistent baseline cancer pain. The Abstral formulation delivers the analgesic power and increased bioavailability of micronized fentanyl in a convenient sublingual tablet which is designed to dissolve under the tongue in seconds and provide relief of breakthrough pain within minutes. Abstral is a transmucosal immediate release fentanyl (TIRF) product with product class oversight by the TIRF Risk Evaluation and Mitigation Strategy (REMS) access program. Abstral is manufactured for us by contract manufacturers and we distribute and sell Abstral in the U.S. through our commercial organization.
Zuplenz® (ondansetron) Oral Soluble Film
In July 2014 we expanded our commercial portfolio through the licensing of our second commercial product, Zuplenz® (ondansetron) Oral Soluble Film, from MonoSol Rx, LLC. Zuplenz is approved by the FDA in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV) in adult patients. Zuplenz is also approved in pediatric patients treated with moderately emetogenic CINV. Nausea and vomiting are two of the most common side-effects experienced by post-surgery patients and patients receiving chemotherapy or radiation. It is estimated that up to 90% of chemotherapy and up to 80% of radiotherapy patients will experience CINV and RINV, respectively.
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Zuplenz utilizes MonoSol’s proprietary PharmFilm® technology, an oral soluble film that dissolves on the tongue in less than thirty seconds. Zuplenz eliminates the burden of swallowing pills during periods of emesis, may be advantageous for patients with oral irritation, and may increase patient adherence and the patient's ability to keep the medication down without vomiting. The active pharmaceutical ingredient in Zuplenz, ondansetron, belongs to a class of medications called serotonin 5-HT 3 receptor antagonists and works by blocking the action of serotonin, a natural substance that may cause nausea and vomiting. Ondansetron is the most widely prescribed drug in this class of anti-emetics, and used broadly across the oncology spectrum. MonoSol will exclusively manufacture Zuplenz for sale by Galena in the United States through its commercial organization.
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Recent Operational Developments (in reverse chronological order)
Notice of Allowance of Improvement Patent for NeuVax™ (nelipepimut-S) in Japan - We announced the Notice of Allowance from the Japanese Patent Office for NeuVax covering the use of NeuVax alone or in combination with other agents.
On October 14, 2014, we announced the Notice of Allowance from the Japanese Patent Office covering the use of NeuVax™ (nelipepimut-S) alone or in combination with other agents to prevent recurrence of any HER2/neu expressing breast cancer tumor having an immunohistochemistry (IHC) level of 1+ or 2+, or a fluorescencein situhybridization (FISH) rating of less than about 2.0. Once issued, the patent will expire in 2027, not including any patent term extensions.
Notice of Allowance of U.S. Patent Application for NeuVax™ (nelipepimut-S) - We announced the Notice of Allowance of U.S. patent application for NeuVax in combination with Herceptin® (trastuzumab; Genentech/Roche).
On October 8, 2014, we announced the Notice of Allowance of a U.S. patent application covering methods of treating patients having any HER2/neu expressing cancer by administering NeuVax™ (nelipepimut-S) in combination with Herceptin® (trastuzumab; Genentech/Roche). The patent will cover the use of NeuVax in combination with Herceptin for treating patients having any HER2/neu expressing cancer. The patent will expire in 2026, not including any patent term extensions.
Initiated the GALE-401 Phase 2 Clinical Trial - We announced that we had dosed the first patient in the GALE-401, or Anagrelide Controlled Release (CR), Phase 2 Clinical Trial.
On September 9, 2014, we announced the first patient had been dosed in the GALE-401 trial. The Phase 2 study will treat patients with elevated platelet counts in myeloproliferative neoplasms (MPNs) including essential thrombocythemia (ET). Based on discussions with the U.S. Food and Drug Administration (FDA) and pending a successful development program, Galena would pursue approval via the 505(b)(2) regulatory pathway.
Licensed U.S. Commercial Rights to Zuplenz® (ondansetron) Oral Soluble Film - We announced an agreement to license the U.S. commercial rights to Zuplenz from Monosol Rx, LLC.
On July 22, 2014, we announced a definitive agreement to license the U.S. rights for the commercial product, Zuplenz® (ondansetron) Oral Soluble Film. Zuplenz is approved by the FDA in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). Zuplenz is also approved in pediatric patients treated with moderately emetogenic CINV.
Broad U.S. Patent Allowance Granted for NeuVax™ (nelipepimut-S) - We announced the broad allowance from claims covering the use of NeuVax alone or in combination with other agents
On July 1, 2014, we announced the notice of allowance of a U.S. Patent for NeuVax™ (nelipepimut-S) covering the use of NeuVax alone or in combination with other agents to prevent recurrence of any HER2/neu expressing tumor having a fluorescence in situ hybridization (FISH) rating of less than about 2.0.
Full Enrollment in GALE-301 Phase 2a - We announced that we had completed enrollment of 45 patients in the Phase 2a clinical trial for GALE-301, or Folate Binding Protein.
On June 17, 2014, we announced the completion of enrollment in the Phase 2a clinical trial for GALE-301, or Folate Binding Protein (FBP) peptide immunotherapy. We have since over-enrolled the trial with over 50 patients. GALE-301 is administered to HLA-A2 or A3 positive patients in combination with granulocyte macrophage-colony stimulating factor (GM-CSF) as an adjuvant treatment to prevent recurrences in high-risk, ovarian and endometrial cancer patients rendered disease-free after completing standard of care therapy.
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Department of Defense Grant for NeuVax™ (nelipepimut-S) Clinical Trial - We announced the Department of Defense will provide grant funding towards a new clinical trial with NeuVax to prevent breast cancer recurrence in high risk HER2 3+ patients.
On April 28, 2014, we announced the Department of Defense would provide grant funding towards a new clinical trial with NeuVax™ (nelipepimut-S) to prevent breast cancer recurrence in high-risk HER2 3+ patients. The grant, a Breast Cancer Research Program (BCRP) Breakthrough Award, was obtained by Elizabeth A. Mittendorf, M.D., Associate Professor, Department of Surgical Oncology, The University of Texas MD Anderson Cancer Center who will oversee the investigator-sponsored trial. Galena will support the trial with study drug and funding and will have access to the research to support ongoing registration studies. The study will enroll 100 patients and cost approximately $3.0 million, which will be jointly funded by us (sponsoring approximately $1.75 million) and by the grant from the Department of Defense ($1.25 million).
Galena Patient Services Launched - We announced the launch of Galena Patient Services (GPS), a full service program to help manage patient access and reimbursement for patients taking Galena Biopharma Products.
On March 3, 2014, we announced the launch of Galena Patient Services (GPS), a full service support program coordinated through a third party vendor and designed to navigate patient access to Galena Biopharma commercial products. GPS works with healthcare professionals, their patients, and the insurance providers to guide the benefits investigation and approval process, manages the appeals and denial process, locate the preferred pharmacy and execute our Patient Assistance Program for patient reimbursement support.
NeuVax™ (nelipepimut-S) Australian Patent - We received a Notice of Acceptance for a patent for NeuVax by the Australian Patent Office.
On February 28, 2014, we announced that the Australian Patent Office had notified us of a Notice of Acceptance for a patent for NeuVax™ (nelipepimut-S) in Australia. The patent covers the use of NeuVax as a vaccine for the prevention of breast cancer recurrence in patients having low-to-intermediate of HER2, as determined by an IHC score of 1+ or 2+ and a FISH rating of less than 2.0. The patent protection expires in 2028.
Dr. Reddy's Partnership - We entered into a partnership with Dr. Reddy's Laboratories Ltd., which includes future commercialization of NeuVax™ (nelipepimut-S) in India for breast and gastric cancers.
On January 14, 2014, we announced a strategic development and commercialization partnership for NeuVax™ (nelipepimut-S) with Dr. Reddy's Laboratories Ltd. in India. We licensed commercial rights to Dr. Reddy's for NeuVax in breast and gastric cancers, in exchange for development and sales milestones, as well as double-digit royalties on sales. Dr. Reddy's is to lead the Phase 2 development of NeuVax in India in gastric cancer, significantly expanding the potential addressable patient population.
GALE-401 Acquisition - We acquired the worldwide rights to GALE-401, a controlled release formulation of anagrelide.
On January 13, 2014, we announced the acquisition of worldwide rights to GALE-401, a controlled release formulation of anagrelide. If clinical trials are successful, we expect to pursue the expedited 505(b)(2) regulatory pathway to seek approval of GALE-401 for the treatment of myeloproliferative neoplasms, including essential thrombocythemia (ET). Based on multiple Phase 1 studies in healthy volunteers, the controlled release formulation is expected to decrease the adverse event rate relative to the approved product.
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Results of Operations for the Three and Nine Months Ended September 30, 2014 and September 30, 2013
For the three months ended September 30, 2014, our net loss was approximately $6.2 million compared with a net loss of $9.3 million for the three months ended September 30, 2013. The net loss decreased by $3.1 million, or approximately 34%, for the reasons discussed below.
For the nine months ended September 30, 2014, our net loss was approximately $28.7 million compared with a net loss of $28.2 million for the nine months ended September 30, 2013. The net loss increased by $0.5 million, or approximately 2%, for the reasons discussed below.
Abstral is our first commercial product and revenue was recorded for the first time during the second half of 2013. We expect to continue to incur significant costs and expenses in connection with our commercialization of our products in the U.S. before we expect to realize a profit from the sale and distribution of our products. For these reasons, we expect our future results of operation to differ materially from our historical results.
Net Revenue
Net revenue for the three and nine month periods ended September 30, 2014 and 2013, was as follows (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | % Change |  | 2014 |  | 2013 |  | % Change
Net revenue | $ | 1,620 |  |  | $ | 1,170 |  |  | 38 | % |  | $ | 6,124 |  |  | $ | 1,170 |  |  | 423 | %

Net revenue for the three months ended September 30, 2014 was $1.6 million, as compared to $1.2 million for three months ended September 30, 2014. Net revenue for the nine months ended September 30, 2014 was $6.1 million, as compared to $1.2 million for nine months ended September 30, 2014.
We sell Abstral in the United States to wholesale pharmaceutical distributors and retail pharmacies, or our "customers," subject to rights of return. We recognize revenue from product sales at the time title transfers to our customer (ex-manufacturer), and provide allowances for estimated future product returns, prompt pay discounts, wholesaler discounts, rebates, chargebacks, patient assistance program benefits and other deductions as appropriate. Gross revenue, gross-to net-deductions, and net revenue, for the three and nine months ended September 30, 2014 and 2013, respectively, were as follows (in thousands):

| Three Months Ended, |  | Nine Months Ended,
| September 30, 2014 |  | September 30, 2014 |  | September 30, 2013 **
| $ |  | % of Gross Revenue |  | $ |  | % of Gross Revenue |  | $ |  | % of Gross Revenue
Gross revenue (ex-manufacturer) | $ | 2,637 |  |  | 100 | % |  | $ | 11,190 |  |  | 100 | % |  | $ | 2,309 |  |  | 100 | %
Gross to net deductions | 1,017 |  |  | 39 | % |  | 5,066 |  |  | 45 | % |  | 1,139 |  |  | 49 | %
Net revenue | $ | 1,620 |  |  | 61 | % |  | $ | 6,124 |  |  | 55 | % |  | $ | 1,170 |  |  | 51 | %
** Gross revenue, gross to net deductions, and net revenue for the three and nine months ended September 30, 2013 were the same as this was the first quarter that the company generated revenue.

In March of 2014 we launched the Galena Patient Services (GPS) program, a full service support program designed to navigate patient access to Abstral that is coordinated through a third party vendor. Along with the launch of GPS, we also made changes to our patient assistance program (PAP) to reduce the use of free product vouchers and rely more heavily upon an expedited prior authorization process. These changes resulted in both a flattening in the growth in prescription demand and significant improvement in gross-to-net deductions, quarter-over-quarter in 2014. We believe the slowed growth in quarter-over-quarter prescription demand is the temporary result of our GPS program and PAP rules changes, and we anticipate an increase in prescription demand and ex-manufacturer sales in the last quarter of 2014.
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Our gross revenue is also affected by the timing of customer orders, which timing sometimes results in quarter-to-quarter fluctuations in gross revenue. From time to time we have offered favorable pricing and extended payment terms to new wholesale distributor customers as an incentive to place initial Abstral orders. In the second quarter of 2014, we afforded such incentives to one or our principal customers with respect to an order from which we recognized approximately $1.5 million of gross revenue (ex-manufacturer), or approximately $0.9 million of net revenue. The timing and amount of this significant order, and the timing of customer orders in general, may have contributed to a corresponding reduction in customer orders, and in related revenue, in the third quarter of 2014. We believe the same timing differences will create a recovery in net revenues in the fourth quarter, and expect for net revenue for the full year of 2014 to be within the range of our guidance of $8 million to $10 million through increased ex-manufacturer sales and a continued reduction in the gross to net deductions..
Cost of Revenue and Amortization of Certain Acquired Intangible Assets
Cost of revenue and amortization of certain acquired intangible assets for the three and nine months ended September 30, 2014 and 2013, respectively, were as follows (dollars in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | % of net revenue |  | 2013 |  | % of net revenue |  | 2014 |  | % of net revenue |  | 2013 |  | % of net revenue
Cost of revenue (excluding amortization of certain acquired intangible assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Abstral royalties | $ | 188 |  |  | 12 | % |  | $ | 141 |  |  | 12 | % |  | $ | 728 |  |  | 12 | % |  | $ | 141 |  |  | 12 | %
Direct product costs and related overhead | 15 |  |  | 1 | % |  | 50 |  |  | 4 | % |  | 65 |  |  | 1 | % |  | 50 |  |  | 4 | %
Other cost of revenue | 44 |  |  | 3 | % |  | 67 |  |  | 6 | % |  | 132 |  |  | 2 | % |  | 67 |  |  | 6 | %
Total cost of revenue | $ | 247 |  |  | 15 | % |  | $ | 258 |  |  | 22 | % |  | $ | 925 |  |  | 15 | % |  | $ | 258 |  |  | 22 | %
Amortization of certain acquired intangible assets | $ | 70 |  |  | 4 | % |  | $ | 43 |  |  | 4 | % |  | $ | 259 |  |  | 4 | % |  | $ | 43 |  |  | 4 | %

Cost of revenue, which excludes the amortization of certain acquired intangible assets, was $0.2 million and $0.3 million for the three months ended September 30, 2014 and 2013, respectively. Cost of revenue, which excludes the amortization of certain acquired intangible assets, was $0.9 million and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively. Variable cost of revenue includes the royalty due to Orexo and product costs. Product related overhead and other cost of revenue are fixed in nature, and will decrease or increase as a percentage of net revenue as net revenue increases or decreases, respectively. There was no cost of revenue or amortization of certain acquired intangible assets during the three and nine months ended September 30, 2013.
Amortization of certain acquired intangible assets was $70 thousand and $43 thousand for the three months ended September 30, 2014 and 2013, respectively. Amortization of certain acquired intangible assets was $259 thousand and $43 thousand for the nine months ended September 30, 2014 and 2013, respectively. Amortization of certain acquired intangible assets is a non-cash variable cost based on net revenue during the period.
Research and Development Expense
Research and development expense consists primarily of clinical trial expenses, including costs related to our Abstral Registry trial, and compensation-related costs for our employees dedicated to research and development activities, compensation paid to our Scientific Advisory Board (“SAB”) members, and licensing fees and patent prosecution costs. Research and development expense for the three and nine months ended September 30, 2014 and 2013, respectively, was as follows (dollars in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | % Change |  | 2014 |  | 2013 |  | % Change
Research and development expense | $ | 7,243 |  |  | $ | 3,633 |  |  | 99 | % |  | $ | 22,082 |  |  | $ | 13,990 |  |  | 58 | %

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The increase in research and development expense in 2014 was primarily related to the ramp-up of our Phase 3 PRESENT clinical trial and the related patient enrollment efforts. We expect research and development expense related to our PRESENT trial to remain consistent with the current period for the next two quarters, and then begin to decrease throughout 2015 as we complete the enrollment phase of the trial and transition to the monitoring and follow-up phase. The expected decrease in costs could be partially offset by the increase in research and development expense related to our Phase 2 clinical trial of the GALE-401 program, in which we currently expect to complete enrollment during 2014.
Selling, General and Administrative Expense
Selling, general and administrative expense includes compensation-related costs for our employees dedicated to sales and marketing, general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses. Selling, general and administrative expense for the three and nine months ended September 30, 2014 and 2013, respectively, was as follows (dollars in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | % Change |  | 2014 |  | 2013 |  | % Change
Selling, general and administrative expense | $ | 7,268 |  |  | $ | 4,129 |  |  | 76 | % |  | $ | 23,698 |  |  | $ | 8,369 |  |  | 183 | %

Selling, general and administrative expense increased during the last two quarters of 2013 and into the first three quarters of 2014, primarily due to the establishment of our Abstral commercial sales force and marketing team, as well as other expenses related to the commencement of our commercial efforts and the launch of Abstral. The selling, general and administrative costs for the three months ended September 30, 2014 and 2013 were $7.1 million and $9.6 million, or a decrease of $2.5 million or 26%. The quarter over quarter decrease was primarily driven by the decrease in legal fees related to the ongoing litigation and proceedings described in Part II, Item 1 of this report, which were approximately $0.7 million this quarter as compared to $3.0 million last quarter. This decrease is due to the fact we exceeded the retention (deductible) under our insurance policy during the third quarter of 2014, and therefore realized a significant insurance recovery against those fees. We continue to expect a significant portion of future legal expenses to be reimbursable by insurance.
Selling, general and administrative expense includes non-cash stock-based compensation expense of $1.3 million and $0.5 million for the three months ended September 30, 2014 and 2013, respectively. Selling, general and administrative expense includes non-cash stock-based compensation expense of $4.4 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.
Non-Operating Income (Expense)
Non-operating income (expense) for the three and nine month periods ended September 30, 2014 and 2013, respectively, was as follows (dollars in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2014 |  | 2013 |  | % Change |  | 2014 |  | 2013 |  | % Change
Non-operating income (expense) | $ | 7,035 |  |  | $ | (1,235 | ) |  | (670 | )% |  | $ | 12,190 |  |  | $ | (6,749 | ) |  | (281 | )%

The increase to our non-operating income (expense) during the three months ended September 30, 2014 was primarily due to an decrease in the fair value of warrants accounted for as liabilities. This decrease in the estimated fair value of our warrant liabilities was primarily due to the decrease in our common stock price, which is one of the most impactful inputs into the pricing model we use to estimate the fair value of our warrant liabilities. The increase to our non-operating income (expense) during the nine months ended September 30, 2014 was primarily due to a decrease in the fair value of warrants accounted for as liabilities, which was attributable to the decrease in our common stock price.
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Income Taxes
For the three months ended September 30, 2014, there was no income tax benefit or expense recognized. For the three months ended September 30, 2013, we recognized an income tax expense of $1.2 million. This expense offsets the tax impact related to the unrealized loss on our marketable securities, which is presented as other comprehensive income, net of tax, on our condensed consolidated statement of comprehensive loss. We continue to maintain a full valuation allowance against our net deferred tax assets.
For the nine months ended September 30, 2014, there was no income tax benefit or expense recognized. For the nine months ended September 30, 2013, we recognized an income tax benefit of $0.1 million This benefit offsets the tax impact related to the unrealized gain on our marketable securities, which is presented as other comprehensive income, net of tax, on our condensed consolidated statement of expenses and comprehensive loss. We continue to maintain a full valuation allowance against our net deferred tax assets.
Liquidity and Capital Resources
We had cash and cash equivalents of approximately $24.6 million as of September 30, 2014, compared with $47.8 million as of December 31, 2013.
The decrease of approximately $23.1 million in our cash and cash equivalents from December 31, 2013 to September 30, 2014 was attributable primarily to $32.1 million in cash used in operating activities, $3.1 million used to purchase U.S. rights to Zuplenz, and $2.3 million used to purchase worldwide rights to GALE-401, which uses were partially offset by $10.7 million in net proceeds from common stock warrant exercises and $4.1 million in net proceeds from common stock option exercises.
On July 22, 2014, we announced that we entered into a definitive agreement to license Zuplenz® from MonoSol. Under the terms of the agreement, we paid $3.1 million in cash to MonoSol during the third quarter of 2014 and will pay MonoSol an additional $2.5 million in cash or stock during the fourth quarter of 2014. During the remainder of 2014, we expect to incur significant increased expenses related to regulatory and marketing efforts for Zuplenz in connection with our planned product launch on or before December 31, 2014. Additionally, we expect to continue to incur operating losses for the foreseeable future as we continue to commercialize our products in the U.S. and to advance our product candidates through the drug development and regulatory process. We will need to generate significant revenues to achieve profitability and may never do so. In the absence of profits from the commercialization of Abstral and Zuplenz or our product candidates, our potential sources of operational funding are proceeds from the sale of equity and funded research and development payments and payments received under partnership and collaborative agreements.
We believe that our existing working capital, along with net revenue from Abstral sales, is sufficient to fund our operations into the second quarter of 2015. This projection is based on our current planned operations and revenue expectations and is subject to changes in our plans and uncertainties inherent in our business, and we may need to seek to replenish our existing working capital sooner than we project. We have no commitments for any financing, and there is no assurance that additional financing will be available to us on acceptable terms, or at all. If we fail to obtain additional financing, we would be forced to scale back, or terminate, our operations, or to seek to merge with or to be acquired by another company.
Net Cash Flow from Operating Activities
Net cash used in operating activities was approximately $32.1 million for the nine months ended September 30, 2014, compared with $20.4 million for the nine months ended September 30, 2013. The increase in cash used in operating activities of approximately $11.7 million resulted primarily from an increase in research and development activities related to our Phase 3 PRESENT trial, the addition of sales and marketing efforts for the launch of Abstral, and legal expenses related to ongoing litigation.
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Net Cash Flow from Investing Activities
Net cash used in investing activities was $5.4 million for the nine months ended September 30, 2014, compared with $9.2 million for the nine months ended September 30, 2013. The decrease was due to the $10.1 million initial payment for Abstral rights during the nine months ended September 30, 2013 compared to the $2.3 million and $3.1 million to purchase the worldwide rights of GALE-401 and U.S. rights to Zuplenz, respectively, during the nine months ended September 30, 2014.
Net Cash Flow from Financing Activities
Net cash provided by financing activities was $14.4 million for the nine months ended September 30, 2014, compared with $48.3 million for the nine months ended September 30, 2013. The decrease was primarily due to net proceeds from issuance of common stock of $37.5 million and net proceeds from the issuance of long-term debt of $9.9 million during the nine months ended September 30, 2013 compared to net proceeds of common stock warrant exercises of $10.7 million and net proceeds of common stock option exercises of $4.3 million during the nine months ended September 30, 2014.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financing arrangements other than operating leases.
Critical Accounting Policies and Estimates
In our Annual Report on Form 10-K for the year ended December 31, 2013, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2013 that are not included in Note 1 of the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2014. Readers are encouraged to read our Annual Report on Form 10-K in conjunction with this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary objective of our investment activities is to preserve capital. We do not utilize hedging contracts or similar instruments.
We are exposed to certain market risks relating primarily to interest rate risk on our cash and cash equivalents and risks relating to the financial viability of the institutions which hold our capital and through which we have invested our funds. We manage the latter risks by investing primarily in money market mutual funds.
In addition, we are exposed to foreign currency exchange rate fluctuations relating to payments we make to certain vendors and suppliers and license partners using foreign currencies. We do not hedge against foreign currency risks. Consequently, changes in exchange rates could adversely affect our operating results and stock price. Such losses have not been significant to date.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and our principal accounting officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. Based on these evaluations, the Certifying Officers have concluded, that, as of the end of the period covered by this quarterly report on Form 10-Q:
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(a) | our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

(b) | our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during the nine months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Earlier this year, several purported shareholder derivative complaints were filed against our company, as nominal defendant, and certain of our officers and directors in the Circuit Court of Oregon for the County of Multnomah, the United States District Court for the District of Oregon and the Delaware Court of Chancery. On April 11, 2014, the Oregon federal derivative cases were consolidated into one action, In re Galena Biopharma, Inc. Derivative Litig., Nos. 3:14-cv-382, 3:14-cv-514, 3:14-cv-516 (D. Or.). On July 21, 2014, the Oregon state derivative cases were consolidated into one action, Fagin v. Ahn, et al., No. 140202384; Zhang v. Hillsberg, et al., No. 140403987 (Or. Cir. Ct.). On July 22, 2014, all of the Delaware derivative complaints were consolidated into one action, the matter of In re Galena Biopharma, Inc. Stockholder Derivative Litigation, Consolidated C.A. No. 9715-VCN (Del. Ch.). The various complaints allege, among other things, breaches of fiduciary duties and abuse of control by the officers and directors in connection with public statements purportedly issued by us or on our behalf and sales of our common stock by our officers and directors in January and February of this year.
Also, five purported securities class action complaints filed in the United States District Court for the District of Oregon have been consolidated into a single action, In re Galena Biopharma, Inc. Securities Litig., No. 3:14-cv-367 (D. Or.), and a lead plaintiff has been appointed. On October 31, 2014, the lead plaintiff filed a consolidated amended complaint, which alleges, among other things, that certain of our officers and directors violated the federal securities laws by making materially false and misleading statements and omissions in press releases and in filings with the SEC arising out of the same circumstances that are the subject of the derivative actions described above.
We intend to vigorously defend against the foregoing complaints. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of these matters.
In March and April 2014, we received demands (“220 Demands”) pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”) from five purported stockholders of our company to inspect certain of our books and records. Under Delaware law, a stockholder may bring an action to enforce a 220 Demand that has been rejected.
On March 18, 2014, one of the derivative lawsuit shareholders commenced an action (the “220 Action”) against us in the Delaware Court of Chancery under Section 220 (Fuhs v. Galena Biopharma, Inc., No. 9457-ML (Del. Ch.)). In the 220 Action, the plaintiff seeks to inspect our books and records described in his 220 Demand. The 220 Action was stayed prior to trial, and the shareholder has now filed a derivative complaint in the Delaware Court of Chancery. Nevertheless, we intend to vigorously defend against the 220 Action until it is dismissed.
At September 30, 2014, no material liabilities with respect to the foregoing claims have been recorded in our consolidated financial statements. We have notified our insurance carriers of the claims, and the insurers have responded by requesting additional information and by reserving their rights under the policies, including the rights to deny coverage under various policy exclusions.
We are aware that the SEC is investigating certain matters relating to the use of certain outside investor-relations professionals by us and other public companies. We have been in contact with the SEC staff through our counsel and are cooperating with the investigation.
Litigation is inherently uncertain, and there is no assurance as to the outcome of the matters described above. We could incur substantial unreimbursed legal fees, settlements, judgments and other expenses in connection with these or other legal and regulatory proceedings that may not qualify for coverage under, or may exceed the limits of, our applicable directors and officers liability insurance policies and could have a material adverse effect on our financial condition, liquidity and results of operations. These matters also may distract the time and attention of our officers and directors or divert our other resources away from our ongoing commercial and development programs. An unfavorable outcome in any of these matters could damage our business and reputation or result in additional claims or proceedings against us.
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ITEM 6. EXHIBITS

Exhibit Number |  | Description |
10.1 |  | Employment Agreement, dated July 28, 2014, between Galena Biopharma, Inc. and Margaret Kivinski *
31.1 |  | Sarbanes-Oxley Act Section 302 Certification of Mark W.Schwartz, Ph.D.
31.2 |  | Sarbanes-Oxley Act Section 302 Certification of Ryan M. Dunlap.
32.1 |  | Sarbanes-Oxley Act Section 906 Certification of Mark W. Schwartz, Ph.D., and Ryan M. Dunlap.
101.INS |  | XBRL Instance Document.
101.SCH |  | XBRL Taxonomy Extension Schema.
101.CAL |  | XBRL Taxonomy Extension Calculation.
101.DEF |  | XBRL Taxonomy Extension Definition.
101.LAB |  | XBRL Taxonomy Extension Label.
101.PRE |  | XBRL Taxonomy Extension Presentation.
101.PRE |  | XBRL Taxonomy Extension Presentation. |

* | Indicates a management contract or compensatory plan or arrangement.

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

| GALENA BIOPHARMA, INC.
| By: |  | /s/ Mark W. Schwartz
|  |  | Mark W. Schwartz, Ph.D.
|  |  | President and Chief Executive Officer
|  |  | Date: November 5, 2014
| By: |  | /s/ Ryan M. Dunlap
|  |  | Ryan M. Dunlap
|  |  | Vice President and Chief Financial Officer
|  |  | Date: November 5, 2014

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