Infinity Pharmaceuticals
Annual Report 2013

Plain-text annual report

GLOBAL PHASE 3 CLINICAL TRIALS “Our confidence in the therapeutic potential of IPI-145 as a targeted agent with broad activity across a spectrum of hematologic malignancies continues to grow as the DUETTS global registration program advances. One of our most exciting areas of study is the Phase 2 DYNAMO trial of IPI-145 in which we are investigating its potential to be the best-in-class targeted therapy for patients with refractory indolent non-Hodgkin lymphoma.” David A. Roth, M.D. Executive Vice President, Chief Medical Officer “The DUETTS registration program for IPI-145 includes global clinical trials evaluating IPI-145, as a monotherapy and in combination, for the treatment of patients with indolent non-Hodgkin lymphoma or chronic lymphocytic leukemia. The scope of DUETTS reflects the magnitude of IPI-145’s potential to improve outcomes for these patients.” Tamyra A. Toole, Esq. Vice President, Regulatory Affairs and Quality Assurance “Infinity has undertaken a comprehensive approach to evaluate the wide and promising range of treatment opportunities offered by IPI-145. I am proud to be part of a team that has the disciplines and depth required to execute and achieve IPI-145’s potential: leveraging scientific and technical leadership of experienced team members with clinical development, regulatory affairs and manufacturing expertise.” John J. Lee Vice President, Pharmaceutical Development “By targeting PI3K-delta and PI3K-gamma, signaling enzymes expressed in immune cells, IPI-145 offers tremendous potential to treat a broad range of both hematologic cancers and autoimmune diseases. I am incredibly enthusiastic to see the translation of that scientific insight into potential therapeutic benefits for people suffering from debilitating and life threatening diseases.” James R. Porter, Ph.D. Senior Director, Product Development/IPI-145 Program Leader To Infinity’s stockholders, Citizen-Owners and supporters throughout the medical community, I nfinity is, first and foremost, focused on patients. We are patients with relapsed or refractory iNHL. Patients with iNHL building a fully integrated biopharmaceutical company receiving IPI-145 showed high monotherapy response rates committed to delivering medicines that improve treat- supporting its therapeutic potential as a molecularly targeted ment outcomes for patients with serious diseases. It is therapy in this difficult-to-treat disease. We also presented data my privilege to report on the meaningful progress we at ASH demonstrating that IPI-145 had strong clinical activity made toward realizing this goal in 2013. in patients with relapsed or refractory CLL. Notably, certain The foundation of our drug development efforts is IPI-145, high-risk CLL patients, who generally have a poor response to chemotherapy and thus a poor prognosis, experienced clinically our oral inhibitor of phosphoinositide-3-kinase (PI3K)-delta meaningful responses to IPI-145, and there are early signs and PI3K-gamma. In 2013 Infinity reported clinical data that of activity in patients who have progressed on other B-cell demonstrated tremendous activity across a variety of hema- receptor inhibitors recently approved or now in development. tologic malignancies. In particular, IPI-145 has the potential to transform the treatment of patients with indolent non- Beyond iNHL and CLL, we presented encouraging data for Hodgkin Lymphoma, iNHL, and to play an important role in IPI-145 in aggressive non-Hodgkin lymphoma, T-cell lympho- the ongoing transformation in the treatment of patients with mas and diffuse large B-cell lymphoma during 2013. These chronic lymphocytic leukemia, CLL. positive data are evidence of IPI-145’s broad activity and Based on this potential, Infinity launched the DUETTS™ program, its worldwide evaluation of IPI-145 in iNHL and CLL. We have three later-stage potentially registration- enabling studies either now under way or approaching initiation, so 2014 will be an important year of execution in clinical development as we prepare for the ultimate commercialization of this promising new drug candidate. further reinforce our belief in the prospect for IPI-145 to make a meaningful difference in the lives of patients with a variety of hematologic diseases. Based on the strength of these results, Infinity is conducting the DUETTS™ global clinical program of IPI-145. These studies are intended to generate the data needed to support regulatory submissions for IPI-145 in the United States and overseas. DUETTS includes DYNAMO™, a Phase 2 study currently under way in patients with refractory iNHL based on what At the 2013 American Society of Hematology Annual we believe are clinically important monotherapy response Meeting (ASH), we reported data from our Phase 1 study rates in iNHL. A successful outcome in this study may demonstrating that IPI-145 was highly clinically active in enable us to seek accelerated approval of IPI-145 in iNHL. To Infinity’s stockholders, Citizen-Owners and supporters throughout the medical community, In 2014 we also plan to initiate DYNAMO+R, a Phase 3 study of IPI-145 in combination with rituximab in patients with relapsed follicular lymphoma. This study was designed with the potential to serve as a confirmatory study to our DYNAMO trial and support global registrations. Our vision for IPI-145 in iNHL is to provide physicians with effective, oral and chemotherapeutic- free regimens to treat patients in early and later lines of therapy. Therefore, we also plan to initiate a Phase 2 study of IPI-145 in treatment-naive patients with iNHL in 2014. In CLL, we are now enrolling patients in DUO™, a Phase 3 monotherapy study of IPI-145 in patients with relapsed, refractory CLL, and with Finally, achieving our patient-focused mission, including reali- positive results we hope to seek regulatory approval. Our vision zation of the considerable therapeutic potential of IPI-145, in CLL is to treat defined patient populations with IPI-145 across requires that we bring together great people across a broad all lines of therapy as both a monotherapy and in defined range of scientific and business disciplines and that we work combination regimens. We will also initiate at least one additional extraordinarily well as a team. The Infinity community of Citizen- clinical study of IPI-145 in patients with a hematologic malignancy Owners shares a passion for bringing important medicines to indication in 2014 such that we expect to end 2014 with patients by combining scientific and medical insight with a deep ten clinical trials of IPI-145 under way, seven of which will be understanding of patient needs. We continue to augment and Phase 2 or Phase 3 studies. integrate our scientific, operational and financial capabilities as we build a sustainable, fully integrated biopharmaceutical company. Based on its mechanism of action, we are also evaluating IPI-145 for the treatment of autoimmune diseases, and we I thank you for your continued support and look forward, with anticipate gaining important insight in this area during 2014. great anticipation, to reporting on our progress against the goals We look forward to reporting top-line data from two studies: we have set forth for 2014. ASPIRA, a Phase 2 study of IPI-145 in patients with moderate-to- severe rheumatoid arthritis and a Phase 2a study in patients with mild allergic asthma. The outcomes of these studies will help to guide the next steps for the development of IPI-443, our next- Adelene Q. Perkins generation PI3K-delta, gamma inhibitor. CEO, Infinity Pharmaceuticals Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended: December 31, 2013 ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission file number: 000-31141 INFINITY PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) Delaware 33-0655706(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)780 Memorial Drive, Cambridge, Massachusetts 02139(Address of principal executive offices) (zip code)Registrant’s telephone number, including area code: (617) 453-1000Securities registered pursuant to Section 12(b) of the Act:Common Stock, $.001 par value NASDAQ Global Select Market(Title of each class) (Name of each exchange on which listed)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired 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 shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of voting Common Stock held by non-affiliates of the registrant as of June 28, 2013 was $756,105,453 based on the lastreported sale price of the registrant’s Common Stock on the NASDAQ Global Select Market on that date.Number of shares outstanding of the registrant’s Common Stock as of February 14, 2014: 48,281,015Documents incorporated by reference:Portions of our definitive proxy statement to be filed with the Securities and Exchange Commission no later than April 30, 2014 in connection with our2014 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS Page No. Part I Item 1: Business 1 Item 1A: Risk Factors 19 Item 1B: Unresolved Staff Comments 37 Item 2: Properties 38 Item 3: Legal Proceedings 38 Item 4: Mine Safety Disclosures 38 Part II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 39 Item 6: Selected Financial Data 41 Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 43 Item 7A: Quantitative and Qualitative Disclosures about Market Risk 58 Item 8: Financial Statements and Supplementary Data 59 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 85 Item 9A: Controls and Procedures 85 Item 9B: Other Information 87 Part III Item 10: Directors, Executive Officers and Corporate Governance 88 Item 11: Executive Compensation 88 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 88 Item 13: Certain Relationships and Related Transactions, and Director Independence 88 Item 14: Principal Accountant Fees and Services 88 Part IV Item 15: Exhibits and Financial Statement Schedules 89 Signatures 90 Table of ContentsForward-Looking InformationThis Annual Report on Form 10-K contains forward-looking statements regarding our expectations with respect to the possible achievement ofdiscovery and development milestones in 2014, our future discovery and development efforts, our collaborations, our future operating results andfinancial position, our business strategy and other objectives for future operations. We often use words such as “anticipate,” “believe,” “estimate,”“expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and other wordsand terms of similar meaning to help identify forward-looking statements, although not all forward-looking statements contain these identifying words.You also can identify these forward-looking statements by the fact that they do not relate strictly to historical or current facts. There are a number ofimportant risks and uncertainties that could cause actual results or events to differ materially from those indicated by forward-looking statements.These risks and uncertainties include those inherent in pharmaceutical research and development, such as adverse results in our drug discovery andclinical development activities, decisions made by the U.S. Food and Drug Administration and other regulatory authorities with respect to thedevelopment and commercialization of our product candidates, our ability to obtain, maintain and enforce intellectual property rights for our productcandidates, our dependence on our alliance partners, competition, our ability to obtain any necessary financing to conduct our planned activities andother risk factors. Please refer to the section entitled “Risk Factors” in Part I of this report for a description of these risks and uncertainties. Unlessrequired by law, we do not undertake any obligation to update any forward-looking statements.PART I Item 1.BusinessOverviewWe are an innovative biopharmaceutical company dedicated to discovering, developing and delivering best-in-class medicines to people with difficult-to-treat diseases. We combine proven scientific expertise with a passion for developing novel small molecule drugs that target emerging disease pathways. We haveworldwide development and commercialization rights to all of our development candidates and early discovery programs, subject to certain financialobligations to our current licensor and former development partners.IPI-145, our lead product candidate, is a potent, oral inhibitor of Class I delta and gamma isoforms of phosphoinositide-3-kinase, or PI3K, which weare investigating in both hematologic malignancies and inflammatory diseases. The PI3Ks are a family of enzymes involved in multiple cellular functions,including cell proliferation and survival, cell differentiation, cell migration and immunity. The PI3K-delta and PI3K-gamma isoforms are preferentiallyexpressed in white blood cells, where they have distinct and mostly non-overlapping roles in immune cell development and function. Targeting PI3K-delta andPI3K-gamma may provide multiple opportunities to develop differentiated therapies for the treatment of hematologic malignancies and inflammatory diseases.We believe that IPI-145 is the most advanced PI3K-delta,gamma inhibitor in clinical development. The following is a summary of the clinical development ofIPI-145 and 2014 goals:Hematologic Malignancies • We have launched DUETTS, a worldwide investigation of IPI-145 in blood cancers. As part of the DUETTS program, we are conductingDYNAMO, a Phase 2, open-label, single arm study evaluating the safety and efficacy of IPI-145 dosed at 25mg BID in approximately 120patients with indolent non-Hodgkin lymphoma, or iNHL, including follicular lymphoma (or FL), marginal zone lymphoma and smalllymphocytic lymphoma (or SLL), whose disease is refractory to radioimmunotherapy or both rituximab and chemotherapy. The FDA has grantedorphan drug designation to IPI-145 for the potential treatment of FL, the most common subtype of iNHL. 1TMTMTMTable of Contents • Also under the DUETTS program, we are also conducting DUO, a randomized, monotherapy Phase 3 study of IPI-145 in approximately 300patients with relapsed/refractory chronic lymphocytic leukemia, or CLL. • We are also conducting an ongoing Phase 1, open-label, dose-escalation study designed to evaluate the safety, pharmacokinetics and clinicalactivity of IPI-145 in patients with advanced hematologic malignancies. The dose escalation portion of the trial is complete, with the maximumtolerated dose defined as 75 mg twice daily, or BID. We are continuing to evaluate IPI-145 across two 25mg BID expansion cohorts in patientswith relapsed/refractory CLL, iNHL and mantle cell lymphoma, MCL, and treatment-naïve CLL in high-risk patients (those patients who areover age 65 or who have one of two genomic alterations known as a 17p deletion or a p53 mutation). Additionally, we are continuing to evaluateIPI-145 across five 75mg BID expansion cohorts in patients with relapsed/refractory CLL, iNHL and MCL; T-cell lymphomas; aggressive B-celllymphomas; myeloid neoplasms; and T-cell or B-cell acute lymphoblastic leukemia/lymphoma. • In 2014, we intend to initiate DYNAMO+R, a Phase 3 study of IPI-145 dosed at 25 mg BID in combination with rituximab in patients withrelapsed/refractory iNHL, as well as a Phase 2 study of IPI-145 in treatment-naïve patients with iNHL. We also expect to initiate at least oneadditional clinical trial in patients with hematologic malignancies in 2014.Inflammation and Autoimmune Diseases • We have completed a Phase 1, randomized, double-blind, placebo-controlled trial of IPI-145 in healthy adult subjects designed to support thedevelopment of IPI-145 in inflammatory and autoimmune diseases. • We are conducting a Phase 2, randomized, double-blind, placebo-controlled study designed to evaluate the efficacy, safety and pharmacokineticsof IPI-145 in patients with rheumatoid arthritis, or RA, which we refer to as the ASPIRA trial. We intend to report topline data from this study in2014. • We are also conducting a Phase 2a randomized, double-blind, placebo-controlled trial of IPI-145 in patients with mild, allergic asthma. We intendto report topline data from this study in 2014.We are also developing our second PI3K product candidate, a potent, oral inhibitor of PI3K-delta and gamma which we refer to as IPI-443. Thenonclinical studies of IPI-443 required for Phase 1 development have been completed, and the data from the two Phase 2 studies of IPI-145 in inflammatoryand autoimmune diseases will guide the next steps for the development of IPI-443.In September 2013 we announced topline data from our Phase 2 study evaluating retaspimycin hydrochloride, or HCl, a novel, potent and selectiveinhibitor of heat shock protein 90, or Hsp90, in combination with docetaxel, a chemotherapy, in 226 patients with second or third-line non-small cell lungcancer, or NSCLC, who are naïve to docetaxel treatment and have a history of heavy smoking. In this randomized, double-blind, placebo-controlled study,retaspimycin HCl did not meet its pre-specified efficacy endpoints for demonstrating an improvement in overall survival in the total patient population or inpatients with squamous cell carcinoma, despite observing partial responses in patients with squamous cell carcinoma during the Phase 1b testing.Additionally, the combination of retaspimycin HCl plus docetaxel did not show a treatment benefit in patient populations defined by pre-specified biomarkers,including KRAS, p53 and plasma levels of Hsp90-alpha. We expect to present final data in a peer-reviewed setting after all analyses are complete.We completed enrollment of the final cohort of patients in our separate, exploratory study of retaspimycin HCl in combination with everolimus (anmTOR inhibitor) in NSCLC patients with a KRAS mutation. Completing enrollment has concluded our development of retaspimycin HCl, and we will notinitiate any new trials with retaspimycin HCl. 2TMTMTable of ContentsRecent DevelopmentFacility AgreementOn February 24, 2014, or Effective Date, we entered into a Facility Agreement with affiliates of Deerfield Management Company, L.P., or Deerfield,pursuant to which Deerfield agreed to loan to us up to $100,000,000, subject to the terms and conditions set forth in the Facility Agreement. Under the FacilityAgreement, we may draw down on the facility in $25,000,000 increments at any time during the 12 months following the Effective Date. Our ability to drawdown under the Facility Agreement is subject to various customary conditions, including the entry into a Guaranty and Security Agreement, or Guaranty, withDeerfield and Infinity Discovery, Inc., or IDI, our a wholly-owned subsidiary, pursuant to which, as security for the repayment of our obligations under theFacility Agreement, IDI will guaranty all of our obligations under the Facility Agreement and, to secure the obligations under the Facility Agreement and theGuaranty, both we and IDI will grant to Deerfield a security interest in substantially all of our assets including intellectual property.Any amounts drawn under the Facility Agreement accrue interest at a rate of 7.95% per annum, payable quarterly in arrears beginning on June 1, 2014,provided that, during the first five interest payment dates of any draw under the Facility Agreement, we may elect to pay all or a portion of such accruedinterest by adding it to the principal amount outstanding. All such accrued interest will, regardless of which draw it applies to, be payable on the last businessday of the sixth calendar quarter following the date of the first draw. We have the right to terminate the Facility Agreement and/or to prepay amounts owedunder the Facility Agreement at any time, provided that, to the extent that any amount was drawn less than three years before such early termination orprepayment, we will be required to pay an additional amount equal to three years of interest less the amount of interest previously paid. We will be required torepay Deerfield one-third of the total principal amount drawn under the Facility Agreement on each of the third, fourth and fifth anniversaries of the first draw,however the final payment must be made by December 15, 2019. On February 27, 2015, or upon the earlier termination or acceleration of the facility, we arerequired to pay a fee equal to 3% of the then undrawn portion of the $100,000,000 commitment.Deerfield will have the right to accelerate payment of the facility in the event that we consummate a major transaction, which is generally defined as achange in control, a sale of all or substantially all of our assets, a tender or exchange offer for our common stock, a liquidation, bankruptcy, insolvency,dissolution or wind up, a delisting and/or the common stock ceases to be registered under the Securities Exchange Act of 1934, or the Exchange Act.Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) customary events of default, as defined in theFacility Agreement, or (ii) the consummation of certain major transactions, in which case Deerfield would have the right to require us to repay 100% of theprincipal amount of the loan, plus any accrued and unpaid interest thereon, plus any applicable additional amounts relating to a prepayment or termination,as described above.Principal and interest under the Facility may be paid in cash or freely tradable shares of common stock at our election, subject to specified conditions atany time of conversion.The Facility Agreement contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type,provided that the negative covenants are not applicable until the first draw under the Facility Agreement.WarrantsIn connection with the execution of the Facility Agreement, we issued to Deerfield warrants to purchase an aggregate of 1,000,000 shares of commonstock at an exercise price of $13.83 per share, or the Initial Warrants. As noted above, pursuant to the Facility Agreement, we have the right to request fromDeerfield one or more 3Table of Contentscash disbursements in the minimum amount of $25,000,000 per disbursement, which disbursements shall be accompanied by the issuance to Deerfield ofwarrants to purchase an aggregate number of shares of common stock equal to (A) a quotient derived by dividing (x) the aggregate amount of suchdisbursement by (y) the volume weighted average closing price per share of the common stock during the 20 trading days following Deerfield’s receipt of theapplicable draw notice, or the 20-Day VWAP, multiplied by (B) 50%, or the Draw Warrants. We refer to the Initial Warrants and the Draw Warrantsindividually as a Warrant or together as the Warrants. The exercise price of the Draw Warrants will be the applicable 20-Day VWAP for each disbursement.The number of shares of common stock into which a Warrant is exercisable and the exercise price of any Warrant will be adjusted to reflect any stock splits,recapitalizations or similar adjustments in the number of outstanding shares of common stock.Each Warrant issued under the Facility Agreement expires on the seventh anniversary of its issuance. Subject to certain exceptions, the Warrants and theFacility Agreement contain certain limitations such that we may not issue shares of common stock to Deerfield pursuant to the Warrants or the FacilityAgreement if such issuance would result in Deerfield beneficially owning in excess of 9.985% of the total number of shares of our common stock of thenissued and outstanding.The holder of a Warrant may exercise the Warrant either for cash or on a cashless basis. In connection with certain major transactions, the holder mayhave the option to receive, upon exercise of the Warrant in whole or in part, either cash or a number of shares of common stock equal to the Black-Scholesvalue of the Warrant, as defined in the Warrant.Registration Rights AgreementIn connection with the entry into the Facility Agreement and issuance of the Initial Warrants, we entered into a Registration Rights Agreement withDeerfield dated February 24, 2014. Pursuant to the terms of the Registration Rights Agreement, we have agreed to file a registration statement on Form S-3 withthe SEC on or prior to 30 days from the Effective Date, to register for resale the shares of common stock issuable upon the exercise of the Initial Warrants.Additionally, pursuant to the terms of the Registration Rights Agreement, we have agreed to file one or more additional registration statements with the SEC toregister for resale the shares of common stock issuable upon the exercise of the applicable Draw Warrants, on or prior to 30 days after issuance of each of theDraw Warrants.Corporate InformationWe were incorporated in California on March 22, 1995 under the name IRORI and, in 1998, we changed our name to Discovery Partners International,Inc., or DPI. In July 2000, we reincorporated in Delaware. On September 12, 2006, DPI completed a merger with Infinity Pharmaceuticals, Inc., or IPI,pursuant to which a wholly-owned subsidiary of DPI merged with and into IPI. IPI, the surviving corporation in the merger, changed its name to InfinityDiscovery, Inc., or IDI, and became a wholly owned subsidiary of DPI. In addition, we changed our corporate name from Discovery Partners International,Inc. to Infinity Pharmaceuticals, Inc., and our ticker symbol on the NASDAQ Global Market to “INFI.” Our common stock currently trades on theNASDAQ Global Select Market.Our principal executive offices are located at 780 Memorial Drive, Cambridge, Massachusetts 02139, and our telephone number at that address is(617) 453-1000.The Infinity logo and all other Infinity product names are trademarks of Infinity or its subsidiary in the United States and in other select countries. Wemay indicate U.S. trademark registrations and U.S. trademarks with the symbols “” and “™”, respectively. Other third-party logos and product/tradenames are registered trademarks or trade names of their respective owners. 4®Table of ContentsProduct Development PipelineHistorically, our product development programs have arisen from a combination of internally developed programs and strategic licensing arrangements.Whether our programs are developed internally or obtained from a third party, we focus on targets that have the potential to represent fundamentally newapproaches to how disease is treated and where we believe we can use our scientific capabilities to identify differentiated product candidates with well-defineddevelopment paths. We seek to leverage what we believe to be our innovative approaches to drug discovery and translational medicine and our robust internalcapabilities across all of the relevant scientific disciplines, including medicinal chemistry, cell biology, biochemistry, pharmacology and molecular pathology.Our goal is to integrate these disciplines to rapidly identify product candidates and to better understand which populations of patients may benefit most fromour product candidates. We view biomarkers as a key component of our drug development strategy and are actively researching biomarkers in our PI3Kprograms.IPI-145, our clinical candidate directed to the inhibition of PI3K, arose out of our strategic licensing arrangement with Intellikine, Inc., or Intellikine,which was acquired in January 2012 by Takeda Pharmaceutical Company Limited, or Takeda, acting through its Millennium business unit, or Millennium.We also have multiple innovative projects in earlier stages of development.In building our product development pipeline, we have intentionally pursued targets with applicability across multiple therapeutic areas and indications.This approach gives us multiple product opportunities in oncology and inflammatory disease, which are areas with broad commercial potential. This strategyalso ensures that our success is not dependent on any single product candidate or indication, allowing us to optimize our portfolio on several dimensions inresponse to new data.We also believe that the ability to deliver innovative new medicines to patients is an essential component of our mission. To this end, we have worldwiderights to all product candidates in our portfolio subject to certain financial obligations to Millennium, Mundipharma International Corporation Limited, orMundipharma, and Purdue Pharmaceutical Products L.P., or Purdue.Our product development programs as of February 1, 2014 are illustrated in the following chart: 5Table of ContentsPI3K Inhibitor ProgramThe phosphoinositide-3-kinases, or PI3Ks, are key cellular signaling proteins that act as a central node for relaying signals from cell surface receptors tomodulate downstream biochemical events. The PI3K-delta and PI3K-gamma isoforms are preferentially expressed in white blood cells, where they have distinctand non-overlapping roles in key cellular functions, including cell proliferation, cell differentiation, cell migration and immunity. Targeting PI3K-delta andPI3K-gamma may provide multiple opportunities to develop differentiated therapies for the treatment of inflammatory diseases as well as hematologicmalignancies.Our lead development candidate in this program is IPI-145, a potent, oral inhibitor of Class I PI3K-delta,gamma, for which we are conducting clinicaltrials in both hematologic malignancies and inflammatory diseases. We believe that IPI-145 is the most advanced PI3K-delta,gamma inhibitor in clinicaldevelopment.Hematologic MalignanciesHematologic malignancies are cancers of the blood or bone marrow and include leukemia and lymphoma, such as CLL, Hodgkin lymphoma and non-Hodgkin lymphoma, or NHL. It is estimated that there will be approximately 130,000 newly diagnosed incident cases of NHL in the seven majorpharmaceutical markets (France, Germany, Italy, Japan, Spain, UK and US) in 2014. The distribution of NHL subtypes differs by country. In the UnitedStates and major European countries, diffuse large B-cell lymphoma, or DLBCL, accounts for the majority of NHL cases ranging from 40-43 percent, whileCLL accounts for 25-33 percent and FL for 17-22 percent. MCL is the rarest subtype, accounting for 5-6 percent of cases. Even with advances in treatmentoptions for these diseases, the clinical outlook still remains poor for patients. A significant proportion of patients relapses following treatment and becomerefractory to current agents, representing a significant unmet medical need.Our Phase 1, open-label, dose-escalation study designed to evaluate the safety, pharmacokinetics and clinical activity of IPI-145 in patients withadvanced hematologic malignancies is ongoing (ClinicalTrials.gov Identifier NCT01476657). Data from this study, presented in December 2013 at theAnnual Meeting of the American Society for Hematology, or ASH, and in January 2014 at the 6 Annual T-Cell Lymphoma Forum, showed that IPI-145 isclinically active in CLL, iNHL, T-Cell lymphoma and other hematologic malignancies.Indolent Non-Hodgkin LymphomaIPI-145 is clinically active in patients with iNHL, with a 73 percent overall response rate, or ORR, (11 of 15 evaluable patients) and a 20 percentcomplete response rate (3 of 15 patients). Eight patients (53 percent) remain progression-free for over one year. IPI-145 was generally well tolerated, and themajority of side effects were low-grade, asymptomatic and transient. The most common  Grade 3 side effects were increases in ALT or AST (two liverenzymes) (38 percent), neutropenia (31 percent) and diarrhea (13 percent).We have initiated DYNAMO, a Phase 2, open-label, single arm study evaluating the safety and efficacy of IPI-145 dosed at 25mg BID in approximately120 patients with iNHL, including FL, marginal zone lymphoma and SLL, whose disease is refractory to radioimmunotherapy or both rituximab andchemotherapy. The FDA has granted orphan drug designation to IPI-145 for the potential treatment of FL, the most common subtype of iNHL. We intend toinitiate DYNAMO+R, a Phase 3 study in combination with rituximab in patients with relapsed/refractory iNHL in 2014, as well as initiate a Phase 2 study intreatment-naïve patients with iNHL.Chronic Lymphocytic LeukemiaIPI-145 is clinically active in patients with relapsed/refractory CLL, with a nodal response rate of 89 percent and an overall response rate of 48 percentas defined by criteria established by the International Workshop on Chronic Lymphocytic Leukemia, or IWCLL criteria, including one complete response and12 partial responses, among patients receiving IPI-145 at doses £ 25 mg BID. Onset of activity was rapid, with the majority of 6thTable of Contentsresponses occurring in less than two months. Among 12 patients evaluable with 17p deletions or p53 mutations who received IPI-145 at doses £ 25 mg BID,there were six partial responses, five patients with stable disease and one disease progression due to Richter transformation, an aggressive disease. Patients withCLL with 17p deletions or p53 mutations generally have a poor response to chemotherapy and worse prognosis. Preliminary data in treatment-naïve patientsshowed a decrease in the size of lymph nodes, in all six patients. Three of these six patients had nodal responses, a different way of measuring of clinicalactivity, including nodal responses in two patients with p53 mutations.Data showed that IPI-145 was generally well tolerated, with a safety profile consistent with co-morbidities seen in patients with advanced hematologicmalignancies. The majority of side effects were low-grade and/or asymptomatic. The most common  Grade 3 side effects in patients with relapsed/refractoryCLL were neutropenia (30 percent), anemia (12 percent), diarrhea (6 percent) and increases in ALT or AST (6 percent). Fewer side effects were observed intreatment-naïve patients, which is consistent with the co-morbidities of patients with less advanced disease.We are conducting DUO, a Phase 3 monotherapy study designed to evaluate the safety and efficacy of IPI-145 in patients with relapsed/refractoryCLL. This randomized study is designed to evaluate the safety and efficacy of IPI-145 dosed at 25 mg BID compared to ofatumumab in approximately 300patients with relapsed or refractory CLL. The primary endpoint of the study is progression-free survival. The FDA and the European Medicines Agency, orEMA, have granted orphan drug designation to IPI-145 for the potential treatment of CLL and SLL. We are also continuing to evaluate patients from our Phase1 study with relapsed or refractory CLL and patients with CLL over the age of 65 or have a 17p deletion or p53 mutation and are treatment naïve.T-Cell Lymphoma and Other LymphomasIPI-145 is clinically active in advanced T-cell lymphomas. Treatment with IPI-145 in patients with T-cell lymphomas led to an overall response rate of38 percent (10 of 26 patients), including one complete response and nine partial responses. Among the 11 patients with peripheral T-cell lymphoma, or PTCL,evaluable for activity, IPI-145 led to one complete response and five partial responses (ORR of 55 percent). Among the 15 patients with cutaneous T-celllymphoma, or CTCL, evaluable for activity, IPI-145 led to four partial responses (ORR of 27 percent). Stable disease was observed in seven patients withCTCL. The onset of activity was rapid, with a median time to response of 1.9 months (range: 1.5 – 2.7) for patients with PTCL and 2.4 months (range: 1.7– 3.8) for patients with CTCL. The median number of treatment cycles for the 13 patients with PTCL was 2.2 (range 0.5-8) and the median number oftreatment cycles for the 17 patients with CTCL was 3.1 (range: 0.4-11).IPI-145 was generally well tolerated in this patient population with the majority of T-cell lymphoma patients (20 of 30) receiving 75 mg BID IPI-145. Themost common Grade 3 side effects were increases in ALT or AST (10 of 30 patients, 33 percent), rash (4 of 30 patients, 13 percent) and fatigue (3 of 30patients, 10 percent). One patient (3%) had grade 4 ALT or AST increases.Additionally, early clinical data in patients with aggressive non-Hodgkin lymphoma, or aNHL, and T-cell acute lymphoblastic leukemia, or T-ALL,were reported, with reductions in adenopathy, or decrease in the size of lymph nodes, observed in patients with DLBCL and Richter transformation, anaggressive disease, as well as a partial response in one patient with transformed FL. Translational data showed that IPI-145 effects key signaling molecules inthe tumor microenvironment, providing a potential mechanistic rationale for the clinical activity of IPI-145 observed in patients with iNHL and CLL.An investigator-sponsored Phase 1b, open-label study of IPI-145 in patients with B-cell NHL, CLL and T-cell lymphoma in combination withrituximab (a monoclonal antibody therapy), bendamustine (a chemotherapy) or both rituximab and bendamustine is also open for enrollment(NCT01871675). 7 TMTable of ContentsInflammatory and Autoimmune DiseasesInflammatory and autoimmune diseases are a group of disorders characterized by the immune system attacking the body’s own tissues, which canresult in increased inflammation and organ dysfunction. Two examples of autoimmune and inflammatory diseases in particular, RA and asthma, affect largesections of the population with an estimated annual number of prevalent cases in the seven major markets in 2013 of 5.3 million and 76.5 million,respectively. Symptoms of RA include painful swelling and stiffness of the joints and surrounding tissues, while asthma is characterized by inflammation inthe lungs leading to wheezing, shortness of breath, chest tightness and coughing. With inadequate treatment, either disease can lead to a poor quality of life,disability and increased mortality. In preclinical studies, IPI-145 has demonstrated activity in an allergen challenge model of asthma and in multiple models ofRA. IPI-145 has also demonstrated activity in preclinical models of other inflammatory and autoimmune diseases including Crohn’s disease, lupus andmultiple sclerosis.Within inflammatory diseases, IPI-145 is currently being evaluated in two Phase 2 trials. The first trial, which we refer to as the ASPIRA trial, is aPhase 2, randomized, double-blind, placebo-controlled study designed to evaluate the efficacy, safety and pharmacokinetics of IPI-145 in patients with RA.The study is expected to enroll approximately 316 adults with moderate-to-severe RA and is designed to examine three dose levels of IPI-145 given twice dailyfor 12 weeks in combination with methotrexate compared to treatment with methotrexate alone. The primary efficacy endpoint of the study is the AmericanCollege of Rheumatology 20 response rate, or ACR20, which is defined as the proportion of people who achieve at least a 20 percent improvement in ACRresponse criteria. The second is a Phase 2a randomized, double-blind, placebo-controlled trial of IPI-145 in patients with mild, allergic asthma. Endpoints ofthis multi-dose, two-way crossover study include safety, pharmacokinetics and FEV1, a measure of lung function. We expect to provide an update on thistrial in 2014.Pipeline ExpansionWe are also developing our second PI3K product candidate, a potent, oral inhibitor of PI3K-delta and gamma which we refer to as IPI-443. Thenonclinical studies of IPI-443 required for Phase 1 development are complete, and the data from the two Phase 2 studies of IPI-145 in inflammatory andautoimmune diseases will guide the next steps for the development of IPI-443.Other ProgramsIn addition to our clinical stage programs, we have multiple innovative projects in earlier stages of development. Through our internal discovery efforts,we discovered IPI-940, a novel, orally available inhibitor of fatty acid amide hydrolase, or FAAH. It is believed that inhibition of FAAH may enable the bodyto bolster its own analgesic and anti-inflammatory response and may have applicability in a broad range of painful or inflammatory conditions. We arecurrently seeking potential partnering opportunities for our FAAH program.Strategic AlliancesSince our inception, strategic alliances have been integral to our growth. These alliances have provided access to breakthrough science, significantresearch support and funding and innovative drug development programs, all intended to help us realize the full potential of our product pipeline. Since ourinception, all of our revenue has been derived from our strategic alliances, and all of our revenue during 2012 and 2011 was derived from our former strategicalliance with Mundipharma and Purdue.MillenniumIn July 2010, we entered into a development and license agreement with Intellikine, Inc., or Intellikine, under which we obtained rights to discover,develop and commercialize pharmaceutical products targeting the delta and/or gamma isoforms of PI3K, including IPI-145 and we paid Intellikine a $13.5million up-front license 8Table of Contentsfee. In January 2012, Intellikine was acquired by Takeda Pharmaceutical Company Limited, or Takeda, acting through its Millennium business unit. Werefer to our PI3K program licensor as Millennium. In December 2012, we amended and restated our development and license agreement with Millennium.Under the terms of the amended and restated agreement, we retained worldwide development and commercialization rights for products arising from theagreement for all therapeutic indications, and we are solely responsible for research conducted under the agreement. Additionally, under the amended andrestated agreement, Millennium waived certain commercial rights and, in consideration of such waiver, we agreed to pay to Millennium $15 million, payablein installments.In addition to developing IPI-145, we are seeking to develop our second potent, oral PI3K-delta,gamma inhibitor product candidate, IPI-443, and we areseeking to identify additional novel inhibitors of PI3K-delta and/or PI3K-gamma for future development. We are obligated to pay to Millennium up to $5million in remaining success-based milestone payments for the development of two distinct product candidates and up to $450 million in success-basedmilestones for the approval and commercialization of two distinct products. In February 2014, we paid Millennium a $10 million milestone payment inconnection with the initiation of our Phase 3 study of IPI-145 in patients with relapsed or refractory CLL. In addition, we are obligated to pay Millenniumtiered royalties on worldwide net sales ranging from 7 percent to 11 percent upon successful commercialization of products described in the agreement. Suchroyalties are payable until the later to occur of the expiration of specified patent rights and the expiration of non-patent regulatory exclusivities in a country,subject to reduction and limits on the number of products, in certain circumstances.The amended and restated agreement expires on the later of the expiration of certain patents and the expiration of the royalty payment terms for theproducts, unless earlier terminated. Either party may terminate the agreement on 75 days’ prior written notice if the other party materially breaches theagreement and fails to cure such breach within the applicable notice period, provided that the notice period is reduced to 30 days where the alleged breach isnon-payment. Millennium may also terminate the agreement if we are not diligent in developing or commercializing the licensed products and do not, withinthree months after notice from Millennium, demonstrate to Millennium’s reasonable satisfaction that we have not failed to be diligent. The foregoing periods aresubject to extension in certain circumstances. Additionally, Millennium may terminate the agreement upon 30 days’ prior written notice if we or a related partybring an action challenging the validity of any of the licensed patents, provided that we have not withdrawn such action before the end of the 30-day noticeperiod. We may terminate the agreement at any time upon 180 days’ prior written notice. The agreement also provides for customary reciprocal indemnificationobligations of the parties.Mundipharma and PurdueStrategic Alliance Termination AgreementsOn July 17, 2012, we terminated our strategic alliance with Mundipharma and Purdue and entered into termination and revised relationship agreementswith each of those entities, which we refer to as the 2012 termination agreements. The alliance was previously governed by strategic alliance agreements that weentered into with each of Mundipharma and Purdue in November 2008. The strategic alliance agreement with Purdue was focused on the development andcommercialization in the United States of products targeting FAAH. The strategic alliance agreement with Mundipharma was focused on the development andcommercialization outside of the United States of all products and product candidates that inhibit or target the Hedgehog pathway, FAAH, PI3K and productcandidates arising out of our early discovery projects in all disease fields. Our Hsp90 program was expressly excluded from the alliance. 9Table of ContentsUnder the terms of the 2012 termination agreements: • All intellectual property rights that we had previously licensed to Mundipharma and Purdue to develop and commercialize products under theprevious strategic alliance agreements terminated, with the result that we have worldwide rights to all product candidates that had previously beencovered by the strategic alliance. • We have no further obligation to provide research and development services to Mundipharma and Purdue as of July 17, 2012. • Mundipharma and Purdue have no further obligation to provide research and development funding to us. Under the alliance, Mundipharma wasobligated to reimburse us for research and development expenses we incurred, up to an annual aggregate cap for each alliance program other thanFAAH. • We are obligated to pay Mundipharma and Purdue a four percent royalty in the aggregate, subject to reduction as described below, on worldwidenet sales of products that were covered by the alliance until such time as they have recovered approximately $260 million, representing theresearch and development funding paid to us for research and development services performed by us through the termination of the strategicalliance. After this cost recovery, our royalty obligations to Mundipharma and Purdue will be reduced to a one percent royalty on net sales in theUnited States of products that were previously subject to the strategic alliance.Royalties are payable under these agreements until the later to occur of the last-to-expire of specified patent rights and the expiration of non-patentregulatory exclusivities in a country, provided that if royalties are payable solely on the basis of non-patent regulatory exclusivity, each of the royalty rates isreduced by 50 percent. In addition, royalties payable under these agreements after Mundipharma and Purdue have recovered all research and developmentexpenses paid to us are subject to reduction on account of third party royalty payments or patent litigation damages or settlements which might be required tobe paid by us if litigation were to arise, with any such reductions capped at 50 percent of the amounts otherwise payable during the applicable royaltypayment period.Intellectual PropertyOur intellectual property consists of patents, trademarks, trade secrets and know-how. Our ability to compete effectively depends in large part on ourability to obtain patents and trademarks for our technologies and products, maintain trade secrets, operate without infringing the rights of others and preventothers from infringing our proprietary rights. We will be able to protect our proprietary technologies from unauthorized use by third parties only to the extentthat they are covered by valid and enforceable patents, or are effectively maintained as trade secrets. As a result, patents or other proprietary rights are anessential element of our business.We have five issued or allowed U.S. patents covering IPI-145 and/or other molecules related to our PI3K program, which expire on various dates between2029 and 2031, excluding any patent term extension. In addition, we have approximately 170 patents and patent applications pending worldwide related to ourPI3K program. Any patents that may issue from our pending patent applications would expire between 2029 and 2034, excluding any patent term extension.These patents and patent applications disclose compositions of matter, pharmaceutical compositions, methods of use and synthetic methods.Our policy is to obtain and enforce the patents and proprietary technology rights that are commercially important to our business, and we intend tocontinue to file patent applications to protect such technology and compounds in countries where we believe it is commercially reasonable and advantageous todo so. We also rely on trade secrets to protect our technology where patent protection is deemed inappropriate or unobtainable. We protect our proprietarytechnology and processes, in part, by confidentiality agreements with our employees, consultants, collaborators and contractors. 10Table of ContentsCompetitionThe pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceuticalcompanies, are actively engaged in research and development of drugs for the treatment of the same diseases and conditions as our current and potential futureproduct candidates. Many of these companies have substantially greater financial and other resources, larger research and development staffs and moreextensive marketing and manufacturing organizations than we do. In addition, some of them have considerably more experience than us in preclinical testing,clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that areconducting research in areas in which we are working. They may also develop products that may be competitive with our product candidates, either on theirown or through collaborative efforts.We expect to encounter significant competition for any drugs we develop. Companies that complete clinical trials, obtain required regulatory approvalsand commence commercial sales of their products before their competitors may achieve a significant competitive advantage. We are aware that many othercompanies or institutions are pursuing the development of drugs in the areas in which we are currently seeking to develop our own product candidates, andthere may be other companies working on competitive projects of which we are not aware.Our competitors may commence and complete clinical testing of their product candidates, obtain regulatory approvals and begin commercialization oftheir products sooner than we may for our own product candidates. These competitive products may have superior safety or efficacy, or be manufactured lessexpensively, than our product candidates. If we are unable to compete effectively against these companies on the basis of safety, efficacy or cost, then we maynot be able to commercialize our product candidates or achieve a competitive position in the market. This would adversely affect our business.PI3K Inhibitor ProgramWe believe that the following companies, among others, are in the clinical stage of development of compounds targeting the delta and/or gamma isoformsof PI3K: • Gilead Sciences, Inc., which we believe is conducting multiple late stage clinical trials of idelalisib and is conducting a Phase 1b clinical trial ofGS-9820; • Amgen, Inc., which we believe is conducting a Phase 1 clinical trial of AMG-319; • TG Therapeutics, Inc., which we believe is conducting a Phase 1 clinical trial of TGR-1202; • Rhizen Pharmaceuticals S.A., which we believe is conducting a Phase 1 clinical trial of RP-6530; and • GlaxoSmithKline, which we believe has completed Phase 1 clinical trials of GSK-2269557.In addition, many companies are developing product candidates directed to disease targets such as Bruton’s Tyrosine Kinase (or BTK), Janus Kinase(or JAK), Spleen Tyrosine Kinase (or Syk) and B-cell lymphoma 2 (or Bcl-2) in the fields of hematology-oncology and inflammation, including in thespecific diseases for which we are currently developing IPI-145, or for which we may develop IPI-145, IPI-443, or other PI3K inhibitors in the future. Suchcompanies include: • Pharmacyclics, Inc., which has received approval with the U.S. Food and Drug Administration, or FDA, of ibrutinib, a BTK inhibitor, for thetreatment of people with MCL or CLL and is conducting multiple late stage clinical studies of ibrutinib in additional hematologic malignancies; • Incyte Corporation which has received FDA approval of ruxolitinib, a JAK inhibitor, in patients with intermediate or high-risk myelofibrosis; 11Table of Contents • Rigel Pharmaceuticals, Inc. which has completed a Phase 2 clinical trial of fostamatinib, a Syk inhibitor, in patients with immunethrombocytopenic purpura; and • AbbVie, Inc., which we believe is conducting multiple Phase 1 clinical trials of ABT-199, a Bcl-2 inhibitor, in hematologic malignancies.Research and DevelopmentAs of February 1, 2014, our research and development group consisted of 151 employees, of whom over 34 percent hold Ph.D. or M.D. degrees and anadditional 25 percent hold other advanced degrees. Our research and development group is focusing on drug discovery, preclinical research, clinical trials andmanufacturing technologies. Our research and development expense for the years ended December 31, 2013, 2012 and 2011 was approximately $99.8million, $118.6 million and $108.6 million, respectively. Reimbursement for our strategic collaborator-sponsored research and development expenses for theyears ended December 31, 2013, 2012 and 2011 totaled approximately $0, $45.0 million, and $88.5 million, respectively. In calculating strategiccollaborator-sponsored research and development expenses, we have included all reimbursement for our research and development efforts and excluded licensefees. Our remaining research and development expense is company-sponsored.Manufacturing and SupplyWe rely primarily on third parties, and in some instances we rely on only one third party, to manufacture critical raw materials, drug substance andfinal drug product for our research, preclinical development and clinical trial activities. Commercial quantities of any drugs we seek to develop will have to bemanufactured in facilities and by processes that comply with the FDA and other regulations, and we plan to rely on third parties to manufacture commercialquantities of any products we successfully develop.Sales and MarketingWe currently have limited marketing and no commercial sales or distribution capabilities. We do, however, currently have worldwide development andcommercialization rights for products arising out of all of our programs. In order to commercialize any of these drugs if and when they are approved for sale,we will need to, and we intend to, develop the necessary marketing, sales and distribution capabilities.Government RegulationGovernment authorities in the United States and in other countries extensively regulate, among other things, the research, development, testing,manufacturing, storage, recordkeeping, approval, promotion, labeling, advertising, distribution, marketing, post-approval monitoring and reporting,sampling and export and import of pharmaceutical products such as those we are developing. We cannot provide assurance that any of our product candidateswill prove to be safe or effective, will receive regulatory approvals or will be successfully commercialized.New Drug Approval in the United StatesIn the United States, drugs and drug testing are regulated by the FDA and other federal agencies, as well as by state and local government authorities.Before any of our products may be marketed for commercial sale and/or shipment in the United States, we must comply with the requirements of the FederalFood, Drug and Cosmetic Act (FFD&C Act), which generally involves the following: • preclinical laboratory and animal tests performed in compliance with the FDA’s Good Laboratory Practices, or GLP, regulations; • development of manufacturing processes which conform to FDA-mandated current Good Manufacturing Practices, or cGMPs; 12Table of Contents • submission and acceptance of an investigational new drug application, or IND, which must become effective before clinical trials may begin inthe United States; • conduct of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for its intended use; and • the submission to and review and approval by the FDA of a New Drug Application, or NDA, prior to any commercial sale or shipment of aproduct.The testing and marketing approval process requires substantial time, effort and financial resources. We cannot be certain that any approval will be granted ona timely basis, if at all.Preclinical testing. Preclinical tests include laboratory evaluation of a product candidate, its chemistry, formulation, safety and stability, as well asanimal studies to assess the potential safety and efficacy of the product candidate. The conduct of the preclinical tests must comply with federal regulationsand requirements including GLP. We must submit the results of the preclinical tests, together with manufacturing information, analytical data and a proposedclinical trial protocol to the FDA as part of an IND. An IND is an exemption from the FFD&C Act that allows an unapproved drug to be shipped in interstatecommerce for use in an investigational clinical trial and a request for FDA authorization to administer an investigational drug to humans. Such authorizationmust be secured prior to interstate shipment and administration of any new drug that is not the subject of an approved NDA. Preclinical tests and studies cantake several years to complete, and despite completion of those tests and studies, the FDA may not permit clinical testing to begin.The IND process. The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin. This waitingperiod is designed to allow the FDA to review the IND to determine whether human research subjects will be exposed to unreasonable health risks. At any timeduring this 30-day period or at any time thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and imposea clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin or continue. The INDapplication process may become extremely costly and substantially delay development of our product candidates. Moreover, positive results of preclinical testswill not necessarily indicate positive results in clinical trials.Prior to the initiation of clinical studies, an independent Institutional Review Board, or IRB, at each clinical site proposing to conduct the clinical trialmust review and approve each study protocol, and study subjects must provide informed consent. During clinical studies the FDA requires the submission ofserious adverse event reports and other periodic reports.Clinical trials. Human clinical trials are typically conducted in three sequential phases that may overlap or be combined: • Phase 1: The product candidate is initially introduced into healthy human subjects or patients with the disease being investigated and tested forsafety, dosage tolerance, bioavailability, absorption, distribution, excretion and metabolism. These studies may be conducted in healthyvolunteers or patients with the disease being studied. • Phase 2: The product candidate is introduced into a limited patient population to: (1) assess the efficacy of the candidate in specific, targetedindications; (2) assess dosage tolerance and optimal dosage; and (3) identify possible adverse effects and safety risks. • Phase 3: These are commonly referred to as pivotal studies. If a product candidate is found to have an acceptable safety profile and to bepotentially effective in Phase 1 and 2 trials, Phase 3 clinical trials will be initiated to further demonstrate clinical efficacy and safety within alarger number of patients at geographically dispersed clinical study sites. 13Table of ContentsWe cannot be certain that we will successfully complete Phase 1, Phase 2 or Phase 3 testing of our product candidates within any specific time period, if at all.Clinical testing must meet requirements for IRB oversight, informed consent and Good Clinical Practices (GCP). The FDA and the IRB at each institution atwhich a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed toan unacceptable health risk.The NDA process. If clinical trials are successful, the next step in the drug development process is the preparation and submission to the FDA of anNDA. The NDA is the vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical for marketing and sale in theUnited States. The NDA must contain a description of the manufacturing process and quality control methods, as well as results of preclinical tests,toxicology studies, clinical trials and proposed labeling, among other things. A substantial user fee must also be paid with the NDA, unless an exemptionapplies. Every new drug must be the subject of an approved NDA before commercialization in the United States.Upon submission of the NDA, the FDA will make a threshold determination of whether the application is sufficiently complete to permit review, and, ifnot, will issue a refuse-to-file letter. If the application is accepted for filing, the FDA will attempt to review and take action on the application in accordance withperformance goal commitments the FDA has made in connection with the prescription drug user fee act, or PDUFA, in effect at that time. Current timingcommitments under PDUFA vary depending on whether an NDA qualifies for a priority or standard review. FDA acceptance of an NDA for review regardlessof the review classification does not guarantee that an application will be approved or even acted upon by any specific deadline. The review process can besignificantly extended by FDA due to requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review,evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do notadequately establish the safety and efficacy of the drug. In addition, the FDA may approve a product candidate subject to the completion of post-marketingcommitment studies, commonly referred to as Phase 4 trials, to monitor the safety and/or effect of the approved product. The FDA may also grant approvalwith restrictive product labeling, or may impose other restrictions on marketing or distribution such as the adoption of a special risk management plans. TheFDA has broad post-marketing regulatory and enforcement powers, including the ability to issue warning letters, levy fines and civil penalties, suspend ordelay issuance of approvals, seize or recall products and withdraw approvals.Manufacturing and post-marketing requirements. If approved, a drug may only be marketed in the dosage forms and for the indications approvedin the NDA. Special requirements also apply to any drug samples that are distributed in accordance with the Prescription Drug Marketing Act. Themanufacturers of approved products and their manufacturing facilities are subject to continual review and periodic inspections by the FDA and otherauthorities where applicable, and must comply with ongoing requirements, including the FDA’s cGMP requirements. Once the FDA approves a product, amanufacturer must provide certain updated safety and efficacy information, submit copies of promotional materials to the FDA and make certain otherrequired reports. Product and labeling changes, as well as certain changes in a manufacturing process or facility or other post-approval changes, maynecessitate additional FDA review and approval. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal orregulatory action, such as untitled letters, warning letters, suspension of manufacturing, seizure of product, voluntary recall of a product, injunctive action orpossible criminal or civil penalties. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problemsconcerning safety or efficacy of the product occur following approval. Because we intend to contract with third parties for manufacturing of our products, ourability to control third party compliance with FDA requirements will be limited to contractual remedies and rights of inspection. Failure of third partymanufacturers to comply with cGMP or other FDA requirements applicable to our products may result in, among other things, total or partial suspension ofproduction, failure of the government to grant approval for marketing and withdrawal, suspension, or revocation of marketing approvals. 14Table of ContentsWith respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise andpromote pharmaceuticals, which include, among others, standards for direct-to-consumer advertising, promoting drugs for uses or in patient populations thatare not described in the drug’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities and promotionalactivities involving the internet. Failure to comply with FDA requirements can have negative consequences, including adverse publicity, enforcement lettersfrom the FDA, mandated corrective advertising or communications with doctors and civil or criminal penalties. Although physicians may prescribe FDA-approved products for off-label uses, manufacturers may not market or promote such off-label uses.The FDA’s policies may change, and additional government regulations may be enacted which could prevent or delay regulatory approval of our productcandidates. Moreover, increased attention to the containment of health care costs in the United States and in foreign markets could result in new governmentregulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation thatmight arise from future legislative or administrative action, either in the United States or abroad.New Drug Approval Outside of the United StatesApproval of a drug in the United States does not guarantee approval in any other country and vice versa. Thus, we will have to complete approvalprocesses that are similar to those in the United States in virtually every foreign market in order to conduct clinical or preclinical research and to commercializeour product candidates in those countries. The approval procedures and the time required for approvals vary from country to country, may involve additionaltesting and may take longer than in the United States. Foreign approvals may not be granted on a timely basis, or at all. In addition, regulatory approval ofdrug prices is required in most countries other than the United States. We face the risk that the resulting prices would be insufficient to generate an acceptablereturn to us.In common with the United States, the various phases of preclinical and clinical research are subject to significant regulatory controls within theEuropean Union. Variations in the national regimes exist. Most jurisdictions, however, require regulatory and IRB/ethics committee (EC) approval ofinterventional clinical trials. Most European regulators also require the submission of serious adverse event reports during a study and a copy of the finalstudy report. Under European Union regulatory systems, for products that have an Orphan Drug designation or which target cancer, such as the productcandidates we are currently developing, marketing authorizations must be submitted under a centralized procedure that provides for the granting of a singlemarketing authorization that is valid for all European Union member states.Orphan Drug DesignationUnder the Orphan Drug Act and corresponding European Union orphan regulations, the FDA and European Union regulatory authorities may grantOrphan Drug designation to drugs intended to treat a rare disease or condition. In the United States, a rare disease or condition is one that affects fewer than200,000 individuals, or more than 200,000 individuals but for which there is no reasonable expectation that the cost of developing and making available in theUnited States a drug for this type of disease or condition will be recovered from sales in the United States of that drug. In the European Union, a rare diseaseor condition is one that affects fewer than 5 in 10,000 individuals.In the United States, Orphan Drug designation must be requested before submitting an NDA. After the FDA grants Orphan Drug designation, theidentity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan Drug designation does not convey any advantage in orshorten the duration of the regulatory review and approval process, nor does it assure approval.In the United States, if a product that has Orphan Drug designation receives the first FDA approval for the disease for which it has such designation,the product is entitled to orphan product exclusivity, which means that 15Table of Contentsthe FDA may not approve any other applications to market the same drug (sameness defined as same active moiety) for the same indication, except in verylimited circumstances, for seven years. In the European Union, the period of product exclusivity is ten years.Orphan Drug exclusivity, however, also could block the approval of one of our products in the United States for seven years for an Orphan Drugindication if a competitor obtains approval of the same drug, as defined by the FDA, for such Orphan Drug indication or if our product candidate isdetermined to be contained within the competitor’s product for the same indication or disease. We intend to seek Orphan Drug status for our productcandidates as appropriate, but even if an Orphan Drug designation is granted it may not provide us with a material commercial advantage.Other Regulatory MattersIn the United States, manufacturing, sales, promotion and other activities following the approval of a new drug are subject to regulation by regulatoryauthorities in addition to the FDA, including the Federal Trade Commission, the Department of Justice, the Centers for Medicare & Medicaid Services, otherdivisions of the Department of Health and Human Services and state and local governments. Among other laws and requirements, our sales, marketing andscientific/educational programs would need to comply with the anti-kickback provisions of the Social Security Act, the False Claims Act and similar statelaws. Our pricing and rebate programs would need to comply with pricing and reimbursement rules. If products are made available to authorized users of theFederal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of our activities are potentially subject to federaland state consumer protection and unfair competition laws. Finally, certain jurisdictions have other trade regulations from time to time to which our businessis subject such as technology or environmental export controls and political trade embargoes. Depending on the circumstances, failure to meet these applicableregulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, private “qui tam” actions brought by individualwhistleblowers in the name of the government, or refusal to allow us to enter into supply contracts, including government contracts.In addition to regulations enforced by the FDA, we also are subject to regulation under the Occupational Safety and Health Act, the Toxic SubstancesControl Act, the Resource Conservation and Recovery Act and other present and potential future foreign, federal, state and local laws and regulations. Ourresearch and development involves the controlled use of hazardous materials, including corrosive, explosive and flammable chemicals, various radioactivecompounds and compounds known to cause birth defects. Although we believe that our safety procedures for storing, handling, using and disposing of suchmaterials comply with the standards prescribed by applicable regulations, the risk of contamination or injury from these materials cannot be completelyeliminated. In the event of an accident, we could be held liable for any damages that result, and any such liability could materially affect our ongoing business.EmployeesAs of February 1, 2014, we had 180 full-time employees, 151 of whom were engaged in research and development and 29 of whom were engaged ingeneral business management, administration and finance. Over 57 percent of our employees hold advanced degrees. Our success depends, in part, on ourability to recruit and retain talented and trained scientific and business personnel and senior leadership. We believe that we have been successful to date inobtaining and retaining these individuals, but we do not know whether we will be successful in doing so in the future. None of our employees are representedby a labor union or covered by a collective bargaining agreement, nor have we experienced work stoppages. We believe that relations with our employees aregood. 16Table of ContentsExecutive OfficersThe following table lists the positions, names and ages of our executive officers as of February 15, 2014: Name Age PositionAdelene Q. Perkins 54 President and Chief Executive OfficerJulian Adams, Ph.D. 59 President of Research & DevelopmentLawrence E. Bloch, M.D., J.D. 48 Executive Vice President, Chief Financial Officer and Chief Business OfficerVito J. Palombella, Ph.D. 51 Chief Scientific OfficerDavid A. Roth, M.D. 51 Chief Medical OfficerAdelene Q. Perkins has served as our President and Chief Executive Officer since January 2010, President and Chief Business Officer from October2008 through December 2009 and as our Executive Vice President and Chief Business Officer between September 2006 and October 2008. Ms. Perkins servedas Executive Vice President of IPI from February 2006 until its merger with DPI in September 2006 and Chief Business Officer of IPI from June 2002 until theDPI merger. Prior to joining IPI, Ms. Perkins served as Vice President of Business and Corporate Development of TransForm Pharmaceuticals, Inc., a privatepharmaceutical company, from 2000 to 2002. From 1992 to 1999, Ms. Perkins held various positions at Genetics Institute, most recently serving as VicePresident of Emerging Business and General Manager of the DiscoverEase business unit. From 1985 to 1992, Ms. Perkins held a variety of positions atBain & Company, a strategy consulting firm. Ms. Perkins received a B.S. in Chemical Engineering from Villanova University and an M.B.A. from HarvardBusiness School.Julian Adams, Ph.D., has served as our President of Research & Development since October 2007, our Chief Scientific Officer between September2006 and May 2010, as Chief Scientific Officer of IPI from October 2003 until the merger with DPI in September 2006, as our President between September2006 and October 2007 and as President of IPI from February 2006 until September 2006. Prior to joining Infinity, Dr. Adams served as Senior Vice President,Drug Discovery and Development at Millennium Pharmaceuticals, Inc. from 1999 to 2001, where he led the development of Velcade. Dr. Adams served asSenior Vice President, Research and Development at LeukoSite Inc., a private biopharmaceutical company, from July 1999 until its acquisition byMillennium in December 1999. Dr. Adams served as a director and Executive Vice President of Research and Development at ProScript, Inc., a privatebiopharmaceutical company, from 1994 until its acquisition by LeukoSite in 1999. Prior to joining ProScript, Dr. Adams held a variety of positions withBoehringer Ingelheim, a private pharmaceutical company, and Merck & Co., Inc., a publicly traded pharmaceutical company. Dr. Adams has served as adirector of Aileron Therapeutics, Inc., a privately held biopharmaceutical company, since May 2011. Dr. Adams received a B.S. from McGill University anda Ph.D. from the Massachusetts Institute of Technology in the field of synthetic organic chemistry.Lawrence E. Bloch, M.D., J.D., has served as our Chief Financial Officer and Chief Business Officer since July 2012. Prior to joining Infinity,Dr. Bloch served as Chief Executive Officer of NeurAxon, Inc., a privately-held biopharmaceutical company, from 2007 to 2011. Previously, he served asChief Financial Officer and Chief Business Officer of NitroMed, Inc., a publicly-held biopharmaceutical company, from 2004 to 2006. From 2000 to 2004,Dr. Bloch served as Chief Financial Officer, and from 1999 to 2002 as Vice President of Business Development, of Applied Molecular Evolution, Inc., apublicly-held biopharmaceutical company. Dr. Bloch began his career as an emergency medicine resident physician at Massachusetts General Hospital andBrigham & Woman’s Hospital. He holds a J.D. from Harvard Law School, an M.D. from Harvard Medical School and an M.B.A. from Harvard BusinessSchool.Vito J. Palombella, Ph.D., has served as our Chief Scientific Officer since May 2010. He is responsible for our drug discovery and preclinicaldevelopment activities. Prior to his role as Chief Scientific Officer, Dr. Palombella was Vice President, Drug Discovery from September 2006 to May 2010 andVice President, Biology of IPI from January 2004 to September 2006. Prior to joining Infinity, Dr. Palombella was Director of 17®®Table of ContentsMolecular Biology and Protein Chemistry at Syntonix Pharmaceuticals where he was responsible for improving and expanding its core Fc receptor-mediateddrug delivery technology. Before joining Syntonix, Dr. Palombella was Senior Director of Cell and Molecular Biology at Millennium Pharmaceuticals, whichhe joined through its acquisition of LeukoSite, at which he held the same title, in 1999. Prior to its acquisition by LeukoSite, Dr. Palombella held a number ofpositions at ProScript, Inc. between 1994 and 1999. While at ProScript, LeukoSite and Millennium, Dr. Palombella was involved in the discovery anddevelopment of Velcade (bortezomib), a proteasome inhibitor for cancer therapy. He also managed a number of additional projects, including research intoNF-kB regulation. Dr. Palombella received a B.S. in Microbiology from Rutgers University and an M.S. and Ph.D. in Viral Oncology and Immunology fromthe New York University Medical Center. He was also a post-doctoral fellow at Harvard University in the laboratory of Dr. Tom Maniatis.David A. Roth, M.D., has served as our Chief Medical Officer since January 2014. In this role, he provides strategic leadership for our clinicaldevelopment activities, including responsibility for the company’s medical affairs, pharmacovigilance and clinical operations functions. Prior to his role asChief Medical Officer, Dr. Roth served as our Senior Vice President of Clinical Development and Medical Affairs from the time he joined Infinity in September2013. Prior to joining Infinity, Dr. Roth was with Pfizer Inc. and Wyeth Pharmaceuticals, publicly traded pharmaceutical companies, from 2003 to 2013 wherehe contributed to the successful regulatory approval of several products, including Bosulif (bosutinib), a dual Src/Abl tyrosine kinase inhibitor for thetreatment of chronic myelogenous leukemia; Xyntha and ReFacto AF for the treatment of hemophilia A; and BeneFIX for the treatment of hemophilia B. Dr.Roth also led the early development of palbociclib, a CDK 4/6 inhibitor, to Phase 3 evaluation in women with ER positive advanced breast cancer. Amongother leadership positions, Dr. Roth served as Vice President and Head of the Early Development, Oncology Business Unit at Pfizer from 2009 to 2013. Whileat Wyeth, he held the role of Assistant Vice President, Clinical Research & Development and Global Therapeutic Area Director of Hematology from 2007 untilPfizer’s acquisition of Wyeth in 2009. During his tenure at Pfizer and Wyeth, Dr. Roth also co-chaired Pfizer’s oncology research and development board andserved on several oncology and hematology R&D leadership teams and governance committees. Prior to joining the pharmaceutical industry, Dr. Roth’sexperience included over 10 years in research and clinical practice as an academic hematologist, and he served on the full time faculty at Harvard MedicalSchool and Beth Israel Deaconess Medical Center in Boston. Dr. Roth received his B.S. from the Massachusetts Institute of Technology and his M.D. fromHarvard Medical School in the Harvard-M.I.T. Division of Health Sciences and Technology, where he remains on the Affiliated Faculty.Available InformationOur Internet website is http://www.infi.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities ExchangeAct of 1934, as amended. We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with,or furnish such reports to, the U.S. Securities and Exchange Commission. In addition, we regularly use our website to post information regarding ourbusiness, product development programs and governance, and we encourage investors to use our website, particularly the information in the section entitled“Investors/Media,” as a source of information about us.Our Code of Conduct and Ethics and the charters of the Audit, Compensation, Nominating & Corporate Governance and Research & DevelopmentCommittees of our board of directors are all available on our website at http://www.infi.com at the “Investors/Media” section under “Corporate Governance.”Stockholders may request a free copy of any of these documents by writing to Investor Relations, Infinity Pharmaceuticals, Inc., 780 Memorial Drive,Cambridge, Massachusetts 02139, U.S.A.The foregoing references to our website are not intended to, nor shall they be deemed to, incorporate information on our website into this report byreference. 18®®®®®Table of ContentsItem 1A. Risk FactorsRisks Related to Our Stage of Development as a CompanyOur results to date do not guarantee that any of our product candidates will be safe or effective, or receive regulatory approval.The risk of failure of our current product candidates is high. To date, the data supporting our clinical development strategy for our product candidatesare derived solely from laboratory and preclinical studies and limited early-to-mid-stage clinical trials. Later clinical trials may not yield data consistent withearlier clinical trials, as was the case with our randomized Phase 2 clinical trial of retaspimycin hydrochloride in combination with docetaxel in patients withnon-small cell lung cancer, which did not yield results consistent with results obtained from an earlier Phase 1b study. Similarly, clinical responses seen inpatients enrolled at early stages of a clinical trial may not be replicated in patients enrolled in that trial at a later time. In addition, adverse events not observedin early clinical trials may be seen for the first time in later studies, or adverse events observed in a small number of patients in early trials may be seen in agreater number of patients in later studies and have greater statistical significance than previously anticipated. In the event that our clinical trials do not yielddata consistent with earlier experience, it may be necessary for us to change our development strategy or abandon development of that product candidate, eitherof which could result in delays, additional costs and a decrease in our stock price. It is impossible to predict when or if any of our product candidates willprove safe or effective in humans or receive regulatory approval. These product candidates may not demonstrate in patients the chemical and pharmacologicalproperties ascribed to them in laboratory studies or early-stage clinical trials, and they may interact with human biological systems or other drugs inunforeseen, ineffective or harmful ways. If we are unable to discover or successfully develop drugs that are safe and effective in humans, we will not have aviable business.We have a history of operating losses, expect to incur significant and increasing operating losses in the future, may never become profitable, or ifwe become profitable we may not remain profitable.We have a limited operating history for you to evaluate our business. We have no approved products and have generated no product revenue from sales.We have primarily incurred operating losses. As of December 31, 2013, we had an accumulated deficit of $449.8 million. We expect to continue to spendsignificant resources to fund the research and development of IPI-145 and our other product candidates. While we may have net income in future periods as theresult of non-recurring collaboration revenue, we expect to incur substantial operating losses over the next several years as our clinical trial and drugmanufacturing activities increase. As a result, we expect that our accumulated deficit will also increase significantly.Our product candidates are in varying stages of preclinical and clinical development and may never be approved for sale or generate any revenue. Wewill not be able to generate product revenue unless and until one of our product candidates successfully completes clinical trials and receives regulatoryapproval. Since even our most advanced product candidate requires substantial additional clinical development, we do not expect to receive revenue from ourproduct candidates for several years, if ever. Even if we eventually generate revenues, we may never be profitable, and if we do achieve profitability, we maynot be able to sustain or increase profitability on a quarterly or annual basis.We may be unable to raise the substantial additional capital that we will need to sustain our operations.We will need substantial additional funds to support our planned operations. In the absence of additional funding or business development activities andbased on our current operating plans, we expect that our current cash and investments are sufficient to fund our current operating plans into 2015. In theabsence of changes to our current operating plans, we will need to raise additional funds by that date. Our need to raise additional funds may be accelerated ifour research and development expenses exceed our current expectation, if we acquire a 19Table of Contentsthird party or if we acquire or license rights to additional product candidates or new technologies from one or more third parties. Our need to raise additionalfunds may also be accelerated for other reasons, including without limitation if: • our product candidates require more extensive clinical or preclinical testing than we currently expect; • we advance our product candidates into clinical trials for more indications than we currently expect; • we advance more of our product candidates than expected into costly later stage clinical trials; • we advance more preclinical product candidates than expected into early stage clinical trials; • we acquire additional business, technologies, products or product candidates; • the cost of acquiring raw materials for, and of manufacturing, our product candidates is higher than anticipated; • we are required, or consider it advisable, to acquire or license intellectual property rights from one or more third parties; or • we experience a loss in our investments due to general market conditions or other reasons.Historically, we relied on our previous strategic alliance with Mundipharma International Corporation Limited, or Mundipharma, and PurduePharmaceutical Products L.P., or Purdue, for a significant portion of our research and development funding needs. Mundipharma and Purdue provided uswith approximately $260 million in research and development funding during the term of our strategic alliance. Following the termination of the strategicalliance agreements with Mundipharma and Purdue on July 17, 2012, we no longer receive such funding and must use other resources available to us to fundour research and development expenses. Our efforts to raise sufficient capital to replace the funding we previously received under the terminated strategicalliance agreements may not be successful.We may seek to satisfy our need for additional funds by drawing down funds under the debt Facility Agreement we entered into with affiliates ofDeerfield Management Company, L.P., or Deerfield, in February 2014. Under the Facility Agreement, Deerfield agreed to loan to us up to $100 million subjectto the terms and conditions of the Facility Agreement. Our ability to draw down under the Facility Agreement is subject to various customary conditions,however, there is no assurance that we will be able to satisfy these conditions and draw down any funds. If we draw down under the Facility Agreement, wewill be required to grant to Deerfield a security interest in substantially all of our assets including intellectual property, issue additional warrants to Deerfield,and repay any amounts borrowed together with interest accruing at a rate of 7.95% per annum no later than December 15, 2019. Any amounts drawn underthe Facility Agreement may become immediately due and payable upon customary events of default or the consummation of certain major transactions, inwhich case Deerfield would have the right to require us to repay 100% of the principal amount of the loan, plus any accrued and unpaid interest thereon, plusany applicable additional amounts relating to a prepayment or termination. Principal and interest under the Facility may be paid in cash or freely tradableshares of common stock at our election, subject to specified conditions at any time of conversion. There is no assurance that the conditions to our ability torepay the loan in shares of our common stock would be satisfied at the time that any outstanding principal and interest under the loan is due, in which case wewould be obligated to repay the loan in cash, or that events permitting acceleration of the loan will not occur, in which event we would be required to repay anyoutstanding principal and interest sooner than anticipated.We may also seek additional funding through public or private financings of equity or debt securities, but such financing may not be available onacceptable terms, or at all. In addition, the terms of such financings may result in, among other things, dilution for stockholders or the incurrence ofindebtedness that may impact our ability to make capital expenditures or incur additional debt as would be the case if we decided to draw down under theFacility Agreement with Deerfield. We may also seek additional funds through arrangements with collaborators or other third parties, or through projectfinancing. These arrangements would generally require us 20Table of Contentsto relinquish or encumber rights to some of our technologies or product candidates, and we may not be able to enter into such arrangements on acceptableterms, if at all. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our productdevelopment programs or to scale back, suspend or terminate our business operations.If we are not able to attract and retain key personnel and advisors, we may not be able to operate our business successfully.We are highly dependent on our executive leadership team. All of these individuals are employees-at-will, which means that neither Infinity nor theemployee is obligated to a fixed term of service and that the employment relationship may be terminated by either Infinity or the employee at any time, withoutnotice and whether or not cause or good reason exists for such termination. The loss of the services of any of these individuals might impede the achievementof our research, development and commercialization objectives. We do not maintain “key person” insurance on any of our employees.Recruiting and retaining qualified scientific and business personnel is also critical to our success. We may not be able to attract or retain these personnelon acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. This competition isparticularly intense near our headquarters in Cambridge, Massachusetts. We also experience competition for the hiring of scientific personnel from universitiesand research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our researchand development strategy. Our consultants and advisors may be employed by other entities, have commitments under consulting or advisory contracts withthird parties that limit their availability to us, or both.We may not be able to execute our business strategy if we are unable to enter into alliances with other companies that can provide capabilities orfunding for the development and commercialization of our product candidates.As part of our business strategy, we have historically entered into, and expect to enter into in the future, alliances with major biotechnology orpharmaceutical companies to jointly develop specific product candidates and to jointly commercialize them if they are approved. In these alliances, we wouldexpect our alliance partner to provide substantial funding, as well as significant capabilities in development, marketing and sales. We may not be successfulin entering into any such alliances on favorable terms, if at all. Even if we do succeed in securing such alliances, we may not be able to maintain them if, forexample, development or approval of a product candidate is delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering intoalliances could delay the development and commercialization of our product candidates and reduce their competitiveness, even if they reach the market. Anysuch delay related to our alliances could adversely affect our business.If an alliance partner terminates or fails to perform its obligations under agreements with us, the development and commercialization of ourproduct candidates could be delayed or terminated.If any future alliance partner does not devote sufficient time and resources to its alliance arrangements with us, we may not realize the potentialcommercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if any alliance partner were to breach or terminateits arrangements with us, the development and commercialization of the affected product candidate could be delayed, curtailed or terminated because we maynot have sufficient financial resources or capabilities to continue development and commercialization of the product candidate on our own, and we may find itdifficult to attract a new alliance partner for such product candidate.Much of the potential revenue from any alliance we may enter into in the future will likely consist of contingent payments, such as royalties payable onsales of any successfully developed drugs. Any such contingent revenue will depend upon our, and our alliance partner’s, ability to successfully develop,launch, 21Table of Contentsmarket and sell new drugs. In some cases, we will not be involved in some or all of these processes, and we will depend entirely on our alliance partners. Anyof our future alliance partners may fail to develop or effectively commercialize these drugs because it: • decides not to devote the necessary resources because of internal constraints, such as limited personnel with the requisite scientific expertise,limited cash resources or specialized equipment limitations, or the belief that other product candidates may have a higher likelihood of obtainingregulatory approval or may potentially generate a greater return on investment; • does not have sufficient resources necessary to carry the product candidate through clinical development, regulatory approval andcommercialization; or • cannot obtain the necessary regulatory approvals.If any future alliance partner fails to develop or effectively commercialize our product candidates, we may not be able to develop and commercialize thatproduct candidate independently, and our financial condition and operations would be negatively impacted.Our competitors and potential competitors may develop products that make ours less attractive or obsolete.In building our product development pipeline, we have intentionally pursued targets with applicability across multiple therapeutic areas and indications.This approach gives us several product opportunities in oncology and inflammatory diseases, which are highly competitive and rapidly changing segments ofthe pharmaceutical industry. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public andprivate research organizations are pursuing the development of novel drugs that target various diseases in these segments. We currently face, and expect tocontinue to face, intense and increasing competition as new products enter the market and advanced technologies become available. Moreover, there are anumber of large pharmaceutical companies currently marketing and selling products in these segments including Bristol-Myers Squibb Company, the RocheGroup and its subsidiary Genentech, Novartis AG and Pfizer, Inc. In addition to currently approved drugs, there are a significant number of drugs that arecurrently under development and may become available in the future for the treatment of various forms of cancer and inflammatory diseases.We are also aware of a number of companies seeking to develop product candidates directed to the same biological targets that our own productcandidates are designed to inhibit. Specifically: • we believe that Gilead Sciences, Inc., Amgen Inc., Rhizen Pharmaceuticals S.A, TG Therapeutics, Inc., and GlaxoSmithKline, are conductingclinical trials of drugs that target the delta and/or gamma isoforms of phosphoinositide-3-kinase, or PI3K, which is the target of IPI-145; and • many companies are developing product candidates directed to disease targets such as Bruton’s Tyrosine Kinase (or BTK), Janus Kinase (orJAK), Spleen Tyrosine Kinase (or Syk) and B-cell lymphoma 2 (or Bcl-2) in the fields of hematology-oncology and inflammation, including inthe specific diseases for which we are currently developing IPI-145, or for which we may develop IPI-145, IPI-443 or other PI3K inhibitors in thefuture, including Pharmacyclics, Inc., Incyte Corporation, Rigel Pharmaceuticals, Inc., and AbbVie, Inc.Many of our competitors have: • significantly greater financial, technical and human resources than we have, and may be better equipped to discover, develop, manufacture andcommercialize product candidates than we are; • more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing products thanwe do; and/or 22Table of Contents • product candidates that have been approved, such as ibrutinib, a BTK inhibitor being developed and commercialized by Pharmacyclics, Inc. forthe treatment of people with mantle cell lymphoma or chronic lymphocytic leukemia, or are in later-stage clinical development than our ownproduct candidates.Our competitors may commence and complete clinical testing of their product candidates, obtain regulatory approvals and begin commercialization oftheir products sooner than we and/or our strategic alliance partners may for our own product candidates. These competitive products may have superior safetyor efficacy, have more attractive pharmacologic properties, or may be manufactured less expensively than our future products. If we are unable to competeeffectively against these companies on the basis of safety, efficacy or cost, then we may not be able to commercialize our future products or achieve acompetitive position in the market. This would adversely affect our ability to generate revenues.We may encounter difficulties in managing organizational change, which could adversely affect our operations.Our ability to effectively manage changes to our organization, including organizational growth, depends upon the continual improvement of ourprocesses and procedures and the preservation of our corporate culture. We may not be able to implement improvements in an efficient or timely manner, ormaintain our corporate culture during periods of organizational change. If we do not meet these challenges, we may be unable to take advantage of marketopportunities, execute our business strategies or respond to competitive pressures, which in turn may give rise to inefficiencies that would increase our lossesor delay our programs.We may undertake strategic acquisitions in the future, and any difficulties from integrating acquired businesses, products, product candidates andtechnologies could adversely affect our business and our stock price.We may acquire additional businesses, products, product candidates, or technologies that complement or augment our existing business. We may not beable to integrate any acquired business, product, product candidate or technology successfully or operate any acquired business profitably. Integrating anynewly acquired business, product, product candidate, or technology could be expensive and time-consuming. Integration efforts often place a significant strainon managerial, operational and financial resources and could prove to be more difficult or expensive than we expect. The diversion of the attention of ourmanagement to, and any delay or difficulties encountered in connection with, any future acquisitions we may consummate could result in the disruption ofour ongoing business or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships withcustomers, suppliers, collaborators, employees and others with whom we have business dealings. We may need to raise additional funds through public orprivate debt or equity financings to acquire any businesses, products, product candidates, or technologies which may result in, among other things, dilutionfor stockholders or the incurrence of indebtedness.As part of our efforts to acquire businesses, products, product candidates and technologies or to enter into other significant transactions, we conductbusiness, legal and financial due diligence in an effort to identify and evaluate material risks involved in the transaction. We will also need to make certainassumptions regarding acquired product candidates, including, among other things, development costs, the likelihood of receiving regulatory approval and themarket for such product candidates. If we are unsuccessful in identifying or evaluating all such risks or our assumptions prove to be incorrect, we might notrealize some or all of the intended benefits of the transaction. If we fail to realize intended benefits from acquisitions we may consummate in the future, ourbusiness and financial results could be adversely affected.In addition, we will likely incur significant expenses in connection with our efforts, if any, to consummate acquisitions. These expenses may includefees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts, and could be incurred whether or not anacquisition is consummated. Even if we consummate a particular acquisition, we may incur as part of such acquisition 23Table of Contentssubstantial closure costs associated with, among other things, elimination of duplicate operations and facilities. In such case, the incurrence of these costscould adversely affect our financial results for particular quarterly or annual periods.Our investments are subject to risks that may cause losses and affect the liquidity of these investments.As of December 31, 2013, we had approximately $214 million in cash, cash equivalents and available-for-sale securities. We historically have investedthese amounts in money market funds, corporate obligations, U.S. government-sponsored enterprise obligations, U.S. Treasury securities and mortgage-backed securities meeting the criteria of our investment policy, which prioritizes the preservation of our capital. Corporate obligations may include obligationsissued by corporations in countries other than the United States, including some issues that have not been guaranteed by governments and governmentagencies. Our investments are subject to general credit, liquidity, market and interest rate risks and instability in the global financial markets. We may realizelosses in the fair value of these investments or a complete loss of these investments. In addition, should our investments cease paying or reduce the amount ofinterest paid to us, our interest income would suffer. These market risks associated with our investment portfolio may have a material adverse effect on ourfinancial results and the availability of cash to fund our operations.The estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could proveinaccurate.Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Thepreparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities,revenues and expenses. Such estimates and judgments include those related to revenue recognition, accrued expenses, assumptions in the valuation of stock-based compensation and income taxes. We base our estimates and judgments on historical experience, facts and circumstances known to us and on variousassumptions that we believe to be reasonable under the circumstances. These estimates and judgments, or the assumptions underlying them, may change overtime or prove inaccurate. If this is the case, we may be required to restate our financial statements as we did in 2011, which could in turn subject us tosecurities class action litigation. Defending against such potential litigation relating to a restatement of our financial statements would be expensive and wouldrequire significant attention and resources of our management. Moreover, our insurance to cover our obligations with respect to the ultimate resolution of anysuch litigation may be inadequate. As a result of these factors, any such potential litigation could have a material adverse effect on our financial results andcause our stock price to decline.Under our strategic alliance termination agreements, Mundipharma and Purdue continue to have the right to audit research and development expensesincurred by us during the term of our former strategic alliance, in order to verify the research and development funding amounts previously paid byMundipharma and Purdue and have, in the past, exercised such rights. If, as a result of any audit, it is determined that Mundipharma and Purdue haveoverpaid research and development expenses, we will be required to refund the amount of such overpayment, plus interest, and if such amount is material itcould adversely impact our financial results and available cash and we may be required to restate prior period revenue.If we are not able to maintain effective internal controls under Section 404 of the Sarbanes-Oxley Act, our business and stock price could beadversely affected.Section 404 of the Sarbanes-Oxley Act of 2002 requires us, on an annual basis, to review and evaluate our internal controls, and requires ourindependent auditors to attest to the effectiveness of our internal controls. Any failure by us to maintain the effectiveness of our internal controls in accordancewith the requirements of Section 404 of the Sarbanes-Oxley Act, as such requirements exist today or may be modified, supplemented or amended in the future,could have a material adverse effect on our business, operating results and stock price. 24Table of ContentsRisks Related to the Development and Commercialization of Our Product CandidatesAll of our product candidates remain subject to clinical testing and regulatory approval. This process is highly uncertain, and we may never beable to obtain marketing approval for any of our product candidates.To date, we have not obtained approval from the Food and Drug Administration, or FDA, or any foreign regulatory authority to market or sell any of ourproduct candidates. Our product candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing andcommercialization. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required in the United States and in manyforeign jurisdictions prior to the commercial sale of medicinal products like our product candidates. For example, we are evaluating IPI-145, the leadcompound in our PI3K inhibitor program, in all phases of clinical development and we anticipate initiating multiple additional trials of IPI-145 in 2014. If anyof these trials or other trials of our product candidates are successful, we may need to conduct further clinical trials and will need to apply for regulatoryapproval before we may market or sell any of our future products. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertainand subject to unanticipated delays. It is possible that none of the product candidates we are developing, or may in the future develop, either alone or incollaboration with strategic alliance partners, will obtain marketing approval. We have limited experience in conducting and managing the clinical trialsnecessary to obtain regulatory approvals, including approval by the FDA and comparable foreign regulatory agencies. The time required to complete clinicaltrials and for regulatory review by the FDA and other countries’ regulatory agencies is uncertain and typically takes many years. Some of our productcandidates may be eligible for the FDA’s programs that are designed to facilitate the development and expedite the review of certain drugs, but we cannotprovide any assurance that any of our product candidates will qualify for one or more of these programs. Even if a product candidate qualifies for one or moreof these programs, the FDA may later decide that the product candidate no longer meets the conditions for qualification.Our analysis of data obtained from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which coulddelay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to changes in government regulation from futurelegislation or administrative action or changes in FDA and other regulatory policy during the period of product candidate development, clinical trials and FDAand other regulatory review.Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenues from the particularproduct candidate. Furthermore, the uses for which any regulatory authority may grant approval to market a product may be limited, thus placing constraintson the manner in which we may market the product and curtailing its market potential.Our product candidates must undergo rigorous clinical trials prior to receipt of regulatory approval. Any problems in these clinical trials coulddelay or prevent commercialization of our product candidates.We cannot predict whether we will encounter problems with any of our ongoing or planned clinical trials that will cause us or regulatory authorities todelay, suspend, or discontinue clinical trials or to delay the analysis of data from ongoing clinical trials. Any of the following could delay or disrupt theclinical development of our product candidates: • unfavorable results of discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials; • delays in receiving, or the inability to obtain, required approvals from institutional review boards or other reviewing entities at clinical sitesselected for participation in our clinical trials; • delays in enrolling patients into clinical trials; • a lower than anticipated retention rate of patients in clinical trials; 25Table of Contents • the need to repeat or discontinue clinical trials as a result of inconclusive or negative results or unforeseen complications in testing or because theresults of later trials may not confirm positive results from earlier preclinical studies or clinical trials; • inadequate supply, delays in distribution or deficient quality of, or inability to purchase or manufacture drug product, comparator drugs or othermaterials necessary to conduct our clinical trials; • unfavorable FDA or other foreign regulatory inspection and review of a clinical trial site or records of any clinical or preclinical investigation; • serious and unexpected drug-related side effects experienced by participants in our clinical trials, which may occur even if they were not observedin earlier trials or only observed in a limited number of participants; • a finding that the trial participants are being exposed to unacceptable health risks; • the placement by the FDA or a foreign regulatory authority of a clinical hold on a trial; or • any restrictions on, or post-approval commitments with regard to, any regulatory approval we ultimately obtain that render the product candidatenot commercially viable.We may suspend, or the FDA or other applicable regulatory authorities may require us to suspend, clinical trials of a product candidate at any time ifwe or they believe the patients participating in such clinical trials, or in independent third party clinical trials for drugs based on similar technologies, arebeing exposed to unacceptable health risks or for other reasons.The delay, suspension or discontinuation of any of our clinical trials, or a delay in the analysis of clinical data for our product candidates, for any ofthe foregoing reasons, could adversely affect our efforts to obtain regulatory approval for and to commercialize our product candidates, increase our operatingexpenses and have a material adverse effect on our financial results.Our inability to enroll sufficient numbers of patients in our clinical trials, or any delays in patient enrollment, can result in increased costs andlonger development periods for our product candidates.Clinical trials require sufficient patient enrollment, which is a function of many factors, including: • the size of the patient population; • the nature of the trial protocol, including eligibility criteria for the trial; • the number of clinical trial sites and the proximity of patients to those sites; • the commitment of clinical investigators to identify eligible patients; and • competing studies or trials.Additionally, the availability of safe and effective treatments for the relevant disease being studied may impact patient enrollment in our clinical trials.For example, Pharmacyclics, Inc. has received approval to manufacture and market, ibrutinib, a BTK inhibitor for the treatment of CLL, an indication inwhich we are currently evaluating IPI-145 in a Phase 3 clinical trial.Our failure to enroll patients in a clinical trial could delay the initiation or completion of the clinical trial beyond current expectations. In addition, theFDA or other foreign regulatory authorities could require us to conduct clinical trials with a larger number of patients than has been projected for any of ourproduct candidates. As a result of these factors, we may not be able to enroll a sufficient number of patients in a timely or cost-effective manner. 26Table of ContentsFurthermore, enrolled patients may drop out of a clinical trial, which could impair the validity or statistical significance of the clinical trial. A number offactors can influence the patient discontinuation rate, including, but not limited to: • the inclusion of a placebo arm in a trial; • possible inactivity or low activity of the product candidate being tested at one or more of the dose levels being tested; • the occurrence of adverse side effects, whether or not related to the product candidate; and • the availability of numerous alternative treatment options, including clinical trials evaluating competing product candidates, that may inducepatients to discontinue their participation in the trial.A delay in our clinical trial activities could adversely affect our efforts to obtain regulatory approval for and to commercialize our product candidates,increase our operating expenses, and have a material adverse effect on our financial results.If we are unable to successfully develop companion diagnostics for our product candidates, or experience significant delays in doing so, we maynot realize the full commercial potential of our product candidates.There has been limited success to date industry-wide in developing companion diagnostics. To be successful in developing a companion diagnostic, wewill need to address a number of scientific, technical and logistical challenges. Companion diagnostics are subject to regulation by the FDA and similarregulatory authorities outside the United States as medical devices and require separate regulatory approval prior to commercialization. We have limitedexperience in the development of diagnostics and may not be successful in developing appropriate diagnostics to pair with any of our product candidates thatreceive marketing approval. Given our limited experience in developing diagnostics, we expect to rely, in part, on third parties for their design andmanufacture. If we, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our product candidates orexperience delays in doing so, the development of our product candidates may be adversely affected, our product candidates may not receive marketingapproval and we may not realize the full commercial potential of any product candidates that receive marketing approval.We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily.We rely on third parties such as contract research organizations, medical institutions and external investigators to enroll qualified patients, conduct ourclinical trials and provide services in connection with such clinical trials, and we intend to rely on these and other similar entities in the future. Our reliance onthese third parties for clinical development activities reduces our control over these activities. Accordingly, these third party contractors may not completeactivities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or the trial design. If these third parties do notsuccessfully carry out their contractual obligations or meet expected deadlines, we may be required to replace them. Replacing a third party contractor mayresult in a delay of the affected trial and unplanned costs. If this were to occur, our efforts to obtain regulatory approval for and to commercialize our productcandidates may be delayed.In addition, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocolfor the trial. The FDA requires us to comply with certain standards, referred to as good clinical practices, for conducting, recording and reporting the resultsof clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants areprotected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. If any of our trial investigators orthird party contractors does not comply with good clinical practices, we may not be able to use the data and reported results from the trial. If this were tooccur, our efforts to obtain regulatory approval for and to commercialize our product candidates may be delayed. 27Table of ContentsManufacturing difficulties could delay or preclude commercialization of our product candidates and substantially increase our expenses.Our product candidates require precise, high quality manufacturing. The third party manufacturers on which we rely may not be able to comply withthe FDA’s current good manufacturing practices, or cGMPs, and other applicable government regulations and corresponding foreign standards. Theseregulations govern manufacturing processes and procedures and the implementation and operation of systems to control and assure the quality of products.The FDA and foreign regulatory authorities may, at any time, audit or inspect a manufacturing facility to ensure compliance with cGMPs and other qualitystandards. Any failure by our contract manufacturers to achieve and maintain high manufacturing and quality control standards could result in the inabilityof our product candidates to be released for use in one or more countries. In addition, such a failure could result in, among other things, patient injury ordeath, product liability claims, penalties or other monetary sanctions, the failure of regulatory authorities to grant marketing approval of our productcandidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictionsand/or criminal prosecution, any of which could significantly and adversely affect supply of our product candidates and seriously hurt our business.Contract manufacturers may also encounter difficulties involving production yields or delays in performing their services. We do not have control overthird party manufacturers’ performance and compliance with applicable regulations and standards. If, for any reason, our manufacturers cannot perform asagreed, we may be unable to replace such third party manufacturers in a timely manner, and the production of our product candidates would be interrupted,resulting in delays in clinical trials and additional costs. Switching manufacturers may be difficult because the number of potential manufacturers is limitedand, depending on the type of material manufactured at the contract facility, the change in contract manufacturer must be submitted to and/or approved by theFDA and comparable regulatory authorities outside of the United States. In addition, a new manufacturer would have to be educated in, or developsubstantially equivalent processes for, production of our product candidates after receipt of regulatory approval. It may be difficult or impossible for us tofind a replacement manufacturer on acceptable terms quickly, or at all.To date, our product candidates have been manufactured for preclinical testing and clinical trials primarily by third party manufacturers. If the FDA orother regulatory agencies approve any of our product candidates for commercial sale, we expect that we would continue to rely, at least initially, on third partymanufacturers to produce commercial quantities of our approved product candidates. These manufacturers may not be able to successfully increase themanufacturing capacity for any approved product candidates in a timely or economical manner, or at all. Significant scale-up of manufacturing might entailchanges in the manufacturing process that have to be submitted to or approved by the FDA or other regulatory agencies. If contract manufacturers engaged byus are unable to successfully increase the manufacturing capacity for a product candidate, or we are unable to establish our own manufacturing capabilities,the commercial launch of any approved products may be delayed or there may be a shortage in supply.We have commercialization rights to all product candidates in our portfolio, but we currently have limited marketing, sales and distributionexperience and capabilities.We have global commercialization rights for products arising out of our all of our development programs. In order to successfully commercialize ourproduct candidates, we will need to, and we intend to, establish adequate marketing, sales and distribution capabilities for commercialization in the UnitedStates, and to seek a qualified partner with these capabilities for commercialization outside the United States. We may not successfully establish thesecapabilities or have sufficient resources to do so. If we do not establish adequate marketing, sales and distribution capabilities or engage a qualified partner,our ability to successfully commercialize any product candidates that we successfully develop will be adversely affected, as will our financial results. Even ifwe do develop such capabilities, we will compete with other companies that have more experienced and well-funded marketing, sales and distributionoperations. 28Table of ContentsIf physicians and patients do not accept our future drugs, we may not be able to generate significant revenues from product sales.Even if any of our product candidates obtains regulatory approval, that product may not gain market acceptance among physicians, patients and themedical community for a variety of reasons including: • timing of our receipt of any marketing approvals, the terms of any such approvals and the countries in which any such approvals are obtained; • timing of market introduction of competitive products; • lower demonstrated clinical safety or efficacy, or less convenient route of administration, compared to competitive products; • lack of cost-effectiveness; • lack of reimbursement from managed care plans and other third-party payors; • inconvenient or difficult administration; • prevalence and severity of side effects; • potential advantages of alternative treatment methods; • safety concerns with similar products marketed by others; • the reluctance of the target population to try new therapies and of physicians to prescribe those therapies; • the lack of success of our physician education programs; and • ineffective sales, marketing and distribution support.If any of our approved drugs fails to achieve market acceptance, we would not be able to generate significant revenue from those drugs, which mayadversely impact our ability to become profitable.Even if we receive regulatory approvals for marketing our product candidates, we could lose our regulatory approvals and our business would beadversely affected if we, our strategic alliance partners, or our contract manufacturers fail to comply with continuing regulatory requirements.The FDA and other regulatory agencies continue to review products even after they receive initial approval. If we receive approval to commercialize anyof our product candidates, the manufacturing, marketing and sale of these drugs will be subject to continuing regulation, including compliance with qualitysystems regulations, cGMPs, adverse event requirements and prohibitions on promoting a product for unapproved uses. Enforcement actions resulting fromour failure to comply with government and regulatory requirements could result in fines, suspension of approvals, withdrawal of approvals, product recalls,product seizures, mandatory operating restrictions, criminal prosecution, civil penalties and other actions that could impair the manufacturing, marketing andsale of our product candidates and our ability to conduct our business.If our product candidates exhibit harmful side effects after approval, our regulatory approvals could be revoked or otherwise negatively impacted,and we could become subject to costly and damaging product liability claims.Even if we receive regulatory approval for any of our product candidates, we will have tested them in only a small number of patients and over a limitedperiod of time during our clinical trials. If our applications for marketing are approved and more patients begin to use our products, or patients use ourproducts for a longer period of time, new risks and side effects associated with our products may be discovered or previously observed risks and side effectsmay become more prevalent and/or clinically significant. In addition, supplemental clinical trials that may be conducted on a drug following its initialapproval may produce findings that are inconsistent with the trial results previously 29Table of Contentssubmitted to regulatory authorities. As a result, regulatory authorities may revoke their approvals, or we may be required to conduct additional clinical trials,make changes in labeling of our product, reformulate our product or make changes and obtain new approvals for our and our suppliers’ manufacturingfacilities. We also might have to withdraw or recall our products from the marketplace. Any safety concerns with respect to a product may also result in asignificant drop in the potential sales of that product, damage to our reputation in the marketplace, or result in us becoming subject to lawsuits, includingclass actions. Any of these results could decrease or prevent any sales of our approved product or substantially increase the costs and expenses ofcommercializing and marketing our product.We are subject to uncertainty relating to reimbursement policies that could hinder or prevent the commercial success of our product candidates.Our ability to commercialize any future products successfully will depend in part on the coverage and reimbursement levels set by governmentalauthorities, private health insurers and other third-party payors. As a threshold for coverage and reimbursement, third-party payors in the U.S. generallyrequire that product candidates have been approved for marketing by the FDA. Third-party payors also are increasingly challenging the effectiveness of andprices charged for medical products and services. We may not obtain adequate third-party coverage or reimbursement for our future products, or we may berequired to sell our future products at prices that are below our expectations.We expect that private insurers will consider the efficacy, cost effectiveness and safety of our future products in determining whether, and at what level,to approve reimbursement for our future products. Obtaining these approvals can be a time consuming and expensive process. Our business would bematerially adversely affected if we do not receive approval for reimbursement of our future products from private insurers on a timely or satisfactory basis.Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare and Medicaid programs or otherreimbursing bodies or payors limit the indications for which our future products will be reimbursed to a smaller set than we believe our future products areeffective in treating.In some foreign countries, particularly Canada and European Union member states, the pricing of prescription pharmaceuticals is subject to strictgovernmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatoryapproval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required toconduct a clinical trial that compares the cost-effectiveness of our products to other available therapies. If reimbursement for our products is unavailable in anycountry in which reimbursement is sought or is limited in scope or amount, or if pricing is set at unsatisfactory levels, our business would be materiallyharmed.We expect to experience pricing pressures in connection with the sale of our future products, if any, due to the potential healthcare reforms discussedbelow, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenance organizations and additionallegislative proposals.Healthcare reform measures could hinder or prevent our future products’ commercial success.The U.S. government and other governments have shown significant interest in pursuing healthcare reform, as evidenced by the passing of the PatientProtection and Affordable Healthcare Act and the Health Care and Education Reconciliation Act. This healthcare reform law increases the number ofindividuals who receive health insurance coverage and closes a gap in drug coverage under Medicare Part D as established under the Medicare PrescriptionDrug Improvement Act of 2003. Each of these reforms could potentially increase our future revenue from any of our product candidates that are approved forsale. The law, however, also implements cost containment measures that could adversely affect our future revenue. These measures include increased drugrebates under Medicaid for brand name prescription drugs and extension of these rebates to Medicaid managed care. The legislation also extends certaindiscounted pricing on outpatient drugs to children’s hospitals, critical access hospitals and rural health centers. This expansion reduces the amount ofreimbursement received for drugs purchased by these newly covered entities. 30Table of ContentsAdditional provisions of the health care reform law may negatively affect our future revenue and prospects for profitability. Along with otherpharmaceutical manufacturers and importers of brand name prescription drugs, we would be assessed a fee based on our proportionate share of sales of brandname prescription drugs to certain government programs, including Medicare and Medicaid. As part of the health care reform law’s provisions closing afunding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), we will also be required to providea 50 percent discount on brand name prescription drugs sold to beneficiaries who fall within the donut hole.In the aftermath of the healthcare reform law, private health insurers and managed care plans are likely to continue challenging the prices charged formedical products and services. These cost-control initiatives could decrease the price we might establish for any of our future products, which would result inlower product revenue or royalties payable to us.In addition, in some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways thatcould affect our ability to sell our future products profitably. These proposed reforms could result in reduced reimbursement rates for any of our futureproducts, which would adversely affect our business strategy, operations and financial results.Our business could be harmed if we are unable to comply with applicable “fraud and abuse” and other laws and regulations where our productcandidates may ultimately be sold.As our pipeline of product candidates matures, we are becoming increasingly subject to extensive and complex laws and regulations, including but notlimited to healthcare “fraud and abuse” and patient privacy laws and regulations by both the federal government and the states in which we conduct ourbusiness. These laws and regulations include: • the federal healthcare program anti-kickback law, which prohibits, among other things, persons from soliciting, receiving or providingremuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good orservice, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; • federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented,claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like uswhich provide coding and billing advice to customers; • the federal Health Insurance Portability and Accountability Act of 1996, which prohibits executing a scheme to defraud any healthcare benefitprogram or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, securityand transmission of individually identifiable health information; • the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug marketing, prohibits manufacturers frommarketing drugs for off-label use and regulates the distribution of drug samples; and • state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information incertain circumstances, many of which differ from each other in significant ways and often are not preempted by federal laws, thus complicatingcompliance efforts.If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject topenalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines,curtailment or restructuring 31Table of Contentsof our operations could adversely affect our financial results. We are developing and implementing a corporate compliance program designed to ensure that wewill market and sell any future products that we successfully develop from our product candidates in compliance with all applicable laws and regulations, butwe cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be incompliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting ourrights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.Risks Related to Our FieldWe may have significant product liability exposure that may harm our business and our reputation.We face exposure to significant product liability or other claims if any of our product candidates is alleged to have caused harm. These risks are inherentin the testing, manufacturing and marketing of human medicinal products. Although we do not currently commercialize any products, claims could be madeagainst us based on the use of our product candidates in clinical trials. We currently have clinical trial insurance and will seek to obtain product liabilityinsurance prior to the commercial launch of any of our product candidates. Our insurance may not, however, provide adequate coverage against potentialliabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain currentamounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost. If we are sued for any injury caused by our product candidatesor future products, our liability could exceed our insurance coverage and our total assets, and we would need to divert management attention to our defense.Claims against us, regardless of their merit or potential outcome, may also generate negative publicity or hurt our ability to recruit investigators and patients toour clinical trials, obtain physician acceptance of our future products, or expand our business.We work with hazardous materials that may expose us to liability.Our activities involve the controlled storage, use and disposal of hazardous materials, including infectious agents, corrosive, explosive and flammablechemicals and various radioactive compounds. We are subject to certain federal, state and local laws and regulations governing the use, manufacture, storage,handling and disposal of these hazardous materials. We incur significant costs to comply with these laws and regulations. In addition, we cannot eliminate therisk of accidental contamination or injury from these materials. In the event of an accident, regulatory authorities may curtail our use of these materials, andwe could be liable for any civil damages that result. These damages may exceed our financial resources or insurance coverage and may seriously harm ourbusiness. Additionally, an accident could damage, or force us to shut down, our operations.Security breaches may disrupt our operations and harm our operating results.Our network security and data recovery measures may not be adequate to protect against computer viruses, break-ins and similar disruptions fromunauthorized tampering with our computer systems. The misappropriation, theft, sabotage or any other type of security breach with respect to any of ourproprietary and confidential information that is electronically stored, including research or clinical data, could have a material adverse impact on ourbusiness, operating results and financial condition. Additionally, any break-in or trespass of our facilities that results in the misappropriation, theft, sabotageor any other type of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damageto our research and development equipment and assets, could have a material adverse impact on our business, operating results and financial condition. 32Table of ContentsRisks Related to Intellectual PropertyOur success depends substantially upon our ability to obtain and maintain intellectual property protection for our product candidates.We own or hold exclusive licenses to a number of U.S. and foreign patents and patent applications directed to our product candidates. Our successdepends on our ability to obtain patent protection both in the United States and in other countries for our product candidates, their methods of manufactureand their methods of use. Our ability to protect our product candidates from unauthorized or infringing use by third parties depends substantially on ourability to obtain and enforce our patents.Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and moleculardiagnostics and the claim scope of these patents, our ability to obtain and enforce patents that may issue from any pending or future patent applications isuncertain and involves complex legal, scientific and factual questions. The standards that the United States Patent and Trademark Office, or PTO, and itsforeign counterparts use to grant patents are not always applied predictably or uniformly and are subject to change. To date, no consistent policy has emergedregarding the breadth of claims allowed in pharmaceutical or molecular diagnostics patents. Thus, we cannot guarantee that any patents will issue from anypending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot guarantee that the claims of these patents will be heldvalid or enforceable by a court of law, will provide us with any significant protection against competitive products or will afford us a commercial advantageover competitive products.The U.S. Congress passed the Leahy-Smith America Invents Act, or the America Invents Act, which became effective in March 2013. The AmericaInvents Act reforms United States patent law in part by changing the standard for patent approval for certain patents from a “first to invent” standard to a“first to file” standard and developing a post-grant review system. This new law changes United States patent law in a way that may severely weaken ourability to obtain patent protection in the United States. Additionally, recent judicial decisions establishing new case law and a reinterpretation of past case law,as well as regulatory initiatives, may make it more difficult for us to protect our intellectual property.If we do not obtain adequate intellectual property protection for our products in the United States, competitors could duplicate them without repeating theextensive testing that we will have been required to undertake to obtain approval by the FDA. Regardless of any patent protection, under the current statutoryframework the FDA is prohibited by law from approving any generic version of any of our products for up to five years after it has approved our product.Upon the expiration of that period, or if that time period is altered, the FDA could approve a generic version of our product unless we have patent protectionsufficient for us to block that generic version. Without sufficient patent protection, the applicant for a generic version of our product would only be required toconduct a relatively inexpensive study to show that its product is bioequivalent to our product, and would not have to repeat the studies that we conducted todemonstrate that the product is safe and effective.In the absence of adequate patent protection in other countries, competitors may similarly be able to obtain regulatory approval in those countries forproducts that duplicate our products. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the UnitedStates. Many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. Some of our developmentefforts are performed in China, India and other countries outside of the United States through third party contractors. We may not be able to monitor andassess intellectual property developed by these contractors effectively; therefore, we may not be able to appropriately protect this intellectual property and couldthus lose valuable intellectual property rights. In addition, the legal protection afforded to inventors and owners of intellectual property in countries outside ofthe United States may not be as protective of intellectual property rights as in the United States, and we may, therefore, be unable to acquire and protectintellectual property developed by these contractors to the same extent as if these development activities were being conducted in the United States. If weencounter difficulties in protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed. 33Table of ContentsIn addition, we rely on intellectual property assignment agreements with our strategic alliance partners, vendors, employees, consultants, clinicalinvestigators, scientific advisors and other collaborators to grant us ownership of new intellectual property that is developed by them. These agreements maynot result in the effective assignment to us of that intellectual property. As a result, our ownership of key intellectual property could be compromised.Patent interference, opposition or similar proceedings relating to our intellectual property portfolio are costly, and an unfavorable outcome couldprevent us from commercializing our product candidates.Patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applicationsremain confidential in the PTO for the entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in the scientific or patent literatureoften lags behind actual discoveries. Consequently, we cannot be certain that we were the first to invent, or the first to file patent applications on, our productcandidates or their therapeutic use. In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similarinvention, we may have to participate in interference proceedings declared by the PTO or the third party to determine priority of invention in the United States.An adverse decision in an interference proceeding may result in the loss of rights under a patent or patent application. In addition, the cost of interferenceproceedings could be substantial.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and otherprovisions during the patent process. There are situations in which non-compliance can result in abandonment or lapse of a patent or patent application,resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to comply with these requirements, competitors might be able to enterthe market earlier than would otherwise have been the case, which could decrease our revenue from that product.Claims by third parties of intellectual property infringement are costly and distracting, and could deprive us of valuable rights we need to developor commercialize our product candidates.Our commercial success will depend on whether there are third party patents or other intellectual property relevant to our potential products that mayblock or hinder our ability to develop and commercialize our product candidates. We may not have identified all U.S. and foreign patents or publishedapplications that may adversely affect our business either by blocking our ability to manufacture or commercialize our drugs or by covering similartechnologies that adversely affect the applicable market. In addition, we may undertake research and development with respect to product candidates, evenwhen we are aware of third party patents that may be relevant to such product candidates, on the basis that we may challenge or license such patents. Thereare no assurances that such licenses will be available on commercially reasonable terms, or at all. If such licenses are not available, we may become subject topatent litigation and, while we cannot predict the outcome of any litigation, it may be expensive and time consuming. If we are unsuccessful in litigationconcerning patents owned by third parties, we may be precluded from selling our products.While we are not currently aware of any litigation or third party claims of intellectual property infringement related to our product candidates, thebiopharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents andclaim that the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. We could incursubstantial costs and diversion of management and technical personnel in defending against any claims that the manufacture and sale of our potentialproducts or use of our technologies infringes any patents, or defending against any claim that we are employing any proprietary technology without 34Table of Contentsauthorization. The outcome of patent litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor andcredibility of witnesses and the identity of the adverse party, especially in pharmaceutical patent cases that may turn on the testimony of experts as to technicalfacts upon which experts may reasonably disagree. In the event of a successful claim of infringement against us, we may be required to: • pay substantial damages; • stop developing, manufacturing and/or commercializing the infringing product candidates or approved products; • develop non-infringing product candidates, technologies and methods; and • obtain one or more licenses from other parties, which could result in our paying substantial royalties or the granting of cross-licenses to ourtechnologies.If any of the foregoing were to occur, we may be unable to commercialize the affected products, or we may elect to cease certain of our businessoperations, either of which could severely harm our business.We may undertake infringement or other legal proceedings against third parties, causing us to spend substantial resources on litigation andexposing our own intellectual property portfolio to challenge.Competitors may infringe our patents. To prevent infringement or unauthorized use, we may need to file infringement suits, which are expensive andtime-consuming. In an infringement proceeding, a court may decide that one or more of our patents is invalid, unenforceable, or both. Even if the validity ofour patents is upheld, a court may refuse to stop the other party from using the technology at issue on the ground that the other party’s activities are notcovered by our patents. In this case, third parties may be able to use our patented technology without paying licensing fees or royalties. Policing unauthorizeduse of our intellectual property is difficult, and we may not be able to prevent misappropriation of our proprietary rights, particularly in countries where thelaws may not protect such rights as fully as in the United States. In addition, third parties may affirmatively challenge our rights to, or the scope or validityof, our patent rights.Confidentiality agreements may not adequately prevent disclosure of trade secrets and other proprietary information.In order to protect our proprietary technology, we rely in part on confidentiality agreements with our vendors, strategic alliance partners, employees,consultants, scientific advisors, clinical investigators and other collaborators. We generally require each of these individuals and entities to execute aconfidentiality agreement at the commencement of a relationship with us. These agreements may not effectively prevent disclosure of confidential information,and may not provide an adequate remedy in the event of unauthorized disclosure or misuse of confidential information or other breaches of the agreements.In addition, we may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable.Trade secrets are, however, difficult to protect. Others may independently discover our trade secrets and proprietary information, and in such case we couldnot assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive andtime consuming, and the outcome is unpredictable. In addition, courts outside of the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights and could result in a diversion of management’sattention, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.If we fail to obtain necessary or useful licenses to intellectual property, we could encounter substantial delays in the research, development andcommercialization of our product candidates.We may decide to license third party technology that we deem necessary or useful for our business. We may not be able to obtain these licenses at areasonable cost, or at all. If we do not obtain necessary licenses, we could encounter substantial delays in developing and commercializing our productcandidates while we attempt to 35Table of Contentsdevelop alternative technologies, methods and product candidates, which we may not be able to accomplish. Furthermore, if we fail to comply with ourobligations under our third party license agreements, we could lose license rights that are important to our business. For example, if we fail to use diligentefforts to develop and commercialize products licensed under our amended and restated development and license agreement with Millennium, we could lose ourlicense rights under that agreement, including rights to IPI-145.Risks Associated with Our Common StockOur common stock may have a volatile trading price and low trading volume.The market price of our common stock has been and could continue to be subject to significant fluctuations. Some of the factors that may cause themarket price of our common stock to fluctuate include: • the results of our current and any future clinical trials of our product candidates; • the results of preclinical studies and planned clinical trials of our discovery-stage programs; • product portfolio decisions resulting in the delay or termination of our product development programs; • future sales of, and the trading volume in, our common stock; • our entry into key agreements, including those related to the acquisition or in-licensing of new programs, or the termination of key agreements,including our amended and restated development and license agreement with Millennium; • the results and timing of regulatory reviews relating to the approval of our product candidates; • the initiation of, material developments in, or conclusion of litigation, including but not limited to litigation to enforce or defend any of ourintellectual property rights or to defend product liability claims; • the failure of any of our product candidates, if approved, to achieve commercial success; • the results of clinical trials conducted by others on drugs that would compete with our product candidates; • issues in manufacturing our product candidates or any approved products; • the loss of key employees; • changes in estimates or recommendations, or publication of inaccurate or unfavorable research about our business, by securities analysts whocover our common stock; • future financings through the issuance of equity or debt securities or otherwise; • changes in the structure of healthcare payment systems; • our cash position and period-to-period fluctuations in our financial results; and • general and industry-specific economic and/or capital market conditions.Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individualcompanies. These broad market fluctuations may also adversely affect the trading price of our common stock.In the past, when the market price of a stock has been volatile, as our stock price may be, holders of that stock have occasionally brought securitiesclass action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuitis without merit, negative publicity could be generated and we could incur substantial costs defending the lawsuit. A stockholder lawsuit could also divert thetime and attention of our management. 36Table of ContentsWe do not anticipate paying cash dividends, so you must rely on stock price appreciation for any return on your investment.We anticipate retaining any future earnings for reinvestment in our research and development programs. Therefore, we do not anticipate paying cashdividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cashdividends should not invest in our common stock.Anti-takeover provisions in our organizational documents and Delaware law may make an acquisition of us difficult.We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our organizational documents may make a change in control moredifficult. Also, under Delaware law, our board of directors may adopt additional anti-takeover measures. For example, our charter authorizes our board ofdirectors to issue up to 1,000,000 shares of undesignated preferred stock and to determine the terms of those shares of stock without any further action by ourstockholders. If our board of directors exercises this power, it could be more difficult for a third party to acquire a majority of our outstanding voting stock.Our charter and by-laws also contain provisions limiting the ability of stockholders to call special meetings of stockholders.Our stock incentive plan generally permits our board of directors to provide for acceleration of vesting of options granted under that plan in the event ofcertain transactions that result in a change of control. If our board of directors uses its authority to accelerate vesting of options, this action could make anacquisition more costly, and it could prevent an acquisition from going forward.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law statute,which generally prohibits a person who owns in excess of 15 percent of our outstanding voting stock from engaging in a transaction with us for a period ofthree years after the date on which such person acquired in excess of 15 percent of our outstanding voting common stock, unless the transaction is approvedby our board of directors and holders of at least two-thirds of our outstanding voting stock, excluding shares held by such person. The prohibition againstsuch transactions does not apply if, among other things, prior to the time that such person became an interested stockholder, our board of directors approvedthe transaction in which such person acquired 15 percent or more of our outstanding voting stock. The existence of the foregoing provisions could limit theprice that investors might be willing to pay in the future for shares of our common stock.Our executive officers, directors and major shareholders may be able to exert significant control over the company, which may make anacquisition of us difficult.To our knowledge, based on the number of shares of our common stock outstanding on December 31, 2013, our executive officers, directors, theirrespective affiliates, and stockholders holding 5 percent or more of our common stock, owned in the aggregate approximately 56 percent of our commonstock. These stockholders have the ability to influence our company through this ownership position. For example, as a result of this concentration ofownership, these stockholders, if acting together, may have the ability to affect the outcome of matters submitted to our stockholders for approval, includingthe election and removal of directors, changes to our equity compensation plans and any merger or similar transaction. This concentration of ownership may,therefore, harm the market price of our common stock by: • delaying, deferring or preventing a change in control of Infinity; • impeding a merger, consolidation, takeover or other business combination involving Infinity; or • discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Infinity. Item 1B.Unresolved Staff CommentsNone. 37Table of ContentsItem 2.PropertiesWe currently lease, under two lease agreements, an aggregate of approximately 74,900 square feet of laboratory and office space among three buildingslocated at 780, 784 and 790 Memorial Drive in Cambridge, Massachusetts. One lease covering approximately 68,000 square feet of laboratory and officespace expires in January 2016. We have the right to extend this lease for another five-year term on the same terms and conditions as the current lease by givingthe landlord notice prior to the expiration of the current lease term. We currently sublease approximately 13,000 square feet of this space under a subleaseagreement that expired in April 2013. The second lease covers approximately 6,900 square feet of office space and expires in October 2014. Should we requireadditional space, we believe that a suitable facility would be available to accommodate expansion of our operations on commercially reasonable terms Item 3.Legal ProceedingsWe are not a party to any material legal proceedings. Item 4.Mine Safety DisclosuresNot applicable. 38Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is traded on the NASDAQ Global Select Market under the symbol “INFI.” Prior to January 3, 2011, our common stock was tradedon the NASDAQ Global Market. The following table sets forth the range of high and low sales prices for our common stock for the quarterly periodsindicated, as reported by NASDAQ. Such quotations represent inter-dealer prices without retail mark up, mark down or commission and may not necessarilyrepresent actual transactions. 2013 2012 High Low High Low First quarter $50.51 $32.13 $12.40 $5.50 Second quarter 50.40 16.07 14.15 11.02 Third quarter 23.68 15.45 24.00 13.45 Fourth quarter 18.35 11.57 35.32 17.21 HoldersAs of February 1, 2014, there were 56 holders of record of our common stock.DividendsWe have never paid cash dividends on our common stock, and we do not expect to pay any cash dividends in the foreseeable future.Comparative Stock Performance GraphThe information included under the heading “Comparative Stock Performance Graph” included in this Item 5 of Part II of this Annual Report on Form10-K shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, shall not be deemed “filed” for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it bedeemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.The graph below shows a comparison of cumulative total stockholder returns from December 31, 2008 through December 31, 2013 for our commonstock, the NASDAQ Stock Market (U.S.) Index and the NASDAQ Biotechnology Index. The graph assumes that $100 was invested in our common stockand in each index on December 31, 2008, and that all dividends were reinvested. No cash dividends have been declared or paid on our common stock.The stockholder returns shown on the graph below are not necessarily indicative of future performance, and we will not make or endorse anypredictions as to future stockholder returns. 39Table of ContentsComparison of 5-Year Cumulative Total Returnamong Infinity Pharmaceuticals, Inc.,the NASDAQ Stock Market (U.S.) Index,and the NASDAQ Biotechnology Index 40Table of ContentsItem 6.Selected Financial DataThe following financial data should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in thisreport. Amounts below are in thousands, except for shares and per share amounts. Year Ended December 31, 2013 2012 2011 2010 2009 Statement of Operations Data: Collaborative research and developmentrevenue from Purdue entities $— $47,114 $92,773 $71,331 $50,765 Operating expenses: Research and development 99,760 118,595 108,582 99,232 77,857 General and administrative 27,916 27,882 22,719 21,070 19,456 Total operating expenses 127,676 146,477 131,301 120,302 97,313 Gain on termination of Purdue entities alliance — 46,555 — — — Loss from operations (127,676) (52,808) (38,528) (48,971) (46,548) Interest income (expense), net 896 (1,349) (1,514) (1,447) 744 Income from NIH reimbursement — — — — 1,745 Income from residual funding afterreacquisition of Hsp90 program — — — — 12,450 Income from Therapeutic Discovery Grants — — — 734 — Income from Massachusetts tax incentiveaward — 193 — — — Loss before income taxes (126,780) (53,964) (40,042) (49,684) (31,609) Income tax benefit — — — 700 330 Net loss $(126,780) $(53,964) $(40,042) $(48,984) $(31,279) Loss per common share: Basic $(2.64) $(1.70) $(1.50) $(1.86) $(1.20) Diluted $(2.64) $(1.70) $(1.50) $(1.86) $(1.20) Weighted average number of common sharesoutstanding: Basic 47,936,001 31,711,264 26,620,278 26,321,398 26,096,515 Diluted 47,936,001 31,711,264 26,620,278 26,321,398 26,096,515 41Table of Contents As of December 31, 2013 2012 2011 2010 2009 Selected Balance Sheet Data: Cash, cash equivalents and available-for-sale securities, includinglong-term $214,468 $326,635 $115,937 $100,959 $130,737 Working capital 202,735 311,086 88,995 75,378 119,408 Total assets 230,710 335,660 124,490 124,566 157,318 Long-term debt due to Purdue entities, net of debt discount(1) — — 37,553 — — Due to Millennium, less current portion(2) 6,456 6,252 — — — Accumulated deficit (449,796) (323,016) (269,052) (229,010) (180,026) Total stockholders’ equity 201,275 310,205 15,433 49,484 90,312 (1)In November 2011, we borrowed $50 million under a line of credit agreement with Purdue and its independent associated entity, Purdue Pharma L.P., orPPLP. We reduced the long-term debt on our balance sheet with a debt discount. On September 7, 2012, upon completion of the sale and issuance ofcommon stock to PPLP under the 2012 securities purchase agreement, the line of credit agreement with PPLP terminated in its entirety. See note 11 of thefinancial statements.(2)During the year ended December 31, 2012, we recorded $14.4 million in research and development expense related to the fair value of a release paymentof $15 million, payable in installments, pursuant to the amended and restated agreement with Millennium. We paid $1.7 million of this $15 millionrelease payment during the year ended December 31, 2012 and recorded the remaining balance as a liability. As of December 31, 2013, we have abalance of $6.7 million in Due to Millennium, current and $6.5 million in Due to Millennium, noncurrent. 42Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statementsand related notes included elsewhere in this report. Some of the information contained in this discussion and analysis and set forth elsewhere in this report,including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Youshould review the section titled “Risk Factors” in Part I—Item 1A of this report for a discussion of important factors that could cause actual results to differmaterially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.Business OverviewOverviewWe are an innovative biopharmaceutical company dedicated to discovering, developing and delivering best-in-class medicines to patients with difficult-to-treat diseases. We combine proven scientific expertise with a passion for developing novel small molecule drugs that target emerging disease pathways. Wehave worldwide development and commercialization rights to all of our development candidates and early discovery programs, subject to certain financialobligations to our current licensor and former development partners.Research and Development ProgramsPI3 Kinase Inhibitor ProgramPhosphoinositide-3-kinases, or the PI3Ks, are a family of enzymes involved in multiple cellular functions, including cell proliferation and survival, celldifferentiation, cell migration and immunity. The PI3K-delta and PI3K-gamma isoforms are preferentially expressed in white blood cells, where they havedistinct and mostly non-overlapping roles in immune cell development and function. Targeting PI3K-delta and PI3K-gamma may provide multipleopportunities to develop differentiated therapies for the treatment of hematologic malignancies and inflammatory diseases. IPI-145, our lead product candidate,is a potent, oral inhibitor of Class I PI3K-delta and PI3K-gamma, or a PI3K delta,gamma inhibitor, which we are investigating in both hematologicmalignancies and inflammatory diseases. We believe that IPI-145 is the most advanced PI3K-delta,gamma inhibitor in clinical development.We have launched DUETTS, a worldwide investigation of IPI-145 in blood cancers. As part of the DUETTS program, we are conductingDYNAMO, a Phase 2, open-label, single arm study evaluating the safety and efficacy of IPI-145 dosed at 25mg twice daily, or BID, in approximately 120patients with indolent non-Hodgkin lymphoma, or iNHL, including FL, marginal zone lymphoma and SLL, whose disease is refractory toradioimmunotherapy or both rituximab and chemotherapy. Patients enrolled in the study must have progressed within six months of receiving their lasttherapy. The primary endpoint of the study is response rate according to the International Working Group Criteria. The U.S. Food and Drug Administration,or FDA, has granted orphan drug designation to IPI-145 for the potential treatment of follicular lymphoma, or, FL, the most common subtype of iNHL. Weintend to expand the DUETTS program in 2014 with the initiation of DYNAMO+R, a Phase 3 study of IPI-145 in combination with rituximab in patientswith relapsed/refractory iNHL, as well as a Phase 2 study in treatment-naïve patients with iNHL and at least one additional clinical study in patients withhematologic malignancies.Additionally, under the DUETTS program we are also enrolling patients in DUO, a Phase 3 study of IPI-145 in patients with chronic lymphocyticlymphoma, or CLL. This randomized study is designed to evaluate the safety and efficacy of IPI-145 dosed at 25 mg BID compared to ofatumumab inapproximately 300 patients with relapsed or refractory CLL. The primary endpoint of the study is progression-free survival. The FDA and the EuropeanMedicines Agency, or EMA, have granted orphan drug designation to IPI-145 for the potential treatment of CLL and SLL. 43TMTMTMTMTMTMTable of ContentsThese trials are supported by data from our ongoing Phase 1, open-label, dose-escalation study designed to evaluate the safety, pharmacokinetics andclinical activity of IPI-145 in patients with advanced hematologic malignancies. The dose-escalation portion of the trial is complete, with the maximumtolerated dose defined at 75 mg BID. We are continuing to evaluate IPI-145 across two 25mg BID expansion cohorts in patients with relapsed/refractory CLL,iNHL and mantle cell lymphoma, or MCL, and treatment-naïve CLL in high-risk patients (those patients who are over age 65 or have either of two geneticabnormalities known as a 17p deletion or p53 mutation). Additionally, we are continuing to evaluate IPI-145 across five 75mg BID expansion cohorts inpatients with relapsed/refractory CLL, iNHL and MCL; T-cell lymphomas; aggressive B-cell lymphomas; myeloid neoplasms; and T-cell or B-cell acutelymphoblastic leukemia/lymphoma. Data from this study, presented in December 2013 at the Annual Meeting of the American Society for Hematology, orASH, and in January 2014 at the 6 Annual T-Cell Lymphoma Forum, showed that IPI-145 is clinically active in CLL, iNHL, T-Cell lymphoma, as well asother hematologic malignancies.An investigator-sponsored Phase 1b, open-label study of IPI-145 in patients with B-cell NHL, CLL and T-cell lymphoma in combination withrituximab (a monoclonal antibody therapy), bendamustine (a chemotherapy) or both rituximab and bendamustine is also open for enrollment(NCT01871675).Inflammatory and Autoimmune DiseasesWithin inflammatory diseases, IPI-145 is currently being evaluated in two Phase 2 trials. The first, which we refer to as the ASPIRA trial, is a Phase 2,randomized, double-blind, placebo-controlled study designed to evaluate the efficacy, safety and pharmacokinetics of IPI-145 in patients with rheumatoidarthritis (RA). The study is expected to enroll approximately 316 adults with moderate-to-severe RA and is designed to examine three dose levels of IPI-145given twice daily for 12 weeks in combination with methotrexate compared to treatment with methotrexate alone. The primary efficacy endpoint of the study isthe American College of Rheumatology 20, or ACR20, response rate, which is defined as the proportion of people who achieve at least a 20 percentimprovement in ACR response criteria. The second trial is a Phase 2a randomized, double-blind, placebo-controlled trial of IPI-145 in patients with mild,allergic asthma. Endpoints of this multi-dose, two-way crossover study include safety, pharmacokinetics and FEV1, a measure of lung function. We expect toprovide an update on this trial by the end of 2013.PI3K Pipeline ExpansionWe are also developing our second PI3K product candidate, a potent, oral inhibitor of PI3K-delta and gamma which we refer to as IPI-443. Thenonclinical studies of IPI-443 required for Phase 1 development have been completed, and the data from the two Phase 2 studies of IPI-145 in inflammatoryand autoimmune diseases will guide the next steps for the development of IPI-443.Other ProgramsIn September 2013 we announced topline data from our Phase 2 study evaluating retaspimycin hydrochloride (HCl), a novel, potent and selectiveinhibitor of heat shock protein 90 (Hsp90), in combination with docetaxel, a chemotherapy, in 226 patients with second or third-line non-small cell lungcancer (NSCLC) who are naïve to docetaxel treatment and have a history of heavy smoking. In this randomized, double-blind, placebo-controlled study,retaspimycin HCl did not meet its pre-specified efficacy endpoints for demonstrating an improvement in overall survival in the total patient population or inpatients with squamous cell carcinoma, despite observing partial responses in patients with squamous cell carcinoma during the Phase 1b testing.Additionally, the combination of retaspimycin HCl plus docetaxel did not show a treatment benefit in patient populations defined by pre-specified biomarkers,including KRAS, p53 and plasma levels of Hsp90-alpha. We expect to present final data in a peer-reviewed setting after all analysis are complete.We also announced in September that we will complete enrollment of the final cohort of patients in our separate, exploratory study of retaspimycin HClin combination with everolimus (an mTOR inhibitor) in NSCLC patients with a KRAS mutation by the end of 2013. This enrollment will conclude ourdevelopment of retaspimycin HCl, and we will not initiate any new trials with retaspimycin HCl. 44thTable of ContentsIn addition to our clinical stage programs, we have multiple innovative projects in earlier stages of development. Through our internal discovery efforts,we discovered IPI-940, a novel, orally available inhibitor of fatty acid amide hydrolase, or FAAH. It is believed that inhibition of FAAH may enable the bodyto bolster its own analgesic and anti-inflammatory response, and may have applicability in a broad range of painful or inflammatory conditions. We arecurrently seeking potential partnering opportunities for our FAAH program.Strategic AlliancesMillenniumIn July 2010, we entered into a development and license agreement with Intellikine, Inc., or Intellikine, under which we obtained rights to discover,develop and commercialize pharmaceutical products targeting the delta and/or gamma isoforms of PI3K, including IPI-145 and we paid Intellikine a $13.5million up-front license fee. In January 2012, Intellikine was acquired by Takeda Pharmaceutical Company Limited, Takeda acting through its Millenniumbusiness unit. We refer to our PI3K program licensor as Millennium. In December 2012, we amended and restated our development and license agreement withMillennium.Under the terms of the amended and restated agreement, we retained worldwide development and commercialization rights for products arising from theagreement for all therapeutic indications, and we are solely responsible for research conducted under the agreement. Additionally, under the amended andrestated agreement, Millennium waived certain commercial rights and, in consideration of such waiver, we agreed to pay to Millennium $15 million, payablein installments.In addition to developing IPI-145, we are seeking to develop our second potent, oral PI3K-delta,gamma inhibitor product candidate, IPI-443, and we areseeking to identify additional novel inhibitors of PI3K-delta and/or PI3K-gamma for future development. We are obligated to pay to Millennium up to $5million in remaining success-based milestone payments for the development of two distinct product candidates and up to $450 million in success-basedmilestones for the approval and commercialization of two distinct products. In February 2014, we paid Millennium a $10 million milestone payment inconnection with the initiation of our Phase 3 study of IPI-145 in patients with relapsed or refractory CLL. In addition, we are obligated to pay Millenniumtiered royalties on worldwide net sales ranging from 7 percent to 11 percent upon successful commercialization of products described in the agreement. Suchroyalties are payable until the later to occur of the expiration of specified patent rights and the expiration of non-patent regulatory exclusivities in a country,subject to reduction and limits on the number of products, in certain circumstances.The amended and restated agreement expires on the later of the expiration of certain patents and the expiration of the royalty payment terms for theproducts, unless earlier terminated. Either party may terminate the agreement on 75 days’ prior written notice if the other party materially breaches theagreement and fails to cure such breach within the applicable notice period, provided that the notice period is reduced to 30 days where the alleged breach isnon-payment. Millennium may also terminate the agreement if we are not diligent in developing or commercializing the licensed products and do not, withinthree months after notice from Millennium, demonstrate to Millennium’s reasonable satisfaction that we have not failed to be diligent. The foregoing periods aresubject to extension in certain circumstances. Additionally, Millennium may terminate the agreement upon 30 days’ prior written notice if we or a related partybring an action challenging the validity of any of the licensed patents, provided that we have not withdrawn such action before the end of the 30-day noticeperiod. We may terminate the agreement at any time upon 180 days’ prior written notice. The agreement also provides for customary reciprocal indemnificationobligations of the parties. 45Table of ContentsMundipharma and PurdueStrategic Alliance Termination AgreementsOn July 17, 2012, we terminated our strategic alliance with Mundipharma International Corporation Limited, or Mundipharma, and PurduePharmaceutical Products L.P., or Purdue, and entered into termination and revised relationship agreements with each of those entities, which we refer to as the2012 termination agreements. The alliance was previously governed by strategic alliance agreements that we entered into with each of Mundipharma andPurdue in November 2008. The strategic alliance agreement with Purdue was focused on the development and commercialization in the United States ofproducts targeting FAAH. The strategic alliance agreement with Mundipharma was focused on the development and commercialization outside of the UnitedStates of all products and product candidates that inhibit or target the Hedgehog pathway, FAAH, PI3K and product candidates arising out of our earlydiscovery projects in all disease fields. Our Hsp90 program was expressly excluded from the alliance.Under the terms of the 2012 termination agreements: • All intellectual property rights that we had previously licensed to Mundipharma and Purdue to develop and commercialize products under theprevious strategic alliance agreements terminated, with the result that we have worldwide rights to all product candidates that had previously beencovered by the strategic alliance. • We have no further obligation to provide research and development services to Mundipharma and Purdue as of July 17, 2012. • Mundipharma and Purdue have no further obligation to provide research and development funding to us. Under the alliance, Mundipharma wasobligated to reimburse us for research and development expenses we incurred, up to an annual aggregate cap for each alliance program other thanFAAH. During the year ended December 31, 2012, we received $55 million in research and development funding. We recognized revenue forreimbursed research and development services we performed for Mundipharma and Purdue. We recognized $45 million in such revenue in theyear ended December 31, 2012. We recognized $88.5 million in such revenue, which included $3.5 million in revenue related to reimbursedresearch and development services for the transition of the FAAH program, in the year ended December 31, 2011. We did not record a liability foramounts previously funded by Purdue and Mundipharma as this relationship was not considered a financing arrangement. • We are obligated to pay Mundipharma and Purdue a four percent royalty in the aggregate, subject to reduction as described below, on worldwidenet sales of products that were covered by the alliance until such time as they have recovered approximately $260 million, representing theresearch and development funding paid to us for research and development services performed by us through the termination of the strategicalliance. After this cost recovery, our royalty obligations to Mundipharma and Purdue will be reduced to a one percent royalty on net sales in theUnited States of products that were previously subject to the strategic alliance. All payments are contingent upon the successful commercializationof products subject to the alliance, which products are subject to significant further development. As such, there is significant uncertainty aboutwhether any such products will ever be approved or commercialized. If no products are commercialized, no payments will be due by us toMundipharma and Purdue; therefore, no amounts have been accrued.Royalties are payable under these agreements until the later to occur of the last-to-expire of specified patent rights and the expiration of non-patentregulatory exclusivities in a country, provided that if royalties are payable solely on the basis of non-patent regulatory exclusivity, each of the royalty rates isreduced by 50 percent. In addition, royalties payable under these agreements after Mundipharma and Purdue have recovered all research and developmentexpenses paid to us are subject to reduction on account of third party royalty payments or patent litigation damages or settlements which might be required tobe paid by us if litigation were to arise, with 46Table of Contentsany such reductions capped at 50 percent of the amounts otherwise payable during the applicable royalty payment period. The 2012 termination agreementsresulted in a gain on termination of Purdue entities alliance and a positive net income impact of $46.6 million, or a decrease of $1.47 in basic and diluted lossper share for the year ended December 31, 2012.Line of Credit AgreementIn connection with the previous strategic alliance with Mundipharma and Purdue, we also entered into a line of credit agreement with Purdue and itsindependent associated company, Purdue Pharma L.P., or PPLP, that provided for the borrowing by us of one or more unsecured loans up to an aggregatemaximum principal amount of $50 million. We recorded interest expense on the net amount borrowed using the effective interest method. We recorded $1.9million and $0.2 million of related interest expense in the years ended December 31, 2012 and 2011, respectively, using an effective interest rate of 7.29percent.On September 7, 2012, upon completion of the sale and issuance of common stock to PPLP under the 2012 securities purchase agreement describedbelow, the line of credit agreement with PPLP terminated in its entirety.2012 Securities Purchase Agreement; 2013 OfferingOn July 17, 2012, in connection with the termination of the strategic alliance with Mundipharma and Purdue, we executed a securities purchaseagreement with PPLP, which we refer to as the 2012 securities purchase agreement, under which we agreed to sell and issue 5,416,565 shares of our commonstock to PPLP and two entities associated with PPLP, which we collectively refer to as the BRP entities, at a price of $14.50 per share for an aggregateconsideration of approximately $78.5 million. The consideration was composed of extinguishment of approximately $51.0 million in principal and interestowed to PPLP under a line of credit agreement and $27.5 million in cash. We completed the sale and issuance on September 7, 2012 at which time the line ofcredit agreement with PPLP terminated in its entirety.The 2012 securities purchase agreement also terminated, as of July 17, 2012, all attendance rights to meetings of our board of directors held by thePurdue entities.On April 16, 2013, the BRP entities, through two selling stockholders, sold 11,416,565 shares in an underwritten public offering at a price of $40 pershare, representing their entire holdings in our common stock. In connection with the public offering and sale of their common stock, we entered into anagreement with the BRP entities, pursuant to which the 2012 securities purchase agreement, as amended in connection with the offering, terminated in itsentirety.Recent DevelopmentFacility AgreementOn February 24, 2014, or Effective Date, we entered into a Facility Agreement with affiliates of Deerfield Management Company, L.P., or Deerfield,pursuant to which Deerfield agreed to loan to us up to $100,000,000, subject to the terms and conditions set forth in the Facility Agreement. Under the FacilityAgreement, we may draw down on the facility in $25,000,000 increments at any time during the 12 months following the Effective Date. Our ability to drawdown under the Facility Agreement is subject to various customary conditions, including the entry into a Guaranty and Security Agreement, or Guaranty, withDeerfield and Infinity Discovery, Inc., or IDI, our a wholly-owned subsidiary, pursuant to which, as security for the repayment of our obligations under theFacility Agreement, IDI will guaranty all of our obligations under the Facility Agreement and, to secure the obligations under the Facility Agreement and theGuaranty, both we and IDI will grant to Deerfield a security interest in substantially all of our assets including intellectual property. 47Table of ContentsAny amounts drawn under the Facility Agreement accrue interest at a rate of 7.95% per annum, payable quarterly in arrears beginning on June 1, 2014,provided that, during the first five interest payment dates of any draw under the Facility Agreement, we may elect to pay all or a portion of such accruedinterest by adding it to the principal amount outstanding. All such accrued interest will, regardless of which draw it applies to, be payable on the last businessday of the sixth calendar quarter following the date of the first draw. We have the right to terminate the Facility Agreement and/or to prepay amounts owedunder the Facility Agreement at any time, provided that, to the extent that any amount was drawn less than three years before such early termination orprepayment, we will be required to pay an additional amount equal to three years of interest less the amount of interest previously paid. We will be required torepay Deerfield one-third of the total principal amount drawn under the Facility Agreement on each of the third, fourth and fifth anniversaries of the first draw,however the final payment must be made by December 15, 2019. On February 27, 2015, or upon the earlier termination or acceleration of the facility, we arerequired to pay a fee equal to 3% of the then undrawn portion of the $100,000,000 commitment.Deerfield will have the right to accelerate payment of the facility in the event that we consummate a major transaction, which is generally defined as achange in control, a sale of all or substantially all of our assets, a tender or exchange offer for our common stock, a liquidation, bankruptcy, insolvency,dissolution or wind up, a delisting and/or the common stock ceases to be registered under the Securities Exchange Act of 1934, or the Exchange Act.Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) customary events of default, as defined in theFacility Agreement, or (ii) the consummation of certain major transactions, in which case Deerfield would have the right to require us to repay 100% of theprincipal amount of the loan, plus any accrued and unpaid interest thereon, plus any applicable additional amounts relating to a prepayment or termination,as described above.Principal and interest under the Facility may be paid in cash or freely tradable shares of common stock at our election, subject to specified conditions atany time of conversion.The Facility Agreement contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type,provided that the negative covenants are not applicable until the first draw under the Facility Agreement.WarrantsIn connection with the execution of the Facility Agreement, we issued to Deerfield warrants to purchase an aggregate of 1,000,000 shares of commonstock at an exercise price of $13.83 per share, or the Initial Warrants. As noted above, pursuant to the Facility Agreement, we have the right to request fromDeerfield one or more cash disbursements in the minimum amount of $25,000,000 per disbursement, which disbursements shall be accompanied by theissuance to Deerfield of warrants to purchase an aggregate number of shares of common stock equal to (A) a quotient derived by dividing (x) the aggregateamount of such disbursement by (y) the volume weighted average closing price per share of the common stock during the 20 trading days following Deerfield’sreceipt of the applicable draw notice, or the 20-Day VWAP, multiplied by (B) 50%, or the Draw Warrants. We refer to the Initial Warrants and the DrawWarrants individually as a Warrant or together as the Warrants. The exercise price of the Draw Warrants will be the applicable 20-Day VWAP for eachdisbursement. The number of shares of common stock into which a Warrant is exercisable and the exercise price of any Warrant will be adjusted to reflect anystock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock.Each Warrant issued under the Facility Agreement expires on the seventh anniversary of its issuance. Subject to certain exceptions, the Warrants and theFacility Agreement contain certain limitations such that we may not issue shares of common stock to Deerfield pursuant to the Warrants or the FacilityAgreement if such issuance would result in Deerfield beneficially owning in excess of 9.985% of the total number of shares of our common stock of thenissued and outstanding. 48Table of ContentsThe holder of a Warrant may exercise the Warrant either for cash or on a cashless basis. In connection with certain major transactions, the holder mayhave the option to receive, upon exercise of the Warrant in whole or in part, either cash or a number of shares of common stock equal to the Black-Scholesvalue of the Warrant, as defined in the Warrant.Registration Rights AgreementIn connection with the entry into the Facility Agreement and issuance of the Initial Warrants, we entered into a Registration Rights Agreement withDeerfield dated February 24, 2014. Pursuant to the terms of the Registration Rights Agreement, we have agreed to file a registration statement on Form S-3 withthe SEC on or prior to 30 days from the Effective Date, to register for resale the shares of common stock issuable upon the exercise of the Initial Warrants.Additionally, pursuant to the terms of the Registration Rights Agreement, we have agreed to file one or more additional registration statements with the SEC toregister for resale the shares of common stock issuable upon the exercise of the applicable Draw Warrants, on or prior to 30 days after issuance of each of theDraw Warrants.Financial OverviewRevenueAll of our revenue to date has been derived from license fees, the reimbursement of research and development costs, contract service revenue andmilestone payments received from our collaboration partners. License fees were recognized as revenue ratably over the expected research and developmentperiod under our arrangement with Mundipharma and Purdue. Because our agreements with Mundipharma and Purdue also provided for funding for ourresearch and development efforts, we recognized this cost reimbursement as revenue in the period earned in proportion to our forecasted total expenses ascompared to the total research funding budget for the year. In the future, we may generate revenue from a combination of product sales, research anddevelopment support services and milestone payments in connection with strategic relationships, as well as royalties resulting from the sales of productsdeveloped under licenses of our intellectual property. We expect that any potential future revenue we generate will fluctuate from year to year as a result of thetiming and amount of license fees, research and development reimbursement, milestone and other payments earned under our collaborative or strategicrelationships and the amount and timing of payments that we earn upon the sale of our products, to the extent any are successfully commercialized.Research and Development ExpenseWe are a drug discovery and development company. Our research and development expense primarily consists of the following: • compensation of personnel associated with research and development activities; • clinical testing costs, including payments made to contract research organizations; • costs of purchasing laboratory supplies and materials; • costs of manufacturing product candidates for preclinical testing and clinical studies; • costs associated with the licensing of research and development programs; • preclinical testing costs, including costs of toxicology studies; • fees paid to external consultants; • fees paid to professional service providers for independent monitoring and analysis of our clinical trials; 49Table of Contents • costs for collaboration partners to perform research activities, including development milestones for which a payment is due when achieved; • depreciation of equipment; and • allocated costs of facilities.General and Administrative ExpenseGeneral and administrative expense primarily consists of compensation of personnel in executive, finance, accounting, legal, information technologyinfrastructure, corporate communications, corporate development, human resources and commercial functions. Other costs include facilities costs nototherwise included in research and development expense and professional fees for legal and accounting services. General and administrative expense alsoconsists of the costs of maintaining our intellectual property portfolio.Other Income and ExpenseInterest and investment income typically consists of interest earned on cash, cash equivalents and available-for-sale securities, net of interest expense andamortization of warrants. Interest expense included amortization of the loan commitment asset from Purdue entities, net, from April 2009 through November2011 when we drew down the full $50 million loan available under the line of credit agreement. Interest expense also included accrued interest on the long-termdebt, including amortization of the debt discount, through September 7, 2012 when the debt was extinguished. Income from Massachusetts tax incentiveaward represents the pro-rata amount earned for an award we received for headcount growth.Critical Accounting Policies and Significant Judgments and EstimatesThe following discussion and analysis of our financial condition and results of operations is based on our financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to makejudgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluateour estimates, including those related to revenue recognition, accrued expenses and assumptions in the valuation of stock-based compensation. We base ourestimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ fromthose estimates. Differences between actual and estimated results have not been material and are adjusted in the period they become known. We believe that thefollowing accounting policies and estimates are most critical to understanding and evaluating our reported financial results. Please refer to note 2 to ourconsolidated financial statements included in this report for a description of our significant accounting policies.Revenue RecognitionTo date, all of our revenue has been generated under research collaboration agreements. The terms of these research collaboration agreements may includepayment to us of non-refundable, up-front license fees, funding or reimbursement of research and development efforts, milestone payments if specifiedobjectives are achieved and/or royalties on product sales. We recognize revenue based upon our best estimate of the selling price for an undelivered item whenthere is no other means to determine the fair value of that undelivered item.Under our previous strategic alliance with Mundipharma and Purdue, we recognized revenues from non-refundable, up-front license fees on a straight-line basis over the contracted or estimated period of performance, which was the research and development term. We regularly considered whether eventswarranted a change in the estimated period of performance under an agreement. Such a change would have caused us to modify the period of time over whichwe recognized revenue from the up-front license fee on a prospective basis and would have, in turn, resulted in changes in our quarterly and annual results.We recognized research and development 50Table of Contentsfunding as earned over the period of effort as related research and development costs were incurred in proportion to our forecasted total expenses as compared tothe total expected research and development funding for the year. We recognized the impact of any change in forecasted total expenses or expected research anddevelopment funding as a change in accounting estimate and recorded the impact of that change on a prospective basis. On July 17, 2012, we mutually agreedwith Mundipharma and Purdue to terminate our strategic alliance agreements. Further information regarding the terms and conditions of this termination isdescribed in note 11 to our consolidated financial statements included in this report.At the inception of each agreement that includes milestone payments, we evaluate whether each milestone is substantive on the basis of the contingentnature of the milestone. This evaluation includes an assessment of whether: • the consideration is commensurate with either (1) our performance to achieve the milestone, or (2) the enhancement of the value of the delivereditem(s) as a result of a specific outcome resulting from our performance to achieve the milestone; • the consideration relates solely to past performance; and • the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.We evaluate factors such as the clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level ofeffort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement inmaking this assessment. We recognize revenues related to substantive milestones in full in the period in which the substantive milestone is achieved. If amilestone payment is not considered substantive, we recognize the applicable milestone over the remaining period of performance. Our strategic alliance withMundipharma and Purdue did not include potential milestone payments.We will recognize royalty revenue, if any, based upon actual and estimated net sales by the licensee of licensed products in licensed territories in theperiod the sales occur. We have not recognized any royalty revenue to date.Accrued ExpensesAs part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services thathave been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date.Examples of services for which we must estimate accrued expenses include contract service fees paid to contract manufacturers in conjunction withpharmaceutical development work and to contract research organizations in connection with clinical trials and preclinical studies. In connection with theseservice fees, our estimates are most affected by our understanding of the status and timing of services provided. The majority of our service providers invoiceus in arrears for services performed. In the event that we do not identify certain costs that have been incurred by our service providers, or if we under- or over-estimate the level of services performed or the costs of such services in any given period, our reported expenses for such period would be too low or too high,respectively. We often rely on subjective judgments to determine the date on which certain services commence, the level of services performed on or before agiven date and the cost of such services. We make these judgments based upon the facts and circumstances known to us. Our estimates of expenses in futureperiods may be under- or over-accrued.Stock-Based CompensationWe expense the fair value of employee stock options and other equity compensation. We use our judgment in determining the fair value of our equityinstruments, including in selecting the inputs we use for the Black-Scholes valuation model. Equity instrument valuation models are by their nature highlysubjective. Any 51Table of Contentssignificant changes in any of our judgments, including those used to select the inputs for the Black-Scholes valuation model, could have a significant impacton the fair value of the equity instruments granted and the associated compensation charge we record in our financial statements.Results of OperationsThe following table summarizes our results of operations for the years ended December 31, 2013, 2012 and 2011, in thousands, together with thechange in each item as a percentage. 2013 % Change 2012 % Change 2011 Revenue $— (100)% $47,114 (49)% $92,773 Research and development expense (99,760) (16)% (118,595) 9% (108,582) General and administrative expense (27,916) 0% (27,882) 23% (22,719) Gain on termination of Purdue entities alliance — (100)% 46,555 — — Interest expense — (100)% (1,908) 4% (1,841) Interest and investment income 896 60% 559 71% 327 Income from Massachusetts incentive tax award — (100)% 193 — — RevenueWe did not recognize revenue during the year ended December 31, 2013 as our strategic alliance with Mundipharma and Purdue terminated in 2012.Our revenue during the year ended December 31, 2012 consisted of approximately: • $45 million related to reimbursed research and development services we performed under our strategic alliance entered into with Mundipharmaand Purdue in November 2008; and • $2.1 million related to the amortization of the deferred revenue associated with the grant of rights and licenses under our strategic alliance withMundipharma and Purdue.Our revenue during the year ended December 31, 2011 consisted of approximately: • $88.5 million related to reimbursed research and development services we performed under our strategic alliance with Mundipharma and Purdue,which includes $3.5 million related to the transition of our FAAH program to Mundipharma and Purdue; and • $4.3 million related to the amortization of the deferred revenue associated with the grant of rights and licenses under our strategic alliance withMundipharma and Purdue.In the absence of any potential business development activities that generate revenue, we do not expect to recognize any revenue in 2014.Research and Development ExpenseResearch and development expenses represented approximately 78 percent of our total operating expenses for the year ended December 31, 2013, 81percent of our total operating expenses for the year ended December 31, 2012, and 83 percent of our total operating expenses for the year ended December 31,2011.The decrease in research and development expense for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarilyattributable to: • $25.8 million lower clinical expenses, including clinical manufacturing expenses, primarily due to the discontinuation of company-sponsoreddevelopment of saridegib, as well as conclusion of our development of retaspimycin HCl. 52Table of Contents • $14.4 million incurred in 2012 associated with the fair value of installment payments related to amended and restated agreement with Millennium;and • $5 million associated with the achievement of a milestone for the initiation of a Phase 2a clinical trial of IPI-145 in patients with mild, allergicasthma and a $1.0 million milestone for the initiation of the first IND-enabling cGLP toxicology study of IPI-443.These decreases were partially offset by an increase of $28.1 million in clinical expenses, including clinical manufacturing expenses, related toincreased clinical development activities of IPI-145.The increase in research and development expense for the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarilyattributable to: • $14.4 million incurred in 2012 associated with the fair value of installment payments related to amended and restated agreement with Millennium;and • $5 million associated with the achievement of a milestone for the initiation of a Phase 2a clinical trial of IPI-145 in patients with mild, allergicasthma and a $1.0 million milestone for the initiation of the first IND-enabling cGLP toxicology study of IPI-443.These increases were partially offset by a decrease of $6.2 million in pharmaceutical development expense due primarily to the discontinuation ofcompany-sponsored development of saridegib and $4 million in milestone payments associated with the initiation of two Phase 1 clinical trials in our PI3Kprogram.We began to track and accumulate costs by major program starting on January 1, 2006. The following table sets forth our estimates of research anddevelopment expenses, by program, over the last three years and cumulatively from January 1, 2006 to December 31, 2013. These expenses primarily relate topayroll and related expenses for personnel working on the programs, process development and manufacturing, preclinical toxicology studies, clinical trialcosts and allocated costs of facilities. From August 2006 through December 2008, our Hsp90 inhibitor program was conducted in collaboration withMedImmune, a division of AstraZeneca plc, or MedImmune; from August 2006 through November 2007, our Hedgehog pathway inhibitor program wasconducted in collaboration with MedImmune. Under this collaboration, we shared research and development expenses equally with MedImmune. Pursuant toour cost-sharing arrangement, reimbursable amounts from MedImmune were credited to research and development expense, and the expenses for the Hsp90inhibitor and Hedgehog pathway inhibitor programs below include credits of approximately $34.4 million in years prior to 2009. Program Year EndedDecember 31, 2013 Year EndedDecember 31, 2012 Year EndedDecember 31, 2011 January 1, 2006 toDecember 31, 2013 (in millions) PI3K Inhibitor(1) $71.7 $48.8 $23.5 $162.0 Hsp90 inhibitor 12.1 21.3 15.2 136.1 Hedgehog pathway inhibitor 1.2 34.0 48.4 164.0 (1)Includes an upfront license fee of $13.5 million in 2010, $4 million in development milestones in 2011, as well as $14.4 million recorded as fair value forthe release payment for the amended and restated Millennium agreement and $6 million in development milestones in 2012.We expect expenses related to our PI3K programs to increase as we continue clinical development of IPI-145. We expect expenses related to our Hsp90program to decrease significantly as we conclude development of retaspimycin HCl. We expect to incur minimal expenses related to our Hedgehog pathwayinhibitor programs as a result of the discontinuation of company-sponsored development. We do not believe that the historical costs associated with our leaddrug development programs are indicative of the future costs associated with these 53Table of Contentsprograms, nor represent what any other future drug development programs we initiate may cost. Due to the variability in the length of time and scope ofactivities necessary to develop a product candidate and uncertainties related to our cost estimates and our ability to obtain marketing approval for our productcandidates, accurate and meaningful estimates of the total costs required to bring our product candidates to market are not available.Because of the risks inherent in drug discovery and development, we cannot reasonably estimate or know: • the nature, timing and estimated costs of the efforts necessary to complete the development of our programs; • the completion dates of these programs; or • the period in which material net cash inflows are expected to commence, if at all, from the programs described above and any potential futureproduct candidates.There is significant uncertainty regarding our ability to successfully develop any product candidates. These risks include the uncertainty of: • the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future; • the scope and rate of progress of our preclinical studies and other research and development activities; • clinical trial results; • the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our programs underdevelopment; • the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to ourprograms under development; • the cost and timing of regulatory approvals; • the cost of establishing clinical supplies of any product candidates; and • the effect of competing technological and market developments.General and Administrative ExpenseGeneral and administrative expense is comparable for the years ended December 31, 2013 and 2012.The increase in general and administrative expense for the year ended December 31, 2012 as compared to the year ended December 31, 2011 wasprimarily attributable to: • an increase of $1.9 million in stock-based compensation expense; • an increase of $1.7 million in consulting expenses, principally related to early commercial development; and • an increase of $1.0 million in legal expenses primarily related to corporate development activities.Gain on Termination of Purdue Entities AllianceThe gain on termination of the Purdue entities alliance is non-recurring and due to the 2012 termination agreements.Interest ExpenseThere was no interest expense in the year ended December 31, 2013 as compared to the years ended December 31, 2012 and 2011 due to theextinguishment of the long-term debt due to the Purdue entities on September 7, 2012. 54Table of ContentsInterest and Investment IncomeInterest and investment income increased in the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily as a result ofhigher yields and higher average cash and investment balances. Interest and investment income increased in the year ended December 31, 2012 as compared tothe year ended December 31, 2011 primarily as a result of higher average cash and investment balances.Income from Massachusetts Tax Incentive AwardDuring the year ended December 31, 2012, we recognized $0.2 million as other income, which related to a tax grant we were awarded in 2009 from theCommonwealth of Massachusetts. The total award was approximately $0.5 million and was earned over a five year period based on our achieving certainheadcount growth levels each year. We achieved the required headcount growth levels for the first two years and therefore recognized a pro rata portion of thegrant in the year ended December 31, 2012. However, we did not meet the required headcount level in the third year and were required to repay the remaining$0.3 million to the Commonwealth of Massachusetts in 2013.Liquidity and Capital ResourcesWe have not generated any revenue from the sale of drugs to date, and we do not expect to generate any such revenue for the next several years, if at all.We have instead relied on the proceeds from sales of equity securities, interest on investments, up-front license fees, expense reimbursement, milestones andcost sharing under our collaborations and debt to fund our operations. Our available-for-sale debt securities primarily trade in liquid markets, and the averagedays to maturity of our portfolio, as of December 31, 2013, is less than six months. Because our product candidates are in various stages of clinical andpreclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete thedevelopment and commercialization of our product candidates or whether, or when, we may achieve profitability.Our significant capital resources are as follows: December 31, 2013 December 31, 2012 (in thousands) Cash, cash equivalents and available-for-sale securities $214,468 $326,635 Working capital 202,735 311,086 Years ended December 31, 2013 2012 2011 (in thousands) Cash (used in) provided by: Operating activities $(113,907) $(80,135) $(33,109) Investing activities 606 (61,998) (13,688) Capital expenditures (included in investing activities above) (1,754) (1,301) (1,542) Financing activities 5,673 293,678 50,577 Cash FlowsThe principal use of cash in operating activities in all periods presented was related to our research and development programs. On July 17, 2012, we,Mundipharma and Purdue mutually agreed to terminate our strategic alliance agreements and, as a result, Mundipharma discontinued all research anddevelopment funding thereafter. During the years ended December 31, 2012 and 2011, we received research and development funding from Mundipharma andPurdue totaling $55 million and $85 million, respectively. Our research and development costs exceeded the funding from Mundipharma and Purdue for theyear ended December 31, 2011 due primarily 55Table of Contentsto investments we made in our Hedgehog and PI3K programs. Our cash flow used in operating activities in future periods may vary significantly due tovarious factors, including potential cash inflows from future collaboration agreements and potential cash outflows for licensing new programs from thirdparties. We cannot be certain whether and when we may enter into any such collaboration agreements or in-licenses.Our cash flow used in operating activities for the year ended December 31, 2013 compared to the year ended December 31, 2012 increased primarily dueto a decrease in research and development funding from Mundipharma and Purdue. Our cash used in operating activities for the year ended December 31,2013 included a prepayment of approximately $8 million related to purchases of comparator drugs to be used for our clinical trials. Our cash used in operatingactivities for the year ended December 31, 2012 included a decrease in deferred revenue from the termination of the strategic alliance agreements. During theyear ended December 31, 2012, we recorded $14.4 million in research and development expense related to the fair value of a release payment of $15 million,payable in installments, relating to the amended and restated agreement with Millennium. We paid $1.7 million of this $15 million release payment during theyear ended December 31, 2012 and recorded $12.7 million in Due to Millennium. During the year ended December 31, 2012, we paid Millennium $1.0million associated with the achievement of a milestone under the original agreement with Millennium and $5 million associated with the achievement of amilestone under our amended and restated agreement with Millennium, which we recorded as research and development expense. During the year endedDecember 31, 2011, we paid Millennium $4 million associated with the achievement of milestones under the original agreement, which we recorded as researchand development expense.Our investing activities for the years ended December 31, 2013, 2012 and 2011 included the purchase of and proceeds from maturities and sales ofavailable-for-sale securities and purchases of property and equipment. Our investing activities for the year ended December 31, 2013 included $249.8 millionin purchases of available-for-sale securities, proceeds of $251.1 million from maturities of available-for-sale securities and proceeds of $1.0 million from salesof available-for-sale securities. Capital expenditures for the year ended December 31, 2013 of $1.8 million primarily consisted of laboratory equipment andsoftware.Our financing activities for the year ended December 31, 2013 included $5.3 million of proceeds from issuances of common stock from stock optionexercises related to stock incentive plans and $0.4 million of proceeds from issuances of common stock related to our employee stock purchase plan. Ourfinancing activities for the year ended December 31, 2012 included $244.8 million of net proceeds from two public stock offerings, $27.5 million of proceedsfrom issuance of common stock to PPLP as a result of termination of strategic agreements with Mundipharma and Purdue and $21.4 million of proceeds fromissuances of common stock from stock option exercises related to stock incentive plans. Our financing activities for the year ended December 31, 2011includes borrowings of $50 million on the line of credit made available to us by PPLP. On September 7, 2012, upon completion of the sale and issuance ofcommon stock to PPLP under the 2012 securities purchase agreement, the line of credit agreement with PPLP terminated in its entirety.We will need substantial additional funds to support our planned operations. In the absence of additional funding or business development activities andbased on our current operating plans, we expect that our current cash and investments are sufficient to fund our planned operations into 2015. In the absenceof changes to our current operating plans, we will need to raise additional funds by that date. Our need to raise additional funds may be accelerated if ourresearch and development expenses exceed our current expectations, if we acquire a third party or if we acquire or license rights to additional productcandidates or new technologies from one or more third parties. Our need to raise additional funds may also be accelerated for other reasons, including, withoutlimitation, if: • our product candidates require more extensive clinical or preclinical testing than we currently expect; • we advance our product candidates into clinical trials for more indications than we currently expect; • we advance more of our product candidates than expected into costly later stage clinical trials; 56Table of Contents • we advance more preclinical product candidates than expected into early stage clinical trials; • we acquire additional business, technologies, products or product candidates; • the cost of acquiring raw materials for, and of manufacturing, our product candidates is higher than anticipated; • we are required, or consider it advisable, to acquire or license intellectual property rights from one or more third parties; or • we experience a loss in our investments due to general market conditions or other reasons.Historically, we have relied on our strategic alliance with Mundipharma and Purdue for a significant portion of our research and development fundingneeds. Mundipharma and Purdue provided us approximately $260 million in research and development funding during the term of our strategic alliance.Following the termination of the strategic alliance agreements with Mundipharma and Purdue on July 17, 2012, we no longer receive funding fromMundipharma or Purdue and must use other resources available to us to fund our research and development expenses. Our efforts to raise sufficient capital toreplace the funding we previously received under the terminated strategic alliance agreements may not be successful.We have received $244.8 million of net proceeds from our public stock offerings since the termination of the strategic alliance agreements withMundipharma and Purdue. We may continue to seek additional funding through public or private financings of equity or debt securities, but such financingmay not be available on acceptable terms, if at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of ourcommon stock, and such terms may impact our ability to make capital expenditures or incur additional debt. We may also seek additional funds througharrangements with collaborators or other third parties, or through project financing. These arrangements would generally require us to relinquish or encumberrights to some of our technologies or product candidates, and we may not be able to enter into such agreements on acceptable terms, if at all. If we are unable toobtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our development programs or to scale back, suspend orterminate our business operations.Organizational RestructuringIn June 2012, we voluntarily stopped all company-sponsored clinical trials of saridegib, our Hedgehog pathway inhibitor, and in July 2012 werestructured our strategic alliance agreements with Mundipharma and Purdue such that we are no longer entitled to research and development funding. As aresult, we implemented work force reductions totaling 20 percent of our employee headcount as of December 31, 2011. Our work force reductions resulted inrestructuring charges totaling $2.6 million related to severance, benefits and related costs for employees and was recorded in research and developmentexpenses and general and administrative expenses in the year ended December 31, 2012. All payments have been made in 2013.Contractual ObligationsAs of December 31, 2013, we had the following contractual obligations, excluding contingent milestone payments: Payments Due by Period (in thousands) Contractual Obligations Total 2014 2015 2016 2017and beyond Due to Millennium $13,334 $6,667 $6,667 $— $— Operating lease obligations 9,793 4,715 4,677 401 — Software contract obligations 696 363 333 — — Total contractual cash obligations $23,823 $11,745 $11,677 $401 $— 57Table of ContentsThe above table does not include contracts with contract research organizations as they are generally cancellable, with notice, at our option. In addition,we have obligations to make milestone payments under our license agreement with Millennium. For a description of these obligations, please see our descriptionof our license agreement with Millennium under the heading “—Strategic Alliances—Millennium” above. In February 2014, we paid to Millennium a $10million milestone payment in connection with the initiation of our Phase 3 study of IPI-145 in patients with relapsed or refractory CLL.Off-Balance Sheet ArrangementsSince inception, we have not engaged in any off-balance sheet financing activities, including the use of structured finance, special purpose entities orvariable interest entities.InflationWe do not believe that inflation has had a significant impact on our revenues or results of operations since inception. Item 7A.Quantitative and Qualitative Disclosures about Market RiskOur interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are inmoney market funds, corporate obligations, and U.S. government-sponsored enterprise obligations. We do not enter into investments for trading or speculativepurposes. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interestrate risk and will fall in value if market interest rates increase.A hypothetical 100 basis point increase in interest rates would result in an approximate $0.8 million decrease in the fair value of our investments as ofDecember 31, 2013, as compared to an approximately $1.0 million decrease as of December 31, 2012. We have the ability to hold our fixed incomeinvestments until maturity and, therefore, we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a changein market interest rates on our investments. 58Table of ContentsItem 8.Financial Statements and Supplementary DataReport of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders ofInfinity Pharmaceuticals, Inc.We have audited the accompanying consolidated balance sheets of Infinity Pharmaceuticals, Inc. as of December 31, 2013 and 2012, and the relatedconsolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InfinityPharmaceuticals, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2013, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Infinity Pharmaceuticals,Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 25, 2014 expressed an unqualifiedopinion thereon./s/ ERNST & YOUNG LLPBoston, MassachusettsFebruary 25, 2014 59Table of ContentsINFINITY PHARMACEUTICALS, INC.Consolidated Balance Sheets(in thousands, except share and per share amounts) December 31, 2013 2012 Assets Current assets: Cash and cash equivalents $68,114 $175,742 Available-for-sale securities 145,772 150,276 Prepaid expenses and other current assets 11,055 3,731 Total current assets 224,941 329,749 Property and equipment, net 4,010 4,079 Long-term available-for-sale securities 582 617 Restricted cash 1,130 1,128 Other assets 47 87 Total assets $230,710 $335,660 Liabilities and stockholders’ equity Current liabilities: Accounts payable $6,375 $2,148 Accrued expenses 9,164 10,059 Due to Millennium, current 6,667 6,456 Total current liabilities 22,206 18,663 Due to Millennium, less current portion 6,456 6,252 Other liabilities 773 540 Total liabilities 29,435 25,455 Commitments and contingencies (note 10) Stockholders’ equity: Preferred Stock, $.001 par value; 1,000,000 shares authorized, no shares issued and outstanding at December 31,2013 and 2012 — — Common Stock, $.001 par value; 100,000,000 shares authorized, and 48,227,838 and 47,499,257 shares issuedand outstanding, at December 31, 2013 and December 31, 2012, respectively 48 48 Additional paid-in capital 650,867 633,039 Accumulated deficit (449,796) (323,016) Accumulated other comprehensive income 156 134 Total stockholders’ equity 201,275 310,205 Total liabilities and stockholders’ equity $230,710 $335,660 The accompanying notes are an integral part of these consolidated financial statements. 60Table of ContentsINFINITY PHARMACEUTICALS, INC.Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share amounts) Years Ended December 31, 2013 2012 2011 Collaborative research and development revenue from Purdue entities $— $47,114 $92,773 Operating expenses: Research and development 99,760 118,595 108,582 General and administrative 27,916 27,882 22,719 Total operating expenses 127,676 146,477 131,301 Gain on termination of Purdue entities alliance — 46,555 — Loss from operations (127,676) (52,808) (38,528) Other income (expense): Interest expense — (1,908) (1,841) Income from Massachusetts tax incentive award — 193 — Investment and other income 896 559 327 Total other income (expense) 896 (1,156) (1,514) Loss before income taxes (126,780) (53,964) (40,042) Income tax benefit — — — Net loss $(126,780) $(53,964) $(40,042) Basic and diluted loss per common share $(2.64) $(1.70) $(1.50) Basic and diluted weighted average number of common shares outstanding 47,936,001 31,711,264 26,620,278 Other comprehensive income (loss): Net unrealized holding gains (losses) on available-for-sale securities arising during theperiod $22 $112 $(32) Comprehensive loss $(126,758) $(53,852) $(40,074) The accompanying notes are an integral part of these consolidated financial statements. 61Table of ContentsINFINITY PHARMACEUTICALS, INC.Consolidated Statements of Cash Flows(in thousands) Years Ended December 31, 2013 2012 2011 Operating activities Net loss $(126,780) $(53,964) $(40,042) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 1,823 1,643 2,099 Stock-based compensation including 401(k) match 12,155 7,811 5,441 Non-cash interest expense on long-term debt due to Purdue entities — 1,908 102 Non-cash interest expense on Due to Millennium amount 415 — — Amortization of loan commitment asset from Purdue entities — — 1,588 Net amortization of premium/discount on available-for-sale securities 2,201 1,653 915 Impairment of property and equipment — 161 — Other, net (2) 46 72 Changes in operating assets and liabilities: Unbilled accounts receivable — 218 (218) Prepaid expenses and other assets (7,284) (1,037) 356 Accounts payable, accrued expenses and other liabilities 3,565 (12,395) 1,359 Due to Millennium — 12,708 — Deferred revenue from Purdue entities — (38,887) (4,781) Net cash used in operating activities (113,907) (80,135) (33,109) Investing activities Purchases of property and equipment (1,754) (1,301) (1,542) Purchases of available-for-sale securities (249,764) (180,498) (150,588) Proceeds from maturities of available-for-sale securities 251,093 113,520 137,153 Proceeds from sales of available-for-sale securities 1,031 6,281 1,289 Net cash provided by (used in) investing activities 606 (61,998) (13,688) Financing activities Borrowings of long-term debt from Purdue entities — — 50,000 Proceeds from issuance of common stock related to stock offering, net — 244,792 — Proceeds from issuance of common stock to Purdue entities — 27,500 — Proceeds from issuances of common stock related to stock incentive plans 5,299 21,386 582 Proceeds from issuances of common stock related to employee stockpurchase plan 374 — — Other financing activities — — (5) Net cash provided by financing activities 5,673 293,678 50,577 Net increase (decrease) in cash and cash equivalents (107,628) 151,545 3,780 Cash and cash equivalents at beginning of period 175,742 24,197 20,417 Cash and cash equivalents at end of period $68,114 $175,742 $24,197 Supplemental schedule of noncash investing and financing activities Receivable for stock option exercises $152 $200 $— Issuance of common stock to extinguish debt from Purdue entities $— $51,277 $— The accompanying notes are an integral part of these consolidated financial statements. 62Table of ContentsINFINITY PHARMACEUTICALS, INC.Consolidated Statements of Stockholders’ Equity(in thousands, except share and per share amounts) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) TotalStockholders’Equity Shares Amount Balance at December 31, 2010 26,519,217 $27 $278,413 $(229,010) $54 $49,484 Exercise of stock options 114,815 582 582 Stock-based compensation expense 4,847 4,847 401(k) plan match issued in common stock 87,707 594 594 Unrealized loss on marketable securities (32) (32) Net loss (40,042) (40,042) Balance at December 31, 2011 26,721,739 $27 $284,436 $(269,052) $22 $15,433 Exercise of stock options 2,632,097 3 21,583 21,586 Exercise of warrants 29,958 Issuance of common stock in connection with publicoffering 12,646,461 13 244,779 244,792 Issuance of common stock to Purdue entities 5,416,565 5 74,430 74,435 Stock-based compensation expense 7,117 7,117 401(k) plan match issued in common stock 52,437 694 694 Unrealized gain on marketable securities 112 112 Net loss (53,964) (53,964) Balance at December 31, 2012 47,499,257 $48 $633,039 $(323,016) $134 $310,205 The accompanying notes are an integral part of these consolidated financial statements. 63Table of ContentsINFINITY PHARMACEUTICALS, INC.Consolidated Statements of Stockholders’ Equity(Continued)(in thousands, except share and per share amounts) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) TotalStockholders’Equity Shares Amount Balance at December 31, 2012 47,499,257 $48 $633,039 $(323,016) $134 $310,205 Exercise of stock options 634,420 5,299 5,299 Exercise of warrants 32,248 Stock-based compensation expense 11,495 11,495 401(k) plan match issued in common stock 30,010 660 660 Issuance of common stock related to employeestock purchase plan 31,903 374 374 Unrealized gain on marketable securities 22 22 Net loss (126,780) (126,780) Balance at December 31, 2013 48,227,838 $48 $650,867 $(449,796) $156 $201,275 The accompanying notes are an integral part of these consolidated financial statements. 64Table of ContentsINFINITY PHARMACEUTICALS, INC.Notes to Consolidated Financial Statements1. OrganizationInfinity Pharmaceuticals, Inc. is an innovative biopharmaceutical company seeking to discover, develop and deliver to patients best-in-class medicinesdesigned to address difficult-to-treat diseases. As used throughout these audited, consolidated financial statements, the terms “Infinity,” “we,” “us,” and “our”refer to the business of Infinity Pharmaceuticals, Inc. and its wholly owned subsidiaries.2. Summary of Significant Accounting PoliciesBasis of PresentationThese consolidated financial statements include the accounts of Infinity and its wholly owned subsidiaries. We have eliminated all significantintercompany accounts and transactions in consolidation.The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires our management to makeestimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets andliabilities. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other assumptionsthat are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual resultsmay differ from these estimates under different assumptions or conditions.Cash Equivalents and Available-For-Sale SecuritiesCash equivalents and available-for-sale securities primarily consist of money market funds, U.S. government-sponsored enterprise obligations,corporate obligations and mortgage-backed securities. Corporate obligations include obligations issued by corporations in countries other than the UnitedStates, including some obligations that have not been guaranteed by governments and government agencies. We consider all highly liquid investments withmaturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents, which consist of money market funds and corporateobligations, are stated at fair value. They are also readily convertible to known amounts of cash and have such short-term maturities that each presentsinsignificant risk of change in value due to changes in interest rates. Our classification of cash equivalents is consistent with prior periods.We determine the appropriate classification of marketable securities at the time of purchase and reevaluate such designation at each balance sheetdate. We have classified all of our marketable securities at December 31, 2013 and 2012 as “available-for-sale.” We carry available-for-sale securities at fairvalue, with the unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.We adjust the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. We include suchamortization and accretion in interest and investment income. The cost of securities sold is based on the specific identification method. We include ininvestment income interest and dividends on securities classified as available-for-sale.We conduct periodic reviews to identify and evaluate each investment that is in an unrealized loss position in order to determine whether an other-than-temporary impairment exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealizedlosses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated othercomprehensive income (loss). 65Table of ContentsFor available-for-sale debt securities in an unrealized loss position, we perform an analysis to assess whether we intend to sell or whether we would morelikely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required todo so, the security’s decline in fair value is deemed to be other-than-temporary, and the full amount of the unrealized loss is recorded within earnings as animpairment loss.Regardless of our intent to sell a security, we perform additional analysis on all securities in an unrealized loss position to evaluate losses associated withthe creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of asecurity and are recorded within earnings as an impairment loss.Concentration of RiskWe have no significant off-balance sheet risk.Cash and cash equivalents are primarily maintained with two major financial institutions in the United States. Deposits at banks may exceed theinsurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. Financial instruments thatpotentially subject us to concentration of credit risk primarily consist of available-for-sale securities. Available-for-sale securities consist of U.S. government-sponsored enterprise obligations, investment grade corporate obligations and mortgage-backed securities. Our investment policy, which has been approved byour board of directors, limits the amount that we may invest in any one issuer of investments, thereby reducing credit risk concentrations.Segment InformationWe operate in one business segment, which focuses on drug discovery and development. We make operating decisions based upon performance of theenterprise as a whole and utilize our consolidated financial statements for decision making.All of our revenues to date have been generated under research collaboration agreements. Revenue associated with the amortization of the deferred revenueassociated with the grant of rights and licenses to, and reimbursed research and development services provided to, Mundipharma International CorporationLimited, or Mundipharma, and Purdue Pharmaceutical Products L.P., or Purdue, accounted for all of our revenue during the years ended December 31, 2012and 2011. We did not record any revenue in the year ended December 31, 2013 due to the termination of our strategic alliance with Mundipharma and Purdueon July 17, 2012, (see note 11).We considered Mundipharma, Purdue and their respective associated entities to be related parties for financial reporting purposes prior to April 2013because of their equity ownership in us (see note 11).Property and EquipmentProperty and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the applicable assets.Application development costs incurred for computer software developed or obtained for internal use are capitalized. Upon sale or retirement, the cost andrelated accumulated depreciation are eliminated from the respective account, and the resulting gain or loss, if any, is included in current operations.Amortization of leasehold improvements and capital leases are included in depreciation expense. Repairs and maintenance charges that do not increase theuseful life of the assets are charged to operations as incurred. Property and equipment are depreciated over the following periods: Laboratory equipment 5 yearsComputer equipment and software 3 to 5 yearsLeasehold improvements Shorter of lease term or useful life of assetFurniture and fixtures 7 years 66Table of ContentsImpairment of Long-Lived AssetsWe evaluate our long-lived assets for potential impairment. Potential impairment is assessed when there is evidence that events or changes incircumstances have occurred that indicate that the carrying amount of a long-lived asset may not be recovered. Recoverability of these assets is assessed basedon undiscounted expected future cash flows from the assets, considering a number of factors, including past operating results, budgets and economicprojections, market trends and product development cycles. An impairment in the carrying value of each asset is assessed when the undiscounted expectedfuture cash flows, including its eventual residual value, derived from the asset are less than its carrying value. Impairments, if any, are recognized inearnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount over the undiscounted expected future cash flows.See note 7 for discussion on impairment charges recognized during the periods presented.Fair Value MeasurementsWe define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. We determine fair value based on the assumptions market participants use when pricing the asset or liability. We also use the fairvalue hierarchy that prioritizes the information used to develop these assumptions.We value our available-for-sale securities utilizing third party pricing services. The pricing services use many observable market inputs to determinevalue, including benchmark yields, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, referencedata, new issue data, monthly payment information and collateral performance. We validate the prices provided by our third party pricing services byunderstanding the models used, obtaining market values from other pricing sources and confirming that those securities trade in active markets. We value thebalance of the release payment due to Millennium based on a discounted cash flow model (see note 11).Revenue RecognitionTo date, all of our revenue has been generated under research collaboration agreements. The terms of these research collaboration agreements may includepayment to us of non-refundable, up-front license fees, funding or reimbursement of research and development efforts, milestone payments if specifiedobjectives are achieved and/or royalties on product sales. We recognize revenue based upon our best estimate of the selling price for an undelivered item whenthere is no other means to determine the fair value of that undelivered item.We did not recognize any revenue for the year ended December 31, 2013 as our strategic alliance with Mundipharma and Purdue was mutuallyterminated on July 17, 2012 (see note 11). We did not enter into any new research collaboration agreements in 2013 that resulted in revenue to be recognized.Under our previous strategic alliance with Mundipharma and Purdue, we recognized revenues from non-refundable, up-front license fees on a straight-line basis over the contracted or estimated period of performance, which was the research and development term. We regularly considered whether eventswarranted a change in the estimated period of performance under these agreements. Such a change would have caused us to modify the period of time overwhich we recognized revenue from the up-front license fee on a prospective basis and would have, in turn, resulted in changes in our quarterly and annualresults. We recognized research and development funding as earned over the period of effort as related research and development costs were incurred inproportion to our forecasted total expenses as compared to the total expected research and development funding for the year. We recognized the impact of anychange in forecasted total expenses or expected research and development funding as a change in accounting estimate and recorded the impact of that change ona prospective basis. 67Table of ContentsAt the inception of an agreement that includes milestone payments, we evaluate whether each milestone is substantive on the basis of the contingentnature of the milestone. This evaluation includes an assessment of whether: • the consideration is commensurate with either (1) our performance to achieve the milestone, or (2) the enhancement of the value of the delivereditem(s) as a result of a specific outcome resulting from our performance to achieve the milestone; • the consideration relates solely to past performance; and • the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.We evaluate factors such as the clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level ofeffort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement inmaking this assessment. We recognize revenues related to substantive milestones in full in the period in which the substantive milestone is achieved. If amilestone payment is not considered substantive, we recognize the applicable milestone over the remaining period of performance. Our strategic alliance withMundipharma and Purdue did not include potential milestone payments.We will recognize royalty revenue, if any, based upon actual and estimated net sales by the licensee of licensed products in licensed territories in theperiod the sales occur. We have not recognized any royalty revenue to date.Income TaxesWe use the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reportingand income tax basis of assets and liabilities, as well as net operating loss and tax credit carryforwards, and are measured using the enacted tax rates and lawsthat will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with theirultimate realization. The effect of a change in tax rate on deferred taxes is recognized in income or loss in the period that includes the enactment date.We use our judgment for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognizeany material interest and penalties related to unrecognized tax benefits in income tax expense.Due to the uncertainty surrounding the realization of the net deferred tax assets in future periods, we have recorded a full valuation allowance against ourotherwise recognizable net deferred tax assets as of December 31, 2013 and 2012.Basic and Diluted Net Loss per Common ShareBasic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is basedupon the weighted average number of common shares outstanding during the period plus the effect of additional weighted average common equivalent sharesoutstanding during the period when the effect of adding such shares is dilutive. Common equivalent shares result from the assumed exercise of outstandingstock options (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method) and the exercise ofoutstanding warrants. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stockoptions that are in-the-money. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of stock options. Commonequivalent shares have not been included in the net loss per share 68Table of Contentscalculations for the periods presented because the effect of including them would have been anti-dilutive. Total potential gross common equivalent sharesconsisted of the following: At December 31, 2013 2012 2011 Stock options 6,083,318 5,574,527 6,985,460 Warrants — 50,569 3,246,629 Comprehensive LossComprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) is comprised of unrealizedholding gains and losses arising during the period on available-for-sale securities that are not other-than-temporarily impaired. During the year endedDecember 31, 2013, there were no reclassifications out of accumulated other comprehensive income (loss).Stock-Based Compensation ExpenseFor awards granted to employees and directors, including our Employee Stock Purchase Plan, or ESPP, we measure stock-based compensation cost atthe grant date based on the estimated fair value of the award and recognize it as expense over the requisite service period on a straight-line basis. We record theexpense of services rendered by non-employees based on the estimated fair value of the stock option as of the respective vesting date. We use the Black-Scholesvaluation model in determining the fair value of all equity awards. We have no awards with market or performance conditions.Research and Development ExpenseResearch and development expense consists of expenses incurred in performing research and development activities, including salaries and benefits,overhead expenses including facilities expenses, materials and supplies, preclinical expenses, clinical trial and related clinical manufacturing expenses, stock-based compensation expense, depreciation of equipment, contract services and other outside expenses. We also include as research and development expenseup-front license payments related to acquired technologies which have not yet reached technological feasibility and have no alternative use. Nonrefundableadvance payments for comparator drugs that will be used for future research and development activities are deferred and capitalized and recognized as expensewhen the drugs are delivered. We expense research and development costs as they are incurred. We have been a party to collaboration agreements in which weare reimbursed for work performed on behalf of the collaborator, as well as one in which we reimbursed the collaborator for work it has performed. We recordall appropriate expenses under our collaborations as research and development expense. If the arrangement provides for reimbursement of research anddevelopment expenses, as was the case with our alliance with Mundipharma and Purdue, we record the reimbursement as revenue. If the arrangement providesfor us to reimburse the collaborator for research and development expenses or achieving a development milestone for which a payment is due, as was the casewith our agreement with Intellikine, Inc., or Intellikine, we record the reimbursement or the achievement of the development milestone as research anddevelopment expense. In January 2012, Intellikine was acquired by Takeda Pharmaceutical Company Limited, or Takeda, acting through its Millenniumbusiness unit. We refer to our phosphoinositide-3-kinase, or PI3K, program licensor as Millennium.3. Stock-Based CompensationUnder each of the stock incentive plans described below, stock option awards made to new employees upon commencement of employment typicallyprovide for vesting of 25 percent of the shares underlying the award at the end of the first year of service with the remaining 75 percent of the sharesunderlying the award vesting ratably on a monthly basis over the following three-year period subject to continued service. Annual grants to existing employeestypically provide for monthly vesting over four years. In addition, under each plan, all options granted expire no later than ten years after the date of grant. 69Table of Contents2010 Stock Incentive PlanOur 2010 Stock Incentive Plan, or the 2010 Plan, was approved by our stockholders in May 2010. The 2010 Plan provides for the grant of incentivestock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, or IRC, nonstatutory stock options, stockappreciation rights, restricted stock, restricted stock units and other stock-based and cash-based awards. Up to 6,000,000 shares of our common stock maybe issued pursuant to awards granted under the 2010 Plan, plus an additional amount of our common stock underlying awards issued under the 2000 StockIncentive Plan, or the 2000 Plan, that expire or are canceled without the holders receiving any shares under those awards. As of December 31, 2013, anaggregate of 3,494,836 shares of our common stock were reserved for issuance upon the exercise of outstanding awards and up to 2,436,134 shares ofcommon stock may be issued pursuant to awards granted under the 2010 Plan.2000 Stock Incentive PlanThe 2000 Plan provided for the grant of stock options intended to qualify as incentive stock options under the IRC, nonstatutory stock options andrestricted stock. As of December 31, 2013, an aggregate of 2,519,372 shares of our common stock were reserved for issuance upon the exercise of outstandingawards granted under the 2000 Plan. The 2000 Plan was terminated upon approval of the 2010 Plan; therefore, no further grants may be made under the 2000Plan.2001 Stock Incentive PlanIn connection with the merger between Discovery Partners International, Inc., or DPI, and Infinity Pharmaceuticals, Inc., or IPI, in 2006, which we referto as the DPI merger, we assumed awards that were granted under the Infinity Pharmaceuticals, Inc. Pre-Merger Stock Incentive Plan, or the 2001 Plan. The2001 Plan provided for the grant of incentive stock options and nonstatutory stock options and restricted stock awards. Under the 2001 Plan, stock awardswere granted to IPI’s employees, officers, directors and consultants. Incentive stock options were granted at a price not less than fair value of the commonstock on the date of grant. The board of directors of IPI determined the vesting of the awards. As of December 31, 2013, an aggregate of 69,110 shares of ourcommon stock were reserved for issuance upon the exercise of outstanding assumed awards. The 2001 Plan was not assumed by us following the DPI merger;therefore, no further grants may be made under the 2001 Plan.2013 Employee Stock Purchase PlanOur 2013 ESPP permits eligible employees to purchase shares of our common stock at a discount and consists of consecutive, overlapping 24-monthoffering periods, each consisting of four six-month purchase periods. On the first day of each offering period, each employee who is enrolled in the ESPP willautomatically receive an option to purchase up to a whole number of shares of our common stock. The purchase price of each of the shares purchased in agiven purchase period will be 85 percent of the closing price of a share of our common stock on the first day of the offering period or the last day of thepurchase period, whichever is lower. During 2013, 31,903 shares of common stock were purchased for total proceeds of $0.4 million.Compensation ExpenseTotal stock-based compensation expense, related to all equity awards, comprised the following: Year EndedDecember 31, 2013 2012 2011 (in thousands) Research and development $6,213 $3,177 $2,743 General and administrative 5,942 4,634 2,698 70Table of ContentsAs of December 31, 2013, we had approximately $19.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvestedoptions and awards under our ESPP, which are expected to be recognized over a weighted-average period of 2.7 years.Valuation AssumptionsWe estimate the fair value of stock options at the date of grant using the Black-Scholes valuation model with the following weighted-averageassumptions: Year EndedDecember 31, 2013 2012 2011 Risk-free interest rate 1.1% 1.1% 2.2% Expected annual dividend yield — — — Expected stock price volatility 64.6% 63.3% 58.2% Expected term of options 5.4 years 6.1 years 5.9 years The valuation assumptions were determined as follows: • Risk-free interest rate: The yield on zero-coupon U.S. Treasury securities for a period that was commensurate with the expected term of theawards. • Expected annual dividend yield: The estimate for annual dividends was zero, because we have not historically paid a dividend and do not intendto do so in the foreseeable future. • Expected stock price volatility: We determined the expected volatility by using a weighted average of selected peer companies as well as ouravailable implied and historical price information. • Expected term of options: The expected term of the awards represented the period of time that the awards were expected to be outstanding. Weused historical data and expectations for the future to estimate employee exercise and post-vest termination behavior.We stratify employees into two groups to evaluate exercise and post-vesting termination behavior. We estimate forfeitures based upon historical data,adjusted for known trends, and will adjust the estimate of forfeitures if actual forfeitures differ or are expected to differ from such estimates. Subsequentchanges in estimated forfeitures are recognized through a cumulative adjustment in the period of change and will also impact the amount of stock-basedcompensation expense in future periods. As of December 31, 2013, 2012 and 2011, the weighted-average forfeiture rate was estimated to be 13 percent, 12percent and 10 percent, respectively.All options granted to employees during the years ended December 31, 2013, 2012 and 2011 were granted with exercise prices equal to the fair marketvalue of our common stock on the date of grant. We consider the closing price of our common stock as reported on the NASDAQ Global Select Market to bethe fair market value.A summary of our stock option activity for the year ended December 31, 2013 is as follows: Stock Options Weighted-AverageExercise Price Weighted-AverageContractual Life(years) AggregateIntrinsic Value(in millions) Outstanding at January 1, 2013 5,574,527 $9.00 Granted 1,412,894 32.57 Exercised (634,420) 8.36 Forfeited (269,683) 20.27 Outstanding at December 31, 2013 6,083,318 $14.04 6.6 $23.8 Vested or expected to vest at December 31, 2013 5,809,122 $13.60 6.5 $23.3 Exercisable at December 31, 2013 4,112,636 $10.79 5.7 $18.9 71Table of ContentsThe weighted-average fair value per share of options granted during the years ended December 31, 2013, 2012 and 2011 was $18.07, $6.00 and $3.54,respectively.The aggregate intrinsic value of options outstanding at December 31, 2013 was calculated based on the positive difference between the closing fairmarket value of our common stock on December 31, 2013 and the exercise price of the underlying options. The aggregate intrinsic value of options exercisedduring the years ended December 31, 2013, 2012 and 2011 was $16.0 million, $34.1 million and $0.4 million, respectively. The total cash received fromemployees and non-employees as a result of stock option exercises during the year ended December 31, 2013 was $5.3 million.No related income tax benefits were recorded during the years ended December 31, 2013, 2012 or 2011.We settle employee stock option exercises with newly issued shares of our common stock.During the year ended December 31, 2012, two members of our board of directors retired, and we extended these directors’ rights to exercise their vestedstock options from 90 days following their retirement to two years following their retirement. In connection with these extensions, we recognized an additional$0.3 million of stock-based compensation expense during the year ended December 31, 2012 with respect to the modification of these awards. In addition,during the year ended December 31, 2012, the chair of our board of directors resigned and entered into a three-year substantive consulting agreement to act as astrategic advisor. As a result of this transition, we recognized $1.2 million of non-employee stock-based compensation expense in general and administrativeexpenses during the year ended December 31, 2012 with respect to the options that continue to vest. The fair value of the unvested options will be remeasuredat each reporting date until the options have fully vested. We recognized $0.7 million of non-employee stock-based compensation expense in general andadministrative expenses during the year ended December 31, 2013 with respect to the remeasurement and continued vesting of these options.4. Cash, Cash Equivalents and Available-for-Sale SecuritiesThe following is a summary of cash, cash equivalents and available-for-sale securities: December 31, 2013 Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value (in thousands) Cash and cash equivalents due in 90 days or less $68,114 $— $— $68,114 Available-for-sale securities: Corporate obligations due in one year or less 103,889 18 (16) 103,891 Corporate obligations due in one to five years 13,513 32 — 13,545 Mortgage-backed securities due after ten years 478 104 — 582 U.S. government-sponsored enterprise obligations due in one year or less 24,144 13 — 24,157 U.S. government-sponsored enterprise obligations due in one to five years 4,174 5 — 4,179 Total available-for-sale securities 146,198 172 (16) 146,354 Total cash, cash equivalents and available-for-sale securities $214,312 $172 $(16) $214,468 72Table of Contents December 31, 2012 Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value (in thousands) Cash and cash equivalents due in 90 days or less $175,742 $— $— $175,742 Available-for-sale securities: Corporate obligations due in one year or less 88,644 53 (13) 88,684 Corporate obligations due in one to five years 16,291 8 (9) 16,290 Mortgage-backed securities due after ten years 547 70 — 617 U.S. government-sponsored enterprise obligations due in one year or less 38,779 22 — 38,801 U.S. government-sponsored enterprise obligations due in one to five years 6,498 3 — 6,501 Total available-for-sale securities 150,759 156 (22) 150,893 Total cash, cash equivalents and available-for-sale securities $326,501 $156 $(22) $326,635 We held 15 debt securities at December 31, 2013 that had been in an unrealized loss position for less than 12 months. The fair value on these securitieswas $50.7 million. We evaluated our securities for other-than-temporary impairments based on quantitative and qualitative factors. We considered the declinein market value for these 15 securities to be primarily attributable to current economic and market conditions. It is not more likely than not that we will berequired to sell these securities, and we do not intend to sell these securities before the recovery of their amortized cost bases. Based on our analysis, we do notconsider these investments to be other-than-temporarily impaired as of December 31, 2013.As of December 31, 2013, we held securities of 15 financial institutions and other corporate debt securities located in the Netherlands, the UnitedKingdom, Australia, Switzerland, Canada, Japan and France with a fair value of $64.5 million. These securities are short term in nature, with $59.3 millionscheduled to mature within 12 months. Eight of these securities had gross unrealized losses of approximately $10 thousand and fair value of $20.2 million.Based on our analysis, we do not consider these investments to be other-than-temporarily impaired as of December 31, 2013.We had no material realized gains or losses on our available-for-sale securities for the years ended December 31, 2013, 2012 and 2011. There were noother-than-temporary impairments recognized for the years ended December 31, 2013, 2012 and 2011.5. Fair ValueWe use a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1inputs, which we consider the highest level inputs, are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quotedprices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through marketcorroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used tomeasure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level inputthat is significant to the fair value measurement. For our fixed income securities, we reference pricing data supplied by our custodial agent and nationallyknown pricing vendors, using a variety of daily data sources, largely readily-available market data and broker quotes. We validate the prices provided by ourthird party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing our validationprocedures, we did not adjust or override any fair value measurements provided by our pricing services as of December 31, 2013 and 2012. 73Table of ContentsThe following table provides the assets carried at fair value measured on a recurring basis as of December 31, 2013: Level 1 Level 2 (in thousands) Assets: Cash and cash equivalents $68,114 $— Corporate obligations (including commercial paper) — 117,436 Mortgage-backed securities — 582 U.S. government-sponsored enterprise obligations — 28,336 Total $68,114 $146,354 The fair value of the available-for-sale securities and cash and cash equivalents (including asset types listed below with maturities of three months orless at the time of purchase) is based on the following inputs: • Corporate Obligations: • Commercial paper: calculations by custodian based on the three month Treasury bill published on last business day of the month. • Other: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offersand reference data. • Mortgage-backed securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,bids, offers and reference data, new issue data, monthly payment information and collateral performance. • U.S. government-sponsored enterprise obligations: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sidedmarkets, benchmark securities, bids, offers and reference data.The amount due to Millennium is recorded at its carrying value at December 31, 2013. The fair value of the amount due to Millennium, a Level 2measurement, was approximately $13.3 million as of December 31, 2013 and was determined using a discounted cash flow model and based on an interestrate we would be charged for a similar loan as of December 31, 2013 (see note 11).The carrying amounts reflected in the consolidated balance sheets for unbilled accounts receivable, prepaid expenses and other current assets, otherassets, accounts payable and accrued expenses approximate fair value due to their short term maturities.There have been no changes to the valuation methods during the year ended December 31, 2013. We evaluate transfers between levels at the end of eachreporting period. There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended December 31, 2013. We had no available-for-sale securities that were classified as Level 3 at any point during the years ended December 31, 2013 or 2012.6. Prepaid expenses and other current assetsPrepaid expenses and other current assets consist of the following: December 31, 2013 2012 (in thousands) Comparator drug prepaid $8,008 $— Prepaid expenses 2,044 2,701 Other current assets 1,003 1,030 Total prepaid expenses and other current assets $11,055 $3,731 74Table of Contents7. Property and EquipmentProperty and equipment consist of the following: December 31, 2013 2012 (in thousands) Laboratory equipment $14,958 $15,067 Computer hardware and software 6,488 7,033 Office equipment and furniture and fixtures 872 775 Leasehold improvements 4,982 4,574 27,300 27,449 Less accumulated depreciation (23,290) (23,370) $4,010 $4,079 During the year ended December 31, 2013, we capitalized approximately $0.4 million of costs associated with internally developed software.Depreciation expense associated with this software was $49 thousand during 2013.8. Restricted CashWe held $1.1 million in restricted cash as of December 31, 2013 and December 31, 2012. The balances are held on deposit with a bank to collateralize astandby letter of credit in the name of our facility lessor in accordance with our facility lease agreement.9. Accrued ExpensesAccrued expenses consisted of the following: December 31, 2013 2012 (in thousands) Accrued compensation and benefits $1,839 $5,555 Accrued drug manufacturing costs 991 1,288 Accrued clinical studies 4,009 1,234 Accrued preclinical studies 303 403 Other 2,022 1,579 Total accrued expenses $9,164 $10,059 10. Commitments and ContingenciesWe lease our office and laboratory space under two lease agreements. The term of our primary office and laboratory lease expires in January 2016, andmay be terminated by us earlier under certain circumstances. We have the right to extend this lease for another five-year term on the same terms and conditionsas the current lease by giving the landlord notice before the term of the lease expires. Under this lease, we have a tenant improvement allowance of up to $0.7million for the design and construction of fixed and permanent improvements until December 31, 2013. We have used all of the allowance as of December 31,2013. Our secondary office lease expires in October 2014. 75Table of ContentsFuture minimum payments, excluding operating costs and taxes, under these facility leases, are as follows: Facility Leases (in thousands) Years Ending December 31: 2014 $4,706 2015 4,677 2016 401 Total minimum lease payments $9,784 Rent expense of $4.7 million, $4.8 million and $4.7 million, before considering sublease income, was incurred during the years ended December 31,2013, 2012 and 2011, respectively. Deferred rent is being amortized to rent expense over the life of the lease. During the years ended December 31, 2013, 2012and 2011, we subleased a portion of our facility space for total sublease income of $0.2 million, $0.7 million and $0.7 million, respectively, each year. Werecord sublease payments as an offset to rental expense in our statement of operations. The sublease expired April 2013.11. CollaborationsMillenniumIn July 2010, we entered into a development and license agreement with Intellikine under which we obtained rights to discover, develop andcommercialize pharmaceutical products targeting the delta and/or gamma isoforms of PI3K, including IPI-145, and we paid Intellikine a $13.5 million up-front license fee. In January 2012, Intellikine was acquired by Takeda acting through its Millennium business unit. We refer to our PI3K program licensor asMillennium. In December 2012, we amended and restated our development and license agreement with Millennium.Under the terms of the amended and restated agreement, we retained worldwide development and commercialization rights for products arising from theagreement for all therapeutic indications, and we are solely responsible for research conducted under the agreement. Additionally, under the amended andrestated agreement, Millennium waived certain commercial rights and, in consideration of such waiver, we agreed to pay to Millennium $15 million, payablein installments. During the year ended December 31, 2012, we paid $1.7 million of the $15 million, and we recorded the $15 million release payment at itsfair value of $14.4 million in research and development expenses. The remaining amount is payable in two equal payments due in January 2014 and January2015, which we recorded as short-term and long-term liabilities Due to Millennium on our balance sheet.In addition to developing IPI-145, we are seeking to develop our second potent, oral PI3K-delta,gamma inhibitor product candidate, IPI-443, and we areseeking to identify additional novel inhibitors of PI3K-delta and/or PI3K-gamma for future development. We are obligated to pay to Millennium up to $5million in remaining success-based milestone payments for the development of two distinct product candidates, and up to $450 million in success-basedmilestones for the approval and commercialization of two distinct products. In February 2014, we paid Millennium a $10 million milestone payment inconnection with the initiation of our Phase 3 study of IPI-145 in patients with relapsed or refractory CLL. In addition, we are obligated to pay Millenniumtiered royalties on worldwide net sales ranging from 7 percent to 11 percent, which are the same royalty levels as those specified under the original agreement,upon successful commercialization of products described in the agreement. Such royalties are payable until the later to occur of the expiration of specifiedpatent rights and the expiration of non-patent regulatory exclusivities in a country, subject to reduction, and limits on the number of products, in certaincircumstances. 76Table of ContentsThe amended and restated agreement expires on the later of the expiration of certain patents and the expiration of the royalty payment terms for theproducts, unless earlier terminated. Either party may terminate the agreement on 75 days’ prior written notice if the other party materially breaches theagreement and fails to cure such breach within the applicable notice period, provided that the notice period is reduced to 30 days where the alleged breach isnon-payment. Millennium may also terminate the agreement if we are not diligent in developing or commercializing the licensed products and do not, withinthree months after notice from Millennium, demonstrate to Millennium’s reasonable satisfaction that we have not failed to be diligent. The foregoing periods aresubject to extension in certain circumstances. Additionally, Millennium may terminate the agreement upon 30 days’ prior written notice if we or a related partybring an action challenging the validity of any of the licensed patents, provided that we have not withdrawn such action before the end of the 30-day noticeperiod. We may terminate the agreement at any time upon 180 days’ prior written notice. The agreement also provides for customary reciprocal indemnificationobligations of the parties.Mundipharma and PurdueStrategic Alliance Termination AgreementsOn July 17, 2012, we terminated our strategic alliance with Mundipharma and Purdue and entered into termination and revised relationship agreementswith each of those entities, which we refer to as the 2012 termination agreements. The alliance was previously governed by strategic alliance agreements that weentered into with each of Mundipharma and Purdue in November 2008. The strategic alliance agreement with Purdue was focused on the development andcommercialization in the United States of products targeting fatty acid amide hydrolase, or FAAH. The strategic alliance agreement with Mundipharma wasfocused on the development and commercialization outside of the United States of all products and product candidates that inhibit or target the Hedgehogpathway, FAAH, phosphoinositide-3-kinase, or PI3K, and product candidates arising out of our early discovery projects in all disease fields. Our heat shockprotein 90, or Hsp90, program was expressly excluded from the alliance.Under the terms of the 2012 termination agreements: • All intellectual property rights that we had previously licensed to Mundipharma and Purdue to develop and commercialize products under theprevious strategic alliance agreements terminated, with the result that we have worldwide rights to all product candidates that had previously beencovered by the strategic alliance. • We have no further obligation to provide research and development services to Mundipharma and Purdue as of July 17, 2012. • Mundipharma and Purdue have no further obligation to provide research and development funding to us. Under the alliance, Mundipharma wasobligated to reimburse us for research and development expenses we incurred, up to an annual aggregate cap for each alliance program other thanFAAH. During the year ended December 31, 2012, we received $55 million in research and development funding. We recognized revenue forreimbursed research and development services we performed for Mundipharma and Purdue. We recognized $45 million in such revenue in theyear ended December 31, 2012. We recognized $88.5 million in such revenue, which included $3.5 million in revenue related to reimbursedresearch and development services for the transition of the FAAH program, in the year ended December 31, 2011. We did not record a liability foramounts previously funded by Purdue and Mundipharma as this relationship was not considered a financing arrangement. • We are obligated to pay Mundipharma and Purdue a four percent royalty in the aggregate, subject to reduction as described below, on worldwidenet sales of products that were covered by the alliance until such time as they have recovered approximately $260 million, representing theresearch and development funding paid to us for research and development services performed by us through the termination of the strategicalliance. After this cost recovery, our royalty obligations to Mundipharma and Purdue will be reduced to a one percent royalty on net sales in theUnited States of products that 77Table of Contents were previously subject to the strategic alliance. All payments are contingent upon the successful commercialization of products subject to thealliance, which products are subject to significant further development. As such, there is significant uncertainty about whether any such productswill ever be approved or commercialized. If no products are commercialized, no payments will be due by us to Mundipharma and Purdue;therefore, no amounts have been accrued.Royalties are payable under these agreements until the later to occur of the last-to-expire of specified patent rights and the expiration of non-patentregulatory exclusivities in a country, provided that if royalties are payable solely on the basis of non-patent regulatory exclusivity, each of the royalty rates isreduced by 50 percent. In addition, royalties payable under these agreements after Mundipharma and Purdue have recovered all research and developmentexpenses paid to us are subject to reduction on account of third party royalty payments or patent litigation damages or settlements which might be required tobe paid by us if litigation were to arise, with any such reductions capped at 50 percent of the amounts otherwise payable during the applicable royaltypayment period.The 2012 termination agreements resulted in a gain on termination of Purdue entities alliance and a positive net income impact of $46.6 million, or adecrease of $1.47 in basic and diluted loss per share for the year ended December 31, 2012.Line of Credit AgreementIn connection with the previous strategic alliance with Mundipharma and Purdue, we also entered into a line of credit agreement with Purdue and itsindependent associated company, Purdue Pharma L.P., or PPLP, that provided for the borrowing by us of one or more unsecured loans up to an aggregatemaximum principal amount of $50 million. In March 2009, Purdue assigned its interest under the line of credit agreement to PPLP. The extension of the line ofcredit at an interest rate below our incremental borrowing rate represented the transfer of additional value to us in the arrangement. As such, we recorded the fairvalue of the line of credit of $17.3 million as a loan commitment asset on our balance sheet in 2008. The fair value of the loan commitment asset wasdetermined using a discounted cash flow model of the differential between the terms and rates of the line of credit and market rates. We amortized the loancommitment asset to interest expense until we drew down the line of credit in November 2011. We recorded approximately $1.6 million of related amortizationexpense in the year ended December 31, 2011.In November 2011, we borrowed $50 million under this line of credit, which we recorded as long-term debt. The loan would have matured and waspayable in full, including principal and any accrued interest, on April 1, 2019, which we referred to as the maturity date, and would have been subordinate toany senior indebtedness that we may have incurred. The loan bore interest at a fluctuating rate set at the prime rate on the business day prior to the funding ofthe loan and reset on the last business day of each month ending thereafter. At the time of the borrowing, the prime rate was 3.25 percent. Interest wascompounded on each successive three-month anniversary following the date of borrowing. Upon drawing down the $50 million under the line of creditagreement, we reclassified the loan commitment asset as a debt discount which reduced the debt on our balance sheet. The unamortized balance of the loancommitment asset was $12.7 million as of the date of borrowing. We recorded interest expense on the net amount borrowed using the effective interest method.We recorded $1.9 million and $0.2 million of related interest expense in the years ended December 31, 2012 and 2011, respectively, using an effective interestrate of 7.29 percent. On September 7, 2012, upon completion of the sale and issuance of common stock to PPLP under the 2012 securities purchase agreementdescribed below, the line of credit agreement with PPLP terminated in its entirety.2008 Securities Purchase AgreementIn connection with the previous strategic alliance with Mundipharma and Purdue, we also entered into a securities purchase agreement with Purdue andPPLP. Under the securities purchase agreement, we issued and 78Table of Contentssold in two separate closings an aggregate of 6,000,000 shares of our common stock and warrants to purchase up to an aggregate of 6,000,000 shares of ourcommon stock, for an aggregate purchase price of $75 million. An equal number of securities were sold to each purchaser. As of December 31, 2012, allwarrants that were issued in connection with the strategic alliance expired without having been exercised.We recorded an aggregate of $59.3 million in deferred revenue associated with the grant of rights and licenses to Mundipharma and Purdue, whichconsisted of the excess of the amount paid for the purchased shares over the closing market price on the day before the equity closings and the value of the loancommitment asset. We determined that the rights and licenses did not have stand-alone value, and we considered all of the obligations under the arrangement tobe a single unit of accounting. There was no obligation for us to repay the $59.3 million, and we had been recognizing the deferred revenue ratably over 14years, which was our estimated period of performance under the arrangement through July 17, 2012. We recognized $0, $2.1 million and $4.3 million indeferred revenue associated with grant of rights and licenses in the years ended December 31, 2013, 2012 and 2011, respectively.2012 Securities Purchase AgreementOn July 17, 2012, in connection with the termination of the strategic alliance with Mundipharma and Purdue, we executed a securities purchaseagreement with PPLP, which we refer to as the 2012 securities purchase agreement, under which we agreed to sell and issue 5,416,565 shares of our commonstock to PPLP and two entities associated with PPLP, which we collectively refer to as the BRP entities, at a price of $14.50 per share for an aggregateconsideration of approximately $78.5 million. The consideration was composed of extinguishment of approximately $51.0 million in principal and interestowed to PPLP under a line of credit agreement and $27.5 million in cash. We completed the sale and issuance on September 7, 2012 at which time the line ofcredit agreement with PPLP terminated in its entirety. The 2012 securities purchase agreement also terminated, as of July 17, 2012, all attendance rights tomeetings of our board of directors held by the Purdue entities.On April 16, 2013, the BRP entities, through two selling stockholders, sold 11,416,565 shares in an underwritten public offering at a price of $40 pershare, representing their entire holdings in our common stock. In connection with the public offering and sale of their common stock, we entered into anagreement with the BRP entities, pursuant to which the 2012 securities purchase agreement, as amended in connection with the offering, terminated in itsentirety. Following the closing of the offering, the BRP entities no longer owned any shares of our common stock at such time, and, as such, are no longerrelated parties.Accounting Impact of Alliance Termination, Debt Extinguishment and Sale and Issuance of Common StockWe recorded the following during the year ended December 31, 2012: • gain on termination of Purdue entities strategic alliance of $46.6 million; • additional equity on our balance sheet of $74.4 million; • extinguishment of $39.5 million of debt on balance sheet; • elimination of $54.0 million of deferred revenue on balance sheet; and • additional cash of $27.5 million.We considered the fact that certain elements of the arrangement discussed above close before others, despite the fact that all of the elements werenegotiated and signed concurrently in contemplation of one another. In particular, the strategic alliance with Mundipharma and Purdue was terminated onJuly 17, 2012, and therefore, there are no further deliverables required under those agreements. However, the equity offering and debt extinguishment did notclose at that time because certain regulatory events outside of our control had to occur prior to the closing. As a result, we evaluated the termination of thestrategic alliance separately from the 79Table of Contentsfinancing transaction, including the extinguishment of debt and sale and issuance of stock. We recorded the gain on termination of the Mundipharma andPurdue strategic alliance for $46.6 million, which represented our past performance under the 2008 collaboration because we have no further obligation toprovide research and development, and the financial risk associated with the research and development has been transferred to the Purdue entities. Inparticular, any payment of royalties to Mundipharma and Purdue are conditional on the future commercialization of our product candidates.To establish the financial impact of the stock issuance and debt extinguishment, we determined both the fair value of the common stock we sold andissued and the debt and accrued interest extinguished. We consider Mundipharma and Purdue to be related parties for financial reporting purposes because oftheir equity ownership. Therefore, we recorded the difference between extinguishing the fair value of the debt and accrued interest, the sale and issuance of ourcommon stock and receiving $27.5 million in cash in additional paid-in capital.12. Income TaxesWe had no income tax expense or benefit for the years ended December 31, 2013, 2012 and 2011.Our income tax benefit for the years ended December 31, 2013, 2012 and 2011 differed from the expected U.S. federal statutory income tax benefit as setforth below: 2013 2012 2011 (in thousands) Expected federal tax benefit $(43,105) $(18,348) $(13,609) Permanent differences 2,681 (4,685) 1,295 State taxes, net of the deferred federal benefit (6,694) (2,849) (2,180) Tax credits (11,534) (589) (1,931) Effect of change in state tax rate on deferred tax assets and deferred tax liabilities — — 61 Expired state net operating loss — — 1,424 Adjustments to deferred tax assets and deferred tax liabilities 129 3,371 745 Change in valuation allowance 58,461 23,066 14,160 Other 62 34 35 Income tax benefit $— $— $— The significant components of our deferred tax assets are as follows: Year Ended December 31, 2013 2012 (in thousands) Deferred tax assets: Net operating loss carryforwards $136,879 $89,998 Tax credits 27,768 16,233 Intangible assets 13,413 14,270 Accrued expenses 194 1,442 Stock-based compensation 9,842 7,015 Other 715 752 Valuation allowance (188,811) (129,710) Net deferred tax assets $— $— We have recorded a valuation allowance against our deferred tax assets in each of the years ended December 31, 2013, 2012 and 2011 becausemanagement believes that it is more likely than not that these assets 80Table of Contentswill not be realized. The valuation allowance increased by approximately $59.1 million during the year ended December 31, 2013 primarily as a result ofincreases in unbenefited deferred tax assets such as tax losses and credits. The valuation allowance increased by approximately $24.2 million during the yearended December 31, 2012 primarily as a result of increases in unbenefited deferred tax assets such as tax losses and credits and intangible assets. Thevaluation allowance increased by approximately $14.2 million during the year ended December 31, 2011 primarily as a result of increases in unbenefiteddeferred tax assets such as tax losses, credits and intangible assets.Subject to the limitations described below, at December 31, 2013, we had cumulative net operating loss carryforwards of approximately $359.3 millionand $278.9 million available to reduce federal and state taxable income, which expire through 2033, and have begun to expire and expire through 2033,respectively. In addition, we have cumulative federal and state tax credit carryforwards of $22.6 million and $7.7 million, respectively, available to reducefederal and state income taxes which expire through 2033 and 2028, respectively. The net operating loss carryforwards include approximately $34.2 million ofdeductions related to the exercise of stock options. This amount represents an excess tax benefit and has not been included in the gross deferred tax assetreflected for net operating losses nor the cumulative net operating loss carryforward disclosures above. Additionally, our net operating loss carryforwards andtax credits are limited as a result of certain ownership changes, as defined under Sections 382 and 383 of the Internal Revenue Code. This limits the annualamount of these tax attributes that can be utilized to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based onour value immediately prior to an ownership change. Subsequent ownership changes may affect the limitation in future years. The net operating losses and taxcredits that have and will expire unused in the future as a result of Section 382 and 383 limitations have been excluded from the amounts disclosed above.At December 31, 2013 and 2012, we had no unrecognized tax benefits. As of December 31, 2013, 2012 and 2011, we had no accrued interest orpenalties related to uncertain tax positions and no amounts have been recognized in our consolidated statements of operations. We will recognize interest andpenalties related to uncertain tax positions in income tax expense.We file income tax returns in the U.S. federal, Massachusetts, and other state jurisdictions. The statute of limitations for assessment by the InternalRevenue Service, or IRS, and state tax authorities is closed for tax years prior to 2010, although carryforward attributes that were generated prior to tax year2010 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period.13. Stockholders’ EquityCommon Stock OfferingsIn August 2012, we completed an underwritten public offering of 6,095,000 shares of common stock, which were sold at a price of $14.50 per share.This offering resulted in $82.8 million of net proceeds. In December 2012, we completed an underwritten public offering of 6,551,461 shares of commonstock, which were sold at a price of $26.33 per share. This offering resulted in $162.0 million of net proceeds. Related legal and accounting fees for bothofferings were recorded as an offset to additional paid-in capital.WarrantsIn connection with various loan and financing agreements during the period from December 2001 through December 2006, IPI issued warrants topurchase shares of convertible preferred stock, which subsequently became warrants to purchase shares of our common stock in the DPI merger. The fairvalue of the warrants was estimated using the Black-Scholes valuation model assuming no expected dividends, a volatility ranging from 64 percent to 95percent, a contractual life of ten years and a risk-free interest rate ranging from 3.1 percent to 5.5 percent. The warrants were recorded as a reduction of theassociated debt and were amortized to interest expense over the life of the loans. These warrants are fully amortized. 81Table of ContentsIn July 2002, IPI issued warrants to purchase shares of convertible preferred stock, which subsequently in the DPI merger became warrants to purchaseshares of common stock in the DPI merger, in conjunction with the entry into our facility lease. The fair value of the warrants was estimated using the Black-Scholes valuation model assuming no expected dividends, a volatility of 75 percent, an estimated contractual life of ten years, and a risk-free interest rate of 5percent. The warrants were recorded in other non-current assets and have been fully amortized over the lease period as rent expense.Warrants described above to purchase 246,629 shares of our common stock were outstanding at December 31, 2011. At December 31, 2012, warrantsto purchase 50,569 shares of our common stock were outstanding. All of these outstanding warrants were exercised in January 2013 at $13.35 per share.14. Income from Massachusetts Tax Incentive AwardDuring the year ended December 31, 2012, we recognized $0.2 million as other income, which related to a tax grant we were awarded in 2009 from theCommonwealth of Massachusetts. The total award was approximately $0.5 million and was earned over a five year period based on our achieving certainheadcount growth levels each year. We achieved the required headcount growth levels for the first two years and therefore recognized a pro rata portion of thegrant in the year ended December 31, 2012. However, we did not meet the required headcount level in the third year and were required to repay the remaining$0.3 million to the Commonwealth of Massachusetts in 2013. As the award is not related to our ordinary course of operations, we have recorded the amount asother income.15. Restructuring ActivitiesIn June 2012, we voluntarily stopped all company-sponsored clinical trials of saridegib, our Hedgehog pathway inhibitor. In July 2012, we restructuredour strategic alliance agreement with Mundipharma and Purdue such that we are no longer entitled to research and development funding (see note 11), andtherefore we undertook a subsequent workforce reduction.The associated restructuring expenses were recorded as research and development and general and administrative expenses. We recorded a restructuringexpense of $2.6 million during the year ended December 31, 2012. The remaining balance payable as of December 31, 2012 was $0.4 million related toemployee severance, benefits and related costs. All amounts have been paid as of December 31, 2013.16. Defined Contribution Benefit PlanWe sponsor a 401(k) retirement plan in which substantially all of our full-time employees are eligible to participate. Participants may contribute apercentage of their annual compensation to this plan, subject to statutory limitations. During the years ended December 31, 2013, 2012 and 2011, we matched50 percent of the first six percent of participant contributions with shares of our common stock. Our matching contributions during the years endedDecember 31, 2013, 2012 and 2011 were $0.7 million, $0.7 million and $0.6 million, respectively. 82Table of Contents17. Quarterly Financial Information (unaudited) Quarter EndedMarch 31, 2013 Quarter EndedJune 30, 2013 Quarter EndedSeptember 30, 2013 Quarter EndedDecember 31, 2013 (In Thousands, Except Shares and Per Share Amounts) Operating expenses: Research and development $20,231 $26,080 $26,857 $26,592 General and administrative 7,430 6,675 7,319 6,492 Total operating expenses 27,661 32,755 34,176 33,084 Loss from operations (27,661) (32,755) (34,176) (33,084) Other income: Interest and investment income 335 164 238 159 Total other income 335 164 238 159 Net loss $(27,326) $(32,591) $(33,938) $(32,925) Basic and diluted net loss per common share $(0.57) $(0.68) $(0.71) $(0.68) Basic and diluted weighted average number of commonshares outstanding 47,620,147 47,915,726 48,052,939 48,114,922 Quarter EndedMarch 31, 2012 Quarter EndedJune 30, 2012 Quarter EndedSeptember 30, 2012 Quarter EndedDecember 31, 2012 (In Thousands, Except Shares and Per Share Amounts) Collaborative research and development revenue fromPurdue entities $25,202 $21,912 $— $— Operating expenses: Research and development 28,551 28,533 21,495 40,016 General and administrative 6,812 7,666 6,294 7,110 Total operating expenses 35,363 36,199 27,789 47,126 Gain on termination of Purdue entities alliance — — 46,555 — (Loss) income from operations (10,161) (14,287) 18,766 (47,126) Other (expense) income: Interest expense (681) (694) (533) — Income from Massachusetts tax incentive award — 193 — — Interest and investment income 120 127 170 142 Total other expense (561) (374) (363) 142 Net (loss) income $(10,722) $(14,661) $18,403 $(46,984) (Loss) per common share: Basic $(0.40) $(0.54) $0.57 $(1.15) Diluted $(0.40) $(0.54) $0.52 $(1.15) Weighted average number of common sharesoutstanding: Basic 26,776,856 27,061,435 32,039,866 40,855,124 Diluted 26,776,856 27,061,435 35,173,223 40,855,124 83Table of Contents18. Subsequent EventsOn February 24, 2014, we entered into a Facility Agreement (the “Facility Agreement”) with affiliates of Deerfield Management Company, L.P. (“Deerfield”),pursuant to which Deerfield agreed to loan us up to $100,000,000, subject to the terms and conditions set forth in the Facility Agreement. In connection with theexecution of the Facility Agreement, we issued to Deerfield warrants to purchase an aggregate of 1,000,000 shares of common stock at an exercise price of$13.83 per share. Under the Facility Agreement, we may draw down on the facility in $25,000,000 increments at any time prior to February 27, 2015 andany such disbursements shall be accompanied by the issuance to Deerfield of warrants to purchase an aggregate number of shares of common stock pursuantto the terms in the Facility Agreement. Each Warrant issued under the Facility Agreement expires on the seventh anniversary of its issuance.Any amounts drawn under the Facility Agreement accrue interest at a rate of 7.95% per annum, payable quarterly in arrears. We have the right to prepayamounts owed under the Facility Agreement at any time, provided that, to the extent that any amount was drawn less than three years before prepayment, wewould be required to pay an additional amount equal to three years of interest less the amount of interest previously paid. We will be required to repay Deerfieldone-third of the total principal amount drawn under the Facility Agreement on each of the third, fourth and fifth anniversaries of the first draw, however thefinal payment must be made by December 15, 2019. On February 27, 2015, or upon the earlier termination or acceleration of the facility, we are required topay a fee equal to 3% of the then undrawn portion of the $100,000,000 commitment.We are currently evaluating the accounting for this transaction, which will be reflected in our 2014 first quarter results. 84Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureThere have been no disagreements with our independent accountants on accounting and financial disclosure matters. Item 9A.Controls and ProceduresDisclosure Controls and ProceduresOur management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as ofDecember 31, 2013. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment inevaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financialofficer concluded that as of December 31, 2013, our disclosure controls and procedures were (1) designed to ensure that material information relating to us ismade known to our management including our principal executive officer and principal financial officer by others, particularly during the period in which thisreport was prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.Management’s report on our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) appearsbelow.No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2013 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.Internal Control Over Financial Reporting(a) Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, ourprincipal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of thecompany; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets thatcould have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance 85Table of Contentswith respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework (1992). Based on its assessment, management believes that, as of December 31, 2013, our internal control over financial reportingis effective based on those criteria.Our independent registered public accounting firm has issued an attestation report of our internal control over financial reporting. This report appearsbelow.(b) Attestation Report of the Independent Registered Public Accounting Firm on Internal Control over Financial ReportingThe Board of Directors and Shareholders ofInfinity Pharmaceuticals, Inc.We have audited Infinity Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSOcriteria). Infinity Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessmentof the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting.Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. 86Table of ContentsIn our opinion, Infinity Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,2013, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2013 of Infinity Pharmaceuticals, Inc. and our report dated February 25, 2014 expressed anunqualified opinion thereon./s/ ERNST & YOUNG LLPBoston, MassachusettsFebruary 25, 2014(c) Changes in Internal Control Over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during thefiscal year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other InformationNot applicable. 87Table of ContentsPART III Item 10.Directors, Executive Officers and Corporate GovernanceThe sections titled “Proposal 1—Election of Directors,” “Board and Committee Meetings,” “Section 16(a) Beneficial Ownership Reporting Compliance”and “Corporate Governance Guidelines; Code of Conduct and Ethics” appearing in the definitive proxy statement we will file in connection with our AnnualMeeting of Stockholders to be held on June 17, 2014 are incorporated herein by reference. The information required by this item relating to executive officersmay be found in Part I, Item 1 of this report under the heading “Business—Executive Officers.” Item 11.Executive CompensationThe section titled “Compensation of Executive Officers” appearing in the definitive proxy statement we will file in connection with our Annual Meeting ofStockholders to be held on June 17, 2014 is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe sections titled “Stock Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under EquityCompensation Plans” appearing in the definitive proxy statement we will file in connection with our Annual Meeting of Stockholders to be held on June 17,2014 are incorporated herein by reference. Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe sections titled “Transactions with Related Persons,” “Policies and Procedures for Related Persons Transactions,” and “Determination ofIndependence” appearing in the definitive proxy statement we will file in connection with our Annual Meeting of Stockholders to be held on June 17, 2014 areincorporated herein by reference. Item 14.Principal Accountant Fees and ServicesThe section titled “Audit Fees” appearing in the definitive proxy statement we will file in connection with our Annual Meeting of Stockholders to be heldon June 17, 2014 is incorporated herein by reference. 88Table of ContentsPART IV Item 15.Exhibits and Financial Statement Schedules(a)(1) Financial StatementsThe financial statements listed below are filed as a part of this Annual Report on Form 10-K. Page number Report of Independent Registered Public Accounting Firm on Financial Statements 59 Consolidated Balance Sheets at December 31, 2013 and 2012 60 Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 61 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 62 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 63 Notes to Consolidated Financial Statements 65 (a)(2) Financial Statement SchedulesFinancial statement schedules have been omitted because of the absence of conditions under which they are required or because the required information,where material, is shown in the financial statements or notes thereto.(a)(3) ExhibitsThe Exhibits listed in the Exhibit Index are filed as a part of this Annual Report on Form 10-K. 89Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. INFINITY PHARMACEUTICALS, INC.Date: February 25, 2014 By: /s/ ADELENE Q. PERKINS Adelene Q. PerkinsPresident & Chief Executive Officer(Principal Executive Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/s/ ADELENE Q. PERKINS Adelene Q. Perkins President, Chief Executive Officer; Chair of the Boardof Directors February 25, 2014 (Principal Executive Officer) /s/ LAWRENCE E. BLOCH, M.D., J.D. Lawrence E. Bloch, M.D., J.D. Executive Vice President, Chief Financial Officer andChief Business Officer; Secretary and Treasurer February 25, 2014 (Principal Financial Officer, Principal AccountingOfficer) /s/ MARTIN BABLER Martin Babler Director February 25, 2014/s/ ANTHONY B. EVNIN, PH.D. Anthony B. Evnin, Ph.D. Director February 25, 2014/s/ GWEN A. FYFE, M.D. Gwen A. Fyfe, M.D. Director February 17, 2014/s/ ERIC S. LANDER, PH.D. Eric S. Lander, Ph.D. Director February 18, 2014/s/ THOMAS J. LYNCH, JR., M.D. Director February 25, 2014Thomas J. Lynch, Jr., M.D. /s/ NORMAN C. SELBY Director February 25, 2014Norman C. Selby /s/ IAN F. SMITH Ian F. Smith Director February 18, 2014/s/ MICHAEL C. VENUTI, PH.D. Michael C. Venuti, Ph.D. Director February 25, 2014 90Table of ContentsEXHIBIT INDEX Incorporated by ReferenceExhibit No. Description Form SECFilingdate ExhibitNumber Filedwiththis10-K 3.1 Restated Certificate of Incorporation of the Registrant. 10-Q 8/9/07 3.1 3.2 Amended and Restated Bylaws of the Registrant. 8-K 03/17/09 3.1 4.1 Form of Common Stock Certificate. 10-K 3/14/08 4.1 10.1 Termination and Revised Relationship Agreement, dated as of July 17, 2012, between the Registrantand Mundipharma International Corporation Limited. 8-K 07/19/12 10.2 10.2 Termination and Revised Relationship Agreement, dated as of July 17, 2012, between the Registrantand Purdue Pharmaceutical Products L.P. 8-K 7/19/12 10.3 10.3† Amended and Restated Development and License Agreement, dated as of December 24, 2012, byand between the Registrant and Intellikine, LLC. 10-K 3/5/13 10.4 10.4 Lease Agreement dated July 2, 2002 between IDI and ARE-770/784/790 Memorial Drive LLC (the“Lease”), as amended by First Amendment to Lease dated March 25, 2003, Second Amendment toLease dated April 30, 2003, Third Amendment to Lease dated October 30, 2003 and FourthAmendment to Lease dated December 15, 2003. 8-K 9/18/06 10.36 10.5 Fifth Amendment to Lease dated July 8, 2011 between the Registrant and ARE-770/784/790Memorial Drive LLC. 10-Q 8/9/11 10.1 10.6 Sixth Amendment to Lease dated July 8, 2012 between the Registrant and ARE-770/784/790Memorial Drive LLC. 10-Q 8/7/12 10.2 10.7 Sublease dated August 24, 2004 between IDI and Hydra Biosciences, Inc (“Hydra”), together withConsent to Sublease dated September 16, 2004 by ARE-770/784/790 Memorial Drive LLC, IDIand Hydra Biosciences, Inc., as amended by First Amendment to Sublease dated October 17,2005, together with Consent to Amendment to Sublease dated as of October 31, 2005 by ARE-770/784/790 Memorial Drive LLC and Second Amendment to Sublease dated as of January 9,2006, together with Consent to Amendment to Sublease dated as of January 26, 2006 by ARE-770/784/790 Memorial Drive LLC, IDI and Hydra. 8-K 9/18/06 10.37 10.8 Third Amendment to Sublease dated April 17, 2009 between IDI and Hydra, together with Consentto Third Amendment to Sublease dated May 5, 2009 by ARE-770/784/790 Memorial Drive LLC,IDI and Hydra. 10-Q 5/6/09 10.1 91Table of Contents Incorporated by ReferenceExhibit No. Description Form SECFilingdate ExhibitNumber Filedwiththis10-K 10.9 Fourth Amendment to Sublease dated December 19, 2012 between IDI and Hydra, together withConsent to Fourth Amendment to Sublease dated December 28, 2012 by ARE-770/784/790Memorial Drive LLC, IDI and Hydra. 10-K 3/15/13 10.9 10.10* Offer Letter between the Registrant and Lawrence E. Bloch, M.D., J.D. dated May 15, 2012. 8-K 7/25/12 10.1 10.11* Offer Letter between IDI and Julian Adams dated as of August 19, 2003. 8-K 9/18/06 10.10 10.12* Amendment to Offer Letter between IDI and Julian Adams dated as of October 25, 2007. 8-K 10/30/07 99.4 10.13* Offer Letter between IDI and Adelene Perkins dated as of February 6, 2002. 8-K 9/18/06 10.11 10.14* Amendment to Offer Letter between IDI and Adelene Perkins dated as of October 25, 2007. 8-K 10/30/07 99.5 10.15 Pre-Merger Stock Incentive Plan. 8-K 9/18/06 10.18 10.16* Form of Incentive Stock Agreement entered into with each of the officers identified on the schedulethereto. 8-K 9/18/06 10.25 10.17* Form of Nonstatutory Stock Option Agreement entered into with each of the officers identified onthe schedule thereto. 8-K 9/18/06 10.27 10.18 2000 Stock Incentive Plan. S-1 5/9/2000 10.59 10.19 Amendment No. 1 to 2000 Stock Incentive Plan; Amendment No. 2 to 2000 Stock Incentive Plan;Amendment No. 3 to 2000 Stock Incentive Plan. 8-K 9/18/06 10.32 10.20 Amendment No. 4 to 2000 Stock Incentive Plan. 10-Q 8/9/07 10.1 10.21 Amendment No. 5 to 2000 Stock Incentive Plan. S-8 5/23/08 99.4 10.22 Form of Incentive Stock Option Agreement under 2000 Stock Incentive Plan. 8-K 9/18/06 10.33 10.23 Form of Nonstatutory Stock Option Agreement under 2000 Stock Incentive Plan. 8-K 9/18/06 10.34 10.24 2010 Stock Incentive Plan. 8-K 5/28/10 10.1 10.25 Form of Incentive Stock Option Agreement under 2010 Stock Incentive Plan. 8-K 5/28/10 10.2 10.26 Form of Nonstatutory Stock Option Agreement under 2010 Stock Incentive Plan. 8-K 5/28/10 10.3 10.27 Amendment No. 1 to 2010 Stock Incentive Plan. 8-K 12/14/10 99.2 10.28 Amendment No. 2 to 2010 Stock Incentive Plan. 8-K 5/18/12 99.1 92Table of Contents Incorporated by ReferenceExhibit No. Description Form SECFilingdate ExhibitNumber Filedwiththis10-K 10.29 Amendment No. 3 to 2010 Stock Incentive Plan. 8-K 6/13/13 10.1 10.30 Amendment No. 4 to 2010 Stock Incentive Plan. 8-K 6/13/13 10.1 10.31 Infinity Pharmaceuticals, Inc. Executive Severance Benefits Plan effective February 6, 2013. 8-K 2/12/13 10.1 10.32 2013 Employee Stock Purchase Plan, as amended. 8-K 6/13/13 99.1 21.1 Subsidiaries of the Registrant. Filed herewith. X 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Filed herewith. X 31.1 Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the SecuritiesExchange Act of 1934, as amended. Filed herewith. X 31.2 Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the SecuritiesExchange Act of 1934, as amended. Filed herewith. X 32.1 Statement of principal executive officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002. Filed herewith. X 32.2 Statement of principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002. Filed herewith. X 101 The following materials from the Registrant’s Annual Report on Form 10-K for the year endedDecember 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) theConsolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the ConsolidatedStatements of Cash Flows, (iv) the Consolidated Statements of Stockholders’ Equity, and (v) Notes toConsolidated Financial Statements. X *Indicates management contract or compensatory plan†Confidential treatment has been requested and/or granted as to certain portions, which portions have been filed separately with the Securities andExchange Commission. 93EXHIBIT 21.1SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Organization Percentage OwnershipInfinity Discovery, Inc. Delaware 100%Infinity Security Corporation Massachusetts 100%Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-173534 and 333-184775 and Form S-8 Nos. 333-167488, 333-164207, 333-156641, 333-151135, 333-145306, 333-138248, 333-189342, 333-97173, 333-44850 and 333-182005) of Infinity Pharmaceuticals, Inc. and inthe related Prospectuses of our reports dated February 25, 2014, with respect to the consolidated financial statements of Infinity Pharmaceuticals, Inc., and theeffectiveness of internal control over financial reporting of Infinity Pharmaceuticals, Inc., included in this Annual Report (Form 10-K) for the year endedDecember 31, 2013./s/ Ernst & Young LLPBoston, MassachusettsFebruary 25, 2014EXHIBIT 31.1CERTIFICATIONI, Adelene Q. Perkins, certify that:1. I have reviewed this annual report on Form 10-K of Infinity Pharmaceuticals, Inc. (the “Registrant”);2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respectsthe financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities,particularly during the period in which this annual report is being prepared;(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under mysupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report my conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and(d) disclosed in this annual report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’sfourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;and5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committeeof the Registrant’s board of directors (or persons performing the equivalent functions):(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting. Date: February 25, 2014 /S/ ADELENE Q. PERKINS Adelene Q. Perkins President and Chief Executive Officer (Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Lawrence E. Bloch, certify that:1. I have reviewed this annual report on Form 10-K of Infinity Pharmaceuticals, Inc. (the “Registrant”);2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities,particularly during the period in which this annual report is being prepared;(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under mysupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report my conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and(d) disclosed in this annual report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’sfourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;and5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committeeof the Registrant’s board of directors (or persons performing the equivalent functions):(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting. Date: February 25, 2014 /s/ Lawrence E. Bloch, M.D., J.D. Lawrence E. Bloch, M.D., J.D. Executive Vice President, Chief Financial Officer and Chief Business Officer (Principal Financial Officer)EXHIBIT 32.1STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K for the period ended December 31, 2013 fully complieswith the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in allmaterial respects, the financial condition and results of operations of Infinity Pharmaceuticals, Inc. Dated: February 25, 2014 /S/ ADELENE Q. PERKINS Adelene Q. Perkins President and Chief Executive Officer (Principal Executive Officer)A signed original of this written statement required by Section 906 has been provided to Infinity Pharmaceuticals, Inc. and will be retained by InfinityPharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.EXHIBIT 32.2STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K for the period ended December 31, 2013 fully complieswith the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in allmaterial respects, the financial condition and results of operations of Infinity Pharmaceuticals, Inc. Date: February 25, 2014 /s/ Lawrence E. Bloch, M.D., J.D. Lawrence E. Bloch, M.D., J.D. Executive Vice President, Chief Financial Officer and ChiefBusiness Officer (Principal Financial Officer)A signed original of this written statement required by Section 906 has been provided to Infinity Pharmaceuticals, Inc. and will be retained by InfinityPharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.Building a Fully Integrated Biopharmaceutical Company Infinity is an innovative biopharmaceutical company dedicated to discovering, developing and delivering best-in-class medicines to people with difficult-to-treat diseases. We have assembled an experienced team with a track record of success, a passion for science and a commitment to developing therapies to address important medical needs. EXECUTIVE LEADERSHIP BOARD OF DIRECTORS Julian Adams, Ph.D. President, Research and Development Lawrence E. Bloch, M.D., J.D. Executive Vice President, Chief Financial Officer and Chief Business Officer José Baselga, M.D., Ph.D. Physician-in-Chief, Memorial Sloan-Kettering Cancer Center Jeffrey Berkowitz President, Walgreens Boots Alliance Development GmbH James G. Ham Vice President, Finance John J. Keilty Vice President, Information Technology and Informatics Jeanette W. Kohlbrenner Vice President, Human Resources John J. Lee Vice President, Pharmaceutical Development Joseph F. McPherson Vice President, Vendor Management/Sourcing and Facilities Vito J. Palombella, Ph.D. Executive Vice President, Chief Scientific Officer Adelene Q. Perkins Chair, President and Chief Executive Officer James R. Porter, Ph.D. Senior Director, Product Development David A. Roth, M.D. Executive Vice President, Chief Medical Officer Tamyra A. Toole, Esq. Vice President, Regulatory Affairs and Quality Assurance Anthony B. Evnin, Ph.D. Managing General Partner, Venrock Associates Gwen A. Fyfe, M.D. Industry Consultant Eric S. Lander, Ph.D. Professor and Founding Director, Broad Institute of MIT and Harvard Adelene Q. Perkins Chair, President and Chief Executive Officer, Infinity Pharmaceuticals, Inc. Norman C. Selby Chairman, RealEndpoints Ian F. Smith Executive Vice President and Chief Financial Officer, Vertex Pharmaceuticals Incorporated Michael C. Venuti, Ph.D. Industry Consultant ANNUAL MEETING The Annual Meeting of Stockholders will be held at 8:30 a.m. EDT on June 17, 2014, at The Charles Hotel One Bennett Street Cambridge, MA 02138 INDEPENDENT AUDITORS Ernst & Young LLP; Boston, MA INVESTOR INQUIRIES 617.453.1015 irpr_info@infi.com STOCK LISTING NASDAQ: INFI TRANSFER AGENT The transfer agent is responsible, among other things, for handling stockholder questions regarding lost stock certificates, address changes, including duplicate mailings, and changes in ownership or name in which shares are held. These requests may be directed to the transfer agent at the following address: American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 www.amstock.com SEC FORM 10-K A copy of Infinity’s annual report on Form 10-K filed with the Securities and Exchange Commission is available free of charge from the company’s Investor Relations Department by calling 617.453.1015, sending a request by email to irpr_info@infi .com or sending a written request to: Investor Relations Infinity Pharmaceuticals, Inc. 780 Memorial Drive Cambridge, MA 02139 www.infi.com | NASDAQ: INFI Infinity Pharmaceuticals, Inc. 780 Memorial Drive Cambridge, MA 02139 ©2014 Infinity Pharmaceuticals, Inc. All Rights Reserved April 2014 INFI-2014-002 

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