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1 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 DENNIS J. HERMAN (220163) DANIEL J. PFEFFERBAUM (248631) 3 100 Pine Street, Suite 2600 San Francisco, CA 94111 4 Telephone: 415/288-4545 415/288-4534 (fax) 5 [email protected] [email protected] 6 Lead Counsel for Plaintiffs 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 OAKLAND DIVISION 10 JERRY TWINDE, On Behalf of Himself and ) No. 4:07-cv-04972-CW 11 All Others Similarly Situated, ) ) CLASS ACTION 12 Plaintiff, ) ) CONSOLIDATED AMENDED CLASS 13 vs. ) ACTION COMPLAINT FOR VIOLATION ) OF THE FEDERAL SECURITIES LAWS 14 THRESHOLD PHARMACEUTICALS, INC., ) et al., ) DEMAND FOR JURY TRIAL 15 ) Defendants. ) 16 ) ) No. 4:07-cv-04971-CW RAYNOLD L. GILBERT, On Behalf of 17 Himself and All Others Similarly Situated, ) ) CLASS ACTION 18 ) Plaintiff, ) 19 ) vs. ) 20 THRESHOLD PHARMACEUTICALS, INC., ) ) et al., 21 ) ) Defendants. 22 ) 23 24 25 26 27 28

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1 2 3 I. 4 II. 5 III. 6 IV. 7 V. 8 9 10 11 12 13 14 VI. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 C. D. B. VII. C. E.

TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................1 JURISDICTION AND VENUE ..........................................................................................5 THE PARTIES.....................................................................................................................6 SOURCES OF ALLEGATIONS.........................................................................................7 BACKGROUND TO THE CLASS PERIOD .....................................................................8 A. B. C. D. Symptomatic BPH and Urinary Problems .............................................................10 Lonidamine (TH-070)............................................................................................11 Market Opportunity for TH-070 ............................................................................12 Threshold Could Not Complete Clinical Trials of TH-070 Without Additional Funding ................................................................................................13 Threshold Generates Purportedly Positive Results in a Quickly Thrown Together Study of Thirty Patients in Bari, Italy ....................................................15

THRESHOLD ISSUES MATERIALLY FALSE AND MISLEADING PROXY AND REGISTRATION STATEMENTS FOR TWO PUBLIC OFFERINGS IN VIOLATION OF THE 1933 ACT.....................................................................................17 A. B. Misleading Statements in IPO Prospectus and Registration Statement.................18 Misleading Statements in Prospectus and Registration Statement for the Follow-on Offering ................................................................................................26 Threshold's Generic Risk Warnings Were Misleading to Investors .....................31

MATERIALLY FALSE AND MISLEADING STATEMENTS PERTAINING TO CLAIMS UNDER THE 1934 ACT.............................................................................33 A. Selick Falsely Claims Threshold Has "Replicated" Bari Study Data and TH-070 Is a "Home Run" ......................................................................................33 Threshold Misled Investors by Announcing the Completion of Clinical Trial Enrollment Without Revealing Additional Risks to the Safety and Efficacy of TH-070 ................................................................................................35 Misleading Statements in May 10, 2006 Announcement of 1Q06 Financial Results and Highlights ...........................................................................................39 Threshold Reveals Some Toxicity Problems Affecting TH-070, Sending Stock Price Crashing, but Fails to Identify Full Extent of Those Problems and Falsely Claims TH-070 Remains Promising and Efficacious.........................40

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1 2 3 4 VIII. 5 A. 6 B. 7 8 IX. 9 X. 10 A. 11 12 13 14 C. 15 16 D. 17 18 XI. 19 20 21 22 23 24 25 26 27 28
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Page E. Threshold Finally Admits TH-070 Does Not Work and Cancels Its Clinical Program for the Drug, Again Sending Its Stock Price Plummeting.........46

PROXIMATE LOSS CAUSATION/ECONOMIC LOSS ................................................48 Applicability of Presumption of Reliance: Fraud on the Market Doctrine............49 Defendants' False and Misleading Statements Proximately Caused Economic Loss to Threshold's Investors...............................................................50

GROUP PLEADING ALLEGATIONS ............................................................................51 ADDITIONAL SCIENTER ALLEGATIONS IN SUPPORT OF 1934 ACT CLAIMS ............................................................................................................................51 Sofinnova Dumps 75% of Its Shares Just Weeks Before the FDA Is Told of Significant Liver Toxicity Problems Discovered During TH-070 Trials..........51 Three Arch Management Dumps Their Investments in Threshold Immediately Following Threshold's Claim that TH-070 Will Be a "Home Run" and Just Weeks Before Threshold Informs the FDA of Liver Toxicity Problems..................................................................................................54 Selick's and Swearson's Salaries and Bonuses Were Dependent upon the Purported Success of TH-070, and Dropped Significantly Just Before the Company Revealed TH-070 Was Toxic to Patients and Did Not Work ...............56 Unexplained Heavy Trading on May 11, 2006 Suggests that Inside Information Leaked to the Market .........................................................................57

B.

CLASS ACTION ALLEGATIONS ..................................................................................57

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1 I. 2

INTRODUCTION 1. This is a securities fraud class action on behalf of all purchasers of the publicly traded

3 common stock of Threshold Pharmaceuticals, Inc. ("Threshold" or the "Company") between 4 February 4, 2005 and July 14, 2006 (the "Class Period"), including those who purchased stock in or 5 traceable to the Company's February 4, 2005 initial public offering ("IPO") or its October 12, 2005 6 follow-on offering ("Follow-on Offering"). The claims asserted herein are brought against 7 Threshold and two of its current or former officers and directors: Harold E. "Barry" Selick 8 ("Selick"), Threshold's Chief Executive Officer ("CEO") and a member of its Board of Directors, 9 and Janet I. Swearson ("Swearson"), Threshold's Chief Financial Officer ("CFO") during the Class 10 Period. Plaintiffs assert claims on behalf of the proposed Class for violations of both the Securities 11 Act of 1933, 15 U.S.C. §§77a, et seq. ("1933 Act") and the Securities Exchange Act of 1934, 15 12 U.S.C. §§78a, et seq. ("1934 Act"). 13 2. Threshold is a development-stage drug company. Threshold's drug candidates rely

14 on a process it describes as "Metabolic Targeting" in which drugs target abnormal glucose 15 metabolism to starve and kill off diseased cells while leaving healthy cells with normal glucose 16 metabolism unharmed. Threshold claimed this process offered advantages over existing treatments, 17 including fewer side effects and applicability to a wider range of conditions. Prior to the Class 18 Period, Threshold was developing a drug known as "TH-070" for the treatment of Benign Prostatic 19 Hyperplasia, or "BPH." BPH is a disease common among middle-aged and elderly men that causes 20 the prostate to enlarge, resulting in urinary problems and related conditions. Although TH-070 was 21 one of three later-stage drugs being developed at the time of Threshold's IPO, it was, by virtue of the 22 $1.6 billion market for BPH drugs, far and away the most important product to investors. 23 3. While BPH can have significant lifestyle impacts, it is not a life threatening disease.

24 However, to treat the condition Threshold was relying on lonidamine (the active ingredient in TH25 070), a drug that had previously been approved in Italy only for seriously ill cancer patients. 26 Lonidamine was not a drug developed by Threshold. Rather, it was simply an existing drug that 27 appeared to exhibit certain "Metabolic Targeting" tendencies like the drugs Threshold hoped to one 28 day develop on its own.
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4.

By 2004, Threshold had raised over $50 million in private financing yet lacked the

2 necessary funds to complete clinical trials for TH-070 and another drug candidate, glufosfamide. 3 With additional private equity investment drying up, Threshold turned its attention to the public 4 markets and began planning for its IPO. To assure investors that TH-070 was a viable candidate for 5 the BPH market, Threshold planned a quick study of 60 patients in Bari, Italy treated with 6 lonidamine. Before the Bari Study was complete, Threshold got the results it wanted, cancelled the 7 second half of the study, and told investors it had statistically significant results demonstrating that 8 TH-070 worked better than existing BPH treatments, including blockbuster drugs Flomax and 9 Proscar. Threshold also told investors that TH-070 was well tolerated and safe, with no serious side 10 effects. 11 5. Threshold repeatedly trumpeted the purportedly positive results of the Bari Study to

12 the market, permitting it to complete both its IPO and the Follow-on Offering and raising more than 13 $100 million in cash the Company needed to survive as a going concern. Threshold used this money 14 to fund phase 2 and 3 clinical trials of TH-070 and glufosfamide, as well as to pay generous salaries 15 and bonuses and provide potentially lucrative stock options to its senior management, including 16 Selick and Swearson. 17 6. Plaintiffs bring claims under the 1933 Act for false and misleading statements

18 contained in the Prospectuses and Registration Statements for the two offerings regarding the safety 19 and efficacy of TH-070 to treat BPH, including statements that the drug showed "statistically 20 significant improvements with no therapy related side effects," had "demonstrate[d] tolerability" in 21 prior clinical trials, had demonstrated the ability to "kill[] prostate cells disproportionately" and 22 worked better at increasing urine flow, reducing prostate size, and improving International Prostate 23 Symptom Scores than either Flomax or Proscar. In fact, as the Company later admitted, TH-070 had 24 no statistically significant benefit to BPH patients, worked no better than a placebo, and caused 25 significant serious side effects in the livers of patients taking the drug. 26 7. Plaintiffs' claims for the false and misleading statements in the Registration

27 Statements and Prospectuses for the two offerings are brought under the 1933 Act only, and are 28 grounded in strict liability and negligence. Plaintiffs do not assert claims of deliberate misconduct
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1 with respect to those false statements. Plaintiffs do assert claims for deliberate misconduct in 2 violation of Securities and Exchange Commission ("SEC") Rule 10b-5 and the 1934 Act for later 3 false and misleading statements regarding the safety and efficacy of TH-070. 4 8. On March 1, 2006, in connection with the release of Threshold's 4Q05 financial

5 results, Selick told investors that clinical data from the ongoing phase 2 and 3 clinical trials had 6 "replicated" the results of the Bari Study and that TH-070 would be a "home run" drug. This, of 7 course, was false because, as later admitted, there was never any data replicating the Bari Study or 8 otherwise showing that TH-070 worked better than a placebo or had any positive clinical effect 9 whatsoever. Shortly after these statements were made, four significant events took place. 10 9. On March 3, 2006, just two days after Selick pumped the stock, one of Threshold's

11 early investors, Three Arch Partners ("Three Arch"), which included Threshold founder George 12 Tidmarsh ("Tidmarsh") and director Wilfred E. Jaeger ("Jaeger") among its members, suddenly 13 dumped 1 million of its shares on the market for $14.5 million. Two weeks later, on March 16, 14 2006, another early investor, Sofinnova Ventures, Inc. ("Sofinnova"), a venture capital firm run by 15 Threshold director Michael F. Powell ("Powell") and which counts Selick among its Venture 16 Partners, suddenly liquidated, in one day, 75% of its holdings, amounting to more than 2.5 million 17 shares and netting proceeds in excess of $36.5 million. On March 31, 2006, Tidmarsh suddenly and 18 unexpectedly resigned from the Company to pursue other interests. 19 10. Then, on April 10, 2006, Threshold told the Food and Drug Administration ("FDA")

20 ­ but not the public ­ that one of the patients in the phase 3 clinical trial of TH-070 had developed 21 elevated liver enzymes that were more than 30 times normal levels. Moreover, according to an 22 internal company source, by April 2006, additional unreported evidence of liver toxicity in at least 23 two other patients involved in the clinical trials of TH-070 had also arisen. 24 11. Throughout this period, defendants continued to make positive statements about TH-

25 070 and its prospects for success, including announcements that enrollment in both clinical trials had 26 been completed, advising investors that final results would be available around October 2006, and 27 reiterating the purportedly positive results of the Bari Study. Even when Threshold announced its 28
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1 1Q06 financial results on May 10, 2006, it continued to advise investors that TH-070 was on track 2 for success. 3 12. The very next day, May 11, 2006, Threshold shocked investors by revealing that TH-

4 070 had caused significant liver problems in at least six patients being treated in the ongoing 5 clinical trials, and that, as a result, the FDA had ordered that the drug trials be halted pending 6 further investigation of the toxicity issues. Although this announcement caused Threshold's stock 7 to collapse, falling from $14 to $3.44 and losing 75% of its value in a single day, defendants sought 8 to stem even further losses by falsely claiming that TH-070 remained promising as a treatment for 9 BPH, and minimizing both the significance of the liver toxicity issues that had arisen and the 10 seriousness of the FDA's response. Based on these misrepresentations, the market for Threshold 11 stock remained active, and its stock traded at elevated trading volumes for the remainder of the Class 12 Period. Then, before the market opened on July 17, 2006, Threshold shocked investors again by 13 finally revealing that TH-070 worked no better than a placebo, admitting that the liver toxicity 14 problems were more widespread than previously revealed and involved at least 16 patients in the two 15 clinical studies, and that, as a result, the TH-070 program was being cancelled, as there was no 16 commercial potential for the drug.1 This announcement again caused Threshold's stock price to 17 collapse, dropping from $3.18 to $1.55 and losing an additional 51% of its value in a single day. 18 13. Defendants' false and misleading statements about the safety and efficacy of TH-070

19 caused Threshold's stock to trade at artificially inflated levels during the Class Period, causing harm 20 to investors who purchased shares in or traceable to the two offerings or in the aftermarket when the 21 stock price dropped in response to the May 11, 2006 and July 17, 2006 disclosures described above: 22 23 24 25 26 This announcement was made before the market opened on July 17, 2006, which was a Monday. For this reason, the Class Period ends on July 14, 2006, the last full public trading day 27 before that announcement. 28
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1 2 3 4 5 6 7 8 9 10 11 12 14. Since the events complained of herein, Threshold has continued to suffer setbacks.

13 On February 26, 2007, the Company announced that its phase 3 clinical trial for glufosfamide for the 14 treatment of pancreatic cancer had failed, and on October 11, 2007, it announced that studies to 15 evaluate the use of that drug to treat other cancers had also failed. On July 30, 2007, Threshold's 16 stock fell below $1, and it has remained there since September 6, 2007, placing it in danger of being 17 delisted from NASDAQ (the National Association of Securities Dealers Automated Quotation 18 System). Its stock presently trades at just $0.47 per share. The Company's early investors, 19 including Three Arch, Sofinnova and their beneficiaries ­ Selick, Tidmarsh, Powell, Jaeger and 20 others ­ were able to recoup much of their investments through Class Period sales of their stock, 21 while Company insiders profited handsomely as a result of the generous salaries and bonuses they 22 were paid out of the public offering proceeds. Meanwhile, Threshold's public investors, the 23 members of the Class proposed here, have been left holding the bag. 24 II. 25 JURISDICTION AND VENUE 15. The claims asserted herein arise under and pursuant to §§11, 12(a)(2) and 15 of the

26 1933 Act (15 U.S.C. §§77k, 77l(a)(2) and 77o) and §§10(b) and 20(a) of the 1934 Act (15 U.S.C. 27 §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R. §240.10b-5). 28
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16.

This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

2 §1331, §22 of the 1933 Act and §27 of the 1934 Act. 3 17. Venue is proper pursuant to §22 of the 1933 Act and §27 of the 1934 Act. The

4 Company is located in the District, and most of the false and misleading statements were concocted 5 at the Company's office within the District. 6 III. 7 THE PARTIES 18. Lead plaintiff Michael Hentosh ("Hentosh") purchased Threshold common stock,

8 including shares purchased in or traceable to Threshold's public stock offerings on February 4, 2005 9 and October 12, 2005 during the Class Period as described in the attached certification, and was 10 damaged as a result of defendants' false and misleading statements. See Ex. A, attached hereto. 11 19. Named plaintiff Christopher Lee ("Lee") purchased Threshold common stock during

12 the Class Period, including shares purchased in or traceable to Threshold's February 4, 2005 public 13 offering, as described in the attached certification, and was damaged as a result of defendants' false 14 and misleading statements, as described in the initial complaint he filed in No. 07-CV-04972 15 consolidated herein. See Ex. B, attached hereto. 16 20. Named plaintiff Jerry Twinde ("Twinde") purchased Threshold common stock during

17 the Class Period and was damaged as a result of defendants' false and misleading statements, as 18 described in the initial complaint he filed in No. 07-CV-04972 consolidated herein. 19 21. Named plaintiff Raynold Gilbert claims to have purchased Threshold common stock

20 during the Class Period and suffered damages as a result of defendants' false and misleading 21 statements, as described in the complaint filed in No. 07-CV-04971 consolidated herein. 22 23 22. 23. Hentosh, Lee, Twinde and Gilbert are referred to collectively herein as "plaintiffs." Defendant Threshold Pharmaceuticals, Inc. ("Threshold" or the "Company") is a

24 biotechnology company focused on the discovery, development and commercialization of drugs 25 based on a process it described as "Metabolic Targeting." Threshold was incorporated as a 26 Delaware corporation in 2001. The Company's principal place of business is at 1300 Seaport 27 Boulevard, 5th Floor, Suite 500, Redwood City, California, 94063. The Company's common stock 28 is traded on the NASDAQ under the ticker symbol THLD.
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24.

Defendant Harold E. "Barry" Selick ("Selick") is, and at all relevant times has been,

2 Threshold's CEO and a member of its Board of Directors. Selick joined the Company in May 2003. 3 Between June 2002 and July 2007, Selick was a Venture Partner of Sofinnova Ventures, Inc. 4 ("Sofinnova"), a venture capital firm that owned more than 10% of Threshold's publicly issued stock 5 during the Class Period. Selick signed the Registration Statements for Threshold's public stock 6 offerings on February 4, 2005 and October 12, 2005. 7 25. Defendant Janet I. Swearson ("Swearson") served as CFO and Vice President,

8 Finance and Administration of Threshold from September 2002 until her resignation in August 2006. 9 She remained a consultant to the Company until the end of 2006. Swearson signed the Registration 10 Statements for Threshold's public stock offerings on February 4, 2005 and October 12, 2005. 11 26. Defendants Selick and Swearson are collectively referred to herein as the "Individual

12 Defendants." During the Class Period, Threshold had only four executive officers, including 13 Individual Defendants Selick and Swearson. 14 IV. 15 SOURCES OF ALLEGATIONS 27. The allegations contained herein are based upon investigation of counsel, including a

16 review of SEC filings issued by Threshold, news articles, securities analyst reports, advisories about 17 the Company, press releases and other public statements issued by the Company or its 18 representatives, media reports about the Company, and the first-hand accounts of confidential 19 witnesses, including: 20 (a) Confidential Witness No. 1 ("CW1"), a former executive with the Company

21 who oversaw Threshold's clinical operations, including the phase 2 and 3 clinical trials of TH-070, 22 during 2006; 23 (b) Confidential Witness No. 2 ("CW2"), a former clinical research coordinator

24 with one of the companies involved in the phase 2 clinical trial of TH-070 conducted during the 25 Class Period; 26 27 during 2006; 28
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Confidential Witness No. 3 ("CW3"), a receptionist who worked at Threshold

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1 2 during 2006; 3

(d)

Confidential Witness No. 4 ("CW4"), an executive assistant with Threshold

(e)

Confidential Witness No. 5 ("CW5"), who worked in Threshold's information

4 technology department throughout the Class Period; and 5 (f) Confidential Witness No. 6 ("CW6"), an administrative assistant in

6 Threshold's clinical department throughout the Class Period. 7 V. 8 BACKGROUND TO THE CLASS PERIOD 28. Threshold is a biotechnology company focused on the discovery, development and

9 commercialization of drugs based on Metabolic Targeting, an approach that targets differences in 10 metabolism between normal and certain diseased cells. During the Class Period, Threshold claimed 11 to be "building a pipeline of drugs that are designed to selectively target tumor cells so that the drugs 12 are less toxic to healthy tissues than conventional drugs, thereby providing improvements over 13 current therapies." 14 29. As of November 30, 2004, shortly before its IPO, Threshold had 42 employees and

15 three drug candidates: (i) TH-070 for the treatment of benign prostatic hyperplasia ("BPH"); (ii) 16 glufosfamide for the treatment of pancreatic cancer; and (iii) 2-deoxyglucose ("2-DG") for the 17 treatment of solid tumors. Though glufosfamide appeared to be closest to FDA approval, having 18 commenced its pivotal phase 3 trial in September 2004, TH-070 was the most eagerly anticipated by 19 the investment community due to its targeting of the $1.6 billion market for BPH, as compared with 20 an estimated $400 million market for pancreatic cancer treatment. 21 30. The active ingredient in TH-070 is lonidamine, a drug not approved for distribution in

22 the United States but which had been approved in Italy to treat solid tumors in seriously ill cancer 23 patients. Following purportedly successful results of a limited and quickly conducted phase 2 trial of 24 TH-070 among a small group of BPH patients in Italy, Threshold announced its IPO of publicly 25 traded common stock. Threshold used the results of the study, conducted at Bari University in Bari, 26 Italy (the "Bari Study"), to prime the market for its IPO, which was completed on February 4, 2005, 27 raising $38 million in much-needed capital for the Company. A subsequent Follow-on Offering 28
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1 completed on October 12, 2005, netted an additional $62 million which the Company needed to 2 continue its clinical trials for TH-070 and its other drug candidates. 3 31. In the Registration Statements and Prospectus for the two offerings and elsewhere,

4 defendants repeatedly claimed that the Bari Study results evidenced great promise for the ultimate 5 success of TH-070. Infra §VI. Defendants led the market to believe that, by virtue of its past use to 6 treat cancer patients in Italy, there was little risk of adverse health effects with lonidamine, and the 7 side effects that could be expected were much milder than with existing treatments for BPH, 8 including the widely advertised prescriptions drugs Flomax and Proscar. Id. Both of these 9 statements were false. 10 32. The limited results from the 28-day study of 30 patients in Bari, Italy provided no

11 basis at all claiming TH-070 was safe and effective or for predicting success of the phase 2 and 3 12 clinical trials, including more than 700 patients located throughout the United States and Europe. 13 For example, a well-documented placebo effect had been recognized in prior clinical studies of BPH 14 that Threshold claimed to have analyzed in planning and carrying out the Bari Study ­ demonstrating 15 that little weight should be given to the results of the non-placebo controlled study. The Bari Study 16 represented little more than a quick investigation designed to generate results that, if positive, could 17 be leveraged into a stock offering that would provide the funds necessary to figure out whether or 18 not TH-070 had any real promise as a potential treatment for BPH. As CW1 stated, the Bari Study 19 was designed merely to detect "a hint" of a positive response from the drug. At the end of the Class 20 Period, Threshold admitted that TH-070 did not work any better than a placebo in treating the 21 symptoms of BPH. 22 33. Neither did lonidamine's past use to treat cancer patients in Italy demonstrate that

23 TH-070 would be safe when administered to the general healthy population suffering from moderate 24 BPH, a common and relatively non-serious, though bothersome, side effect of aging that affects 25 nearly all men by the time they reach 70 years old. In fact, as defendants later acknowledged on a 26 conference call to discuss the onset of liver problems among patients taking TH-070 in advanced 27 clinical trials, there were repeated instances of elevated liver enzymes found even in blood tests of 28 cancer patients who had taken lonidamine in prior clinical studies of the drug. Contrary to
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1 Threshold's public statements, the Bari Study was not adequately designed to determine whether or 2 not TH-070 was safe when administered for BPH. The Bari Study was too short in duration to 3 determine the safety of the drug, and also permitted patients with pre-existing elevated liver 4 functions to participate, thereby masking any potential adverse health impacts of the drug. Even 5 with these significant limitations, at least one patient in the study (3.8% of the participants) 6 experienced elevated levels of liver enzyme ­ a fact that was not publicly reported prior to the IPO, 7 and contradicted Threshold's statements that the drug was "well tolerated" with "no therapy-related 8 side effects." 9 10 A. 34. Symptomatic BPH and Urinary Problems BPH is a condition that affects middle-aged and elderly men by restricting the flow of

11 urine. As the prostate enlarges, it can partially or completely block the urethra leading to a variety of 12 urinary and bladder symptoms. Given the enormous patient population and the relative inadequacy 13 of existing drugs, a fast, safe and effective treatment for BPH has tremendous market opportunity. 14 35. Unlike most organs, the prostate gland continues to grow throughout a man's adult

15 life. This non-malignant growth or enlargement is called Benign Prostatic Hyperplasia, or BPH. 16 Because the prostate wraps around the urethra, enlargement may impinge the urethra restricting or 17 obstructing urine flow and affecting urine retention. Urine retention can cause a weakening of the 18 bladder wall resulting in the inability to completely empty the bladder. Symptoms including 19 difficulty urinating, urinary hesitancy, and frequent urination increased risk of urinary tract 20 infections, urinary retention. These symptoms are collectively referred to as Lower Urinary Tract 21 Symptoms ("LUTS"). If left untreated, severe BPH can lead to kidney and bladder damage, bladder 22 stones and incontinence. 23 36. The International Prostate Symptom Score ("IPSS") is a clinically validated seven

24 question, self-administered questionnaire used by medical practitioners to assess LUTS. Scores 25 from 0 to 7 are considered "mild," scores from 8 to 19 are "moderate" and scores from 20 to 35 are 26 "severe." Other measurements used to assess the extent of BPH are a patient's maximum urine flow 27 rate (uroflowmetry), the amount of urine left in a bladder after urination is complete (called the "post 28
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1 void residual volume"), the size of the prostrate (expressed as prostate volume), and the level of 2 Prostate Specific Antigen ("PSA"), a protein produced by the prostate gland, in the blood. 3 4 B. 37. Lonidamine (TH-070) Defendants claimed that lonidamine ­ an indazole-3-carboxylic acid ­ disrupted

5 glycolysis in glandular prostate epithelial cells, the cells that overgrow in BPH. As a result, 6 Threshold claimed that the targeted cells are unable to generate energy, thereby causing the prostate 7 gland to shrink, relieving symptoms and effectively reversing the aging process of the prostate. 8 Although Threshold claimed that reducing prostate size would relieve symptomatic BPH, the 9 relationship between prostate size and BPH was more complex, such that simply shrinking the 10 prostate would not necessarily relieve or cure BPH, particularly among patients with only mild or 11 moderate symptoms. 12 38. Lonidamine was approved for use in Italy in the mid-1980 as a monotherapy for the

13 treatment of prostate, brain, breast and lung cancer. Threshold's preparation of lonidamine was 14 designated TH-070. In June 2004, Threshold licensed worldwide rights to the use of lonidamine for 15 treatment of BPH from Acraf S.p.a. ("Acraf"). The terms of the license agreement gave Threshold 16 the rights to use Acraf's regulatory documents and pre-clinical and clinical information pertaining to 17 lonidamine in its regulatory filings on TH-070-based products and for obtaining marketing 18 authorizations for such products. 19 39. The information obtained from Acraf included reports of approximately 80 studies

20 involving lonidamine. Twenty of those were controlled clinical studies involving over 3,500 21 patients. The studies were not widely disseminated or easily obtained or understood by the investing 22 public, which relied on defendants' statements summarizing the clinical history of lonidamine. The 23 Company has admitted that these studies reflect repeated anecdotal evidence which could suggest 24 that lonidamine elevates liver enzymes. On a May 11, 2006 conference call, following the revelation 25 of serious liver problems among patients taking TH-070 in clinical trials, Threshold's medical 26 director, Alan Colowick ("Colowick"), conceded: "There are studies in which numerically, in some 27 studies, the liver toxicity was higher numerically." 28
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1 2

C. 40.

Market Opportunity for TH-070 Prior to and during the Class Period, Threshold represented that there was an

3 enormous market for TH-070, and that it would compete directly with Flomax and other widely 4 prescribed drugs used to treat BPH. In its February 3, 2005 IPO Registration Statement, for 5 example, the Company stated the following: 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 BPH Market Opportunity * * *

The National Institutes of Health, or NIH, estimates that more than 50% of men in their sixties and approximately 90% of men over seventy have some symptoms of BPH. Approximately 17 million men in the United States, 27 million men in five major European countries and eight million men in Japan are estimated to suffer from symptoms of the disease and could benefit from a safe and effective treatment for BPH. Approximately 21% of them have been diagnosed, of which 59% receive medical therapy. In the United States, 2.0 million men are treated with drugs. These numbers are expected to increase in the future due to increased awareness and the aging population. The two major drugs approved to treat BPH, Flomax and Proscar, had combined worldwide revenues of over $1.6 billion in 2003. Alpha adrenergic receptor blockers, such as Flomax, work by relaxing the smooth muscle in the urethra and bladder and do not change the size of the prostate. In clinical studies of Flomax for the treatment of BPH symptoms, the average increase in urine flow was approximately 1.8 mL/sec. after four weeks of treatment. 5-alpha reductase inhibitors, such as Proscar and recently approved Avodart, work by blocking production of the hormones that stimulate the growth of new prostate cells but do not immediately kill existing cells. Consequently, this class of drugs has a slow onset, typically requiring daily treatment for many months before improving patient symptoms. In clinical studies of Avodart, the average increase in urine flow was approximately 1.6 mL/sec. and the average decrease in prostate size was approximately 8% after four weeks of treatment. TH-070 offers the potential to treat symptomatic BPH via a novel mechanism, by reducing the prostate size through Metabolic Targeting. By directly inhibiting glycolysis in prostate cells, we expect TH-070 to reduce the size of the prostate more rapidly than current medical treatments, without the attendant side effects, which include decreased libido, impotence and cardiovascular effects. 41. Threshold stated in the IPO Registration Statement that TH-070 would compete

24 directly with other BPH drugs on the market: 25 26 27 28 Competition for our BPH Product Candidate Our TH-070 product candidate for the treatment of symptomatic BPH will compete with alpha adrenergic receptor blockers, including Flomax ® , co-marketed by Boehringer Ingelheim and Abbott Laboratories, and Cardura ® , marketed by Pfizer, and with 5-alpha reductase inhibitors, including Proscar ® , marketed by Merck, Avodart ® , marketed by GlaxoSmithKline, and Xatral ® , marketed by the
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sanofi-aventis Group. . . . The leading BPH drugs are Flomax, which had worldwide 2003 sales of approximately $1 billion, and Proscar, which had worldwide 2003 sales of approximately $600 million. 42. Based on these and similar statements, the market recognized that the investment

4 thesis for Threshold was based upon the success of TH-070. In initiating coverage on the Company 5 with a buy rating and a $17 price target on September 20, 2005, Fortis Bank recognized that TH-070 6 was the Company's "most significant potential revenue driver," while repeating the Company's 7 claims that the Bari Study had "showed promising efficacy in men with symptomatic BPH" with a 8 "benign side effect profile." A day later, Baird/U.S. Equity Research issued a similar report with an 9 outperform rating and $17 price target, again noting the purported "significant improvement" in 10 BPH symptoms in the Bari Study and the "particularly large market" for TH-070. Other analysts 11 followed with similar reports. 12 13 43. 14 generating any revenue. Furthermore, the Company was experiencing escalating costs attributable to 15 the high cost of clinical trials, its primary expenditure. According to Threshold's February 4, 2005 16 prospectus and Registration Statement: 17 18 19 20 21 22 44. 23 operating expenses and net losses for calendar years 2001 to 2004 had grown at an exponential rate: 24 25 26 27 28
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D.

Threshold Could Not Complete Clinical Trials of TH-070 Without Additional Funding Prior to the Class Period, the Company had no marketable products and was not

We expect our net losses to increase primarily due to our anticipated clinical trial activities. Clinical trials are costly, and as we continue to advance our product candidates through development, we expect our research and development expenses to increase significantly, especially as we continue our pivotal Phase 3 clinical trial of glufosfamide and begin a registrational program for TH-070 for the treatment of symptomatic BPH in the first half of 2005. Compared to Phase 1 and Phase 2 clinical trials, Phase 3 clinical trials typically involve a greater number of patients, may be conducted at multiple sites and in several countries, are conducted over a longer period of time and require greater quantities of drug product. Primarily due to its rising research and development ("R&D") expenses, Threshold's

($000s) Research and Development General and administrative Total Operating Expenses Net Losses

2001 $35 $201 $236 ($236)

2002 $2,179 $306 $2,485 ($2,458)

2003 2004 $6,252 $16,327 $2,057 $7,649 $8,309 $23,976 ($8,303) ($23,566)

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45.

R&D expenses continued to rise during the Class Period as a result of the clinical

2 trials associated with TH-070 and glufosfamide: 3 4 5 6 7 46. As a result, Threshold was burning through an increasing amount of cash each year in THLD R&D EXPENSE ($000S) TH-070 Glufosfamide Other Total R&D Expense 2004 $3,269 $7,522 $5,536 $16,327 2005 $13,842 $12,009 $10,140 $35,991 2006 $15,647 $17,018 $13,602 $46,267

8 its attempt to develop a viable and profitable drug candidate, as reflected in its annual cash flow 9 statements: 10 11 12 13 14 47. By the end of 2004, Threshold had $28.6 million in cash and equivalents on hand, and ($000s) Net Cash Used in Operating Activities 2004 ($10,800) 2005 ($29,879) 2006 ($46,424) Cumulative (10/17/01 ­ 12/31/06) ($96,282)

15 had been burning cash at a rate of $2.1 million per month. Moreover, the Company was projecting a 16 cash burn of $32 to $38 million for 2005 ­ an increased burn rate of $2.6 to $3.2 million per month. 17 With no anticipated income from operating activities and expenses expected to increase as a result of 18 the clinical trials of glufosfamide and TH-070, the Company plainly required an additional infusion 19 of cash to remain in business. 20 48. From its inception in 2001 through 2004, Threshold had relied on private placements

21 to generate funding. In 2001 and 2002, Threshold raised $9 million through the sale of Series A 22 convertible preferred stock. In November 2003, it raised an additional $40.9 million through the sale 23 of Series B convertible preferred stock. In November 2004, the Company entered into a

24 development agreement with MediBIC Co., Ltd. for which it received an upfront payment of $4.75 25 million in December 2004 to support the development of glufosfamide in the Asian countries 26 27 28
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1 covered by the agreement.2 Having already raised more than $50 million of private equity, 2 Threshold's ability to tap the private markets for additional funding was limited. Threshold thus set 3 its sights on the public markets, and began planning for its IPO. 4 5 49. 6 potential. TH-070, targeted at the reported $1.6 billion market for the treatment of BPH, was the 7 Company's only candidate to fill this need. By comparison, its only other drug candidate 8 undergoing clinical trials at the time was glufosfamide, which was targeted at the much smaller $400 9 million market for the treatment of pancreatic cancer. In addition, TH-070 relied upon an existing 10 drug ­ lonidamine ­ that exhibited Metabolic Targeting properties, as opposed to an entirely new 11 compound that would have to be developed from scratch through costly and uncertain internal R&D 12 efforts. 13 50. 14 result of its private sale of Series B stock, the Company lacked the capital necessary to mount a full 15 scale phase 2 or 3 study necessary to secure FDA approval for TH-070 while also pursuing approval 16 for glufosfamide and its other drug candidates. Threshold, therefore, devised a plan to fund a very 17 limited, small scale study on foreign soil, hoping to achieve positive results it could then leverage 18 into a successful IPO to obtain the funding it needed. 19 51. 20 Development, L.P. and PPD Global Limited (collectively, "PPD"), at the University of Bari on the 21 Adriatic coast of Italy. Threshold told potential investors the Bari Study was "designed to evaluate 22 the safety and efficacy of TH-070 in patients with symptomatic BPH." Although PPD was 23 responsible for managing the clinical trials, it had regular communications with the two Threshold 24 project managers overseeing the clinical trials, who reported to CW1. According to CW5, data from 25 26
2 This was a related party transaction: Selick's wife was Chief Operating 27 of Anexus Pharmaceuticals, Inc., which is a subsidiary of MediBIC Co. Ltd. Officer and a director 28

E.

Threshold Generates Purportedly Positive Results in a Quickly Thrown Together Study of Thirty Patients in Bari, Italy To attract public investors, Threshold needed a drug candidate with a huge market

Although Threshold had $40.8 million in cash on hand at the outset of 2004 as a

In January 2004, Threshold initiated a phase 2 clinical trial managed by PPD

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1 the clinical trials was kept in-house on the Company's server in Word, Excel and Adobe Acrobat 2 documents. Additional databases were also maintained by PPD. 3 52. Despite its significant drawbacks, the Bari Study became Threshold's primary support

4 for further testing of TH-070 ­ and for both the IPO and the Follow-on Offering. The study was 5 described as a "proof of concept" study that was the first to examine the use of lonidamine in the 6 treatment of symptomatic BPH. As CW1 explained, the main purpose of the Bari Study was merely 7 to determine if there was a "hint" of a response to the drug before proceeding to phase 3 trials. 8 53. The study was "open-label," meaning that both the researchers and the subjects were

9 aware of the treatment being administered, and there was no placebo arm. As the principal 10 investigators of the study later acknowledged: 11 12 13 The drawback of this design is the placebo effect that may elicit misleading results, if not properly corrected for, especially considering the small number of patients and the absence of a blind run-in period. 3 54. Men between the ages of 50 and 80 years were eligible for inclusion if they met

14 certain criteria. Fifty percent of the patients were described as "severely symptomatic" and already 15 taking alpha-blockers. The average IPSS score for patients entering the phase 2 study was 19.5, 16 meaning that the study was skewed towards patients with severe symptomatic BPH. As a result, the 17 patient population was not representative of the potential TH-070 market for patients with mild to 18 moderate symptoms, who represented 60%-75% of all symptomatic BPH patients. This was the 19 market segment with the greatest potential growth, as it involved conditions that were more likely to 20 be viewed as a nuisance condition, such that the problems would either be unreported or left 21 untreated in view of the risks of side effects with existing treatments. Hence, the very advantage that 22 TH-070 was purported to offer over Flomax and Proscar was not capable of being tested, at all, in 23 24 25 Clinical Evidence Supporting the Role of Lonidamine for the Treatment of BPH. Pasquale Ditonno, MD*, Michele Battaglia, MD*, Oscar Selvaggio, MD*, Lucio Garofalo, MD*, Vito 26 Lorusso, MD, Francesco Paolo Selvaggi, MD* *UO Urologia I°, University of Bari, Bari, Italy, UO Oncologia Medica, IRCSS Ospedale Oncologico, Bari, Italy. VOL. 7 SUPPL. 7 2005 27 REVIEWS IN UROLOGY S27 28
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1 the Bari Study. The Bari Study, therefore, did not and could not prove that TH-070 had any 2 advantage over existing treatments. 3 55. The Bari Study was originally designed to treat 60 patients, split into two groups of

4 30 patients each. The first group would receive a daily dose of 150 mg once a day for 28 days, while 5 the second would receive 150 mg three times a day, five days a week, for four weeks. Between 6 March and August 2004, 30 patients at the Bari University Hospital were recruited for the low dose 7 arm of the study. Four dropouts were registered, leaving only 26 patients who completed the first 8 arm of the study. 9 56. Within six months after the Bari Study began, Threshold got the results it wanted and

10 cancelled the remainder of the study. Even before the required six-month follow-up period for the 11 30 low dose patients was complete, Threshold announced that TH-070 had achieved significant 12 "positive" results after 28 days of dosing, including a purported 11.2% average decrease in prostate 13 volume, a 17.8% decrease in PSA levels, a 7.3 average reduction in IPSS scores, a 3.2 ml/sec 14 increase in maximum urine flow rate, and a 61% decline in post-void urine volume. Threshold also 15 claimed that the TH-070 was "well tolerated" with no significant side effects. 16 57. Threshold told investors that, based on the purportedly significant results achieved by

17 the low-dose (150 mg once daily) patients, it had elected not to enroll the second 30 patient group for 18 the higher-dose study (450 mg for five times per week). In canceling the higher-dose arm, 19 Threshold conserved its rapidly dwindling capital, which it needed not only to fund further studies of 20 TH-070 but also to pay the expense of its ongoing phase 2 and 3 trials of glufosfamide. 21 58. With the purportedly positive results of the Bari Study in hand, Threshold turned to

22 the capital markets. 23 VI. 24 25 THRESHOLD ISSUES MATERIALLY FALSE AND MISLEADING PROXY AND REGISTRATION STATEMENTS FOR TWO PUBLIC OFFERINGS IN VIOLATION OF THE 1933 ACT 59. Plaintiffs bring claims for violation of §§11, 12(a)(2) and 15 of the 1933 Act. These

26 claims are grounded in strict liability and negligence only. Plaintiffs do not assert claims of fraud or 27 intentional misconduct with respect to these claims. 28
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60.

During the Class Period, Threshold earned nearly $100 million from two public stock

2 offerings: (i) its February 4, 2005 IPO; and (ii) an October 12, 2005 Follow-on Offering. 3 Registration Statements and Prospectuses issued for both offerings misled the investing public about 4 the reliability of the Bari Study and its results, the safety and efficacy of TH-070, and the specific 5 risks to the ongoing phase 2 and 3 trials for the drug. 6 7 A. 61. Misleading Statements in IPO Prospectus and Registration Statement On February 4, 2005, Threshold commenced its IPO of 5.3 million shares of common

8 stock at $7 per share. All of the shares were offered by Threshold and traded on the NASDAQ 9 under the THLD symbol. Upon completion of the offering, Threshold earned net proceeds of $38 10 million. 11 62. As part of the IPO, Threshold's officers, directors, majority shareholders and other

12 persons owning pre-IPO shares in the Company signed lock-up agreements preventing the public 13 sale of such shares for up to 180 days after the date of the offering. As a result, all of the shares of 14 Threshold that were purchased on the public market during that period were shares that are directly 15 traceable to the Company's IPO. 16 17 070: 18 19 20 21 22 23 24 25 26 27 28
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63.

Threshold's February 4, 2005 Prospectus stated the following information about TH-

TH-070 TH-070, our lead product candidate for the treatment of symptomatic BPH, is being evaluated in a Phase 2 trial in Italy. The primary objective of this trial is to determine the safety and tolerability of TH-070 in patients with BPH. In addition, patients are being evaluated for efficacy as measured by changes in specific variables that have been used in clinical trials of currently marketed BPH drugs to support their FDA approval. The primary endpoint specified in the protocol for our trial is a comparison of prostate size between baseline and day 28 of treatment. We have completed enrollment and are evaluating interim data. We observed statistically significant improvements in all variables measured by day 28. In the study, TH-070 was well tolerated with no therapy-related side effects. The safety and efficacy of TH-070 for the treatment of symptomatic BPH will need to be demonstrated in subsequent trials. Based on these interim Phase 2 results, we are designing a registrational program for TH-070 to treat symptomatic BPH. Our registrational program will include multiple multi-center, randomized, double-blinded, placebocontrolled studies, including at least one dose-comparison study. We expect to commence two clinical trials in the first half of 2005, one of which we believe will be a Phase 3 trial. There can be no assurance that regulatory agencies will consider this Phase 3 trial pivotal. Our registrational program will include additional trials.

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TH-070 is an orally administered small molecule that has been reported to inhibit the enzyme that catalyzes the first step in glycolysis. We initially selected TH-070 to treat BPH based on our understanding that prostate cells rely predominantly on glycolysis for energy production as well as published animal data and human clinical data demonstrating tolerability. TH-070 offers the potential to treat symptomatic BPH via a novel mechanism, by reducing the prostate size through Metabolic Targeting. By directly inhibiting glycolysis in prostate cells, we expect TH-070 to reduce the size of the prostate more rapidly than current medical treatments, without the attendant side effects, which include decreased libido, impotence and cardiovascular effects. * Metabolic Targeting For BPH We are also using Metabolic Targeting to develop a new class of drugs for BPH that may offer an improvement over current treatments. BPH is an overgrowth of prostate cells that results in a tumor that can restrict urine flow and cause a number of debilitating symptoms. Like hypoxic cancer cells, prostate cells in BPH tissue depend on glycolysis for energy production. These cells divert citrate, a molecule required for energy production by the citric acid cycle, into the seminal fluid to support the sperm, and therefore these cells cannot produce energy from the citric acid cycle. This process is mediated by the accumulation of high levels of zinc, which blocks citrate metabolism and disables the citric acid cycle in these prostate cells. These cells are therefore highly dependent on glycolysis for energy production. We are focused on developing new BPH therapies by targeting the metabolism of glucose by prostate cells. Preclinical studies and our interim Phase 2 data suggest that our product candidate TH-070 inhibits glycolysis and kills prostate cells disproportionately since normal cells can rely on the citric acid cycle for energy production. Current therapies either address BPH symptoms without addressing the underlying condition, or block growth of new prostate cells without reducing prostate size. We believe our product candidate treats both the symptoms of BPH and underlying condition as well as reduces prostate size. * * * * *

19 TH-070 20 21 22 23 24 25 26 27 28
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TH-070, our lead product candidate for the treatment of symptomatic BPH, is an orally administered small molecule that has been reported to inhibit glycolysis by inactivating hexokinase, the enzyme that catalyzes the first step in glycolysis. As described above, hypoxic tumor cells and certain prostate cells depend on glycolysis for their energy production. By inhibiting glycolysis, TH-070 kills prostate cells, reducing the size of the prostate, and therefore may provide an effective treatment for symptomatic BPH. We have completed enrollment and are evaluating interim clinical data from a Phase 2 trial of TH-070 for the treatment of symptomatic BPH. We plan to initiate a registrational program for this indication in the first half of 2005. We initially selected TH-070 to treat BPH based on our understanding that prostate cells rely predominantly on glycolysis for energy production as well as published animal data and human clinical data demonstrating tolerability. * * *

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

The two major drugs approved to treat BPH, Flomax and Proscar, had combined worldwide revenues of over $1.6 billion in 2003. Alpha adrenergic receptor blockers, such as Flomax, work by relaxing the smooth muscle in the urethra and bladder and do not change the size of the prostate. In clinical studies of Flomax for the treatment of BPH symptoms, the average increase in urine flow was approximately 1.8 mL/sec. after four weeks of treatment. 5-alpha reductase inhibitors, such as Proscar and recently approved Avodart, work by blocking production of the hormones that stimulate the growth of new prostate cells but do not immediately kill existing cells. Consequently, this class of drugs has a slow onset, typically requiring daily treatment for many months before improving patient symptoms. In clinical studies of Avodart, the average increase in urine flow was approximately 1.6 mL/sec. and the average decrease in prostate size was approximately 8% after four weeks of treatment. TH-070 offers the potential to treat symptomatic BPH via a novel mechanism, by reducing the prostate size through Metabolic Targeting. By directly inhibiting glycolysis in prostate cells, we expect TH-070 to reduce the size of the prostate more rapidly than current medical treatments, without the attendant side effects, which include decreased libido, impotence and cardiovascular effects. Prior Clinical Trials and Preclinical Studies Studies have shown that, at the highest doses studied, multiple TH-070 doses can shrink the rat prostate by over 40%, and a single oral dose of a TH-070 analog can reduce the size of the rat prostate by up to 24%. Prostate shrinkage occurs at dosages that cause no observable adverse clinical effect on the animals and can be seen within ten days of dosing. Ongoing Clinical Program In January 2004, we initiated a Phase 2 clinical trial managed by PPD Development, L.P. and PPD Global Limited, at the University of Bari, Italy, to evaluate the safety and efficacy of TH-070 in patients with symptomatic BPH. This trial is an open-label, two-arm study designed to enroll a total of 60 patients in two 30-patient dosing schedules of TH-070, 150 mg once a day and 150 mg three times a day. These doses and dosing schedules were based on animal efficacy data as well as human safety data. Based on promising interim data from the low-dose group of patients in this study, we elected not to enroll the high-dose group and instead plan to initiate a registrational program for TH-070 to treat symptomatic BPH in the first half of 2005. In our Phase 2 trial, patients are being evaluated at several dates for specific efficacy variables, including prostate size, maximum urine flow rate, prostate specific antigen levels, or PSA, and an assessment of each patient's BPH symptoms called the International Prostate Symptom Score, or IPSS. IPSS is a clinically validated seven question, self-administered questionnaire to assess lower urinary tract symptoms. These efficacy variables include those that have been used as endpoints in previous clinical trials that led to FDA approval of currently marketed BPH drugs. The primary endpoint specified in the protocol for our trial is a comparison of prostate size between baseline and day 28 of treatment. In the trial we observed improvements in all variables measured by day 14 of treatment, and further improvements by day 28. All pvalues were less than 0.005, except for day 14 PSA levels. A p-value is a statistical term that indicates the probability that a desired result is random. The smaller the p-value, the lower the
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likelihood that the desired result was random. A p-value of 0.05 or less is considered statistically significant. These interim results are shown in the table below. Prostate Size Changes from Baseline Maximum Urine IPSS (units) Flow Rate +3.1 mL/sec not determined +3.2 mL/sec -7.3 PSA -1.5% -17.8

4 5 6 7 8 9 10 11 12 13 14 15 16 17 Day 14 Day 28 -6.5% -11.1%

In particular, at day 28 of treatment the average decrease in prostate size was 5.9 cc (­11.2%), the average increase in maximum urine flow rate was 3.2 mL/sec. (an increase from 9.4 mL/sec to 12.6 mL/sec), and the average decrease in PSA levels was 0.7 ng/mL (­17.8%). TH- 070 was well tolerated with no therapyrelated side effects. These observations are based on interim data, and we continue to follow all patients enrolled and treated in the trial and will do so for a period of six months from first treatment. The purpose of looking at longer-term data is to determine whether the improvements are sustained after the treatment regimen has been completed, as well as to confirm the absence of latent adverse effects. We expect to publish results of this trial in the second quarter of 2005. Based on the interim results, we intend to initiate a registrational program of TH-070 for the treatment of symptomatic BPH in the first half of 2005. Our registrational program will include multiple multicenter, randomized, double-blinded, placebo-controlled studies, including at least one dose-comparison study. Although our final trial design is not complete, in future clinical trials we expect to measure the same variables we are measuring in our current Phase 2 trial. We expect to commence two clinical trials in the first half of 2005, one of which we believe will be a Phase 3 trial. There can be no assurance that regulatory authorities will consider this Phase 3 trial pivotal. Our registrational program will include additional trials. 64. Taken as a whole, the statements about TH-070 in Threshold's IPO Registration

18 Statement were materially misleading to investors because they emphasized the purportedly positive 19 results of the Bari Study while minimizing or failing to accurately or completely disclose the specific 20 risks associated with TH-070, including that the results of the Bari Study were unreliable indicators 21 of either the efficacy or safety of the drug. 22 23 65. In particular, the Registration Statement misled investors as to the following facts: (a) That the small size of the Bari Study ­ only 30 patients completed dosing ­

24 together with the lack of a blind run-in period or a placebo control created a heightened risk that the 25 results were misleading; 26 (b) That lack of correction for the small size, lack of placebo control, and no blind

27 run-in period rendered the statistical results with p values under 0.05 neither reliable or meaningful; 28
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(c)

That the sample size of the Bari Study was too small to draw any meaningful

2 conclusions about the efficacy or safety of the drug, rendering the statements that the results of the 3 study were "promising" speculative; 4 (d) That due to the known and uncorrected placebo effect, there was a significant

5 risk that the results were "misleading" such that the purported improvements in prostate size, flow 6 rate, IPSS scores, or PSA levels could not reliably be linked to the action of the drug rather than an 7 uncorrected placebo effect; 8 (e) That the results presented for the Bari Study were not comparable with the

9 results presented for the prior clinical studies of Flomax and Proscar because, unlike the Bari Study, 10 both of those studies involved the use of placebos and the reported results were corrected for the 11 placebo effect; 12 (f) That, contrary to the statements in the Registration Statement, the Bari Study

13 was not designed to demonstrate the safety and efficacy of TH-070. To the contrary, the safety of 14 TH-070 was assumed based on its prior use in treating cancer patients in Europe, while trends in 15 prior animal and human studies indicating that the drug might cause abnormal liver functions were 16 overloaded or disregarded. Moreover, the inclusion of patients with elevated liver functions at the 17 start of the study, as well as the cancellation of the high-dose arm of the study, in which patients 18 would have received three times the dosage of the patients for whom results were reported, further 19 reduced the Bari Study's ability to demonstrate the safety or efficacy of TH-070; and 20 (g) That, contrary to the statement that "TH- 070 was well tolerated with no

21 therapy-related side effects," at least one participant in the Bari Study ­ representing 3.8% of the 22 participants in the tiny study ­ had developed a three-fold elevation of alanine transaminase ("ALT") 23 levels ­ a possible sign of liver malfunction ­ and significant increases in the mean serum follicle24 stimulating hormone ("FSH") and luteinizing hormone ("LH") levels, as well as decreases in free 25 testosterone. 26 66. At the time the Registration Statement was published, Threshol