Paratek Pharmaceuticals, Inc. - Quarter Report: 2008 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2008

For the transition period from                      to                     

Commission File No. 000 – 51967

NOVACEA, INC.

(Exact Name of Registrant as Specified in its Charter)

(650) 228-1800

Registrant’s telephone number, including area code

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

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

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

As of August 7, 2008, 25,865,516 shares of our Common Stock, $0.001 par value, were outstanding.

Table of Contents

Index to Consolidated Financial Statements

Novacea, Inc.

2

Table of Contents

PART I

FINANCIAL INFORMATION

Novacea, Inc.

Condensed Balance Sheets

(In thousands, except for share and per share amounts)

See accompanying notes.

3

Table of Contents

Novacea, Inc.

Condensed Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

See accompanying notes.

4

Table of Contents

Novacea, Inc.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

See accompanying notes.

5

Table of Contents

Novacea, Inc.

Notes to Condensed Financial Statements

1. Organization and Summary of Significant Accounting Policies

Novacea, Inc. (the “Company”) is a biopharmaceutical company currently focused on in-licensing, developing and commercializing novel therapies for the treatment of patients with cancer. The Company was founded in February 2001 and is incorporated in the State of Delaware. The Company’s product portfolio features two clinical-stage oncology product candidates with worldwide rights, Asentar™ and AQ4N, each of which is a potential treatment for certain types of cancer. In May 2007, the Company signed an exclusive worldwide license agreement with Schering Corporation (“Schering”) for the development and commercialization of Asentar™, which agreement was terminated in April 2008.

The Company continues to be primarily involved in performing research and development activities.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial information. The results for the three months and six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008 or for any other interim period or any other future year.

The accompanying unaudited condensed financial statements and notes to financial statements should be read in conjunction with the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the United States Securities and Exchange Commission on March 17, 2008.

Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

Revenue Recognition

The Company applies the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values. Applicable revenue recognition criteria are then applied to each of the units.

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

For each source of revenue, the Company complies with the above revenue recognition criteria in the following manner:

6

Table of Contents

Fair Value Measurements

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). Effective January 1, 2008, the Company adopted SFAS No. 157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.

The Company adopted the provisions of SFAS No. 157 on a prospective basis for financial assets and liabilities which require that the Company determine the fair value of financial assets and liabilities using the fair value hierarchy established in SFAS No. 157. SFAS No. 157 describes three levels of inputs that may be used to measure fair value, as follows:

The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations and financial condition as of and for the six months ended June 30, 2008.

Recently Issued Accounting Pronouncement

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). In December 2007, the FASB issued SFAS No. 141R. SFAS No. 141R establishes principles and requirements for recognizing and measuring assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. SFAS No. 141R also provides guidance for recognizing and measuring goodwill acquired in a business combination, including capitalizing at the acquisition date the fair value of acquired in-process research and development, and requires the acquirer to disclose information it needs to evaluate and understand the financial effect of the business combination As SFAS No. 141R is effective for business combinations for which the acquisition date is on or after December 15, 2008. The Company has not yet evaluated whether SFAS 141R will have a material impact to its prospective financial statements.

Stock-Based Compensation Expense

The following table summarizes the stock-based compensation expense included in our Condensed Consolidated Statements of Income (in thousands):

2. Results of Operations

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of vested shares outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all potential dilutive common securities, including options and common stock subject to repurchase.

7

Table of Contents

The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and unrealized gains (losses) on available-for-sale securities. Total comprehensive income (loss) for the three months and six months ended June 30, 2008 and 2007 are as follows (in thousands):

3. Fair Value

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value on a recurring basis as of June 30, 2008 (in thousands):

8

Table of Contents

4. License and Collaboration Agreements

Schering Corporation. In May 2007, the Company signed an exclusive worldwide License, Development and Commercialization Agreement with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation (“Schering”), for the development and commercialization of Asentar™ (the “Collaboration Agreement”) in androgen-independent prostate cancer, or AIPC, earlier stages of prostate cancer, and other types of cancers, including pancreatic cancer.

The Collaboration Agreement became effective on June 26, 2007, and in July 2007, the Company received upfront payments from Schering totaling $60 million, of which $35 million was reimbursement for past research and development expenses and $25 million was a license fee. Additionally, in July 2007, pursuant to the terms of the Collaboration Agreement, the Company sold to Schering 1,490,868 shares of its common stock for cash at $8.05 per share, for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement.

In November 2007, the Company and Schering terminated the ASCENT-2 Phase 3 clinical trial of Asentar™ for treatment of AIPC due to an unexplained imbalance of deaths between the treatment and control arms of the trial. At that time, the Company also suspended enrollment in its Phase 2 clinical trial of Asentar™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar™. Together with Schering, the Company reviewed and analyzed the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm. Based on its preliminary findings from the ASCENT-2 Phase 3 clinical trial, as announced by the Company in June 2008, the Company believes that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were treated with once-weekly Taxotere in each of the control arm of its earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004.

On April 4, 2008, Schering delivered written notice (the “Termination Letter”) of Schering’s termination of the Collaboration Agreement as of that date. Schering elected to terminate the Collaboration Agreement based on Schering’s determination, related to the termination of the ASCENT-2 Phase 3 clinical trial, that there had been a technical failure related to Asentar™.

According to the Termination Letter, the termination was effective immediately upon the Company’s receipt of the Termination Letter. Upon termination of the Collaboration Agreement, the licenses and other rights granted by the Company to Schering pursuant to the Collaboration Agreement terminated and Schering became responsible for conducting an orderly wind-down of all ongoing development activities with respect to Asentar™ and making all payments due to the Company and any other third parties with respect to Asentar™, as per the terms of the Collaboration Agreement. In August 2008, the Company and Schering agreed that Schering would make a payment of $5.7 million, representing reimbursement for the Company’s R&D efforts on Asentar™ of $4.3 million for the first quarter of 2008 and of $1.4 million for the second quarter of 2008. The $1.4 million covers a portion of the estimated $2.3 million incurred by the Company for its R&D efforts on Asentar™ during the second quarter of 2008, which were focused on the orderly wind-down of all ongoing development activities and preparing a complete response to the U.S. Food and Drug Administration, or FDA, regarding releasing the clinical hold on the Investigational New Drug, or IND, application with respect to Asentar™. The $5.7 million has been recorded as accounts receivable as of June 30, 2008. Following receipt of the $5.7 million payment, the Company will not be entitled to receive any future reimbursement from Schering under the Collaboration Agreement for its remaining activities on Asentar™ and the Company will no longer recognize any related reimbursement revenue. All future costs incurred by the Company for activities on the Asentar™ development programs and for any future development of Asentar™ will be at the Company’s expense.

During the three months and six months ended June 30, 2008, the Company recorded revenue under the agreement with Schering of $53.7 million and $60.5 million, respectively. The revenue recognized in connection with the upfront payment in the three months and six months ended June 30, 2008 was $52.4 million and $54.8 million, respectively. Through the termination date of the Collaboration Agreement, the Company had recognized revenues from the upfront payments from Schering ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. As a result of the termination of the Collaboration Agreement, the Company recognized as revenue in the three months and six months ended June 30, 2008 the previously deferred revenue balance of $52.4 million related to the $60.0 million in upfront payments from Schering. Revenue from reimbursement for the Company’s R&D efforts on Asentar™ is recognized as the related costs are incurred. The revenue from reimbursement for the Company’s R&D efforts on Asentar™ during the three months and six months ended June 30, 2008 was $1.4 million and $5.7 million, respectively. All payments received from Schering are non-refundable.

Oregon Health & Science University. As of June 30, 2008 and under the terms of the amended OHSU License Agreement, the Company may be obligated in the future to make certain milestone payments to OHSU of up to an aggregate of $0.6 million, which milestone payments are contingent upon the occurrence of certain clinical development and regulatory events related to Asentar™. The Company is obligated to pay to OHSU certain royalties on net sales of Asentar™, which royalty rate may be reduced in the event that the Company must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar™. The Company has agreed to pay OHSU a certain percentage of any sub-license revenues that the Company receives. The Company has also agreed to reimburse OHSU for all reasonable fees and costs related to the preparation, filing,

9

Table of Contents

prosecution and maintenance of the patent rights underlying the agreement, and the Company has agreed to indemnify OHSU and certain of its affiliates against liability arising out of the exercise of patent rights under the agreement. Furthermore, in addition to customary termination provisions for breach or bankruptcy, OHSU may also terminate the license agreement if the Company does not proceed reasonably with the development and practical application of the products and processes covered under the license or does not keep the products and processes covered under the license reasonably available to the public after commencing commercial use.

University of Pittsburgh. As of June 30, 2008 and under the terms of the amended University of Pittsburgh License Agreement, the Company may be obligated through 2012 to make certain minimum royalty payments to the University of Pittsburgh of up to an aggregate of $1.2 million, of which a liability of $0.2 million was recorded as research and development expense in the quarter ended June 30, 2008, related to a minimum royalty payment due and paid in July 2008. The minimum royalty obligation began in July 2003, and future royalty payments are contingent upon continuation of the license agreement and are creditable against the Company’s other royalty obligations that are actually due in any calendar year. Minimum royalty payments to the University of Pittsburgh in advance of Asentar™ marketing approval are recorded as research and development expense when incurred. The Company is obligated to pay the University of Pittsburgh certain royalties on net sales of Asentar™ when used in combination with certain chemotherapies. The royalty rate may be reduced in the event that the Company must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar™. Additionally, the Company has agreed to pay the University of Pittsburgh a certain percentage of any sub-license revenues that the Company receives. The Company has also agreed to reimburse the University of Pittsburgh for all reasonable fees and costs related to the filing prosecution and maintenance of the patent rights underlying the agreement. In addition, the Company is obligated to issue an additional 14,285 shares of its common stock to the University of Pittsburgh upon the issuance of certain claims included in one of several U.S. patents that are subject to this license. This agreement will terminate in the United States on the expiration date of the last-to-expire U.S. patent subject to the license. Currently, the last-to-expire U.S. patent under the agreement is scheduled to expire in August 2017, absent an extension of the expiration date of any patent under the agreement past such date. The Company has patent applications pending which, if issued and not invalidated, may extend the expiration date of the last-to-expire patent. Furthermore, on a country-by-country basis outside of the United States, the term of this agreement continues until the expiration in the applicable country of the last-to-expire of the patents licensed to the Company under the agreement. In addition, the Company may terminate the agreement by giving three months prior written notice to the University of Pittsburgh and paying all amounts due under the agreement through the effective date of termination.

KuDOS Pharmaceuticals Limited. In April 2007, the Company terminated the December 2003 license agreement under which it licensed KuDOS’ North American rights to AQ4N and entered into a worldwide license agreement directly with the primary licensor to KuDOS, BTG International Limited. Also in April 2007, the Company entered into an assignment of KuDOS’ ownership of rights, title and interests in patents and know-how related to AQ4N. As of June 30, 2008 and under the terms and conditions of the assignment agreement, the Company may be obligated in the future to make a payment to KuDOS of $5.0 million upon achievement of a certain milestone tied to the Company’s AQ4N sales reaching a specified dollar level. No future pre-approval development milestones or royalties will be due to KuDOS under this agreement.

BTG International Limited. In April 2007, the Company entered into a novation and license agreement with BTG International Limited, or BTG, the primary licensor to KuDOS regarding AQ4N. The Company acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. In May 2007, the Company paid BTG $1.4 million as an up-front payment, which was recorded as a research and development expense. Under the terms and conditions of the agreement, the Company is obligated to pay BTG approximately £50,000 (approximately $0.1 million) per year beginning in 2008 until the Company receives regulatory approval for AQ4N. Further, under the agreement, the Company may be obligated in the future to make certain milestone payments to BTG of up to approximately £6.0 million (approximately $11.9 million), which are contingent upon the occurrence of certain clinical development and regulatory events related to AQ4N. Payments to BTG that relate to pre-approval development milestones will be recorded as research and development expense when incurred. In addition, the Company is obligated to pay BTG certain annual royalties based on net sales of AQ4N, which are subject to annual minimum royalty payment amounts, and which royalty rate may be reduced in the event that we must pay certain additional royalties under patent licenses to third parties in order to manufacture, use or sell AQ4N. The Company also agreed to pay BTG a certain percentage of any sub-license revenues that the Company receives. The license agreement will terminate on a country-by-country basis on the expiration date in the applicable country of the last-to-expire patent licensed to the Company under the agreement. In addition to customary termination provisions, including breach of the agreement and bankruptcy, BTG may terminate the license agreement if the Company directly or indirectly opposes or assists any third party in opposing BTG’s patents. The Company may terminate the agreement by giving notice to BTG at any time, which termination shall be effective six months after such notice and upon transfer of ownership to BTG or its designee of certain rights as required by the agreement, subject to certain payments. As of June 30, 2008, the only payments that the Company has made to BTG is the up-front payment of $1.4 million in May 2007 and the 2008 annual license fee of $0.1 million in January 2008.

5. Commitment and Contingencies

Legal Proceedings. From time to time, the Company may be involved in a number of judicial, regulatory and arbitration matters arising in connection with its business, including recently initiated litigation by its former officer described below. The

10

Table of Contents

outcome of matter the Company is involved in cannot be determined at this time, and the result cannot be predicted with certainty. There can be no assurance that this matter will not have a material adverse effect on the Company’s results of operations in any future period and a significant judgment could have a material adverse impact on the Company’s consolidated statements of financial condition, results of operations and cash flows. The Company may in the future become involved in additional litigation in the ordinary course of its business, including litigation that could be material to the Company’s business.

In accordance with SFAS No. 5, Accounting for Contingencies, the Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management, it is probable that such litigation would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, with respect to matters the Company is involved in, in view of the inherent difficulty of predicting the outcome of these matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time.

On April 1, 2008, a former officer of the Company filed a complaint in San Mateo County Superior Court against the Company alleging three separate breaches of contract and/or failure to take certain actions with respect to Company securities held by the former officer. The aggregate amount of the alleged damages is up to $1.7 million. The Company believes it has meritorious defenses to the claims brought by the former officer and intends to vigorously defend against such claims.

6. Restructuring

On May 8, 2008, the Company committed to a restructuring plan to reduce its spending while maintaining the capabilities needed to conduct wind-down and other activities related to its product candidates, Asentar and AQ4N, to maintain the operations of the Company, and to evaluate potential strategic options. The plan reduced the Company’s workforce by approximately 22 people, or 60%, in the second and third quarters of 2008. Total charges under the plan are estimated to be up to $2.7 million.

Certain employees subject to the workforce reduction plan were eligible for one-time severance pay of $0.7 million upon signing a separation and release agreement with the Company, all of which was accrued at June 30, 2008. For employees who signed a separation and release agreement and were terminated on May 15, 2008, a total of $0.5 million was paid on that date. An additional total of $0.2 million was subsequently paid in July 2008 for employees who signed their separation and release agreement and were terminated on July 15, 2008.

Additionally, on May 12, 2008, the Company adopted retention bonus and severance payment arrangements, pursuant to which it may make retention and severance payments to those non-executive employees who remain employed by the Company following the workforce reduction, in accordance with the terms and conditions of the retention bonus and severance payment arrangements, to assist the Company with final wind-down activities related to the clinical programs, to maintain operations and to evaluate potential strategic options. The payment of the retention bonus and severance is contingent upon the completion of a defined transaction by the Company and is subject to employee continued employment through that date. In aggregate, the Company estimates that such retention bonuses and severance payments to non-executive employees could total up to $1.1 million. Retention and severance payments to non-executive employees will be accrued as an expense in the period a defined transaction is consummated and the amounts are earned. No such amounts have been recorded as of June 30, 2008

Executive officers who remain with the Company following the workforce reduction in accordance with the terms and conditions of the retention bonus plan will also be eligible to receive retention payments. The payment of the retention bonus is contingent and will be made upon the completion of a defined transaction by the Company and is subject to the employee’s continued employment through that date. In aggregate, the Company estimates that such retention payments to executive officers could total up to $0.8 million. Payments to executive officers, and the terms and conditions of such payments, are the subject of individual employment or severance agreements with each of the executive officers, and will be recorded as expense in the period a defined transaction is consummated and the amounts are earned. No such mounts have been recorded June 30, 2008

In the three months ended June 30, 2008, as part of its research and development expenses, the Company recorded an impairment charge of $0.1 million related to its license agreement with the University of Pittsburgh License Agreement. The University of Pittsburgh License Agreement is specific to the use of Asentar^™ in combination with certain chemotherapies. The Company does not anticipate any future use of such license after termination of the Collaboration Agreement, as discussed in Note 4 to the condensed financial statements.

11

Table of Contents

Of the $0.8 million in restructuring costs recorded in the quarter ended June 30, 2008, $0.5 million was recognized as research and development expense and $0.3 was recognized as general and administrative expense. At June 30, 2008 $0.5 million was paid, $0.1 million represented a non cash impairment charge and $0.2 million remains accrued.

7. Income Taxes

As discussed in Note 4 to the condensed financial statements, the Company received non-refundable upfront payments from Schering totaling $60 million in July 2007. For financial reporting purposes, $5.2 million was recognized as revenue during 2007 and $54.8 million was recorded as deferred revenue at December 31, 2007, and subsequently recognized as revenue during the six months ended June 30, 2008. For income tax purposes, the Company elected the “full inclusion” method of income tax accounting for recognition of all its non-refundable upfront payments, as provided by the Internal Revenue Code and Revenue Procedure 2004-34, thereby recognizing the entire $60 million as taxable income for the year ended December 31, 2007. Further, for 2007 the Company utilized its net operating loss carry-forwards to offset any regular taxable income and is exempt from the alternative minimum tax because of an exemption available to it under the Internal Revenue Code, given its status as a small corporation for that year.

12

Table of Contents

The following discussion and analysis of our financial condition as of June 30, 2008 and results of operations for the three months and six months ended June 30, 2008 and 2007 should be read together with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A. “Risk Factors” and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

Overview

We are a biopharmaceutical company currently focused on in-licensing, developing and commercializing novel therapies for the treatment of cancer. We currently have two clinical-stage oncology product candidates. Our lead product candidate, Asentar™, had been in a Phase 3 clinical trial for the treatment of androgen-independent prostate cancer, or AIPC, and had been in a Phase 2 clinical trial for the treatment of advanced pancreatic cancer, initiated in September 2007. In November 2006, we initiated a Phase 1b/2a clinical trial of our second product candidate, AQ4N, in combination with radiation and chemotherapy, for the treatment of glioblastoma multiforme, or GBM. In October 2007, we initiated a Phase 2 clinical trial of AQ4N for the treatment of acute lymphoblastic leukemia, or ALL; however, this trial was discontinued in January 2008 in connection with our decision to scale back clinical development activities for AQ4N in order to preserve capital resources. In May 2007, we signed an exclusive worldwide License, Development and Commercialization Agreement with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation (“Schering”), for the development and commercialization of Asentar™ (the “Collaboration Agreement”) in AIPC, earlier stages of prostate cancer, and in other types of cancers, including pancreatic cancer.

In November 2007, we and Schering ended our ASCENT-2 Phase 3 clinical trial of Asentar™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial. At that time, we also suspended enrollment in our Phase 2 clinical trial of Asentar™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar™. Together with Schering, we reviewed and analyzed the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm. Based on our preliminary findings from the ASCENT-2 Phase 3 clinical trial that we announced in June 2008, we believe that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were treated with once-weekly Taxotere in each of the control arm of our earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004.

On April 4, 2008, Schering delivered written notice of Schering’s termination of the Collaboration Agreement. Through the termination date of the Collaboration Agreement, we had recognized revenues from the upfront payments ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. As a result of the termination of the Collaboration Agreement, we recognized as revenue during the second quarter of 2008 all of the previously deferred revenue balance of $52.4 million related to the $60.0 million in upfront payments from Schering. Upon termination of the Collaboration Agreement, the licenses and other rights granted by the Company to Schering pursuant to the Collaboration Agreement terminated and Schering became responsible for conducting an orderly wind-down of all ongoing development activities with respect to Asentar™ and making all payments due to us and any other third parties with respect to Asentar™, as per the terms of the Collaboration Agreement. In August 2008, we reached agreement with Schering that they would make a payment of $5.7 million, representing reimbursement for our R&D efforts on Asentar™ of $4.3 million for the first quarter of 2008 and of $1.4 million for the second quarter of 2008. The $1.4 million covers a portion of the $2.3 million incurred by us for our R&D efforts on Asentar™ during the second quarter of 2008, which have been focused on the orderly wind-down of all ongoing development activities with respect to Asentar™. Following receipt of the $5.7 million payment, we will not be entitled to receive any future reimbursement from Schering under the Collaboration Agreement for our remaining activities on Asentar™ and we will no longer recognize any related reimbursement revenue. All future costs incurred by us for activities on the Asentar™ development programs and for any future development of Asentar™ will be at our expense.

In May 2008, we made the decision to limit our additional development activities on Asentar, which have been directed toward the following: winding-down and finalizing the analysis of the ASCENT-2 Phase 3 clinical trial; preparing a complete response to the U.S. Food and Drug Administration regarding releasing the clinical hold on the Investigational New Drug, or IND, application for Asentar; and meeting with the ASCENT-2 clinical trial investigators during the American Society of Oncology meeting in June 2008. Additionally, our AQ4N development efforts have focused on completing the necessary activities on the Phase 1b portion of the Phase 1b/2a GBM trial with AQ4N, which had completed enrollment, while placing the Phase 2a portion of the trial on hold prior to patient enrollment.

Additionally, in May 2008, we committed to a restructuring plan with the intention of reducing our spending while maintaining the capabilities needed to conduct the activities noted above related to Asentar and AQ4N, to maintain our operations and to evaluate potential strategic options, for which we have hired a financial advisor to assist us in this process. The plan reduced our workforce by approximately 22 people, or 60%, and was completed in the second and third quarters of 2008.

13

Table of Contents

Also, in May 2008, we adopted retention bonus and severance payment arrangements, pursuant to which we may make payments to those non-executive employees who remain employed by us following the workforce reduction. In aggregate, we estimate that such retention bonuses and severance payments to non-executive employees could total up to $1.1 million. Executive officers who remain with us following the workforce reduction will also be eligible to receive retention payments. In aggregate, we estimate that such retention payments to executive officers could total up to approximately $0.8 million. Payments to executive officers, and the terms and conditions of such payments, are the subject of individual employment or severance agreements with each of the executive officers.

We incorporated in February 2001 and have devoted substantially all of our resources to the licensure and clinical development of our product candidates. Until we completed our initial public offering in May 2006, we funded our operations primarily through the private placement of equity securities. Net proceeds from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option and purchase of additional shares of our common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses. Prior to the quarter ended June 30, 2008, we had incurred net losses since our inception in 2001. However, due to the recognition of the previously deferred revenue from the upfront payments from Schering, we had net income for the three months and six months ended June 30, 2008 of $47.1 million and $46.0 million, respectively. As of June 30, 2008, we had an accumulated deficit of $78.0 million. We expect net losses in future periods primarily due to our operating activities. Clinical trials are costly, and if we decide to advance our product candidates through later stages of development, we expect our research and development expenses to increase significantly. As compared to Phase 1 and Phase 2 clinical trials, Phase 3 clinical trials are typically more expensive as they involve a greater number of patients, are conducted at multiple sites and sometimes in several countries, are conducted over a longer period of time and require greater quantities of drug product. In addition, our expenses will increase if we expand our infrastructure and facilities and hire additional personnel, including clinical development, administrative, sales and marketing personnel. We are unable to predict when, if ever, we will be able to commence the sale of, or generate any other type of revenue for, any of our product candidates.

Research and Development Expenses. Research and development expenses consist primarily of costs for: personnel, including salaries and benefits; regulatory activities; pre-clinical studies; clinical trials; materials and supplies; and allocations of other research and development-related costs. External research and development expenses include fees paid to other entities that manufacture our products for use in our clinical trials and that conduct certain research and development activities on our behalf. We recognize research and development expenses as they are incurred. The costs to acquire technologies to be used in research and development activities, but which have not reached technological feasibility and have no alternative future use, are expensed when incurred. Payments to licensors that relate to the achievement of pre-approval development milestones are recorded as research and development expense when incurred. Clinical trial costs are a significant component of our research and development expenses. Currently, we manage our clinical trials through independent medical investigators at their sites and at hospitals. We accrue research and development expenses for clinical trials based on estimates from our ongoing monitoring of the levels of patient enrollment and other activities at the investigator sites.

Research and development expenses will increase in the future if we progress our product candidates through the more expensive Phase 2 and Phase 3 clinical trials, start additional clinical trials, file for regulatory approvals, hire more employees and expand our infrastructure and facilities. Completion of clinical trials may take several years, although the length of these trials varies substantially according to the nature and complexity of the particular product candidate.

The following table provides a general estimated completion period for each phase of the clinical trials that we typically conduct:

The clinical development and regulatory approval processes inherently contain significant risks and uncertainties. Therefore, it is difficult to estimate the costs necessary to complete development projects. For example: we may experience delays or fail to obtain institutional review board approval to conduct clinical trials at a prospective site; we may experience delays or fail to reach agreement on acceptable clinical trial terms or clinical trial protocols with prospective sites or investigators; patient enrollment may be slower than expected at trial sites due to factors including the limited number of, and substantial competition for, suitable patients required for enrollment in our clinical trials; there is a limited number of, and substantial competition for, suitable sites to conduct our clinical trials; clinical trial sites may terminate our clinical trials; patients and medical investigators may be unwilling or unable to follow our clinical trial protocols; patients may fail to complete our clinical trials once enrolled; results from clinical trials may be unfavorable; and unforeseen safety issues may arise or regulatory agencies may deem data from clinical trials insufficient for marketing approval and may require additional clinical trials. Additionally, risks related to the timing and results of our clinical trials add to the difficulty of estimating the costs necessary to complete development projects. For example: failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed; the results of previous clinical trials may not be predictive of

14

Table of Contents

future results, which might delay regulatory approval, and our current and any planned clinical trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities or our product candidates may cause undesirable side effects during clinical trials that could delay or prevent their regulatory approval or commercialization. Because of these risks, and the other risks set forth more fully in Item 1A, Risk Factors, to this Quarterly Report on Form 10-Q, the cost projections and development timelines related to our clinical development and regulatory programs may be materially impacted. Any failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for our personnel in executive, business development, marketing, human resources, external communications, finance and other administrative functions, as well as consulting costs, including market research and business consulting. Other costs include professional fees for legal and accounting services, insurance and facility costs. General and administrative expenses may increase in the future if we expand our operating activities.

Results of Operations

Three months and six months ended June 30, 2008 and 2007

The following tables reflect period over period changes in selected line items from our condensed statements of operations (in thousands, except percentages):

Collaboration Revenue

The Collaboration Agreement with Schering became effective on June 26, 2007, and in July 2007, we received non-refundable upfront payments from Schering totaling $60 million, including $35 million as reimbursement for past research and development (R&D) expenses and a license fee of $25 million. Through the termination date of the Collaboration Agreement on April 4, 2008, we had recognized revenues from the upfront payments ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. We believed that this period for revenue recognition represented substantially the entire period for which we would have significant participatory obligations for Asentar™. As a result of the termination of the Collaboration Agreement with Schering on April 4, 2008, we recognized as revenue during the second quarter of 2008 the previously deferred revenue balance of $52.4 million related to the upfront payments. The deferred revenue balance related to the upfront payments from Schering was zero as of June 30, 2008.

Revenue from reimbursement for our R&D efforts on Asentar™ is recognized as the related costs are incurred. In August 2008, we and Schering agreed that the final payment of $5.7 million, representing reimbursable costs for the first quarter of 2008 of $4.3 million and part of reimbursable costs for the second quarter of 2008 of $1.4 million, would cover all development costs and wind-out costs under the Collaboration Agreement and we would not be entitled to any additional monies from Schering in connection with the Collaboration Agreement. Any future development of Asentar™ would be at our expense. In August 2008, we reached agreement with Schering that they would make a payment of $5.7 million, representing reimbursement for our R&D efforts on Asentar™ of $4.3 million for the first quarter of 2008 and of $1.4 million for the second quarter of 2008. The $1.4 million covers a portion of the estimated $2.3 million incurred by us for our R&D efforts on Asentar™ during the second quarter of 2008, which have been focused on the orderly wind-down of all ongoing development activities and preparing a complete response to the U.S. FDA regarding releasing the clinical hold on the IND application with respect to Asentar™. The $5.7 million has been recorded as accounts receivable as of June 30, 2008. Following receipt of the $5.7 million payment, we will not be entitled to receive any future reimbursement from Schering under the Collaboration Agreement for our remaining activities on Asentar™ and we will no longer recognize any related reimbursement revenue. All future costs incurred by us for activities on the Asentar™ development programs and for any future development of Asentar™ will be at our expense.

Additionally, with the termination of the Collaboration Agreement, we are no longer eligible to receive from Schering any pre-commercial milestone payments or royalties on worldwide sales of Asentar™.

Collaboration revenue for the three months and six months ended June 30, 2008 was $53.7 million and $60.5 million, respectively, compared to $0.1 million for the three months and six months ended June 30, 2007. This includes $52.4 million and $54.8 million during the three months and six months ended June 30, 2008, respectively, related to the recognition of a portion of the $60.0 million in upfront payments under the Schering Collaboration Agreement and $1.4 million and $5.7 million during the three months and six months ended June 30, 2008, respectively, related to reimbursement by Schering for our R&D efforts on Asentar™.

15

Table of Contents

Through the termination date of the Collaboration Agreement, we had recognized revenues from the upfront payments from Schering ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. As a result of the termination of the Collaboration Agreement, we recognized as revenue in the three months and six months ended June 30, 2008, the previously deferred revenue balance of $52.4 million related to the upfront payments from Schering. A total of $5.7 million in revenue related to the reimbursement for our R&D efforts during the first and the second quarters of 2008 is recorded as a receivable from Schering as of June 30, 2008. All payments received from Schering are non-refundable. Revenue for the three months and six months ended June 30, 2007 was $0.1 million and was attributable to amortization of upfront payments under the Schering Collaboration Agreement. Approximately $0.1 million remained available for grant under one of the two agreements with Aventis Pharmaceuticals, Inc. related to our Asentar™ clinical studies as of June 30, 2008, which amount is payable to us upon achievement of a final milestone.

Research and Development Expenses

The following table summarizes our research and development expenses:

Research and development expenses for the three months and six months ended June 30, 2008 were $4.1 million and $9.6 million, respectively, compared to $11.4 million and $19.0 million for the three months and six months ended June 30, 2007, respectively. This represents a decrease in research and development expenses of $7.3 million, or 64%, between the three-month periods in 2008 and 2007 and of $9.4 million, or 49% between the six-month periods in 2008 and 2007.

Research and development expenses associated with Asentar™ were $2.9 million and $7.0 million for the three months and six months ended June 30, 2008, compared to $8.9 million and $13.7 million for the three months and six months ended June 30, 2007, respectively. The $6.0 million, or 68%, decrease between the three-month periods in 2008 and 2007 and $6.7 million, or 49%, decrease between the six-month periods in 2008 and 2007 was due primarily to the lower level of clinical development activities in our ASCENT-2 Phase 3 clinical trial of AIPC, which began in the first quarter of 2006 and was terminated in November 2007, partially offset by restructuring charges of $0.5 million. Our activities for Asentar™ in 2008 have been primarily focused on reviewing and analyzing the data from the ASCENT-2 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and on preparing a complete response to the U.S. FDA regarding releasing the clinical hold on the IND application for the product. Based on our preliminary findings from the ASCENT-2 Phase 3 clinical trial that we announced in June 2008, we believe that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were treated with once-weekly Taxotere in each of the control arm of our earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004. In May 2008, we made the decision to limit our additional development activities on Asentar™, which are directed toward the following: winding-down and finalizing the analysis of the ASCENT-2 Phase 3 clinical trial; preparing a complete response to the U.S. Food and Drug Administration regarding releasing the clinical hold on the Investigational New Drug, or IND, application for Asentar; and meeting with the ASCENT-2 clinical trial investigators during the American Society of Oncology meeting in June 2008. Certain research and development expenses for Asentar™ have been subject to reimbursement from Schering under the Collaboration Agreement, which was terminated by Schering in April 2008. The expenses were recorded as research and development expenses and the reimbursement of such costs were recorded as revenue as costs were incurred by us. For periods subsequent to the second quarter of 2008, we will not be entitled to receive any additional reimbursement from Schering under the Collaboration Agreement for our remaining activities on Asentar™ and we will no longer recognize any related reimbursement revenue. All future costs incurred by us for activities on the Asentar™ development programs and for any future development of Asentar™ will be at our expense.

Research and development expenses associated with AQ4N were $0.2 million and $0.9 million for the three months and six months ended June 30, 2008, respectively, compared to $1.1 million and $2.8 million for the three months and six months ended June 30, 2007, respectively. The $0.9 million, or 84%, decrease between the three-month periods in 2008 and 2007 and the $1.9 million, or 69%, decrease between the six-month periods in 2008 and 2007 resulted primarily from reduced development activities and product manufacturing expenses for AQ4N, in a Phase 1b/2a clinical trial in glioblastoma multiforme, or GBM, which began in the fourth

16

Table of Contents

quarter of 2006. In May 2008, we decided that our future AQ4N development efforts will focus on completing the necessary activities on the Phase 1b portion of the Phase 1b/2a GBM trial, which had completed enrollment, while placing the Phase 2a portion of the trial on hold prior to patient enrollment. In October 2007, we initiated a Phase 2 clinical trial of AQ4N for the treatment of acute lymphobastic leukemia, or ALL. However, this trial was discontinued in January 2008 in connection with our decision to scale back clinical development activities for AQ4N in order to preserve capital resources.

Other research and development expenses were approximately $0.5 million and $1.2 million for the three months and six months ended June 30, 2008, respectively, compared to $1.0 million and $1.9 million for the three months and six months ended June 30, 2007, respectively. The $0.5 million, or 45%, decrease between the three-month periods in 2008 and 2007 and the $0.7 million, or 38%, decrease between the six-month periods in 2008 and 2007 resulted primarily from costs associated with reduced internal, and related external activities associated with our general research and development efforts.

Stock-based compensation expense included in research and development expenses was $0.6 million and $0.6 million for the three months and six months ended June 30, 2008, respectively, compared to $0.5 million and $0.7 million for the three months and six months ended June 30, 2007, respectively.

Our research and development expenses may increase in the future if we advance our product candidates through Phase 2 and Phase 3 clinical trials and registration trials, start additional clinical trials, file for regulatory approvals, hire more employees and expand our infrastructure and facilities.

General and Administrative Expenses

General and administrative expenses for the three months and six months ended June 30, 2008, were $3.2 million and $6.7 million, respectively, compared to $5.4 million and $9.3 million for the three months and six months ended June 30, 2007, respectively. The decrease of $2.2 million, or 40%, between the three-month periods in 2008 and 2007 in general and administrative expenses was mainly due to a $0.9 million decrease in marketing-related expenses, a $0.8 million decrease in stock-based compensation, a $0.4 million decrease in consulting, a $0.3 million decrease in compensation and benefits, partially offset by $0.3 million in restructuring-related expense. The decrease of $2.6 million, or 28%, between the six-month periods in 2008 and 2007 in general and administrative expenses was mainly due to a $1.3 million decrease in marketing-related expenses, a $0.7 million decrease in stock-based compensation, a $0.4 million decrease in consulting, and a $0.4 million decrease in recruiting, offset partially by $0.3 million in restructuring-related expense.

General and administrative expenses may increase in the future if we expand our operating activities or continue to file and prosecute new and existing patents.

Interest and Other Income, Net

Interest and other income, net, was $0.7 million and $1.7 million for the three months and six months ended June 30, 2008, respectively, compared to $0.7 million and $1.5 million for the three months and six months ended June 30, 2007, respectively. The increase of $0.2 million, or 17% between the six-month periods in 2008 and 2007 in interest and other income, net, resulted from higher investment balances resulting from the availability of the net proceeds from our Collaboration Agreement with Schering.

Liquidity and Capital Resources

We have generated a limited amount of revenue, and do not expect to generate revenue from product candidates for several years, if at all. Since inception, we have funded our operations significantly through the private placement of our preferred stock, with total net proceeds of $108.3 million.

In May 2007, we signed a Collaboration Agreement with Schering. The Collaboration Agreement became effective on June 26, 2007, and in July 2007, we received upfront payments from Schering totaling $60 million, of which $35 million was reimbursement for past research and development expenses and $25 million was a license fee. Additionally, in July 2007, pursuant to the terms of the Collaboration Agreement, we sold to Schering 1,490,868 shares of our common stock for cash at $8.05 per share, for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement. On April 4, 2008, Schering delivered written notice of Schering’s termination of the Collaboration Agreement. Upon termination of the Collaboration Agreement, the licenses and other rights granted by the Company to Schering pursuant to the Collaboration Agreement terminated and Schering became responsible for conducting an orderly wind-down of all ongoing development activities with respect to Asentar™ and making all payments due to us and any other third parties with respect to Asentar™, as per the terms of the Collaboration Agreement. In August 2008, we reached agreement with Schering that they would make a payment of $5.7 million, representing reimbursement for our R&D efforts on Asentar™ of $4.3 million for the first quarter of 2008 and of $1.4 million for the second quarter of 2008. A total of $5.7 million in

17

Table of Contents

revenue related to the reimbursement for our R&D efforts during the first and the second quarters of 2008 is recorded as a receivable from Schering as of June 30, 2008. Following receipt of the $5.7 million payment noted above, we will not be entitled to receive any future reimbursement from Schering under the Collaboration Agreement for our remaining activities on Asentar™ and we will no longer recognize any related reimbursement revenue. All future costs incurred by us for activities on the Asentar™ development programs and for any future development of Asentar™ will be at our expense.

In addition, we are no longer eligible to receive from Schering any pre-commercial milestone payments or royalties on worldwide sales of Asentar™. All payments received from Schering are non-refundable.

At June 30, 2008, we had cash, cash equivalents and marketable securities of $89.3 million and accounts receivable of $5.7 million. At December 31, 2007, we had cash, cash equivalents and marketable securities of $94.6 million and accounts receivable of $11.5 million.

The following table summarizes cash provided by (used in) our operating, investing and financing activities:

Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2008 was $5.2 million. Net cash used in operating activities for the six months ended June 30, 2007 was $18.9 million. For the six months ended June 30, 2008, cash used in operations was primarily attributable to a decrease in deferred revenue and a decrease in accounts payable, partially offset by net income, a net decrease in accounts receivable resulting from R&D reimbursement payments from Schering, and non-cash charges related to stock-based compensation. For the six months ended June 30, 2007, cash used in operations was primarily attributable to our net loss, partially offset by an increase in accrued liabilities resulting principally from the total sublicensing fees of $5.0 million to be paid to Oregon Health & Science University and to the University of Pittsburgh and increased research and development activities, and non-cash charges related to stock-based compensation.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities of $5.7 million for the six months ended June 30, 2008 was due primarily to net purchases of short-term investments. Net cash provided by investing activities of $17.2 million for the six months ended June 30, 2007 was due primarily to net maturities of short-term investments.

Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2008 and 2007 were $0.1 million and $0.5 million, respectively, which were due primarily to proceeds from the issuance of our common stock from the exercise of outstanding stock options.

Liquidity Sources and Cash Requirements and Commitments

Developing drugs, conducting clinical trials, and commercializing products are expensive. Our future funding requirements may depend on many factors, including:

18

Table of Contents

On May 8, 2008, we committed to a restructuring plan with the intention of reducing our spending while maintaining the capabilities needed to conduct wind-down and other activities related to our product candidates, Asentar and AQ4N, to maintain our operations, and to evaluate potential strategic options. The plan reduced our workforce by approximately 22 people, or 60%, which was completed in the second and third quarters of 2008. Employees subject to the workforce reduction were eligible for one-time severance pay of $0.7 million in total recorded in the second quarter of 2008, of which $0.5 million and $0.2 million were paid in the second and third quarters of 2008, respectively.

Additionally, on May 12, 2008, we adopted retention bonus and severance payment arrangements, pursuant to which we may make retention and severance payments to those non-executive employees who remain employed by us following the workforce reduction in accordance with the terms and conditions of the retention bonus and severance payment arrangements. In aggregate, we estimate that such retention bonuses and severance payments to non-executive employees could total up to approximately $1.1 million. Executive officers who remain with us following the workforce reduction in accordance with the terms and conditions of the retention bonus plan will be eligible to receive retention payments. In aggregate, we estimate that such retention payments to executive officers could total up to approximately $0.8 million. Severance payments to executive officers, and the terms and conditions of such, are the subject of individual employment or severance agreements with each of the executive officers.

We expect to incur losses from operations in the future. Our research and development expenses may increase in the future if we advance our product candidates through Phase 2 and Phase 3 clinical trials and registration trials, start additional clinical trials, file for regulatory approvals, hire more employees and expand our infrastructure and facilities. Our general and administrative expenses may increase in the future if we expand our staff, add infrastructure and incur additional expenses related to being a public company, including directors’ and officers’ insurance, investor relations and increased professional fees, including costs associated with maintaining compliance with the Sarbanes-Oxley Act of 2002.

Based on our current operating plans, including the reimbursement by Schering of certain of our Asentar costs incurred in the first and second quarters of 2008, we project that in 2008 our usage of operating capital, comprised of cash and cash equivalents, marketable securities and accounts receivable, will be approximately $15 million to $16 million.

Off-Balance Sheet Arrangements

As of June 30, 2008, we had no off-balance sheet arrangements, as defined under Regulation S-K Item 303(a)(4).

Contingencies

From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. There are no matters as of June 30, 2008 that, in the opinion of management, are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

On April 1, 2008, a former officer of the Company filed a complaint in San Mateo County Superior Court against the Company alleging three separate breaches of contract and/or failure to take certain actions with respect to Company securities held by the former officer. The aggregate amount of the alleged damages is up to $1.7 million. The Company believes it has meritorious defenses to the claims brought by the former officer and intends to vigorously defend against such claims.

We do not anticipate incurring any early termination penalties as a result of the termination on April 4, 2008 of the Collaboration Agreement with Schering.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates and judgments during the quarter ended June 30, 2008 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007, other than as noted below:

Fair Value Measurements

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). Effective January 1, 2008, the Company adopted SFAS No. 157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.

The Company adopted the provisions of SFAS No. 157 on a prospective basis for financial assets and liabilities which require that the Company determine the fair value of financial assets and liabilities using the fair value hierarchy established in SFAS No. 157. SFAS No. 157 describes three levels of inputs that may be used to measure fair value, as follows:

19

Table of Contents

The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations and financial condition as of and for the quarter ended June 30, 2008.

Recently Issued Accounting Pronouncement

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). In December 2007, the FASB issued SFAS No. 141R. SFAS No. 141R establishes principles and requirements for recognizing and measuring assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. SFAS No. 141R also provides guidance for recognizing and measuring goodwill acquired in a business combination, including capitalizing at the acquisition date the fair value of acquired in-process research and development, and requires the acquirer to disclose information it needs to evaluate and understand the financial effect of the business combination As SFAS No. 141R is effective for business combinations for which the acquisition date is on or after December 15, 2008. The Company has not yet evaluated whether SFAS 141R will have a material impact to its prospective financial statements.

20

Table of Contents

Our concentration of credit risk consists principally of cash, cash equivalents, and short-term investments. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of our investments are in short-term debt securities.

Our investment policy restricts investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital; fulfillment of liquidity needs; above-market returns versus industry averages; and fiduciary control of cash and investments. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our portfolio of cash equivalents, short-term marketable securities and restricted cash in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio. As of June 30, 2008, all of our investments were in money market accounts, certificates of deposit or investment grade corporate debt. Due to the short-term nature of these investments, a 10% movement in market interest rates would not have a material impact on the total fair market value of our portfolio as of June 30, 2008. We do not expect current credit market conditions to materially impact the value of our investment portfolio.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

21

Table of Contents

PART II.

OTHER INFORMATION

A discussion of Legal Proceedings is included in Note 5 — “Commitments and Contingencies” to the consolidated financial statements included in Item 1 of this Quarterly Report of Form 10-Q.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this report before you decide to purchase our common stock. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

Other than in the quarter ended June 30, 2008, we have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We may never achieve or sustain profitability.

We are a clinical-stage biopharmaceutical company with a limited operating history. We have only generated a limited amount of grant revenue and revenue from our collaboration agreement, and we have not generated any revenue from product sales. We do not anticipate that we will generate revenue from the sale of products for the foreseeable future. We have not yet submitted any products for approval by regulatory authorities and we do not currently have rights to any products that have been approved for marketing in our territory. We continue to incur research and development and general and administrative expenses related to our operations. Other than in the quarter ended June 30, 2008, we have incurred net losses since our inception in 2001. However, due to the recognition of the previously deferred revenue from the upfront payments under the the exclusive License, Development and Commercialization Agreement between us and Schering for the development and commercialization of Asentar™ (the “Collaboration Agreement”) that was terminated in April 2008, we had net income for the six months ended June 30, 2008 of $46.0 million. Our net loss for the years ended December 31, 2007, 2006 and 2005 was $32.5 million, $29.6 million, and $23.8 million, respectively. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase if we continue our research activities and conduct development of, and seek regulatory approvals for, our product candidates, and prepare for and begin to commercialize any approved products. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our product candidates do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

We are currently evaluating strategic opportunities, which could result in us changing the current focus of our business.

We have substantially reduced our development activities relating to Asentar™ following the termination of our ASCENT-2 Phase 3 clinical trial for the treatment of advanced pancreatic cancer in November 2007 and suspended enrollment in our Phase 2 clinical trial of Asentar™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar™. On April 4, 2008, Schering delivered written notice of Schering’s termination of the Collaboration Agreement as of that date. Schering elected to terminate the Collaboration Agreement based on Schering’s determination, related to the termination of the ASCENT-2 Phase 3 clinical trial, that there had been a technical failure related to Asentar™. During 2008, we also curtailed our development efforts on AQ4N. We are currently evaluating strategic opportunities, which could include our merger with, or acquisition by, another company, and have engaged a financial advisor to assist us in evaluation of our strategic alternatives. As we evaluate these strategic opportunities, we may decide to cease our current focus on biopharmaceutical therapies for the treatment of patients with cancer and allocate our resources toward other potential biopharmaceutical product areas.

We ended and have suspended enrollment in clinical trials for our lead product candidate, Asentar™, and we cannot give any assurance that it will receive regulatory approval or be successfully developed or commercialized.

In November 2007, we ended our Phase 3 clinical trial of Asentar™ for the treatment of androgen-independent prostate cancer, or AIPC, due to an unexplained imbalance of deaths between the treatment and control arms of the trial. At that time, we also suspended enrollment in our Phase 2 clinical trial of Asentar™ for the treatment of advanced pancreatic cancer and in other trials involving the use of Asentar™. Additionally, in November 2007, the FDA placed a hold on our existing Investigational New Drug application, or IND, for Asentar™. We are analyzing data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis, may decide to stop all development efforts with respect to Asentar™. Based on our preliminary findings from the ASCENT-2 Phase 3 clinical trial that we announced in June 2008, we believe that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were

22

Table of Contents

treated with once-weekly Taxotere in each of the control arm of our earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004. If we continue to seek approval for Asentar™, we do not know whether we will be able to enroll another clinical trial, and Asentar™ may never receive regulatory approval or be successfully commercialized. The clinical development program for Asentar™ may not receive regulatory approval from the U.S. Food and Drug Administration, or FDA, or similar non-U.S. regulatory agencies either if we fail to determine the causes of the imbalance in death rates and demonstrate that it is safe and effective in clinical trials, or if there are inadequate financial or other resources to advance Asentar™ through the clinical trial process. Even if Asentar™ receives regulatory approval, we may not be successful in marketing it for a number of reasons, including concerns raised by the results of the ASCENT-2 Phase 3 clinical trial, the introduction by our competitors of more clinically-effective or cost-effective alternatives or failure in sales and marketing efforts. Any failure to obtain approval of Asentar™ and to successfully commercialize it would have a material and adverse impact on our business.

We ended the ASCENT-2 Phase 3 clinical confirmatory trial without confirming the previously observed safety and efficacy trends of Asentar™.

The ASCENT-2 Phase 3 clinical confirmatory trial was designed based on observations about secondary endpoints from our completed Phase 2 clinical trial, referred to as our ASCENT clinical trial, which enrolled 250 patients. In addition, while our ASCENT clinical trial evaluated the weekly administration of Asentar™ in combination with weekly Taxotere^® versus once weekly placebo in combination with weekly Taxotere, the ASCENT-2 Phase 3 clinical confirmatory trial evaluated this Asentar™ and Taxotere regimen versus the currently approved regimen for Taxotere, which is dosed every three weeks in combination with prednisone. We ended the ASCENT-2 Phase 3 clinical trial in November 2007 due to an unexplained imbalance of deaths between the treatment and control arms of the trial and were not able to demonstrate the levels of safety and efficacy observed in our earlier clinical trials, including our ASCENT clinical trial. Additionally, in November 2007, the FDA placed a hold on our existing Investigational New Drug application, or IND, for Asentar™. Based on our preliminary findings from the ASCENT-2 Phase 3 clinical trial that we announced in June 2008, we believe that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were treated with once-weekly Taxotere in each of the control arm of our earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004. If we conduct additional analysis of the data from both the completed ASCENT clinical trial and the ASCENT-2 Phase 3 clinical trial, and determine that the higher death rate is related to Asentar™, or if we are unable to determine the cause, the FDA may not release the existing hold on our IND for Asentar™, we would discontinue development of Asentar™, or we may be unable to enroll or complete an additional Phase 3 study that would support regulatory approval.

Non-U.S. regulatory authorities may request that we update our analysis from our ASCENT clinical trial, and we cannot guarantee that the results of the analysis will be the same.

While the FDA regards our ASCENT clinical trial of Asentar™ as completed, non-U.S. regulatory authorities may request that we analyze the overall survival or other secondary endpoints at a later date or perform other analyses not contemplated by our original clinical trial design. We cannot guarantee that the trends we observed with respect to secondary endpoints in our ASCENT clinical trial will be observed in any subsequent analyses, which may delay or prevent Asentar™ from achieving regulatory approval.

We have tested the efficacy of Asentar™ in combination with Taxotere in AIPC patients at a single dosing level. We do not currently know the minimum efficacious dose of Asentar™ or whether alternative formulations of calcitriol, the active ingredient in Asentar™, could be substituted.

Our ASCENT clinical trial tested a single dose of 45 micrograms of Asentar™ administered once a week in combination with Taxotere in AIPC patients. We selected this dose because it approximated the dose used by investigators at Oregon Health & Science University, or OHSU, in their small Phase 2 study of calcitriol, the active ingredient in Asentar™, from which favorable efficacy results were reported. We used this dose in our development of Asentar™ based on the survival and safety benefits observed in the ASCENT clinical trial.

If a different dosage level of calcitriol is demonstrated to be equally or more effective than Asentar™, physicians might be able to prescribe commercially available formulations of calcitriol to AIPC patients as an alternative to Asentar™. While this may infringe our issued and pending patents, we may be limited in our ability to prevent any such product substitution.

We do not hold and cannot license composition of matter patents covering the active ingredient in Asentar™, calcitriol, and our competitors may be able to develop cancer therapies that are similar to Asentar™ using calcitriol.

We do not hold and we cannot license patents covering the composition of matter of calcitriol, which is the active ingredient for our lead product candidate, Asentar™. Although we have, or have licensed, issued and pending patents related to the use of calcitriol with a novel and proprietary dosing regimen capable of administering calcitriol in high doses without inducing its common side effects, which we refer to as high-dose pulse administration technology, or HDPA, as well as patents and pending patents related to using calcitriol in combination with certain chemotherapy treatments, our competitors are free to conduct their own research and development with respect to calcitriol and they may develop similar cancer therapies that compete with Asentar™, which could harm our future operating results.

23

Table of Contents

We cannot guarantee that lack of composition of matter protection for calcitriol will not adversely impact our proprietary position with respect to Asentar™, or that third parties will not infringe any of our issued patent claims, or that these patents will be found valid and enforceable. There can be no assurance that any of our patent applications will issue in any jurisdiction. Moreover, we cannot predict the breadth of claims that may be allowed or the actual enforceable scope of the Asentar™ patents that we hold. Furthermore, while our patent claims cover the treatment of hyperproliferative diseases, which are diseases characterized by abnormal proliferation of cells, by monotherapy with Asentar™, we cannot guarantee that our existing patent applications will provide protection for all monotherapeutic uses of Asentar™ that we may seek to pursue. Furthermore, we may not be able to obtain patent protection for any such uses even if they prove commercially valuable.

There are currently clinical trials ongoing which seek to use other agents with Taxotere for the treatment of AIPC. If these clinical trials are completed before we are able to enroll and complete another clinical confirmatory trial establishing the safety and efficacy of Asentar™, our ability to commercialize Asentar™ may suffer.

Other companies, such as Genentech, Inc., are seeking to commercialize other agents to add to the benefits of Taxotere in the first-line treatment of AIPC. For example, a major oncology cooperative group of investigators is currently conducting a three-year clinical trial studying the use of Genentech’s Avastin^® in combination with Taxotere in the first-line treatment of AIPC patients. If this trial, or any similar trial, is completed before we enroll and complete another clinical confirmatory trial which establishes the safety and efficacy of Asentar™ in combination with Taxotere for treatment of AIPC, or if the results of this trial, or any similar trial, are superior to the results of our clinical confirmatory trial, it may cause a delay in the approval of Asentar™ or reduce the market opportunity for our lead product candidate.

If we decide to pursue development of Asentar™, for any other indications with other chemotherapies or as a monotherapy, we may expend significant additional resources.

We have been primarily developing Asentar™ for use as a combination therapy with Taxotere for the treatment of AIPC. In 2007, we initiated a Phase 2 clinical trial of Asentar for the treatment of advanced pancreatic cancer, and several investigator-sponsored trials using Asentar were underway. Due to the unexplained higher number of deaths in the treatment arm over the control arm of our ASCENT-2 Phase 3 clinical trial, we have suspended enrollment in these trials until we can determine the cause of this imbalance. Based on our preliminary findings from the ASCENT-2 Phase 3 clinical trial that we announced in June 2008, we believe that the overall incidence of grade 3 and grade 4 adverse events between the treatment arm and the control arm of the ASCENT-2 Phase 3 clinical trial appears to be comparable. Additionally, the median survival data from the treatment arm of the trial appears to be similar to median survival data observed in AIPC patients not receiving Asentar who were treated with once-weekly Taxotere in each of the control arm of our earlier ASCENT Phase 2 trial, and in one of the comparator arms of the TAX327 trial, as reported by Sanofi-Aventis in 2004. Following the decision to terminate these trials, Schering in April 2008 terminated the Collaboration Agreement. Any future development of Asentar will be at our expense and we do not know when, or if, we will continue enrollment for these trials. In May 2008, we made the decision to limit our additional development activities on Asentar™, which will be directed toward the following: winding-down and finalizing the analysis of the ASCENT-2 Phase 3 clinical trial; preparing a complete response to the U.S. Food and Drug Administration regarding releasing the clinical hold on the Investigational New Drug, or IND, application for Asentar; and meeting with the ASCENT-2 clinical trial investigators during the American Society of Oncology meeting in June 2008.

Our drug development activities could be delayed or stopped.

We do not know whether our other trials for Asentar™ and AQ4N will be completed on schedule, or at all, and we cannot guarantee that our planned clinical trials will begin on time or at all. The commencement of our planned clinical trials could be substantially delayed or prevented by several factors, including:

24

Table of Contents

The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:

Clinical trials for our product candidates may be suspended or terminated at any time by the Data Safety and Monitoring Board, the FDA, other regulatory authorities, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or us. For example, in November 2007, we ended our Phase 3 clinical trial of Asentar™ for the treatment of androgen-independent prostate cancer, or AIPC, due to an unexplained imbalance of deaths between the treatment and control arms of the trial as reported to us by the Data Safety and Monitoring Board, and in November 2007, the FDA placed a hold on our existing IND for Asentar™. Any failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

There is a high risk that our drug development activities will not result in commercial products.

Our product candidates are in various stages of development and are prone to the risks of failure inherent in drug development. We will need to complete significant additional clinical trials before we can demonstrate that our product candidates are safe and effective to the satisfaction of the FDA and other non-U.S. regulatory authorities. Clinical trials are expensive and uncertain processes that take years to complete. Failure can occur at any stage of the process, and successful early clinical trials do not ensure that later clinical trials will be successful. Product candidates in later-stage trials may fail to show desired efficacy and safety traits despite having progressed through initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. In addition, a clinical trial may prove successful with respect to a secondary endpoint, but fail to demonstrate clinically significant benefits with respect to a primary endpoint, as we experienced in our ASCENT clinical trial of Asentar™. Failure to satisfy a primary endpoint in a Phase 3 clinical trial would generally mean that a product candidate would not receive regulatory approval without a further successful Phase 3 clinical trial, which we may not be able to complete.

The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities.

Positive results from pre-clinical studies and early clinical trials should not be relied upon as evidence that later-stage or large-scale clinical trials will succeed. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and other non-U.S. regulatory authorities despite having progressed through initial clinical trials.

Further, our product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials. The FDA or other non-U.S. regulatory authorities may disagree with our trial design and our interpretation of data from pre-clinical studies and clinical trials. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comment on a protocol for a pivotal Phase 3 clinical trial that has the potential to result in FDA approval. Any of these regulatory authorities may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials. In addition, the FDA or other non-U.S. regulatory authorities may not approve the labeling claims necessary or desirable for the successful commercialization of our product candidates.

Our product candidates may cause undesirable side effects during clinical trials that could delay or prevent their regulatory approval or commercialization.

Common side effects of Asentar™ include mild hypercalcemia, a significant and unhealthy level of calcium in the blood, hypercalciuria, a significant and unhealthy level of calcium in the urine, fatigue and nausea. Common side effects of AQ4N include cosmetic blue discoloration of the skin and urine, along with a decrease in lymphocytes and neutrophils, fatigue and anorexia. Because our product candidates have been tested in relatively small patient populations and for limited durations, additional side effects may be observed as their development progresses.

25

Table of Contents

Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other non-U.S. regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing our product candidates and generating revenues from their sale. In addition, if our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:

26

Table of Contents

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from the sale of the product.

Any collaborations we enter into in the future may not be successful.

We may seek additional collaborative arrangements, which may not be available to us, to develop and commercialize our drug candidates in the future. Even if we are able to establish acceptable collaborative arrangements in the future, they may not be successful. The success of our collaboration arrangements, if any, will depend heavily on the efforts and activities of our collaborators. Possible future collaborations have risks, including the following:

Given these risks, it is possible that any collaborative arrangements into which we enter may not be successful. For example, Schering in April 2008 terminated the Collaboration Agreement for the development and commercialization of Asentar^™. Schering elected to terminate the Collaboration Agreement based on Schering’s determination, related to the termination of the ASCENT-2 Phase 3 clinical trial, that there had been a technical failure related to Asentar™. In November 2007, we and Schering terminated the ASCENT-2 trial of Asentar™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial.

We may require substantial additional funding which may not be available to us on acceptable terms, or at all.

We may need to raise substantial additional capital to continue our clinical development and commercialization activities.

Our future funding requirements will depend on many factors, including but not limited to:

27

Table of Contents

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs.

If our competitors develop and market products that are more effective, safer or less expensive than our current and future product candidates, our commercial opportunities will be negatively impacted.

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching, developing and marketing products designed to address prostate cancer and other indications. Our oncology product candidates will compete with other drugs and therapies that currently exist or are being developed. Products we may develop in the future are also likely to face competition from other drugs and therapies. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research, development and marketing capabilities than we do. Some of the large pharmaceutical companies with which we expect to compete include Genentech, Inc., Sanofi-Aventis, S.A., AstraZeneca PLC, Novartis AG, Roche and Celgene Corporation. In addition, many universities and private and public research institutes may become active in cancer research, some of which are in direct competition with us.

Our product candidates will compete with a number of drugs that are currently marketed or in development that also target proliferating cells. We expect that Asentar™ will compete with products that have been marketed or are in advanced stages of development, including Emcyt^®, Novantrone^®, Paraplatin^®, Taxol^®, VEGF-Trap, Thalomid^®, Avastin^®, Satraplatin^®, Provenge^® vaccine and the like. We expect that AQ4N will compete with products that have been marketed or are in advanced stages of development, including cintredekin besudotox, Avastin, and radiation therapy.

In many instances, the drugs that will compete with our product candidates are generic, widely available and/or established, existing standards of care. To compete effectively with these drugs, our product candidates will need to demonstrate advantages that lead to improved clinical safety or efficacy compared to these products.

We believe that our ability to successfully compete will depend on, among other things:

If our competitors market products that are more effective, safer or less expensive than our future product candidates, if any, or that reach the market sooner than our future product candidates, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete or less competitive.

28

Table of Contents

Vitamin D analogs, which are chemically-designed compounds that mimic natural vitamin D compounds, have been, or may be in the future, evaluated systemically in clinical trials for the treatment of diseases where the objective of therapy is to decrease or normalize the growth rate of cells. While the developers of some of these product candidates claim their compounds have increased benefits relative to their effects on the blood levels of calcium, we are unaware of any clinical data for these compounds that demonstrate significant therapeutic benefits to date in oncology. If vitamin D analogs demonstrate significant therapeutic benefits, they may be a cost-effective alternative to Asentar™.

If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

We will need to effectively manage our managerial, operational, financial, development and other resources in order to successfully pursue our research, development and commercialization efforts for our existing and future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and pre-clinical and clinical personnel. The loss of the services of any of our senior management could delay or prevent the commercialization of our product candidates. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason and with or without notice. We will need to hire additional personnel if we expand our research and development activities and build a sales and marketing function.

We have scientific and clinical advisors who assist us in formulating our research, development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco, California area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements in a timely fashion or at all and our business may be harmed as a result.

In addition, the value of stock options granted to employees under our stock option plans have decreased along with the trading price of our common stock. As a result of these factors, our personnel may seek alternate employment, such as with larger, more established companies or companies that they perceive as having less volatile stock prices or better prospects.

If we evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.

If we advance our product candidates through clinical trials, we may need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. If our operations expand, we expect that we will need to manage additional relationships with such third parties, as well as additional collaborators and suppliers. Maintaining these relationships and managing our future growth may impose significant added responsibilities on members of our management. We must be able to: manage our development efforts effectively; manage our clinical trials effectively; hire, train and integrate additional management, development, administrative and sales and marketing personnel; improve our managerial, development, operational and finance systems and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure.

Furthermore, we may acquire additional businesses, products or product candidates that complement or augment our existing business. To date, we have no experience in acquiring and integrating other businesses. Integrating any newly acquired business or product could be expensive and time-consuming. We may not be able to integrate any acquired business or product successfully or operate any acquired business profitably. Our future financial performance will depend, in part, on our ability to manage any future growth effectively and our ability to integrate any acquired businesses. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

If we fail to acquire and develop other products or product candidates at all or on commercially reasonable terms, we may be unable to grow our business.

We may continue to rely on in-licensing as the source of any of our future product candidates for development and commercialization. Because we do not currently have internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license products to us. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical product candidates. Proposing, negotiating and implementing an economically viable product acquisition or license are lengthy and complex processes. We compete for partnering arrangements and license agreements with pharmaceutical and biotechnology companies and academic research institutions. Our competitors may have stronger relationships with third parties with whom we are interested in collaborating, greater financial, development and commercialization resources and/or may have more established histories of developing and commercializing products than we do. As a result, our

29

Table of Contents

competitors may have a competitive advantage in entering into partnering arrangements with such third parties. In addition, even if we find promising product candidates, and generate interest in a partnering or strategic arrangement to acquire such product candidates, we may not be able to acquire rights to additional product candidates or approved products on commercially reasonable terms that we find acceptable, or at all.

We expect that any product candidate to which we acquire rights will require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and other non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities and the possibility that, due to strategic considerations, we will discontinue research or development with respect to a product candidate for which we have already incurred significant expense. Even if the product candidates are approved, we cannot be sure that they would be capable of economically feasible production or commercial success.

If we are unable to in-license or develop product candidates necessary to grow our business, we may consider other potential strategic alternatives, such as a sale of the Company. During 2008, we announced that we would be evaluating potential strategic alternatives, and that we had hired a financial advisor to assist us in this process. Additionally, in May 2008, we committed to a restructuring plan with the intention of reducing our spending while maintaining the capabilities needed to conduct certain activities related to Asentar and AQ4N, to maintain the operations of the company, and to evaluate potential strategic options. The plan reduced the Company’s workforce by approximately 22 people, or 60%, which was completed in the second and third quarters of 2008.

We rely on third parties to conduct clinical trials for our product candidates and plan to rely on third parties to conduct future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current and future product candidates.

We do not have the ability to independently conduct clinical trials for Asentar™, AQ4N or any other product candidate. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct some or all of our clinical trials of our product candidates. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other non-U.S. regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, a failure by such third parties to perform their obligations in compliance with GCPs may cause our clinical trials to fail to meet regulatory requirements, which may require us to repeat our clinical trials.

We rely on third parties to manufacture and supply our product candidates.

We do not own or operate manufacturing facilities for clinical or commercial production of our product candidates. We have no experience in drug formulation or manufacturing, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We obtain calcitriol, which is the active ingredient in Asentar™, through an agreement with a single supplier, Plantex, Inc. Except in limited circumstances, we are obligated to purchase the majority of our calcitriol product requirements from Plantex. Plantex has the capacity to manufacture calcitriol in the quantities that our development and future commercialization efforts, if any, require. If Plantex is unable to produce calcitriol in the amounts that we require, we may not be able to establish a contract and obtain a sufficient alternative supply from another supplier on a timely basis or for the quantities we require. We expect to continue to depend on third-party contract manufacturers for the foreseeable future.

We may not be able to start our clinical trials as planned and obtain regulatory approvals if we do not receive materials or drug products from our manufacturers.

Our product candidates require precise, high quality manufacturing. Any of our contract manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and other non-U.S. regulatory authorities to ensure strict compliance with current Good Manufacturing Practice, or cGMP, and other applicable government regulations and corresponding standards. If our contract manufacturers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we may experience manufacturing errors resulting in patient injury or death, product recalls or withdrawals, delays or interruptions of production, failures in product testing or delivery, delay or prevention of filing or approval of marketing applications for our products, cost overruns or other problems that could seriously harm our business.

30

Table of Contents

To date, our product candidates have been manufactured in small quantities for pre-clinical studies and clinical trials, although calcitriol is manufactured in bulk form by Plantex for commercial use in the chronic kidney disease market. If in the future one of our product candidates is approved for commercial sale, we will need to manufacture that product candidate in larger quantities. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. Additionally, any third party manufacturer we retain to manufacture our product candidates on a commercial scale must pass an FDA pre-approval inspection for conformance to the cGMPs before we can obtain approval of our product candidates. If we are unable to successfully increase the manufacturing capacity for a product candidate in conformance with cGMPs, the regulatory approval or commercial launch of any related products may be delayed or there may be a shortage in supply.

Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval of our product candidates or commercialization of our future product candidates, depriving us of potential product revenue and resulting in additional losses. In addition, our dependence on a third party for manufacturing may adversely affect our future profit margins. Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer before it can begin manufacturing our product candidates. Such approval would require new testing and compliance inspections. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.

We currently have limited marketing staff and no sales or distribution organization. If we are unable to develop our sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our product candidates.

We currently have limited marketing and no sales or distribution capabilities. If any of our product candidates are approved, we intend to establish our sales and marketing organization with technical expertise and supporting distribution capabilities to commercialize our product candidates, which will be expensive and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. With respect to our existing and future product candidates, we may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. To the extent that we enter into co-promotion or other licensing arrangements, our product revenue is likely to be lower than if we directly marketed or sold our products. In addition, any revenue we receive will depend in whole or in part upon the efforts of such third parties, which may not be successful and are generally not within our control. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our existing and future product candidates. If we are not successful in commercializing our existing and future product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional losses.

Our proprietary rights may not adequately protect our technologies and product candidates.

Our commercial success will depend on our ability to obtain patents and/or regulatory exclusivity and maintain adequate protection for our technologies and product candidates in the United States and other countries. As of June 30, 2008, we owned or had exclusive rights to 99 issued U.S. and foreign patents and 201 pending U.S. and foreign patent applications. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future product candidates are covered by valid and enforceable patents or are effectively maintained as trade secrets.

We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents covering important technologies or product candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. In addition, we generally do not control the patent prosecution of subject matter that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over our own. Moreover, the patent positions of biopharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, we do not know whether:

31

Table of Contents

The actual protection afforded by a patent varies on a product-by-product basis, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents under existing and future laws. Our ability to maintain and solidify our proprietary position for our products will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

Protection afforded by U.S. patents may be adversely affected by proposed changes to patent-related U.S. statutes and to U.S. Patent and Trademark Office, or USPTO, rules, especially changes to rules concerning the filing of continuation applications and other rules affecting the prosecution of our patent applications in the U.S, which were enacted August 22, 2007 and were to be effective November 1, 2007 but were successfully challenged by a third party. While the rules have not been interpreted or implemented at this time and it is unknown when and if the rules would apply to our current patent applications, the rules require that third or subsequent continuing application filings be supported by a showing as to why the new amendments or claims, argument or evidence presented could not have been previously submitted. In addition, the rules limit the numbers of Requests for Continuing Examination (RCEs) to one per application family. Other rules limit consideration by the USPTO of up to only 5 independent claims and 25 total claims per application. It is common practice to file multiple patent applications with many claims and file multiple RCEs in an effort to maximize patent protection. The USPTO rules as implemented and interpreted may limit our ability to file RCEs and continuing applications directed to our products and methods and related competing products and methods. In addition, the USPTO rules may limit our ability to patent a number of claims sufficient to cover our products and methods and related competing products and methods. Other changes to the patent statutes may adversely affect the protection afforded by U.S. patents and/or open up U.S. patents to third party attack in non-litigation settings.

We also rely on trade secrets to protect some of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, our or our collaboration partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, non-U.S. courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

The intellectual property protection for our product candidates is dependent on third parties.

With respect to Asentar™, OHSU and the University of Pittsburgh of the Commonwealth System of Higher Education, or UPitt, retain the right to prosecute and maintain the patents and patent applications covered by our license agreements. We only have the right to select patent counsel and provide comments and suggestions under our OHSU license agreement. We only have the right to consult in the selection of counsel and advise in the prosecution, filing and maintenance of patent applications under our UPitt license agreement. Generally, we only have right to prosecute and maintain certain patents for AQ4N in our territory and rely on our licensing partner to prosecute and maintain the remainder of our AQ4N patents. We would need to determine, with our partners, who would be responsible for the prosecution of patents relating to any joint inventions. If any of our licensing partners fail to appropriately prosecute and maintain patent protection for any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. In addition, OHSU retains an initial right to bring any infringement actions related to the intellectual property we license from these parties. Any failure by OHSU, or any other licensing partner of ours, to properly protect the intellectual property rights relating to our product candidates could have a material adverse effect on our financial condition and results of operation.

If we breach any of the agreements under which we license commercialization rights to our product candidates or technology from third parties, we could lose license rights that are important to our business.

We license the development and commercialization rights for each of our product candidates, and we expect to enter into similar licenses in the future. For instance, we licensed exclusive worldwide rights from OHSU and the University of Pittsburgh, pursuant to two separate license agreements, that enable us to use and administer calcitriol, the active ingredient in Asentar™, in the treatment of cancer. In 2003, we licensed exclusive rights in the United States, Canada and Mexico to AQ4N from KuDOS, which was acquired by AstraZeneca. In April 2007, we terminated the December 2003 license agreement with KuDOS, in favor of an agreement directly with the primary licensor to KuDOS, BTG International Limited, under which we acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. Under these licenses we are subject to commercialization and development, sublicensing, royalty and milestone payments, insurance and other obligations. If we fail to comply with any of these obligations or otherwise breach these license agreements, our licensing partners may have the right to terminate the license in whole or in part or to terminate the exclusive nature of the license. Loss of any

32

Table of Contents

of these licenses or the exclusivity rights provided therein could harm our financial condition and operating results, including by resulting in the termination or delay of, or a reduction in the scope of our development efforts with respect to, any of our current or future product candidates, or by resulting in increased competition with respect to any of our current or future product candidates. In addition, to the extent that we receive benefits from collaborative provisions under any of our license agreements, we may lose those benefits, which could result in significant increases to our product development expenditures, and the need to hire additional employees or otherwise develop expertise for which we have not budgeted.

If conflicts of interest arise between our licensing partners and us, any of them may act in their self-interest, which may be adverse to our interests.

We license the development and commercialization rights for each of our product candidates, and we expect to enter into similar licenses in the future. If a conflict of interest arises between us and one or more of our licensing partners, they may act in their own self-interest and not in our interest or in the interest of our stockholders. For example, even after entering into licensing agreements, our licensors may seek to renegotiate or terminate their relationships with us for a variety of reasons, including unsatisfactory clinical results or timing, a change in our or their business strategy on either our or their part or for other reasons. If one or more of our licensing partners were to breach their licensing agreement with us, or seek to renegotiate such agreement, the business attention and focus of our management team would be diverted and the development and commercialization of our product candidates may be delayed or terminated.

The patent protection for our product candidates or products may expire before we are able to maximize their commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.

The patents for our product candidates have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. For example, one of our U.S. patent claims for AQ4N is due to expire in 2010 and our other U.S. patent for a process of producing AQ4N is due to expire in 2019. Our U.S. patents for use of Asentar™ are due to expire in 2017 and 2019. In some of the larger economic territories, such as the United States and Europe, patent term extension/restoration may be available to compensate for time taken during aspects of the product’s regulatory review. However, we cannot be certain that an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extended period will be. In addition, even though some regulatory agencies may provide some other exclusivity for a product under its own laws and regulations, we may not be able to qualify the product or obtain the exclusive time period. If we are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and non-U.S. patents.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on all of our products or product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products. These products may compete with our products and may not be covered by any of our patent claims or other intellectual property rights. Additionally, the intellectual property laws throughout the world, including the United States, are subject to change from time to time which could affect our patent and other intellectual property rights.

The laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent us from developing or commercializing our future product candidates.

Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and product candidates. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the areas of cancer chemotherapy with vitamin D compounds and formulations comprising vitamin D compounds.

For example, we are aware of a pending U.S. patent application owned by a competitor with claims that, as originally filed, would have presented potential infringement issues if a patent had issued. The claims have since been narrowed so that they do not cover the use of Asentar™ for the treatment of cancer; however, this competitor has filed a continuation application with the original claims, which if successful, could result in an issued patent that covers the use of Asentar™ for the treatment of cancer. While we are aware of issued U.S. patents which claim formulations similar to Asentar™, we believe that Asentar™ does not infringe the claims of these issued patents. In addition, we are aware of a patent that appears to be broad enough to cover Sanofi-Aventis’ Taxotere^® formulation and use thereof to treat cancer. We believe that the use of Asentar™ together with Sanofi-Aventis’ Taxotere^® formulation to treat cancer does not infringe any valid claim of this patent.

33

Table of Contents

Because patent applications can take several years to issue, if they are issued at all, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or product candidates. It is uncertain whether the issuance of any third party patent would require us to alter our products or processes, obtain licenses or cease certain activities. If we wish to use the technology or compound claimed in issued and unexpired patents owned by others, we will need to obtain a license from the owner, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that the owner asserts that we infringe its patents. The failure to obtain a license to technology or the failure to challenge an issued patent that we may require to discover, develop or commercialize our products may have a material adverse impact on us.

If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of risks that could seriously harm our results of operations, financial condition and competitive position, including:

Although we are not currently a party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, if at all, could seriously harm our business or financial condition.

One or more third-party patents or patent applications may conflict with patent applications to which we have rights. Any such conflict may substantially reduce the coverage of any rights that may issue from the patent applications to which we have rights. If third parties file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the USPTO to determine priority of invention.

We may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets of our employees’ former employers.

Many of our employees were previously employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we have not received any claim to date, we may be subject to claims that these employees through their employment inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

We expect that the price of our common stock may be volatile.

Prior to our initial public offering of common stock, there was no public market for our common stock. The price of our common stock may be volatile as a result of changes in our operating performance or prospects. From the date of our initial public offering in May 2006 through June 30, 2008, the price of our common stock has ranged from a high of $17.25 to a low of $2.20. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

34

Table of Contents

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has been often unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

The ownership of our common stock may continue to be highly concentrated.

As of June 30, 2008, we believe that our executive officers and directors and their affiliates, together with our current significant stockholders, beneficially owned significant amounts of our outstanding common stock. Based on required securities filings, we do not believe that any substantial change has occurred in this ownership concentration. Accordingly, these stockholders, acting as a group, will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for our stockholders to change management.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

35

Table of Contents

In addition, Delaware law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

Provisions in our charter and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

We may incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the NASDAQ Global Market, will result in increased costs to us as we respond to these requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive

A significant portion of our outstanding common stock may be sold into the market. Substantial sales of our common stock, or the perception such sales are likely to occur, could cause the price of our common stock to decline.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly.

Risks Related to Our Industry

The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.

The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA and other non-U.S. regulatory authorities, which regulations differ from country to country. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not submitted an application for or received marketing approval for any of our product candidates. Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA, non-U.S. regulatory authorities or other applicable U.S. and non-U.S. regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including:

Regulatory approval of an NDA or NDA supplement is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the drug approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional pre-clinical studies and clinical trials. The number of pre-clinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including:

36

Table of Contents

Even if we obtain regulatory approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to commercialize and generate revenue.

Once regulatory approval has been granted, the approved product and its manufacturer are subject to continual review. Any regulatory approval that we receive for a product candidate is likely to be subject to limitations on the indicated uses for which the product may be marketed, or include requirements for potentially costly post-approval follow-up clinical trials. In addition, if the FDA and/or other non-U.S. regulatory authorities approve any of our product candidates, the labeling, packaging, adverse event reporting, storage, advertising and promotion for the product will be subject to extensive regulatory requirements. We and the manufacturers of our products are also required to comply with cGMP regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S. regulatory authorities, or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:

In addition, the FDA and other non-U.S. regulatory authorities may change their policies and additional regulations may be enacted that could prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we would likely not be permitted to market our future product candidates and we may not achieve or sustain profitability.

Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our products.

Even if our product candidates obtain regulatory approval, resulting products may not gain market acceptance among physicians, patients, health care payors and/or the medical community. We believe that the degree of market acceptance will depend on a number of factors, including:

If our future product candidates fail to achieve market acceptance, we may not be able to generate significant revenue or achieve or sustain profitability.

37

Table of Contents

The coverage and reimbursement status of newly approved drugs is uncertain, and failure to obtain adequate coverage and adequate reimbursement could limit our ability to market any future product candidates we may develop and decrease our ability to generate revenue from any of our existing and future product candidates that may be approved.

There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. The commercial success of our existing and future product candidates in both domestic and international markets will depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations, and other third-party payors. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for our existing and future product candidates. These payors may conclude that our future product candidates are less safe, less effective or less cost-effective than existing or later introduced products, and they may not approve our future product candidates for coverage and reimbursement. The failure to obtain coverage and adequate reimbursement for our existing and future product candidates or health care cost containment initiatives that limit or restrict reimbursement for our existing and future product candidates may reduce any future product revenue.

Current health care laws and regulations and future legislative or regulatory changes to the health care system may affect our ability to sell our future product candidates profitably.

In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the health care system, some of which are intended to contain or reduce the costs of medical products and services. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, which, among other things, established a new Part D prescription drug benefit beginning January 1, 2006 and changed coverage and reimbursement for drugs and devices under existing benefits. It remains difficult to predict the full impact that the MMA will have on us and our industry.

There have also been federal legislative proposals to change pharmaceutical importation laws that could affect our business. Many current proposals seek to expand consumers’ ability to import lower priced versions of products from Canada and other foreign countries where there are government price controls on medical products and services. In addition, the MMA contains provisions that may change U.S. importation laws and broaden permissible imports. Even if the MMA changes do not take effect, and other legislative proposals are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the U.S. Customs Service, and other government agencies.

We are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Any cost containment measures or other health care system reforms that are adopted could have a material adverse effect on our ability to commercialize our existing and future product candidates successfully.

Failure to obtain regulatory approval outside the United States will prevent us from marketing our product candidates abroad.

We intend to market certain of our existing and future product candidates in non-U.S. markets. In order to market our existing and future product candidates in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited interactions with non-U.S. regulatory authorities, and the approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory authorities does not ensure approval by regulatory authorities in other countries or by the FDA. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval as well as other risks specific to the jurisdictions in which we may seek approval. We may not obtain non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to file for non-U.S. regulatory approvals and may not receive necessary approvals to commercialize our existing and future product candidates in any market.

Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market certain of our existing and future product candidates in both the United States and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S. jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some countries, particularly in the European Union, prescription drug pricing is subject to negotiation and governmental control. In these countries, price negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our existing and future product candidates to other available therapies. If reimbursement of our future product candidates is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

We may be subject to costly claims related to our clinical trials and may not be able to obtain adequate insurance.

Because we conduct clinical trials in humans, we face the risk that the use of our product candidates will result in adverse side effects. We cannot predict the possible harms or side effects that may result from our clinical trials. Although we have clinical trial liability insurance for up to $10 million, our insurance may be insufficient to cover any such events. We do not know whether we will be able to continue to obtain clinical trial coverage on acceptable terms, or at all. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage. There is also a risk that third parties that we have agreed to indemnify could incur liability. Any litigation arising from our clinical trials, even if we were ultimately successful, would consume substantial amounts of our financial and managerial resources and may create adverse publicity.

38

Table of Contents

Our business may become subject to economic, political, regulatory and other risks associated with international operations.

Our business is subject to risks associated with conducting business internationally, in part due to a number of our suppliers being located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

Recent Sales of Unregistered Securities

We did not sell any securities during the six months ended June 30, 2008 that were not registered under the Securities Act of 1933, as amended.

Use of Proceeds From Registered Securities

On May 15, 2006, the Company completed its initial public offering, or IPO, of 6,250,000 shares of its common stock at the public offering price of $6.50 per share for gross proceeds of approximately $40.6 million. We paid the underwriters a commission of approximately $2.8 million incurred additional offering expenses of approximately $2.5 million. On June 9, 2006, the underwriters of the Company’s initial public offering purchased an additional 657,500 shares of the Company’s common stock pursuant to their over-allotment option at the public offering price of $6.50 per share for gross proceeds of approximately $4.3 million. Net proceeds from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option to purchase additional shares of the Company’s common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses. The managing underwriters of our initial public offering were Bear, Stearns & Co., Inc. and Cowen and Company, LLC. In connection with the closing of the initial public offering, all of the Company’s shares of convertible preferred stock outstanding at the time of the offering were automatically converted into 14,239,571 shares of common stock.

No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

The net proceeds from our initial public offering have been invested into short-term investment grade securities and money market accounts. We have used the net proceeds from our initial public offering primarily to fund clinical development of our product candidates, Asentar™ and AQ4N.

Issuer Purchases of Equity Securities

The following table sets forth information with respect to repurchases of our common stock during the second quarter of fiscal 2008.

39

Table of Contents

Not applicable.

The 2008 Annual Meeting of Stockholders of the Company was held pursuant to notice on June 9, 2008, at 9:00 a.m. local time at the Company’s principal executive offices, 400 Oyster Point Boulevard, Suite 200, South San Francisco, California. There were present at the meeting, in person or represented by proxy, the holders of 17,928,275 shares of the Company’s common stock. The matters voted on at the meeting and the votes cast were as follows:

(a) The nominees for Class II Directors listed below were elected at the meeting:

Judith A. Hemberger, Camille D. Samuels, and Frederick J. Ruegsegger are Class I Directors and were not up for election at the 2008 Annual Meeting. Daniel M. Bradbury, Michael G. Raab and Eckard Weber are Class III Directors and were not up for election at the 2008 Annual Meeting. Ms. Samuels, Messrs. Ruegsegger, Bradbury and Raab and Drs. Weber and Hemberger continue to serve as directors of the Company.

(b) The appointment of Ernst & Young LLP as the Company’s independent accountants for the fiscal year ending December 31, 2008 was ratified. There were 17,889,993 shares of the Company’s common stock voting in favor, 28,802 shares of common stock voting against and 9,479 shares of common stock abstaining.

Not applicable.

40

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 11^th day of August 2008.

41