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Viracta Therapeutics, Inc. - Quarter Report: 2008 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

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

For the transition period from                     to                    

Commission file number: 000-51531

SUNESIS PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
  
94-3295878
(State or Other Jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification Number)

395 Oyster Point Boulevard, Suite 400
South San Francisco, California 94080
(Address of Principal Executive Offices including Zip Code)

(650) 266-3500
(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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The registrant had 34,401,525 shares of common stock, $0.0001 par value per share, outstanding as of July 31, 2008.
 

1
 
SUNESIS PHARMACEUTICALS, INC.
TABLE OF CONTENTS

 
Page
No.
   
PART I. FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements:
 3
     
 
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
  3
     
 
Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007
  4
     
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
  5
     
 
Notes to Consolidated Financial Statements
  6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  15
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 21
     
Item 4.
Controls and Procedures
  21
     
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
 22
     
Item 1A.
Risk Factors
 22
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 37
     
Item 3.
Defaults Upon Senior Securities
 38
     
Item 4.
Submission of Matters to a Vote of Security Holders
 38
     
Item 5.
Other Information
 38
     
Item 6.
Exhibits
 38
     
Signatures
   40

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

SUNESIS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

   
June 30, 
2008
  
December 31, 
2007
  
   
(Unaudited)
  
(1)
  
ASSETS
          
Current assets:
          
Cash and cash equivalents
  
$
9,480,277
  
$
11,726,126
  
Marketable securities
    
18,864,275
    
35,957,933
  
Prepaids and other current assets
    
845,895
    
945,583
  
Total current assets
    
29,190,447
    
48,629,642
  
               
Property and equipment, net
    
860,764
    
4,238,498
  
Assets held-for-sale
    
1,375,313
    
—
  
Deposits and other assets
    
377,798
    
377,798
  
Total assets
  
$
31,804,322
  
$
53,245,938
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable and other accrued liabilities
  
$
7,072,536
  
$
4,515,426
  
Accrued compensation
    
1,478,649
    
2,225,868
  
Current portion of deferred revenue
    
—
    
1,227,031
  
Current portion of equipment financing
    
1,410,667
    
953,940
  
Total current liabilities
    
9,961,852
    
8,922,265
  
               
Non-current portion of equipment financing
    
390,747
    
1,352,684
  
Deferred rent liabilities
    
1,564,671
    
1,576,734
  
Total liabilities
    
11,917,270
    
11,851,683
  
Commitments
              
Stockholders’ equity:
              
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2008 and December 31, 2007
    
—
    
—
  
Common stock, $0.0001 par value; 100,000,000 shares authorized at June 30, 2008 and December 31, 2007; 34,401,495 shares issued and outstanding at June 30, 2008; 34,364,896 shares issued and outstanding at December 31, 2007
    
3,440
    
3,437
  
Additional paid-in capital
    
322,122,902
    
320,579,240
  
Deferred stock-based compensation
    
(50,906
)
  
(251,601
)
Accumulated other comprehensive income
    
11,022
    
69,262
  
Accumulated deficit
    
(302,199,406
)
  
(279,006,083
)
Total stockholders’ equity
    
19,887,052
    
41,394,255
  
               
Total liabilities and stockholders’ equity
  
$
31,804,322
  
$
53,245,938
  

(1)
The consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date included in the Company’s Form 10-K for the year ended December 31, 2007.

See accompanying notes to consolidated financial statements.

3
 
SUNESIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three months ended June 30,
  
Six months ended June 30,
  
   
2008
  
2007
  
2008
  
2007
  
   
(Unaudited)
  
(Unaudited)
  
Revenue:
                  
                   
Collaboration revenue
  
$
2,591,240
  
$
3,270,265
  
$
4,894,423
  
$
5,536,531
  
License revenue
    
—
    
—
    
—
    
250,000
  
Total revenues
    
2,591,240
    
3,270,265
    
4,894,423
    
5,786,531
  
                         
Operating expenses:
                          
Research and development
    
8,262,604
    
9,697,462
    
17,005,499
    
19,004,940
  
General and administrative
    
3,235,061
    
4,044,194
    
6,501,190
    
7,340,341
  
Restructuring charges
    
4,876,746
    
—
    
5,197,520
    
—
  
Total operating expenses
    
16,374,411
    
13,741,656
    
28,704,209
    
26,345,281
  
                           
Loss from operations
    
(13,783,171
)
  
(10,471,391
)
  
(23,809,786
)
  
(20,558,750
)
                           
Interest income
    
269,385
    
743,928
    
729,797
    
1,513,554
  
Interest expense
    
(54,433
)
  
(44,308
)
  
(113,806
)
  
(96,351
)
Other income (expense), net
    
(199
)
  
188
    
472
    
927
  
Net loss
  
$
(13,568,418
)
$
(9,771,583
)
$
(23,193,323
)
$
(19,140,620
)
                           
                           
Basic and diluted loss per share
  
$
(0.39
)
$
(0.31
)
$
(0.67
)
$
(0.63
)
                           
Shares used in computing basic and diluted loss per share
    
34,377,367
    
31,175,933
    
34,371,132
    
30,321,338
  

See accompanying notes to consolidated financial statements.

4
 
SUNESIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

   
Six months ended June 30,
  
   
2008
  
2007
  
   
(Unaudited)
  
Cash flows from operating activities
          
Net loss
  
$
(23,193,323
)
$
(19,140,620
)
Adjustments to reconcile net loss to net cash used in operating activities:
              
Depreciation and amortization
    
866,381
    
858,180
  
Stock-based compensation expense
    
1,318,122
    
1,747,500
  
Non-cash restructuring charges
    
1,662,354
    
—
  
Changes in operating assets and liabilities:
              
Prepaids and other current assets
    
99,688
    
(356,397
)
Accounts payable and other accrued liabilities
    
2,556,936
    
1,142,435
  
Accrued compensation
    
(747,219
)
  
(94,449
)
Deferred rent liabilities
    
(12,062
)
  
120,817
  
Deferred revenue
    
(1,227,031
)
  
(1,333,332
)
Net cash used in operating activities
    
(18,676,154
)
  
(17,055,866
)
               
Cash flows from investing activities
              
Purchases of property and equipment
    
(164,170
)
  
(1,137,695
)
Purchases of marketable securities
    
(21,989,907
)
  
(55,055,960
)
Proceeds from maturities of marketable securities
    
39,025,325
    
58,605,873
  
Proceeds from property and equipment disposal
    
2,100
    
—
  
Net cash provided by investing activities
    
16,873,348
    
2,412,218
  
               
Cash flows from financing activities
              
Proceeds from borrowings under equipment financing
    
—
    
906,593
  
Payments on equipment financing
    
(505,210
)
  
(504,698
)
Proceeds from issuance of common stock and exercise of options, net of repurchases
    
62,167
    
19,869,262
  
Net cash (used in) provided by financing activities
    
(443,043
)
  
20,271,157
  
               
Net (decrease) increase in cash and cash equivalents
    
(2,245,849
)
  
5,627,509
  
Cash and cash equivalents at beginning of period
    
11,726,126
    
6,075,449
  
Cash and cash equivalents at end of period
  
$
9,480,277
  
$
11,702,958
  
               
Supplemental disclosure of cash flow information
              
Interest paid
  
$
129,389
  
$
96,351
  
Non-cash activities:
              
Deferred stock-based compensation, net of (reversal)
  
$
(11,456
)
$
(13,933
)

See accompanying notes to consolidated financial statements.

5
 
SUNESIS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)

1.
Organization and Summary of Significant Accounting Policies

Organization

Sunesis Pharmaceuticals, Inc. (“Sunesis” or the “Company”) was incorporated in the state of Delaware on February 10, 1998 and its facilities are headquartered at 395 Oyster Point Boulevard, Suite 400, South San Francisco, California 94080. Sunesis is a clinical-stage biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. The Company’s primary activities since incorporation have been conducting research and development internally and with corporate collaborators, in-licensing pharmaceutical compounds, conducting clinical trials, performing business and financial planning, and raising capital. In January 2007, the Company formed a wholly-owned subsidiary, Sunesis Europe Limited, a United Kingdom corporation.

Sunesis, Tethering and the Company’s logo are registered trademarks of the Company. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Need to Raise Additional Capital

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and negative cash flows from operations since its inception. At June 30, 2008, the Company had an accumulated deficit of $302.2 million. Management believes that currently available cash, cash equivalents and marketable securities, together with the revenue generated from our collaborations, will provide sufficient funds to enable the Company to meet its obligations for at least the next twelve months. Management plans to continue to finance the Company’s operations with some combination of equity issuances, debt arrangements, technology and product licenses, and, in the long term, product sales and royalties. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs or obtain funds through collaborative arrangements with others that may require the Company to relinquish rights to certain of its product candidates that the Company would otherwise seek to develop or commercialize itself.

Principles of Consolidation

The Company’s consolidated financial statements include a wholly-owned subsidiary, Sunesis Europe Limited, a United Kingdom corporation.

Use of Estimates

The preparation of financial statements in conformity with US generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates.

Clinical Trial Accounting

The Company records accruals for estimated clinical trial costs, comprising payments for work performed by contract research organizations and participating clinical trial sites. These costs will be a significant component of future research and development expense. The Company accrues costs for activities related to clinical trials performed by contract research organizations based on estimates of work performed under the contracts. Costs of setting up clinical trial sites for participation in trials are expensed immediately. Costs related to patient enrollment are accrued as patients are entered in the trial, reduced by an initial payment made to the trial site when the first patient is enrolled. These cost estimates may or may not match the actual costs incurred for services performed by the organizations as determined by patient enrollment levels and related activities. If the Company has incomplete or inaccurate information, it may underestimate costs associated with various trials at a given point in time. Although the Company’s experience in estimating these costs is limited, the difference between accrued expenses based on its estimates and actual expenses have not been material to date.

6
 
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results to be expected for the full fiscal year or any other interim period. The balance sheet at December 31, 2007 was derived from the audited financial statements at that date.

These unaudited consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Loss Per Share

Basic loss per share is calculated by dividing the loss by the weighted-average number of common shares outstanding for the period, less the weighted average number of unvested common shares subject to repurchase. Diluted loss per common share is computed by dividing the loss applicable to common stockholders by the weighted-average number of common shares outstanding, less the weighted average number of unvested common shares subject to repurchase, and dilutive potential common shares for the period determined using the treasury-stock method. For purposes of this calculation, options to purchase common stock and warrants to purchase common stock are considered to be potential common shares and are only included in the calculation of diluted loss per common share when their effect is dilutive.

   
Three months ended June 30,
  
Six months ended June 30,
  
   
2008
  
2007
  
2008
  
2007
  
Outstanding securities not included in diluted loss per share calculation:
                  
Options to purchase common stock
    
5,502,682
    
4,046,086
    
5,502,682
    
4,046,086
 
Warrants to purchase common stock
    
2,693,237
    
2,693,237
    
2,693,237
    
2,693,237
  
Total
    
8,195,919
    
6,739,323
    
8,195,919
    
6,739,323
  
 
Comprehensive Loss

Comprehensive loss is comprised of net loss and unrealized gains and losses on marketable securities. Comprehensive loss is
as follows:

   
Three months ended June 30,
  
Six months ended June 30,
  
   
2008
  
2007
  
2008
  
2007
  
Net loss
  
$
(13,568,418
)
$
(9,771,583
)
$
(23,193,323
)
$
(19,140,620
)
Change in unrealized gain (loss) on marketable securities
   
(110,158
)
  
12,207
    
(58,240
)
  
19,711
 
Comprehensive loss
 
$
(13,678,576
)
$
(9,759,376
)
$
(23,251,563
)
$
(19,120,909
)
 
Accumulated other comprehensive income consists of the following:

   
June 30,
2008
  
December 31, 
2007
  
Unrealized gain on marketable securities
  
$
11,022
  
$
69,262
  

7
 
Restructuring

The Company has in recent years engaged in, and may in the future engage in, restructuring to streamline its operations and extend its financial resources. Restructurings require management to utilize significant estimates related to expenses for severance and related benefit costs, facility-related expenses and asset-related impairment. For a description of our restructuring actions, see Note 4.
 
Recent Accounting Pronouncements

In June 2007, the FASB ratified the Emerging Issues Task Force (“EITF”) 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities to be deferred and capitalized. Such amounts should be recognized as an expense when the related goods are delivered or services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. The Company adopted EITF 07-3 in the first quarter of 2008. The adoption of EITF 07-3 did not have a material effect on the Company’s financial position or results of operations.

In December 2007, the EITF reached a consensus on EITF 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”). EITF 07-1 discusses the appropriate income statement presentation and classification for the activities and payments between participants in arrangements related to the development and commercialization of intellectual property. The sufficiency of disclosure related to these arrangements is also specified. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The Company will adopt EITF 07-1 in the first quarter of 2009 and currently does not believe the adoption of EITF 07-1 will have a material impact on its financial position or results of operations.

2.
License Agreements

In-Licenses

Dainippon Sumitomo Pharma Co., Ltd.

In October 2003, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd. (“Dainippon”) to acquire exclusive worldwide development and marketing rights for the Company’s lead anti-cancer product candidate, referred to as voreloxin (formerly SNS-595). In addition to payments already made as of December 31, 2007, the Company may in the future make a series of milestone payments of up to $8.0 million to Dainippon based on successful development and regulatory approval of voreloxin for anti-cancer indications, as well as royalty payments based on any future product sales. In return, the Company has received an exclusive, worldwide license to develop and market voreloxin.

Bristol-Myers Squibb Company

In April 2005, the Company entered into an agreement with Bristol-Myers Squibb Company (“BMS”) to acquire worldwide development and commercialization rights for a second anti-cancer product candidate, referred to as SNS-032. Under the terms of this agreement, the Company may in the future be required to make a series of milestone payments of up to $29.0 million to BMS based on the successful development and approval for the first indication and formulation of SNS-032. The Company may also be required to make a series of additional development and commercialization milestone payments totaling up to $49.0 million to BMS, as well as royalty payments based on any future product net sales. The Company may, at its election, pay some of the initial milestone payments in equity or a mixture of cash and equity, rather than entirely in cash. In return, the Company received worldwide exclusive and non-exclusive diagnostic and therapeutic licenses to SNS-032 and any future cyclin-dependent kinase (“CDK”) inhibitors derived from the related intellectual property.
 
Out-Licenses

SARcode Corporation

In March 2006, the Company entered into a license agreement with SARcode Corporation (“SARcode”), a privately-held biopharmaceutical company, which provides SARcode an exclusive, worldwide license to all of the Company’s lymphocyte function-associated antigen-1 (“LFA-1”) patents and related know-how. SARcode intends to use the license to develop small molecule drugs to treat inflammatory diseases. Pursuant to the license agreement, in 2007 the Company received a $0.5 million license fee, which the Company recorded as revenue, and two notes convertible into preferred stock of SARcode, one in the amount of $0.3 million and the other in the amount of $0.4 million. The Company did not record these two notes receivable from SARcode, which are due in 2012, as revenue due to uncertainty of collectibility. In addition to the $0.5 million of cash and the convertible notes already received, the Company may receive up to $0.4 million in convertible notes, $31.3 million in development and marketing milestone payments, and royalties for the commercialization of a licensed compound.
 
8
 
3.
Strategic Collaborations

Johnson & Johnson Pharmaceutical Research & Development, L.L.C.

In May 2002, the Company entered into a research collaboration with Johnson & Johnson Pharmaceutical Research & Development, L.L.C (“J&J PRD”) to discover small molecule inhibitors of Cathepsin S, an enzyme that is important to regulating the inflammatory response. During the research term, the Company applied its proprietary Tethering technology to discover novel inhibitors of Cathepsin S.

The research funding portion of the agreement expired on December 31, 2005. In February 2008, the Company received a milestone payment from J&J PRD upon its selection of a development candidate from the collaboration. The Company may in the future receive additional research and development milestones of up to $24.5 million, as well as royalty payments from J&J PRD based on future product sales.

Biogen Idec, Inc.

In August 2004, the Company entered into a research collaboration with Biogen Idec, Inc. (“Biogen Idec”) to discover and develop small molecules targeting kinases, a family of cell signaling enzymes that play a role in the progression of cancer. During the research term, the Company applied its proprietary Tethering technology to generate leads that inhibit the oncology kinase targets covered by this collaboration. The research funding portion of the agreement was scheduled to expire in August 2008, but in light of the Company’s June 2008 restructuring (see Note 4), the parties agreed to terminate the research term on June 30, 2008.

Under the terms of the collaboration agreement, the Company received a $7.0 million upfront non-refundable and non-creditable technology access fee, which was recognized as revenue over the research term. During the research term, the Company also received quarterly research funding of $1.2 million from Biogen Idec, subject to inflation adjustments, which was paid in advance to support some of the Company’s scientific personnel. As a result of the June termination of the research term, the Company will not receive any further research funding and the $0.3 million remaining balance of upfront technology access fee was recognized as revenue in the second quarter of 2008. Also in the second quarter of 2008, the Company received a $0.5 million milestone payment that was recognized as revenue. The Company may in the future receive additional pre-commercialization milestone payments of up to $60.0 million per target covered by the collaboration and royalty payments based on any product sales. The Company retains an option to participate in the co-development and co-promotion of product candidates for up to two collaboration targets.

9
 
Merck & Co., Inc.

In February 2003, the Company and Merck & Co., Inc. (“Merck”) entered into a research collaboration to identify and optimize inhibitors of beta-secretase (“BACE”), which is believed to be important in the progression of Alzheimer’s disease. The research term of the collaboration ended in February 2006. Accordingly, the upfront, non-refundable and non-creditable technology access fee was recognized as revenue over the 36-month term of the agreement. However, the Company retains the right to earn future milestone payments of up to $84.3 million, as well as royalty payments depending on sales of products which may result from the collaboration.

In July 2004, the Company and Merck entered into a second multi-year research collaboration to discover novel oral drugs for the treatment of viral infections. The Company provided Merck with a series of small molecules targeting viral infections. These compounds were derived from Tethering. Under the terms of the anti-viral agreement, the Company received an upfront, non-refundable and non-creditable technology access fee of $2.3 million, which was recognized as revenue over the research term. The Company is also entitled to receive annual license fees aggregating approximately $1.0 million for the Company’s consulting services and ongoing access to Tethering as a means of identifying additional compounds for the treatment of viral infections. Through June 30, 2008, the Company has received approximately $1.0 million in annual license fees. In addition, the Company may receive payments based on the achievement of development milestones of up to $22.1 million and royalty payments based on net sales for any products resulting from the collaboration.

In connection with the four collaboration agreements described above, the Company recognized the following revenues in the periods presented, which include the amortization of upfront fees received, research funding, and milestones earned:

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Biogen Idec
  
$
2,544,868
  
$
2,041,098
  
$
4,310,551
  
$
4,078,197
  
Merck
    
46,372
    
1,229,167
    
83,872
    
1,458,334
  
J&J PRD
    
—
    
—
    
500,000
    
—
  
Total collaboration revenue
  
$
2,591,240
  
$
3,270,265
  
$
4,894,423
  
$
5,536,531
  
 
4.
Restructurings

2008 Restructuring

On June 3, 2008, the Company implemented a corporate realignment to focus on the development of the Company’s lead oncology product candidate, voreloxin (formerly SNS-595). In conjunction with this strategic restructuring, the Company expanded its late-stage development leadership team, announced the winding down of its internal discovery research activities and reduced its workforce by approximately 60 percent. All terminated employees were awarded severance payments and continuation of benefits, based on length of service at the Company, and career transition assistance. The Company also decided to consolidate its remaining employees in one location at leased premises at 395 Oyster Point Boulevard and is in the process of vacating its former research and development facility at 341 Oyster Point Boulevard. The Company is currently seeking a tenant to sublease the research and development facility.

The Company currently estimates total restructuring expenses of approximately $12.5 million in connection with the 2008 restructuring. However, as a result of a $0.7 million reversal of restructuring costs incurred in connection with the 2007 restructuring discussed below, the Company anticipates net restructuring expenses of $11.8 million in 2008. Of this total, approximately $3.6 million relates to employee severance and related benefit costs, and $8.2 million relates to net facility exit costs and asset impairments. During the second quarter of 2008, the Company recognized a $4.9 million restructuring charge, of which approximately $3.6 million related to employee severance and related benefit costs, including a non-cash portion of approximately $0.4 million related to stock-based compensation, and approximately $2.0 million related to asset impairment and facility exit costs both in connection with the 2008 restructuring, partially offset by the $0.7 million reversal of restructuring costs incurred in connection with the 2007 restructuring. These expenses were included in the line labeled “Restructuring charges” in the Company’s Consolidated Statements of Operations. The Company currently expects to record an additional restructuring expense of approximately $7.0 million in the third quarter of 2008. This expense is primarily related to the anticipated vacating of the Company’s former research and development facility in the third quarter. The Company expects to pay a majority of the remaining employee severance and related benefits in the third quarter of 2008.
 
10
 
The following table summarizes the restructuring accrual balances, which are part of the line labeled “accounts payable and other accrued liabilities” in the Company’s Consolidated Balance Sheet, and the utilization by cost type for the 2008 restructuring:

   
Employee 
Severance and 
Related 
Benefits
  
Facilities 
Related and 
Other Costs
  
Total
  
Restructuring liability at December 31, 2007
  
$
—
  
$
—
  
$
—
  
2nd quarter charges
   
3,537,585
    
2,012,794
    
5,550,379
  
Cash payments
    
(418,475
)
  
(1,212
)
  
(419,687
)
Non-cash settlements
    
(364,071
)
  
(1,728,932
)
  
(2,093,003
)
Restructuring liability at June 30, 2008
  
$
2,755,039
  
$
282,650
  
$
3,037,689
  
 
2007 Restructuring

In August 2007, the Company implemented a revised operating plan to focus its efforts on generating definitive data from its lead programs while streamlining the Company’s operations and extending its financial resources. The restructuring plan included a reduction in the Company’s workforce of approximately twenty-five percent. All terminated employees were given severance payments and continuation of benefits, based on length of service at the Company, and career transition assistance. Also, in the third quarter of 2007, the Company vacated its leased facilities at 395 Oyster Point Boulevard and relocated employees to its main research and development facility at 341 Oyster Point Boulevard. As a result of the 2008 restructuring, the Company relocated its remaining employees to 395 Oyster Point Boulevard.

As a result of the 2007 restructuring, the Company recorded in 2007 total restructuring charges of $1.6 million for employee severance and related benefit costs, including a non-cash portion related to stock-based compensation of approximately $0.1 million, and approximately $0.6 million of facilities exit costs, of which $0.3 million was related to the impairment of leasehold improvements and $0.3 million on the lease obligation on the vacated property. In the first quarter of 2008, the Company recorded an additional $0.3 million of restructuring charges on the lease obligation on the vacated property. In the second quarter of 2008, the Company reversed a previously recorded expense of approximately $0.7 million related to the lease obligation on 395 Oyster Point Boulevard after the Company relocated its remaining employees back into this facility. Cash payments related to employee severance for the 2007 restructuring were all made by December 31, 2007.
 
The following table summarizes the accrual balances and utilization by cost type for the 2007 restructuring:

   
Employee 
Severance and 
Related 
Benefits
  
Facilities 
Related and 
Other Costs
  
Total
  
Restructuring liability at December 31, 2007
  
$
41,399
  
$
274,834
  
$
316,233
  
1st quarter charges (reversal)
    
(9,418
)
  
330,192
    
320,774
  
2nd quarter charges (reversal)
    
—
    
(673,633
)
  
(673,633
)
Cash payments
    
(227
)
  
(197,654
)
  
(197,881
)
Adjustments
    
(31,754
)
  
266,261
    
234,507
  
Restructuring liability at June 30, 2008
  
$
—
  
$
—
  
$
—
  

5.
Assets Held-for-Sale
 
As a part of the 2008 restructuring, the Company implemented a corporate realignment to focus on the development of the Company’s oncology products and terminated its research activities. Due to this realignment, laboratory equipment valued at approximately $1.4 million is being held-for-sale as of June 30, 2008. The Company expects to sell the held-for-sale equipment by June 30, 2009.

6.
Equipment Financing and Debt Facility

In June 2000, the Company entered into an equipment financing agreement with General Electric Capital Corporation (“GECC”). Various credit lines have been issued under the financing agreement since 2000. As of June 30, 2008, the Company had drawn an aggregate of $10.7 million under various credit lines under the financing agreement. At June 30, 2008, the outstanding balance was $1.8 million of which approximately $1.0 million is associated with laboratory equipment held-for-sale. Upon sale of the held-for-sale assets, the Company will be required to pay the associated $1.0 million loan. The outstanding balance bears interest at rates ranging from 8.70 percent to 10.61 percent per annum and is due in 36 to 48 monthly payments. The equipment loans are secured by the equipment financed. As of June 30, 2008, the Company was in compliance with all covenants under the GECC agreement. No credit lines remain available under this agreement.

11

7.
Contingencies

The Company is not currently involved in any material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of the Company’s business.

8.
Stockholders’ Equity

On May 30, 2007, the Company completed a public offering of 4,750,000 shares of its common stock at a public offering price of $4.43 per share. Net cash proceeds from this offering were approximately $19.5 million after deducting issuance costs of $1.5 million.

9.
Employee Benefit Plans

Stock Option Plans

2005 Equity Incentive Award Plan

On January 1, 2008, the 2005 Equity Incentive Award Plan (“2005 Plan”) was increased by 1,082,352 shares pursuant to the 2005 Plan’s evergreen provision. Options to purchase 592,725 shares of the Company’s common stock were granted in the six months ended June 30, 2008 and, as of June 30, 2008, options to purchase an aggregate of 4,337,581 shares of the Company’s common stock have been granted under the 2005 Plan. As of June 30, 2008, the total number of shares available for future grants under the 2005 Plan was 1,312,026.
 
2006 Employment Commencement Incentive Plan

On January 1, 2008, the Company’s Board of Directors approved an amendment to the Company’s 2006 Employment Commencement Incentive Plan (“2006 Plan”) to increase the number of shares of common stock reserved for issuance under the 2006 Plan by an additional 125,000 shares. Options to purchase 140,000 shares of the Company’s common stock were granted in the six months ended June 30, 2008 and, as of June 30, 2008, options to purchase an aggregate of 553,000 shares of the Company’s common stock have been granted under the 2006 Plan. As of June 30, 2008, the total number of shares available for future grants under the 2006 Plan was 25,334.
 
2005 Employee Stock Purchase Plan

On January 1, 2008, the share reserve under the Company’s 2005 Employee Stock Purchase Plan (“ESPP”) was increased by 100,000 shares pursuant to the ESPP’s evergreen provision. At June 30, 2008, there were 260,686 shares of common stock reserved for future issuance under the ESPP. For the six months ended June 30, 2008, 36,569 shares were issued.
 
A summary of stock option transactions for all of the Company’s stock option plans (including its 1998 Stock Plan and 2001 Stock Plan) since December 31, 2007 follows:

   
Number 
of Shares
  
Weighted Average
 Exercise Price
  
Weighted 
Average 
Remaining 
Contractual 
Term (years)
  
Aggregate 
Intrinsic 
Value
  
Outstanding at December 31, 2007
    
5,099,847
  
$
3.83
              
Options granted
    
732,725
  
$
1.44
              
Options exercised
    
—
    
—
              
Options canceled/forfeited/expired
    
(329,890
)
$
3.86
              
Balance at June 30, 2008
    
5,502,682
  
$
3.51
    
7.7
  
$
11,514
  
Exercisable at June 30, 2008
    
2,959,752
  
$
3.91
    
6.5
  
$
10,674
  


12

The following table summarizes outstanding and exercisable options for all of the Company’s stock option plans as of June 30, 2008:

   
Options Outstanding
  
Options Exercisable
  
Range of Exercise Prices
  
Number 
Outstanding
as of 6/30/08
  
Weighted-
Average 
Remaining 
Contractual 
Term
  
Weighted-
Average 
Exercise 
Price
  
Number 
Exercisable 
as of 6/30/08
  
Weighted-
Average 
Exercise 
Price
  
$0.43 - $1.30
    
22,711
    
3.4
  
$
0.93
    
16,711
  
$
0.80
  
$1.44
    
721,725
    
10.0
  
$
1.44
    
—
  
$
—
  
$1.55 - $2.31
    
116,000
    
9.4
  
$
2.18
    
500
  
$
1.99
  
$2.55
    
1,211,033
    
4.4
  
$
2.55
    
1,209,978
  
$
2.55
  
$2.59
    
1,032,108
    
9.2
  
$
2.59
    
240,735
  
$
2.59
  
$2.60 - $4.74
    
470,585
    
8.6
  
$
4.08
    
221,120
  
$
4.19
  
$4.85
    
595,492
    
8.3
  
$
4.85
    
280,939
  
$
4.85
  
$4.93 - $5.16
    
89,174
    
8.1
  
$
5.02
    
67,535
  
$
5.04
  
$5.25
    
987,353
    
7.4
  
$
5.25
    
705,177
  
$
5.25
  
$5.50 - $9.56
    
256,501
    
7.8
  
$
6.94
    
217,057
  
$
7.02
  
$0.43 - $9.56
    
5,502,682
    
7.7
  
$
3.51
    
2,959,752
  
$
3.91
  
 
Employee Stock-Based Compensation

Employee stock-based compensation expense related to all of the Company’s share-based awards, including stock options granted prior to the Company’s initial public offering (“IPO”), which continue to be accounted for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”), is as follows for the periods presented:

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Research and development
  
$
271,282
  
$
361,471
  
$
541,460
  
$
726,364
  
General and administrative
    
392,336
    
536,304
    
776,062
    
1,017,995
  
Restructuring charges
   
364,071
    
—
    
364,071
    
—
  
Stock-based compensation
  
$
1,027,689
  
$
897,775
  
$
1,681,593
  
$
1,744,359
  
 
The Company determines the fair value of share-based payment awards on the grant date using the Black-Scholes option-pricing model (the “Black-Scholes Model”) which is affected by the Company’s stock price as well as assumptions regarding a number of highly subjective variables. The total estimated grant date fair value of stock options that were granted during the three months ended June 30, 2008 and 2007 was approximately $0.6 million and $0.7 million, respectively. The total estimated grant date fair value of stock options that were granted during the six months ended June 30, 2008 and 2007 was approximately $0.6 million and $0.8 million, respectively. The estimated fair value of shares vested during each of the three month periods ended June 30, 2008 and 2007 was $0.8 million for both periods. The estimated fair value of shares vested during each of the six month periods ended June 30, 2008 and 2007 was $1.4 million for both periods. At June 30, 2008, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $5.5 million and the cost is expected to be recognized over a weighted average period of 3.5 years. No options were exercised during the three months and six months ended June 30, 2008. The total intrinsic value of stock options exercised during the three months and six months ended June 30, 2007 was approximately $0.1 million for both periods. For the three months and six months ended June 30, 2007, the Company recorded cash received from the exercise of stock options of approximately $0.1 million for both periods. As it is more likely than not that all of the stock option related tax benefits will not be realized, the Company did not record net tax benefits related to the options exercised in the three months and six months ended June 30, 2008 and 2007.

The weighted-average estimated fair value of employee stock options granted during the three months ended June 30, 2008 and 2007 was $0.88 and $2.61 per share, respectively, using the Black-Scholes Model. The weighted-average estimated fair value of employee stock options granted during the six months ended June 30, 2008 and 2007 was $0.88 and $2.63 per share, respectively, using the Black-Scholes Model.
 
13
 
The Company uses the Black-Scholes Model to value its stock options with the following assumptions (annualized percentages):

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Volatility
    
71.6
%
  
68.5
%
  
71.6
%
  
68.5
%
Risk-free interest rate
    
3.3
%
  
4.7
%
  
3.3
%
  
4.7
%
Dividend yield
    
0
%
  
0
%
  
0
%
  
0
%
Expected term (years)
    
5.0
    
5.0
    
5.0
    
5.0
  
 
The weighted-average estimated fair value of purchase rights under the ESPP for the three months ended June 30, 2008 and 2007 was $0.81 and $1.98 per share, respectively. The weighted average estimated fair value of purchase rights under the ESPP for the six months ended June 30, 2008 and 2007 was $1.23 and $1.94 per share, respectively. The weighted average estimated fair value of purchase rights under the ESPP was calculated using the Black-Scholes Model with the following assumptions (annualized percentages):

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Volatility
    
68.5% - 71.6
%
  
68.5% - 80.0
%
  
68.5% - 71.6
%
  
68.5% - 80.0
%
Risk-free interest rate
    
2.0% - 5.1
%
  
4.9% - 5.1
%
  
2.0% - 5.1
%
  
4.9% - 5.1
%
Dividend yield
    
0
%
  
0
%
  
0
%
  
0
%
Expected term (years)
    
0.5 - 1.0
    
0.5 - 1.0
    
0.5 - 1.0
    
0.5 - 1.0
  
 
The total estimated fair value of purchase rights outstanding under the ESPP that vested during the three months ended June 30, 2008 and 2007 was approximately $0.1 million for both periods. The total estimated fair value of purchase rights outstanding under the ESPP that vested during the six months ended June 30, 2008 and 2007 was approximately $0.1 million for both periods.

The Company has based its assumptions for volatility and expected term of employee stock options on the information available with respect to its peer group in the same industry. The expected term of the employees’ purchase rights under the Company’s ESPP is equal to the purchase period. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company’s employee stock options and employees’ purchase rights. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore uses an expected dividend yield of zero in both models. Statement of Financial Accounting Standard No. 123 (revised 2004),“Share-Based Payment (“FAS 123R”),” also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate is estimated based on the Company’s historical option cancellation and forfeiture information. The Company’s stock-based compensation expense recognized under FAS 123R in its consolidated financial statements reflects estimated forfeiture rates of 7.2% and 5.5% in the three months ended June 30, 2008 and 2007, respectively. If factors change and the Company employs different assumptions in the application of FAS 123R in future periods, the compensation expense that the Company records under FAS 123R may differ significantly from what it has recorded in the current period.

Stock-Based Compensation for Options Granted Prior to the IPO

Prior to the Company’s IPO in September 2005, certain stock options were granted with exercise prices that were below the reassessed fair value of the common stock at the date of grant. In accordance with APB 25, deferred stock-based compensation was recorded for the difference between the estimated fair value of the common stock underlying the options and the exercise price of the options. The deferred stock-based compensation is being amortized over the related vesting terms of the options. For the three months ended June 30, 2008 and 2007, the Company recorded amortization of deferred stock-based compensation of $0.1 million and $0.2 million, respectively. For the six months ended June 30, 2008 and 2007, the Company recorded amortization of deferred stock-based compensation of $0.2 million and $0.4 million, respectively.

As of June 30, 2008, the expected future amortization expense for deferred stock-based compensation is less than $0.1 million and is expected to be fully amortized by December 31, 2008.

10.
Fair Value Measurements

As of January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 established a framework for measuring fair value based on GAAP and clarified the definition of fair value within that framework. SFAS 157 does not require any new fair value measurements in GAAP. SFAS 157 introduced, or reiterated, a number of key concepts which form the foundation of the fair value measurement approach to be utilized for financial reporting purposes. The fair value of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:
 
14
 
Level 1—quoted prices in active markets for identical assets and liabilities.
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3—unobservable inputs.

The adoption of SFAS 157 did not have a material effect on the Company’s financial condition and results of operations, but SFAS 157 introduced new disclosures about how the Company values certain assets and liabilities, focusing on the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable (Level 3) inputs. The Company’s financial instruments are valued using quoted prices in active markets (Level 1) or based upon other observable inputs (Level 2). The following table sets forth the fair value of the Company’s financial assets that were measured on a recurring basis during the six months ended June 30, 2008 (in thousands):
 
   
Fair Value Measurements at Reporting Date Using
  
   
(Level 1)
  
(Level 2)
  
(Level 3)
  
Total
  
Description
                  
Cash equivalents
  
$
500
  
$
1,393
  
$
—
  
$
1,893
  
Marketable securities
    
7,460
    
11,404
    
—
    
18,864
  
Total
  
$
7,960
  
$
12,797
  
$
—
  
$
20,757
  

At June 30, 2008, the Company’s cash equivalents and marketable securities were classified within Level 1 or Level 2 of the fair value hierarchy. The type of securities utilizing Level 1 inputs consisted of the Company’s U.S. Government Agency securities. The Company’s Level 2 valuations are based upon quoted prices for similar instruments or securities that are under an active market with pricing adjustments for yield and number of days to maturity. The type of securities utilizing Level 2 inputs consisted of the Company’s Corporate Bonds and Commercial Papers.
 
11.
Guarantees and Indemnification

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.

As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The indemnification agreements with the Company’s officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company’s officer and director insurance policy reduces the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification agreements is minimal. In addition, in the ordinary course of business the Company enters into agreements, such as licensing agreements, clinical trial agreements and certain services agreements, containing standard indemnifications provisions. The Company believes that the likelihood of an adverse judgment related to such indemnification provisions is remote. Accordingly, the Company has not recorded any liabilities for any of these agreements as of June 30, 2008.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition as of June 30, 2008 and results of operations for the three 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” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks, uncertainties and assumptions. All statements other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any projections of revenue, expenses or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new clinical trials or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “anticipates,” “believe,” “continue,” “estimates,” “expects,” “intend,” “look forward,” “may,” “could,” “seeks,” “plans,” “potential,” or “will” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. 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 “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.
 
15
 
In this report, “Sunesis,” the “Company,” “we,” “us,” and “our” refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiary, except where it is made clear that the term means only the parent company.

Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. We have built a highly experienced cancer drug development organization committed to advancing our lead product candidate, voreloxin (formerly SNS-595), in multiple indications to improve the lives of people with cancer. Our product candidate portfolio was built through internal discovery and the in-licensing of novel cancer therapeutics.

From our incorporation in 1998 through 2001, our operations consisted primarily of developing and refining our drug discovery technologies. From 2002 through June 2008, we focused on the discovery and development of novel small molecule drugs. On June 3, 2008, we announced a corporate realignment to focus on the development of voreloxin. In conjunction with this strategic restructuring, we expanded our late-stage development leadership team, announced the winding down of our internal discovery research activities and reduced our workforce by approximately 60 percent. The restructuring is expected to be substantially completed by the end of 2008.

 We are currently advancing voreloxin and two other proprietary oncology product candidates, SNS-032 and SNS-314, through in-house development efforts. Voreloxin is a novel naphthyridine analog, structurally related to quinolones, a class of compound which has not been used previously for the treatment of cancer. We are in the process of conducting three clinical trials of voreloxin: a Phase 2 single agent clinical trial in advanced platinum-resistant ovarian cancer patients, a Phase 2 clinical trial (known as the REVEAL-1 trial) in previously untreated elderly patients with acute myeloid leukemia (“AML”) and one Phase 1b combination clinical trial with cytarabine in patients with relapsed/refractory AML. A Phase 1 single agent study in advanced acute leukemias is continuing to treat patients, but enrollment was completed in 2007.

Our second product candidate, SNS-032, is a potent and selective inhibitor of cyclin-dependent kinases (“CDKs”) 2, 7 and 9. We currently are conducting a Phase 1 clinical trial with SNS-032 in patients with relapsed/refractory chronic lymphocytic leukemia (“CLL”) or multiple myeloma. Future development of SNS-032 will depend on achieving positive results from the ongoing trial. We are also developing SNS-314, a potent and selective inhibitor of the Aurora A, B and C kinase enzymes. SNS-314 is being studied in a Phase 1 dose-escalating clinical trial in patients with advanced solid tumors. We plan to continue to seek a development partner to support advanced clinical trials of SNS-314.

We have worldwide development and commercialization rights to voreloxin, SNS-032 (for diagnostic and therapeutic applications) and SNS-314. In the future, we plan to enter into collaborations for one or more of these product candidates in order to maximize their commercial potential.

We have developed proprietary methods of discovering drugs in pieces, or fragments. Our initial fragment-based discovery approach was called “Tethering®.” The Tethering approach to drug discovery formed the basis of several collaborations, including our four ongoing collaborations: one with Biogen Idec, Inc. (“Biogen Idec”), one with Johnson & Johnson Pharmaceutical Research & Development, L.L.C. (“J&J PRD”) and two with Merck & Co., Inc. (“Merck”). In those collaborations, we are no longer receiving research funding, and our personnel are not actively participating in continued development. However, as of June 30, 2008, we had received an aggregate of approximately $85.2 million in cash from our collaboration partners in the form of stock purchase proceeds and fees. In addition, we may in the future receive milestones as well as royalty payments based on future sales of products resulting from such collaborations.

Prior to our restructuring announced in June 2008 and the resulting wind down of our internal discovery research activities, we had developed further enhancements to our fragment-based discovery platform that were being used to discover new targeted agents. With the closing of our research activities, we will be exploring opportunities to monetize our exclusive fragment-based drug discovery capabilities, our preclinical programs and/or our intellectual property portfolio.
 
16
 
In addition, we have licensed worldwide rights to all of our LFA-1 patents and related know-how to SARcode Corporation.

Since our inception, we have generated significant losses. As of June 30, 2008, we had an accumulated deficit of $302.2 million, including a deemed dividend of $88.1 million recorded in conjunction with our IPO in September 2005. We expect our significant net losses to continue for the foreseeable future, as we continue to conduct development of, and seek regulatory approvals for, voreloxin.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially change the financial statements. We believe there have been no significant changes during the six months ended June 30, 2008 to the items that we disclosed as our critical accounting policies and estimates under Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
 
Recent Accounting Pronouncements

In June 2007, the FASB ratified the Emerging Issues Task Force (“EITF”) 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense when the related goods are delivered or services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. We adopted EITF 07-3 in the first quarter of 2008. The adoption of EITF 07-3 did not have a material effect on our financial position or results of operations.

In December 2007, the EITF reached a consensus on EITF 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”). EITF 07-1 discusses the appropriate income statement presentation and classification for the activities and payments between participants in arrangements related to the development and commercialization of intellectual property. The sufficiency of disclosure related to these arrangements is also specified. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. We will adopt EITF 07-1 in the first quarter of 2009 and currently do not believe the adoption of EITF 07-1 will have a material impact on our financial position or results of operations.

Results of Operations

Three and Six Months Ended June 30, 2008 and 2007

Collaboration Revenue. Since inception, we have not generated any revenue from sales of commercial products and do not expect to generate any product revenue for the foreseeable future. To date, substantially all of our revenue has consisted of technology access fees, research funding and milestone payments we have received in connection with our collaborations. As of July 31, 2008, we had four ongoing collaborations. The research term of all of these collaborations is completed, including the research term of our collaboration with Biogen Idec, which ended June 30, 2008. As a result, we are no longer receiving research funding, and our personnel are not actively participating in continued development of product candidates resulting from such collaborations.
 
17
 
The table below sets forth our revenue for the three and six months ended June 30, 2008 and 2007 from each of our current collaborations.

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Biogen Idec
  
$
2,544,868
  
$
2,041,098
  
$
4,310,551
  
$
4,078,197
  
Merck
    
46,372
    
1,229,167
    
83,872
    
1,458,334
  
J&J PRD
    
—
    
—
    
500,000
    
—
  
Total collaboration revenue
  
$
2,591,240
  
$
3,270,265
  
$
4,894,423
  
$
5,536,531
  
 
Collaboration revenue for the three months ended June 30, 2008 decreased to $2.6 million compared to $3.3 million in 2007. The decrease was primarily due to the fact that in 2007 we received from Merck a $1.0 million payment upon the achievement of a preclinical milestone, as well as research revenue, in our BACE program, which were partially offset in 2008 by a $0.5 million payment from Biogen Idec related to the achievement of a discovery milestone and $0.3 million acceleration of revenue due to the termination of the research phase of our collaboration with Biogen Idec in June 2008. In addition, research revenue from Biogen Idec was lower in 2008 compared to 2007 due to a lower number of our researchers working on the collaboration. Collaboration revenue for the six months ended June 30, 2008 decreased to $4.9 million compared to $5.5 million. This decrease was due to the factors discussed above as well as a milestone payment from J&J PRD during 2008.

We expect to have no material research funding after June 2008. As a result, collaboration revenue may be substantially lower in future years, unless and until any products that may result from the ongoing collaborations advance to a level where significant milestones will be payable to us.

Research and Development Expense. Most of our operating expenses to date have been for research and development activities. Past research and development expense primarily represents costs incurred:

·
  
in the discovery and development of novel small-molecule therapeutics and the advancement of product candidates towards clinical trials, including the Phase 1 and Phase 2 clinical trial costs for voreloxin and the Phase 1 clinical trial costs for SNS-032 and SNS-314,
     
·
  
in the development of our proprietary fragment-based Tethering drug discovery approach and other novel fragment-based drug discovery methods,
     
·
  
in the development of in-house research, preclinical study and development capabilities,
     
·
  
in connection with in-licensing activities, and
     
·
  
in the conduct of activities we were required to perform in connection with our strategic collaborations.

We expense all research and development costs as they are incurred.

The table below sets forth our research and development expense for the three and six months ended June 30, 2008 and 2007 for each of our product candidate programs (in thousands):

   
Three months ended June  30,
  
Six months ended June  30,
  
   
2008
  
2007
  
2008
  
2007
  
Voreloxin
  
$
4,399
  
$
3,281
  
$
8,884
  
$
6,306
  
SNS-032
    
1,170
    
1,044
    
2,408
    
1,906
  
SNS-314
    
653
    
1,151
    
1,456
    
2,481
  
Discovery programs and new technologies
    
1,074
    
1,094
    
2,233
    
1,972
  
Other kinase inhibitors
    
963
    
3,052
    
2,001
    
6,237
  
Other programs
    
4
    
76
    
23
    
103
  
Total Expense
  
$
8,263
  
$
9,698
  
$
17,005
  
$
19,005
  
 
Research and development expense decreased by $1.4 million, or 15 percent, to $8.3 million for the three months ended June 30, 2008 from $9.7 million for the same period in 2007. This decrease is primarily due to (i) a $0.5 million decrease in clinical trial activity related to SNS-314 and (ii) a $2.1 million decrease in expenses under our other kinase inhibitors program, partially offset by (iii) a $1.1 million increase in voreloxin expenses due to increased clinical activities and (iv) a $0.1 million increase in SNS-032 expenses due to increased clinical trial activities.
 
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Research and development expense decreased by $2.0 million, or 11 percent, to $17.0 million for the six months ended June 30, 2008 from $19.0 million for the same period in 2007. This decrease is primarily due to (i) a $1.0 million decrease in clinical trial activity related to SNS-314 and (ii) a $4.2 million decrease in expenses under our other kinase inhibitors program, partially offset by (iii) a $2.6 million increase in voreloxin expenses and a $0.5 million increase in SNS-032 expenses due to increased clinical trial activities, and (iv) a $0.2 million increase in expenses for discovery programs and new technologies due to increased work on our proprietary technologies and discovery programs.

As a result of our June restructuring and the resulting wind down of our research activities, we do not anticipate incurring any significant additional research expenses related to the discovery of additional product candidates, the development or application of our proprietary fragment-based drug discovery methods, or the development of in-house research capabilities. In addition, we are no longer conducting any research activities in connection with our four ongoing collaborations.

However, we have incurred and expect to continue to incur substantial research and development expense to conduct clinical trials on voreloxin, SNS-032 and SNS-314. Clinical trials are costly, and as we continue to advance our product candidates through preclinical and clinical development, we expect our related expenses to remain high. For example, we expect to spend approximately $10.0 million over the next twelve months (i) to advance our voreloxin program to completion of the current Phase 2 clinical trial in ovarian cancer, Phase 1b combination trial in AML and Phase 2 AML clinical trial in the untreated elderly, (ii) to advance our SNS-032 program to completion of our ongoing Phase 1 clinical trial, and (iii) to complete the ongoing Phase 1 clinical trial for SNS-314. As of the date of this report, due to the risks inherent in the clinical trial process and given the early state of development of our programs, we are unable to estimate the additional substantial costs we will incur in any continued development of our product candidates for potential commercialization.

In addition, while we are currently focused on advancing voreloxin, SNS-032 and SNS-314 through clinical development, we anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, an assessment as to the product candidate’s commercial potential and our overall financial objectives. This will affect our research and development expense going forward. We also cannot forecast which product candidates will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Under our Biogen Idec agreement, we have an option on a target-by-target basis to co-fund post-Phase 1 development costs for product candidates directed to up to two collaboration targets, which may, at our option, include the Raf kinase target. If we exercise our option on one or more product candidates, our research and development expense will increase significantly. We expect that research and development expense related to co-development activities that we might elect to co-fund would consist primarily of manufacturing costs for the product candidate, clinical trial-related costs, costs for consultants and contract research organizations, employee and facilities costs and depreciation of equipment.

General and Administrative Expense. Our general and administrative expense consists primarily of salaries and other related costs for personnel in finance, human resources, facilities management, legal, including intellectual property management, and general administration, as well as non-cash stock-based compensation. Other significant costs include facilities costs and fees paid to outside legal advisors and auditors. General and administrative expense for the three months ended June 30, 2008 decreased by approximately $0.8 million compared to the same period in 2007, primarily due to reduced headcount compared to 2007 and a decrease in personnel- and office- related expenses. For the six months ended June 30, 2008, general and administrative expenses decreased by approximately $0.8 million compared to the same period in 2007, primarily due to reduced headcount and lower personnel-, office- and facilities- related expenses, partially offset by an increase in legal and patent expenses. As a result of the 2008 restructuring, we expect our general and administrative expenses to decrease over the next twelve months due to reduced headcount.

 Restructuring Charge. For the three months ended June 30, 2008, we recorded approximately $4.9 million of restructuring charges, comprised of $5.6 million related to the 2008 restructuring, partially offset by a $0.7 million reversal of a charge for the 2007 restructuring related to Company’s facilities exit costs. For the six months ended June 30, 2008, we recorded approximately $5.2 million of restructuring charges, comprised of $5.6 million related to the 2008 restructuring, partially offset by a $0.4 million reversal of the 2007 restructuring related to Company’s facilities exit costs. No such charges were recorded in the three months and six months ended June 30, 2007. We currently expect to record additional restructuring expenses of approximately $7.0 million in the third quarter of 2008.

Interest Income. Interest income decreased by $0.4 million to $0.3 million for the three months ended June 30, 2008, compared to $0.7 million for the same period in 2007. Interest income decreased by $0.8 million to $0.7 million for the six months ended June 30, 2008, compared to $1.5 million in the same period in 2007. The lower interest income for the three and six months ended June 30, 2008 was due to lower average balances of cash, cash equivalents and marketable securities during 2008, as well as lower average interest rates earned.
 
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Interest Expense. Interest expense increased to $54,000 in the three months ended June 30, 2008 from $44,000 for the three months ended June 30, 2007 and increased to $114,000 in the six months ended June 30, 2008 from $96,000 for the same period in 2007, in each case due to higher interest rates on outstanding debt obligation in 2008 compared to 2007.

Liquidity and Capital Resources

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock, research funding, technology access fees and milestone payments from our collaboration partners, debt financings and research grants. As of June 30, 2008, we had cash, cash equivalents and marketable securities of $28.3 million and outstanding debt from equipment financing of $1.8 million.

Cash Flows

Net cash used in operating activities was $18.7 million and $17.1 million for the six months ended June 30, 2008 and 2007, respectively. Net cash used in operating activities for the six months ended June 30, 2008 resulted primarily from our net loss of $23.2 million, partially offset by changes in operating assets and liabilities of $0.7 million and adjustments for non-cash items of $3.8 million primarily from depreciation and amortization, the non-cash portion of restructuring charges, and stock-based compensation expense. Net cash used in operating activities for the six months ended June 30, 2007 resulted primarily from our net loss of $19.1 million and changes in operating assets and liabilities of $0.5 million, partially offset by adjustments for non-cash items of $2.6 million primarily from depreciation and amortization and stock-based compensation expense.

Net cash provided by investing activities was $16.9 million for the six months ended June 30, 2008, compared to $2.4 million for the six months ended June 30, 2007. The cash provided by investing activities during the six months ended June 30, 2008 was primarily attributable to net proceeds from the maturity of marketable securities of $17.0 million, partially offset by capital expenditures of $0.2 million. Net cash provided by investing activities during the six months ended June 30, 2007 was related to the net proceeds from maturities of marketable securities of $3.5 million, partially offset by the purchase of capital equipment totaling $1.1 million.

Net cash used in financing activities was $0.4 million for the six months ended June 30, 2008, as compared with $20.3 million in net cash provided by financing activities for the six months ended June 30, 2007. Our financing activities for the six months ended June 30, 2008 consist of equipment loan re-payments of $0.5 million, partially offset by proceeds from common stock issuance under our Employee Stock Purchase Plan (ESPP) of $0.1 million. Our financing activities for the six months ended June 30, 2007 consisted primarily of $19.5 million in net proceeds from a public offering in May 2007, $0.4 million of proceeds from common stock issuance under the ESPP and stock option exercises and $0.4 million pursuant to equipment loan borrowing net of re-payments.

Credit and Loan Arrangements

In June 2000, we entered into an equipment financing agreement with General Electric Capital Corporation (“GECC”). Various credit lines have been issued under the financing agreement since 2000. As of June 30, 2008, we had drawn an aggregate of $10.7 million under various credit lines under the financing agreement. At June 30, 2008, the outstanding balance was $1.8 million of which approximately $1.0 million of the current loan portion is associated with laboratory equipment held-for-sale. Upon sale of the held-for-sale assets, we will be required to pay the associated $1.0 million loan. The outstanding balance bears interest at rates ranging from 8.70 percent to 10.61 percent per annum and is due in 36 to 48 monthly payments. The equipment loans are secured by the equipment financed. No credit lines remain available under this agreement.
 
Operating Capital and Capital Expenditure Requirements

We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue unless and until a product candidate has been approved by the United States Food and Drug Administration (“FDA”) or similar regulatory agency in other countries and has been successfully commercialized. As of June 30, 2008, our cash, cash equivalents and marketable securities totaled $28.3 million. We also have outstanding equipment debt from financing of $1.8 million. We believe that our cash, cash equivalents and marketable securities, together with the revenue generated from our collaborations, will be sufficient to fund our operations for at least the next twelve months. However, we need to raise substantial additional funds to continue our operations, fund additional clinical trials of our product candidates and bring future products to market. We cannot be certain that any of our programs will be successful or that we will be able to raise sufficient funds to complete the development and commercialization of any of our product candidates currently in development, should they succeed. Additionally, we plan to continue to evaluate in-licensing and acquisition opportunities to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction would likely increase our funding needs in the future.
 
20
 
Our future funding requirements will depend on many factors, including but not limited to:

·
  
the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;
     
·
  
the costs associated with establishing manufacturing and commercialization capabilities;
     
·
  
the costs of acquiring or investing in businesses, product candidates and technologies;
     
·
  
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
     
·
  
the costs and timing of seeking and obtaining FDA and other regulatory approvals;
     
·
  
the effect of competing technological and market developments; and
     
·
  
the economic and other terms and timing of any collaboration, licensing or other arrangements into which we may enter.

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 development programs or conduct additional workforce reductions. In addition, we may have to partner one or more of our product candidate programs at an earlier stage of development, which could lower the economic value of those programs to us.

Off-Balance Sheet Arrangements

Through the six months ended June 30, 2008 and the year ended December 31, 2007, we do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. This means that a change in prevailing interest rates may cause the principal amount of the investments to fluctuate. By policy, we minimize risk by placing our investments with high quality debt security issuers, limit the amount of credit exposure to any one issuer, limit duration by restricting the term and hold investments to maturity except under rare circumstances. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and corporate debt securities. Our investment policy prohibits investments in derivative instruments. We did not hold derivative instruments as of June 30, 2008, and we have not held derivative instruments in the past. Through our money managers, we maintain risk management control systems to monitor interest rate risk. Our cash and cash equivalents as of June 30, 2008 included liquid money market accounts. Our marketable securities as of June 30, 2008 included readily marketable debt securities. Due to the short-term nature of these instruments, a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio as of June 30, 2008. For example, a 1/2 percentage point increase in short-term interest rates would reduce the fair market value of our portfolio of June 30, 2008 by approximately $24,000.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in SEC Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended, reports is recorded, processed, summarized and reported within the time periods specified in the SEC’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.
 
21
 
As required by SEC Exchange Act 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 Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on us because of the defense costs, diversion of management resources and other factors.

We are not currently involved in any material legal proceedings.

Item 1A.
Risk Factors

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 on Form 10-Q 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.

Please see the language regarding forward-looking statements in “Managements’ Discussion and Analysis of Financial Condition and Results of Operations.”

We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2008.
 
Risks Related to Our Business

* If we are unable to raise additional capital in the near term, we may not be able to continue to operate as a going concern.

We are advancing multiple product candidates through development. We will need to raise substantial additional capital to continue our development activities and any possible future commercialization activities.

We will need to raise substantial additional capital in the near term to:

 
·
fund clinical trials and seek regulatory approvals;

 
·
continue and expand our development activities;

 
·
hire additional development personnel;
 
22
 
 
·
maintain, defend and expand the scope of our intellectual property portfolio;

 
·
implement additional internal systems and infrastructure; and

 
·
build or access manufacturing and commercialization capabilities.

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

 
·
the rate of progress and cost of our clinical trials, and other development activities;

 
·
the economic and other terms and timing of any collaboration, licensing or other arrangements into which we may enter;

 
·
the costs associated with building or accessing manufacturing and commercialization capabilities;

 
·
the costs of acquiring or investing in businesses, product candidates and technologies;

 
·
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 
·
the costs and timing of seeking and obtaining FDA and other regulatory approvals; and

 
·
the effect of competing technological and market developments.

We currently anticipate that our cash, cash equivalents and marketable securities, together with revenue generated from our collaborations, will be sufficient to fund our operations for at least the next twelve months. 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, out-licensing development and/or commercialization rights to one or more of our product candidates or debt financings. We do not know whether additional funding will be available on acceptable terms, or at all.

We are currently continuing to advance our ongoing clinical trials of voreloxin in ovarian cancer and acute myeloid leukemia (“AML”), SNS-032 in chronic lymphocytic leukemia or multiple myeloma and SNS-314 in solid tumors. 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 development programs or conduct additional workforce reductions. For example, in June 2008, we announced that we reduced our workforce by approximately sixty percent and implemented a revised operating plan to focus our efforts on our lead oncology product candidate, voreloxin, wind down our internal discovery research activities to streamline our operations and extend our financial resources.

In addition, if we out-license or partner one or more of our product candidate programs prior to completion of a Phase 2 trial or at an earlier stage of development, this will likely lower the long-term economic value of such program or programs to our company. However, if we retain rights for a longer period with an expectation of improving our economic upside, we will not only incur substantial development expenditures, but also risk that our clinical trials may not generate data sufficient to support an out-license or partnering arrangement.
 
Conditions affecting the equity market may make it more difficult and costly to raise additional capital.

Currently, there is turmoil in the U.S. economy in part due to tightening credit markets. Banks have tightened their lending standards, investors are balking at buying new corporate bonds and economic growth has begun to slow. Factors contributing to a slowing economy appear to be reduced credit availability, falling house prices and rising energy and food prices. If these factors continue to affect equity markets, our ability to raise capital may be adversely affected.

* We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We may not ever achieve or sustain profitability.

We are a clinical-stage biopharmaceutical company with a limited operating history as a public company. We are not profitable and have incurred losses in each year since our inception in 1998, including a net loss of $23.2 million for the six months ended June 30, 2008. Our net loss for the years ended December 31, 2007, 2006 and 2005 was $38.8 million, $31.2 million, and $27.5 million (excluding a preferred stock deemed dividend of $88.1 million), respectively. As of June 30, 2008, we had an accumulated deficit of $302.2 million, including the $88.1 million preferred stock deemed dividend related to our initial public offering in September 2005. We do not currently have any products that have been approved for marketing, and we continue to incur substantial development and general and administrative expenses related to our operations. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase significantly, especially upon commencing Phase 3 clinical trials, as we conduct development of, and seek regulatory approvals for, our product candidates, and commercialize any approved drugs. Our losses, among other things, have caused and will continue to cause our stockholders’ equity and working capital to decrease.
 
Our business model had been based in part upon entering into strategic collaborations for discovery and/or the development of some of our product candidates. To date, we have derived substantially all of our revenue from research collaboration agreements. The research phase for all of our revenue-generating collaboration agreements is completed. As we have wound down our internal discovery research capabilities in connection with our June 2008 restructuring, we do not expect to enter into any new collaboration agreement that will result in research revenue for us. We also do not anticipate that we will generate revenue from the sale of products for the foreseeable future. In the absence of additional sources of capital which may not be available to us on acceptable terms, the development of our current or future product candidates may be reduced in scope, delayed or terminated. If our product candidates or those of our collaborators fail in clinical trials or do not gain regulatory approval, or if our future products 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.
 
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* There is a high risk that our drug discovery and development activities could be halted or significantly delayed for various reasons.

Our product candidates are in the early stages of drug development and are prone to the risks of failure inherent in the drug development process. We and our collaboration partners will need to conduct significant additional preclinical studies and clinical trials before we or our collaboration partners can demonstrate that our product candidates are safe and effective to the satisfaction of the FDA and other regulatory authorities. In our industry, it is unlikely that the limited number of compounds that we have identified as potential product candidates will actually lead to successful product development efforts. Failure can occur at any stage of the process, and successful preclinical studies and early clinical trials do not ensure that later clinical trials will be successful. We terminated two Phase 2 trials of voreloxin in small cell and non-small cell lung cancer. To date, SNS-032 and SNS-314 have only been tested in humans in Phase 1 trials. None of our product candidates with collaboration parties have been tested in humans. In addition, 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.

We do not know whether our ongoing clinical trials or any other future clinical trials with any of our product candidates will be completed on schedule, or at all, or whether our ongoing or planned clinical trials will begin on time. The commencement of our planned clinical trials could be substantially delayed or prevented by several factors, including:

 
·
limited number of, and competition for, suitable patients with particular types of cancer for enrollment in clinical trials;

 
·
delays or failures in obtaining regulatory approval to commence a clinical trial;

 
·
delays or failures in obtaining sufficient clinical materials;

 
·
delays or failures in obtaining IRB approval to conduct a clinical trial at prospective sites; or
 
 
·
delays or failures in reaching acceptable clinical trial agreement terms or clinical trial protocols with prospective sites.

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

 
·
slower than expected rates of patient recruitment and enrollment;

 
·
failure of patients to complete the clinical trial;

 
·
unforeseen safety issues;
 
24
 
 
·
lack of efficacy during clinical trials;

 
·
inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols; and

 
·
inability to monitor patients adequately during or after treatment.

For example, due to potential complications from treatment in our Phase 1 clinical trial of SNS-032, we have provided patients enrolling in this clinical trial with in-patient hospital care. In addition to increasing costs to perform this clinical trial, we believe that this has resulted in difficulty in recruiting patients. Additionally, our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, ourselves or, in some cases, our collaboration partners. Any failure to complete or significant delay in completing, clinical trials for our product candidates could harm our financial results and the commercial prospects for our product candidates.

In March 2008, we informed the FDA of a stability observation in our voreloxin drug product. Specifically, visible particles were observed in the finished product. We have since identified a process impurity in the active pharmaceutical ingredient (“API”) for voreloxin that appears to interact with the stoppers in the packaged vial of the voreloxin drug product, resulting in the formation of the particles. Currently, we are implementing plans to eliminate the particles by changing the stopper used and revising our manufacturing process to control the impurity. It will take time to evaluate whether or not this revised manufacturing process for voreloxin drug product will be successful in stopping the formation of these particles. We have implemented a short-term corrective action for this issue and committed to provide an update on the results from our process optimization activities to the FDA before the end of the year. If the change in stopper used and change in manufacturing process do not adequately control the formation of the visible particles, we will need to discuss other possibilities with the FDA, which could possibly include temporary clinical hold until the issue has been resolved to their satisfaction.

* Our clinical trials for our product candidates voreloxin, SNS-032 and SNS-314, may not demonstrate safety or efficacy or lead to regulatory approval.

Our product candidates, voreloxin, SNS-032 and SNS-314, are small molecule therapeutics being developed for the treatment of certain types of cancer. Many cancer drugs promote cancer cell death by inhibiting cell proliferation, and commonly have a narrow dose range between efficacy and toxicity, commonly known as a “therapeutic window.” We may select a dose for use in future clinical trials that may prove to be ineffective in treating cancer. If our clinical trials result in unacceptable toxicity or lack of efficacy, we may have to terminate further clinical trials. Even if we are able to find a proper dose that balances the toxicity and efficacy of one or more of our product candidates, we will be required to conduct extensive additional clinical trials before we are able to seek the regulatory approvals needed to market them. If clinical trials of voreloxin, SNS-032 and/or SNS-314 are halted, or if they do not show that these product candidates are safe and effective in the indications for which we are seeking regulatory approval, our future growth would be limited and we may not have any other product candidates to develop.

Furthermore, our development strategy to date for SNS-032 and SNS-314 has been to first test the efficacy and toxicity of each product candidate as a single agent. We may determine that one or both of these product candidates are more effective and/or less toxic in combination with another approved cancer drug. While we are currently conducting a Phase 1b clinical trial of voreloxin, studying escalating doses of voreloxin in combination with cytarabine in acute leukemias, it is possible that when therapeutic levels of voreloxin are achieved the toxicity of the combined regimen may be not tolerated in patients. Likewise, each of our product candidates may only receive FDA and foreign approvals, if at all, in combination with another cancer drug.

In addition to the risks described above, we are aware of risks that are specific to SNS-032. In previous Phase 1 clinical trials of SNS-032, significant safety risks were observed in patients who were administered SNS-032 on either a one-hour or a 24-hour infusion once every three weeks. For example, increases in certain phases of the cardiac cycle, known as the QT interval, or the corrected QT interval, or QTc, on the electrocardiograms of patients were observed in patients receiving the 24-hour infusion regimen. Increased QT intervals may be associated with increased risk for cardiac rhythm abnormalities, some of which can be serious, life-threatening events. In addition, pronounced, rapidly reversible decreases in white blood cells were observed following infusion under the one-hour infusion regimen, most likely associated with higher peak drug levels in this regimen. Further, some patients also experienced reversible liver toxicity, which limited the amount of drug that could be administered to those patients. Two of these planned clinical trials were discontinued prior to completion and prior to determination of a maximum tolerated dose by the former sponsor, BMS, we believe because of a change in priorities within BMS’ portfolio. We will not receive regulatory approval for SNS-032 unless we are able to deliver therapeutically active doses of SNS-032 while keeping toxicities at acceptable levels. In a Phase 1 clinical trial of SNS-032 in patients with advanced solid tumors, we delivered the drug on a daily basis in a one-hour infusion for five consecutive days. However, this dose and regimen did not allow us to achieve expected efficacious exposure without dose-limiting toxicity, and therefore we decided not to advance SNS-032 at that time as a single-agent therapeutic in that patient population.
 
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In our ongoing Phase 1 clinical trial of SNS-032, we are aware that SNS-032 has the potential to kill a large number of cancer cells rapidly and all at once and the contents of those cells may be released into a patient’s bloodstream. This may result in a higher risk of a severe complication called tumor lysis syndrome. We have seen biochemical evidence of tumor lysis occurring in some of our patients in our Phase 1 study. When tumor lysis syndrome occurs, some chemicals in a patient’s blood, such as potassium, uric acid and phosphate levels will rise, whereas some others like calcium may decline. Tumor lysis syndrome, if severe enough, may result in kidney failure and, without treatment, can be life-threatening. This severe complication has a higher risk of occurring early in the course of treatment and we are taking measures, which may not be effective, to prevent, monitor and treat this complication when it occurs.

In addition, in clinical trials to date SNS-032 has demonstrated variable pharmacokinetics (“PK”), which is the measure of the concentration of drug in the bloodstream over time. The PK variability results in differences in drug exposure between patients, and in some cases in the same patient, who are administered the same dose of SNS-032. Dose levels in Phase 2 clinical trials will be selected primarily based on safety criteria. Because of the observed PK variability between and among patients, we believe that there is a risk that some patients may receive sub-therapeutic exposure, limiting the opportunity to show activity and efficacy for SNS-032. As with other product candidates in the biotechnology industry at this stage of development, even if we are able to find adequate doses and schedules from our planned Phase 2 clinical trials, we will be required to conduct extensive additional clinical trials before we are able to seek regulatory approval to market SNS-032.

The failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays if we or our collaboration partners are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely effected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit.

The results of preclinical studies and clinical trials may not satisfy the requirements of the FDA or other regulatory agencies.

Prior to receiving approval to commercialize any of our product candidates in the United States or abroad, we and our collaboration partners must demonstrate with substantial evidence from well-controlled clinical trials, to the satisfaction of the FDA and other regulatory authorities, that such product candidates are safe and effective for their intended uses. The results from preclinical studies and clinical trials can be interpreted in different ways. Even if we and our collaboration partners believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any of our product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of our product candidates and result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications.

Our approach to developing cancer therapeutics by inhibiting CDKs, Aurora kinases and other kinases has not been clinically validated and may not be successful.

SNS-032 is an inhibitor of CDKs 2, 7 and 9, and SNS-314 is an inhibitor of Aurora A, B and C kinases. The therapeutic benefit of inhibiting CDKs and/or Aurora kinases in the treatment of human cancer has not been established definitively in the clinic. There are also other CDKs and Aurora kinase inhibitors in early clinical development, but they have yet to show therapeutic benefit or they target other kinases in addition to CDKs and Aurora kinases and their activity may be associated with inhibition of those other kinases. In addition, there are conflicting scientific reports regarding the reliance or necessity of CDK2 in the cell cycle. If CDK or Aurora kinase inhibition is not an effective treatment of human cancer, SNS-032, SNS-314 and any other drug candidates from our kinase programs, including the Raf kinase program from our collaboration with Biogen Idec, may have little or no commercial value.

We rely on third parties to manufacture our product candidates, including voreloxin, SNS-032 and SNS-314, and depend on a single supplier for the active pharmaceutical ingredients for voreloxin and SNS-032. There are a limited number of manufacturers that are capable of manufacturing the active ingredient of voreloxin.

We do not currently own or operate manufacturing facilities and lack the capability to manufacture any of our product candidates on a clinical or commercial scale. As a result, we rely on third parties to manufacture both the active pharmaceutical ingredient, or API, and drug products for voreloxin, SNS-032 and SNS-314. The APIs are classified as toxic substances, limiting the available manufacturers. We believe that there are at least five contract manufacturers in North America with suitable capabilities for API manufacture, and at least four that can manufacture our drug products. We currently have established relationships with only one manufacturer for API for voreloxin and two manufacturers for the finished drug product. If our third-party manufacturer is unable or unwilling to produce API for voreloxin, we will need to establish a contract with another supplier. However, establishing a relationship with an alternative supplier would likely delay our ability to produce voreloxin API for six to nine months, during which time we will rely on current inventory to supply our drug product manufacturing activities. We expect to continue to depend on third-party contract manufacturers for all our API and drug products in the foreseeable future.
 
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Our product candidates require precise, high quality manufacturing. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with current Good Manufacturing Practice (“cGMP”), and other applicable government regulations and corresponding foreign standards. Our contract manufacturer’s failure to achieve and maintain high manufacturing standards in compliance with cGMP regulations could result in manufacturing errors resulting in patient injury or death, product recalls or withdrawals, delays or interruptions of production or 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.

To date, our product candidates have been manufactured in small quantities for preclinical studies and clinical trials. Prior to one of our product candidates being approved for commercial sale, we will need to manufacture that product in larger quantities. Significant scale-up of manufacturing will be accompanied by significant validation studies, which will be reviewed by the FDA prior to approval. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch may be delayed or there may be a shortage in commercial supply.

Any performance failure on the part of a contract manufacturer could delay clinical development or regulatory approval of our product candidates or commercialization of our future products, depriving us of potential product revenue and resulting in additional losses. For example, because we rely on a single supplier for the API for voreloxin and SNS-032, the failure of such supplier to have sufficient quantities of the API or to supply API on a timely basis or at all would negatively affect us. 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 for commercial sale. 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 expect to expand our clinical development and marketing capabilities, and any difficulties hiring or retaining key personnel or managing this growth could disrupt our operations.

We are highly dependent on the principal members of our management and clinical staff. We expect to expand our clinical development and marketing capabilities by increasing expenditures in these areas, hiring additional employees and expanding the scope of our current operations. Future growth will require us to continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. The competition for qualified personnel in the biopharmaceutical field is intense. We are highly dependent on our continued ability to attract, retain and motivate highly-qualified management and clinical personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

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 products.

Our commercial success depends on not infringing the patents and other proprietary rights of third 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 foreign-issued patents and pending patent applications exist in the area of kinases, including CDKs and Aurora and Raf kinases. Because patent applications can take several years to issue, there may be pending applications that may result in issued patents that cover our technologies or product candidates. For example, some pending patent applications contain broad claims that could represent freedom to operate limitations for some of our kinase programs should they be issued unchanged. In addition, because pending patent applications are not required to be published generally until at least 18 months after they are filed (or at all before issuance in the case of U.S. patent applications filed before November 29, 2000) there may be claims contained therein that we are not even aware of. If a third party asserts that we are using technology or compounds claimed in issued and unexpired patents owned or controlled by the third party, we may need to obtain a license, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that a third party asserts that we infringe its patents.

If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:

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·
  
infringement and other intellectual property claims, which would be costly and time consuming to litigate, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from our business;
     
·
  
substantial damages for past infringement, which we may have to pay if a court determines that our product candidates or technologies infringe a third party patent or other proprietary rights;
     
·
  
a court prohibiting us from selling or licensing our product candidates or technologies unless a third party licenses relevant patent or other proprietary rights to us, which it is not required to do; and
     
·
  
if a license is available from a third party, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights.

* If our competitors develop and market products that are more effective, safer or less expensive than our future products, 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 and marketing products designed to address cancer and other serious diseases. We are developing small molecule therapeutics that will compete with other drugs and therapies that currently exist or are being developed. 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 capabilities than we do. In addition, many universities and private and public research institutes are active in cancer research, some of which are in direct competition with us.

Our product candidates will compete with a number of cancer therapeutics that are currently marketed or in development that also target proliferating cells but at different points of the cell cycle or with a different mechanism of action. These drugs include irinotecan, doxorubicin, taxanes and other cytotoxics and targeted therapies. To compete effectively with these agents, our product candidates will need to demonstrate advantages that lead to improved clinical efficacy as either a single agent or in combination settings.

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

·
  
our ability to develop novel compounds with attractive pharmaceutical properties and to secure, protect and maintain intellectual property rights based on our innovations;
     
·
  
the efficacy, safety and reliability of our product candidates;
     
·
  
the speed at which we develop our product candidates;
     
·
  
our ability to design and successfully execute appropriate clinical trials;
     
·
  
our ability to maintain a good relationship with regulatory authorities;
     
·
  
our ability to obtain, and the timing and scope of, regulatory approvals;
     
·
  
our ability to manufacture and sell commercial quantities of future products to the market; and
     
·
  
acceptance of future products by physicians and other healthcare providers.

Some of the current key competitors to voreloxin in AML include Genzyme Corporation’s clofarabine, Eisai Corporation’s decitabine and ViON Corporation’s cloretazine, all of which could change the treatment paradigm of acute leukemia. Each of these compounds is further along in clinical development than is voreloxin. Liposomal doxorubicin and topotecan are current standards of care in platinum-resistant ovarian cancer patients, and we are aware that several of our competitors have initiated Phase 3 clinical trials for this indication.
 
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Further, with respect to SNS-032, we believe that several companies, including Sanofi-Aventis, Inc., Nerviano Medical Sciences, Cyclacel Pharmaceuticals, Inc., Pfizer Inc., Schering AG and others, are conducting clinical trials with CDK inhibitors and others are developing other compounds that may compete with SNS-032.

With respect to SNS-314, Merck and Vertex Pharmaceuticals Incorporated are co-developing an Aurora kinase inhibitor and Cyclacel Pharmaceuticals, Inc., AstraZeneca International, Astex Therapeutics Limited, Millennium Pharmaceuticals, Inc. and Rigel Pharmaceuticals, Inc. in conjunction with Merck Serono International S.A., Pfizer Inc., Nerviano Medical Sciences, and others are also developing Aurora kinase inhibitors. Several other companies have Aurora kinase programs for which they are close to filing an investigational new drug application (“IND”) with the FDA. Other molecules that may compete with SNS-314 may include other naturally occurring cell-cycle inhibitor drugs.

If our competitors market products that are more effective, safer or less expensive than our future products, if any, or that reach the market sooner than our future products, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid change. Products developed by our competitors may render our product candidates obsolete.
 
We rely on third parties to conduct our clinical trials for voreloxin, SNS-032, and SNS-314. 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 product candidates.

We do not have the ability to independently conduct clinical trials for voreloxin, SNS-032, SNS-314 or any other product candidate. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct the planned and existing clinical trials of our product candidates. 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 our clinical trial protocols 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 or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

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

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for our technologies and product candidates in the United States and other countries. As of December 31, 2007, we owned, co-owned or had rights to approximately 220 issued U.S. and foreign patents and approximately 345 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 products 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 on 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 exclusively control the patent prosecution of subject matter that we license to and 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:

·
  
we, our licensors or our collaboration partners were the first to make the inventions covered by each of our issued patents and pending patent applications;
     
·
  
we, our licensors or our collaboration partners were the first to file patent applications for these inventions;
     
·
  
others will independently develop similar or alternative technologies or duplicate any of our technologies;
     
·
  
any of our or our licensors’ pending patent applications will result in issued patents;
     
·
  
any of our, our licensors’ or our collaboration partners’ patents will be valid or enforceable;
 
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·
  
any patents issued to us, our licensors or our collaboration partners will provide us with any competitive advantages, or will be challenged by third parties;
     
·
  
we will develop additional proprietary technologies that are patentable; or

·
  
the patents of others will have an adverse effect on our business.

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, or those of our licensors, 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, foreign 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 composition of matter patents covering voreloxin are due to expire in 2015. Even if voreloxin is approved by the FDA, we may not be able to recover our development costs prior to the expiration of these patents.

The composition of our lead product candidate, voreloxin, is covered by U.S. patent 5,817,669 and its counterpart patents and patent applications in 43 foreign jurisdictions. U.S. patent 5,817,669 is due to expire in October 2015, and most of its foreign counterparts are due to expire in June 2015. We do not know whether patent term extensions and data exclusivity periods will be available in the future. Voreloxin must undergo extensive clinical trials before it can be approved by the FDA. We do not know when, if ever, voreloxin will be approved by the FDA. Even if voreloxin is approved by the FDA in the future, we may not have sufficient time to commercialize voreloxin to enable us to recover our development costs prior to the expiration of the U.S. and foreign patents covering voreloxin. Our obligation to pay royalties to Dainippon, the company from which we licensed voreloxin, may extend beyond the patent expiration, which will further erode the profitability of this product.

The composition of matter patents covering SNS-032 are due to expire in 2018 in the United States. Even if SNS-032 is approved by the FDA, we may not be able to recover our development costs prior to the expiration of these patents.

The composition of our product candidate SNS-032 is covered by U.S. patent 6,515,004 and its counterpart patents and patent applications in 33 foreign jurisdictions. U.S. patent 6,515,004 is due to expire in October 2018, and most of its foreign counterparts are due to expire in May 2021 (although some expire as early as November 2018). We do not know whether patent term extensions and data exclusivity periods will be available in the future. SNS-032 must undergo extensive clinical trials before it can be approved by the FDA. We do not know when, if ever, SNS-032 will be approved by the FDA. Even if SNS-032 is approved by the FDA in the future, we may not have sufficient time to commercialize SNS-032 to enable us to recover our development costs prior to the expiration of the U.S. and foreign patents covering SNS-032. Our obligation to pay royalties to BMS, the company from which we licensed SNS-032, may extend beyond the patent expiration, which will further erode the profitability of this product.

The composition of matter patents covering SNS-314 are due to expire in 2025 in the United States. Even if SNS-314 is approved by the FDA, we may not be able to recover our development costs prior to the expiration of these patents.

The composition of our product candidate SNS-314 is covered by a pending U.S. patent application and its counterpart patents and patent applications in 14 foreign jurisdictions. If a patent issues based on the pending U.S. application, it would be due to expire on or about July 2025, along with most of its foreign counterparts. We do not know whether patent term extensions and data exclusivity periods will be available in the future. SNS-314 must undergo extensive clinical trials before it can be approved by the FDA. We do not know when, if ever, SNS-314 will be approved by the FDA. Even if SNS-314 is approved by the FDA in the future, we may not have sufficient time to commercialize SNS-314 to enable us to recover our development costs prior to the expiration of any U.S. and foreign patents covering SNS-314.

* Our workforce reductions in August 2007 and June 2008 and any future workforce and expense reductions may have an adverse impact on our internal programs, our ability to hire and retain key personnel and may be distracting to management.

In August 2007, we conducted a workforce reduction of approximately twenty five percent in order to reduce expenses. In June 2008, we conducted a second workforce reduction of approximately sixty percent to focus on the development of the Company’s lead oncology product candidate, voreloxin. In conjunction with this strategic restructuring, we wound down our internal discovery research activities. In light of our continued need for funding and expense control, we may be required to implement further workforce and expense reductions in the future. Further workforce and expense reductions could result in reduced progress on our internal programs. In addition, employees, whether or not directly affected by a reduction, may seek future employment with our business partners or competitors. Although our employees are required to sign a confidentiality agreement at the time of hire, the confidential nature of certain proprietary information may not be maintained in the course of any such future employment. Further, we believe that our future success will depend in large part upon our ability to attract and retain highly skilled personnel. We may have difficulty retaining and attracting such personnel as a result of a perceived risk of future workforce and expense reductions. In addition, the implementation of expense reduction programs may result in the diversion of efforts of our executive management team and other key employees, which could adversely affect our business.

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The commercial success of products resulting from our collaborations, if any, depends in whole or in part on the development and marketing efforts of our collaboration partners, over which we have limited control. If our collaborations are unsuccessful, our potential to generate future revenue from the sale of these products would be significantly reduced.

Our dependence on collaboration arrangements subjects our company to a number of risks. The commercial success of products resulting from our collaborations, if any, depends, in whole or in part on our collaboration partners’ ability to establish the safety and efficacy of our product candidates, obtain and maintain regulatory approvals and achieve market acceptance of a product once commercialized. Our collaboration partners may elect to delay or terminate development of one or more product candidates, independently develop products that compete with ours, or fail to commit sufficient resources to the marketing and distribution of products developed through their collaborations with us. In the event that one or more of our collaboration partners fails to diligently develop or commercialize a product candidate covered by one of our collaboration agreements, we may have the right to terminate our partner’s rights to such product candidate but we will not receive any future revenue from that product candidate unless we are able to find another partner or commercialize the product candidate on our own, which is likely to result in significant additional expense. Business combinations, significant changes in business strategy, litigation and/or financial difficulties may also adversely affect the willingness or ability of one or more of our collaboration partners to complete their obligations under our collaboration agreements. If our collaboration partners fail to perform in the manner we expect, our potential to generate future revenue from the sale of products resulting from our collaborations, would be significantly reduced.

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

If a conflict of interest arises between us and one or more of our collaboration partners, they may act in their own self interest or otherwise in a way that is not in the interest of our company or our stockholders. Some of our collaboration partners are conducting, and future collaboration partners, if any, may conduct, multiple product development efforts within the disease area that is the subject of collaboration with our company. In some of our collaborations, we have agreed not to conduct, independently or with any third party, any research that is competitive with the research conducted under our collaborations. Our collaboration partners, however, may develop, either alone or with others, products in related fields that are competitive with the product candidates that are the subject of these collaborations. Competing products, either developed by our collaboration partners or to which our collaboration partners have rights, may result in their withdrawal of support for our product candidates.

If one or more of our collaboration partners were to breach or terminate their collaboration agreements with us or otherwise fail to perform their obligations thereunder in a timely manner, the preclinical or clinical development or commercialization of the affected product candidates could be delayed or terminated. We do not know whether our current or any future collaboration partners will pursue alternative technologies or develop alternative product candidates, either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by collaboration agreements with our company.

*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. We may be subject to claims that we or our employees have 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. A loss of key personnel or the work product of current or former personnel could hamper or prevent our ability to commercialize our product candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
 
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We currently have limited marketing staff and no sales or distribution organization. If we are unable to develop a sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our future products.

We currently have no sales or distribution capabilities and limited marketing staff. We intend to establish our own sales and marketing organization with technical expertise and supporting distribution capabilities to commercialize at least some of our future products, if any, 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 other future products, we plan to collaborate with third parties that have direct sales forces and established 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 upon the efforts of third parties, which may not be successful and are only partially 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 these future products. If we are not successful in commercializing our future products, 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.

*We depend on various scientific consultants and advisors for the success and continuation of development efforts.

We work extensively with various scientific consultants and advisors. The potential success of our drug development programs depends, in part, on continued collaborations with certain of these consultants and advisors. We rely on certain of these consultants and advisors for expertise in our regulatory and clinical efforts. Our scientific consultants and advisors are not our employees and may have commitments and obligations to other entities that may limit their availability to us. We do not know if we will be able to maintain such relationships or that such scientific consultants and advisors will not enter into other arrangements with competitors, any of which could have a detrimental impact on our development objectives and our business.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

Our facilities are located in the San Francisco Bay Area near known earthquake fault zones and are vulnerable to significant damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fires, floods, power loss, communications failures and similar events. We are in the process of designing and implementing a disaster relief plan. However, even if such a plan were in place, if any disaster were to occur, our ability to operate our business at our facilities may be seriously or completely impaired and our data could be lost or destroyed.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from potential revenue-generating activities to compliance matters. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

Global credit and financial market conditions negatively impact the value of our current portfolio of cash equivalents or short-term investments and our ability to meet our financing objectives.

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our marketable securities consist primarily of investments in readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since June 30, 2008, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our current liquidity needs.
 
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 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, selling and marketing of product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Neither we nor our collaboration partners are permitted to market our product candidates in the United States until we receive approval of a new drug application (“NDA”) from the FDA or in any other country without the equivalent marketing approval from such country. Neither we nor our collaboration partners have received marketing approval for any of our product candidates. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NDAs, supplements to approved NDAs or their foreign equivalents.

Regulatory approval of an NDA or NDA supplement or a foreign equivalent is not guaranteed, and the approval process is expensive and may take several years. Furthermore, the development process for oncology products may take longer than in other therapeutic areas. Regulatory authorities have 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 preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for marketing 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 or a foreign regulatory authority can delay, limit or deny approval of a drug candidate for many reasons, including:

 
·
the drug candidate may not be deemed safe or effective;

 
·
regulatory officials may not find the data from preclinical studies and clinical trials sufficient;

 
·
the FDA or foreign regulatory authority might not approve our or our third-party manufacturer’s processes or facilities; or

 
·
the FDA or foreign regulatory authority may change its approval policies or adopt new regulations.

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 $10.0 million aggregate, 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.

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, if any, may not gain market acceptance among physicians, patients, healthcare payors and/or the medical community. We believe that the degree of market acceptance will depend on a number of factors, including:

 
·
timing of market introduction of competitive products;

 
·
efficacy of our product;

 
·
prevalence and severity of any side effects;

 
·
potential advantages or disadvantages over alternative treatments;

 
·
strength of marketing and distribution support;

 
·
price of our future products, both in absolute terms and relative to alternative treatments; and
 
33
 
 
·
availability of reimbursement from health maintenance organizations and other third-party payors.

For example, the potential toxicity of single and repeated doses of voreloxin has been explored in a number of animal studies that suggest the dose-limiting toxicities in humans receiving voreloxin may be similar to some of those observed with approved cytotoxic agents, including reversible toxicity to bone marrow cells, the gastrointestinal system and other systems with rapidly dividing cells. In our Phase 1 and Phase 2 clinical trials of voreloxin, we have witnessed the following side effects, irrespective of causality, ranging from mild to more severe: lowered white blood cell count that may lead to a serious or possibly life-threatening infection, hair loss, mouth sores, fatigue, nausea with or without vomiting, lowered platelet count, which may lead to an increase in bruising or bleeding, lowered red blood cell count (anemia), weakness, tiredness, shortness of breath, diarrhea and intestinal blockage. Our ongoing Phase 1 clinical trials of SNS-032 and SNS-314 have a limited number of patients enrolled thus far. We can not yet assess the extent and type of side effects and/or unacceptable toxicities that these product candidates might exhibit in the patient populations and dosing regimens being evaluated.

If our future products fail to achieve market acceptance, due to unacceptable side effects or any other reasons, we may not be able to generate significant revenue or to achieve or sustain profitability.

Even if we receive regulatory approval for a product candidate, we will be subject to ongoing FDA and other regulatory obligations and continued regulatory review, which may result in significant additional expense and limit our ability to commercialize our future products.

Any regulatory approvals that we or our collaboration partners receive for our product candidates may also be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing studies. In addition, even if approved, the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for any product will be subject to extensive and ongoing regulatory requirements. The subsequent discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the product, and could include withdrawal of the product from the market.

Regulatory policies may change and additional government 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 might not be permitted to market our future products and we may not achieve or sustain profitability.

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

There is significant uncertainty related to the third party coverage and reimbursement of newly approved drugs both nationally and internationally. The commercial success of our future products in both domestic and international markets depends on whether third-party coverage and reimbursement is available for the ordering of our future products by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to manage healthcare costs by limiting both coverage and the level of reimbursement of new drugs and, as a result, they may not cover or provide adequate payment for our future products. These payors may not view our future products as cost-effective, and reimbursement may not be available to consumers or may not be sufficient to allow our future products to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or reduce healthcare costs or reform government healthcare programs could result in lower prices or rejection of our future products. Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our future products may reduce any future product revenue.

Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.

We intend to market our future products in international markets. In order to market our future products in Canada, the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals. We have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional testing at significant cost. 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 foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.
 
34
 
Foreign governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to governmental control. In these countries, pricing 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 future product to other available therapies. If reimbursement of our future products 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 incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state, regional and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials. Although we believe our safety procedures for handling and disposing of these materials and waste products comply with these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could significantly exceed our insurance coverage, which is limited to $0.1 million for pollution cleanup, and we are uninsured for third-party contamination injury. In addition, as a result of the wind down of our research activities and the closure of our former research and development facility, we are in the process of extensive hazardous waste disposal and decontamination activities. Failure to conduct these activities in a timely manner and in accordance with all applicable laws and regulations could result in significant liability and/or significant delays in our ability to sublease our vacated facility.

Risks Related to Our Common Stock

If we sell shares of our common stock in future financings, stockholders may experience immediate dilution.
 
We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount.

In addition, as opportunities present themselves in the future, we may enter into financing or similar arrangements, including the issuance of debt securities, preferred stock or common stock. If we issue additional common or preferred stock or securities convertible into common stock, our stockholders could experience dilution.

*The price of our common stock may continue to be volatile, and the value of an investment in our common stock may decline.

In 2008, our common stock has traded as low as $1.00 and as high as $2.10. Factors that could cause continued volatility in the market price of our common stock include, but are not limited to:

 
·
failure to raise additional capital to carry through with our clinical development plans;

 
·
results from, and any delays in or discontinuance of, our clinical trial programs, including our ongoing and planned clinical trials for voreloxin, SNS-032 and SNS-314;

 
·
announcements of FDA non-approval of our product candidates, including voreloxin, SNS-032 or SNS-314, delays in filing regulatory documents with the FDA or other regulatory agencies, or delays in the review process by the FDA or other foreign regulatory agencies;

 
·
announcements relating to our ongoing collaborations with Biogen Idec, Johnson & Johnson PRD and Merck;

 
·
announcements relating to restructuring and other operational changes;

 
·
delays in the commercialization of our future products;

 
·
market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors;
 
35
 
 
·
issuance of new or changed securities analysts’ reports or recommendations;

 
·
actual and anticipated fluctuations in our quarterly operating results;

 
·
developments or disputes concerning our intellectual property or other proprietary rights;

 
·
introduction of technological innovations or new products by us or our competitors;

 
·
issues in manufacturing our product candidates or future products, if any;

 
·
market acceptance of our future products, if any;

 
·
deviations in our operating results from the estimates of analysts;

 
·
third-party healthcare reimbursement policies;

 
·
FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 
·
litigation or public concern about the safety of our product candidates or future products, if any;

 
·
failure to develop or sustain an active and liquid trading market for our common stock;

 
·
sales of our common stock by our officers, directors or significant stockholders; and

 
·
additions or departures of key personnel.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has often been 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.

*If we fail to continue to comply with the listing requirements of The NASDAQ Global Market, the price of our common stock and our ability to access the capital markets could be negatively impacted. 
 
Our common stock is currently listed on The NASDAQ Global Market. Through August 7, 2008, our stock has traded as low as $1.00 per share and, as of August 4, 2008, the closing price of our common stock was $1.55. The listing standards of The NASDAQ Global Market provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30 consecutive business days. Additionally, we must satisfy at least one of the following conditions: (A) stockholders’ equity of at least $10 million, (B) total market value of listed securities of at least $50 million or (C) at least $50 million of total assets and $50 million of total revenue.
 
Announcements by us of potential or pending NASDAQ delisting actions could further depress our stock price and market value and, even if we satisfy the market capitalization requirement, our stock price will need to trade above $1.00 on a sustained basis to remain listed. If our stock price drops below $1.00, we may seek to implement a reverse stock split. Reverse stock splits frequently result in a loss in stockholder value as the actual post-split price is often lower than the pre-split price, adjusted for the split.

If we fail to comply with the listing standards, our common stock listing may be moved to the NASDAQ Capital Market, which is a lower tier market, or our common stock may be delisted and traded on the over-the-counter bulletin board network. Moving our listing to the NASDAQ Capital Market could adversely affect the liquidity of our common stock and the delisting of our common stock would significantly affect the ability of investors to trade our securities and could significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

36

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 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:

 
·
a classified Board of Directors so that not all directors are elected at one time;

 
·
a prohibition on stockholder action through written consent;

 
·
limitations on our stockholders’ ability to call special meetings of stockholders;

 
·
an advance notice requirement for stockholder proposals and nominations; and

 
·
the authority of our Board of Directors to issue preferred stock with such terms as our Board of Directors may determine.

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

The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Our executive officers and directors and their affiliates beneficially owned approximately 42.0 percent of our outstanding common stock as of February 29, 2008. Accordingly, these stockholders, acting as a group, 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.

We have never paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

There were no repurchases of securities or any sales of unregistered equity securities during the quarter ended June 30, 2008.

37
 
Item 3.
Defaults Upon Senior Securities

None.


Item 4.
Submission of Matters to a Vote of Security Holders

We held our 2008 Annual Meeting of Stockholders on June 5, 2008. The two proposals at the Annual Meeting were (i) the election of three directors, each to serve until the 2011 annual meeting of stockholders or until their earlier resignation or removal or their successors have been duly elected and qualified, and (ii) our stockholders’ ratification of Ernst & Young LLP as our independent registered public accounting firm for the year ended December 31, 2008. The tabulation of votes on each of the proposals is as follows:

1.
Proposal to elect three (3) directors:

Nominee
  
For
  
Withheld
  
Matthew K. Fust
    
20,337,211
    
361,605
  
Jonathan S. Leff
    
19,821,940
    
876,876
  
Daniel N. Swisher, Jr.
    
20,605,792
    
93,024
  

Anthony B. Evnin, Ph.D., Stephen P.A. Fodor, Ph.D., Matthew K. Fust, Steven Goldby, Homer L. Pearce, Ph.D., David C. Stump, M.D., Ph.D and James W. Young, Ph.D. also continued as directors after the Annual Meeting. James A. Wells, Ph.D. resigned from the Board of Directors effective as of June 25, 2008.

2.
Proposal to ratify the selection of Ernst & Young LLP, as our independent registered public accounting firm:

For
  
Against
  
Abstain
  
20,461,691
    
31,546
    
205,579
  

There were no broker non-votes on the matters described above.
 
Item 5.
Other Information

On August 6, 2008, the 2008 Executive Bonus Program (the “Program”) was approved by the Compensation Committee of our Board of Directors and our “outside directors” (as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended) (the “Outside Directors”) as to the elements relating to our Executive Chairman and Chief Executive Officer. The Program supersedes and replaces in its entirety the Amended and Restated 2008 Bonus Program that was originally adopted by the Board of Directors on March 5, 2008 and amended by the Compensation Committee on June 3, 2008 with respect to Sunesis’ Vice President level employees and above. Employees below such level are covered by a separate bonus program also adopted on August 6, 2008. The material changes to the Program as compared to the Amended and Restated 2008 Bonus Program previously disclosed on a Form 8-K filed March 11, 2008 are as follows:

 
·
Eligible participants under the Program are now limited to Sunesis’ Vice President level employees and above.
 
 
·
The performance period under the Program was modified such that each eligible participant is provided an opportunity to earn an aggregate target bonus based on the level of achievement by Sunesis of certain corporate objectives and the level of achievement by the participant of individual objectives for performance during the second half of 2008 as well as for performance during the first half of 2009. The aggregate target bonus opportunity under the Program is weighted under the Program 50% to the second half of 2008 and 50% to the first half of 2009.
 
 
·
Bonus targets under the Program were increased to a range of between 50% to 80% of an eligible executive’s 2008 annual base salary, from 25% to 40% of an eligible executive’s 2008 annual base salary.
 
 
·
Our Outside Directors, rather than our entire Board of Directors, shall approve the individual objectives, target bonus opportunity and any payouts under the Program for our Chief Executive Officer and Chairman after a recommendation is made by the Compensation Committee regarding such matters.
 
 
·
Eligible participants must remain employed by us through the dates in which bonuses under the Program are determined by the Compensation Committee or our Outside Directors, as applicable.
 
 
·
The Compensation Committee will determine whether to pay some or all of any bonus payout for an eligible participant in cash or in restricted stock awards, restricted stock units or stock options under our 2005 Equity Incentive Award Plan and the Compensation Committee may require such equity awards to be subject to time-based vesting following the applicable determination date; provided, however, that at least 50% of the value of any bonus payout finally determined by the Compensation Committee will be paid in cash.
 
The above summary of the Program is qualified in its entirety by the Program, a copy of which is filed as Exhibit 10.56 to this Quarterly Report on Form 10-Q and incorporated by reference herein.

Item 6.
Exhibits

Exhibit 
Number
  
Description
     
3.1
  
Amended and Restated Certificate of Incorporation of the Registrant (Delaware) (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K/A filed on May 23, 2007).
     
3.2
  
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on December 11, 2007).
     
4.1
  
Reference is made to Exhibit 3.1 and 3.2.
     
10.56*
  
Sunesis Pharmaceuticals, Inc. 2008 Executive Bonus Program.
     
10.57*
  
Forms of Stock Option Grant Notice and Stock Option Agreement under the Amended and Restated 2006 Employment Commencement Incentive Plan.
     
10.58*
  
Executive Severance Benefits Agreement, dated June 2, 2008, by and between the Registrant and Steven B. Ketchum, Ph.D.
 
38
 
10.59*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 28, 2008, by and between Registrant and Daniel N. Swisher, Jr.
     
10.60*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 29, 2008, by and between Registrant and Eric H. Bjerkholt.
     
10.61*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 26, 2008, by and between Registrant and James W. Young, Ph.D.
     
10.62*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 22, 2008, by and between Registrant and Valerie L. Pierce.
     
10.63*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 27, 2008, by and between Registrant and Daniel C. Adelman, M.D.
     
10.64*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 28, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
10.65*
  
Release Agreement, dated June 6, 2008, by and between Registrant and Daniel C. Adelman, M.D.
     
10.66*
  
Release Agreement, dated August 4, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
10.67*
  
Acceptance of Option Amendment, dated June 6, 2008, by and between Registrant and Daniel C. Adelman, M.D.
     
10.68*
  
Acceptance of Option Amendment, dated June 27, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
31.1
  
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
     
31.2
  
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
     
32.1#
  
Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
     
32.2#
  
Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

*
Management contract, compensating plan or arrangement.
   
#
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule; Management’s Reports on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the Certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be filed for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

39
 
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
SUNESIS PHARMACEUTICALS, INC.
 
 
(Registrant)
     
Date: August 7, 2008
 
/S/ ERIC H. BJERKHOLT
 
  
Eric H. Bjerkholt
Senior Vice President, Corporate Development and Finance,
Chief Financial Officer

Exhibit Index

Exhibit 
Number
  
Description
     
3.1
  
Amended and Restated Certificate of Incorporation of the Registrant (Delaware) (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K/A filed on May 23, 2007).
     
3.2
  
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on December 11, 2007).
     
4.1
  
Reference is made to Exhibit 3.1 and 3.2.
     
10.56*
  
Sunesis Pharmaceuticals, Inc. 2008 Executive Bonus Program.
     
10.57*
  
Forms of Stock Option Grant Notice and Stock Option Agreement under the Amended and Restated 2006 Employment Commencement Incentive Plan.
     
10.58*
  
Executive Severance Benefits Agreement, dated June 2, 2008, by and between the Registrant and Steven B. Ketchum, Ph.D.
     
10.59*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 28, 2008, by and between Registrant and Daniel N. Swisher, Jr.
     
10.60*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 29, 2008, by and between Registrant and Eric H. Bjerkholt.
     
10.61*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 26, 2008, by and between Registrant and James W. Young, Ph.D.
     
10.62*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 22, 2008, by and between Registrant and Valerie L. Pierce.
     
10.63*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 27, 2008, by and between Registrant and Daniel C. Adelman, M.D.
     
10.64*
  
Amended and Restated Executive Severance Benefits Agreement, dated May 28, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
10.65*
  
Release Agreement, dated June 6, 2008, by and between Registrant and Daniel C. Adelman, M.D.
 
40
 
10.66*
  
Release Agreement, dated August 4, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
10.67*
  
Acceptance of Option Amendment, dated June 6, 2008, by and between Registrant and Daniel C. Adelman, M.D.
     
10.68*
  
Acceptance of Option Amendment, dated June 27, 2008, by and between Registrant and Robert S. McDowell, Ph.D.
     
31.1
  
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
     
31.2
  
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
     
32.1#
  
Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
     
32.2#
  
Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

*
Management contract, compensating plan or arrangement.
   
#
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule; Management’s Reports on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the Certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be filed for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

41

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