Viracta Therapeutics, Inc. - Quarter Report: 2009 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2009

OR

For the transition period from              to             

Commission file number: 000-51531

SUNESIS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

The registrant had 34,419,176 shares of common stock, $0.0001 par value per share, outstanding as of June 30, 2009.

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SUNESIS PHARMACEUTICALS, INC.

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PART I — FINANCIAL INFORMATION

SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

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SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

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SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

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SUNESIS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Sunesis Pharmaceuticals, Inc. (the “Company” or “Sunesis”) was incorporated in the state of Delaware on February 10, 1998, and its facilities are located in South San Francisco, California. Sunesis is a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of hematologic and solid tumor cancers. The Company’s primary activities since incorporation have been conducting research and development internally and through corporate collaborators, in-licensing pharmaceutical compounds, conducting clinical trials, performing business and financial planning, and raising capital.

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 condensed 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. As of June 30, 2009, the Company had an accumulated deficit of $347.4 million. The Company needs to raise substantial additional funds to continue operations, fund additional clinical trials of voreloxin and bring future products to market. Management plans to finance the Company’s operations with equity issuances, including the initial closing and potential additional closings of the sale of units and common stock described in Note 6 — Stockholders’ Equity, debt arrangements, a possible partnership or license of development and/or commercialization rights to voreloxin and, in the long term, product sales and royalties. Management believes that currently available cash, cash equivalents and marketable securities will be sufficient to fund the Company’s operations through December 31, 2009.

Principles of Consolidation

The Company’s condensed 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 generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates. Significant estimates, assumptions and judgments made by management include those related to revenue recognition, clinical trial accounting and stock-based compensation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 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. The balance sheet as of December 31, 2008 was derived from the audited financial statements as of that date. These interim financial results are not necessarily indicative of results to be expected for the full year or any other interim period. Certain prior period liabilities in the condensed consolidated balance sheets and statements of cash flows have been reclassified to conform to the current year presentation. These unaudited condensed 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, 2008. The Company has evaluated subsequent events through July 28, 2009, the date on which the financial statements being presented were issued as part of this Quarterly Report on Form 10-Q, and not beyond that date.

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Loss per Common Share

Basic loss attributable to common stockholders per common share is calculated by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss attributable to common stockholders per common share is computed by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding and dilutive potential common shares for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock and options and warrants to purchase common stock are considered to be potential common shares, but have been excluded from the calculation of diluted loss attributable to common stockholders per common share as their effect is anti-dilutive. The excluded amounts stated below are on an as-converted basis as of the period end date.

The following table sets forth the computation of basic and diluted loss attributable to common stockholders per common share:

Comprehensive Loss

Comprehensive loss is comprised of net loss and unrealized gains or losses on marketable securities. Comprehensive loss for the periods presented is as follows:

Accumulated other comprehensive income (loss) consists entirely of unrealized gains or losses on marketable securities as of each balance sheet date presented.

Recent Accounting Pronouncements

Effective January 1, 2009, the Company adopted Emerging Issues Task Force, or EITF, Issue No. 07-1, Accounting for Collaborative Arrangements, or EITF 07-1. EITF 07-1 requires participants in a collaborative arrangement (sometimes referred to as a “virtual joint venture”) to present the results of activities for which they act as the principal on a gross basis and to report any payments received from (made to) other collaborators based on other applicable GAAP, or, in the absence of other applicable GAAP, based on analogy to authoritative literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 also requires significant disclosures related to collaborative arrangements. The adoption did not have a material impact on the Company’s financial condition or consolidated results of operations.

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Effective April 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of SFAS 165 had no material effect on the Company’s financial condition or consolidated results of operations.

Effective April 1, 2009, the Company adopted Financial Accounting Standards Board, or FASB, Staff Position No. FAS 115-2, or FSP FAS 115-2. FSP FAS 115-2 amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. FSP FAS 115-2 requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of FSP FAS 115-2 had no material effect on the Company’s financial condition or consolidated results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162, or SFAS 168. The FASB Accounting Standards Codification, or Codification, will become the source of authoritative U.S. GAAP recognized by the FASB applicable to non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will no longer be authoritative. SFAS 168 is effective for the Company for the nine-month period ended September 30, 2009 and is not expected to have a material effect on the Company’s financial condition or consolidated results of operations.

2. License Agreements

Dainippon Sumitomo Pharma Co., Ltd.

In October 2003, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd., or Dainippon, to acquire exclusive worldwide development and marketing rights for the Company’s lead anti-cancer product candidate, voreloxin. The Company may in the future make a series of milestone payments of up to $7.5 million to Dainippon for starting Phase 3 clinical testing, for filing new drug applications, or NDAs, and for receiving regulatory approval in the United States, Europe and Japan for cancer treatment. If voreloxin is approved for a non-cancer indication, additional milestone payments become payable to Dainippon.

The agreement also provides for royalty payments to Dainippon at rates that are based on total annual net sales. Under the agreement, the Company may reduce its royalty payments to Dainippon if a third party markets a competitive product and the Company must pay royalties for third-party intellectual property rights necessary to commercialize voreloxin. Royalty obligations under the agreement continue on a country-by-country and product-by-product basis until the later of the date on which no valid patent claims relating to a product exist or 10 years from the date of the first sale of the product.

Bristol-Myers Squibb Company

In April 2005, the Company entered into a license agreement with Bristol-Myers Squibb Company, or BMS, in which the Company obtained worldwide exclusive and non-exclusive diagnostic and therapeutic licenses to SNS-032, a selective inhibitor of cyclin-dependent kinases, or CDKs, 2, 7 and 9, and any future CDK inhibitors derived from the related intellectual property. At that time, the Company made an $8.0 million upfront payment to BMS through the issuance of shares of the Company’s Series C-2 preferred stock, which converted into common stock upon the Company’s initial public offering in September 2005. In February 2006, the Company made a $2.0 million milestone payment to BMS for the initiation of a Phase 1 clinical trial of SNS-032 through the issuance of shares of the Company’s common stock.

Based on the results of the Company’s Phase 1 clinical trial of SNS-032 and the decision to focus on the development of voreloxin, the Company has discontinued development of SNS-032. As a result, the Company terminated the license agreement and returned SNS-032 to BMS in March 2009.

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SARcode Corporation

In March 2006, the Company entered into a license agreement with SARcode Corporation, or SARcode, a privately held biopharmaceutical company, granting SARcode an exclusive, worldwide license to all of the Company’s lymphocyte function-associated antigen-1, or LFA-1, patents and related know-how. Pursuant to the license agreement, the Company received a total of $1.0 million in license fees: $0.5 million in 2007 and $0.5 million in September 2008, which were recorded as revenue upon receipt. In addition, the Company received three secured convertible promissory notes, with a total principal amount of $1.0 million, which are due in 2012 and are convertible into the preferred stock of SARcode at the Company’s option. The Company has yet to record these notes receivable from SARcode as revenue due to uncertainty of collectibility.

In March 2009, SARcode acquired the Company’s interest in all of its LFA-1 patents and related know-how for a total cash consideration of $2.0 million. Of this amount, $1.8 million was received in March 2009 and was recorded as deferred revenue. The remaining $0.2 million was received in April 2009 upon delivery to SARcode of all records related to LFA-1. The entire $2.0 million was recorded as revenue in the second quarter of 2009 when all elements of the transaction had been delivered. In connection with the sale, the license agreement was terminated. Sunesis continues to hold the three secured convertible promissory notes with a total principal amount of $1.0 million.

3. Strategic Collaborations

Biogen Idec, Inc.

In August 2004, the Company entered into a collaboration agreement with Biogen Idec, Inc., or Biogen Idec, to discover, develop and commercialize small molecule inhibitors of Raf kinase and up to five additional targets that play a role in oncology and immunology indications or in the regulation of the human immune system. Concurrent with the signing of the agreement, Biogen Idec made a $14.0 million equity investment in the Company through the purchase of the Company’s Series C-2 preferred stock, which converted into common stock upon the Company’s initial public offering in September 2005. Biogen Idec’s equity ownership was 8.5% of the Company’s common shares outstanding as of June 30, 2009 and December 31, 2008.

Pursuant to the terms of the collaboration agreement, the Company applied its proprietary Tethering technology to generate small molecule leads during the research term, for which it received research funding of approximately $1.2 million per quarter. The funding was paid in advance to support some of the Company’s scientific personnel. In connection with the Company’s June 2008 restructuring, the parties agreed to terminate the research term on June 30, 2008 and the Company no longer receives research funding from Biogen Idec. The Company received a $7.0 million upfront technology access fee from Biogen Idec and had received a total of $1.5 million in milestone payments for meeting certain preclinical milestones through June 30, 2009, including a $0.5 million milestone received in June 2008. In June 2009, the Company earned a milestone of $1.5 million for Biogen Idec’s selection of a Raf kinase inhibitor development candidate for the treatment of cancer, which was recorded as revenue in the second quarter of 2009. The milestone payment was received in July 2009.

The Company may in the future receive pre-commercialization milestone payments of up to $60.0 million per target, as well as royalty payments depending on product sales. Royalty payments may be increased if the Company exercises its option to co-develop and co-promote product candidates for up to two targets worldwide (excluding Japan) and may be reduced if Biogen Idec is required to in-license additional intellectual property related to certain technology jointly developed under the collaboration agreement in order to commercialize a collaboration product.

Johnson & Johnson Pharmaceutical Research & Development LLC

In the first quarter of 2009, the Company initiated discussions with Johnson & Johnson Pharmaceutical Research & Development LLC, or J&JPRD, regarding the termination of its collaboration related to the enzyme, Cathepsin S, entered into in May 2002. On July 17, 2009, J&JPRD provided written notice that it was terminating this collaboration agreement. In accordance with the terms of the collaboration agreement, the termination will be effective on January 13, 2010. As a result, the Company does not expect to receive any additional revenues from J&JPRD under this collaboration agreement.

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The table below sets forth our collaboration revenue for the three and six months ended June 30, 2009 and 2008:

4. Restructuring

2009 Restructuring

On March 30, 2009, the Compensation Committee of the Company’s board of directors, in conjunction with the anticipated closing of the initial closing of the Private Placement (see Note 6), committed to a restructuring plan for an immediate reduction in force affecting six employees, including two executives, or the “2009 Restructuring”. Employees were notified on March 31, 2009. All terminated employees were awarded severance payments and continuation of benefits based on length of service at the Company.

As a result of the 2009 Restructuring, the Company recorded a restructuring charge of $0.6 million in the first quarter of 2009 for employee severance and related benefit costs, which is included on a separate line in the Company’s statement of operations. The severance payments were made in the second quarter of 2009, and other personnel-related expenses such as employee benefits will be substantially paid over the remainder of 2009. No further charges are expected related to this restructuring.

The following table summarizes the changes in the 2009 Restructuring liabilities, for which balances are included under “Accrued restructuring charges” in the Company’s balance sheets:

2008 Restructuring

In June 2008, the Company implemented a corporate realignment to focus on the development of voreloxin. In conjunction with this restructuring, or the “2008 Restructuring”, the Company expanded its late-stage development leadership team, ceased its internal discovery research activities and reduced its workforce by approximately 60%. All terminated employees were awarded severance payments, continuation of benefits based on length of service at the Company and career transition assistance. The Company also consolidated its remaining employees into the leased office premises at 395 Oyster Point Boulevard and a small leased laboratory facility at 349 Allerton Avenue, both in South San Francisco.

In January 2009, the Company entered into an Agreement for Termination of Lease and Voluntary Surrender of Premises with ARE-Technology Center, SSF, LLC, or Alexandria, with respect to a leased facility located at 341 Oyster Point Boulevard, South San Francisco, which formerly served as the Company’s headquarters and research and development facility. Pursuant to the terms of the Termination Agreement, the Company was required to vacate the premises by February 28, 2009, and agreed to pay an aggregate fee of $2.2 million in consideration of early termination of the Lease Agreement. Under the original Lease Agreement, the Company was required to pay Alexandria base rents and operating expenses of $15.7 million between 2009 and 2013. The $2.2 million termination fee was paid in January 2009. In addition, the Company paid a commission of $0.4 million to a third party in January 2009 for negotiation of the lease termination.

In the first quarter of 2009, the Company recorded net restructuring charges of $1.3 million for these lease termination activities related to the 2008 Restructuring, which are included on a separate line in the Company’s statement of operations. The net charge included the $2.2 million early termination fee and $0.4 million third-party commission, partially offset by the reversal of $1.4 million in non-cash deferred rent on this facility, which is recorded as a non-cash restructuring credit in the Company’s statement of cash flows.

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The following table summarizes the changes in 2008 Restructuring liabilities, for which balances are included under “Accrued restructuring charges” in the Company’s balance sheets:

As of June 30, 2009, a total of $3.5 million of expenses had been incurred for the employee severance and related benefit costs, consisting of $3.2 million of severance and other benefit costs and $0.3 million of stock-based compensation. A total of $3.6 million had been incurred through June 30, 2009 related to facility exit costs, consisting of $2.2 million of lease termination fees, $1.6 million of asset impairments, $0.4 million of third-party commission and $0.8 million of other facility closure expenses, partially offset by the reversal of $1.4 million of deferred rent. No further charges are expected related to the 2008 Restructuring.

As part of the 2008 Restructuring, the Company implemented a corporate realignment to focus on the development of voreloxin. Due to the resulting termination of research activities, it was determined that laboratory equipment with a net book value of $1.2 million would be sold, and, accordingly, this equipment was recorded as held-for-sale. Held-for-sale equipment with a net book value of $0.4 million was sold in the first six months of 2009 for net proceeds of $0.4 million. The $52,000 loss on sale has been included in “Other income (expense), net” in the Company’s statement of operations. As of June 30, 2009, the remaining held-for-sale equipment was valued at $24,000. The Company expects to sell the remaining held-for-sale equipment by the end of 2009.

5. Contingencies

From time to time, the Company may be involved in legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of its business or otherwise. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on the Company’s results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on the Company because of the defense costs, diversion of management resources and other factors. The Company is not currently involved in any material legal proceedings.

6. Stockholders’ Equity

Private Placement

Initial Closing of Units

On April 3, 2009, the Company closed the initial $10.0 million of a private placement of up to $43.5 million of the Company’s securities, or the Private Placement. The Private Placement contemplates the sale of up to $15.0 million of units consisting of Series A convertible preferred stock and warrants to purchase common stock, and up to $28.5 million in common stock, in three closings, to accredited investors, including certain members of management. The per unit purchase price for a share of Series A convertible preferred stock and a warrant to purchase 10 shares of common stock is $3.45 for both the initial and second closings. The warrants issued in the initial closing and issuable in the second closing have an exercise price of $0.22 per share and a term of seven years from issuance. In the initial closing, $10.0 million of units were sold, resulting in net proceeds of $8.8 million, which the Company expects to be used for working capital and other general corporate purposes. In the initial closing, the Company issued approximately 2.9 million shares of Series A convertible preferred stock, which are initially convertible into approximately 29 million shares of common stock and warrants to purchase an aggregate of approximately 29 million shares of common stock at $0.22 per share.

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Second Closing of Units

An additional $5.0 million of units may be sold in a second closing, which was approved by the Company’s stockholders on June 18, 2009. This second closing may occur at the Company’s election or at the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement. The Company may elect to hold the second closing if the achievement of a specified milestone with respect to voreloxin has occurred and the Company’s common stock is trading above a specified price. If the Company has not delivered notice to the investors in the Private Placement of the Company’s election to complete the second closing, or if the conditions for the second closing have not been met, the investors may elect to purchase the units in the second closing by delivering notice to the Company of their election. Notice of an election to complete the second closing, either by the Company or the investors in the Private Placement, must be delivered on or before the earliest to occur of December 31, 2009, the common equity closing described below or the occurrence of a qualifying alternative common stock financing. If the second closing occurs, it will be subject to the satisfaction of customary closing conditions. In the second closing, if completed, the Company would issue approximately 1.45 million shares of Series A convertible preferred stock, which would be convertible into approximately 14.5 million shares of common stock, and warrants to purchase approximately 14.5 million shares of common stock.

Common Equity Closing

An additional $28.5 million of common stock may be sold in a common equity closing, which was approved by the Company’s stockholders on June 18, 2009. The common equity closing may be completed at the Company’s election prior to the earlier of December 31, 2010 and a qualifying alternative common stock financing, or upon the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement prior to a date determined with reference to the Company’s cash and investment balance dropping below $4.0 million at certain future dates. If the Company elects to complete the common equity closing, it will be subject to the approval of the purchasers holding a majority of the Series A convertible preferred stock issued in the Private Placement and subject to a condition that the Company sells at least $28.5 million of common stock in the common equity closing. In the common equity closing, if completed, the Company would issue approximately 103.6 million shares of common stock at a purchase price of $0.275 per share.

Other Investor Rights

As of the initial closing, certain of the investors have the right to designate three of eight members of the Company’s board of directors. Following the second closing, if completed, the independent investors would have the right to designate five of nine members of the board of directors. In conjunction with the initial closing of the Private Placement, the investors received a number of additional rights as a result of their convertible preferred stock ownership, including the right to approve any sale of the Company, any issuance of debt or preferred stock and, unless certain conditions are met, any issuance of common stock, other than the second closing and the common equity closing described above. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series A convertible preferred stock have a right to receive proceeds equal to $10.35 (i.e. three times the purchase price of each unit) for each share of Series A convertible preferred stock held, plus all declared and unpaid dividends, in preference to the holders of common stock. A change in control, as defined in the securities purchase agreement, shall be deemed a liquidation, and includes a consolidation or merger with or into any other corporation, or the sale, exclusive license or exclusive partnering of the majority of the Company’s assets.

On June 29, 2009, certain documents executed in connection with the Private Placement were amended to: (a) clarify that in the event that an investor wishes to sell or transfer their shares of Series A convertible preferred stock, they must transfer all associated rights and obligations with such shares, including the option to participate in the second closing, or the Second Closing Option, and the option to participate in the common equity closing, or the Common Equity Closing Option, and (b) require approval by the Company’s board of directors of any transaction that constitutes a “change of control” event that does not already require board approval by statute.

Accounting Treatment

On April 3, 2009, the fair values of the four primary components of the Private Placement: (a) the Series A convertible preferred stock, (b) the warrants to purchase common stock, (c) the Second Closing Option, and (d) the Common Equity Closing Option, were computed using the Black-Scholes option-pricing model, or Black-Scholes Model. The values were calculated as a series of call options on the potential enterprise value of the Company at different valuation points at which the claims of the different stakeholder groups on the enterprise value would change. On April 3, 2009, the Company determined that the Second Closing Option and Common Equity Closing Option were freestanding instruments, and as a result, their fair values of $7.3 million and $10.2 million were initially recorded as liabilities in the Company’s balance sheet. As the total fair value of these two components exceeded the gross proceeds of the Private Placement of $10.0 million, no value was attributed to the Series A convertible preferred stock or warrant components as of this date, and the $7.5 million excess of the fair value of the two closing options over the gross proceeds was recorded as a loss within other income (expense) in the Company’s statement of operations.

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On June 18, 2009, the Company’s stockholders approved an increase in the authorized number of shares of common stock from 100 million to 400 million, subject to an administrative filing with the State of Delaware, which occurred on July 2, 2009 (see Note 9). As a result, the Common Equity Closing Option liability was revalued to its fair value of $20.1 million as of June 18, 2009, resulting in a charge for the increase in fair value of $9.9 million, which was recorded within other income (expense) in the Company’s statement of operations. The Common Equity Closing Option was then reclassified from a liability to additional paid-in-capital in the Company’s balance sheet.

On June 29, 2009, as a result of the amendments to the Private Placement agreements, the convertible preferred stock, the Second Closing Option, and the Common Equity Closing Option were extinguished by the issuance of the amended convertible preferred stock instrument. The Second Closing Option liability was revalued upon extinguishment to its fair value of $10.9 million, resulting in a charge to other income (expense) for the increase in fair value of $3.6 million. The convertible preferred stock and Common Equity Closing Option were also revalued upon extinguishment to their fair values of $22.9 million and $23.6 million, respectively, resulting in a deemed distribution to preferred stockholders of $26.4 million. On June 29, 2009, the amended convertible preferred stock instrument was recorded as convertible preferred stock within stockholders equity, at its fair value of $57.4 million, less transaction costs of $1.2 million.

In the event the Second Closing Option is exercised, the independent investors will have the right to designate five of nine members of the board of directors, which will allow the Series A convertible preferred stock to become redeemable in certain events outside of the control of the Company. As a result, the Company would be required to immediately reclassify all of the Series A convertible preferred stock issued in the Private Placement to mezzanine equity.

Stock Option Plans

The Company generally grants options (i) to new employees, 25% of which becomes exercisable on the first anniversary of the vesting commencement date, and 1/48^th becomes exercisable each month over the remainder of the four-year vesting period, (ii) to existing employees, 1/48^th of which becomes exercisable each month following the date of grant over a period of four years, (iii) to new non-employee members of the board of directors, 50% of which becomes exercisable on each of the first and second anniversary of the vesting commencement date, and (iv) to continuing non-employee members of the board of directors, 1/12th of which becomes exercisable each month following the date of grant over a period of one year.

2005 Equity Incentive Award Plan

On January 1, 2009, the number of shares of stock reserved for future issuance under the 2005 Equity Incentive Award Plan, or 2005 Plan, was increased by 1,082,352 shares pursuant to the 2005 Plan’s evergreen provision. Options to purchase 140,000 shares of the Company’s common stock were granted under the 2005 Plan during the six months ended June 30, 2009. As of June 30, 2009, options to purchase an aggregate of 4,621,748 shares of the Company’s common stock had been granted and 4,664,467 shares were available for future grants under the 2005 Plan.

2006 Employment Commencement Incentive Plan

Effective January 1, 2009, the Company’s board of directors approved an amendment to the Company’s 2006 Employment Commencement Incentive Plan, or 2006 Plan, to increase the number of shares of common stock reserved for issuance under the 2006 Plan by an additional 100,000 shares. No options were granted under the 2006 Plan during the six months ended June 30, 2009. As of June 30, 2009, options to purchase an aggregate of 553,000 shares of the Company’s common stock had been granted and 307,000 shares were available for future grants under the 2006 Plan.

2005 Employee Stock Purchase Plan

There were 9,408 shares issued under the 2005 Employee Stock Purchase Plan, or ESPP, during the six months ended June 30, 2009. As of June 30, 2009, there were 243,045 shares of common stock reserved for future issuance under the ESPP.

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7. Stock-Based Compensation

Overview

Employee stock-based compensation expense has been calculated based on awards ultimately expected to vest, reduced for estimated forfeitures. Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Employee stock-based compensation expense related to the Company’s stock-based awards is as follows:

Fair Value of Awards

The Company determines the fair value of stock-based awards on the grant date using the Black-Scholes Model, which is affected by the Company’s stock price as well as assumptions regarding a number of highly subjective variables.

Options to purchase 140,000 and 722,725 shares of the Company’s common stock were granted during the three months ended June 30, 2009 and 2008, respectively, with a total estimated grant date fair value of $22,000 and $0.6 million, respectively. Options to purchase 140,000 and 732,725 shares of the Company’s common stock were granted during the six months ended June 30, 2009 and 2008, respectively, with a total estimated grant date fair value of $22,000 and $0.6 million, respectively. The weighted-average estimated fair value of employee stock options granted was $0.18 and $0.88 per share for the three months ended June 30, 2009 and 2008, respectively, and $0.18 and $0.88 per share for the six months ended June 30, 2009 and 2008, respectively, using the Black-Scholes Model with the following annualized assumptions:

The estimated fair value of stock options that vested in the three months ended June 30, 2009 and 2008 was $0.4 million and $0.8 million, respectively, and for the six months ended June 30, 2009 and 2008 was $0.7 million and $1.4 million, respectively.

The weighted-average estimated fair value of purchase rights granted under the ESPP was $0.47 and $0.81 per share for the three months ended June 30, 2009 and 2008, respectively, and $0.37 and $1.23 per share for the six months ended June 30, 2009 and 2008, respectively, using the Black-Scholes model with the following annualized assumptions:

The estimated fair value of purchase rights outstanding under the ESPP that vested in the three months ended March 31, 2009 and 2008 was $5,000 and $0.1 million, respectively, and for the six months ended June 30, 2009 and 2008 was $5,000 and $0.1 million, respectively.

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For employee stock options, the Company based its assumptions for expected term and expected volatility on the information available with respect to its mature peer group in the same industry. For employee purchase rights under the ESPP, the expected term is equal to the purchase period. The risk-free interest rate assumptions are based upon observed interest rates appropriate for the expected life of the Company’s employee stock options and employee purchase rights. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore uses an expected dividend yield of zero. The post-vesting forfeiture rate is derived from the Company’s historical option cancellation information.

Option Plan Activity

The following table summarizes stock option activity for the Company’s stock option plans in the six months ended June 30, 2009:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders if they had exercised all their options on June 30, 2009.

There were no options exercised during the three and six months ended June 30, 2009 and 2008; therefore, the intrinsic value for options exercised during these periods is zero. As the Company believes it is more likely than not that no stock option related tax benefits will be realized, the Company does not record any net tax benefits related to exercised options.

The following table summarizes outstanding and exercisable options for the Company’s stock option plans as of June 30, 2009:

Total estimated unrecognized stock-based compensation cost related to unvested stock options was $3.2 million as of June 30, 2009, which is expected to be recognized over the respective vesting terms of each award through 2011. The weighted average term of the unrecognized stock-based compensation expense is 2.1 years.

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8. Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 established a framework for measuring fair value, and expanded disclosure requirements about such fair value measurements. The Company adopted SFAS 157 on a prospective basis for its financial assets and liabilities on January 1, 2008. In accordance with Statement of Financial Position No. 157-2, issued by the FASB in February 2008, the Company adopted FAS 157 for non-financial assets and non-financial liabilities on January 1, 2009.

Under SFAS 157, 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 (i.e. the exit price). SFAS 157 also establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

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.

All of the Company’s financial instruments held at any time since January 1, 2008 have been valued using Level 1 or Level 2 inputs. The Company’s Level 2 valuations are based upon quoted prices in active markets for similar securities, with pricing adjustments for yield and number of days to maturity.

The following is a summary of the fair value of the Company’s financial assets measured on a recurring basis, which is comprised solely of available-for-sale securities. The table also indicates the related level of inputs of each class of security:

There were no realized gains or losses on the sale of available-for-sale securities for the six months ended June 30, 2009 and the year ended December 31, 2008. As of June 30, 2009, all available-for-sale securities had a contractual maturity of one year or less.

9. Subsequent Events

On July 2, 2009, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 100 million to 400 million and the authorized number of shares of preferred stock from five million to 10 million. The par values of the Company’s common stock and preferred stock both remained at $0.0001 per share.

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The following discussion and analysis of our financial condition as of June 30, 2009 and results of operations for the three and six months ended June 30, 2009 and 2008 should be read together with our condensed consolidated 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, which 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, cash requirements, financing plans, 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.

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 biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of hematologic and solid tumor cancers. We have built a highly experienced cancer drug development organization committed to advancing our lead product candidate, voreloxin, in multiple indications to improve lives of people with cancer.

From our incorporation in 1998 through 2001, our operations consisted primarily of developing and refining our proprietary methods of discovering drugs in pieces, or fragments. From 2002 through June 2008, we focused on the discovery, in-licensing and development of novel small molecule drugs. In June 2008, we announced a corporate realignment to focus on the development of voreloxin. In conjunction with this strategic restructuring, or the 2008 Restructuring, we expanded our late-stage development team, announced the winding down of our internal discovery research activities, ceased development of an enhanced fragment-based discovery platform, and reduced our workforce by approximately 60%.

We are currently advancing voreloxin through Phase 2 development. Voreloxin is a first-in-class anti-cancer quinolone derivative, or AQD — a class of compounds that has not been used previously for the treatment of cancer. Quinolone derivatives have been shown to mediate anti-tumor activity by targeting mammalian topoisomerase II, an enzyme critical for cell replication, and have demonstrated promising preclinical anti-tumor activity. We are in the process of conducting three clinical trials of voreloxin: a Phase 2 clinical trial (known as the REVEAL-1 trial) in previously untreated elderly patients with acute myeloid leukemia, or AML, a Phase 1b/2 clinical trial combining voreloxin with cytarabine for the treatment of patients with relapsed/refractory AML, and a Phase 2 single agent clinical trial in platinum-resistant ovarian cancer patients. We have worldwide development and commercialization rights to voreloxin. We may enter into partnering arrangements for this product candidate to maximize its commercial potential.

At the American Society of Clinical Oncology (ASCO) 2009 Annual Meeting in June, we presented new data from the three ongoing clinical trials that we believe demonstrates that voreloxin shows promising safety and efficacy in acute myeloid leukemia and in platinum-resistant ovarian cancer. Please see our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2009 for further information regarding the data we presented at ASCO.

We have taken a number of important steps to focus our resources and efforts on the advancement of voreloxin. We have discontinued development of our product candidate, SNS-032, a selective inhibitor of cyclin-dependent kinases, or CDKs, 2, 7 and 9, which we had in-licensed from BMS. In March 2009, the license agreement was terminated and SNS-032 was returned to BMS. In addition, we recently completed enrollment in a Phase 1 trial of SNS-314, a potent and selective pan-Aurora kinase inhibitor discovered internally at Sunesis, in patients with advanced solid tumors. A maximum tolerated dose was not established in that trial, and no responses were observed. We currently have no plans to conduct further development activities on SNS-314 on our own, but we plan to seek a partner to support further development of SNS-314 in the future.

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On April 3, 2009, we closed the initial $10.0 million of a Private Placement of up to $43.5 million of the Company’s securities. The Private Placement contemplates the sale of up to $15.0 million of units consisting of Series A convertible preferred stock and warrants to purchase common stock, and up to $28.5 million in common stock, in three closings, to accredited investors, including certain members of management. In the initial closing, $10.0 million of units were sold, resulting in net proceeds of $8.8 million. An additional $5.0 million of units may be sold in the second closing, which may occur at our election upon the occurrence of certain defined events or at the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement, subject to conditions described in ‘Sources of Liquidity’ below. An additional $28.5 million of common stock may be sold in a common equity closing, again subject to conditions described in ‘Sources of Liquidity’ below.

In March 2009, we announced that we sold our interest in all of our lymphocyte function-associated antigen-1, or LFA-1, patents and related know-how to SARcode Corporation, or SARcode, for total cash consideration of $2.0 million, of which $1.8 million was received in March 2009 and $0.2 million was received in April 2009. The entire $2.0 million was recorded as revenue in the second quarter of 2009. In connection with the sale, the license agreement was terminated. SARcode has been the exclusive licensee of those assets since March 2006.

Our fragment-based discovery approach, known as Tethering, formed the basis of several strategic research and development collaborations entered into between 2002 and 2004, including collaborations with Biogen Idec and Merck. In June 2009, we earned a milestone of $1.5 million for Biogen Idec’s selection of a Raf kinase inhibitor development candidate for the treatment of cancer, which was recorded as revenue in the second quarter of 2009. The milestone payment was received in July 2009. Biogen Idec is currently conducting IND-enabling preclinical work with the Raf kinase development candidate.

We have incurred significant losses in each year since our inception. As of June 30, 2009, we had an accumulated deficit of $347.4 million. 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.

On July 24, 2009, we applied to transfer our listing of common stock from The NASDAQ Global Market to The NASDAQ Capital Market. If our application is not approved, we expect to be subject to delisting proceedings. To list our common stock on The NASDAQ Capital Market we are required to meet certain listing requirements, including a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1.0 million and stockholders’ equity of at least $2.5 million. We requested the transfer of our listing of common stock based upon our compliance with the minimum stockholders’ equity requirement and all other applicable criteria for continued listing on The NASDAQ Capital Market, but for the $1.00 minimum bid price requirement, which has been suspended by NASDAQ through August 2, 2009. If the application is approved, we will no longer be subject to delisting from NASDAQ as a result of the previously disclosed stockholders’ equity deficiency as of December 31, 2008, but we will need to comply with The NASDAQ Capital Markets’ continued listing requirements on an ongoing basis.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the six months ended June 30, 2009 to our critical accounting policies and significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

Effective January 1, 2009, we adopted EITF Issue No. 07-1, Accounting for Collaborative Arrangements, or EITF 07-1. EITF 07-1 requires participants in a collaborative arrangement (sometimes referred to as a “virtual joint venture”) to present the results of activities for which they act as the principal on a gross basis and to report any payments received from (made to) other collaborators based on other applicable GAAP, or, in the absence of other applicable GAAP, based on analogy to authoritative literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 also requires significant disclosures related to collaborative arrangements. The adoption did not have a material impact on our financial condition or consolidated results of operations.

Effective April 1, 2009, we adopted Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of SFAS 165 had no material effect on our financial condition or consolidated results of operations.

Effective April 1, 2009, we adopted Financial Accounting Standards Board, or FASB, Staff Position No. FAS 115-2, or FSP FAS 115-2. FSP FAS 115-2 amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities to make the other-than-temporary

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impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. FSP FAS 115-2 requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of FSP FAS 115-2 had no material effect on our financial condition or consolidated results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162, or SFAS 168. The FASB Accounting Standards Codification, or Codification, will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will no longer be authoritative. SFAS 168 is effective for us for the nine-month period ended September 30, 2009 and is not expected to have a material effect on our financial condition or consolidated results of operations.

Results of Operations

Revenue

We have not generated any revenue from sales of commercial products and do not expect to generate any product revenue or any other significant revenue for the foreseeable future.

Collaboration Revenue. In the past we have generated revenue primarily through payments received in connection with our collaborations, consisting principally of research funding and milestones paid by our collaborators, substantially offsetting our related research and development expenses. However, we are no longer conducting any research activities or receiving research funding in connection with any of our collaborations.

We are entitled to receive milestone payments under our collaborations with Biogen Idec and Merck upon achievement of certain milestones by them. Additionally, we are entitled to receive royalty payments based on future sales of products, if any, resulting from these collaborations, although we do not expect to generate any royalty revenue from these collaborations in the foreseeable future, if at all.

Collaboration revenue was $1.5 million for the three months ended June 30, 2009 as compared to $2.6 million for the same period in 2008. The decrease of $1.1 million was primarily as a result of a decrease in revenue recognized under the collaboration with Biogen Idec due to the termination of the research phase of this collaboration in June 2008. Collaboration revenue was $1.5 million for the six months ended June 30, 2009 as compared to $4.9 million for the same period in 2008. The decrease of $3.4 million was primarily as a result of decreased revenue from the collaborations with Biogen Idec, as described above, and Johnson & Johnson Pharmaceutical Research & Development LLC, or J&JPRD, for which a milestone of $0.5 million was recognized in the first quarter of 2008. The revenues in the three and six months ended June 30, 2009 were primarily comprised of the $1.5 million milestone earned from Biogen Idec’s selection of a Raf kinase inhibitor development candidate for the treatment of cancer.

In the first quarter of 2009, we initiated discussions with J&JPRD regarding the termination of our collaboration related to the enzyme, Cathepsin S, entered into in May 2002. On July 17, 2009, J&JPRD provided written notice that it was terminating this collaboration agreement. In accordance with the terms of the collaboration agreement, the termination will be effective on January 13, 2010. As a result, we do not expect to receive any additional revenues from J&JPRD under this collaboration agreement.

We expect that we will have substantially lower collaboration revenue in 2009 and in future years unless, and until, any products that may result from our collaborations advance to a level where significant milestones will be payable to us.

License and Other Revenue. License and other revenue was $2.0 million and $2.2 million for the three and six months ended June 30, 2009, respectively, as compared to zero for the same periods in 2008. In March 2009, we sold to SARcode our interest in all of the patents and related know-how that had been the subject of a license agreement with them for a total cash consideration of $2.0 million. Of this amount, $1.8 million was received in March 2009 and $0.2 million was received in April 2009. All deliverables under the agreement were completed in April 2009, and as a result, the entire $2.0 million was recorded as revenue in the second quarter. In connection with the sale, the license agreement was terminated and we will not receive any future license fees, milestones or royalties under that license. We still hold three secured convertible promissory notes issued under the original license agreement, with a total principal value of $1.0 million, which are due in 2012 and are convertible into the preferred stock of SARcode at our option. We have yet to record these notes as revenue due to uncertainty of their collectibility.

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Research and Development Expense

Most of our operating expenses to date have been for research and development activities, and include costs incurred:

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

The table below sets forth our research and development expense by program for the three and six months ended June 30, 2009 and 2008 (in thousands):

As a result of our 2008 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 any of our collaborations.

However, we have incurred and expect to continue to incur substantial research and development expense to conduct clinical trials of voreloxin. Clinical trials are costly, and as we continue to advance voreloxin through clinical development, we expect our related expenses to remain high. For example, we expect to spend at least $10.0 million over the next 12 months to advance our voreloxin program to completion of the current Phase 1b/2 and Phase 2 clinical trials as well as prepare for subsequent trials for AML. Due to the risks inherent in the clinical trial process and given the early state of development, we are unable to estimate the additional substantial costs we will incur in the voreloxin development program.

In addition, we are currently focused on trials of voreloxin in targeted indications and patient populations. Based on results of translational research, clinical results, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to pursue and patient populations to treat and how much funding to direct to each indication on an ongoing basis. This will affect our research and development expense going forward.

We are currently anticipating that development of voreloxin will be our highest priority. If we engage a development or commercialization partner on our voreloxin program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future collaborative or licensing arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

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Under our Biogen Idec agreement, we have the right to participate in the co-development and co-promotion of product candidates for up to two targets including, at our option, the Raf kinase target, on a worldwide basis (excluding Japan). If we were to exercise our option on one or more product candidates, our research and development expense would increase significantly.

Research and development expense was $3.4 million and $7.7 million for the three and six months ended June 30, 2009 as compared to $8.3 million and $17.0 million for the same periods in 2008. The decrease of $4.9 million between the three month periods was primarily due to reduced research staffing as a result of our 2008 Restructuring, which resulted in a $2.0 million decrease in headcount-related expenses, and decreases in facility costs of $1.2 million, clinical expenses of $0.7 million and other outside services of $0.5 million. The decrease of $9.3 million between the six month periods was again primarily due to reduced staffing due to the 2008 Restructuring, which resulted in a $4.2 million decrease in headcount-related expenses, and decreases in facility costs of $2.2 million, clinical expenses of $1.1 million, lab costs of $0.7 million and other outside services of $0.7 million. We expect that we will continue to incur significant expenses related to the development of voreloxin in 2009 and future years. Overall research and development expenses are expected to be lower in 2009 as compared to 2008 as a result of the reduction in research efforts and related staffing.

General and Administrative Expense

Our general and administrative expense consists primarily of salaries and other related costs for personnel in finance, human resources, legal, 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 independent auditors.

General and administrative expense was $2.0 million and $4.3 million for the three and six months ended June 30, 2009 as compared to $3.2 million and $6.5 million for the same periods in 2008. The decrease of $1.2 million between the three month periods was primarily due to reduced administrative headcount as a result of our 2008 and 2009 Restructurings, which resulted in a $1.0 million decrease in headcount-related expenses, and $0.1 million decreases in both facility costs and professional service costs. The decrease of $2.2 million between the six month periods was primarily due to reduced administrative headcount as a result of our 2008 and 2009 Restructurings, which resulted in a $1.6 million decrease in headcount-related expenses, and a $0.4 million decrease in professional service costs. We expect general and administrative expenses to be lower in 2009 as compared to 2008 as a result of the reduction in administrative headcount in connection with our 2008 and 2009 Restructurings (see Note 4).

Restructuring Charges

Restructuring charges were $1,000 and $1.9 million for the three and six months ended June 30, 2009 as compared to $4.9 million and $5.2 million for the same periods in 2008. For the three months ended June 30, 2008, the $4.9 million of charges were comprised of $5.6 million related to the 2008 Restructuring, partially offset by a $0.7 million reversal of charges for the restructuring plan implemented in August 2007, or the 2007 Restructuring, related to facility exit costs. For the six months ended June 30, 2009, we recorded net charges of $1.3 million for lease termination activities related to the 2008 Restructuring and a charge of $0.6 million for employee severance and related benefit costs related to the 2009 Restructuring. The net charge for lease termination activities includes $2.2 million for early lease termination fees paid to the landlord and $0.4 million for third party commission, partially offset by the reversal of $1.4 million in non-cash deferred rent on this facility. For the six months ended June 30, 2008, the $5.2 million of charges were comprised of $5.6 million related to the 2008 Restructuring, partially offset by a $0.4 million reversal of 2007 Restructuring charges related to facility exit costs.

Interest Income

Interest income was $6,000 and $19,000 for the three and six months ended June 30, 2009 as compared to $0.3 million and $0.7 million for the same periods in 2008. The decreases between the periods were primarily due to lower average balances of cash, cash equivalents and marketable securities and lower average interest rates during the 2009 periods.

Interest Expense

Interest expense was zero and $1,000 in the three and six months ended June 30, 2009 as compared to $54,000 and $114,000 for the same periods in 2008. The decreases between the periods resulted from the full payment of the outstanding balance under our equipment financing agreement with General Electric Capital Corporation in November 2008.

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Other Income (Expense), Net

Other expense, net was $21.0 million and $21.1 million for the three and six months ended June 30, 2009 as compared to zero for the same periods in 2008. The expense in the 2009 periods was primarily due to non-cash charges of $21.0 million related to the accounting for the Private Placement, comprising of $7.5 million recorded upon the initial closing in April 2009 and $13.5 million upon the revaluation in June 2009 of the options to participate in the second closing and common equity closing.

Liquidity and Capital Resources

Sources of Liquidity

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; research grants; loans from Biogen Idec and other debt financings.

Our cash, cash equivalents and marketable securities totaled $7.3 million as of June 30, 2009, as compared to $10.6 million as of December 31, 2008. The decrease of $3.3 million was primarily due to $12.4 million of net cash used in operating activities, partially offset by net proceeds of $8.8 million from the Private Placement, as described below. No debt was outstanding at either balance sheet date.

On April 3, 2009, we closed the initial $10.0 million of a Private Placement of up to $43.5 million of our securities. The Private Placement contemplates the sale of up to $15.0 million of units consisting of Series A convertible preferred stock and warrants to purchase common stock, and up to $28.5 million in common stock, in three closings, to accredited investors, including certain members of management. In the initial closing, $10.0 million of units were sold, resulting in net proceeds of $8.8 million.

An additional $5.0 million of units may be sold in a second closing, which was approved by our stockholders on June 18, 2009. This second closing may occur at our election or at the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement. We may elect to hold the second closing if the achievement of a specified milestone with respect to voreloxin has occurred and our common stock is trading above a specified floor price. If we have not delivered a notice to the investors in the Private Placement of our election to complete the second closing, or if the conditions for the second closing have not been met, the investors may elect to purchase the units in the second closing by delivering notice to us of their election. Notice of an election to complete the second closing, either by us or the investors in the Private Placement, would have to be delivered on or before the earliest to occur of December 31, 2009, the common equity closing described below or the occurrence of a qualifying alternative common stock financing. If the second closing occurs, it will be subject to the satisfaction of customary closing conditions.

An additional $28.5 million of common stock may be sold in a common equity closing, which was approved by our stockholders on June 18, 2009. The common equity closing may be completed at our election prior to the earlier of December 31, 2010 and a qualifying alternative common stock financing, or upon the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement prior to a date determined with reference to our cash and investments balance dropping below $4.0 million at certain future dates. If we elect to complete the common equity closing, it will be subject to the approval of the purchasers holding a majority of the Series A convertible preferred stock issued in the Private Placement and subject to a condition that we sell at least $28.5 million of common stock in the common equity closing.

Cash Flows

Net cash used in operating activities was $12.4 million for the six months ended June 30, 2009, as compared to $18.7 million for the same period in 2008. Net cash used in the 2009 period resulted primarily from the net loss of $31.2 million and changes in operating assets and liabilities of $1.8 million, including $1.5 million related to accounts receivable, partially offset by net adjustments for non-cash items of $20.7 million, including non-cash expense of $21.0 million related to the Private Placement, and a credit of $1.4 million for deferred rent related to the 2008 Restructuring. Net cash used in the 2008 period resulted primarily from our net loss of $23.2 million, partially offset by adjustments for non-cash items of $3.8 million (including $1.7 million of non-cash restructuring charges, $1.3 million of stock-based compensation and $0.9 million of depreciation and amortization), and changes in operating assets and liabilities of $0.7 million (including a $2.7 million increase in restructuring accruals offset by a $1.2 million decrease in deferred revenue and a $0.9 million decrease in accounts payable and other accrued liabilities).

Net cash provided by investing activities was $4.2 million for the six months ended June 30, 2009, as compared to $16.9 million for the same period in 2008. Net cash provided in the 2009 period consisted of net proceeds from marketable securities transactions of $3.8 million and proceeds from the sale of held-for-sale assets totaling $0.4 million. Net cash provided in the 2008 period consisted of net proceeds from marketable securities transactions of $17.0 million, partially offset by capital expenditures of $0.2 million.

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Net cash provided by financing activities was $8.8 million for the six months ended June 30, 2009 as compared to net cash used of $0.4 million for the same period in 2008. Net cash provided in the 2009 period consisted of the net proceeds from the initial closing of the Private Placement transaction. Net cash used in the 2008 period consisted primarily of equipment loan repayments of $0.5 million.

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 until a product candidate has been approved by the U.S. Food and Drug Administration, or FDA, or similar regulatory agencies in other countries, and has been successfully commercialized. We need to raise substantial additional funds to complete the development and commercialization of voreloxin. Additionally, we may 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.

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

We anticipate that our cash, cash equivalents and marketable securities as of June 30, 2009, together with the $1.5 million milestone payment received in July 2009 under one of our collaborations, will be sufficient to fund our operations through the end of 2009.

Until we can generate a sufficient amount of collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through equity issuances (including the possible second closing of the sale of units and common equity closing in the Private Placement described above and subject to the satisfaction of the conditions described above), debt arrangements and a possible partnership or license of development and/or commercialization rights to voreloxin. 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 scale back our development program or conduct additional workforce or other expense reductions. In addition, we may have to partner voreloxin at an earlier stage of development than we might otherwise choose to do, which would lower the economic value of that program to us.

Contractual Obligations

Our operating lease obligations as of June 30, 2009 relate to the leases for two facilities in South San Francisco, California. In December 2006, we leased approximately 15,000 square feet of office space in a building at 395 Oyster Point Boulevard. This lease expires in April 2013, subject to our option to extend the lease through February 2014. In October 2008, we leased approximately 5,500 square feet of laboratory space at 349 Allerton Avenue. This lease expires in October 2010 with our option to extend the lease through October 2012.

The lease for the facility located at 341 Oyster Point Boulevard, which formerly served as our headquarters and research and development facility, was terminated in the first quarter of 2009.

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Off-Balance Sheet Arrangements

Since our inception, we have not had 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.

This item is not applicable to us as a smaller reporting company.

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 reports under the Securities Exchange Act of 1934, as amended, 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.

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 Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which 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 believe there is no litigation pending that could, individually or in the aggregate, have a material adverse effect on our results of operations or financial condition.

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 Quarterly 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 further 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 3, 2009.

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 will need to raise substantial additional capital to continue the development and commercialization of voreloxin. We will need to raise substantial additional capital in the near term to:

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

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On April 3, 2009, we closed the initial $10.0 million of a Private Placement of up to $43.5 million of our securities. The Private Placement contemplates the sale of up to $15.0 million of units consisting of Series A convertible preferred stock and warrants to purchase common stock, and up to $28.5 million of common stock, in three closings, to accredited investors, including certain members of management. In the initial closing, $10.0 million of units were sold, resulting in net proceeds of $8.8 million. An additional $5.0 million of units may be sold in a second closing, which was approved by our stockholders on June 18, 2009. This second closing may occur at our election or at the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement. We may elect to hold the second closing if the achievement of a specified milestone with respect to voreloxin has occurred and our common stock is trading above a specified floor price. If we have not delivered notice to the investors in the Private Placement of our election to complete the second closing, or if the conditions for the second closing have not been met, the investors may elect to purchase the units in the second closing by delivering a notice to us of their election. Notice of an election to complete the second closing, either by us or the investors in the Private Placement, must be delivered on or before the earliest to occur of December 31, 2009, the common equity closing described below or the occurrence of a qualifying alternative common stock financing. If the second closing occurs, it will be subject to the satisfaction of customary closing conditions. An additional $28.5 million of common stock may be sold in a common equity closing, which was approved by our stockholders on June 18, 2009. The common equity closing may be completed at our election prior to the earlier of December 31, 2010 or a qualifying alternative common stock financing, or upon the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement prior to a date determined with reference to our cash and investments balance dropping below $4.0 million at certain future dates. If we elect to complete the common equity closing, it will be subject to the approval of the purchasers holding a majority of the Series A convertible preferred stock issued in the Private Placement and subject to a condition that we sell at least $28.5 million of common stock in the common equity closing.

We anticipate that our cash, cash equivalents and marketable securities as of June 30, 2009, together with the $1.5 million milestone payment received in July 2009 under one of our collaborations, will be sufficient to fund our operations through the end of 2009.

The conditions to the second closing for $5.0 million of units are substantial, including the development of voreloxin and our stock price, and it is possible that the conditions to this second closing will not be met, in which event we would not be entitled to receive the $5.0 million of gross proceeds that are contemplated for that closing unless the investors elected to complete the second closing. The $28.5 million common equity closing is entirely in the discretion of the investors in the Private Placement, and it is possible that they will not elect to complete that closing for reasons related to our business or other factors.

Until we can generate a sufficient amount of collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through equity issuances (including the possible second closing of the sale of units and common equity closing in the Private Placement described above and subject to the satisfaction of the conditions described above), debt arrangements and a possible partnership or license of development and/or commercialization rights to voreloxin. We do not know whether additional funding will be available on acceptable terms, or at all.

We are currently continuing to conduct our ongoing clinical trials of voreloxin in acute myeloid leukemia, or AML, and ovarian cancer. 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, scale back our development program or conduct additional workforce or other expense reductions. For example, in June 2008, we announced that we reduced our workforce by approximately 60% and implemented a revised operating plan to focus our efforts on voreloxin, wind down our internal discovery research activities to streamline our operations and extend our financial resources. In addition, we may have to partner voreloxin at an earlier stage of development than we might otherwise choose to do, which would lower the economic value of that program to us.

Our failure to raise capital when needed and on acceptable terms would require us to reduce our operating expenses, delay or reduce the scope of our voreloxin development program and limit our ability to continue our operations. Any one of the foregoing would have a material adverse effect on our business, financial condition and results of operations.

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*Our independent registered public accountants have indicated that our recurring operating losses raise substantial doubt as to our ability to continue as a going concern.

Our audited financial statements for the fiscal year ended December 31, 2008 and our unaudited financial statements for the six months ended June 30, 2009 were prepared on a basis that our business would continue as a going concern in accordance with United States generally accepted accounting principles. This basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, our independent registered public accountants have indicated in their audit report on our 2008 consolidated financial statements that our recurring operating losses raise substantial doubt as to our ability to continue as a going concern. We may be forced to reduce our operating expenses and raise additional funds to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us. In the event that these plans cannot be effectively realized, there can be no assurance that we will be able to continue as a going concern.

*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 the credit markets. Banks have tightened their lending standards, investors are increasingly unwilling to buy stock and corporate bonds and economic growth has slowed. Factors contributing to a slowing economy appear to be reduced credit availability and falling house 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. Our net losses for the six months ended June 30, 2009 and the years ended December 31, 2008 and 2007 were $31.2 million, $37.2 million and $38.8 million, respectively. As of June 30, 2009, we had an accumulated deficit of $347.4 million. 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 pivotal and Phase 3 clinical trials for voreloxin, as we conduct development of, and seek regulatory approvals for, voreloxin, and as we 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. 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, or at all, the development of voreloxin or future product candidates, if any, 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.

The development of voreloxin could be halted or significantly delayed for various reasons; our clinical trials for voreloxin may not demonstrate safety or efficacy or lead to regulatory approval.

Voreloxin is prone to the risks of failure inherent in the drug development process. We need to conduct significant additional preclinical studies and clinical trials before we can attempt to demonstrate that voreloxin is safe and effective to the satisfaction of the FDA and other regulatory authorities. Failure can occur at any stage of the development process, and successful preclinical studies and early clinical trials do not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.

For example, we terminated two Phase 2 trials of voreloxin in small cell and non-small cell lung cancer. We recently ceased development of SNS-032 and terminated our related license agreement with BMS after completion of a Phase 1 trial as no responses demonstrating efficacy were observed in that trial. In addition, in our Phase 1 trial of SNS-314, a maximum tolerated dose was not established and no responses were observed. As a result, we have suspended further development of SNS-314 and plan to seek a partner or licensee to support further development in the future. If our clinical trials result in unacceptable toxicity or lack of efficacy, we may have to terminate them. If clinical trials are halted, or if they do not show that voreloxin is safe and effective in the indications for which we are seeking regulatory approval, our future growth will be limited and we may not have any other product candidates to develop.

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

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

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 during stability studies of one of our voreloxin drug product lots. We have since identified a process impurity in the voreloxin active pharmaceutical ingredient, or API, that, when formulated into the packaged vial of the voreloxin drug product, can result in the formation of particles over time. As a response to these findings, we implemented a revised manufacturing process to attempt to control the impurity and thereby prevent particle formation. One lot of voreloxin API manufactured using the revised manufacturing process has been formulated into a drug product lot that has completed 12 months of stability testing without formation of particles. This drug product lot is currently being used in our clinical trials. It will take time to evaluate whether or not this revised manufacturing process for voreloxin API will be successful in stopping the formation of particles in this drug product lot over the longer term, and to evaluate whether or not such control of particle formation would also be reliably and consistently achieved in subsequent lots over the shorter or longer term. We provided an update on the results from our process optimization activities to the FDA in December 2008. If the change in manufacturing process does not adequately control the formation of visible particles, we will need to discuss other possibilities with the FDA, which could include temporary clinical hold until the issue has been resolved to their satisfaction.

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The failure to enroll patients for clinical trials may cause delays in developing voreloxin.

We may encounter delays if we are unable to enroll enough patients to complete clinical trials of voreloxin. 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. Voreloxin is being tested in patients with AML and ovarian cancer, which can be difficult patient populations 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 voreloxin or future product candidates, if any, 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 are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities.

We rely on third parties to manufacture our voreloxin drug product and its active pharmaceutical ingredient, and depend on a single supplier for the active pharmaceutical ingredient. There are a limited number of manufacturers that are capable of manufacturing voreloxin.

We do not currently own or operate manufacturing facilities and lack the capability to manufacture voreloxin on a clinical or commercial scale. As a result, we rely on third parties to manufacture both the voreloxin API and the finished drug product. The API is classified as a toxic substance, 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 finished drug product. We currently have established relationships with only one manufacturer for API and two manufacturers for the finished drug product. If our third-party API manufacturer is unable or unwilling to produce 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 API for six to nine months, during which time we would 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 finished drug product needs in the foreseeable future.

Voreloxin requires 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, or 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 voreloxin, cost overruns or other problems that could seriously harm our business.

To date, voreloxin has been manufactured in small quantities for preclinical studies and clinical trials. Prior to being approved for commercial sale, we will need to manufacture finished drug 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 voreloxin, 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 voreloxin API, 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 be an approved commercial supplier. 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.

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We expect to expand our clinical development 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 development staff. We expect to expand our clinical development 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 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 specialized personnel required for clinical development. 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 voreloxin.

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. 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 challenges that could seriously harm our competitive position, including:

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

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching, developing and marketing products designed to address the treatment of cancer, including AML and ovarian cancer. Voreloxin is a small molecule therapeutic 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, and marketing, drugs.

We believe that our ability to successfully compete with voreloxin and any future product candidates, if any, will depend on, among other things:

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Some of the current key competitors of voreloxin in AML include Genzyme Corporation’s clofarabine, Eisai Corporation’s decitabine, Celgene Corporation’s azacitidine and Vion Pharmaceuticals, Inc.’s laromustine, 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.

We expect competition for voreloxin to increase as additional products are developed and approved to treat AML and ovarian cancer in various patient populations. If our competitors market products that are more effective, safer or less expensive than voreloxin or our other future products, if any, or that reach the market sooner we may not achieve commercial success or substantial market penetration. In addition, the biopharmaceutical industry is characterized by rapid change. Products developed by our competitors may render voreloxin or any future product candidates obsolete.

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

We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct our planned and existing clinical trials for voreloxin. 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 voreloxin or future product candidates, if any.

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for voreloxin and any future product candidates in the United States and other countries. We own, co-own or have rights to a significant number of issued U.S. and foreign patents and 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 or from others. Accordingly, in such cases 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:

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