**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

**For the fiscal year endedDecember 31, 2006**

**Commission File No. 0-16614**

**PONIARD PHARMACEUTICALS,INC.**

(Exact name of Registrant as specified in its charter)

| **Washington**                  |   | **91-1261311**                    |
|---------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of |   | (IRS Employer Identification No.) |
| incorporation or organization)  |   |                              |

 

**7000 Shoreline Court, Suite 270, South San Francisco, CA   94080**

(Address of principal executive offices)

Registrant’s telephone number, including area code: **(650) 583-3774**

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock, $.02 par value**

**$2.4375 Convertible Exchangeable PreferredStock, Series 1, $.02 par value**

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yes o No x

Indicate by checkmark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. Yes o No x

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated  filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------------|--------|--------------------------|--------|------------------------------|

 

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

The aggregatemarket value of the voting and non-voting common equity held by nonaffiliatesof the registrant was approximately $77.2 million as of June 30, 2006,based on a per share closing price of $0.97 on the Nasdaq Capital Market onthat date.

As of March 8,2007, 22,808,233 shares of the Registrant’s Common Stock, $.02 par value pershare, were outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Registrant’s ProxyStatement for the Registrant’s 2007 Annual Meeting of Shareholders areincorporated by reference in Part III of this Form 10-K.

 

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**PART I**

**IMPORTANTINFORMATION REGARDING FORWARD-LOOKING STATEMENTS**

This Form 10-K contains forward-lookingstatements within the meaning of the Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, and in reliance upon the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements are thosethat predict or describe future events or trends and that do not relate solelyto historical matters. In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “could,” “should,” “expect,”“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”“propose,” “continue,” “assume” or other similar expressions, or the negativesof those expressions. These statements reflect our current views with respectto future events and are based on assumptions and are subject to risks anduncertainties that are difficult to predict. We have identified some of the factorsthat could cause future events to differ from our current expectations underthe headings “Risk Factors” in Item 1A below and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 7 below.Given these risks and uncertainties, you should not place undue reliance on ourforward-looking statements, which speak only as of the date of this report.

You should read this Form 10-K and thedocuments that we incorporate by reference completely and with the understandingthat our actual results, performance and achievements may be materiallydifferent from any future results, performance or achievements expressed orimplied by our forward-looking statements. We undertake no obligation to updatepublicly any forward-looking statements to reflect new information, events orcircumstances after the date of this report, or to reflect the occurrence ofunanticipated events.

Unless otherwiseindicated, all common stock-related amounts in this report have been adjustedto reflect our one-for-six reverse stock split effective September 22,2006.

***Item 1.***           BUSINESS

**The Company**

Poniard is a biotechnology company focused on thediscovery, development and commercialization of cancer therapy products. Ourlead product candidate is picoplatin, a next generation platinum-based cancertherapy with an improved safety profile. An intravenous chemotherapeutic agent,picoplatin is designed to overcome platinum resistance in the treatment ofsolid tumors. In August 2006, we completed patient enrollment in a PhaseII clinical study of picoplatin in small cell lung cancer. Based on positiveinterim median overall survival data from that ongoing Phase II study, we planto initiate a pivotal Phase III SPEAR (Study of Picoplatin Efficacy AfterRelapse) trial of picoplatin in small cell lung cancer in the first half of2007. We also are conducting separate Phase I/II studies of picoplatin inpatients with metastatic colorectal cancer and hormone-refractory prostatecancer. Both of these Phase I/II trials are continuing to enroll patients.Additionally, we plan to initiate a Phase I study of an oral formulation ofpicoplatin during 2007.

Until May 2005, our lead research and developmentprogram had been skeletal targeted radiotherapy, or STR, a bone-targetingradiotherapeutic. In May 2005, we announced the immediate implementationof a strategic restructuring program to refocus our limited resources on thedevelopment of picoplatin. The restructuring plan, which was completed inJune 2005, included the discontinuation of our STR development program,including halting patient enrollment in our Phase III trial of STR in multiplemyeloma, ceasing operations at our Denton, Texas facility, where STR wasmanufactured, and reducing our workforce by approximately 50%. We recordedrestructuring charges against operations totaling $1.7 million during the yearended December 31, 2005. We evaluated our STR assets in light of therestructuring and determined that a likely impairment existed on those assets.We recognized an 

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impairment loss of $3.3million in June 2005 and an additional impairment loss of $0.4 million inDecember 2006. Future adjustments to the charge may be taken as assetsinvolved are sold or otherwise disposed of. We are actively seeking a buyer forthe Denton facility and our STR related assets.

We have financed our operations primarily through thesale of equity securities, technology licensing, collaborative agreements anddebt instruments. We completed a $65.0 million equity financing inApril 2006. As a result of that financing, entities affiliated with MPMCapital Management, or MPM, acquired beneficial ownership of an aggregate of31.5% of our common stock outstanding immediately following the financing.Entities affiliated with Bay City Capital Management IV LLC, or BCC, acquiredbeneficial ownership of 19.5% of our common stock immediately outstandingfollowing the financing. Nicholas J. Simon, a representative of MPM, and FredB. Craves and Carl S. Goldfischer, managing directors of BCC, serve on ourboard of directors. We invest excess cash in investment securities that will beused to fund future operating costs. Cash used to fund operating activities for the twelve months endedDecember 31, 2006 totaled $17.3 million. Revenues and other income sourcesfor 2006 were not sufficient to cover operating expenses. Cash, cashequivalents and investment securities, net of restricted cash of $0.1 million,totaled $53.7 million at December 31, 2006. We believe that our current cash,cash equivalent and investment securities balances will provide adequateresources to fund operations at least until the end of the first quarter of2008.

Since our inception in1984, we have dedicated substantially all of our resources to research and development.We have not generated any significant revenue from product sales to date andhave operated at a loss in each year of our existence. We had a net loss of$23.3 million for the year ended December 31, 2006, a net loss of $21.0million for the year ended December 31, 2005, and a net loss of $19.4million for the year ended December 31, 2004. We do not anticipate thatour picoplatin product candidate, or any other proposed products, will becommercially available for several years, if at all. We expect to incuradditional operating losses in the future as we expand our clinical trials,increase our research and development activities and seek to commercializepicoplatin or other proposed products. Clinical studies are inherentlyuncertain, and our ongoing and planned trials of picoplatin or any futureproduct candidates may not confirm the results achieved in earlier clinical andpreclinical studies. If picoplatin or any future proposed products are notshown to be safe and effective, we will not receive the required regulatoryapprovals for commercial sale of such products. To the extent that we aresuccessful in obtaining approvals for the commercial sale of picoplatin or anyother product, we will need to secure one or more corporate partners for the manufacture,marketing and/or sale of such product. We may not be able to enter into suchpartnering arrangements in a timely manner or on terms acceptable to us.

**Our PicoplatinDevelopment Program**

***Overview of Cancer and its Treatment ***

Cancer is a disease characterized by the uncontrolledgrowth and spread of abnormal cells. Cancer cells often originate from onetissue site and invade, spread and damage other tissue beds and organs, leadingto death. The National Cancer Institutes estimates that approximately 10.5million Americans with a history of cancer in the United States were alive inJanuary 2003 (American Cancer Society: Cancer Facts & Figures2007).

In recent years, the diagnosis and treatment of humancancers have greatly improved. However, there is still a substantial need toimprove the early diagnosis of cancer, the staging of cancer and the treatmentof cancer and its metastatic spread. It is anticipated that the use ofchemotherapeutics and targeted anti-cancer agents will be used both as single-agentsand in combination to provide benefit to cancer patients. Often patients aretreated with multiple agents in combination and with different sequencedepending on the particular cancer type and severity of disease. The oncologistwill often assess clinical benefit for a particular therapeutic combination bydetermining the impact of treatment on tumor size or spread 

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compared to tolerabilityfeatures. In this regard, chemotherapeutics have continued to have significantimpact on cancer treatment, especially when combined with agents that showdifferent anti-cancer properties and different tolerability features. Webelieve that new treatment combinations that incorporate recently approvedtargeted agents with chemotherapeutics exhibiting improved safety features willbe supported by physicians and their patients.

There is considerable needfor new cancer treatments, as well as treatments that provide an improvement toexisting therapies. In recent years, many new classes of agents that providemodest increases in patient survival have been approved for use. We anticipatethat the use of multiple agents, either in combination or in sequence, willcontinue to provide benefit to cancer patients who have been diagnosed withdisease. In addition, we believe that individualized therapies will become moreprominent as tumor diagnosis and agents with different mechanisms ofanti-cancer effect are approved and become available to the practicingoncologist. We also expect that early diagnosis and cancer prevention willprovide for interventions that will allow patients to live longer and have abetter quality of life. Current treatments for cancer include surgery,external-beam radiation and chemotherapy, including targeted pharmaceuticals,hormone therapy, cytokines, interferons, antibodies, and antibody-basedradiotherapeutics. There has been substantial recent success in the combineduse of both traditional chemotherapeutics, which generally destroy cells, andtargeted agents, which are generally combined with more conventionalchemotherapeutics for maximum effect. Occasionally, chemotherapeutics ortargeted agents are used as stand-alone agents in the treatment of humancancers.

***Picoplatin and Platinum-Based Chemotherapeutics***

In April 2004, we acquired the rights to develop,manufacture and commercialize picoplatin, a next-generation platinum-basedcancer therapeutic. In September 2006, we renegotiated the financial termsof our April 2004 license agreement and obtained exclusive worldwiderights to picoplatin. Over the past two decades, platinum-based drugs havebecome a critical part of modern chemotherapy treatment. Platinum-based agentssuch as cisplatin, carboplatin and oxaliplatin are currently used to treat avariety of tumors, including testicular, ovarian, colorectal and lung cancers.In this regard, platinum-based chemotherapeutics are administered primarily incombination with other agents, including with recently approved targeted canceragents. The mechanism that underlies the use of platinum-based agents reliesupon the targeting of tumor DNA where the platinum compound binds. Cells thatundergo active cell division are prevented from completing the cell cycle bythe presence of the platinum drug that is chemically bound to the DNA. Theinability to proceed through normal cell division ultimately causes cell death.In some cases, treatment of cancer patients with platinum compounds leads toreduction in tumor mass due to a higher rate of tumor cell death compared withtumor cell replication.

Current platinum-based chemotherapeutics have specificlimitations, including chemo-resistance and safety side effects. Allplatinum-based agents exhibit toxicity to the blood forming cells in the bonemarrow (myelosuppression) as a dose-limiting side effect. The degree andcharacteristics of myelosuppression vary by platinum compound, dose andregimen. In addition, some current platinum agents show different degrees ofadditional safety side effects that include kidney toxicity, hearing loss,nausea, vomiting and peripheral nerve****damage. As inthe case of myelosuppression, these side effects vary with dose, agent,combination therapy and regimen.

For most cancers that are treated withplatinum-containing regimes, patients who initially respond toplatinum-containing chemotherapy but subsequently progress six months or moreafter chemotherapy are described as having “platinum-sensitive” disease.Patients with who initially respond to platinum-containing chemotherapy andthen relapse and progress within six months after completing chemotherapy aresaid to have “platinum-resistant” disease. Patients with who fail to have aresponse or whose disease progresses during platinum-containing chemotherapyare said to have “platinum-refractory” cancer. As described below, in the caseof small cell lung cancer, the distinction between platinum-sensitive and 

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platinum-resistant diseaseis generally drawn based on whether progression occurs before or after 90 daysof completing first-line platinum-containing chemotherapy. We believe thatpatients would benefit from a platinum-based agent that can be used initiallyto prevent or delay the development of the platinum-refractory or -resistantdisease and that is effective in the treatment of disease that becomesrefractory or resistant to currently used platinum-based therapies.

New platinum-basedchemotherapeutics that overcome both chemo-resistance and safety limitationsare needed. In this regard, picoplatin has shown efficacy in preclincial andclinical studies of platinum-sensitive, -resistant and -refractory disease.Clinical evidence of activity has been observed for picoplatin in lung, ovarianand prostate cancers. In addition, evaluation of several hundred cancerpatients has suggested that picoplatin treatment may result in less severe andless frequent side effects than observed with some currently marketedplatinum-based agents.

***Our Picoplatin Clinical Studies***

We currently areevaluating picoplatin in an ongoing Phase II clinical trial in small cell lungcancer and in separate Phase I/II clinical trials in advanced colorectal andhormone-refractory prostate cancers. We plan to initiate a pivotal Phase IIISPEAR (Study of Picoplatin Efficacy After Relapse) trial of picoplatin for thetreatment of small cell lung cancer in the first half of 2007. In addition, weplan to initiate a Phase I clinical trial of an oral formulation of picoplatinduring 2007. These programs are described below and in the section of thisreport entitled “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Major Research and Development Programs.” It isimportant to keep in mind that clinical studies are inherently uncertain, andlater trials may not confirm the results achieved in earlier clinical andpreclinical studies and may not be supported by the results obtained insubsequent trials. You should refer to the section of this report entitled“Risk Factors” for a discussion of some of the factors that could materiallyaffect our picoplatin clinical development program.

**Small Cell LungCancer**

*PhaseII and Planned Phase III Clinical Trials.*   InOctober 2004, we filed an investigational new drug application, or IND,with the U.S. Food and Drug Administration, or FDA, to conduct a Phase IIclinical trial of intravenous picoplatin versus intravenous topotecan inpatients with small cell lung cancer. Intravenous topotecan is an anti-tumor drug currently approved by the FDA as atreatment for patients who initially responded to a platinum-containingchemotherapy regime but subsequently progressed at least 60 or 90 days aftercompletion of therapy (platinum-sensitivedisease). Our Phase II trial was initiated in June 2005 in theUnited States and Canada, and the first patient was treated in July 2005.The objective for patient enrollment was approximately 75 patients withplatinum-resistant or -refractory small cell lung cancer, defined as subjectswho either (1) initially responded to first-line platinum-containingchemotherapy and then relapsed or progressed within 90 days after completion offirst-line chemotherapy (resistant disease); or (2) failed to respond toor progressed during first-line platinum-containing chemotherapy (refractorydisease). The clinical endpoints of the study include safety, objective tumorresponse rate (tumor shrinkage), time to tumor progression and overallsurvival.

We amended our Phase II clinical trial protocol inJanuary 2006 from a two-arm study of picoplatin versus topotecan to asingle-arm study of picoplatin. We discontinued the topotecan arm of the studybecause patients and investigators often were unwilling to accept this studyarm. The rationale for the amendment was that the dose and schedule oftopotecan approved by the FDA for use in patients with platinum-sensitive smallcell lung cancer have minimal, if any, efficacy in patients withplatinum-resistant or -refractory small cell lung cancer and unacceptabletoxicity, thus presenting a situation in which an ineffective but toxictreatment regimen was to be used as one arm of the randomized Phase II trial.We also amended the protocol because we no longer intended to use topotecan asthe comparator treatment 

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for our planned Phase IIItrial and wanted data in more patients treated with picoplatin to help us makea decision on whether to embark upon a large Phase III trial.

We discussed the design of a Phase III trial with theFDA in April 2006 and modified our ongoing Phase II trial to support ourplans for a subsequent Phase III trial. We expanded our small cell lung cancerstudy to include additional clinical sites in Eastern Europe, where the greateravailability of patients enabled us to more rapidly increase patientenrollment. In May 2006, we amended our Phase II protocol to provide forenrollment of a subset of patients with platinum-sensitive disease who relapsedwithin 91-180 days of completing first-line platinum-containingchemotherapy. We completed enrollment of our Phase II small cell lung cancertrial in August 2006. In November 2006, we announced positive interimoverall survival results from the study, indicating a median overall survivalof 26.7 weeks in 72 evaluable patients.

We plan to initiate a pivotal Phase III SPEAR (Studyof Picoplatin Efficacy After Relapse) trial in the first half of 2007. ThePhase III SPEAR trial will be undertaken pursuant to a Special ProtocolAssessment, or SPA, with the FDA. The SPA is a written agreement between us andthe FDA on the objectives, design and endpoints to be used as a basis of filingfor accelerated approval of picoplatin and the data analysis plan necessary tosupport full regulatory approval of picoplatin. The Phase III trial will be aninternational, multi-center, open-label, controlled study to compare theefficacy and safety of picoplatin plus best supportive care with bestsupportive care alone as a second-line therapy. The study is expected to enrollapproximately 400 patients with small cell lung cancer whose disease isrefractory (non-responsive) to first-line platinum-containing (cisplatin orcarboplatin) chemotherapy or whose disease responded initially to first-lineplatinum-containing therapy but then progressed within six months aftertreatment was completed. Patients will be randomized on a 2:1 ratio to receivepicoplatin plus best supportive care or best supportive care alone. Bestsupportive care will include all medical, radiation and surgical interventionsthat small cell lung cancer patients should receive to palliate the symptomsand treat the complications caused by small cell lung cancer, but excludestreatment with systemic therapies intended to kill cancer cells. The primaryendpoint of the planned study will be improved overall survival as measured intime from randomization to death. Secondary endpoints will include overallresponse rates, disease control and progression-free survival. We currentlyestimate that the study will take approximately 20 months to complete; however,the actual timing for completion of the study will depend on the rate ofpatient enrollment, survival times of all patients in the trial, as well asother factors such as patient performance status, extent of disease and therisks and uncertainties described in this report.

The FDA has designated picoplatin as an orphan drugfor the treatment of small cell lung cancer under the provisions of the OrphanDrug Act, as amended. To qualify for orphan drug status, a proposed drug mustbe intended for use in the treatment of a condition that affects fewer than200,000 people in the United States. Orphan drug status entitles us toexclusive marketing rights for picoplatin in the United States for seven yearsfollowing market approval, if any, and qualifies us for research grants tosupport clinical studies, tax credits for certain research expenses and anexemption from certain application user fees. As discussed below in the sectionentitled “Government Regulation and Product Testing,” the manufacture andmarketing of picoplatin are subject to regulation for safety, efficacy andquality by the FDA and comparable authorities in foreign countries.

*SmallCell Lung Cancer and its Treatment.**  *Approximately15% of all lung cancer diagnoses in the United States are small cell lungcancer. In about 98% of patients, their small cell lung cancer is thought to becaused by cigarette smoking. According to a 2004 report on cancer statistics,there were approximately 34,700 new small cell lung cancer patients in theUnited States annually. At the time of small cell lung cancer diagnosis,approximately two-thirds of patients have metastases outside the chest andapproximately one-third have limited disease confined to the chest. Small celllung cancer consists of two stages: (1) limited, which is defined ascancer confined to the one side of the chest that can be treated with a singlearea of radiation therapy and (2) extensive, which is defined as diseaseinvolving both sides of the chest and/or obvious spread of the cancer beyondthe chest. Surgery is only used for the very few patients with 

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limited-stage disease.Radiation therapy plus chemotherapy is the standard of care for limited-stagesmall cell lung cancer. Treatment with radiation therapy plus chemotherapy cancure a small percentage of limited-stage patients. Chemotherapy is the standardof care for extensive disease. Although small cell lung cancer is highlysensitive to chemotherapy and radiation therapy, most patients developrecurrent cancer.

Many chemotherapeutic agents are used to treat smallcell lung cancer patients. Initial (first-line) chemotherapy regimens includecisplatin, carboplatin, etoposide, irinotecan (CPT-11), ifosfamide, cyclophosphamide,vincristine and doxorubicin. The most commonly used first-line chemotherapyregimen is combination carboplatin or cisplatin plus etoposide. Eighty percentto 100% of patients with limited disease, and 60% to 80% of patients withextensive disease, have a significant response to radiation plus chemotherapyor combination chemotherapy, respectively. The median duration of response isapproximately 6 to 8 months. Median survival from the time of diagnosis forlimited-stage and extensive-stage disease is approximately 14 to 20 months and8 to 13 months, respectively.

Agents used for second-line chemotherapy includeifosfamide, paclitaxel, docetaxel, gemcitabine, topotecan, irinotecan, CAV(cyclophosphamide, doxorubicin and vincristine) and vinorelbine. Onlyintravenous topotecan is approved by the FDA for use as a second-linechemotherapeutic, and it is only approved for those patients withplatinum-sensitive small cell lung cancer. When small cell lung cancer recursfollowing first-line chemotherapy, the median survival for patients treatedwith second-line chemotherapy is approximately 4 to 5 months.

Based on clinical andpreclinical data to date, we believe that second-line picoplatin has potentialactivity in small cell lung cancer patients who have failed first-lineplatinum-containing therapy. A Phase II study was conducted by a prior licenseeduring 2001 and 2002 to assess the activity and tolerability of picoplatin whengiven intravenously as a second-line therapy to patients with small cell lungcancer. Two of 13 patients (15.4%) with platinum-resistant small cell lungcancer achieved a partial response (a decrease in the size of the tumor or inthe extent of cancer in the body) with picoplatin treatment, and two additionalpatients (15.4%) achieved stable disease (no increase or decrease in extent orseverity of the cancer). Overall, 4 of 13 patients (30.8%) withplatinum-resistant small cell lung cancer achieved a partial response or stabledisease with picoplatin treatment. The median survival of all 13 treatedpatients was approximately 6.3 months, significantly longer than that whichwould be expected with topotecan, the only approved chemotherapy in thispopulation.

**MetastaticColorectal Cancer**

*PhaseI/II Clinical Trial.**  *InMay 2006, we treated our first patient in an approximately 30-patientPhase I/II study of picoplatin in the first-line treatment of patients withmetastatic colorectal cancer. The trial is being conducted in Eastern Europeand is continuing to enroll patients. The Phase I component of the trial isdesigned to evaluate increasing doses of picoplatin in combination with thechemotherapy agents 5-fluorouracil and leucovorin to establish anappropriate dose of picoplatin for further testing in the Phase II efficacycomponent of the trial. Endpoints of the study will include safety, objectivetumor response rate (tumor shrinkage), time to tumor progression,progression-free survival and overall survival.

*Colorectal Cancer and itsTreatment.**  *Accordingto the American Cancer Society, colon cancer is the third most common canceramong American men and women and the second and third leading cause of cancerdeath in the United States for men and women, respectively. An estimated148,000 new cases of colon cancer were diagnosed in 2006, with an estimated55,000 deaths in 2006 (American Cancer Society, Cancer Facts and Figures 2006).Fluorouracil and leucovorin plus oxaliplatin (Eloxatin®), known as the FOLFOXregime, or FOLFOX plus bevacizumab (Avastin®), is the current standard of carefor treatment of metastatic colorectal cancer in the United States.Approximately 90,000 patients received oxaliplatin-containing treatment regimesin 2005, generating approximately $1.4 billion in revenue from the treatment ofearly and late-stage colorectal cancers. However, approximately 82% of thepatients who receive this 

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treatment developperipheral neuropathy, and approximately 19% of all patients develop severeperipheral neuropathy. Neuropathy, a peripheral nerve function problem that canresult in numbness, tingling and pricking sensations, sensitivity to touch,pain, and muscle weakness or wasting, causes an estimated 30% to 50% ofpatients to withdraw from oxaliplatin treatment. Picoplatin has been tested inmore than 500 patients in Phase I and Phase II safety and efficacy studies. Incontrast, approximately 11.5% of picoplatin treated patients in these studiesdeveloped mild or moderate peripheral neuropathy and none developed severeneuropathy.

**Hormone RefractoryProstate Cancer**

*PhaseI/II Clinical Trial.**  *Weare also conducting a Phase I/II study of picoplatin in the first-linetreatment of patients with prostate cancer that is not responding to hormonetreatments and has not previously been treated with chemotherapy. We treatedour first patient in the approximately 12-patient trial in May 2006.The trial is being conducted in Eastern Europe and is continuing to enrollpatients. The Phase I component of the trial is designed to evaluate increasingdoses of picoplatin in combination with the chemotherapy agent docetaxel(Taxotere®) to establish an appropriate dose of picoplatin for further testingin the Phase II efficacy component of the trial. Endpoints of the study willinclude safety, reduction in prostate specific antigen (PSA), objective tumorresponse rate (tumor shrinkage), time to tumor progression, progression-freesurvival and overall survival.

*Hormone-RefractoryProstate Cancer and its Treatment.**  *Prostatecancer is the most common type of cancer among men in the United States, apartfrom skin cancer, and the third leading cause of death in American men.Approximately 234,000 men in the United Stated will be diagnosed with thedisease in 2007***,*** and over 27,000 will diefrom this disease according to the American Cancer Society. In the EuropeUnion, there are approximately 225,000 prostate cancer cases and 83,000 deathsannually, according to the International Agency for Research on Cancer’sGLOBOCAN 2002 database. Since the incidence of prostate cancer increases withage, the aging of the overall population is expected to further increase thenumber of prostate cancer patients.

Many patients diagnosedwith prostate cancer initially receive surgery or radiation therapy, and someof these patients are cured. For many, however, the disease recurs. At thispoint the recurrent disease is treated with hormone therapy, and most patientsinitially respond well. The duration of response averages only 10 to 12 months,however, and the tumor cells eventually become resistant to the hormones(hormone-refractory), and the tumor again progresses. Increasingly,chemotherapy is being used as a first-line treatment for hormone-refractoryprostate cancer, but few effective drugs have been identified. Docetaxel incombination with prednisone was approved by the FDA in 2004 for the treatmentof patients with metastatic (stage IV) hormone-refractory prostate cancer. Themajority (more than 80%) of newly-diagnosed stage IV patients who fail hormonetherapy currently are treated with docetaxel either alone or in combination withother drugs. Other options include mixozantrone, estramustine or prednisonemonotherapy as second-line treatment. We believe that the combination ofpicoplatin and docetaxel has the potential to be more effective than eitherdocetaxel or picoplatin alone and could reduce the likelihood ofchemo-resistance which occurs with platinum agents currently used to treat thispatient population.

**Oral Picoplatin**

*Planned Phase I ClinicalTrial.**  *InFebruary 2007, we filed an IND with the FDA for an oral formulation ofpicoplatin. Following FDA review, we intend to initiate a Phase I clinicaltrial of oral picoplatin. We believe that oralpicoplatin has significant potential for use in combination with other oralchemotherapies and targeted therapies, including in a refractory settingfollowing relapse from first-line therapies. In preclinical studies, picoplatin has been shown to have up to 40% oralbioavailability and a higher therapeutic index and efficacy againstplatinum-sensitive and -resistant tumor variants than currently marketedplatinum-based therapeutics.

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**Picoplatin Sourceof Supply**

We have a limited supplyof picoplatin drug product that was manufactured by a prior licensee andsupplier. The drug product has been demonstrated to be stable for up to 30months from the date of manufacture, which time period is not sufficient tocomplete our current and planned clinical trials. We have entered into separateagreements with third parties for the manufacture of picoplatin activepharmaceutical ingredient, or API, and the bulk production and distribution offinished picoplatin drug product. We currently have one supplier each of APIand finished drug product. Manufacturing services under these agreements areprovided on a purchase order, fixed-fee basis. Unless earlier terminated, eachagreement continues for an initial term ending December 31, 2009 and maybe extended beyond the initial term upon agreement of the parties. Theagreements generally provide that they may be terminated by either party ifthere is a material breach by the other party that remains uncured or in theevent of solvency or bankruptcy of the other party. We may terminate thefinished drug product supply agreement at any time with one year’s advancenotice. We may terminate the API manufacturing agreement if there is a changein control of the manufacturer. We have no assurance that our current supplierswill be able to manufacture sufficient picoplatin API and/or finished drugproduct on a timely or cost-effective basis at all times in the future. Webelieve that there are other contract manufacturers with the capacity tomanufacture picoplatin API and finished drug product. If we are required toseek out alternative manufacturers, we may incur significant additional costsand suffer delays in, or be prevented from, completing or initiating ourongoing or planned clinical trials.

**Patents andProprietary Rights**

Our policy is to aggressively protect our proprietarytechnologies. We have filed applications for United States and foreign patentson many aspects of our technologies.

We hold an exclusive worldwide license granted fromGenzyme Corporation (successor to AnorMED, Inc.) for the development andcommercial sale of picoplatin. Under the license agreement, as amended, Genzymeretains the right to prosecute its patent applications and maintain alllicensed patents, with us reimbursing such expenses. We have the right to sueany third party infringers of the picoplatin patents. If we do not file suit,Genzyme, in its sole discretion, has the right to sue the infringer at itsexpense.

The parties executed the license agreement inApril 2004, at which time we paid a one-time upfront milestone payment of$1.0 million in common stock and $1.0 million in cash. The original licenseagreement excluded Japan from the licensed territory and provided for $13.0million in development and commercialization milestones, payable in cash or acombination of cash and common stock, and a royalty rate of up to 15% ofproduct net sales after regulatory approval. The parties amended the licenseagreement on September 18, 2006, modifying several key financial terms andexpanding the licensed territory to include Japan, thereby providing us worldwiderights. In consideration of the amendment, we paid Genzyme $5.0 million in cashon October 12, 2006 and will pay Genzyme an additional $5.0 million incash by March 31, 2007. The amendment eliminates all development milestonepayments to Genzyme. We remain obligated to pay a total of $5.0 million incommercialization milestones upon the attainment of certain levels of annualnet sales of picoplatin after regulatory approval. The amendment also reducesthe royalty payable to Genzyme to a maximum of 9% of annual net product sales.In addition, the amendment reduces the sharing of sublicense revenue withGenzyme for any sublicenses entered into during the first year following theamendment and eliminates the sharing of sublicense revenues on and afterSeptember 18, 2007. The license agreement may be terminated by eitherparty for breach, or if the other party files a petition in bankruptcy orinsolvency or for reorganization or is dissolved, liquidated or makesassignment for the benefit of creditors. We can terminate the license at anytime upon prior written notice to Genzyme. If not earlier terminated, thelicense agreement will continue in effect, in each country in the territory inwhich the licensed product is sold or manufactured, until the earlier of (i) expirationof the last 

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valid claim of a pendingor issued patent covering the licensed product in that country or (ii) aspecified number of years after first commercial sale of the licensed productin that country.

Our picoplatin portfolio includes United States andforeign patents and applications licensed from Genzyme, which cover thepicoplatin product. With respect to picoplatin, we expect to rely primarily onUS patent number 5,665,771 (expiring February 7, 2016), which is licensedto us by Genzyme, and additional licensed patents expiring in 2016 coveringpicoplatin in the European Union. The FDA also has designated picoplatin as anorphan drug for the treatment of small cell lung cancer under the provisions ofthe Orphan Drug Act, which entitles us to exclusive marketing rights forpicoplatin in the United States for seven years following market approval.

A number of additional potential avenues exist whichmay further extend our picoplatin patent protection and exclusivity. In theUnited States, these include The Drug Price and Competition and Patent TermRestoration Act of 1984, commonly referred to as the Hatch-Waxman Act, which,among other things, generally provides for patent term extension for up to fiveyears for an issued patent covering a drug product which has undergoneregulatory review before marketing. In addition, since picoplatin has not beenpreviously approved for marketing in the United States, picoplatin may qualifyfor new chemical entity data exclusivity, under which the FDA bans for a periodof time submissions of applications from competitors based on published data orAbbreviated New Drug Applications (ANDA) for a drug containing the same activeagent. Certain patent term restoration procedures and marketing exclusivityrights also may be available for qualifying drug products in the European Unionor individual foreign countries. We intend to evaluate the availability ofthese mechanisms for extending the patent term and marketing exclusivity forpicoplatin on an individual regional or country basis. We cannot be certainthat we will be successful in any efforts to extend the term of any patentrelating to picoplatin or that picoplatin will be granted additional marketingexclusivity rights in the United States or abroad.

Risks associated with the protection of our patentsand other proprietary technologies are described under the heading “RiskFactors” in Item 1A below. Pending or future patent applications by us or ourcollaborators will not necessarily result in issued patents. Moreover, thecurrent patents that we own or license may not provide substantial protectionor commercial benefit. In addition to patent protection, we rely upon tradesecrets, unpatented proprietary know-how and continuing technologicalinnovation to develop and maintain our competitive position. Third partiescould acquire or independently develop the same or similar technology, or ourissued patents or those licensed by us could be circumvented, invalidated orrendered obsolete by new technology. Third parties also could gain access to ordisclose our proprietary technology, and we may be unable to meaningfullyprotect our rights in such unpatented proprietary technology.

Under United States law,although a patent has a statutory presumption of validity, the issuance of apatent is not conclusive as to its validity or as to the enforceable scope ofits claims. Accordingly, the patents owned or licensed by us could beinvalidated, infringed or designed around by third parties. Also, third partiescould obtain patents that we would need to license or design around.

**Competition**

The competition fordevelopment of cancer therapies is substantial. There is intense competitionfrom biotechnology and pharmaceutical companies, as well as academic researchinstitutions, clinical reference laboratories and government agencies that arepursuing research and development activities similar to ours in the UnitedStates and abroad. Our initial focus for picoplatin is small cell lung cancer,the most aggressive and deadly form of lung cancer. Although platinum therapiesare the preferred treatment, no FDA-approved therapies are available forpatients with platinum-refractory or -resistant disease. If approved,picoplatin will be competing with existing treatment regimens, as well asemerging therapies for small cell lung cancer, and other platinum-basedtherapeutics. Large pharmaceutical/biotechnology 

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companies,including Bristol-Myer Squibb Company, Bayer Schering Pharma AG, DainipponSumitomo Pharma Co. Ltd., Eli Lilly and Company, GlaxoSmithKline PLC, NovartisAG, Pfizer Inc., Genentech, Inc., Shionogi & Co. Ltd., SK Pharmaand Sanofi-Aventis Group, are marketing and/or developing therapeutics inlate-stage clinical trials for the treatment of small cell lung cancer orplatinum agents for the treatment of cancer. Multiple biotechnology companiesare engaged in clinical trials for the treatment of small cell lung cancer andother platinum-based therapeutics, including Aeterna Zentaris Inc., AccessPharmaceuticals Inc., GPC Biotech AG, Onyx Pharmaceuticals Inc., PharmionCorporation, Sunesis Pharmaceuticals Inc., Keryx Biopharmaceuticals Inc.,Transave Inc., Vion Pharmaceuticals Inc., PharmaMar (Zeltia Group),ImmunoGen, Inc., Meabco A/S, Antigenics, Inc., Ipsen Group andMenarini Group. As we expand the utility of picoplatin into other oncologyindications such as hormone-refractory prostate cancer and colorectal cancer,we will be facing additional competition from major pharmaceutical companies,biotechnology companies, research institutions and government agencies. Wecannot assure you that we will be able to effectively compete with these orfuture third-party product development programs. Many of our existing orpotential competitors have, or have access to, substantially greater financial,research and development, marketing and production resources than we do and maybe better equipped than we are to develop, manufacture and market competingproducts. Further, our competitors may have, or may develop and introduce, newproducts that would render our picoplatin or any other proposed productcandidates less competitive, uneconomical or obsolete.

Timing of marketintroduction and health care reform, both uncertainties, will affect thecompetitive position of our potential products. We believe that competitionamong products approved for sale will be based, among other things, on productsafety, efficacy, reliability, availability, third-party reimbursement, priceand patent protection.

**Government Regulation and Product Testing**

The FDA and comparableregulatory agencies in state and local jurisdictions and in foreign countriesimpose substantial requirements upon the clinical development, manufacture,marketing and distribution of drugs. These agencies and other federal, stateand local entities regulate research and development activities and thetesting, manufacture, quality control, safety, storage, record-keeping,approval, advertising and promotion of picoplatin and any other future drugcandidates. Product development and approval within these regulatory frameworkstake a number of years to accomplish, if at all, and involve the expenditure ofsubstantial resources.

***U.S. GovernmentRegulation***

In theUnited States, drugs and biologics are subject to rigorous regulation by theFDA under the Federal Food, Drug and Cosmetic Act of 1976, as amended, andimplementing regulations. The process required by the FDA before picoplatin andany future drug candidates may be marketed in the United States generallyinvolves the following:

·       completionof extensive preclinical laboratory tests, *in vivo*preclinicalstudies and formulation studies;

·       submissionto the FDA of an Investigational New Drug Application (IND), which must becomeeffective before clinical trials can commence;

·       performanceof adequate and well-controlled clinical trials to establish the safety andefficacy of the product candidate for each proposed indication;

·       submissionof a Biologic License Application (BLA) or New Drug Application (NDA) to theFDA; and

·       FDAreview and approval of the BLA or NDA prior to any commercial sale or shipmentof the drug.

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In addition to obtaining FDA approval for eachproduct, each domestic drug manufacturing establishment must be registered withand inspected by the FDA. Domestic manufacturing establishments are subject tobiennial inspections by the FDA and must comply with current Good ManufacturingPractice (cGMP) regulations, which are enforced by the FDA through itsfacilities inspection program for biologics, drugs and devices. To supplyproducts for use in the United States, foreign manufacturing establishments mustcomply with cGMP regulations and are subject to periodic inspection by the FDAor by corresponding regulatory agencies in such countries under reciprocalagreements with the FDA.

Preclinical studies include laboratory evaluation ofproduct chemistry and formulation, as well as animal studies, to assess thepotential safety and efficacy of the proposed product. Laboratories that complywith the FDA regulations regarding Good Laboratory Practice must conductpreclinical safety tests. The results of the preclinical studies are submittedto the FDA as part of an IND and are reviewed by the FDA prior to commencementof clinical trials. Unless the FDA provides comments to an IND, the IND willbecome effective 30 days following its receipt by the FDA. Submission of an INDdoes not assure FDA authorization to commence clinical trials.

Clinical trials involve the administration of theinvestigational new drug to healthy volunteers or to patients under thesupervision of a qualified principal investigator. Clinical trials areconducted in accordance with the FDA’s Protection of Human Subjects regulationsand Good Clinical Practices under protocols that detail the objectives of thestudy, the parameters to be used to monitor safety, and the efficacy criteriato be evaluated. Each protocol must be submitted to the FDA as part of the IND.Further, each clinical study must be conducted under the auspices of anindependent Institutional Review Board (IRB) at the institution where the studywill be conducted. The IRB will consider, among other things, ethical factors,the safety of human subjects and the possible liability of the institution.

Clinical trials aretypically conducted in three sequential phases, but the phases may overlap. InPhase I, the drug is tested for:

·       safety(adverse effects);

·       dosagetolerance;

·       metabolism;

·       distribution;

·       excretion;and

·       pharmaco-dynamics(clinical pharmacology).

In Phase II, alimited patient population is studied to:

·       determinethe efficacy of the drug for specific, targeted indications;

·       determinedosage tolerance and optimal dosage; and

·       identifypossible adverse effects and safety risks.

If a compound is found to have potential activity in adisease or condition and to have an acceptable safety profile in Phase IIclinical trials, Phase III clinical trials are undertaken to further evaluateclinical activity and to further test for safety within an expanded patientpopulation at geographically dispersed clinical study sites. Often, Phase IV(post-marketing) studies are required by the FDA in order to gain more data onsafety and efficacy of a drug after it has transitioned into general medicalpractice. With respect to picoplatin or any proposed products subject toclinical trials, there can be no assurance that Phase I, Phase II or Phase IIIstudies will be completed successfully within any specific time period, if atall. Clinical studies are inherently uncertain, and our current picoplatin andany future clinical trials may 

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not confirm the resultsachieved in earlier clinical or preclinical trials. If picoplatin is not shownto be safe and effective, we will not be able to obtain the required regulatoryapprovals for commercial sale of that product. Furthermore, we or the FDA maysuspend clinical trials at any time if it is determined that the subjects orpatients are being exposed to an unacceptable health risk.

The results of thepharmaceutical development, preclinical studies and clinical trials aresubmitted to the FDA in the form of an NDA for approval of the marketing andcommercial shipment of the drug. The testing and approval processes are likelyto require substantial cost, time and effort, and there can be no assurancethat any approval will be granted on a timely basis, if at all. The FDA maydeny an NDA if applicable regulatory criteria are not satisfied, may requireadditional testing or information, or may require post-market testing andsurveillance to monitor the safety of the product. If regulatory approval isgranted, such approval may entail limitations on the indicated uses for whichthe product may be marketed. The FDA may withdraw product approvals ifcompliance with regulatory standards is not maintained or if problems occurfollowing initial marketing. Among the conditions for NDA approval is therequirement that the prospective manufacturers’ quality control andmanufacturing procedures conform to cGMP regulations. In complying withstandards set forth in these regulations, manufacturers must continue to expendtime, money and effort in the areas of production and quality control to ensurefull technical compliance.

***Foreign Regulation***

In addition to regulation in the United States, wewill be subject to a variety of foreign regulations governing clinical trialsand commercial sales and distribution of our proposed future products. Whetheror not we obtain FDA approval for a product, we must obtain approval of aproduct by comparable regulatory authorities of foreign countries before we cancommence clinical trials or marketing of the product in those counties. Theapproval process varies from country to country, and the time may be longer orshorter than that required for FDA approval. The requirements governing theconduct of clinical trials, product licensing, pricing and reimbursement alsovary greatly from country to country.

Under the European Union regulatory systems, marketingauthorizations may be submitted either under a centralized or mutualrecognition procedure. The centralized procedure provides for the grant of asingle marketing authorization that is valid for all European Union memberstates. The mutual recognition procedure provides for mutual recognition ofnational approval decisions. Under this procedure, the holder of a nationalmarketing authorization may submit an application to the remaining memberstates. Within 90 days of receiving the application and assessment report, eachmember state must decide whether to recognize approval.

In addition to regulationsin Europe and the United States, we will be subject to a variety of foreignregulations governing clinical trials and commercial distribution of ourcurrent and future product candidates.

**Employees**

As of March 8, 2007,we had 32 full-time employees and 6 part-time employees. Of these full-timeemployees, 8 hold PhD degrees, 2 hold M.D. degrees, and one holds a JD degree.Of the total full-time employees, 17 employees were engaged in research anddevelopment activities and 15 were employed in general administration. AlanGlassberg, M.D. resigned as our chief medical officer effective March 15,2007 and will provide us consulting services as a member of our clinicaladvisory board. We consider our relations with employees to be good. None ofour employees is covered by a collective bargaining agreement.

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**CorporateBackground**

We are a Washingtoncorporation that was originally incorporated as NeoRx Corporation in 1984. Wechanged our name to Poniard Pharmaceuticals, Inc. and relocated ourcorporate headquarters from Seattle, Washington to South San Francisco inSeptember 2006. Our principal executive office and mailing address is 7000Shoreline Court, Suite 270, South San Francisco, California 94080, and ourtelephone number is (650) 583-3774.

***Item 1A.****                  RISKFACTORS*

Investing in our commonstock or other securities involves a high degree of risk. You should carefullyread the risks and uncertainties described below and all information containedin this report before you decide to purchase our common stock. If any of thepossible adverse events described below actually occurs, we may be unable toconduct our business as currently planned and our financial and operatingresults could be harmed. In addition the trading price of our common stockcould decline due to the occurrence of any of these risks, and you may lose allor part of your investment. Please see “Special Note Regarding Forward-LookingStatements.”

**Risks Related toOur Business**

**We have a historyof operating losses, we expect to continue to incur losses, and we may neverbecome profitable.**

We have not been profitable since our formation in1984. As of December 31, 2006, we had an accumulated deficit of $279.6million. Our net loss for the year ended December 31, 2006 was $23.3million. We had net losses of $21.0 million for the year endedDecember 31, 2005 and $19.4 million for the year ended December 31,2004. These losses resulted principally from costs incurred in our research anddevelopment programs and from our general and administrative activities. Todate, we have been engaged only in research and development activities and havenot generated any significant revenue from product sales. In May 2005, weannounced the discontinuation of our skeletal targeted radiotherapy (STR)development program as part of a strategic plan to refocus our limitedresources on the development of picoplatin, a platinum-based cancer therapy. Wedo not anticipate that our picoplatin product candidate, or any other proposedproducts, will be commercially available for several years, if at all. Weexpect to incur additional operating losses in the future. These losses mayincrease significantly as we expand our clinical trials and increase ourresearch and development activities and seek to commercialize picoplatin or anyfuture product candidates.

Our ability to achieve long-term profitability isdependent upon obtaining regulatory approvals for our picoplatin productcandidate and any other proposed products and successfully commercializing ourproducts alone or with third parties.

**We will need toraise additional capital to develop and commercialize our product candidatesand fund operations**,and our future access to capital is uncertain.

It is expensive to develop cancer therapy products andconduct clinical trials for these products. We have not generated revenue fromthe commercialization of any product, and we expect to continue to incursubstantial net operating losses and negative cash flows from operations forthe foreseeable future. On April 26, 2006, we completed a $65.0 millionequity financing; however, we will require substantial additional funding todevelop and commercialize picoplatin and any other proposed products and tofund our future operations.

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Management iscontinuously exploring financing alternatives, including:

·       raisingadditional capital through the public or private sale of equity or debtsecurities or through the establishment of credit or other funding facilities;and

·       enteringinto strategic collaborations, which may include joint ventures or partnershipsfor product development and commercialization, merger, sale of assets or othersimilar transactions.

We may not be able to obtain the required additionalcapital or enter into relationships with corporate partners on a timely basis,on favorable terms, or at all. Conditions in the capital markets in general,and in the life science capital market specifically, may affect our potentialfinancing sources and opportunities for strategic partnering. If we raiseadditional funds by issuing common stock or securities convertible into orexercisable for common stock, our shareholders may experience substantialdilution, and new investors could have rights superior to current securityholders. If we are unable to obtain sufficient additional cash when needed, wemay be forced to reduce expenses though the delay, reduction or curtailment ofour picoplatin and other development and commercialization activities.

The amount ofadditional financing we will require in the future will depend on a number offactors, including:

·       thescope and timing of our picoplatin clinical program and other research anddevelopment efforts, including the progress and costs of our ongoing Phase IIand planned Phase III trials of picoplatin in small cell lung cancer;

·       ourability to obtain clinical supplies of picoplatin active pharmaceuticalingredient and finished drug product in a timely and cost effective manner;

·       actionstaken by the FDA and other regulatory authorities;

·       thetiming of and amount of proceeds from any sale of the Denton facility andassets;

·       thetiming and amount of any milestone or other payments we might receive from orpay to potential strategic partners;

·       ourdegree of success in commercializing picoplatin or any other productcandidates;

·       theemergence of competing technologies and products, and other adverse marketdevelopments;

·       theacquisition or in-licensing of other products or intellectual property;

·       thecosts, including lease and operating costs, incurred in connection with therelocation of our corporate headquarters to South San Francisco and the plannedexpansion of our workforce;

·       thecosts of any research collaborations or strategic partnerships established;

·       thecosts of preparing, filing, prosecuting, maintaining and enforcing patentclaims and other intellectual property rights; and

·       thecosts of performing our obligations under our loan with Silicon Valley Bank andMerrill Lynch Capital, including the cost of interest and other paymentobligations and penalties and the cost of complying with unrestricted cash,product development and other covenants and restrictions under the loanagreement.

During 2006, we experienced significant changes to ourcapital structure which resulted in an ownership change, as defined underSection 382 of the Internal Revenue Code of 1986, as amended (IRC).Consequently, the amount of net operating loss carryforwards and research andexperimentation credit carryforwards available to be used in future years arelimited under IRC Sections 382 and 383. This limitation will result in the lossof approximately $93.3 million of our net operating loss carryforwards and 

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$9.1 million of ourresearch and development credit carryforwards. We had net operating losscarryforwards of approximately $62.3 million available for future use as ofDecember 31, 2006, which will expire from 2007 through 2026.

**Our potentialproducts must undergo rigorous clinical testing and regulatory approvals, whichcould be costly, time consuming, and subject us to unanticipated delays orprevent us from marketing any products.**

The manufacture and marketing of our picoplatin productcandidate and our research and development activities are subject to regulationfor safety, efficacy and quality by the FDA in the United States and bycomparable regulatory authorities in foreign countries.

The process of obtaining FDA and other requiredregulatory approvals, including foreign approvals, is expensive, often takesmany years and can vary substantially depending on the type, complexity andnovelty of the products involved.

We have had only limited experience in filing andpursuing applications necessary to gain regulatory approvals. This may impedeour ability to obtain timely approvals from the FDA or foreign regulatoryagencies. We will not be able to commercialize our product candidates until weobtain regulatory approvals, and consequently any delay in obtaining, orinability to obtain, regulatory approvals could harm our business.

If we violate regulatory requirements at any stage,whether before or after marketing approval is obtained, we may be fined, forcedto remove a product from the market or experience other adverse consequences,including delay, which could materially harm our financial results.Additionally, we may not be able to obtain the labeling claims necessary ordesirable for product promotion. If we or other parties identify serious sideeffects after any of our products are on the market, or if manufacturingproblems occur, regulatory approval may be withdrawn and reformulation of ourproducts, additional clinical trials, changes in labeling of our products, and/oradditional marketing applications may be required.

The requirements governing the conduct of clinicaltrials and manufacturing and marketing of our proposed products outside theUnited States vary widely from country to country. Foreign approvals may takelonger to obtain than FDA approvals and can involve additional testing. Foreignregulatory approval processes include all of the risks associated with the FDAapproval processes. Also, approval of a product by the FDA does not ensureapproval of the same product by the health authorities of other countries.

**We may take longerto complete our clinical trials than we project, or we may be unable tocomplete them at all.**

We completed enrollment in our Phase II clinical trialof picoplatin in small cell lung cancer in August 2006, and we continue totreat and follow patients on this study for survival. This Phase II study is anopen-label, multi-center trial evaluating picoplatin in patients with smallcell lung cancer that did not respond to, or which relapsed within six monthsafter completing, prior platinum-containing chemotherapy. The endpoints of thetrial include survival, response rate (tumor shrinkage), duration of responseand time to progression,

Based upon positive interim overall survival data fromour Phase II study, we plan to initiate an international, multi-centerrandomized Phase III pivotal trial of picoplatin in small cell lung cancer inthe first half of 2007. The Phase III trial, which will be undertaken pursuantto an SPA with the FDA, is designed to compare the efficacy and safety ofpicoplatin plus best supportive care with best supportive care alone as asecond-line therapy. The study is expected to enroll approximately 400 patientswith small cell lung cancer whose disease did not respond to a first-lineplatinum-containing (cisplatin or carboplatin) chemotherapy regimen or whosedisease responded initially to first-line platinum-containing therapy, but thenprogressed within six months after completion of treatment. Patients will be randomizedon a 2:1 ratio 

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to receive picoplatin plusbest supportive care or best supportive care alone. The primary endpoint of theplanned study will be improved overall survival as measured in time fromrandomization to death. Secondary endpoints will include overall responserates, disease control and progression-free survival. We currently estimatethat the study will take approximately 20 months to complete; however, theactual time to completion of the study will depend on the rate of patientenrollment, survival times of all patients in the trial, as well as otherfactors such as patient performance status, extent of disease and the risks anduncertainties described in this report.

In May 2006, we treated our first patient in ourPhase I/II study evaluating picoplatin in the front-line treatment of patientswith metastatic colorectal cancer. This study is designed to determine thesafety and efficacy of picoplatin when combined with the chemotherapy agents 5-fluorouraciland leucovorin to treat patients newly diagnosed with metastatic disease. Alsoin May 2006, we enrolled our first patient in our Phase I/II trial ofpicoplatin in the first-line treatment of patients with hormone-refractoryprostate cancer. This study is designed to determine the safety and efficacy ofpicoplatin when combined with the chemotherapy agent docetaxel. We anticipatecompleting enrollment of the Phase I dose-evaluation components of these trialsand initiating enrollment in the Phase II efficacy components of these trialsduring the first half of 2007. Endpoints of these studies will include safety,disease reduction, time to progression, progression-free survival and overallsurvival.

The actual timesfor initiation and completion of our picoplatin clinical trials depend upon numerousfactors, including:

·       approvalsand other actions by the FDA and other regulatory agencies and the timingthereof;

·       ourability to open clinical sites;

·       ourability to enroll qualified patients into our studies;

·       ourability to obtain sufficient, reliable and affordable supplies of thepicoplatin active pharmaceutical ingredient and finished drug product;

·       ourability to obtain adequate additional funding or enter into strategicpartnerships;

·       theextent of competing trials at the clinical institutions where we conduct ourtrials;

·       theextent of scheduling conflicts with participating clinicians and clinicalinstitutions; and

·       theidentified endpoints of the studies, the extent of patient disease and patientperformance status.

We may not initiate, advance or complete ourpicoplatin or any other proposed clinical studies as projected or achievesuccessful results.

We will rely on academic institutions and clinicalresearch organizations to conduct, supervise or monitor some or all aspects ofclinical trials involving picoplatin. Further, to the extent that we now or inthe future participate in collaborative arrangements in connection with thedevelopment and commercialization of our proposed products, we will have lesscontrol over the timing, planning and other aspects of our clinical trials. Ifwe fail to initiate, advance or complete, or experience delays in or are forcedto curtail our current or planned clinical trials, our stock price and ourability to conduct our business could be materially negatively affected.

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**If testing of aparticular product does not yield successful results, we will be unable tocommercialize that product.**

Our research anddevelopment programs are designed to test the safety and efficacy of ourproposed products in humans through extensive preclinical and clinical testing.We may experience numerous unforeseen events during, or as a result of, thetesting process that could delay or prevent commercialization of picoplatin orany other proposed products, including the following:

·       thesafety and efficacy results obtained in early human clinical trials may not beindicative of results obtained in later clinical trials;

·       theresults of preclinical studies may be inconclusive, or they may not beindicative of results that will be obtained in human clinical trials;

·       afterreviewing test results, we or any potential collaborators may abandon projectsthat we previously believed were promising;

·       ourpotential collaborators or regulators may suspend or terminate clinical trialsif the participating subjects or patients are being exposed to unacceptablehealth risks; and

·       theeffects of our potential products may not be the desired effects or may includeundesirable side effects or other characteristics that preclude regulatoryapproval or limit their commercial use if approved.

Clinical testing is very expensive, can take manyyears, and the outcome is uncertain. The data that we may collect from ourpicoplatin clinical trials may not be sufficient to support regulatory approvalof our proposed picoplatin product. The clinical trials of picoplatin and anyother proposed products may not be initiated or completed on schedule, and theFDA or foreign regulatory agencies may not ultimately approve any of ourproduct candidates for commercial sale. Our failure to adequately demonstratethe safety and efficacy of a cancer therapy product under development woulddelay or prevent regulatory approval of the product, which would prevent usfrom marketing the proposed product.

**Success in earlyclinical trials may not be indicative of results obtained in later trials.**

Results of early preclinical and clinical trials arebased on a limited number of patients and may, upon review, be revised ornegated by authorities or by later stage clinical results. Historically, theresults from preclinical testing and early clinical trials often have not beenpredictive of results obtained in later clinical trials. A number of new drugsand therapeutics have shown promising results in initial clinical trials, butsubsequently failed to establish sufficient safety and effectiveness data toobtain necessary regulatory approvals. Data obtained from preclinical andclinical activities are subject to varying interpretations, which may delay,limit or prevent regulatory approval.

**If we cannotnegotiate and maintain collaborative arrangements with third parties, ourresearch, development, manufacturing, sales and marketing activities may not becost-effective or successful.**

Our success will depend in significant part on ourability to attract and maintain collaborative partners and strategicrelationships to support the development, manufacture, sale, marketing anddistribution of picoplatin and any other future product candidates in theUnited States and Europe.

We have entered into an exclusive worldwide license,as amended, with Genzyme Corporation (successor to AnorMED, Inc.) for thedevelopment and commercial sale of picoplatin. Under that license, we aresolely responsible for the development and commercialization of picoplatin.Genzyme retains the right, at our cost, to prosecute its patent applicationsand maintain all licensed patents. The parties executed the license agreementin April 2004, at which time we paid a one-time upfront milestone paymentof $1.0 million in common stock and $1.0 million in cash. The originalagreement excluded Japan from the licensed territory and provided for $13.0million in development and commercialization milestones, 

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payable in cash or acombination of cash and common stock, and a royalty rate of up to 15% onproduct net sales after regulatory approval. The parties amended the licenseagreement on September 18, 2006, modifying several key financial terms andexpanding the licensed territory to include Japan, thereby providing usworldwide rights. In consideration of the amendment, we paid Genzyme $5.0million in cash on October 12, 2006 and will pay Genzyme an additional$5.0 million in cash by March 31, 2007. The amendment eliminates alldevelopment milestone payments to Genzyme. Genzyme remains entitled to receiveup to $5.0 million in commercialization milestones upon the attainment ofcertain levels of annual net sales of picoplatin after regulatory approval. Theamendment also reduces the royalty payable to Genzyme to a maximum of 9% ofannual net product sales. In addition, the amendment reduces the sharing ofsublicense revenues for any sublicenses entered into during the first yearfollowing the amendment and eliminates the sharing of sublicense revenues withGenzyme on and after September 18, 2007. We currently plan to initiate aPhase III trial of picoplatin in small cell lung cancer in the first half of2007, with the goal of filing an NDA with the FDA in 2009. However, because wecannot predict the length of time to regulatory approval, if any, or the extentof annual sales, if any, of picoplatin, we are unable to predict when or if themilestone and royalty payments under our license agreement with Genzyme may betriggered. The license agreement may be terminated by either party for breach, orif the other party files a petition in bankruptcy or insolvency or forreorganization or is dissolved, liquidated or makes assignment for the benefitof creditors. We can terminate the license at any time upon prior writtennotice to Genzyme. If not earlier terminated, the license agreement willcontinue in effect, in each country in the territory in which the licensedproduct is sold or manufactured, until the earlier of (i) expiration ofthe last valid claim of a pending or issued patent covering the licensedproduct in that country or (ii) a specified number of years after firstcommercial sale of the licensed product in that country. If Genzyme were tobreach its obligations under the license, or if the license expires or isterminated and we cannot renew, replace, extend or preserve our rights underthe license agreement, we would be unable to move forward with our current andplanned picoplatin clinical studies.

On August 4, 2005, we entered into a researchfunding and option agreement with The Scripps Research Institute, or TSRI.Under the agreement, as amended in December 2006, we will provide TSRI anaggregate of $2.5 million over a 26-month period to fund researchrelating to synthesis and evaluation of novel small molecule, multi-targetedprotein kinase inhibitors and focal adhesion kinase inhibitors as therapeuticagents, including for the treatment of cancer. We have the option to negotiatea worldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by us to TSRI quarterlyin accordance with a negotiated budget. We made an initial funding payment toTSRI of $137,500, on August 8, 2005. We paid TSRI total funding paymentsof $1.0 million in 2006, which amount was charged to R&D expense. Theagreement provides for aggregate additional funding payments of $1.4 million in2007. We have no assurance that the research funded under this arrangement willbe successful or ultimately will give rise to any viable product candidates. Further,there can be no assurance that we will be able to negotiate, on acceptableterms, a license with respect to any compounds arising from the collaboration.

**We are dependent onthird-party suppliers for the timely delivery of materials and services and mayexperience future interruptions in supply**

For our picoplatin product candidate to be successful,we need sufficient, reliable and affordable supplies of the picoplatin activepharmaceutical ingredient, or API, and finished drug product. Sources of thesemay be limited, and third-party suppliers may be unable to manufacturepicoplatin API and finished drug product in amounts and at prices necessary tosuccessfully commercialize our picoplatin product. Moreover, third-partymanufacturers must continuously adhere to current Good Manufacturing Practice(cGMP) regulations enforced by the FDA through its facilities inspectionprogram. If the facilities of these manufacturers cannot pass a pre-approvalplant inspection, the FDA will not grant an NDA for our proposed products. Incomplying with cGMP and foreign regulatory requirements, any of our third-party

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manufacturers will beobligated to expend time, money and effort in production, record-keeping andquality control to assure that our products meet applicable specifications andother requirements. If any of our third-party manufacturers or suppliers failsto comply with these requirements, we may be subject to regulatory action.

We have a limited supply of picoplatin drug productthat was manufactured by a prior licensee and supplier. The drug product hasbeen demonstrated to be stable for up to 30 months from the date ofmanufacture. Our current supply will not be sufficient for our current andplanned clinical trials. We have no experience in drug formulation ormanufacturing, and we lack the resources and capability to manufacturepicoplatin or any other product candidate on a clinical or commercial scale. Asa result, we rely on third parties to manufacture picoplatin API and finisheddrug product for our clinical trials. We currently have separate agreementswith one supplier each of API and finished drug product. Manufacturing servicesunder these agreements are provided on a purchase order, fixed-fee basis.Unless earlier terminated, each agreement continues for an initial term endingDecember 31, 2009 and may be extended beyond the initial term uponagreement of the parties. The agreements generally provide that they may beterminated by either party if there is a material breach by the other partythat remains uncured or in the event of solvency or bankruptcy of the otherparty. We may terminate the finished drug supply agreement at any time with oneyear’s advance notice. We may terminate the API manufacturing agreement ifthere is a change in control of the manufacturer. We have no assurance that ourcurrent suppliers will be able to manufacture sufficient picoplatin API and/orfinished drug product on a timely or cost-effective basis at all times in thefuture. If we are required to seek out alternative manufacturers, we may incursignificant additional costs and suffer delays in, or be prevented from,completing or initiating our ongoing or planned clinical trials.

We also rely on third-party contractors to perform forus, or assist us with, the set-up, conduct, support and management of ourclinical studies. Because these contractors provide specialized services, theiractivities and quality of performance may be outside our direct control. Ifthese contractors do not perform their contractual duties or obligations, donot meet expected deadlines, or need to be replaced, or if the quality oraccuracy of the clinical data they obtain is compromised due to the failure toadhere to our clinical trial protocols or for any other reasons, we may need toenter into new arrangements with alternative third parties. In any of thesecircumstances were to occur, our clinical trials may be extended, delayed orterminated or may need to be repeated, and we may not be able to obtainregulatory approval for or commercialize the product candidate being tested insuch trials.

**We currently haveno sales and marketing staff or distribution organization. If we are unable todevelop sales, marketing and distribution capabilities on our own or throughcollaborations with corporate partners, we may not be successful incommercializing our future products.**

None of our current employees has experience selling,marketing and distributing therapeutic products. To the extent we aresuccessful in obtaining approval for the commercial sale of picoplatin or anyother product candidate, we may need to secure one or more corporate partnersto conduct these activities. We may not be able to enter into partneringarrangements in a timely manner or on terms acceptable to us. To the extent thatwe enter into co-promotion or other licensing arrangements, our productrevenues are likely to be lower than if we directly marketed and sold ourproducts, and any revenues we receive would depend upon the efforts of thirdparties, which efforts may not be successful. If we are not able to secureadequate partnering arrangements, we would have to hire additional employees orconsultants with expertise in sales, marketing and distribution. Employees withrelevant skills may not be available to us. Additionally, any increase in thenumber of employees would increase our expense level and could have a materialadverse effect on our financial position. If we are not successful incommercializing any future products, either on our own or throughcollaborations with one or more parties, our future product revenue will sufferand we may incur significant additional losses.

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**We face substantialcompetition in the development of cancer therapies and may not be able tocompete successfully, and our potential products may be rendered obsolete byrapid technological change.**

The competition for development of cancer therapies issubstantial. There is intense competition from biotechnology and pharmaceuticalcompanies, as well as academic research institutions, clinical referencelaboratories and government agencies that are pursuing research and developmentactivities similar to ours in the United States and abroad. Our initial focusfor picoplatin is small cell lung cancer, the most aggressive and deadly formof lung cancer. Although platinum therapies are the preferred treatment, noFDA-approved therapies are available for patients with platinum-refractory or-resistant disease. If approved, picoplatin will be competing with existingtreatment regimens, as well as emerging therapies for small cell lung cancerand other platinum-based therapeutics. Large pharmaceutical/biotechnologycompanies, including Bristol-Myer Squibb Company, Bayer Schering Pharma AG,Dainippon Sumitomo Pharma Co. Ltd., Eli Lilly and Company, GlaxoSmithKline PLC,Novartis AG, Pfizer Inc., Genentech, Inc., Shionogi & Co. Ltd.,SK Pharma and Sanofi-Aventis Group, are marketing and/or developingtherapeutics in late-stage clinical trials for the treatment of small cell lungcancer or platinum agents for the treatment of cancer. Multiple biotechnologycompanies are engaged in clinical trials for the treatment of small cell lungcancer and other platinum-based therapeutics, including Aeterna Zentaris Inc.,Access Pharmaceuticals Inc., GPC Biotech AG, Onyx Pharmaceuticals Inc.,Pharmion Corporation, Sunesis Pharmaceuticals Inc., Keryx BiopharmaceuticalsInc., Transave Inc., Vion Pharmaceuticals Inc., PharmaMar (Zeltia Group),ImmunoGen, Inc., Meabco A/S, Antigenics, Inc., Ipsen Group andMenarini Group. As we expand the utility of picoplatin into other oncologyindications such as hormone-refractory prostate cancer and colorectal cancer,we will be facing additional competition from major pharmaceutical companies,biotechnology companies, research institutions and government agencies. Wecannot assure you that we will be able to effectively compete with these orfuture third party product development programs. Many of our existing orpotential competitors have, or have access to, substantially greater financial,research and development, marketing and production resources than we do and maybe better equipped than we are to develop, manufacture and market competingproducts. Further, our competitors may have, or may develop and introduce, newproducts that would render our picoplatin or any other proposed productcandidates less competitive, uneconomical or obsolete.

**If we are unable toprotect our proprietary rights, we may not be able to compete effectively, oroperate profitably.**

Our success is dependent in part on obtaining,maintaining and enforcing our patents and other proprietary rights and ourability to avoid infringing the proprietary rights of others. The United StatesPatent and Trademark Office, or the USPTO, may not issue patents from thepatent applications owned by or licensed to us. If issued, the patents may notgive us an advantage over competitors with similar technologies.

The issuance of a patent is not conclusive as to itsvalidity or enforceability and it is uncertain how much protection, if any,will be given to our patents if we attempt to enforce them and they arechallenged in court or in other proceedings, such as oppositions, which may bebrought in foreign jurisdictions to challenge the validity of a patent. A thirdparty may challenge the validity or enforceability of a patent after itsissuance by the USPTO. It is possible that a competitor may successfullychallenge our patents or that a challenge will result in limiting theircoverage. Moreover, the cost of litigation to uphold the validity of patentsand to prevent infringement can be substantial. If the outcome of litigation isadverse to us, third parties may be able to use our patented invention withoutpayment to us. Moreover, it is possible that competitors may infringe our patentsor successfully avoid them through design innovation. We may need to filelawsuits to stop these activities. These lawsuits can be expensive and wouldconsume time and other resources, even if we were successful in stopping theviolation of our patent rights. In addition, there is a risk that a court woulddecide that our patents are not valid and that we do not have the right to stopthe other party from using the inventions. There is also the risk that, even ifthe validity of our patents was 

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upheld, a court wouldrefuse to stop the other party on the ground that its activities do notinfringe our patents.

In addition, the protection afforded by issued patentsis limited in duration. With respect to picoplatin, in the United States weexpect to rely primarily on US Patent Number 5,665,771 (expiringFebruary 7, 2016), which is licensed to us by Genzyme, and additionallicensed patents expiring in 2016 covering picoplatin in the Europe Union. TheFDA has also designated picoplatin as an orphan drug for the treatment of smallcell lung cancer under the provisions of the Orphan Drug Act, which entitles usto exclusive marketing rights for picoplatin in the United States for sevenyears following market approval. We may also be able to rely on the Hatch-WaxmanAct to extend the term of a U.S. patent covering picoplatin after regulatoryapproval, if any, of such product in the United States.

Under our license agreement with Genzyme, Genzymeretains the right to prosecute its patent applications and maintain alllicensed patents, with us reimbursing such expenses. We have the right to sueany third party infringers of the picoplatin patents. If we do not file suit,Genzyme, in its sole discretion, has the right to sue the infringer at itsexpense.

In addition to the intellectual property rightsdescribed above, we rely on unpatented technology, trade secrets andconfidential information. Therefore, others may independently developsubstantially equivalent information and techniques or otherwise gain access toor disclose our technology. We may not be able to effectively protect ourrights in unpatented technology, trade secrets and confidential information. Werequire each of our employees, consultants and advisors to execute aconfidentiality agreement at the commencement of an employment or consultingrelationship with us. However, these agreements may not provide effectiveprotection of our information or, in the event of unauthorized use ordisclosure, may not provide adequate remedies.

**The use of ourtechnologies could potentially conflict with the rights of others.**

Our competitors or others may have or may acquirepatent rights that they could enforce against us. In such case, we may berequired to alter our products, pay licensing fees or cease activities. If ourproducts conflict with patent rights of others, third parties could bring legalactions against us claiming damages and seeking to enjoin manufacturing andmarketing of the affected products. If these legal actions are successful, inaddition to any potential liability for damages, we could be required to obtaina license in order to continue to manufacture or market the affected products.We may not prevail in any legal action and a required license under the patentmay not be available on acceptable terms.

**We may incursubstantial costs as a result of litigation or other proceedings relating topatent and other intellectual property rights.**

The cost to us of any litigation or other proceedingsrelating to intellectual property rights, even if resolved in our favor, couldbe substantial. Some of our competitors may be better able to sustain the costsof complex patent litigation because they have substantially greater resources.If there is litigation against us, we may not be able to continue our operations.If third parties file patent applications, or are issued patents claimingtechnology also claimed by us in pending applications, we may be required toparticipate in interference proceedings in the USPTO to determine priority ofinvention. We may be required to participate in interference proceedingsinvolving our issued patents and pending applications. We may be required tocease using the technology or license rights from prevailing third parties as aresult of an unfavorable outcome in an interference proceeding. A prevailingparty in that case may not offer us a license on commercially acceptable terms.

In April 2003, we received $10.0 million from thesale to Boston Scientific Corporation, or BSC, of certain non-core patents andpatent applications and the grant to BSC of exclusive license rights to certainnon-core patents and patent applications. BSC originally asserted four suchpatents in two lawsuits against Johnson & Johnson, Inc., itssubsidiary, Cordis Corporation, and Guidant Corporation, alleging 

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infringement of suchpatents. In both lawsuits, the defendants denied infringement and assertedinvalidity and unenforceability of the patents. BSC subsequently withdrew threeof the patents from the litigation, including the patents that were assigned toBSC. BSC acquired Guidant in April 2006. Although we are not currently aparty to the lawsuits, our management and counsel have been deposed inconnection with the lawsuits. It is possible that BSC, if it is unsuccessful orhas limited success with its claims, may seek damages from us, includingrecovery of all or a portion of the amounts it paid to us in 2003. We cannotassess the likelihood of whether such claim will be brought against us or theextent of recovery, if any, on any such claim***.***

**Product liabilityclaims in excess of the amount of our insurance would adversely affect ourfinancial condition.**

The testing, manufacture, marketing and sale ofpicoplatin and any other proposed cancer therapy products, including pastclinical and manufacturing activities in connection with our terminated STRradiotherapeutic, may subject us to product liability claims. We are insuredagainst such risks up to a $10.0 million annual aggregate limit inconnection with clinical trials of our products under development and intend toobtain product liability coverage in the future. However, insurance coveragemay not be available to us at an acceptable cost. We may not be able to obtaininsurance coverage that will be adequate to satisfy any liability that may arise.Regardless of merit or eventual outcome, product liability claims may result indecreased demand for a product, injury to our reputation, withdrawal ofclinical trial volunteers and loss of revenues. As a result, regardless ofwhether we are insured, a product liability claim or product recall may resultin losses that could be material.

**Our past use ofradioactive and other hazardous materials exposes us to the risk of materialenvironmental liabilities, and we may incur significant additional costs to complywith environmental laws in the future.**

Our past research and development and manufacturingprocesses, as well as the manufacturing processes that may have been used byour collaborators, involved the controlled use of hazardous and radioactivematerials. As a result, we are subject to foreign, federal, state and locallaws, rules, regulations and policies governing the use, generation,manufacture, storage, air emission, effluent discharge, handling and disposalof certain materials and wastes in connection with our use of these materials.Although we believe that our safety procedures for handling and disposing ofsuch materials complied with the standards prescribed by such laws andregulations, we may be required to incur significant costs to comply withenvironmental and health and safety regulations in the future. Because we havediscontinued operations in facilities that have had past research andmanufacturing processes where hazardous or radioactive materials have been inuse, we may have significant decommissioning costs associated with thetermination of operation of these facilities. These potential decommissioningcosts also may reduce the market value of the facilities and may limit ourability to sell or otherwise dispose of these facilities in a timely andcost-effective manner. We have terminated our STR manufacturing operations inDenton, Texas and are actively marketing the facility for sale. In 2005, werecorded costs associated with the closure of the Denton facility of $0.9million. We estimate costs in 2006 related to these activities at $0.2 million.These costs could increase substantially, depending on actions of regulators orif we discover previously unknown contamination in or around the facility. Inaddition, the risk of accidental contamination or injury from hazardous orradioactive materials cannot be completely eliminated. In the event of such anaccident, we could be held liable for any resulting damages, and any suchliability could exceed our resources. Our current insurance does not coverliability for the clean-up of hazardous waste materials or other environmentalrisks.

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**Even if we bring products to market, changes in healthcare reimbursement could adversely affect our ability to effectively price ourproducts or obtain adequate reimbursement for sales of our products.**

Potential sales of our products may be affected by theavailability of reimbursement from governments or other third parties, such asinsurance companies. It is difficult to predict the reimbursement status ofnewly approved, novel medical products. In addition, third-party payors areincreasingly challenging the prices charged for medical products and services.If we succeed in bringing one or more products to market, we cannot be certainthat these products will be considered cost-effective and that reimbursement tothe consumer will be available or will be sufficient to allow us tocompetitively or profitably sell our products.

The levels of revenues and profitability ofbiotechnology companies may be affected by the continuing efforts of governmentand third-party payors to contain or reduce the costs of health care throughvarious means. For example, in certain foreign markets, pricing orprofitability of prescription pharmaceuticals is subject to governmentalcontrol. In the United States, there have been, and we expect that there willcontinue to be, a number of federal and state proposals to implement similargovernmental controls. It is uncertain what legislative proposals will beadopted or what actions federal, state or private payors for health care goodsand services may take in response to any health care reform proposals orlegislation. Even in the absence of statutory change, market forces arechanging the health care sector. We cannot predict the effect health carereforms may have on the development, testing, commercialization andmarketability of our proposed cancer therapy products. Further, to the extentthat such proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospectivecollaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.

**The loss of keyemployees could adversely affect our operations.**

Alan Glassberg, M.D. resigned as our chief medicalofficer effective March 15, 2007. Although Dr. Glassberg was anexecutive officer of the Company, we did not experience any materialdisruptions as a consequence of his resignation. Dr. Glassberg will serveon our clinical advisory board and provide us consulting services.

Susan D. Berland resigned as our chief financialofficer effective July 21, 2006. Although Ms. Berland was anexecutive officer of the company, we did not experience any materialdisruptions or delays as a consequence of her resignation. Caroline M. Loewywas appointed executive vice president, strategic planning on June 23,2006 and assumed the role of chief financial officer of the company uponMs. Berland’s departure. Michael K. Jackson, formerly corporatecontroller, was appointed principal accounting officer of the company effectiveJuly 21, 2006.

As of December 31, 2006, we had a total workforceof 29 full-time employees and 6 part-time employees. In September 2006, wemoved our corporate headquarters to newly leased facilities in South SanFrancisco. We intend to maintain clinical development and support activitiesand facilities in Seattle and do not have plans to relocate any of our 24employees currently in Seattle. Our success depends, to a significant extent,on the continued contributions of our principal management and scientificpersonnel participating in our picoplatin development program. We have limitedor no redundancy of personnel in key development areas, including finance,legal, clinical operations, regulatory affairs and quality control andassurance. The loss of the services of one or more of our employees could delayour picoplatin product development activities or any other proposed programsand research and development efforts. We do not maintain key-person lifeinsurance on any of our officers, employees or consultants.

Competition for qualified employees among companies inthe biotechnology and biopharmaceutical industry is intense. Our future successdepends upon our ability to attract, retain and motivate highly skilledemployees and consultants. In order to commercialize our proposed productssuccessfully, we will in 

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the future be required tosubstantially expand our workforce, particularly in the areas of manufacturing,clinical trials management, regulatory affairs, business development and salesand marketing. These activities will require the addition of new personnel,including management, and the development of additional expertise by existingmanagement personnel.

We have change of controlagreements and severance agreements with all of our executive officers andconsulting agreements with various of our scientific advisors. Our agreementswith our executive officers provide for “at will” employment, which means thateach executive may terminate his or her service with us at any time. Inaddition, our scientific advisors may terminate their services to us at anytime.

**Risks Related toOur Common Stock**

**Our common stockmay be delisted from The Nasdaq Capital Market if we are unable to maintaincompliance with Nasdaq Capital Market continued listing requirements.**

Our common stock listing was transferred from TheNasdaq Global Market (formerly The Nasdaq National Market) to The NasdaqCapital Market (formerly the Nasdaq SmallCap Market) on March 20, 2003. Weelected to seek a transfer to The Nasdaq Capital Market because we had beenunable to regain compliance with The Nasdaq Global Market minimum $1.00 bidprice requirement for continued listing. By transferring to The Nasdaq CapitalMarket, we were afforded an extended grace period in which to satisfy TheNasdaq Capital Market $1.00 minimum bid price requirement. On May 6, 2003,we received notice from Nasdaq confirming that we were in compliance with the$1.00 minimum bid price requirement. We will not be eligible to relist ourcommon stock on The Nasdaq Global Market unless and until our common stockmaintains a minimum bid price of $5.00 per share for 90 consecutive tradingdays and we otherwise comply with the initial listing requirements for TheNasdaq Global Market. Trading on the Nasdaq Capital Market may have a negativeimpact on the value of our common stock, because securities trading on theNasdaq Capital Market typically are less liquid than those traded on The NasdaqGlobal Market.

On August 7, 2006, we received a notice fromNasdaq indicating that we were not in compliance with Nasdaq MarketplaceRule 4310(c)(4) (the Minimum Bid Price Requirement) because theclosing bid price of our common stock had been below $1.00 per share for thirtyconsecutive trading days. We completed a one-for-six reverse stock split onSeptember 22, 2006. On October 10, 2006, we received a notice fromNasdaq stating that we had regained compliance with the Minimum Bid PriceRequirement because the closing bid price of our common stock had been at orabove $1.00 per share for ten consecutive trading days. The closing bid priceof our common stock may in the future fall below the Minimum Bid PriceRequirement or we may in the future fail to meet other requirements forcontinued listing on the Nasdaq Capital Market. If we are unable to cure anyfuture events of noncompliance in a timely or effective manner, our commonstock could be delisted from The Nasdaq Capital Market.

If our common stock were to be delisted from TheNasdaq Capital Market, we may seek quotation on a regional stock exchange, ifavailable. Such listing could reduce the market liquidity for our common stock.If our common stock is not eligible for quotation on another market orexchange, trading of our common stock could be conducted in theover-the-counter market on an electronic bulletin board established forunlisted securities such as the Pink Sheets or the OTC Bulletin Board. As aresult, an investor would find it more difficult to dispose of, or obtainaccurate quotations for the price of, our common stock.

If our common stock were to be delisted from TheNasdaq Capital Market, and our trading price remained below $5.00 per share,trading in our common stock might also become subject to the requirements ofcertain rules promulgated under the Securities Exchange Act of 1934, whichrequire additional disclosure by broker-dealers in connection with any tradeinvolving a stock defined as a “penny 

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stock” (generally, anyequity security not listed on a national securities exchange or quoted onNasdaq that has a market price of less than $5.00 per share, subject to certainexceptions). Many brokerage firms are reluctant to recommend low-priced stocksto their clients. Moreover, various regulations and policies restrict theability of shareholders to borrow against or “margin” low-priced stocks, anddeclines in the stock price below certain levels may trigger unexpected margincalls. Additionally, because brokers’ commissions on low-priced stocksgenerally represent a higher percentage of the stock price than commissions onhigher priced stocks, the current price of the common stock can result in anindividual shareholder paying transaction costs that represent a higherpercentage of total share value than would be the case if our share price werehigher. This factor may also limit the willingness of institutions to purchaseour common stock. Finally, the additional burdens imposed upon broker-dealers bythese requirements could discourage broker-dealers from facilitating trades inour common stock, which could severely limit the market liquidity of the stockand the ability of investors to trade our common stock.

**Our stock price isvolatile and, as a result, you could lose some or all of your investment.**

There has been ahistory of significant volatility in the market prices of securities ofbiotechnology companies, including our common stock. In 2005, the reported highand low closing sale prices of our common stock were $2.34 and $0.47. In 2004,the reported high and low closing sale prices were $5.78 and $1.43. Thereported high and low closing sale prices during the period fromJanuary 3, 2006 through September 22, 2006 (the last trading daypreceding the effectiveness of our one-for-six reverse stock split) were $1.57and $0.50. The reported high and low closing sale prices during the period fromSeptember 25, 2006 through December 31, 2006 (after the effectivedate of the reverse stock split) were $7.74 and $3.00. Our stock price has beenand may continue to be affected by this type of market volatility, as well asour own performance. Our business and the relative price of our common stockmay be influenced by a large variety of factors, including:

·       announcementsby us or our competitors concerning acquisitions, strategic alliances,technological innovations, new commercial products or changes in productdevelopment strategies;

·       theavailability of critical materials used in developing our proposed picoplatinproduct;

·       ourability to conduct our picoplatin clinical development program on a timely andcost-effective basis and the progress and results of our clinical trials andthose of our competitors;

·       developmentsconcerning patents, proprietary rights and potential infringement;

·       developmentsconcerning potential agreements with collaborators;

·       theexpense and time associated with, and the extent of our ultimate success in,securing regulatory approvals;

·       ouravailable cash or other sources of funding; and

·       futuresales of significant amounts of our common stock by us or our shareholders.

In addition, potential public concern about the safetyof our proposed picoplatin product and any other products we develop, commentsby securities analysts, our ability to maintain the listing of our common stockon the Nasdaq system, and conditions in the capital markets in general and inthe life science capital market specifically, may have a significant effect onthe market price of our common stock. The realization of any of the risksdescribed in this report, as well as other factors, could have a materialadverse impact on the market price of our common stock and may result in a lossof some or all of your investment in our securities.

In the past, securities class action litigation oftenhas been brought against companies following periods of volatility in theirstock prices. We may in the future be the target of similar litigation.Securities 

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litigation could result insubstantial costs and divert our management’s time and resources, which couldcause our business to suffer.

**Certain provisionsin our articles of incorporation and Washington state law could discourage achange of control.**

Our articles of incorporation authorize our board ofdirectors to issue up to 200,000,000 shares of common stock and up to 2,998,425shares of preferred stock. With respect to preferred stock, our board has theauthority to determine the price, rights, preferences, privileges andrestrictions, including voting rights, of those shares without any further voteor action by our shareholders. Our shareholder rights plan adopted onApril 10, 1996, and the preferred stock purchase rights issued to eachcommon shareholder thereunder, expired on April 10, 2006.

Washington lawimposes restrictions on certain transactions between a corporation andsignificant shareholders. Chapter 23B.19 of the Washington Business CorporationAct prohibits a target corporation, with some exceptions, from engaging inparticular significant business transactions with an acquiring person, which isdefined as a person or group of persons that beneficially owns 10% or more ofthe voting securities of the target corporation, for a period of five yearsafter the date the acquiring person first became a 10% beneficial owner ofvoting securities of the target corporation, unless the business transaction orthe acquisition of shares is approved by a majority of the members of thetarget corporation’s board of directors prior to the time the acquiring personfirst became a 10% beneficial owner of the target corporation’s votingsecurities. Prohibited business transactions include, among other things:

·       amerger or consolidation with, disposition of assets to, or issuance orredemption of stock to or from the acquiring person;

·       terminationof 5% or more of the employees of the target corporation; or

·       receiptby the acquiring person of any disproportionate benefit as a shareholder.

After the five-year period, a significant businesstransaction may occur if it complies with “fair price” provisions specified inthe statute. A corporation may not opt out of this statute. This provision mayhave an antitakeover effect with respect to transactions that our board doesnot approve in advance.

The provisions of our articles of incorporation andWashington law discussed above may have the effect of delaying, deterring orpreventing a change of control of the company, even if this change would bebeneficial to our shareholders. These provisions also may discourage bids forour common stock at a premium over market price and may adversely affect themarket price of, and the voting and other rights of the holders of, our commonstock. In addition, these provisions could make it more difficult to replace orremove our current directors and management in the event our shareholdersbelieve this would be in the best interests of the corporation and ourshareholders.

**As a result of theclosing of our 2006 equity financing, the number of shares of our common stockoutstanding increased substantially and certain investors beneficially ownsignificant blocks of our common stock; such common shares are generallyavailable for resale in the public market.**

On April 26, 2006, we completed a $65.0 millionequity financing pursuant to a securities purchase agreement dated as ofFebruary 1, 2006. In connection with the equity financing, we issued to asmall group of institutional and other accredited investors an aggregate of15.5 million shares of common stock at a cash purchase price of $4.20 pershare. Investors in the financing also received five-year warrants to purchasean aggregate of 4.6 million shares of common stock at an exercise price of$4.62 per share. Concurrent with the closing of the financing, we issued anaggregate of 1.6 million shares of common stock to the holders of ourSeries B preferred stock upon conversion of their outstandingSeries B preferred shares. At the time of closing, the placement agent forthe financing also received a five-year warrant to 

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purchase, on the same termsas the investors, 139,000 common shares. The issuance of such shares andwarrants resulted in substantial dilution to shareholders who held our commonstock prior to the financing.

As a result of the completion of the financing and theconversion of the Series B preferred shares, our outstanding common stockincreased from approximately 5.7 million shares to approximately 22.8 millionshares. Entities affiliated with MPM Capital Management (MPM) acquiredbeneficial ownership of 7.7 million common shares, or approximately 31.5% ofour common stock outstanding immediately following the financing. Entitiesaffiliated with Bay City Capital Management IV LLC (BCC) acquired beneficialownership of 4.6 million common shares, or approximately 19.5% of the commonshares outstanding immediately following the financing. Two of our directors,Fred B. Craves and Carl S. Goldfischer, are managing directors of BCC andpossess capital and carried interests in the BCC entities that participated inthe financing. We have agreed, for as long as MPM owns at least 10% of theshares of common stock and warrants purchased in the financing, to use our bestefforts to cause one person designated by MPM and one person designated bymutual agreement of MPM and BCC to be nominated and elected to our board ofdirectors. Nicholas J. Simon III, a representative of MPM, was appointed to ourboard of directors on April 26, 2006. Mr. Simon is a general partnerof certain of the MPM entities that participated in the financing and possessescapital and carried interests in those entities.

Pursuant to the securitiespurchase agreement, we maintain an effective registration statement with theSEC covering the resale of the 15.5 million shares of common stock issued inthe equity financing and the 4.6 million shares of common stock issuable uponexercise of the warrants. Accordingly, these shares are generally available forimmediate resale in the public market. In addition, the approximately 1.6million shares of common stock issued upon conversion of the Series Bpreferred stock currently are available for immediate resale pursuant to aregistration statement or an exemption from registration underRule 144(k) of the Securities Act. The market price of our commonstock could fall as a result of such resales due to the increased number ofshares available for sale in the market.

**WHERE YOU CAN FINDMORE INFORMATION**

We file annual, quarterlyand current reports, as well as registration and proxy statements and otherinformation, with the SEC. These documents may be read and copied at the SEC’spublic reference rooms in Washington, DC, New York, NY and Chicago IL. Pleasecall the SEC at 1-800-SEC-0330 for further information on thepublic reference rooms. Our SEC filings also are available to the public at theInternet web site maintained by the SEC at *www.sec.gov*.Our reports filed with the SEC after January 1, 2003, also are availableon our web site, *www.poniard.com*. The informationcontained in our web site does not constitute part of, nor is it incorporatedby reference into, this report. We will provide paper copies of our SEC filingsfree of charge upon request.

***Item 1B.****                  UNRESOLVEDSTAFF COMMENTS*

Not Applicable.

***Item 2.****                          PROPERTIES*

In September 2006, we relocated our corporateheadquarters to 7000 Shoreline Court in South San Francisco, CA, where we lease17,000 square feet of office and laboratory space under a lease that expires inJuly 2011.

We also currently occupy approximately 21,000 squarefeet of office space located at 300 Elliott Avenue West in Seattle, WA, under alease that expires in July 2009. Through May 2006, we occupiedapproximately 2,900 square feet in a building and a parking area adjacent to410 West Harrison Street, Seattle, WA. The lease on this space expired on May 31,2006.

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We believe that the foregoing facilities are in goodcondition and are adequate for their present uses.

In April 2001 weacquired a radiopharmaceutical manufacturing facility located on 12 acres inDenton, Texas. The main building is approximately 88,000 square feet and housesapproximately 12,000 square feet of clean rooms. From 2001 to 2005, we used thefacility to manufacture our STR radiotherapeutic compound. In May 2005, we announced the immediateimplementation of a strategic restructuring program to refocus our limitedresourced on the development of picoplatin. The restructuring plan, which wascompleted in June 2005, included cessation of manufacturing operations atthe Denton facility. We are actively working to sell this facility.

***Item 3.****                          LEGALPROCEEDINGS*

Not Applicable.

***Item 4.****                          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS*

Not Applicable.

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**PART II**

***Item 5.****                          MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS*

Our common stock is listed on the TheNasdaq Capital Market (formerly the Nasdaq SmallCap Market). The followingtable sets forth, for the periods indicated, the high and low sales prices forour common stock as reported on The Nasdaq Capital Market. These quotationsreflect inter-dealer prices without retail mark-up, markdown or commission, andmay not necessarily represent actual transactions. 

| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| **2006**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 1.57       |       | $          | 0.72 |   |
| Second Quarter |       | 1.37       |       | 0.95       |       |
| Third Quarter  |       | 5.70       |       | 0.50       | (1)        |
| Fourth Quarter |       | 7.74       |       | 3.25       |       |
| **2005**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 2.34       |       | $          | 0.99 |   |
| Second Quarter |       | 0.97       |       | 0.47       |       |
| Third Quarter  |       | 1.12       |       | 0.62       |       |
| Fourth Quarter |       | 1.26       |       | 0.75       |       |

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(1)          On September 22,2006, the Company effected a one-for-six reverse split of its outstandingcommon stock.

The closing saleprice of our common stock on The Nasdaq Capital Market was $5.80 onMarch 8, 2007.

There wereapproximately 891 shareholders of record on March 8, 2007. Thisfigure does not include the number of shareholders whose shares are held onrecord by a broker or clearing agency, but includes such a brokerage house orclearing agency as one holder of record.

See Part III. Item 12 for information regarding securitiesauthorized for issuance under our incentive compensation plans.

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**Stock Price Performance Graph**

The graph below compares the cumulative total shareholder returnon our common stock with the cumulative shareholder return of the Nasdaq StockMarket Index (US) and the Nasdaq Pharmaceuticals Stocks Index. Sock priceperformance shown below is historical and not necessarily indicative of futureprice performance.

**Comparison ofFive-Year Cumulative Total Return Among Poniard Pharmaceuticals, Inc.,Nasdaq Stock Market (US) and Nasdaq Pharmaceuticals Stocks Index (1)**

****

| ** **                     | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Poniard Pharmaceuticals, Inc.  |       | $        | 100        |     |       | $        | 7          |     |       | $        | 72         |     | $          | 36 |   | $ | 13 |   | $ | 14 |   |
| Nasdaq Stock Market Index (US) |       | 100      |       |     | 69         |     |       | 103      |       | 112      |       | 115      |       | 126 |   |
| Nasdaq Pharmaceutical Index    |       | 100      |       |     | 65         |     |       | 95       |       | 101      |       | 111      |       | 109 |   |
|                                |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |

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**(1)****         **Assumes $100 invested onJanuary 1, 2001, in our common stock, the Nasdaq Stock Market Index andthe Nasdaq Pharmaceutical Stocks Index, an index of approximately 217 companieswith common stock quoted on the Nasdaq National Market. The Primary StandardIndustrial Classification Code Number (SIC) of these companies is #2835 -Pharmaceutical Companies. Total return performance for the Nasdaq Stock MarketIndex and the Nasdaq Pharmaceutical Stocks Index is weighted based on themarket capitalization of the firms included in each index and assumes thatdividends are reinvested. The Nasdaq Stock Market Index and the NasdaqPharmaceutical Stocks Index are produced and published by the Center forResearch in Securities Pricing at the University of Chicago.

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***Item 6.****                         **SELECTED FINANCIAL DATA (INTHOUSANDS, EXCEPT PER SHARE DATA)*

The following table shows selectedfinancial data. It is important to read this selected financial data along withthe “Financial Statements and Supplementary Data,” as well as the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

| ** **                                                         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                     | ** ** |
| **Consolidated Statement of  Operations Data:**                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                           |       | $                                           | —     |   | $ | 15 |   | $ | 1,015 |   | $ | 10,531 |   | $ | 11,054 |   |
| Operating  expenses                                                |       | 21,234                                      |       | 21,075 |   | 20,502 |   | 15,218 |   | 34,949 |   |
| Loss from  operations                                              |       | (21,234                                     | )          | (21,060 | ) | (19,487 | ) | (4,687 | ) | (23,895 | ) |
| Net loss                                                           |       | (23,294                                     | )          | (20,997 | ) | (19,371 | ) | (5,059 | ) | (23,093 | ) |
| Net loss  applicable to common shareholders                        |       | (23,794                                     | )          | (21,497 | ) | (19,871 | ) | (7,535 | ) | (23,593 | ) |
| Net loss per  common share—basic and diluted                  |       | $                                           | (1.37      | ) | $ | (3.83 | ) | $ | (3.96 | ) | $ | (1.68 | ) | $ | (5.34 | ) |
| Weighted average common shares outstanding—basic and  diluted |       | 17,376                                      |       | 5,611 |   | 5,024 |   | 4,547 |   | 4,441 |   |
| **Consolidated Balance Sheet  Data:**                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and restricted cash                        |       | $                                           | 44,284     |   | $ | 4,523 |   | $ | 16,254 |   | $ | 15,166 |   | $ | 6,564 |   |
| Investment  securities                                             |       | 9,562                                       |       | — |   | 1,499 |   | 12,335 |   | 9,572 |   |
| Working capital  (deficit)                                         |       | 42,299                                      |       | (1,880 | ) | 15,689 |   | 26,064 |   | 14,195 |   |
| Total assets                                                       |       | 69,067                                      |       | 10,114 |   | 27,436 |   | 35,691 |   | 25,993 |   |
| Note payable, net  of current portion                              |       | 9,975                                       |       | — |   | 3,905 |   | 4,112 |   | 5,182 |   |
| Shareholders’ equity                                          |       | $                                           | 46,891     |   | $ | 3,173 |   | $ | 20,828 |   | $ | 29,490 |   | $ | 17,576 |   |

 

***Item 7.****                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

**Introduction**

The followingdiscussion of results of operations, liquidity and capital resources containsforward-looking statements that involve risks and uncertainties. As describedunder the heading “Important Information Regarding Forward-Looking Statements”at the beginning of this report, our actual results may differ materially fromthe results discussed in these forward-looking statements. Factors that mightcause or contribute to such differences include those discussed below and inthe section above entitled “Risk Factors.”

Unless otherwise indicated, all common stock related amounts havebeen adjusted to reflect our one-for-six reverse stock split effectiveSeptember 22, 2006.

**Critical Accounting Policies**

*Basisof Revenue Recognition:**  *Todate, we do not have any significant ongoing revenue sources. On occasion, wederive significant revenue from the sale or licensing of our patentedtechnologies and from government grants. Pursuant to the Securities andExchange Commission Staff Accounting Bulletin No. 104 (SAB 104) andEmerging Issues Task Force Consensus No. 00-21, revenues fromcollaborative agreements are recognized as earned as we perform researchactivities under the terms of each agreement. Billings in excess of amountsearned are classified as deferred revenue. To the extent that a transactioncontains multiple deliverables, we determine whether the multiple deliverablesare separable, and, if separable, the revenue to be allocated to eachdeliverable based on fair value. If fair value is undeterminable forundelivered elements of the arrangement, revenue is deferred over the contractperiod or until delivery, as applicable. The revenue allocated to eachdeliverable is recognized following the 

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requirements of SAB 104.For a detailed description of our revenue recognition policy, refer toNote 2, Summary of Significant Accounting Policies, of the Notes to theConsolidated Financial Statements.

*Impairmentof Long-Lived Assets:**  *Asof December 31, 2006, we had approximately $0.5 million of property andequipment. In accounting for these long-lived assets, we make estimates aboutthe expected useful lives of the assets, the expected residual values of theassets, and the potential for impairment based on events or circumstances. Theevents or circumstances could include a significant decrease in market value, asignificant change in asset condition or a significant adverse change inregulatory climate. Application of the test for impairment requires judgment.

In June 2005, we recognized an asset impairmentloss of $3.3 million on certain facilities and equipment resulting from ourdecision to terminate our STR program. The loss on the equipment at the Seattlefacility was determined based on estimates of potential sales values of usedequipment and other selling costs. In December 2006, we recognized anadditional impairment loss of $0.4 million on the Denton manufacturingfacility, which was based on our evaluation of market data for this property.We used a fair value of $2.8 million for the Denton facility in determining thetotal impairment loss as of December 31, 2006. Due to the inherentuncertainty of the timing of any sale of the Denton facility, we haveclassified this asset as a long-term asset held for sale.

*Long-TermDebt:*   We assumed a note payable to Texas StateBank in connection with the acquisition of our radiopharmaceuticalmanufacturing facility in Denton, Texas. In May 2006, we paid off the $2.7million balance outstanding on the note.

In October 2006, we entered into a loan andsecurity agreement (the loan agreement) with Silicon Valley Bank and MerrillLynch Capital, which is secured by a first lien on substantially all of ournon-intellectual property assets. Under the loan agreement, we received capitalloan proceeds of $15.0 million on October 31, 2006. The term is for 42months with maturity on April 1, 2010. We are required to pay a 7.67%fixed interest rate on the outstanding principal balance plus a $1.35 millionadditional payment on the maturity date of the loan. This additional paymentwill be accreted to the note payable balance over the term of the loan usingthe effective interest rate method and reflected as additional interestexpense. The loan agreement also contains covenants requiring us, not laterthan December 31, 2007, to provide evidence of positive Phase II data for thepicoplatin drug development program and commence enrollment of patients in aPhase III trial for picoplatin.  Thefailure to satisfy these covenants could result in acceleration of our paymentobligations under the loan agreement. In connection with the loan agreement, weissued five-year warrants to purchase an aggregate of 174,418 shares of commonstock at an exercise price of $4.30 per share. The portion of the loan proceedsallocable to the warrants is $540,000 based on their relative fair value, whichwe recorded as additional discount to notes payable. We classify the portion ofthe loan that is due for payment in 2008 and thereafter as a long-term payable.

*Stock Compensation:*   BeginningJanuary 1, 2006, we account for share-based compensation arrangements inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 123R, “Share-Based Payments,” which requires the measurement andrecognition of compensation expense for all share-based payment awards to employeesand directors based on estimated fair values. We use the Black-Scholes optionvaluation model to estimate the fair value of our stock options at the date ofgrant. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. Our employee stock options, however, havecharacteristics significantly different from those of traded options. Forexample, employee stock options are generally subject to vesting restrictionsand are generally not transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions, including the expectedstock price volatility, the expected life of an option and the number of awardsultimately expected to vest. Changes in subjective input assumptions canmaterially affect the fair value estimates of an option. Furthermore, theestimated fair value of an option does not necessarily represent the value thatwill 

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ultimately berealized by an employee. We use historical data, and other related informationas appropriate, to estimate the expected price volatility, the expected optionlife and the expected forfeiture rate. The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of a grant. If actual results arenot consistent with our assumptions and judgments used in estimating the keyassumptions, we may be required to increase or decrease compensation expense,which could be material to our results of operations. See “New AccountingPronouncements” below for additional information.

**Results of Operations**

***Year Ended December 31, 2006 Compared withDecember 31, 2005***

We had no revenue for 2006, while our revenues for2005 totaled $15,000. Revenue for 2005 consisted primarily of royalty payments.

Total operatingexpenses increased 1% to $21.2 million for the year ended December 31,2006, from $21.1 million for the same period in 2005. Total operating expenses for the year endedDecember 31, 2005 included an asset impairment charge of $3.3 million.Additionally, a restructuring charge of $1.7 million was incurred in 2005relating to termination benefits for the reduction in staff and other costsrelated to the termination of our STR program.

Research anddevelopment expenses for the year ended December 31, 2006 increased 31% to$13.4 million, from $10.2 million for the same period in 2005. Among theprimary components of the increasein 2006 were higher clinical costs of $4.9 million associated with ourpicoplatin trials and increased costs of $1.5 million for other R&Defforts, offset by decreasedcosts of $2.9 million related to the termination of activities related to our STR program and decreasedcosts of $0.4 million related to our patent portfolio maintenance.

General and administrativeexpenses increased 27% to $7.5 million for the year ended December 31,2006, from $5.9 million for the same period in 2005. The increase in G&Acosts was due primarily to $1.3 million of stock option expense recorded inconnection with the adoption of Statement of Financial Accounting Standard 123Rand $0.2 million of expense related to special shareholder meetings.

Interest expense for the year ended December 31,2006 was $4.0 million, compared to interest expense of $0.3 million for thesame period in 2005. The $3.7 million increase in interest expense for 2006 wasdue primarily to the amortization of debt discount in the amount of $3.5million related to the bridge financing and $0.1 million related to the SiliconValley Bank loan, which transactions are discussed below. The increase ininterest income of $1.6 million for 2006 compared to 2005 is due to the incomefrom the investment of excess cash from our 2006 equity financing.

We received approximately $62.0 million in net cashproceeds from the sale of common stock and warrants in April 2006 (the2006 equity financing). In connection with the financing, we issued to a groupof institutional and other accredited investors an aggregate of 15.5 millionshares of common stock at a cash purchase price of $4.20 per share. Investorsin the financing also received five-year warrants to purchase an aggregate of4.6 million shares of common stock at an exercise price of $4.62 per share. Aspart of the 2006 equity financing, we received a $3.5 million bridge loan inFebruary 2006 from investors in the 2006 equity financing. Pursuant thebridge loan, we issued five-year warrants to purchase an aggregate ofapproximately 412,000 shares of common stock at an exercise price of $4.62 pershare. We used the funds received in the bridge financing for working capitalpending receipt of required shareholder approvals and satisfaction of otherconditions to completion of the 2006 equity financing. The outstandingprincipal amount of the bridge notes issued to the investors, together with$63,000 of accrued interest, automatically converted, at a conversion price of$4.20 per share, into 839,000 shares of common stock at the closing of the 2006equity financing.

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Cash and cash equivalents as of December 31, 2006were $44.1 million, compared with $3.5 million at December 31, 2005.

As discussed below, we currently are conductingmultiple ongoing studies of picoplatin and plan to initiate a Phase III pivotalstudy in the first half of 2007. In addition, we relocated our corporateheadquarters to office space and laboratory facilities in South San Franciscounder a five-year lease. These, as well as increases in personnel and otherplans for future growth, are expected to result in significant increases in ourfuture operating costs, including research and development and administrativeexpenses. We will require substantial additional funding to support ourpicoplatin and any other clinical development programs and to fund ouroperations. In the event that we do not obtain sufficient additional funds, wemay be required to delay, reduce or curtail the scope of our picoplatin andother proposed development activities.

Preferred dividends on Series 1 Preferred Stock were $0.5million in both 2006 and 2005.

***Year Ended December 31, 2005 Compared withDecember 31, 2004***

Our revenuesfor 2005 totaled $15,000, which primarily consisted of royalty payments. Ourrevenues for 2004 totaled $1.0 million, which consisted primarily of milestonepayments from Boston Scientific Corporation.

Total operatingexpenses increased 3% to $21.1 million for the year ended December 31,2005, from $20.5 million for the same period in 2004.

Research anddevelopment expenses for the year ended December 31, 2005 decreased 24% to$10.2 million, from $13.3 million for the same period in 2004. Among theprimary components of the decrease were a $7.3 million decrease in costsrelated to the STR program, offset by a $3.6 million increase in picoplatinprogram development costs, a $0.3 million reduction in shared-costreimbursements and a $0.3 million increase in development related overheadcosts.

General andadministrative expenses decreased 17% to $5.9 million for the year endedDecember 31, 2005, from $7.2 million for the same period in 2004. Thedecrease in G&A costs was due primarily to a decrease of $1.0 million forpersonnel related costs.

InMarch 2005, we raised approximately $3.8 million in net proceeds from thesale in a private placement of 3.3 million shares of common stock. Inconnection with this private placement, we issued five-year warrants topurchase an aggregate of 1.3 million shares of common stock at an exerciseprice of $2.00 per share. The warrants became exercisable beginningSeptember 3, 2005 and are exercisable at any time during their term.

Until May 2005, our major research anddevelopment program had been STR, a bone-targeting radiotherapeutic. InMay 2005, we announced the immediate implementation of a strategicrestructuring program to refocus our limited resources on the development ofpicoplatin. The restructuring plan, which was completed in June 2005,included the discontinuation of our STR development program, including haltingpatient enrollment in our Phase III trial of STR in multiple myeloma, ceasingoperations at our Denton, Texas facility, where STR was manufactured, andreducing our workforce by approximately 50%. We recorded restructuring chargesagainst operations totaling $1.7 million during 2005. This charge consisted of severance costs totaling $0.9million associated with the reduction in workforce and contract termination anddecommissioning costs of $0.8 million.

We evaluated our STR assets in light of therestructuring and determined that a likely impairment existed on those assets.We recorded a charge of $3.3 million against operations in June 2005 toreflect such impairment. The asset impairment charge reflects the difference in theestimated fair value of assets as compared to the net book value of assetsemployed in our STR program.

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In conjunction with our strategic restructuring, inJune 2005 we negotiated the early termination of our STR-related supplyagreement with the University of Missouri Research Reactor facility group(MURR). We paid MURR a fee of $368,000 in connection with such earlytermination. We also paid MURR $190,000 in minimum purchase requirements underthe agreement during 2005.

Other incometotaled $0.1 million in 2005 and 2004, respectively. These amounts consisted ofinterest income of $0.3 million, offset by interest expense of $0.2 million.

Preferred dividends on Series 1 Preferred Stock were $0.5million in both 2005 and 2004.

***Major Research andDevelopment Programs***

Our major researchand development program during the fiscal year ended December 31, 2006 waspicoplatin, anext-generation platinum-based cancer therapy. Our major research and development program during the fiscal yearsended December 31, 2005 and 2004 was skeletal targeted radiotherapy(STRTM), a bone-targeting radiotherapeutic. In May 2005, we discontinuedour STR development program and refocused our resources on the development ofpicoplatin. This restructuring included terminating patient enrollment in ourPhase III trial of STR in multiple myeloma, ceasing operations at our Dentonfacility, where STR was manufactured, and reducing our workforce byapproximately 50%.

*PicoplatinProgram.**  *Picoplatinis a platinum-based chemotherapeutic designed to overcome platinum resistancein the treatment of solid tumors. We completed patient enrollment in our PhaseII clinical study of picoplatin in small cell lung cancer in August 2006and, based on positive median overall survival data from that ongoing study,plan to initiate a Phase III pivotal trial of picoplatin in small cell lungcancer in the first half of 2007. In May 2006, we treated our firstpatients in separate Phase I/II studies evaluating picoplatin in the front-linetreatment of advanced colorectal cancer and hormone-refractory prostate cancer.We expect to complete patient enrollment in these ongoing Phase I trials andinitiate the Phase II components of these trials during the first half of 2007.As of December 31, 2006, we have incurred costs of approximately$14.0 million in connection with our picoplatin clinical program since theprogram’s inception in 2004. Total estimated costs of our picoplatin Phase IItrial in small cell lung cancer are expected to be in the range of $3.0 millionto $5.0 million through 2007, including the cost of drug supply. Totalestimated costs of our picoplatin Phase I/II trial in colorectal cancer and ourPhase I/II trial in hormone-refractory prostate cancer are expected to be inthe ranges of $3.0 million to $4.0 million and $4.0 million to $5.0 million,respectively, through 2007, including the cost of drug supply. These costscould be substantially higher if we have to repeat, revise or expand the scopeof any of our trials. Material cash inflows relating to our picoplatindevelopment program will not commence unless and until we complete requiredclinical trials and obtain FDA marketing approvals, and then only if picoplatinfinds acceptance in the marketplace. To date, we have not received any revenuesfrom product sales of picoplatin.

The risks anduncertainties associated with completing the development of picoplatin onschedule, or at all, include the following, as well as the other risks anduncertainties described in this report:

·       wemay not have adequate funds to complete the development of picoplatin;

·       wemay be unable to secure adequate supplies of picoplatin active pharmaceuticalingredient and finished drug product in order to complete our clinical trials;

·       picoplatinmay not be shown to be safe and efficacious in clinical trials; and

·       wemay be unable to obtain regulatory approvals of the drug or may be unable toobtain such approvals on a timely basis.

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If we fail toobtain marketing approvals for picoplatin, are unable to secure adequateclinical and commercial supplies of picoplatin active pharmaceutical ingredientand finished drug product, or do not complete development and obtain UnitedStates and foreign regulatory approvals on a timely basis, our operations,financial position and liquidity could be severely impaired, including asfollows:

·       wewould not earn any sales revenue from picoplatin, which would increase thelikelihood that we would need to obtain additional financing for our otherresearch and development efforts; and

·       ourreputation among investors might be harmed, which could make it more difficultfor us to obtain equity capital on attractive terms, or at all.

Because of the many risks and uncertainties relatingto completion of clinical trials, receipt of marketing approvals and acceptancein the marketplace, we cannot predict the period in which material cash inflowsfrom our picoplatin program will commence, if ever.

*Discontinued STR Program.**  *STR is a radiotherapeutic designedto deliver radiation specifically to sites of cancer in the bone and bonemarrow. We have incurred costsof approximately $58.2 million in connection with the STR program since theprogram’s inception in 1998.

We terminated our STR development program inMay 2005. Total estimated costs to complete our STR Phase III clinicaltrial and potentially obtain marketing approval were in the range of $35-40million, including cost of clinical drug supply. These costs would have beensubstantially higher if we were required to repeat, revise or expand the scopeof our trials or conduct additional clinical trials. Discontinuation of our STRdevelopment program relieved us of the annual costs associated with theprogram, including manufacturing, clinical trial and personnel costs. During2004 these costs were approximately $10.2 million. During 2005 these costs wereapproximately $2.9 million. We are actively seeking a buyer for our Dentonmanufacturing facility and our other STR related assets. Given the inherentuncertainty of the timing of a sale of the Denton facility, we have classifiedthis asset as long-term.

STR was a clinical stage product for which nomarketing approvals had been obtained. We had no material cash inflows relatingto our STR development and did not receive any revenues from product sales ofSTR. Due to our decision to curtail our STR development program, there isneither an anticipated completion date nor an expected period during whichmaterial cash inflows will commence. As a consequence of the restructuring, weare not dependent on the successful development and completion of our STRprogram.

*Summary of Research andDevelopment Costs.**  *Ourdevelopment administration overhead costs, consisting of rent, utilities,consulting fees, patent costs and other various overhead costs, are included intotal research and development expense for each period, but are not allocatedamong our various projects. Our total research and development costs includethe costs of various research efforts directed toward the identification andevaluation of future product candidates. These other research projects arepreclinical and not considered major projects. Our total research anddevelopment costs are summarized below:

**Summaryof Research and Development Costs**

| ** **                            | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Picoplatin                            |       | $                       | 9,058      |     | $          | 4,150    |       | $ | 555 |   |
| Discontinued  programs                |       | 68                      |       | 2,864    |       | 10,155   |       |
| Other overhead  and research costs    |       | 4,230                   |       | 3,184    |       | 2,621    |       |
| Total research and  development costs |       | $                       | 13,356     |     | $          | 10,198   |       | $ | 13,331 |   |

 

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***Liquidity and Capital Resources***

We have historically suffered recurring operatinglosses and negative cash flows from operations. As of December 31, 2006,we had net working capital of $42.3 million, an accumulated deficit of $279.6million and total shareholders’ equity of $46.9 million.

We have financed our operations primarily through thesale of equity securities, technology licensing, collaborative agreements anddebt instruments. We invest excess cash in investment securities that will beused to fund future operating costs. Cash used for operating activities for the twelve months endedDecember 31, 2006 totaled $17.3 million. Revenues and other incomesources for 2006 were not sufficient to cover operating expenses. Cash,cash equivalents and investment securities, net of restricted cash of $0.1million, totaled $53.7 million at December 31, 2006 compared to $3.5million at December 31, 2005. We believe that our cash, cash equivalentand investment securities balances will provide adequate resources to fundoperations at least until the end of the first quarter of 2008.

On April 26, 2006, we completed a $65.0 millionequity financing, pursuant to which we issued to a group of institutional andother accredited investors an aggregate of 15.5 million shares of common stockat a cash purchase price of $4.20 per share. Investors in the financing alsoreceived five-year warrants to purchase an aggregate of 4.6 million shares ofcommon stock at an exercise price of $4.62 per share. We received $62.0 millionin net proceeds from the financing, which we are using to fund our picoplatinclinical program and general working capital needs. Concurrent with the closingof the financing, we issued an aggregate of 1.6 million shares of common stockto the holders of our Series B preferred stock upon conversion of theiroutstanding Series B preferred shares. As a result of the completion ofthe financing and the conversion of the Series B preferred shares, ouroutstanding common stock increased from approximately 5.7 million shares toapproximately 22.8 million shares. Entities affiliated with MPM CapitalManagement (MPM) acquired beneficial ownership of 7.7 million common shares, orapproximately 31.5% of our common stock outstanding immediately following thefinancing. Entities affiliated with Bay City Capital Management IV LLC (BCC)acquired beneficial ownership of 4.6 million common shares, or approximately19.5% of the common shares outstanding immediately following the financing. Twoof our directors, Fred B. Craves and Carl S. Goldfischer, are managingdirectors of BCC and possess capital and carried interests in the BCC entitiesthat participated in the financing. We have agreed, for as long as MPM owns atleast 10% of the shares of common stock and warrants purchased in thefinancing, to use our best efforts to cause one person designated by MPM andone person designated by mutual agreement of MPM and BCC to be nominated andelected to our board of directors. Nicholas J. Simon III, a representative ofMPM, was appointed to our board of directors on April 26, 2006.Mr. Simon is a general partner of certain of the MPM entities that participatedin the financing and possesses capital and carried interests in those entities.

In connection with the financing, we entered into aletter agreement with Texas State Bank, pursuant to which we agreed toaccelerate the maturity date of our promissory note with the Bank toJune 5, 2006. The Texas State Bank note, which was secured by ourradiopharmaceutical plant and other STR assets located in Denton, Texas, had anadjustable interest rate equal to the bank prime rate reported in the Wall StreetJournal (8.00% at May 23, 2006). We paid off the outstanding balance ofthe note, $2.7 million, on May 23, 2006.

We completed the relocation of our corporateheadquarters to South San Francisco in September 2006. We intend tomaintain our current clinical and development and support activities inSeattle. The addition of 17,045 square feet of office and laboratory spaceleased in South San Francisco facility will result in a substantial increase inour future rent and operating costs. Under the lease agreement datedJuly 10, 2006, the annual base rent for the leased facilities isapproximately $542,000 and is subject to annual adjustment based ondisbursements for tenant improvements and increases in the Consumer Price Indexin the San Francisco metropolitan market. Base rent is payable in monthly 

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installments ofapproximately $45,200. Additional rent is payable monthly based on our share ofoperating expenses of the project in which the leased facilities are located,as described in the lease agreement. Monthly base rent during the first sevenmonths of the lease will average $21,000 during the construction of tenantimprovements. We paid total rent (base rent and additional rent based on ourshare of project operating expenses) during 2006 of $143,000. We estimate totalrent  payable by us during 2007 will beapproximately $523,000. Annual operating expenses payable under the lease mayincrease substantially as we move forward with our plans to establishlaboratory facilities in the leased space. The initial term of the lease is 60months. We may, upon written notice delivered at least nine months prior toexpiration of the initial lease term, extend the lease for an additional threeyears, with rent payable at the then market rate.

In April 2004, we acquired the worldwideexclusive rights, excluding Japan, to develop, manufacture and commercializepicoplatin from AnorMED, Inc. AnorMED was acquired by Genzyme Corporationin November 2006. Under the terms of the original agreement, we paid aone-time upfront milestone payment of $1.0 million in common stock and $1.0million in cash. The original agreement provided for development andcommercialization milestone payments of up to $13.0 million, payable in cash ora combination of cash and common stock, and a royalty rate of up to 15% of netproduct sales after regulatory approval. The parties executed an amendment tothe license agreement on September 18, 2006, modifying several keyfinancial terms and expanding the licensed territory to include Japan, therebyproviding us worldwide rights. In consideration of the amendment, we paidGenzyme $5.0 million in cash on October 12, 2006 and will pay Genzyme anadditional $5.0 million in cash by March 31, 2007. The amendmenteliminates $8.0 in development milestone payments to Genzyme. Genzyme remainsentitled to receive up to $5.0 million in commercialization milestones upon theattainment of certain levels of annual net sales of picoplatin after regulatoryapproval. The amendment also reduces the royalty payable to Genzyme to amaximum of 9% of annual net product sales. In addition, the amendment reducesthe sharing of sublicense revenues for any sublicenses entered into during thefirst year following the amendment and eliminates the sharing of sublicenserevenues on and after September 18, 2007.

On October 25, 2006, we entered into a loan andsecurity agreement with Silicon Valley Bank and Merrill Lynch Capital, pursuantto which we obtained a $15.0 million capital loan. A portion of the proceeds ofthe loan will be used to fund our cash payment obligations to Genzyme under theamended license agreement described above. The remaining proceeds will be usedto support our strategic growth, late-stage clinical trials of picoplatin andgeneral working capital needs. The loan is for a term of 42 months and matureson April 1, 2010. We are required to pay a 7.67% fixed interest rate onthe outstanding principal balance plus a $1.35 million additional payment uponthe maturity date of the loan. This additional payment will be accreted to thenote payable balance over the term of the loan using the effective interestrate method and reflected as additional interest expense.   All interest payable under the loanagreement and the full amount of the additional payment must be paid upon anyprepayment of the loan. The loan is secured by a first lien on substantiallyall of our non-intellectual property assets. The loan agreement containsrestrictions on our ability to, among other things, dispose of certain assets,engage in certain mergers and acquisition transactions, incur indebtedness,create liens on assets, make investments and pay dividends or repurchase stock.The loan agreement also contains covenants requiring us to maintainunrestricted cash of $7.5 million during the loan term and, not later thanDecember 31, 2007, to provide evidence of positive Phase II data for thepicoplatin drug development program and commence enrollment of patients in aPhase III trial for picoplatin. The loan contains events of default thatinclude, among other things, nonpayment of principal and interest or fees,breaches of covenants, material adverse changes, bankruptcy and insolvencyevents, cross defaults to other indebtedness, material judgments, inaccuracy ofrepresentations and warranties and events constituting a change of control. Theoccurrence of an event of default would increase the applicable rate ofinterest by 5% and could result in acceleration of our payment obligationsunder the loan agreement.

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On August 4, 2005, we entered into a researchfunding and option agreement with The Scripps Research Institute (TSRI). Underthe agreement, as amended in December 2006, we committed to provide TSRIan aggregate of $2.5 million over a 26-month period to fund researchrelating to synthesis and evaluation of novel small molecule, multi-targetedprotein kinase inhibitors and focal adhesion kinase inhibitors as therapeuticagents, including for the treatment of cancer. We have the option to negotiatea worldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by us to TSRI quarterlyin accordance with a negotiated budget. On August 8, 2005, we made aninitial funding payment to TSRI of $137,500. We paid TSRI total funding paymentsof $1.0 million in 2006, which amount was charged to R&D expense. Theagreement provides for aggregate additional funding payments of $1.4 million in2007. We have no assurance that the research funded under this arrangement willbe successful or ultimately will give rise to any viable product candidates.Further, there can be no assurance that we will be able to negotiate, onacceptable terms, a license with respect to any compounds arising from thecollaboration.

In April 2004, we sold and transferred ourPretarget intellectual property to Aletheon Pharmaceuticals, Inc. Underthat agreement, we could receive up to $6.6 million in milestone payments ifAletheon achieves certain development goals, plus royalties on potential futureproduct sales. We did not receive any upfront consideration for the sale of thePretarget property. We discontinued our clinical studies using the Pretargettechnology in July 2002, and sought, both through targeted inquiries and abroad-based auction process, a buyer or licensee for the technology. The saleof the Pretarget intellectual property relieved us of the annual costsassociated with maintaining the Pretarget patent estate. During 2003, we spentapproximately $350,000 for the prosecution and maintenance of the Pretarget patentsand trademarks. For 2004, these costs were approximately $70,000. Seattle-basedAletheon is a development stage biotherapeutics company founded by two formerPoniard employees. The timing and amount of milestone payments, if any, areuncertain. The terms of the transaction were determined through arms-lengthnegotiation.

We raisedapproximately $3.8 million in net proceeds from the sale of common stock andwarrants in a private placement transaction in March 2005. We used the netproceeds from that financing to support our Phase II trial in picoplatin insmall cell lung cancer and for general working capital, including restructuringcosts associated with the termination of our STR development program. We raisedapproximately $9.0 million in net proceeds from the sale of common stock andwarrants in a private placement transaction in February 2004. The netproceeds from that financing were used to support our STR development program,which we discontinued in May 2005, and for general working capital.

We terminated our STR manufacturing operations inDenton, Texas during the second quarter of 2005 and began actively marketingthe facility for sale. In 2005, we recorded costs associated with the closureand maintenance of the Denton facility of approximately $499,000. We recordedcosts of approximately $286,000 in 2006 related to these activities.

We will requiresubstantial additional funding to develop and commercialize picoplatin and anyother proposed products and to fund our operations.**Managementis continuously exploring financing alternatives, including:

·                    raisingadditional capital through the public or private sale of equity or debtsecurities or through the establishment of credit or other funding facilities;and

·                    entering intostrategic collaborations, which may include joint ventures or partnerships forproduct development and commercialization, merger, sale of assets or othersimilar transactions.

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Our actual capitalrequirements will depend upon numerous factors, including:

·                    the scope andtiming of our picoplatin clinical program and other research and developmentefforts, including the progress and costs of our ongoing Phase II and plannedPhase III trials of picoplatin in small cell lung cancer;

·                    our ability toobtain clinical supplies of picoplatin active pharmaceutical ingredient andfinished drug product in a timely and cost-effective manner;

·                    actions takenby the FDA and other regulatory authorities;

·                    the timing andamounts of proceeds from any sale of the Denton facility and assets;

·                    the timing andamount of any milestone or other payments we might receive from potentialstrategic partners;

·                    our degree ofsuccess in commercializing picoplatin or any other cancer therapy productcandidates;

·                    the emergenceof competing technologies and products, and other adverse market developments;

·                    theacquisition or in-licensing of other products or intellectual property;

·                    the costs,including lease and operating costs, incurred in connection with the relocationof our corporate headquarters to South San Francisco and the planned expansionof our workforce;

·                    the costs ofany research collaborations or strategic partnerships established;

·                    the costs ofpreparing, filing, prosecuting, maintaining and enforcing patent claims andother intellectual property rights; and

·                    the costs ofperforming our obligations under the loan with Silicon Valley Bank and MerrillLynch Capital, including the cost of interest and other payment obligations andpenalties and the cost of complying with unrestricted cash, product developmentand other covenants and restrictions under the loan agreement.

During 2006, we experienced significant changes to ourcapital structure which resulted in an ownership change, as defined underSection 382 of the IRC. Consequently, the amount of net operating losscarryforwards and research and experimentation credit carryforwards availableto be used in future years are limited under IRC Sections 382 and 383. Thislimitation will result in the loss of approximately $93.3 million of our net operatingloss carryforwards and $9.1 million of our research and development creditcarryforwards. We had net operating loss carryforwards of approximately $62.3million available for future use as of December 31, 2006, which willexpire from 2007 through 2026.

There can be no assurance that we will be able toraise additional capital or enter into relationships with corporate partners ona timely basis, on favorable terms, or at all. Conditions in the capitalmarkets in general, and in the life science capital market specifically, mayaffect our potential financing sources and opportunities for strategicpartnering. Our financial statements are prepared on a going concern basis;however, our inability to obtain additional cash as needed could have a materialadverse effect on our financial position, results of operations and our abilityto continue in existence. Our consolidated financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

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At December 31, 2006, we had thefollowing contractual obligations (in thousands):

| ** **                       | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 - 3  years** | ** ** | **3 - 5  years** | ** ** | **More  than 5  years** | ** ** |
|----------------------------------|------------|-----------|------------|---------------------------------|------------|----------------------------|------------|----------------------------|------------|------------------------------|------------|
| *Contractual Obligations*        | * *   | * *  | * *   |                            | * *   | * *                   |       | * *                   | * *   | * *                     | * *   |   | * * | * * |   |
| Long-term debt  obligations:     |       |      |       |                            |       | * *                   |       |                       |       |                         |       |   |   | * * |   |
| Notes payable (2) (3)       |       | $         | 17,612     |                            |       | $                          | 4,879      | * *                   |       | $                            | 9,758      |   | $ | 2,975 |   |   | $ | — | * * |   |
| Operating lease  obligations:    |       |      |       |                            |       | * *                   |       |                       |       |                         |       |   |   | * * |   |
| Seattle office space             |       | 1,415     |       |                            | 560        | * *                   |       | 855                        |       | —                       |       |   | — | * * |   |
| South San Francisco premises (1) |       | 2,484     |       |                            | 542        | * *                   |       | 1,084                      |       | 858                          |       |   | — | * * |   |
|                             |       | 3,899     |       |                            | 1,102      | * *                   |       | 1,939                      |       | 858                          |       |   | — | * * |   |
| Purchase obligations:            |       |      |       |                            |       | * *                   |       |                       |       |                         |       |   |   | * * |   |
| Scripps research collaboration   |       | 1,350     |       |                            | 1,350      | * *                   |       | —                     |       | —                       |       |   | — | * * |   |
| Total                            |       | $         | 22,861     |                            |       | $                          | 7,331      | * *                   |       | $                            | 11,697     |   | $ | 3,833 |   |   | $ | — | * * |   |

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(1)          Lease executed inJuly 2006. See discussion above for details.

(2)          Amounts include interestpayments.

(3)          Amountin “Total” column includes total principal payment of $13,881 as refected onthe Consolidated Balance Sheet for the year ended December 31, 2006.

**New AccountingPronouncements**

In May 2005, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 154, “AccountingChanges and Error Corrections, a Replacement of APB Opinion No. 20 andFASB Statement No. 3.” SFAS 154 establishes, unlessimpracticable, retrospective application as the required method for reporting achange in accounting principle in the absence of explicit transitionrequirements specific to a newly adopted accounting principle. Previously, mostchanges in accounting principle were recognized by including the cumulativeeffect of the change to the new accounting principle in net income of theperiod of the change. Under SFAS 154, retrospective applicationrequires the cumulative effect of the change to be reflected in thecarrying amounts of assets and liabilities as of the beginning of the firstperiod presented and financial statements for each individual prior periodpresented to be adjusted to reflect the effects of applying the new accountingprinciple. SFAS 154 carries forward the guidance in APB Opinion 20“Accounting Changes,” requiring justification of a change in accountingprinciple on the basis of preferability, for reporting the correction of anerror in previously issued financial statements and for a change in anaccounting estimate. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005. Theadoption of the Statement by the Company on January 1, 2006 did not have amaterial impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No.123R,“Share-Based Payment.” SFAS 123R replaces SFAS 123, “Stock-Based Compensation,”issued in 1995. SFAS 123R requires that the fair value of the grant of employeestock options be reported as an expense in the results of operations. SFAS 123R eliminatesthe ability to account for stock-based compensation using APB 25 andrequires that such transactions be recognized as compensation cost in theincome statement based on their fair value on the measurement date, which isgenerally the date of the grant. The Statement is effective for the firstannual reporting period that begins after June 15, 2005. Historically, theCompany has disclosed in its footnotes the pro forma expense effect of thegrants. Stock compensationexpense under the prior rules would have increased reported diluted lossper share by $.03 in 2005. SFAS 123R applies to all outstanding,unvested option grants as of the effective date. The Company adopted SFASNo. 123R on January 1, 2006 using the 

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modified prospectivetransition method. Under the modified prospective transition method, SFAS 123Rapplies to new and modified option grants after January 1, 2006, and toany unvested option grants as service is rendered on or after the effectivedate. The attribution of compensation cost for vested option grants as ofJanuary 1, 2006 is based on the same method and on the same grant-datefair values previously determined for the pro forma disclosures required forcompanies that did not adopt the fair value accounting method for stock-based employeecompensation. See Note 3 of the Notes to the Consolidated Financial Statementsfor the discussion of the effect of the adoption of this Statement on theCompany’s consolidated financial statements.

In June 2006, the FASB issued InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes: An Interpretation ofFASB Statement No. 109” (FIN 48). FIN 48 clarifies certain aspects ofaccounting for uncertain tax positions, including issues related to therecognition and measurement of those tax positions. FIN 48 is effective forfiscal years beginning after December 15, 2006. Accordingly, the Companywill adopt FIN 48 on January 1, 2007. The Company is currently assessingthe impact FIN 48 will have, if any, on its consolidated financial statements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements”. SFAS 157 defines fair value,establishes a framework for measuring fair value, and expands disclosurerequirements about fair value measurements. SFAS 157 applies to other accountingpronouncements that require or permit fair value measurements, but does not initself require any new fair value measurements. The provisions of SFASNo. 157 are effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The Company is currentlyevaluating this statement and its impact, if any, on the Company’s consolidatedfinancial statements.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (SAB 108), to address diversity in practice inquantifying financial statement misstatements. SAB 108 requires thequantification of misstatements based on their impact on both the balance sheetand the income statement to determine materiality. The guidance provides for aone-time cumulative effect adjustment to correct for misstatements that werenot deemed material under a company’s prior approach but are material under theSAB 108 approach. SAB 108 is effective for fiscal years ending afterNovember 15, 2006. The adoption of this guidance did not have a materialimpact on the Company’s consolidated financial statements.

***Item 7A.****                  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

**Interest Rate Risk**

The Company’s exposure to market rate risk for changesin interest rates relates primarily to debt securities included in theCompany’s investment portfolio. The Company does not have any derivativefinancial instruments. The Company invests in debt instruments of the U.S.Government and its agencies and in high-quality corporate issuers. Investmentsin both fixed rate and floating rate interest-earning instruments carry adegree of interest rate risk. Fixed rate securities may have their fair marketvalue adversely impacted due to a rise in interest rates, while floating ratesecurities may produce less income than expected if interest rates decrease.Due in part to these factors, the Company’s future investment income may fallshort of expectations due to changes in interest rates or the Company mayexperience losses in principal if forced to sell securities that have declinedin market value due to changes in interest rates. At December 31, 2006,the Company owned government debt instruments totaling $2.6 million andowned corporate debt securities totaling $7.0 million. The Company’s exposureto losses as a result of interest rate changes is managed through investingprimarily in securities with relatively short maturities of up to two years andsecurities with variable interest rates. All government debt instruments andcorporate debt securities owned by the Company at December 31, 2006 hadmaturities of less than one year.

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The Company’s onlymaterial outstanding debt is its loan obligation to Silicon Valley Bank andMerrill Lynch Capital. The outstanding balance of this loan was $13.9 millionon December 31, 2006. The loan, which matures on April 1, 2010,bears interest at a fixed rate of 7.67%. The occurrence of an event of defaultunder the loan, as described above, would increase the applicable rate ofinterest by 5% during the continuance of the event of default and could resultin acceleration of the Company’s payment obligations under the loan agreement.

**Investment Risk**

In the past, the Company has received equity instruments underlicensing agreements. These instruments are included in investment securitiesand are accounted for at fair value with unrealized gains or losses reported asa component of comprehensive loss and classified as accumulated othercomprehensive income—unrealized gain on investment securities in shareholders’equity. Such investments are subject to significant fluctuations in fair marketvalue due to the volatility of the stock market. At December 31, 2005 and2006, the Company owned no corporate equity securities.

***Item 8.***           FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
|                                                                                                                                             | ** ** | **Page  Number** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                    |       | 45               |       |
| Consolidated Balance Sheets—December 31, 2006 and  2005                                                                           |       | 46               |       |
| Consolidated Statements of Operations—For the Years  Ended December 31, 2006, 2005 and 2004              |       | 47               |       |
| Consolidated Statements of Cash Flows—For the Years  Ended December 31, 2006, 2005 and 2004              |       | 48               |       |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Loss—For the Years Ended December 31, 2006, 2005 and 2004 |       | 49               |       |
| Notes to Consolidated Financial Statements                                                                                                  |       | 50               |       |

 

All financial schedules are omitted since the requiredinformation is not applicable or has been presented in the financial statementsand the notes thereto.

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersPoniard Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balancesheets of Poniard Pharmaceuticals, Inc. and subsidiary as ofDecember 31, 2006 and 2005, and the related consolidated statements ofoperations, cash flows and shareholders’ equity and comprehensive loss for eachof the years in the three-year period ended December 31, 2006. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Poniard Pharmaceuticals, Inc. and subsidiary as ofDecember 31, 2006 and 2005, and the results of their operations and theircash flows for each of the years in the three-year period endedDecember 31, 2006, in conformity with U.S. generally accepted accountingprinciples.

As discussed in Note 2 to the consolidatedfinancial statements, Poniard Pharmaceuticals, Inc. and subsidiary adoptedthe provisions of Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*, effectiveJanuary 1, 2006.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Poniard Pharmaceuticals, Inc.’s  internal control over financial reporting asof December 31, 2006, based on criteria established in *Internal Control—Integrated Framework* issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated March 15, 2007, expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

/s/ KPMG LLP

Seattle, Washington

**March 15, 2007**

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(in thousands, except share data)**
|                                                                                                                                                                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Current assets:**                                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                 |       | $                     | 44,148     |   | $ | 3,523 |   |
| Cash - restricted                                                                                                                                                                         |       | 136                   |       | 1,000 |   |
| Investment securities                                                                                                                                                                     |       | 9,562                 |       | — |   |
| Prepaid expenses and other current assets                                                                                                                                                 |       | 654                   |       | 455 |   |
| Assets held for sale                                                                                                                                                                      |       | —                |       | 83 |   |
| Total current assets                                                                                                                                                                      |       | 54,500                |       | 5,061 |   |
| Facilities and equipment, net of depreciation of  $686 and $556, respectively                                                                                                             |       | 525                   |       | 273 |   |
| Other assets                                                                                                                                                                              |       | 182                   |       | 45 |   |
| Assets held for sale                                                                                                                                                                      |       | 2,624                 |       | 3,027 |   |
| Licensed products, net of accumulated amortization  of $764 and $292                                                                                                                      |       | 11,236                |       | 1,708 |   |
| **Total assets**                                                                                                                                                                          |       | $                     | 69,067     |   | $ | 10,114 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Current liabilities:**                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accounts payable                                                                                                                                                                          |       | $                     | 775        |   | $ | 995 |   |
| Accrued liabilities                                                                                                                                                                       |       | 2,520                 |       | 2,078 |   |
| Current portion of notes payable                                                                                                                                                          |       | 3,906                 |       | 3,868 |   |
| Licensed products payable                                                                                                                                                                 |       | 5,000                 |       | — |   |
| Total current liabilities                                                                                                                                                                 |       | 12,201                |       | 6,941 |   |
| **Long-term  liabilities:**                                                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Notes payable, net of current portion and discount  of $1,753                                                                                                                             |       | 9,975                 |       | — |   |
| Total long-term liabilities                                                                                                                                                               |       | 9,975                 |       | — |   |
| **Shareholders’  equity:**                                                                                                                                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Preferred stock,  $.02 par value, 2,998,425 shares authorized:                                                                                                                            |       |                  |       |   |   |
| Convertible preferred stock, Series 1, 205,340  shares issued and outstanding at December 31, 2006 and 2005 (entitled in  liquidation to $5,175, respectively)                  |       | 4                     |       | 4 |   |
| Convertible preferred stock, Series B, 0 and  1,575 shares issued and outstanding at December 31, 2006 and 2005  (entitled in liquidation to $15,750 at December 31, 2005) |       | —                |       | — |   |
| Common stock, $.02 par value, 200,000,000 shares  authorized, 22,808,233 and 5,720,382 shares issued and outstanding at  December 31, 2006 and 2005, respectively                    |       | 456                   |       | 114 |   |
| Additional paid-in capital                                                                                                                                                                |       | 326,025               |       | 258,855 |   |
| Accumulated  deficit, including other comprehensive income of $0 at                                                                                                                       |       |                  |       |   |   |
| December 31, 2006 and 2005                                                                                                                                                           |       | (279,594              | )          | (255,800 | ) |
| Total shareholders’ equity                                                                                                                                                           |       | 46,891                |       | 3,173 |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                      |       | $                     | 69,067     |   | $ | 10,114 |   |

 

See accompanying notes to the consolidated financial statements.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**
|                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                       |       | $                                           | —     |   | $ | 15 |   | $ | 1,015 |   |
| **Operating expenses:**                                            | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development                                          |       | 13,356                                      |       | 10,198 |   | 13,331 |   |
| General and  administrative                                        |       | 7,548                                       |       | 5,948 |   | 7,171 |   |
| Gain on sale of  real estate and equipment                         |       | (73                                         | )          | (158 | ) | — |   |
| Asset impairment  loss                                             |       | 403                                         |       | 3,346 |   | — |   |
| Restructuring                                                      |       | —                                      |       | 1,741 |   | — |   |
| Total operating expenses                                           |       | 21,234                                      |       | 21,075 |   | 20,502 |   |
| Loss from  operations                                              |       | (21,234                                     | )          | (21,060 | ) | (19,487 | ) |
| **Other  income (expense):**                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                    |       | 1,906                                       |       | 330 |   | 326 |   |
| Interest expense                                                   |       | (3,966                                      | )          | (267 | ) | (210 | ) |
| Total other (expense) income                                       |       | (2,060                                      | )          | 63 |   | 116 |   |
| Net loss                                                           |       | (23,294                                     | )          | (20,997 | ) | (19,371 | ) |
| Preferred stock  dividends                                         |       | (500                                        | )          | (500 | ) | (500 | ) |
| Net loss  applicable to common shares                              |       | $                                           | (23,794    | ) | $ | (21,497 | ) | $ | (19,871 | ) |
| Loss per share:                                                    |       |                                        |       |   |   |   |   |
| Basic and diluted loss applicable to common shares                 |       | $                                           | (1.37      | ) | $ | (3.83 | ) | $ | (3.96 | ) |
| Weighted average  common shares outstanding—basic and diluted |       | 17,376                                      |       | 5,611 |   | 5,024 |   |

 

See accompanying notes to the consolidated financial statements.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**
|                                                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                            |       | $                                           | (23,294    | ) | $ | (20,997 | ) | $ | (19,371 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities:                        |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                                      |       | 605                                         |       | 458 |   | 800 |   |
| Amortization of  discount on notes payable                                                          |       | 3,604                                       |       | — |   | — |   |
| (Gain) loss on  disposal of real estate and equipment                                               |       | (27                                         | )          | (137 | ) | 20 |   |
| Asset impairment  loss                                                                              |       | 403                                         |       | 3,346 |   | — |   |
| Restructuring                                                                                       |       | —                                      |       | 476 |   | — |   |
| Increase in  restricted cash to secure operating lease                                              |       | (136                                        | )          | — |   | — |   |
| Stock options and  warrants issued for services                                                     |       | 13                                          |       | (21 | ) | 21 |   |
| Stock-based  employee compensation                                                                  |       | 1,471                                       |       | 5 |   | 340 |   |
| Change in operating assets and liabilities:                                                         |       |                                        |       |   |   |   |   |
| Prepaid expenses  and other assets                                                                  |       | (199                                        | )          | 207 |   | 13 |   |
| Accounts payable                                                                                    |       | (220                                        | )          | (135 | ) | 721 |   |
| Accrued  liabilities                                                                                |       | 506                                         |       | 331 |   | (24 | ) |
| Net cash used in  operating activities                                                              |       | (17,274                                     | )          | (16,467 | ) | (17,480 | ) |
| **Cash flows from investing activities:**                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  sales and maturities of investment securities                                        |       | —                                      |       | 1,500 |   | 10,875 |   |
| Purchases of  investment securities                                                                 |       | (9,562                                      | )          | — |   | (33 | ) |
| Facilities and  equipment purchases                                                                 |       | (385                                        | )          | (84 | ) | (326 | ) |
| Purchase of  licensed product                                                                       |       | (5,000                                      | )          | — |   | (1,000 | ) |
| Proceeds from  sales of equipment and facilities                                                    |       | 110                                         |       | 303 |   | — |   |
| Net cash (used in)  provided by investing activities                                                |       | (14,837                                     | )          | 1,719 |   | 9,516 |   |
| **Cash flows from financing activities:**                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net proceeds from  issuance of common stock and warrants                                            |       | 58,485                                      |       | 3,812 |   | 9,042 |   |
| Proceeds from  bridge note payable                                                                  |       | 3,460                                       |       | — |   | — |   |
| Proceeds from bank  note payable                                                                    |       | 15,000                                      |       | — |   | — |   |
| Repayment of bank  notes payable principal                                                          |       | (4,584                                      | )          | (339 | ) | (290 | ) |
| Decrease  (increase) in restricted cash                                                             |       | 1,000                                       |       | (1,000 | ) | — |   |
| Payment of notes  payable issuance costs                                                            |       | (144                                        | )          | — |   | — |   |
| Proceeds from  stock options and warrants exercised                                                 |       | 19                                          |       | 44 |   | 800 |   |
| Preferred stock  dividends                                                                          |       | (500                                        | )          | (500 | ) | (500 | ) |
| Net cash provided  by financing activities                                                          |       | 72,736                                      |       | 2,017 |   | 9,052 |   |
| Net increase  (decrease) in cash and cash equivalents                                               |       | 40,625                                      |       | (12,731 | ) | 1,088 |   |
| **Cash and cash equivalents:**                                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of year                                                                                   |       | 3,523                                       |       | 16,254 |   | 15,166 |   |
| End of year                                                                                         |       | $                                           | 44,148     |   | $ | 3,523 |   | $ | 16,254 |   |
| **Supplemental disclosure of non-cash financing  activity:**                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of  Licensed Products with common stock                                                    |       | $                                           | —     |   | $ | — |   | $ | 1,000 |   |
| Accrual of  preferred dividend                                                                      |       | 500                                         |       | 500 |   | 500 |   |
| Increase in  Licensed Products with increase in current obligations payable                         |       | 5,000                                       |       | — |   | — |   |
| Warrants issued  and recognition of beneficial conversion feature in connection with debt  issuance |       | 4,000                                       |       | — |   | — |   |
| Conversion of  bridge loan plus interest accrued thereon into common stock                          |       | 3,524                                       |       | — |   | — |   |
| **Supplemental disclosure of cash paid during the  period for:**                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                                             |       | $                                           | 209        |   | $ | 261 |   | $ | 196 |   |

 

See accompanying notes to the consolidated financial statements.

48

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE LOSS(In thousands)**
|                                                                                                        | ** ** | **Preferred Stock,  Series 1** | ** ** | **Preferred Stock,  Series B** | ** ** | **Common Stock**  | ** ** | ** **     | ** ** | ** **             | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|----------------|------------|
| ** **                                                                                             | ** ** | **Number  of  Shares**                   | ** ** | **Par  Value**                           | ** ** | **Number  of  Shares** | ** ** | **Par  Value** | ** ** | **Number  of  Shares** | ** ** | **Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumu-  lated  Deficit** | ** ** | **Share-  holder’s  Equity** | ** ** |
| **Balance,  December 31, 2003**                                                                   |       |                                     | 205        |                                     |       |                   | $          | 4              |       |                   |       | 2              |       |   |   | $ | — |   |   |   | 4,666 |   |   |   | $ | 93 |   |   |   | $ | 243,832 |   |   | $ | (214,439 | ) | $ | 29,490 |   |
| Exercise of stock  options and warrants                                                                |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 136 |   |   |   | 3 |   |   |   | 797 |   |   | — |   | 800 |   |
| Common stock  issued for licensed product                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 41 |   |   |   | 1 |   |   |   | 999 |   |   | — |   | 1,000 |   |
| Common stock  issued, net of offering costs of $763                                                    |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 308 |   |   |   | 6 |   |   |   | 9,036 |   |   | — |   | 9,042 |   |
| Modification of  outstanding employee options                                                          |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 340 |   |   | — |   | 340 |   |
| Stock options  issued for services                                                                     |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 21 |   |   | — |   | 21 |   |
| Comprehensive loss:                                                                                    |       |                                     |       |                                     |       |                   |       |           |       |                   |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                               |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (19,371 | ) | (19,371 | ) |
| Unrealized gain on  investment securities                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 6 |   | 6 |   |
| Total  comprehensive loss                                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (19,365 | ) | (19,365 | ) |
| Preferred stock  dividends                                                                             |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (500 | ) | (500 | ) |
| **Balance,  December 31, 2004**                                                                   |       |                                     | 205        |                                     |       |                   | $          | 4              |       |                   |       | 2              |       |   |   | $ | — |   |   |   | 5,151 |   |   |   | $ | 103 |   |   |   | $ | 255,025 |   |   | $ | (234,304 | ) | $ | 20,828 |   |
| Exercise of stock  options and warrants                                                                |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 16 |   |   |   | — |   |   |   | 44 |   |   | — |   | 44 |   |
| Common stock  issued, net of offering costs of $337                                                    |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 553 |   |   |   | 11 |   |   |   | 3,801 |   |   | — |   | 3,812 |   |
| Modification of  outstanding employee options                                                          |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   |   |   |   |   | 6 |   |   | — |   | 6 |   |
| Stock options  issued for services                                                                     |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (21 | ) |   | — |   | (21 | ) |
| Comprehensive loss:                                                                                    |       |                                     |       |                                     |       |                   |       |           |       |                   |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                               |       |                                     |       |                                     |       |                   |       |           |       |                   |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (20,997 | ) | (20,997 | ) |
| Unrealized gain on  investment securities                                                              |       |                                     |       |                                     |       |                   |       |           |       |                   |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   | 1 |   |
| Total  comprehensive loss                                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (20,996 | ) | (20,996 | ) |
| Preferred stock  dividends                                                                             |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (500 | ) | (500 | ) |
| **Balance,  December 31, 2005**                                                                   |       |                                     | 205        |                                     |       |                   | $          | 4              |       |                   |       | 2              |       |   |   | $ | — |   |   |   | 5,720 |   |   |   | $ | 114 |   |   |   | $ | 258,855 |   |   | $ | (255,800 | ) | $ | 3,173 |   |
| Exercise of stock  options and warrants                                                                |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 6 |   |   |   | — |   |   |   | 19 |   |   | — |   | 19 |   |
| Common stock  issued, net of offering costs of $3,953                                                  |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 14,652 |   |   |   | 293 |   |   |   | 58,192 |   |   | — |   | 58,485 |   |
| Conversion of  bridge loan and interest accrued thereon into common stock                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | 839 |   |   |   | 17 |   |   |   | 3,507 |   |   | — |   | 3,524 |   |
| Conversion of  preferred shares into common stock                                                      |       |                                     | —     |                                     |       |                   | —     |           |       |                   | (2         | )              |       |   | — |   |   |   | 1,591 |   |   |   | 32 |   |   |   | (32 | ) |   | — |   | — |   |
| Share-based  employee compensation expense                                                             |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,572 |   |   | — |   | 1,572 |   |
| Modification of  outstanding employee options                                                          |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (101 | ) |   | — |   | (101 | ) |
| Warrants issued  and recognition of beneficial conversion feature in connection with issuance  of debt |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 4,000 |   |   | — |   | 4,000 |   |
| Stock options and  warrants issued for services                                                        |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 13 |   |   | — |   | 13 |   |
| Comprehensive loss:                                                                                    |       |                                     |       |                                     |       |                   |       |           |       |                   |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                               |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (23,294 | ) | (23,294 | ) |
| Unrealized gain on  investment securities                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |
| Total  comprehensive loss                                                                              |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (23,294 | ) | (23,294 | ) |
| Preferred stock  dividends                                                                             |       |                                     | —     |                                     |       |                   | —     |           |       |                   | —     |           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (500 | ) | (500 | ) |
| **Balance,  December 31, 2006**                                                                   |       |                                     | 205        |                                     |       |                   | $          | 4              |       |                   |       | —         |       |   |   | $ | — |   |   |   | 22,808 |   |   |   | $ | 456 |   |   |   | $ | 326,025 |   |   | $ | (279,594 | ) | $ | 46,891 |   |

 

See accompanying notes to the consolidated financial statements.

49

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.**             Organizationand Operations

Poniardis a biotechnology company focused on the discovery, development andcommercialization of cancer therapy products. The consolidated financialstatements include the accounts of Poniard Pharmaceuticals, Inc. and itswholly owned subsidiary, NeoRx Manufacturing Group, Inc. (the Company).

The Company has historically suffered recurringoperating losses and negative cash flows from operations. As ofDecember 31, 2006, the Company had net working capital of $42,299,000, anaccumulated deficit of $279,594,000 and total shareholders’ equity of$46,891,000. The Company’s total cash, cash equivalents and investmentsecurities, net of restricted cash of $136,000, was $53,710,000 atDecember 31, 2006. The Company believes that its current cash, cashequivalent and investment securities balances will provide adequate resourcesto fund operations at least until the end of the first quarter of 2008.

All inter-company balances and transactions have beeneliminated.

Unless otherwiseindicated, all common stock related amounts have been adjusted to reflect theCompany’s one-for-six reverse stock split effective September 22, 2006.

**NOTE 2.**             Summaryof Significant Accounting Policies

*Estimates and Uncertainties:*   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

*Research and Development Revenues and Expenses:*   Revenuesfrom collaborative agreements are recognized as earned as the Company performsresearch activities under the terms of each agreement. Billings in excess ofamounts earned are classified as deferred revenue. Pursuant to the Securitiesand Exchange Commission Staff Accounting Bulletin No. 104 (SAB 104),“Revenue Recognition in Financial Statements,” non-refundable upfronttechnology license fees, where the Company is providing continuing servicesrelated to product development, are deferred. Such fees are recognized asrevenue over the product development periods based on estimated totaldevelopment costs. If the Company is not providing continuing services, revenueis recognized when the payment is due.

To date, the Company does not have any significantongoing revenue sources. Pursuant to SAB 104 and Emerging Issues Task ForceConsensus No. 00-21, “Revenue Arrangements with MultipleDeliverables,” (EITF 00-21), which became effective for revenuearrangements entered into in fiscal periods beginning after June 15, 2003,revenues from sales and licensing of intellectual property and governmentgrants are recognized as earned. To the extent that a transaction containsmultiple deliverables, the Company determines whether the multiple deliverablesare separable, and, if separable, the revenue to be allocated to eachdeliverable based on fair value. If fair value is undeterminable forundelivered elements of the arrangement, revenue is deferred over the contractperiod or until delivery, as applicable. The revenue allocated to eachdeliverable is recognized following the requirements of SAB 104.

The Company’s revenue in the periods presentedconsisted primarily of proceeds from the sale and licensing of intellectualproperty, milestone payments received, and receipt of government grants. Forthe sale and licensing of intellectual property and milestone payments, revenuehas been recognized as payments are due because the Company has not hadcontinuing service or other obligations subsequent to 

50

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

the sale, licensing ormilestone payment. Additionally, milestone payments are based on events thatrepresent the achievement of substantive steps in the development process andare believed to represent the fair value of achieving the milestone. Governmentgrant revenue is recognized as earned based on completion of performance underthe respective contracts whereby no ongoing obligation on the part of theCompany exists. Milestone payments are recognized as revenue at the time suchpayments are due, based on the ratio of cumulative costs incurred to date, tototal estimated development costs. Any remaining balance is deferred andrecognized as revenue over the remaining development period.

Research and development costs are expensed asincurred. It is the Company’s practice to offset third-party collaborativereimbursements received as a reduction of research and development expenses.Third-party reimbursements for 2006, 2005, and 2004 were $52,000, $16,000 and$259,000, respectively.

*Cash Equivalents:*   Allhighly liquid investments with an original maturity of three months or lesswhen purchased are considered to be cash equivalents. Cash equivalentsrepresent cash invested primarily in money market funds, federal government andagency securities and corporate debt securities.

*InvestmentSecurities:*   TheCompany considers all investment securities as available-for-sale. Allsecurities are carried at fair value. The Company does not invest in derivativefinancial instruments. Unrealized gains and losses on investment securities arereported as a component of comprehensive income or loss and classified asaccumulated other comprehensive income or loss - unrealized gain (loss) oninvestment securities in shareholders’ equity. The Company monitors investmentsecurities for other than temporary declines in fair value and chargesimpairment losses to income when an other than temporary decline in estimatedvalue occurs.

*Facilities andEquipment:*   Facilitiesand equipment are stated at acquired cost, less any charges for impairment.Depreciation is provided using the straight-line method over estimated usefullives of five to seven years for equipment and furniture, three years forcomputer equipment and software and thirty years for buildings. Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe assets’ estimated useful lives or the terms of the leases.

*Impairment ofLong-Lived Assets:*   Long-livedassets including property and equipment are reviewed for possible impairmentwhenever significant events or changes in circumstances, including changes inthe Company’s business strategy and plans, indicate that an impairment may haveoccurred. An impairment is indicated when the sum of the expected futureundiscounted net cash flows identifiable to that asset or asset group is lessthan its carrying value. Impairment losses are determined from actual orestimated fair values, which are based on market values, net realizable valuesor projections of discounted net cash flows, as appropriate. The Companyreviews long-lived assets annually and on an as-needed basis to determine ifthere have been any adverse events or circumstances that would indicate that animpairment exists. As a result of these reviews, the Company recorded animpairment charge related to the restructuring activities during 2005 and anadditional impairment charge in 2006. See Note 10 below for further details.

*Debt Issuance Costs:*   Costs incurred in connectionwith the securing of long-term bank loans and other long-term debt are deferredand amortized as interest expense over the term of the related debt using amethod that approximates the effective interest method.

*Licensed Products:*   Licensed Products representan exclusive license to develop, manufacture and commercialize picoplatin, aplatinum-based anti-cancer agent. Licensed Products are amortized using thestraight-line method over their estimated useful life of twelve years. TheCompany evaluates the 

51

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

recoverability of Licensed Products periodically and takes intoaccount events or circumstances that might indicate that an impairment exists.No impairment of Licensed Products was identified during 2006.

*Income Taxes:*   The Companycomputes income taxes using the asset and liability method, under whichdeferred income taxes are provided for the temporary differences between thefinancial reporting basis and the tax basis of the Company’s assets andliabilities and for operating loss and tax credit carryforwards. A valuationallowance is established when necessary to reduce deferred tax assets to theamount, if any, which is expected more likely than not to be realized.

*Net Loss Per Common Share:*   Basic and diluted loss pershare are based on net loss applicable to common shares, which is comprised ofnet loss and preferred stock dividends in all periods presented. Shares used tocalculate basic loss per share are based on the weighted average number ofcommon shares outstanding during the period. Shares used to calculate dilutedloss per share are based on the potential dilution that would occur upon theexercise or conversion of securities into common stock using the treasury stockmethod. The computation of diluted net loss per share excludes the followingoptions and warrants to acquire shares of common stock for the years indicatedbecause their effect would not be dilutive.

| ** **            | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|-----------|------------|----------|------------|----------|------------|
| Common Stock  options |       | 1,660,000 |       | 721,000  |       | 588,000  |       |
| Common Stock warrants |       | 5,947,000 |       | 538,000  |       | 265,000  |       |

 

Additionally,aggregate shares of 39,015, issuable as of December 31, 2006 uponconversion of the Company’s Series 1 convertible exchangeable preferredstock, are not included in the calculation of diluted loss per share for 2006,2005 and 2004 because the share increments would not be dilutive. Aggregateshares of 574,398, issuable as of December 31, 2005 upon conversion of theCompany’s Series B convertible preferred stock are not included in the calculationof diluted loss per share for 2005 and 2004 because the share increments wouldnot be dilutive. All outstanding shares of the Company’s Series Bconvertible preferred stock were converted into the Company’s common stock andretired in April 2006.

*Share-Based Compensation:*   Effective January 1, 2006,the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which establishes accountingfor equity instruments exchanged for employee services. Under the provisions ofSFAS 123R, share-based compensation cost is measured at the grant date, basedon the fair value of the award, and is recognized as an expense over theemployee’s requisite service period (generally the vesting period of the equitygrant). Prior to January 1, 2006, the Company accounted for share-basedcompensation to employees in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB 25), and related interpretations.The Company also followed the disclosure requirements of SFAS No. 123, asamended by SFAS No. 148, “Accountingfor Stock-Based Compensation Transition and Disclosure”. The Companyelected to adopt the modified prospective transition method as provided by SFAS123R and, accordingly, financial statement amounts for the prior yearspresented have not been restated to reflect the fair value method of expensingshare-based compensation.

*Concentration in theAvailable Sources of Supply of Materials:*   For the Company’spicoplatin product candidate to be successful, the Company needs sufficient,reliable and affordable supplies of the picoplatin active pharmaceuticalingredient (API) and finished drug product. Sources of picoplatin API andfinished drug product may be limited, and third-party suppliers may beunable to manufacture API and drug 

52

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

product in amounts and atprices necessary to successfully commercialize the Company’s picoplatinproduct. Moreover, third-party manufacturers must continuously adhere tocurrent Good Manufacturing Practice (cGMP) regulations enforced by the FDAthrough its facilities inspection program. If the facilities of thesemanufacturers cannot pass a pre-approval plant inspection, the FDA will notgrant a New Drug Application (NDA) for the Company’s proposed products. Incomplying with cGMP and foreign regulatory requirements, any of our third-partymanufacturers will be obligated to expend time, money and effort in production,record-keeping and quality control to assure that the Company’s products meetapplicable specifications and other requirements. If any of the Company’sthird-party manufacturers or suppliers fails to comply with these requirements,the Company may be subject to regulatory action.

The Company relies on third parties to manufacture itspicoplatin API and finished drug product for its clinical trials. The Companycurrently has separate agreements with one supplier each of API and finisheddrug product. Manufacturing services under these agreements are provided on apurchase order, fixed-fee basis. Unless earlier terminated, each agreementcontinues for an initial term ending December 31, 2009, and may beextended beyond the initial term upon agreement of the parties. The agreementsgenerally provide that they may be terminated by either party if there is anuncured material breach by the other party or in the event of insolvency orbankruptcy of the other party. The Company may terminate the finished drugproduct supply agreement at any time with one year’s advance notice. TheCompany may terminate the API manufacturing agreement if there is a change incontrol of the manufacturer. The Company has no assurance that its currentsuppliers will be able to manufacture sufficient picoplatin API and/or finisheddrug product on a timely or cost-effective basis at all times in the future.The Company believes that there are other contract manufacturers with thecapacity to manufacture picoplatin API and finished drug product. If theCompany is required to seek out alternative manufacturers, it may incursignificant additional costs and suffer delays in, or be prevented from,completing or initiating its ongoing or planned clinical trials.

*Fair Value of Financial Instruments:*   TheCompany has financial instruments consisting of cash, cash equivalents,restricted cash, investment securities, notes receivable, accounts payable andnotes payable. The fair value of all of the Company’s financial instruments,based on either the short-term nature of the instrument, current marketindicators or quotes from brokers, approximates their carrying amounts.

*Segment Reporting:*   The Company has oneoperating business segment, cancer therapeutics development.

*New AccountingPronouncements:*   In May 2005, the FinancialAccounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and ErrorCorrections, a Replacement of APB Opinion No. 20 and FASB StatementNo. 3” (SFAS 154). SFAS 154 establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to a newly adopted accounting principle. Previously, most changes inaccounting principle were recognized by including the cumulative effect of thechange to the new accounting principle in net income of the period of thechange. Under SFAS 154, retrospective application requires thecumulative effect of the change to be reflected in the carrying amounts of assetsand liabilities as of the beginning of the first period presented and financialstatements for each individual prior period presented to be adjusted to reflectthe effects of applying the new accounting principle. SFAS 154 carriesforward the guidance in APB Opinion 20 “Accounting Changes,” requiringjustification of a change in accounting principle on the basis ofpreferability, for reporting the correction of an error in previously issuedfinancial statements and for a change in an accounting estimate. SFAS 154is effective for 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The adoption of the Statement by the Company on January 1, 2006 didnot have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issuedSFAS No.123R, “Share-Based Payment.” SFAS 123R replaces SFAS 123,“Stock-Based Compensation,” issued in 1995. SFAS 123R requires that the fairvalue of the grant of employee stock options be reported as an expense in the results of operations.SFAS 123R eliminates the ability to account for stock-based compensationusing APB 25 and requires that such transactions be recognized ascompensation cost in the income statement based on their fair value on themeasurement date, which is generally the date of the grant. The Statement iseffective for the first annual reporting period that begins after June 15,2005. Historically, the Company has disclosed in its footnotes the pro formaexpense effect of the grants (see Note 3). SFAS 123R applies to alloutstanding, unvested option grants as of the effective date. The Companyadopted SFAS No. 123R on January 1, 2006 using the modifiedprospective transition method. Under this method, SFAS 123R applies to new and modifiedoption grants after January 1, 2006, and to any unvested option grants asservice is rendered on or after the effective date. The attribution ofcompensation cost for vested option grants as of January 1, 2006 is basedon the same method and on the same grant-date fair values previously determinedfor the pro forma disclosures required for companies that did not adopt thefair value accounting method for stock-based employee compensation. See Note 3below for the discussion of the effect of the adoption of this Statement on theCompany’s consolidated financial statements.

In June 2006, the FASB issued InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes: An Interpretation ofFASB Statement No. 109” (FIN 48). FIN 48 clarifies certain aspects of accountingfor uncertain tax positions, including issues related to the recognition andmeasurement of those tax positions. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. Accordingly, the Company will adopt FIN48 on January 1, 2007. The Company is currently assessing the impact FIN48 will have, if any, on its consolidated financial statements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements”. SFAS 157 defines fair value,establishes a framework for measuring fair value, and expands disclosurerequirements about fair value measurements. SFAS 157 applies to otheraccounting pronouncements that require or permit fair value measurements, butdoes not in itself require any new fair value measurements. The provisions ofSFAS No. 157 are effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years. TheCompany is currently evaluating this statement and its impact, if any, on theCompany’s consolidated financial statements.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (SAB 108), to address diversity in practice in quantifyingfinancial statement misstatements. SAB 108 requires the quantification ofmisstatements based on their impact on both the balance sheet and the incomestatement to determine materiality. The guidance provides for a one-timecumulative effect adjustment to correct for misstatements that were not deemedmaterial under a company’s prior approach but are material under the SAB 108approach. SAB 108 is effective for fiscal years ending after November 15,2006. The adoption of this guidance did not have a material impact on theCompany’s consolidated financial statements.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 3.**             Stock-Based Compensation

Effective January 1, 2006, the Company adoptedthe provisions of SFAS 123R, using the modified prospective transitionmethod. Under the provisions of SFAS 123R, share-based compensation cost ismeasured at the grant date, based on the fair value of the award, and isrecognized as an expense over the employee’s requisite service period(generally the vesting period of the equity grant). Prior to January 1,2006, the Company accounted for share-based compensation to employees inaccordance with APB 25 and related interpretations.

Under SFAS 123R,the Company is required to select a valuation technique or option-pricing modelthat meets the criteria as stated in SFAS 123R, which includes a binomial modeland the Black-Scholes-Merton (Black-Scholes) model. At the present time, theCompany is continuing to use the Black-Scholes model. The adoption of SFAS123R, applying the modified prospective transition method, as elected by the Company, requires the Company tovalue stock options prior to its adoption of SFAS 123R under the fair valuemethod and expense these amounts over the stock options’ remaining vestingperiod. Under this transition method, compensation expense recognized duringthe year ended December 31, 2006 included compensation expense for allshare-based awards granted prior to, but not yet vested, as ofDecember 31, 2005, based on the grant date fair value estimated inaccordance with the original provisions of SFAS 123. In accordance with themodified prospective transition method, the Company’s consolidated financialstatements for years ended prior to January 1, 2006 have not been restatedto reflect the impact of SFAS 123R.

As a result ofadopting SFAS 123R on January 1, 2006, the Company’s loss from operationsand net loss for the year ended December 31, 2006 is $1,471,000 higherthan if it had continued to account for share-based compensation under therecognition and measurement provisions of APB 25, and related interpretations,as permitted by SFAS 123. Basic and diluted net loss per share for the yearended December 31, 2006 would have been $1.29 if the Company had notadopted SFAS 123R.

Had compensation cost for these stockoptions for employees been determined prior to January 1, 2006 usingthe fair value based method of accounting under SFAS No. 123, theCompany’s net loss applicable to common shares and loss per share would havebeen the pro forma amounts indicated below (in thousands, except per share data):

| ** **                                                                                         | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net loss  applicable to common shares:                                                             |       |                                   |       |   |   |
| As reported                                                                                        |       | $                                      | (21,497    | ) | $ | (19,871 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                      |       | 5                                      |       | 340 |   |
| Deduct: Stock-based employee compensation determined  under fair value based method for all awards |       | (1,189                                 | )          | (1,666 | ) |
| Pro forma                                                                                          |       | $                                      | (22,681    | ) | $ | (21,197 | ) |
| Loss per common  share, basic and diluted:                                                         |       |                                   |       |   |   |
| As reported                                                                                        |       | $                                      | (3.83      | ) | $ | (3.96 | ) |
| Pro forma                                                                                          |       | $                                      | (4.04      | ) | $ | (4.22 | ) |

 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Disclosures for the year ended December 31, 2006are not presented because stock-based payments were accounted for under SFAS123R’s fair value method during this period.

The Company modified certain stock options, which hadbeen granted to a member of the Company’s board of directors, so that suchstock options would fully vest as of August 14, 2006, the date that thedirector retired from the board. No other modifications were made to thesestock options. No other stock options held by the former director, all of whichwere fully vested as of August 14, 2006, were modified. The effect of thismodification was a decrease in total stock compensation expense of $101,000 forthe year ended December 31, 2006.

For the year ended December 31, 2006, the Companyrecognized stock compensation expense of $1,471,000. This amount reflects themodification of stock options described above. The remaining unrecognizedcompensation cost related to unvested awards at December 31, 2006, wasapproximately $5,038,000 and the weighted-average period of time over whichthis cost will be recognized is 2.2 years.

TheCompany records compensation expense for employee stock options based on theestimated fair value of the options on the date of grant using theBlack-Scholes option-pricing model. This fair value is amortized on astraight-line basis over the requisite service periods for the grants, which isgenerally the vesting period. The Company uses historical data, and otherrelated information as appropriate, to estimate the expected price volatility,the expected option life and the expected forfeiture rate. The risk-free rateis based on the U.S. Treasury yield curve in effect at the time of the grant.The weighted-average fair value per share of the Company’s stock optionsgranted to employees was estimated to be $5.49, $4.46 and $11.22 for the yearsended December 31, 2006, 2005 and 2004, respectively, using theBlack-Scholes model with the following weighted-average assumptions: 

| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life in  years  |       | 6.82                                       |       | 4.00 |   | 4.00 |   |
| Expected dividend  rate  |       | 0.0                                        | %          | 0.0 | % | 0.0 | % |
| Risk-free  interest rate |       | 5.0                                        | %          | 3.9 | % | 3.4 | % |
| Expected volatility      |       | 105.0                                      | %          | 122.9 | % | 120.9 | % |

 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

TheCompany issues new shares of common stock upon exercise of stock options. Asummary of option activity as of December 31, 2006 and changes during thethree years then ended are as follows (shares and intrinsic value inthousands):

| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2003   |       |                       | 675        |                                   |       |                                                | $          | 22.05                               |       |   |   |   |   |   |   |   |   |   |
| Granted                                  |       |                       | 233        |                                   |       |                                                | 14.25      |                                |       |   |   |   |   |   |   |   |   |
| Exercised                                |       |                       | (136       | )                                      |       |                                                | 5.88       |                                |       |   |   |   |   |   |   |   |   |
| Forefeited/cancelled/expired             |       |                       | (182       | )                                      |       |                                                | 30.63      |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2004   |       |                       | 590        |                                   |       |                                                | 20.06      |                                |       |   |   |   |   |   |   |   |   |
| *Exercisable  at December 31, 2004* | * *   | * *                   | *309*      |                                   | * *   | * *                                            | *24.69*    |                                |       |   |   |   |   |   |   |   |   |
| Granted                                  |       |                       | 262        |                                   |       |                                                | 6.07       |                                |       |   |   |   |   |   |   |   |   |
| Exercised                                |       |                       | (16        | )                                      |       |                                                | 2.83       |                                |       |   |   |   |   |   |   |   |   |
| Forefeited/cancelled/expired             |       |                       | (115       | )                                      |       |                                                | 15.03      |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2005   |       |                       | 721        |                                   |       |                                                | 16.15      |                                |       |   |   |   |   |   |   |   |   |
| *Exercisable  at December 31, 2005* | * *   | * *                   | *396*      |                                   | * *   | * *                                            | *22.42*    |                                |       |   |   |   |   |   |   |   |   |
| Granted                                  |       |                       | 1,046      |                                   |       |                                                | 6.44       |                                |       |   |   |   |   |   |   |   |   |
| Exercised                                |       |                       | (6         | )                                      |       |                                                | 3.17       |                                |       |   |   |   |   |   |   |   |   |
| Forefeited/cancelled/expired             |       |                       | (101       | )                                      |       |                                                | 9.15       |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006   |       |                       | 1,660      |                                   |       |                                                | $          | 10.50                               |       |   |   | 8.2 |   |   |   | $ | 366 |   |   |
| *Exercisable at  December 31, 2006* | * *   | * *                   | *587*      |                                   | * *   | * *                                            | *$*        | *17.55*                             |       |   |   | 6.3 |   |   |   | $ | 196 |   |   |

 

Informationrelating to stock options outstanding and exercisable at December 31, 2006is as follows (in thousands, except per share data):

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number  of Shares**   | ** ** | **Weighted  Average  Remaining  Life in Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $2.82 - $4.62                               |       |                         | 343        |                         |       |   | 8.48 |   |   |   | $ | 3.93 |   |   |   | 132 |   |   |   | $ | 3.52 |   |   |
| $5.04 - $6.48                               |       |                         | 475        |                         |       |   | 9.47 |   |   |   | 6.19 |   |   |   | 20 |   |   |   | 6.42 |   |   |
| $6.77 - $7.44                               |       |                         | 68         |                         |       |   | 9.31 |   |   |   | 7.00 |   |   |   | 11 |   |   |   | 7.44 |   |   |
| $7.50 - $7.50                               |       |                         | 335        |                         |       |   | 9.31 |   |   |   | 7.50 |   |   |   | 56 |   |   |   | 7.50 |   |   |
| $7.68 - $109.50                             |       |                         | 439        |                         |       |   | 5.67 |   |   |   | 23.14 |   |   |   | 368 |   |   |   | 25.01 |   |   |
|                                        |       |                         | 1,660      |                         |       |   | 8.22 |   |   |   | $ | 10.50 |   |   |   | 587 |   |   |   | $ | 17.55 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cashproceeds and intrinsic value related to total stock options exercised duringthe years ended December 31, 2006, 2005 and 2004 are provided in thefollowing table (dollars in thousands): 

| ** **                                  | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Proceeds from stock  options exercised      |       |                                       | $          | 19 |   |   |   | $ | 44 |   |   | $ | 800 |   |
| Intrinsic value of stock  options exercised |       |                                       | $          | 11 |   |   |   | $ | 50 |   |   | $ | 1,328 |   |

 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In connection withvarious consulting and service contracts, the Company has issued stock optionsto non-employees. These options are valued using a Black-Scholes option-pricingmodel and the total cost of the stock options are recognized over the service period.Stock options to purchase 3,333, 1,666, 8,333 and 19,166 shares of common stockwere granted during 2006, 2005, 2004 and 2002, respectively. The Companyrecorded compensation expense (credits) of $8,000, $(21,000), and $21,000during 2006, 2005, and 2004, respectively, due to these grants.

InApril 2004, the Company extended to December 31, 2004 the time toexercise stock options, held by a former officer, to acquire approximately26,666 shares of common stock. The Company recorded general and administrative compensationexpense of $322,000 in connection with this extension. Also in April 2004,in connection with a consulting agreement with a former employee, the Companyextended the vesting of the stock options to acquire approximately 10,666shares of common stock. The Company recorded research and developmentcompensation expense of $15,000 in connection with this extension.

**NOTE 4.**             Liquidity and Capital Resources

The Company has financed its operations primarilythrough the sale of equity securities, technology licensing, collaborativeagreements and debt instruments. The Company invests excess cash in investmentsecurities that will be used to fund future operating costs. Cash used for operating activitiesfor the twelve months ended December 31, 2006 totaled $17,274,000.Revenues and other income sources for 2006 were not sufficient to coveroperating expenses.

On April 26, 2006, the Company completed a$65,000,000 equity financing, pursuant to which it issued to a group ofinstitutional and other accredited investors an aggregate of 15,491,000 sharesof common stock at a cash purchase price of $4.20 per share. Investors in thefinancing also received five-year warrants to purchase an aggregate of4,643,000 shares of common stock at an exercise price of $4.62 per share. TheCompany received $61,945,000 in net proceeds from the financing, which it isusing to fund its picoplatin clinical program and general working capitalneeds. Concurrent with the closing of the financing, the Company issued anaggregate of 1,591,000 shares of common stock to the holders of itsSeries B preferred stock upon conversion of its outstanding Series Bpreferred shares. As a result of the completion of the financing and theconversion of the Series B preferred shares, the Company’s outstandingcommon stock increased from approximately 5,722,000 shares to approximately22,804,000 shares.

In connection with the financing, the Company enteredinto a letter agreement with Texas State Bank, pursuant to which the Company agreedto accelerate the maturity date of its promissory note with the Bank toJune 5, 2006. The Texas State Bank note, which was secured by theCompany’s radiopharmaceutical plant and other STR assets located in Denton,Texas, had an adjustable interest rate equal to the bank prime rate reported inthe Wall Street Journal (8.00% at May 23, 2006). The Company paid off theoutstanding balance of the note, $2,714,000, on May 23, 2006.

The Company completed the relocation of its corporateheadquarters to South San Francisco in September 2006. The Company intendsto maintain its current clinical and development and support activities inSeattle. The addition of 17,045 square feet of office and laboratory spaceleased in South San Francisco will result in a substantial increase in theCompany’s future rent and operating costs. Under the lease agreement datedJuly 10, 2006, the annual base rent for the leased facilities isapproximately $542,000 and is subject to annual adjustment based ondisbursements for tenant improvements and increases in the Consumer Price Indexin the San Francisco metropolitan market. Base rent is payable in monthlyinstallments of approximately $45,200. Additional rent is payable monthly basedon the Company’s share of operating expenses of the project in which the leasedfacilities are located, as described in the lease 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

agreement. Monthly baserent during the first seven months of the lease will average $21,000 during theconstruction of tenant improvements. The Company paid total rent (base rent andadditional rent based on the Company’s share of project operating expenses)during 2006 of $143,000. The Company estimates total rent payable during 2007will be approximately $523,000. Annual operating expenses under the lease mayincrease substantially as the Company moves forward with its plans to establishlaboratory facilities in the leased space. The initial term of the lease is 60months. The Company may, upon written notice delivered at least nine monthsprior to expiration of the initial lease term, extend the lease for anadditional three years, with rent payable at the then market rate.

In April 2004, the Company acquired the worldwideexclusive rights, excluding Japan, to develop, manufacture and commercializepicoplatin from AnorMED, Inc. AnorMED was acquired by Genzyme Corporationin November 2006. Under the terms of the original agreement, the Companypaid a one-time upfront milestone payment of $1,000,000 in common stock and$1,000,000 in cash. The original agreement provided for development andcommercialization milestone payments of up to $13,000,000, payable in cash or acombination of cash and Company common stock, and a royalty rate of up to 15%of net product sales after regulatory approval. The parties executed anamendment to the license agreement on September 18, 2006, modifyingseveral key financial terms and expanding the licensed territory to includeJapan, thereby providing the Company worldwide rights. In consideration of theamendment, the Company paid Genzyme $5,000,000 in cash on October 12, 2006and will pay Genzyme an additional $5,000,000 in cash by March 31, 2007.The amendment eliminates $8,000,000 in development milestone payments toGenzyme. Genzyme remains entitled to receive up to $5,000,000 in commercializationmilestones upon the attainment of certain levels of annual net sales ofpicoplatin after regulatory approval. The amendment also reduces the royaltypayable to Genzyme to a maximum of 9% of annual net product sales. In addition,the amendment reduces the sharing of sublicense revenues for any sublicensesentered into during the first year following the amendment and eliminates thesharing of sublicense revenues on and after September 18, 2007.

On October 25, 2006, the Company entered into aloan and security agreement with Silicon Valley Bank and Merrill Lynch Capital,pursuant to which it obtained a $15,000,000 capital loan. A portion of theproceeds of the loan will be used to fund the Company’s cash paymentobligations to Genzyme under the amended license agreement described above. Theremaining proceeds will be used to support the Company’s strategic growth,late-stage clinical trials of picoplatin and general working capital needs. Theloan is for a term of 42 months and matures on April 1, 2010. The Companyis required to pay a 7.67% fixed interest rate on the outstanding principalbalance plus a $1,350,000 additional payment on the maturity date of the loan.This additional payment will be accreted to the note payable balance over theterm of the loan using the effective interest rate method and reflected asadditional interest expense. All interest payable under the loan agreement andthe full amount of the additional payment must be paid upon any prepayment ofthe loan. The loan is secured by a first lien on substantially all of theCompany’s non-intellectual property assets. The loan agreement containsrestrictions on the Company’s ability to, among other things, dispose ofcertain assets, engage in certain mergers and acquisition transactions, incurindebtedness, create liens on assets, make investments and pay dividends orrepurchase stock. The loan agreement also contains covenants requiring theCompany to maintain unrestricted cash of $7,500,000 during the loan term and,not later than December 31, 2007, to provide evidence of positive Phase IIdata for the picoplatin drug development program and commence enrollment ofpatients in a Phase III trial for picoplatin. The loan contains events ofdefault that include, among other things, nonpayment of principal and interestor fees, breaches of covenants, material adverse changes, bankruptcy andinsolvency events, 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

cross defaults to otherindebtedness, material judgments, inaccuracy of representations and warranties,and events constituting a change of control. The occurrence of an event ofdefault would increase the applicable rate of interest by 5% and could resultin acceleration of the Company’s payment obligations under the loan agreement.

On August 4, 2005, the Company entered into aresearch funding and option agreement with The Scripps Research Institute(TSRI). Under the agreement, as amended in December 2006, the Companycommitted to provide TSRI an aggregate of $2,500,000 over a 26-monthperiod to fund research relating to synthesis and evaluation of novel smallmolecule, multi-targeted protein kinase inhibitors and focal adhesion kinaseinhibitors as therapeutic agents, including for the treatment of cancer. TheCompany has the option to negotiate a worldwide exclusive license to use,enhance and develop any compounds arising from the collaboration. The researchfunding is payable by the Company to TSRI quarterly in accordance with anegotiated budget. On August 8, 2005, the Company made an initial fundingpayment to TSRI of $137,500. The Company paid TSRI total funding payments of$1,012,500 in 2006, which amount was charged to research and developmentexpense. The agreement provides for aggregate additional funding of $1,350,000in 2007. The Company has no assurance that the research funded under thisarrangement will be successful or ultimately will give rise to any viableproduct candidates. Further, there can be no assurance that the Company will beable to negotiate, on acceptable terms, a license with respect to any compoundsarising from the collaboration.

The Company terminated its STR manufacturingoperations in Denton, Texas during the second quarter of 2005 and beganactively marketing the facility for sale. In 2005, the Company recorded costsassociated with the closure and maintenance of the Denton facility totaling$499,000. The Company recorded costs totaling $286,000 in 2006 related to theseactivities. See Note 9 below for additional information regarding the Company’srestructuring.

The Company receivedapproximately $3,812,000in net proceeds from the sale of common stock and warrants in a privateplacement transaction in March 2005. The Company has applied the netproceeds from this financing to support its Phase II trial in picoplatin insmall cell lung cancer and for general working capital, including restructuringcosts associated with the termination of its STR development program. TheCompany raised approximately $9,042,000 in net proceeds from the sale of commonstock and warrants in a private placement transaction in February 2004.The net proceeds from this financing were used to support the Company’s STRdevelopment program and for general working capital.

In April 2004, the Company sold and transferredits Pretarget intellectual property to Aletheon Pharmaceuticals, Inc. Underthe agreement, the Company could receive up to $6,600,000 in milestone paymentsif Aletheon achieves certain development goals, plus royalties on potentialfuture product sales. The Company did not receive any upfront consideration forthe sale of the Pretarget property. The Company discontinued its clinicalstudies using the Pretarget technology in July 2002, and sought, boththrough targeted inquiries and a broad-based auction process, a buyer orlicensee for the technology. The sale of the Pretarget intellectual propertyrelieved the Company of the annual costs associated with maintaining thePretarget patent estate. During 2003, the Company spent approximately $350,000for the prosecution and maintenance of the Pretarget patents and trademarks.For 2004, these costs were approximately $70,000. Seattle-based Aletheon is adevelopment stage biotherapeutics company founded by two former Poniardemployees. The timing and amount of milestone payments, if any, are uncertain.The terms of the transaction were determined through arms-length negotiation.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Company had cash,cash equivalents and investment securities totaling $53,710,000 atDecember 31, 2006. Company management believes that current cash, cashequivalent and investment securities balances will provide adequate resourcesto fund operations at least until the end of the first quarter of 2008. TheCompany’s actual capital requirements will depend upon numerous factors,including:

·       thescope and timing of the Company’s picoplatin clinical program and otherresearch and development efforts, including the progress and costs of theCompany’s on-going Phase II and planned Phase III trials of picoplatin in smallcell lung cancer;

·       theCompany’s ability to obtain clinical supplies of picoplatin activepharmaceutical ingredient and drug product in a timely and cost-effectivemanner;

·       actionstaken by the FDA and other regulatory authorities;

·       thetiming and amounts of proceeds from any sale of the Denton facility and assets;

·       thetiming and amount of any milestone or other payments the Company might receivefrom potential strategic partners;

·       theCompany’s degree of success in commercializing picoplatin or any other cancertherapy product candidates;

·       theemergence of competing technologies and products, and other adverse marketdevelopments;

·       theacquisition or in-licensing of other products or intellectual property;

·       thecosts, including lease and operating costs, incurred in connection with theCompany’s relocation of its corporate headquarters to South San Francisco andthe planned expansion of its workforce;

·       thecosts of any research collaborations or strategic partnerships established;

·       thecosts of preparing, filing, prosecuting, maintaining and enforcing patentclaims and other intellectual property rights; and

·       thecosts of performing the Company’s obligations under the loan with SiliconValley Bank and Merrill Lynch Capital, including the cost of interest and otherpayment obligations and penalties and the cost of complying with unrestrictedcash, product development and other covenants and restrictions under the loanagreement.

The Company had net operating loss carryforwards ofapproximately $62,300,000 available for future use as of December 31,2006, which will expire from 2007 through 2026. During 2006, the Companyexperienced significant changes to its capital structure which resulted in anownership change, as defined under Section 382 of the Internal RevenueCode of 1986, as amended (IRC). Consequently, the amount of net operating losscarryforwards and research and experimentation credit carryforwards availableto be used in future years are limited under IRC Sections 382 and 383. Thislimitation will result in the loss of approximately $93,300,000 of theCompany’s net operating loss carryforwards and $9,100,000 of the Company’sresearch and development credit carryforwards.

There can be no assurancethat the Company will be able to raise additional capital or enter intorelationships with corporate partners on a timely basis, on favorable terms, orat all. Conditions in the capital markets in general, and in the life sciencecapital market specifically, may affect the Company’s potential financingsources and opportunities for strategic partnering.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE5.**             Restricted Cash

At December 31, 2006,the Company had restricted cash of $136,000, in the form of a certificate ofdeposit. The certificate of deposit serves as collateral for a standby letterof credit issued by Silicon Valley Bank on behalf of the Company. AtDecember 31, 2005 $1,000,000, in the form of a certificate of deposit, wasrestricted. Pursuant to the terms of a letter agreement with Texas State Bank,the Bank, on January 31, 2005, applied the $1,000,000 cash collateral andall interest accrued thereon to the outstanding balance of the loan.

**NOTE 6.**             Investment Securities

Investmentsecurities consisted of the following (in thousands):

| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Corporate debt  securities                |       | 6,964                 |       |   | — |   |   |
| Federal  government and agency securities |       | 2,598                 |       |   | — |   |   |
|                                      |       | 9,562                 |       |   | — |   |   |

 

Unrealizedgains and losses at December 31, 2006 are as follows (in thousands):

| ** **                                | ** ** | **Amortized** | ** ** | **Gross Unrealized** | ** ** | **Fair Market** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **Cost**      | ** ** | **Gains**                 | ** ** | **(Losses)**         | ** ** | **Value** | ** ** |
| Corporate debt  securities                |       |          | $          | 6,964                     |       |                 |       | $ | — |   |   |   | $ | — |   |   |   | $ | 6,964 |   |   |
| Federal  government and agency securities |       |          | 2,598      |                      |       |                 | —     |   |   |   | — |   |   |   | 2,598 |   |   |
|                                      |       |          | $          | 9,562                     |       |                 |       | $ | — |   |   |   | $ | — |   |   |   | $ | 9,562 |   |   |
| Net unrealized loss                       |       |          |       |                      |       |                 |       |   |   |   | $ | — |   |   |   |   |   |   |

 

All of the debt securitiesowned by the Company at December 31, 2006 had maturities of less than oneyear.

**NOTE 7.**             Accrued Liabilities

Accruedliabilities consist of the following (in thousands):

| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Clinical trials        |       | $                     | 1,444      |   | $ | 447 |   |
| Accrued expenses       |       | 312                   |       | 289 |   |
| Compensation           |       | 618                   |       | 743 |   |
| Restructuring          |       | —                |       | 217 |   |
| Decommissioning  costs |       | —                |       | 73 |   |
| Severance              |       | 10                    |       | 250 |   |
| Other                  |       | 136                   |       | 59 |   |
|                   |       | $                     | 2,520      |   | $ | 2,078 |   |

 

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**NOTE 8.**          Notes Payable

On October 25, 2006, the Company entered into aloan and security agreement (the loan agreement) with Silicon Valley Bank andMerrill Lynch Capital. Under the loan agreement, the Company received capitalloan proceeds of $15,000,000 on October 31, 2006. The Company plans to usethe proceeds of the loan to fund its cash payment obligations to GenzymeCorporation under the amended license amendment described in Note 13 below andto support the Company’s strategic growth, late-stage clinical trials ofpicoplatin and general working capital needs. The term of the loan is 42months, maturing on April 1, 2010, with the first monthly principalpayment on November 1, 2006. The Company is required to pay a 7.67% fixedinterest rate on the outstanding principal balance plus a $1,350,000 additionalpayment on the maturity date of the loan. This additional payment will beaccreted to the note payable balance over the term of the loan using theeffective interest rate method and reflected as additional interest expense.Principal and interest paid on the note during the year ended December 31,2006 totaled $813,000. In connection with the loan agreement, the Companyissued five-year warrants to purchase an aggregate of 174,418 shares of commonstock at an exercise price of $4.30 per share. The fair value of the warrantsusing the Black-Scholes option-pricing model was approximately $611,000 basedupon assumptions of expected volatility of 112%, a contractual term of fiveyears, an expected dividend rate of zero and a risk-free rate of interest of4.75%. The portion of the loan proceeds allocable to the warrants is $540,000based on their relative fair value, which the Company recorded as additionaldiscount to notes payable. The total discount of $1,890,000 is amortized tointerest expense using an effective interest rate of 13.7%. All interestpayable under the loan agreement and the full amount of the additional paymentmust be paid upon any prepayment of the loan. The loan is secured by a firstlien on substantially all of the non-intellectual property assets of theCompany.

The loan agreement contains restrictions on theCompany’s ability to, among other things, dispose of certain assets, engage incertain mergers and acquisition transactions, incur indebtedness, create lienson assets, make investments and pay dividends or repurchase stock. The loanagreement also contains covenants requiring the Company to maintainunrestricted cash of $7,500,000 during the loan term and, not later thanDecember 31, 2007, to provide evidence of positive Phase II data for thepicoplatin drug development program and commence enrollment of patients in aPhase III trial for picoplatin. The loan contains events of default thatinclude, among other things, nonpayment of principal and interest or fees,breaches of covenants, material adverse changes, bankruptcy and insolvencyevents, cross defaults to other indebtedness, material judgments, inaccuracy ofrepresentations and warranties and events constituting a change of control. Theoccurrence of an event of default would increase the applicable rate ofinterest by 5% and could result in acceleration of the Company’s paymentobligations under the loan agreement. The Company is not aware of anycircumstances that indicate that an event of default is likely and, therefore,has not classified any portion of the non-current loan balance as current.

In connection with the Company’s 2001 purchase of theradiopharmaceutical manufacturing plant and other assets located in Denton,Texas, the Company assumed $6,000,000 principal amount of restructured debtheld by Texas State Bank, McAllen, Texas. The loan, which matured inJune 2006, was secured by the assets acquired in the transaction.Principal and interest paid on the note during the year ended December 31,2006 totaled $3,980,000.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Notespayable maturities as of December 31, 2006 are as follows (in thousands):

| **Year**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------|------------|------------|------------|------------|------------|
| 2007           |       | $          | 3,906      |       |
| 2008           |       | 4,218      |       |
| 2009           |       | 4,560      |       |
| 2010           |       | 2,950      |       |
|           |       | 15,634     |       |
| Less: discount |       | (1,753     | )          |
|           |       | $          | 13,881     |       |

 

**NOTE 9.**             Restructuring

In May and June 2005, the Companyrestructured its operations and reduced its workforce by approximately 50% inconnection with the implementation of its restructuring plan to refocus itsresources on the development of picoplatin and discontinue its STR developmentprogram. The employees terminated as part of the reduction of staff were nolonger with the Company at December 31, 2005 and did not provide futureservices to the Company. The Company incurred termination benefits charges oftotaling $892,000 related to the reduction in staff in May andJune 2005. Of this amount, $250,000 remained unpaid as ofDecember 31, 2005 and is included in accrued expenses in the consolidatedbalance sheet as of December 31, 2005. This amount was paid during 2006.The Company incurred additional non-employee charges totaling $612,000 relatedto the discontinuation of its STR clinical trials and the closure of itsradiopharmaceutical manufacturing plant and STR research facilities, primarilyconsisting of contract termination and decommissioning costs. The Companyrecorded additional charges of $237,000 for decommissioning costs during thethird and fourth quarters of 2005 due to anticipated increased waste disposalcosts at its radiopharmaceutical manufacturing plant in Denton, Texas andanticipated increased STR study finalization costs. Total non-employee chargestotaled $849,000. Of this amount, $217,000 remained unpaid as ofDecember 31, 2005 and is included in accrued expenses in the consolidatedbalance sheet as of December 31, 2005. This amount was paid during 2006.

In conjunction with the Company’s strategicrestructuring, in June 2005, the Company negotiated the early terminationof its STR-related supply agreement with the University of Missouri ResearchReactor facility group (MURR). The Company paid MURR a fee of $368,000 inconnection with such early termination. The Company also paid MURR $190,000 inminimum purchase requirements under the agreement in 2005. These two amountsare included in the non-employee charges of $612,000 discussed above.

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Thefollowing table summarizes the change in the restructuring accrual from initialrecognition through December 31, 2006: 

| **Description**               | ** ** | ** ** | ** ** | **Initial  Restructuring  Charge** | ** ** | **Adjustment of  Restructuing  Charge** | ** ** | **Adjusted  Restructuring  Charge** | ** ** | **Payment of  Restructuring  Obligations** | ** ** | **Accrued  Restructuring  Charge as of  December 31,  2005** | ** ** | **Payment of  Restructuring  Obligations** | ** ** | **Accrued  Restructuring  Charge as of  December 31,  2006** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Employee termination benefits |       |       | $          | 892,000                            |       |                                         |       | $                                   | —     |                                            |       |                                                                        | $          | 892,000                                         |       |                                                                        |       | $ | (642,000 | ) |   |   | $ | 250,000 |   |   |   | $ | (250,000 | ) |   |   | $ | — |   |   |
| Contract termination costs    |       |       | 378,000    |                               |       |                                         | (10,000    | )                                   |       |                                            | 368,000    |                                                                        |       |                                            | (366,000   | )                                                                           |       |   | 2,000 |   |   |   | (2,000 | ) |   |   | — |   |   |
| Other termination costs       |       |       | 234,000    |                               |       |                                         | 247,000    |                                |       |                                            | 481,000    |                                                                        |       |                                            | (266,000   | )                                                                           |       |   | 215,000 |   |   |   | (215,000 | ) |   |   | — |   |   |
| Sub-total                     |       |       | 612,000    |                               |       |                                         | 237,000    |                                |       |                                            | 849,000    |                                                                        |       |                                            | (632,000   | )                                                                           |       |   | 217,000 |   |   |   | (217,000 | ) |   |   | — |   |   |
| Total                         |       |       | $          | 1,504,000                          |       |                                         |       | $                                   | 237,000    |                                            |       |                                                                        | $          | 1,741,000                                       |       |                                                                        |       | $ | (1,274,000 | ) |   |   | $ | 467,000 |   |   |   | $ | (467,000 | ) |   |   | $ | — |   |   |

 

**NOTE 10.**      AssetImpairment Loss

In June 2005, the Company recognized an assetimpairment loss of $3,346,000 on certain facilities and equipment resultingfrom the Company’s decisions to terminate its STR program. The loss on theDenton manufacturing facility and related equipment was determined based on anappraisal study commissioned by the Company, as well as management reviews withthe assistance of outside commercial real estate brokers. The Company used afair value of $3,300,000 for the Denton facility in determining the impairmentloss. This valuation was the result of weighting the range of values in theappraisal study, which varied from $3,100,000 to $5,000,000. The loss on theequipment at the Seattle facility was determined based on estimates ofpotential sales values of used equipment. These impairment charges establishednew cost bases for the impaired assets, which are reported in Assets Held forSale in current assets and other non-current assets on the consolidated balancesheets as of December 31, 2005 and 2006, respectively. All equipment incurrent Assets Held for Sale was disposed of as of December 31, 2006.Given the inherent uncertainty of the timing of a sale of the Denton facility,the Company has classified this asset as non-current.

As of December 31, 2006, the Company reduced thecarrying value of Denton facility in non-current Assets Held for Sale based ona fair value of $2,800,000 and recognized additional impairment loss of$403,000. This valuation adjustment is based on the Company’s review of listingprices and completed sales of comparable properties in the region and theinterest of prospective buyers. The Company continues to actively seek a buyerfor the Denton facility.

Thefollowing table summarizes information related to the impairment charges:

| **Description**                                   | ** ** | ** ** | ** ** | **Impairment  Loss** | ** ** | **Impaired  Carrying  Value as of  June 30,  2005** | ** ** | **Disposals of  Assets** | ** ** | **Post  Impairment  Carrying Value  as of   December 31,  2005** | ** ** | **Disposals  of Assets** | ** ** | **Post  Impairment  Loss** | ** ** | **Post  Impairment  Carrying Value  as of   December 31,  2006** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------------------|------------|
| Equipment—Seattle, WA                        |       |       | $          | 155,000              |       |                                                               | $          | 45,000                        |       |                                                                                 | $          | (44,000                       | )          |                       |       | $                                                                                    | 1,000      |   |   |   | $ | (1,000 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Equipment—Manufacturing Facility, Denton, TX |       |       | 589,000    |                 |       | 183,000                                                            |       |                          | (101,000   | )                                                                                    |       |                          | 82,000     |                       |       |                                                                                 | (82,000    | ) |   |   | — |   |   |   | — |   |   |
| Manufacturing Facility—Denton, TX            |       |       | 2,602,000  |                 |       | 3,027,000                                                          |       |                          | —     |                                                                                 |       |                          | 3,027,000  |                       |       |                                                                                 | —     |   |   |   | (403,000 | ) |   |   | 2,624,000 |   |   |
| Total                                             |       |       | $          | 3,346,000            |       |                                                               | $          | 3,255,000                     |       |                                                                                 | $          | (145,000                      | )          |                       |       | $                                                                                    | 3,110,000  |   |   |   | $ | (83,000 | ) |   |   | $ | (403,000 | ) |   |   | $ | 2,624,000 |   |   |

 

 

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**NOTE 11.**      Leases

The Company leasesthe office and laboratory space for its principal locations under variousleasing arrangements. In July 2006, Company entered into a five-year leasefor office space and laboratory space in South San Francisco. The Companyrelocated its corporate headquarters to these facilities inSeptember 2006. Base rental payments under this lease are subject to annualadjustment based on disbursements for tenant improvements and increases in theConsumer Price Index in the San Francisco metropolitan market (CPISF). Thefirst adjustment in annual rent will occur in July 2007. Additional rentalpayments under this lease are paid based on the Company’s share of operatingexpenses of the project in which the leased facilities are located.

Total rent expenseunder non-cancelable operating leases was approximately $958,000, $744,000 and$673,000 for 2006, 2005 and 2004, respectively. The Company recognizes rentexpense on a straight-line basis over the term of each lease, including anyperiods of free rent.

Minimum lease payments undernon-cancelable operating leases as of December 31, 2006 are as follows (inthousands):

| **Year**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|
| 2007                          |       | $          | 1,102      |       |
| 2008                          |       | 1,082      |       |
| 2009                          |       | 857        |       |
| 2010                          |       | 542        |       |
| 2011                          |       | 316        |       |
| Thereafter                    |       | —     |       |
| Total minimum lease  payments |       | $          | 3,899      |       |

 

**N**OTE 12.      Shareholders’ Equity

*Common Stock Transactions:*   In connection with the 2006 equityfinancing described in Note 4 above, the Company issued to a group ofinstitutional and other accredited investors an aggregate of 15,491,000 sharesof common stock at a cash purchase price of $4.20 per share. Investors in thefinancing also received five-year warrants to purchase an aggregate of4,643,000 shares of common stock at an exercise price of $4.62 per share.Concurrent with the closing of the financing, the Company issued an aggregateof 1,591,000 shares of common stock to the holders of its Series Bpreferred stock upon conversion of the outstanding Series B preferredshares (the Series B shares).

As part of the 2006 equity financing, onFebruary 1, 2006, the Company received a $3,460,000 bridge loan from investorsin the 2006 equity financing. Pursuant to the bridge loan, the Company issuedconvertible promissory notes in the principal amount of the loan and five-yearwarrants to purchase an aggregate of 411,906 shares of common stock at anexercise price of $4.62 per share. The fair value attributable to the warrantsusing the Black-Scholes option-pricing model was approximately $1,647,000 basedupon assumptions of expected volatility of 114%, a contractual term of fiveyears, an expected dividend rate of zero and a risk-free rate of interest of4.5%. The Company recorded the warrants’ fair value as a discount to thepromissory notes payable. The convertibility of the promissory notes gave riseto a beneficial conversion feature, which the Company recorded as additionaldiscount on the promissory notes of approximately $1,813,000. The proceeds ofthe bridge loan were used for working capital pending closing of the 2006equity financing on April 26, 2006. The convertible promissory notesprovided for an 

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interest rate of 8% perannum and, at the closing of the 2006 equity financing, the principal amount ofthe notes, together with approximately $63,000 of accrued interest thereon,automatically converted, at a conversion rate of $4.20 per share, into anaggregate of 838,976 shares of common stock.

On September 22, 2006, the Company’s shareholdersapproved a one-for-six reverse split of the Company’s outstanding common stock,which became effective at the close of business that day. As a result of thereverse split, every six shares of Company common stock outstanding at theeffective time automatically were combined into one outstanding share ofCompany common stock. The reverse stock split did not change the number ofauthorized shares of Company common stock designated in the Company’s articlesof incorporation, nor did it change the par value of the Company’s commonstock. In lieu of fractional shares, shareholders are entitled to receive anamount in cash equal to the value of their fractional shares based on $0.57,the closing price per share of the Company’s common stock on September 22,2006.

InMarch 2005, the Company raised approximately $3,812,000 in net proceedsthrough the sale in a private placement (the 2005 financing) of 553,333 sharesof common stock. In connection with the 2005 financing, the Company issuedfive-year warrants to purchase an aggregate of 221,333 shares of common stockat an exercise price of $12.00 per share. In addition, the placement agent inthe 2005 financing was granted a warrant, on the same terms as those receivedby the purchasers in that transaction, for 33,200 shares of common stock. TheCompany has registered the shares of common stock issued in the 2005 financing,including the shares of common stock issuable upon exercise of the relatedwarrants, with the SEC.

InApril 2004, the Company issued 40,618 shares of common stock valued at$1,000,000 as a partial payment to purchase an exclusive license to develop,manufacture and commercialize picoplatin, a platinum-based anti-cancer agent.The 40,618 shares of common stock issued in this licensing arrangement havebeen registered with the SEC.

InFebruary 2004, the Company raised approximately $9,000,000 in net proceedsthrough the sale in a private placement (the 2004 financing) of 307,500 sharesof common stock. In connection with the 2004 financing, the Company issuedfive-year warrants to purchase an aggregate of 153,750 shares of common stockat $42.00 per share. The 307,500 shares of common stock issued in the 2004financing, and the shares of common stock issuable upon exercise of thewarrants related thereto, have been registered with the SEC.

During 2006, theCompany received approximately $19,000 in net proceeds from the issuance ofapproximately 6,100 shares of common stock related to the exercises of employeestock options.

During 2005, theCompany received approximately $44,000 in net proceeds from the issuance ofapproximately 15,600 shares of common stock related to the exercises ofemployee stock options.

During 2004, theCompany generated approximately $800,000 in net proceeds from the issuance ofapproximately 136,200 shares of common stock related to the exercises ofemployee stock options.

*Preferred Stock Transactions.**  *During2003, the Company issued 1,575 shares of a newly created class of Series BConvertible Preferred Stock with attached warrants to buy 105,000 shares ofcommon stock. As described above, in connection with the 2006 equity financing,the 1,575 shares of Series B shares were converted into 1,591,000 sharesof common stock in April 2006. The Series B shares received by theCompany were retired and cancelled and are not reissuable. The Company had205,340 shares of Series 1 

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Convertible Exchangeable Preferred Stock (Series 1 preferredstock) outstanding at December 31, 2006. Holders of the Series 1preferred stock are entitled to receive an annual cash dividend of $2.4375 pershare if declared by the Board, payable semi-annually on June 1 andDecember 1. Dividends are cumulative. Each share of Series 1 preferredstock is convertible into 0.19 shares of common stock, subject to adjustment incertain events. The Series 1 preferred stock is redeemable at the optionof the Company at $25.00 per share. Holders of Series 1 preferred stockhave no voting rights, except in limited circumstances. Dividends of $500,000were paid in each of the years 2006, 2005 and 2004, respectively.

The Company’sboard of directors may, without further action by the shareholders, issuepreferred stock in one or more series and fix the rights and preferencesthereof, including dividend rights, dividend rates, conversion rates, votingrights, terms of redemption, redemption price or prices, liquidationpreferences and the number of shares constituting any series or thedesignations of such series.

*Shareholder Rights Plan.**  *TheCompany’s Shareholder Rights Plan, and all preferred share purchase rightsissued thereunder, expired on April 10, 2006.

*Stock Options:*   At December 31, 2006, theCompany’s 2004 Incentive Compensation Plan (the 2004 Plan) was the onlycompensation plan under which options were available for grant. The Company’s1991 Stock Option Plan for Non-Employee Directors (the Directors Plan) wasterminated on March 31, 2005, and no further options can be granted underthat plan. The Company’s 1994 Stock Option Plan (the 1994 Plan) was terminatedon February 17, 2004 and no further options can be granted under thatplan. The 2004 Plan, as amended and restated on September 13, 2006,authorizes the Company’s board or a committee appointed by the board to grantoptions to purchase a maximum aggregate of 4,166,666 shares of common stock, ofwhich 2,500,000 shares are subject to shareholder approval at the 2007 annualmeeting of shareholders. The 2004 Plan allows for the issuance of incentivestock options and nonqualified stock options to employees, officers, directors,agents, consultants, advisors and independent contractors of the Company,subject to certain restrictions. All option grants expire ten years from thedate of grant, except in the event of earlier termination of employment orservice. Option grants for employees with less than one year of servicegenerally become exercisable at a rate of 25% after one year from the grantdate with the balance vesting at a rate of 1/36th per month over the followingthree years. Option grants for employees with more than one year of service orfor employees receiving promotions become exercisable at a rate of 1/48th permonth over the following four years. As of December 31, 2006, there were1,956,115 shares of common stock available for issuance as new option awardsunder the 2004 Plan, subject to shareholder approval at the 2007 annual meetingof shareholders as described below***.***Althoughno Company securities are available for issuance under the Directors Plan orthe 1994 Plan, options granted prior to termination of those plans continue ineffect in accordance with their terms.

OnSeptember 13, 2006, the Company issued stock option grants to employeesand consultants that are subject to shareholder approval at the Company’s 2007annual meeting of an increase in the number of shares authorized for issuanceunder the 2004 Plan. If the shareholders do not approve an increase in thenumber of shares authorized for issuance under the 2004 Plan, these grants willimmediately be cancelled after the 2007 annual meeting of shareholders. Noportion of any options granted subject to shareholder approval is exercisableuntil the date on which the shareholders approval is received. If shareholderapproval is obtained, these grants would be exercisable to the extent vested.The Company has not recognized compensation expense for these grants, because agrant date as defined in SFAS 123R has not occurred. This is because they arecontingent upon shareholder approval, which cannot be assured.

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In May 2000,the Company amended the 1994 Plan to provide that an employee will have twoyears to exercise the vested portion of an option upon retirement from theCompany, whereas an employee previously had three months to exercise suchoption. Compensation expense equal to the intrinsic value of an employee’soption at the modification date will be recorded for any employees that receivean extension of their options upon retirement. The intrinsic value at themodification date for the options subject to the modifications that wereoutstanding at December 31, 2006 totaled approximately $119,000.

*Restricted Stock.*   The Company adopted a RestrictedStock Plan (the Restricted Stock Plan) in 1991, under which 400,000 shares wereauthorized for issuance. Under the Restricted Stock Plan, restricted stockcould be granted or sold to selected employees, officers, agents, consultants,advisors and independent contractors of the Company. The Restricted Stock Planwas terminated by the Board of Directors in June 2006.

*Warrants.*   In connection with the 2006 equityfinancing, the Company issued five-year warrants to purchase an aggregate of4,230,951 shares of common stock at an exercise price of $4.62 per share. Thewarrants became exercisable on April 26, 2006 and, thereafter, areexercisable at any time during their term. In payment of placement agent feesfor the 2006 equity financing, the Company issued five-year warrants topurchase 139,286 shares of common stock at an exercise price of $4.62 pershare. In connection with the bridge notes that were issued as part of the 2006equity financing, the Company issued five-year warrants to purchase anaggregate of 411,906 shares of common stock at an exercise price of $4.62 pershare. The warrants became exercisable on February 1, 2006 and,thereafter, are exercisable at any time during their term. The shares of commonstock issuable upon exercise of the 2006 financing warrants have beenregistered with the SEC.

In connection withan agreement in 2006 for corporate communications services, the Company issueda two-year warrant to purchase an aggregate of 1,667 shares of common stock atan exercise price of $3.66 per share. The Company recorded an expense in theamount of approximately $3,400 for the fair value of the warrant on the datethe services were completed. Based upon the Black-Scholes option pricing model,the grant date fair value of the warrant was $2.06 per share using assumptionsof expected volatility of 105%, contractual term of two years, expecteddividend rate of zero and a risk-free interest rate of 4.8%. The warrant becameexercisable upon issuance and is exercisable at any time during its term.

In connection withthe loan and security agreement with Silicon Valley Bank and Merrill LynchCapital executed on October 25, 2006, the Company issued five-yearwarrants to purchase an aggregate of 174,418 shares of common stock at anexercise price of $4.30 per share. The fair value of the warrants wasdetermined to be approximately $611,000 using the Black-Scholes option pricingmodel with assumptions of expected volatility of 112%, contractual term of fiveyears, expected dividend rate of zero and a risk-free interest rate of 4.8%.Based on this fair value, approximately $540,000 was ascribed to the warrantsand treated as a discount against the $15,000,000 loan obtained from SiliconValley Bank and Merrill Lynch Capital. The warrants became exercisable uponissuance and are exercisable at any time during their term.

In connection withthe 2005 financing, the Company issued five-year warrants to purchase anaggregate of 221,333 shares of common stock at an exercise price of $12.00 pershare. The warrants became exercisable on September 3, 2005 and,thereafter, are exercisable at any time during their term. In payment ofplacement agent fees for the 2005 financing, the Company issued a five-yearwarrant to purchase 33,200 shares of common stock at an exercise price of$12.00 per share. The warrant contains provisions requiring the adjustment ofthe exercise price and number of shares issuable if the Company sells (otherthan in connection with certain permitted transactions, such as strategiccollaborations and 

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acquisitions approved by the board) shares of common stock at aprice lower than the then-current exercise price of the warrants. The shares ofcommon stock issuable upon exercise of the 2005 financing warrants have been registeredwith the SEC.

In connection withthe 2004 financing, the Company issued five-year warrants to purchase anaggregate of 153,750 shares of common stock, at an exercise price of $42.00 pershare. The warrants became exercisable on February 23, 2004 and,thereafter, are exercisable at any time during their term. The warrants containprovisions requiring the adjustment of the exercise price and number of sharesissuable if the Company sells (other than in connection with certain permittedtransactions, such as strategic collaborations and acquisitions approved by theboard) shares of common stock at a price lower than the then-current exerciseprice of the warrants. The warrants are redeemable at the election of theCompany at any time after March 24, 2006, if the volume-weighted averageprice of the underlying common stock for each trading day over a period of 20consecutive trading days is equal to or greater than $63.00 per share, subjectto adjustment. The shares of common stock issuable upon exercise of the 2004financing warrants have been registered with the SEC. In payment of placementagent fees for the 2004 financing, the Company issued three-year warrants topurchase an aggregate of 5,833 shares of common stock at an exercise price of$33.24 per share. The Company recorded a charge to general and administrativeexpense of $118,000 for the fair value of the warrants onFebruary 23, 2004. Based upon the Black-Scholes option-pricing model,the fair value of the warrants was $20.28 per share using assumptions ofexpected volatility of 124%, contractual terms of three years, expecteddividend rate of zero and a risk-free rate of interest of 2.2%.

In connection with itsagreement to purchase the manufacturing facility in Denton, Texas, the Companyon April 19, 2001, issued to International Isotopes Inc. a three-yearwarrant to purchase up to 133,333 shares of common stock at a purchase price of$60.00 per share. The warrant was valued at $9.66 per share using an optionpricing model with assumptions of expected volatility of 125%, contractual termof three years, expected dividend rate of zero and a risk-free rate of interestof 4.6%. This warrant expired April 19, 2004.

**NOTE 13.**      Acquisition of Picoplatin

In April 2004, the Company acquired fromAnorMED, Inc. the worldwide exclusive rights, excluding Japan, to develop,manufacture and commercialize picoplatin, a platinum-based anti-cancer agent.AnorMED, Inc. was acquired by Genzyme Corporation in November 2006.Under the terms of the agreement, the Company paid a one-time upfront milestonepayment of $1,000,000 in its common stock and $1,000,000 in cash. The agreementalso initially provided for $13,000,000 in development and commercializationmilestones, payable in cash or a combination of cash and common stock, and aroyalty rate of up to 15% on net product sales after regulatory approval. Thelicense agreement was amended on September 18, 2006 to modify several keyfinancial terms and expand the licensed territory to include Japan, therebyproviding the Company worldwide rights. In consideration of the amendment, theCompany paid Genzyme $5,000,000 in cash on October 12, 2006 and will payGenzyme an additional $5,000,000 in cash by March 31, 2007. The amendmenteliminates all development milestone payments to Genzyme. Genzyme remainsentitled to receive up to $5,000,000 in commercialization milestones upon theattainment of certain levels of annual net sales of picoplatin after regulatoryapproval. The amendment also reduces the royalty payable to Genzyme to amaximum of 9% of annual net product sales. In addition, the amendment reducesthe sharing of sublicense revenues for any sublicenses entered into during thefirst 

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

year following theamendment and eliminates the sharing of sublicense revenues with Genzyme on andafter September 18, 2007.

The Company accounted for this transaction byrecording a $10,000,000 increase in Licensed Products and the recognition of acurrent liability of $10,000,000. The Company concluded that no change in theexpected life of the intangible asset occurred and will, therefore, amortizethe increase in Licensed Products over the same amortization period used forthe original Licensed Products amount. The Company recognized $306,000 ofadditional amortization expense during the year ended December 31, 2006 asa result of this increase in Licensed Products.

Licensed Products consistsof the picoplatin amortizable intangible with a gross amount of $12,000,000 andaccumulated amortization of $764,000 and $292,000 at December 31, 2006 and2005, respectively. Licensed Products is amortized on a straight-line basisover 12 years. The estimated annual amortization expense for Licensed Productsis approximately $1,215,000 for each of the years 2007 through 2011.

**NOTE 14.**      Revenues

The Company didnot record any revenues during 2006.

Revenue in 2005was $15,000, which consisted primarily of royalty payments received inconnection with licensed intellectual property.

Revenue in 2004 was $1,015,000 and consisted primarily of$1,000,000 from milestone payments received from Boston Scientific Corporationin connection with certain intellectual property licensed to Boston ScientificCorporation in 2003.

**NOTE 15.**      Federal Income Taxes

Temporarydifferences and carryforwards giving rise to deferred tax assets (liabilities)were as follows (in thousands):

| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| **Deferred Tax Assets (Liabilities):** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net operating  loss carryforwards                     |       | $                     | 21,183     |   | $ | 47,008 |   |
| Research and  experimentation credit carryforwards    |       | 445                   |       | 8,883 |   |
| Capitalized research  and development                 |       | 11,591                |       | 11,709 |   |
| Property and  equipment                               |       | 1,757                 |       | 1,694 |   |
| Other                                                 |       | 711                   |       | 718 |   |
| Net deferred tax  assets                              |       | 35,687                |       | 70,012 |   |
| Deferred tax  assets valuation allowance              |       | (35,687               | )          | (70,012 | ) |
| Net deferred income  taxes                            |       | $                     | —     |   | $ | — |   |
|                                                       |            |                       |            |  |  |  |  |  |  |

 

The Company has established a valuation allowanceequal to the amount of its net deferred tax assets because the Company has nothad taxable income since its inception and significant uncertainty existsregarding the ultimate realization of its deferred tax assets. Accordingly, notax benefits have been recorded in the accompanying statements of operations.The valuation allowance decreased by $34,325,000 in 2006, and increased by$5,251,000 in 2005.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In April 2006, the Company experienced asignificant change to its capital structure which resulted in an ownershipchange, as defined under Section 382 of the IRC. Consequently, the amountof net operating loss carryforwards and research and experimentation creditcarryforwards available to be used in future years will be limited under IRCSections 382 and 383. This limitation will result in the loss of approximately$93,300,000 (approximately $31,700,000 in tax benefits) of the Company’s netoperating loss carryforwards and $9,100,000 of the research and development creditcarryforwards. Accordingly, the deferred tax asset and related valuationallowance associated to these carryforwards were reduced in 2006 byapproximately $40,800,000.

The Company has net operating loss carryforwards ofapproximately $62,300,000 (net of the impact of the above referenced change inownership under IRC Section 382), which expire from 2007 through 2026.Research and experimentation credits expire from 2007 to 2026. Future changesin the Company’s ownership could result in additional limitations on theCompany’s ability to utilize its remaining net operating loss carryforwards andresearch and experimentation credit carryforwards.

Approximately $21,159,000of the Company’s net operating loss carryforwards at December 31, 2006,result from deductions associated with the exercise of non-qualified employeestock options, the realization of which would result in a credit toshareholders’ equity.

**NOTE 16.**      Related Party Transactions

As a consequence of theCompany’s 2006 equity financing, entities affiliated with MPM CapitalManagement (MPM) acquired beneficial ownership of 7,744,000 common shares, orapproximately 31.5% of the Company’s common stock outstanding immediatelyfollowing the financing. Entities affiliated with Bay City Capital ManagementIV LLC (BCC) acquired beneficial ownership of 4,643,000 common shares, orapproximately 19.5% of the common shares outstanding immediately following the2006 equity financing. Two Company directors, Fred B. Craves and Carl S.Goldfischer, are managing directors of BCC and possess capital and carriedinterests in the BCC entities that participated in the 2006 equity financing.The Company has agreed, for as long as MPM owns at least 10% of the shares ofcommon stock and warrants purchased in the financing, to use its best effortsto cause one person designated by MPM and one person designated by mutualagreement of MPM and BCC to be nominated and elected to the Company’s board ofdirectors. Nicholas J. Simon III, a representative of MPM, was appointed to theboard of directors on April 26, 2006. Mr. Simon is a general partnerof certain of the MPM entities that participated in the financing and possessescapital and carried interests in those entities.

**NOTE 17.**      401(K) Plan

The Company sponsors a 401(K) plan that covers substantiallyall employees. At its own discretion, the Company may make contributions to theplan on a percentage of participants’ contributions. The Company madecontributions of approximately $9,000, $12,000 and $11,000 for the years endedDecember 31, 2006, 2005, and 2004, respectively. The Company has no otherpost-employment or post-retirement benefit plans.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 18.**      Unaudited Quarterly Data

The following table presents summarizedunaudited quarterly financial data (in thousands, except per share data):

| ** **                            | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2006**                              | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Revenues                              |       | $                  | —     |                | $          | —             |       | $                   | —     |   | $ | — |   |
| Operating  expenses                   |       | 3,999              |       | 5,211               |       | 5,555              |       | 6,469               |       |
| Net loss                              |       | (5,799             | )          | (6,488              | )          | (4,886             | )          | (6,121              | )          |
| Net loss  applicable to common shares |       | (5,924             | )          | (6,613              | )          | (5,011             | )          | (6,246              | )          |
| Net loss per  common share:           |       |               |       |                |       |               |       |                |       |
| Basic                                 |       | (0.51              | )          | (0.37               | )          | (0.22              | )          | (0.27               | )          |
| Diluted                               |       | (0.51              | )          | (0.37               | )          | (0.22              | )          | (0.27               | )          |
| **2005**                              | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Revenues                              |       | $                  | —     |                | $          | 2                  |       | $                   | 2          |   | $ | 11 |   |
| Operating  expenses                   |       | 5,106              |       | 8,887               |       | 3,094              |       | 3,988               |       |
| Net loss                              |       | (5,076             | )          | (8,853              | )          | (3,078             | )          | (3,990              | )          |
| Net loss  applicable to common shares |       | (5,201             | )          | (8,978              | )          | (3,203             | )          | (4,115              | )          |
| Net loss per  common share:           |       |               |       |                |       |               |       |                |       |
| Basic                                 |       | (0.98              | )          | (1.57               | )          | (0.56              | )          | (0.72               | )          |
| Diluted                               |       | (0.98              | )          | (1.57               | )          | (0.56              | )          | (0.72               | )          |

 

Note:  Net loss per common share, basic and diluted,may not add to net loss per common share for the year due to rounding.

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***Item 9.****                         **CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE*

Not Applicable.

***Item 9A.****                 **CONTROLS AND PROCEDURES*

**Evaluation ofDisclosure Controls and Procedures**

Under the supervision and with the participation of the Company’smanagement, including the Company’s Chairman and Chief Executive Officer andthe Chief Financial Officer, the Company has evaluated the effectiveness anddesign of its disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e)) as of the end of the period covered bythis report, and, based on their evaluations, the Chairman and Chief ExecutiveOfficer and the Chief Financial Officer have concluded that these disclosurecontrols and procedures were effective as of December 31, 2006, inensuring that all material information required to be disclosed in the reportsthat the Company files or submits under the Securities Exchange Act of 1934, asamended, have been made known to them in a timely fashion.

**Management’sAnnual Report on Internal Control over Financial Reporting**

Management is responsible for establishing and maintainingadequate internal control over financial reporting for the Company and for theassessment of the effectiveness of internal control over financial reporting.The Company’s internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with accounting principles generally accepted in the United Statedof America. The Company’s internal control over financial reporting includesthose policies and procedures that (i) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the Company’s assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that the Company’sreceipts and expenditures are being made only in accordance with authorizationsof the Company’s management and directors; and (iii) provide reasonableassurance regarding the prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies and procedures may deteriorate.

Management conducted an evaluation of the effectiveness of thesystem of internal control over financial reporting based on the framework inInternal Control Integrated Framework issued by the Committee SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2006. Management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2006 has been audited by KPMG LLP, a registered independentpublic accounting firm, as stated in their report below.

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**Report of Independent Registered Public Accounting Firm**

The Board ofDirectors and ShareholdersPoniard Pharmaceuticals, Inc.:

We have auditedmanagement’s assessment, included in the accompanying Management’s AnnualReport on Internal Control Over Financial Reporting, that PoniardPharmaceuticals, Inc. maintained effective internal control over financialreporting as of December 31, 2006, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).Poniard Pharmaceuticals, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’s assessment that PoniardPharmaceuticals, Inc. maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all material respects,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, PoniardPharmaceuticals, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

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We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedbalance sheet of Poniard Pharmaceuticals, Inc. and subsidiary as of December31, 2006 and 2005, and the related consolidated statements of operations, cashflows and shareholders’ equity and comprehensive income for each of the yearsin the three-year period ended December 31, 2006, and our report dated March 15,2007, expressed an unqualified opinion on those consolidated financialstatements.

/s/ KPMG LLP

Seattle, WashingtonMarch 15, 2007

**Changes in internal control over financial reporting**

There have been no changes in the Company’s internal control overfinancial reporting that occurred during the Company’s fourth fiscal quarterthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

***Item 9B.******                 ******OTHER INFORMATION***

Not Applicable.

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**PART III**

***Item 10.****                   DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT*

(a)   *Directors and AuditCommittee*.   The information required by thisitem is incorporated herein by reference to the sections captioned “Election ofDirectors” and “Board of Directors and Corporate Governance” in the Company’sdefinitive Proxy Statement for the 2007 Annual Meeting of Shareholders to beheld on June 14, 2007, to be filed with the Securities and ExchangeCommission, or the Commission, pursuant to Regulation 14A not later than 120days after December 31, 2006.

(b)   *Executive Officers*.   Information with respect to theCompany’s executive officers is set forth below.

| **Name**                 | ** ** | ** ** | ** ** | **Age** | ** ** | **Position with the Company**                               | ** ** |
|--------------------------|------------|------------|------------|---------|------------|----------------------------------------------------------------------------|------------|
| Gerald McMahon, PhD |       |       | 52         |    |       | Chairman, President and Chief Executive  Officer                           |       |
| Caroline M. Loewy        |       |       | 40         |    |       | Chief Financial Officer                                                    |       |
| David A. Karlin, M.D.    |       |       | 63         |    |       | Senior Vice President, Clinical  Development & Regulatory Affairs |       |
| Anna L. Wight, JD        |       |       | 52         |    |       | Vice President, Legal and Secretary                                        |       |
| Cheni Kwok, PhD     |       |       | 38         |    |       | Vice President, Business Development                                       |       |

 

**Business Experience**

*Gerald McMahon, PhD*,was appointed Chief ExecutiveOfficer of the Company in May 2004 and Chairman of the Board of Directorsin June 2004. Dr. McMahon was appointed President of the Company onJune 15, 2005. Previously, he was President of SUGEN, Inc., abiopharmaceutical company focused on the discovery and development of noveltargeted small-molecule drugs. At SUGEN, Dr. McMahon played a key role inthe discovery and development of several innovative cancer products, includingSutent®, a multi-targeted protein kinase inhibitor for the treatment ofadvanced cancers, now in Phase III trials with Pfizer Inc. SUGEN was acquiredby Pharmacia Corp. in 1999, which subsequently was acquired by Pfizer in 2003.Prior to his role at SUGEN, which he joined in 1993, Dr. McMahon heldseveral research and development management positions at Sandoz Pharmaceuticals(now Novartis), where his responsibilities included the establishment ofexternal collaborations and the development of corporate alliances within theUnited States and Europe. Dr. McMahon has contributed to more than 100scientific publications and was a Staff Scientist and Principal Investigator atthe Massachusetts Institute of Technology and Tufts University School ofMedicine early in his career. He holds a B.S. in Biology and a PhD inBiochemistry from Rensselaer Polytechnic Institute.

*Caroline M. Loewy*wasappointed Chief Financial Officer in July 2006. She initially joined theCompany in June 2006 as Executive Vice President of Strategic Planning.Ms. Loewy has served in a business and financial consulting capacity tobiotechnology companies since 2004. Prior thereto, she was Executive Director,Equity Research at Morgan Stanley, Inc. from March 2000 toJune 2004, where she covered large cap biotechnology stocks. Previously,she was with Prudential Securities, first as an associate capital goods analystin San Francisco from 1993 to 1996 and then as a senior biotechnology analystin New York from 1996 to 2000. Ms. Loewy holds an M.B.A. from CarnegieMellon, Graduate School of Business and a B.A. in economics from the Universityof California, Berkeley.

*David A. Karlin, M.D.*, joined the Company as Senior VicePresident of Clinical Development and Regulatory Affairs in July of 2005.Prior thereto, Dr. Karlin served as Vice President of Clinical Research atCellegy Pharmaceuticals, Inc. from 2002 to 2005. Dr. Karlin’sexperience in the biotech and pharmaceutical industry also includes positionsas Vice President of Clinical Development for Genteric, Inc., a privatelyheld company specializing in gene therapy during 2002, and Senior Medical 

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Director at Matric Pharmaceuticals, Inc., an oncologytherapeutics development company (1991 to 2001). Dr. Karlin has alsoserved as Vice President for Clinical Research and Medical Director at SciClonePharmaceuticals, Inc. from 1995 to 1999 and held various positions atSyntex Corporation, including Director of Medical Research, from 1986 to 1995.Before joining the pharmaceutical industry, Dr. Karlin was an associateprofessor at Temple University School of Medicine and an assistant professor atthe University of Texas M.D. Anderson Hospital and Tumor Institute. He receivedhis M.D. from the University of Chicago and completed his residency in InternalMedicine at the University of Michigan and a fellowship in Gastroenterology andGastrointestinal Oncology at the University of Chicago. He holds a B.S. inBiology from the University of Illinois.

*Anna Lewak Wight, JD*, wasappointed Vice President, Legal and Secretary in September 2001. Prior thereto,she served as Director of Intellectual Property since joining the Company in1994. Ms. Wight previously was a partner in the law firm ofMorrison & Foerster, where she managed their Seattle intellectualproperty practice. Ms. Wight also was a partner in the intellectualproperty law firm of Harness, Dickey and Pierce in Michigan, where sheestablished and chaired the Biotechnology and Medical Arts Group.Ms. Wight received a JD from Wayne State University Law School and an MSfrom the Genetics Program at Michigan State University.

*Cheni Kwok, PhD*,joinedthe Company as Vice President, Business Development in July 2006. Priorthereto, she was Director, Business Development at Celera Genomics, a divisionof Applera Corporation engaged in the discovery and development of targetedtherapeutics for cancer, autoimmune and inflammatory disease, from 2004 throughJune 2006. From 2000 to 2004, Dr. Kwok served in various businessdevelopment positions, including as Associate Director, Business Development atExelixis, Inc., a publicly held drug discovery company. Dr. Kwokreceived a bachelor’s degree in biotechnology from Imperial College of Science,Technology and Medicine, University of London, U.K. and a PhD in humanmolecular genetics from the University of Cambridge, U.K.

(c)   *Compliance withSection 16(a) of the Exchange Act*.   The information required by thisitem is incorporated herein by reference to the section captioned“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’sdefinitive Proxy Statement for the 2007 Annual Meeting of Shareholders to beheld June 14, 2007, to be filed with the Commission pursuant to Regulation14A not later than 120 days after December 31, 2006.

(d)   *Code ofEthics.**  *The information required by thisitem is incorporated herein by reference to the section captioned “Board ofDirectors and Corporate Governance” in the Company’s definitive Proxy Statementfor the 2007 Annual Meeting of Shareholders to be held June14, 2006, to befiled with the Commission pursuant to Regulation 14A not later than 120 daysafter December 31, 2006.

***Item 11.****                   EXECUTIVECOMPENSATION*

The information required by this item is incorporated herein byreference to the sections captioned “Executive Compensation” and “Board ofDirectors and Corporate Governance—Compensation Committee Interlocks andInsider Participation” in the Company’s definitive Proxy Statement for the 2007Annual Meeting of Shareholders to be held June 14, 2007, to be filed withthe Commission pursuant to Regulation 14A not later than 120 days afterDecember 31, 2006.

***Item 12.****                   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS*

The information required by this item is incorporated herein byreference to the sections captioned “Security Ownership of Certain BeneficialOwners and Management” and “Executive Compensation-Equity Compensation PlanInformation” in the Company’s definitive Proxy Statement for the 2007 Annual 

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Meeting of Shareholders to be heldJune 14, 2007, to be filed with the Commission pursuant to Regulation 14Anot later than 120 days after December 31, 2006.

***Item 13.****                   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS*

The information required by this item is incorporated herein byreference to the sections captioned “Certain Relationships and RelatedTransactions with Management” and “Board of Directors and Corporate Governance”in the Company’s definitive Proxy Statement for the 2007 Annual Meeting ofShareholders to be held June 14, 2007, to be filed with the Commissionpursuant to Regulation 14A not later than 120 days after December 31,2006.

***Item 14.****                   PRINCIPALACCOUNTING FEES AND SERVICES*

The information required by this item is incorporatedherein by reference to the sections captioned “Independent Registered PublicAccounting Firm” and “Ratification of Appointment of Independent RegisteredPublic Accounting Firm”in the Company’s definitive Proxy Statement for the 2007 Annual Meeting ofShareholders to be held June 14, 2007, to be filed with the Commissionpursuant to Regulation 14A not later than 120 days after December 31,2006.

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**PART IV**

***Item 15.****                   EXHIBITS,FINANCIAL STATEMENT SCHEDULES*

(a)   (1)    FinancialStatements—See Index to Financial Statements.

(2)   Financial Statement Schedules—Not applicable.

(3)   Exhibits—See Exhibit Index filedherewith.

(b)   Exhibits—See Exhibit Index filed herewith.

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**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|        | PONIARD  PHARMACEUTICALS, INC. |
|--------|--------------------------------|
|   | (Registrant)                   |
|   | /s/ CAROLINE  M. LOEWY         |
|   | Caroline M. Loewy              |
|   | Chief Financial Officer        |

 

Date:March 15, 2007

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and as ofthe dates indicated:
| /s/ GERALD MCMAHON         |   | Chairman, President and      |   | March 15,  2007 |
|----------------------------|--------|------------------------------|--------|----------------------|
| Gerald McMahon             |   | Chief Executive Officer      |   |                 |
| /s/ FRED  B. CRAVES        |   | Director                     |   | March 15, 2007  |
| Fred B. Craves             |   |                         |   |                 |
| /s/ E.  ROLLAND DICKSON    |   | Director                     |   | March 15, 2007  |
| E. Rolland Dickson         |   |                         |   |                 |
| /s/ CARL  S. GOLDFISCHER   |   | Director                     |   | March 15, 2007  |
| Carl S. Goldfischer        |   |                         |   |                 |
| /s/ ROBERT  M. LITTAUER    |   | Director                     |   | March 15, 2007  |
| Robert M. Littauer         |   |                         |   |                 |
| /s/ DAVID  R. STEVENS      |   | Director                     |   | March 15, 2007  |
| David R. Stevens           |   |                         |   |                 |
| /s/ NICHOLAS  J. SIMON III |   | Director                     |   | March 15, 2007  |
| Nicholas J. Simon III      |   |                         |   |                 |
| /s/ RONALD  A. MARTELL     |   | Director                     |   | March 15, 2007  |
| Ronald A. Martell          |   |                         |   |                 |
| /s/ MICHAEL  K. JACKSON    |   | Principal Accounting Officer |   | March 15, 2007  |
| Michael K. Jackson         |   |                         |   |                 |

 

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**EXHIBITINDEX**
| Exhibit | ** ** | **Description**                                                                                                                                                                                                                        | ** ** | ** ** |
|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1     |       | Amended and Restated Articles of Incorporation, as amended  February 7, 2007                                                                                                                                                      |       | (N)        |
| 3.2     |       | Restated Bylaws,  as amended March 28, 2006                                                                                                                                                                                       |       | (V)        |
| 10.1    |       | Restated 1994  Stock Option Plan(‡)                                                                                                                                                                                               |       | (F)        |
| 10.2    |       | 1991 Stock  Option Plan for Non-Employee Directors, as amended(‡)                                                                                                                                                                 |       | (E)        |
| 10.3    |       | Reserved.                                                                                                                                                                                                                              |       |       |
| 10.4    |       | Indemnification  Agreement(‡)                                                                                                                                                                                                     |       | (H)        |
| 10.5    |       | Stock Option  Grant Program for Nonemployee Directors under the NeoRx 2004 Incentive Compensation  Plan, as amended(‡)                                                                                                            |       | (B)        |
| 10.6    |       | Stock Option  Agreement, dated December 19, 2000, between NeoRx Corporation and Carl  S. Goldfischer(‡)                                                                                                                      |       | (I)        |
| 10.7    |       | Stock Option  Agreement, dated January 17, 2001, between NeoRx Corporation and  Carl S. Goldfischer(‡)                                                                                                                  |       | (I)        |
| 10.8    |       | License  Agreement dated as of April 2, 2004, between the Company and AnorMED, Inc.  Certain portions of the agreement have been omitted pursuant to a request for  confidential treatment                                        |       | (Q)        |
| 10.9    |       | Amendment  No. 1 to License Agreement effective as of September 18, 2006,  between the Company and AnorMED, Inc. Certain portions of the agreement  have been omitted pursuant to a request for confidential treatment. |       | (Y)        |
| 10.10   |       | Stock Option  Grant Program for Nonemployee Directors under the NeoRx Corporation 1994  Restated Stock Option Plan(‡)                                                                                                             |       | (M)        |
| 10.11   |       | Facilities Lease  dated February 15, 2002, between NeoRx Corporation and Selig Real Estate  Holdings Six                                                                                                                          |       | (A)        |
| 10.12   |       | Amended and  Restated 2004 Incentive Compensation Plan as amended and restated June 16, 2006(‡)                                                                                                               |       | (G)        |
| 10.13   |       | Reserved.                                                                                                                                                                                                                              |       |       |
| 10.14   |       | Key Executive  Severance Agreement dated as of February 28, 2003, between the Company  and Anna Wight(‡)                                                                                                                     |       | (C)        |
| 10.15   |       | Amendment No. 1 dated as of March 30, 2005 to Key  Executive Severance Agreement dated as of February 28, 2003, between the  Company and Anna Wight(‡)                                                             |       | (L)        |
| 10.16   |       | Change of Control Agreement dated as of February 28, 2003,  between the Company and Anna Wight(‡)                                                                                                                       |       | (C)        |
| 10.17   |       | Key Executive Severance Agreement dated as of June 23,  2005, between the Company and David A. Karlin(‡)                                                                                                                     |       | (P)        |
| 10.18   |       | Change of Control Agreement dated as of June 23, 2005,  between the Company and David A. Karlin(‡)                                                                                                                      |       | (P)        |
| 10.19   |       | Employment Letter dated as of April 26, 2004, between the  Company and Gerald McMahon(‡)                                                                                                                                     |       | (L)        |

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| 10.20 |   | Key Executive Severance Agreement dated as of May 11, 2004,  between the Company and Gerald McMahon(‡)                                                                                                                 |   | (R)    |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.21 |   | Change of  Control Agreement dated as of May 11, 2004, between the Company and  Gerald McMahon(‡)                                                                                                                      |   | (R)    |
| 10.22 |   | Reserved.                                                                                                                                                                                                                        |   |   |
| 10.23 |   | Reserved.                                                                                                                                                                                                                        |   |   |
| 10.24 |   | Key Employee  Severance Agreement dated as of July 11, 2006, between the Company and  Michael K. Jackson(‡)                                                                                                            |   | (X)    |
| 10.25 |   | Form of  Non-Qualified Stock Option Agreement under 2004 Incentive Compensation  Plan(‡)                                                                                                                          |   | (O)    |
| 10.26 |   | Form of  Incentive Stock Option Agreement under 2004 Incentive Compensation Plan(‡)                                                                                                                                    |   | (O)    |
| 10.27 |   | Key Executive  Severance Agreement dated as of June 23, 2006, between the Company and  Caroline M. Loewy(‡)                                                                                                            |   | (S)    |
| 10.28 |   | Change of  Control Agreement dated as of June 23, 2006, between the Company and  Caroline M. Loewy(‡)                                                                                                                  |   | (S)    |
| 10.29 |   | Executive  Severance Agreement dated as of June 23, 2006, between the Company and  Cheni Kwok(‡)                                                                                                             |   | (S)    |
| 10.30 |   | Change of  Control Agreement dated as of July 1, 2006, between the Company and  Cheni Kwok(‡)                                                                                            |   | (S)    |
| 10.31 |   | Research Funding  and Option Agreement dated August 4, 2005, between the Company and The  Scripps Research Institute. Certain portions of the agreement have been  omitted pursuant to a request for confidential treatment |   | (U)    |
| 10.32 |   | Form of  Directors’ Indemnification Agreements(‡)                                                                                                                                                                 |   | (K)    |
| 10.33 |   | Lease Agreement  dated as of July 10, 2006, between the Company and ARE San Francisco  No. 17 LLC                                                                                                                 |   | (W)    |
| 10.34 |   | Loan and  Security Agreement dated as of October 25, 2006, among the Company,  Silicon Valley Bank and Merrill Lynch Capital                                                                                                |   | (J)    |
| 10.35 |   | Secured  Promissory Notes to Silicon Valley Bank and Merrill Lynch Capital                                                                                                                                                       |   | (J)    |
| 23.1  |   | Consent of KPMG                                                                                                                                                                                                                  |   | (Z)    |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of President and Chief Executive Officer                                                                                                                                       |   | (Z)    |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                                                                     |   | (Z)    |
| 32.1  |   | Section 1350  Certification of President and Chief Executive Officer                                                                                                                                                        |   | (Z)    |
| 32.2  |   | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                       |   | (Z)    |

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(‡)          Management contract or compensatory plan.

(A)       Filed as an exhibit to the Company’s Form 10-K for the fiscalyear ended December 31, 2001, and incorporated herein by reference.

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(B)        Filed as an exhibit to the Company’s Current Report onForm 8-K filed June 16, 2005, and incorporated herein by reference.

(C)        Filed as an exhibit to the Company’s Registration Statement onForm S-3/A (Registration No. 333-111344) filed on February 23,2004, and incorporated herein by reference.

(D)       Reserved.

(E)        Incorporated by reference to Exhibit A to the Company’sdefinitive proxy statement on Schedule 14A filed April 10, 1996.

(F)         Filed as an exhibit to the Company’s Form 10-K for the fiscalyear ended December 31, 1995, and incorporated herein by reference. 

(G)      Filed as an exhibit to the Company’s Current Report onForm 8-K filed on June 21, 2006 and incorporated herein by reference.

(H)      Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended March 31, 1996, and incorporated herein byreference.

(I)            Filed as an exhibit to theCompany’s Form 10-K for the fiscal year ended December 31, 2000, andincorporated herein by reference.

(J)           Filed as an exhibit to the Company’s Current Report onForm 8-K filed on October 31, 2006, and incorporated herein byreference.

(K)       Filed as an exhibit to the Company’s Current Reports onForm 8-K filed on April 28, 2006 and June 27, 2006, andincorporated herein by reference. 

(L)         Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended March 31, 2005, and incorporated herein byreference.

(M)     Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended June 30, 2002, and incorporated herein byreference.

(N)       Filed as an exhibit to the Company’s Current Report onForm 8-K filed on September 26, 2006, and incorporated herein byreference.

(O)      Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended September 30, 2004, and incorporated herein byreference.

(P)         Filed as an exhibit to the Company’s Current Report onForm 8-K filed on June 29, 2005, and incorporated herein byreference. 

(Q)      Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended March 31, 2004, and incorporated herein byreference.

(R)       Filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended June 30, 2004, and incorporated herein byreference.

(S)          Filed as an exhibit to the Company’s Current Report onForm 8-K filed June 23, 2006, and incorporated herein by reference.

(T)        Reserved.

(U)      Filed as an exhibit to theCompany’s Form 10-Q for the quarterly period ended September 30,2005, and incorporated herein by reference.

(V)       Filed as an exhibit to theCompany’s Form 10-Q for the quarterly period ended March 31, 2006 andincorporated herein by reference.

84

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(W)    Filed as an exhibit to theCompany’s Current Report Form 8-K filed on July 13, 2006 andincorporated herein by reference.

(X)       Filed as an exhibit to theCompany’s Form 10-Q for the quarterly period ended June 30, 2006 andincorporated herein by reference.

(Y)       Filed as an exhibit to theCompany’s Form 10-Q for the quarterly period ended September 30, 2006and incorporated herein by reference.

(Z)        Filed herewith.

85

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