**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

**Forthe quarterly period ended June 30, 2007**

**CommissionFile No. 0-16614**

**PONIARD PHARMACEUTICALS, INC.**

(Exact name of Registrantas specified in its charter)

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

 

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

(Address of principalexecutive offices)

**Registrant’s telephone number,including area code:** (650) 853-3774

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes    x    No    o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o    No    x

Asof August 2, 2007, 34,656,574 shares of the Registrant’s common stock,$.02 par value per share, were outstanding.

 

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**TABLE OF CONTENTS**

**QUARTERLYREPORT ON FORM 10-Q**

**FORTHE QUARTER ENDED JUNE 30, 2007**
|               | ** ** |                                                                                                                              | ** ** | **PAGE** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART  I**   |       | **FINANCIAL  INFORMATION**                                                                                                   |       |     |   |
| Item 1.       |       | Financial  Statements:                                                                                                       |       |     |   |
|          |       | Condensed  Consolidated Balance Sheets as of June 30, 2007 and  December 31, 2006 (unaudited)                 |       | 3        |   |
|          |       | Condensed  Consolidated Statements of Operations for the Three and six Months Ended  June 30, 2007 and 2006 (unaudited) |       | 4        |   |
|          |       | Condensed  Consolidated Statements of Cash Flows for the Three and six Months Ended  June 30, 2007 and 2006 (unaudited) |       | 5        |   |
|          |       | Notes to Condensed Consolidated  Financial Statements (unaudited)                                                            |       | 6        |   |
| Item 2.       |       | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                  |       | 15       |   |
| Item 3.       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |       | 22       |   |
| Item 4.       |       | Controls  and Procedures                                                                                                     |       | 23       |   |
| **PART II**   |       | **OTHER  INFORMATION**                                                                                                       |       |     |   |
| Item 1A.      |       | Risk Factors                                                                                                                 |       | 24       |   |
| Item 4        |       | Submission  of Matters to a Vote of Security Holders                                                                         |       | 40       |   |
| Item 6.       |       | Exhibits                                                                                                                     |       | 41       |   |
| Signatures    |       | 42                                                                                                                           |       |
| Exhibit Index |       | 43                                                                                                                           |       |

 

2

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**PART I. FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**PONIARD PHARMACEUTICALS,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)(unaudited)**

| ** **                                                                                                                                                                        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |
| **Current assets:**                                                                                                                                                               |       |                        |       |                            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                        |       |                        | $          | 43,326                          |       |   |   | $ | 44,148 |   |   |
| Cash—restricted                                                                                                                                                              |       |                        | 281        |                            |       |   | 136 |   |   |
| Investment  securities                                                                                                                                                            |       |                        | 59,913     |                            |       |   | 9,562 |   |   |
| Prepaid expenses  and other current assets                                                                                                                                        |       |                        | 1,318      |                            |       |   | 654 |   |   |
| Total current  assets                                                                                                                                                             |       |                        | 104,838    |                            |       |   | 54,500 |   |   |
| Facilities and  equipment, net of depreciation of $803 and $686, respectively                                                                                                |       |                        | 1,050      |                            |       |   | 525 |   |   |
| Other assets                                                                                                                                                                      |       |                        | 202        |                            |       |   | 182 |   |   |
| Assets held for  sale                                                                                                                                                             |       |                        | 2,624      |                            |       |   | 2,624 |   |   |
| Licensed products,  net of accumulated amortization of $1,371 and $764, respectively                                                                                         |       |                        | 10,629     |                            |       |   | 11,236 |   |   |
| **Total  assets**                                                                                                                                                                 |       |                        | $          | 119,343                         |       |   |   | $ | 69,067 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                    |       |                        |       |                            |       |   |   |   |   |
| **Current liabilities:**                                                                                                                                                          |       |                        |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                                                                                  |       |                        | $          | 1,236                           |       |   |   | $ | 775 |   |   |
| Accrued  liabilities                                                                                                                                                              |       |                        | 3,049      |                            |       |   | 2,520 |   |   |
| Current portion of  notes payable                                                                                                                                                 |       |                        | 4,057      |                            |       |   | 3,906 |   |   |
| Licensed products  payable                                                                                                                                                        |       |                        | —     |                            |       |   | 5,000 |   |   |
| Total current  liabilities                                                                                                                                                        |       |                        | 8,342      |                            |       |   | 12,201 |   |   |
| **Long-term liabilities:**                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |
| Notes payable, net  of current portion and discount of $1,371 and $1,752, respectively                                                                                       |       |                        | 8,289      |                            |       |   | 9,975 |   |   |
| Total long-term liabilities                                                                                                                                                       |       |                        | 8,289      |                            |       |   | 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 June 30,  2007 and December 31, 2006 (entitled in liquidation to $5,175)                         |       |                        | 4          |                            |       |   | 4 |   |   |
| Common stock, $.02  par value, 200,000,000 shares authorized, 34,656,574 and 22,808,233  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively |       |                        | 693        |                            |       |   | 456 |   |   |
| Additional paid-in  capital                                                                                                                                                       |       |                        | 398,124    |                            |       |   | 326,025 |   |   |
| Accumulated  deficit, including other comprehensive loss of $8 and $0 at June 30,  2007 and December 31, 2006, respectively                                                  |       |                        | (296,109   | )                               |       |   | (279,594 | ) |   |
| Total  shareholders’ equity                                                                                                                                                  |       |                        | 102,712    |                            |       |   | 46,891 |   |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                              |       |                        | $          | 119,343                         |       |   |   | $ | 69,067 |   |   |

 

See accompanying notes to the consolidated financial statements.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(In thousands, except per share data)**

| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                                       |       | $                                               | —     |                                          | $          | — |   | $ | — |   | $ | — |   |
| **Operating expenses:**                                            |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development                                          |       | 5,812                                           |       | 3,243                                         |       | 11,312 |   | 5,766 |   |
| General and  administrative                                        |       | 3,378                                           |       | 2,004                                         |       | 5,778 |   | 3,517 |   |
| (Gain) on sale of  real estate and equipment                       |       | —                                          |       | (36                                           | )          | — |   | (73 | ) |
| Total operating expenses                                           |       | 9,190                                           |       | 5,211                                         |       | 17,090 |   | 9,210 |   |
| Loss from  operations                                              |       | (9,190                                          | )          | (5,211                                        | )          | (17,090 | ) | (9,210 | ) |
| **Other  income (expense):**                                       |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                    |       | 1,106                                           |       | 512                                           |       | 1,743 |   | 550 |   |
| Interest expense                                                   |       | (444                                            | )          | (1,789                                        | )          | (910 | ) | (3,627 | ) |
| Total other (expense) income                                       |       | 662                                             |       | (1,277                                        | )          | 833 |   | (3,077 | ) |
| Net loss                                                           |       | (8,528                                          | )          | (6,488                                        | )          | (16,257 | ) | (12,287 | ) |
| Preferred stock dividends                                          |       | (125                                            | )          | (125                                          | )          | (250 | ) | (250 | ) |
| Net loss  applicable to common shares                              |       | $                                               | (8,653     | )                                             | $          | (6,613 | ) | $ | (16,507 | ) | $ | (12,537 | ) |
| Loss per share:                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted loss applicable to common shares                 |       | $                                               | (0.28      | )                                             | $          | (0.37 | ) | $ | (0.62 | ) | $ | (1.06 | ) |
| Weighted average  common shares outstanding—basic and diluted |       | 30,751                                          |       | 17,924                                        |       | 26,801 |   | 11,856 |   |

 

See accompanying notes to the consolidated financial statements.

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**PONIARD PHARMACEUTICALS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(In thousands)**

| ** **                                                                   | ** ** | **Six Months Ended June 30,**                                | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **      2007      ** | ** ** | **      2006      ** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                                                             |       |   |   |   |   |   |   |
| Net loss                                                                     |       |                                                                             | $          | (16,257 | ) |   |   | $ | (12,287 | ) |   |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation and  amortization                                               |       |                                                                             | 732        |   |   |   | 136 |   |   |
| Amortization of discount  on notes payable                                   |       |                                                                             | 402        |   |   |   | 3,460 |   |   |
| Amortization of discount  on investment securities                           |       |                                                                             | (302       | ) |   |   | — |   |   |
| (Gain) loss on disposal  of real estate and equipment                        |       |                                                                             | —     |   |   |   | (17 | ) |   |
| Stock options and  warrants issued for services                              |       |                                                                             | 41         |   |   |   | 5 |   |   |
| Stock-based employee  compensation                                           |       |                                                                             | 2,328      |   |   |   | 588 |   |   |
| Change in operating assets and liabilities:                                  |       |                                                                             |       |   |   |   |   |   |   |
| Prepaid expenses and  other assets                                           |       |                                                                             | (705       | ) |   |   | 56 |   |   |
| Accounts payable                                                             |       |                                                                             | 461        |   |   |   | (268 | ) |   |
| Accrued liabilities                                                          |       |                                                                             | 529        |   |   |   | (553 | ) |   |
| Net cash used in  operating activities                                       |       |                                                                             | (12,771    | ) |   |   | (8,880 | ) |   |
| **Cash flows from investing activities:**                                    |       |                                                                             |       |   |   |   |   |   |   |
| Proceeds from sales and  maturities of investment securities                 |       |                                                                             | 13,100     |   |   |   | — |   |   |
| Purchases of investment  securities                                          |       |                                                                             | (63,157    | ) |   |   | — |   |   |
| Facilities and equipment  purchases                                          |       |                                                                             | (650       | ) |   |   | (49 | ) |   |
| Proceeds from sales of  equipment and facilities                             |       |                                                                             | —     |   |   |   | 100 |   |   |
| Net cash (used in)  provided by investing activities                         |       |                                                                             | (50,707    | ) |   |   | 51 |   |   |
| **Cash flows from financing activities:**                                    |       |                                                                             |       |   |   |   |   |   |   |
| Proceeds from bridge  note payable                                           |       |                                                                             | —     |   |   |   | 3,460 |   |   |
| Payment of licensed  product payable                                         |       |                                                                             | (5,000     | ) |   |   | — |   |   |
| Payment of principal on  notes payable                                       |       |                                                                             | (1,916     | ) |   |   | (3,868 | ) |   |
| (Increase) decrease in  restricted cash                                      |       |                                                                             | (145       | ) |   |   | 1,000 |   |   |
| Net proceeds from  issuance of common stock and warrants                     |       |                                                                             | 69,967     |   |   |   | 58,566 |   |   |
| Payment of preferred  dividends                                              |       |                                                                             | (250       | ) |   |   | (250 | ) |   |
| Proceeds from stock  options and warrants exercised                          |       |                                                                             | —     |   |   |   | 10 |   |   |
| Net cash provided by  financing activities                                   |       |                                                                             | 62,656     |   |   |   | 58,918 |   |   |
| Net (decrease) increase  in cash and cash equivalents                        |       |                                                                             | (822       | ) |   |   | 50,089 |   |   |
| **Cash and cash equivalents:**                                               |       |                                                                             |       |   |   |   |   |   |   |
| Beginning of period                                                          |       |                                                                             | 44,148     |   |   |   | 3,523 |   |   |
| End of period                                                                |       |                                                                             | $          | 43,326 |   |   |   | $ | 53,612 |   |   |
| **Supplemental disclosure of non-cash financing  activity:**                 |       |                                                                             |       |   |   |   |   |   |   |
| Accrual of preferred  dividend                                               |       |                                                                             | $          | 250 |   |   |   | $ | 250 |   |   |
| Warrants and beneficial  conversion feature                                  |       |                                                                             | $          | — |   |   |   | $ | 3,460 |   |   |
| **Supplemental disclosure of cash paid during the  period for:**             |       |                                                                             |       |   |   |   |   |   |   |
| Cash paid for interest                                                       |       |                                                                             | $          | 523 |   |   |   | $ | 112 |   |   |

 

See accompanying notes to the consolidated financial statements.

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

**Note1. Basis of Presentation**

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Poniard Pharmaceuticals, Inc.and subsidiary (the Company). All intercompany balances and transactions havebeen eliminated in consolidation. Unless otherwise indicated, all commonstock-related amounts in this report have been adjusted to reflect ourone-for-six reverse stock split effective September 22, 2006. The Companyhas historically experienced recurring operating losses and negative cash flowsfrom operations. As of June 30, 2007, the Company had net working capitalof $96,496,000 and had an accumulated deficit of $296,109,000 with totalshareholders’ equity of $102,712,000.

On April 30, 2007, the Company completed a publicoffering of 11,848,341 shares of its common stock at a public offering price of$6.33 per share. Net proceeds of the offering, after payment of underwriters’discounts and commissions and offering expenses, were approximately$69,967,000. The Company believes that current cash, cash equivalent balancesand investment securities balances will provide adequate resources to fundoperations at least through the second quarter of 2009. See Note 8 for adiscussion of the Company’s liquidity and capital resources.

The accompanying condensed consolidated financialstatements contained herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (SEC). Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant tothose rules and regulations, although the Company believes that thedisclosures made are adequate to make the information presented not misleading.These financial statements should be read in conjunction with the Company’sAnnual Report on Form 10-K for the year ended December 31,2006, as amended, filed with the SEC and available on the SEC’s website,www.sec.gov.

The accompanying condensed consolidated financialstatements are unaudited. In the opinion of the Company’s management, thecondensed consolidated financial statements reflect all adjustments, consistingonly of normal recurring accruals necessary to present fairly the Company’sfinancial position and cash flows as of June 30, 2007 and the results ofoperations for the three and six months ended June 30, 2007 and 2006.

The results of operations for the periods endedJune 30, 2007 and 2006 are not necessarily indicative of the expectedoperating results for the full year.

*Estimates andUncertainties:**  *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.

**Note 2. NewAccounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes: An Interpretation of FASB Statement No. 109” (FIN 48). FIN48 clarifies certain aspects of accounting for uncertain tax positions,including issues related to the recognition and measurement of those taxpositions. FIN 48 is effective for fiscal years beginning after December 15,2006. The Company has been in a net operating loss position since its inceptionand has not recognized any tax benefits for any of its income tax positions asa result of a full valuation allowance. The 

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

Company adopted theprovisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did nothave an impact on the Company’s consolidated financial statements.Historically, the Company has not incurred any interest or penalties associatedwith tax matters and no interest or penalties were recognized during the threeand six months ended June 30, 2007. The Company has adopted a policywhereby amounts related to interest and penalties associated with tax mattersare classified as additional income tax expense when incurred. Tax years thatremain open for examination include 2003 through 2006. In addition, tax yearsfrom 1992 to 2002 may be subject to examination in the event that the Companyutilizes the net operating loss carryforwards from those years in its currentor future tax returns.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”.SFAS 157 defines fair value, establishes a framework for measuring fair value,and expands disclosure requirements about fair value measurements. SFAS 157applies to other accounting pronouncements that require or permit fair valuemeasurements, but does not in itself require any new fair value measurements.The provisions of SFAS No. 157 are effective for fiscal years beginningafter November 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 February 2007, theFASB released SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities.”  SFAS No. 159 allows companies to chooseto elect, at specified dates, to measure eligible financial instruments at fairvalue. Companies are required to report unrealized gains and losses on itemsfor which the fair value option has been elected in earnings at each subsequentreporting date, and recognize upfront costs and fees related to those items inearnings as incurred. SFAS No. 159 applies to fiscal years beginning afterNovember 15, 2007, with early adoption permitted for companies that havealso elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.”  Companies are prohibited from retrospectivelyapplying SFAS No. 159 unless they choose to early adopt both SFASNo. 157 and SFAS No. 159. SFAS No. 159 also applies to eligibleitems existing at November 15, 2007 (or early adoption date). The Companyis currently determining whether to adopt SFAS No. 159.

**Note 3. Stock-BasedCompensation**

At June 30,2007, the Company’s Amended and Restated 2004 Incentive Compensation Plan (the2004 Plan) was the only compensation plan under which options were availablefor grant. The Company’s 1991 Stock Option Plan for Non-Employee Directors (theDirectors Plan) was terminated on March 31, 2005, and no further optionscan be granted under that plan. The Company’s 1994 Stock Option Plan (the 1994Plan) was terminated on February 17, 2004 and no further options can begranted under that plan. Although no Company securities are available forissuance under the Directors Plan or the 1994 Plan, options granted prior totermination of those plans continue in effect in accordance with their terms.

The 2004 Plan, asamended and restated on June 14, 2007, authorizes the Company’s board or acommittee appointed by the board to grant options to purchase a maximumaggregate of 4,166,666 shares of common stock. The maximum aggregate of4,166,666 reflects an increase of 2,500,000 shares that was approved byshareholders at the Company’s 2007 annual meeting of shareholders onJune 14, 2007. The 2004 Plan contains an evergreen provisionpursuant to which the number of shares available under the plan willautomatically increase each year, beginning in 2008, according to certainlimits set forth in the plan. The2004 Plan allows for the issuance of incentive stock options and nonqualifiedstock options to employees, officers, directors, agents, consultants, advisorsand independent contractors of the Company, subject to certain restrictions.All option grants expire ten years from the date of grant, except in the eventof earlier termination of employment or service. Option grants for employeeswith less than one year of 

7

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

service generally become exercisable at a rate of 25% after oneyear from the grant date and then in monthly increments at a rate of 1/36th of the remainingbalance per month over the following three years. Option grants for employeeswith more than one year of service and for employees receiving promotionsbecome exercisable at a rate of 1/48th per month over the following four years.As of June 30, 2007, there were 434,272 shares of common stock availablefor issuance as new awards under the 2004 Plan.

OnSeptember 13, 2006, February 7, 2007, February 27, 2007,May 7, 2007 and May 31, 2007 the Company issued stock option grantsto employees and consultants that were subject to shareholder approval of anincrease in the number of shares authorized for issuance under the 2004 Plan atthe Company’s 2007 annual meeting of shareholders held on June 14, 2007.As stated above, shareholders approved the increase in the number of sharesauthorized for issuance under the 2004 Plan to 4,166,666 shares of commonstock, thereby allowing these grants to be effective and exercisable to theextent vested as of June 14, 2007. Under SFAS 123R the Company treatedthese grants as having a grant date of June 14, 2007.

The Company recognized stock compensation expense of$1,849,000 and $2,328,000 for the three and six months ended June 30,2007, respectively, and stock compensation expense of $343,000 and $588,000 forthe three and six months ended June 30, 2006, respectively. The remainingunrecognized compensation cost related to non-vested awards at June 30,2007, was approximately $20,132,000 and the weighted-average period of timeover which this cost will be recognized is 3.9 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 then 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 fair value of the Company’s stock options granted to employees for thethree and six months ended June 30, 2007 and 2006, respectively, wasestimated using the Black-Scholes model with the following weighted-averageassumptions: 

| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term in  years     |       | 5.72  - 9.5                                         |       | 6.02  - 9.5                                       |       | 5.72  - 9.5 |   | 6.02  - 9.5 |   |
| Expected dividend  rate     |       | 0.0%                                                |       | 0.0%                                              |       | 0.0% |   | 0.0% |   |
| Expected  volatility factor |       | 102.0%                                              |       | 105.0%                                            |       | 102.0% |   | 105.0% |   |
| Risk-free interest rate     |       | 4.55% - 5.22%                                       |       | 4.98% - 5.25%                                     |       | 4.55% - 5.22% |   | 4.98% - 5.25% |   |

 

The weighted-average grant date fair value was $6.08and $6.05 for options granted during the three and six months endedJune 30, 2007 and was $5.93 for the three and six months endedJune 30, 2006.

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

TheCompany issues new shares of common stock upon exercise of stock options. Thefollowing table summarizes the Company’s stock option activity for the sixmonths ended June 30, 2007 (in thousands, except per share data):

| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  January 1, 2007 |       |                       | 1,660      |                                       |       |                                                | 10.50      |                                |       |   |   |   |   |   |   |   |   |
| Granted                              |       |                       | 2,968      |                                       |       |                                                | 6.04       |                                |       |   |   |   |   |   |   |   |   |
| Exercised                            |       |                       | —     |                                       |       |                                                | —     |                                |       |   |   |   |   |   |   |   |   |
| Forefeited/cancelled/expired         |       |                       | (209       | )                                          |       |                                                | 16.06      |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2007   |       |                       | 4,419      |                                       |       |                                                | $          | 7.24                                |       |   |   | 9.0 |   |   |   | $ | 4,128 |   |   |
| *Exercisable at June 30,  2007* | * *   | * *                   | *913*      |                                       | * *   | * *                                            | *$*        | *10.87*                             |       |   |   | 7.2 |   |   |   | $ | 1,106 |   |   |

 

Cashproceeds and intrinsic value related to total stock options exercised duringthe three and six months ended June 30, 2007 and 2006 were as follows(dollars in thousands): 

| ** **                                  | ** ** | **Three Months Ended  June 30,**                      | ** ** | **Six Months Ended  June 30,**                        | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** |
| Proceeds from  stock options exercised      |       |                                                                 | $          | —                                                               |       |   |   | $ | 3 |   |   |   | $ | — |   |   |   | $ | 10 |   |   |
| Intrinsic value of stock  options exercised |       |                                                                 | $          | —                                                               |       |   |   | $ | 3 |   |   |   | $ | — |   |   |   | $ | 9 |   |   |

 

**Note 4. Loss PerCommon Share**

Basic and diluted loss per share are based on net lossapplicable to common shares, which is comprised of net loss and preferred stockdividends in all periods presented. Shares used to calculate basic loss pershare are based on the weighted average number of common shares outstandingduring the period. Shares used to calculate diluted loss per share are based onthe potential dilution that would occur upon the exercise or conversion ofsecurities into common stock using the treasury stock method. The calculationof diluted loss per share excludes the effect of the following outstandingstock options and warrants to purchase additional shares of common stockbecause the share increments would not be dilutive.

| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Common stock  options |       | 4,418,820                                       |       | 1,427,010                                     |       | 4,418,820 |   | 1,427,010 |   |
| Common stock warrants |       | 5,946,876                                       |       | 5,770,791                                     |       | 5,946,876 |   | 5,770,791 |   |

 

In addition, 39,015 sharesof common stock that would be issuable upon conversion of the Company’sSeries 1 preferred stock are not included in the calculation of dilutedloss per share for the three and six months ended June 30, 2007 and 2006,respectively, because the effect of including such shares would not bedilutive.

9

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

**Note 5. Comprehensive Loss**

TheCompany’s comprehensive loss for the three and six months ended June 30,2007 and 2006 is summarized as follows (dollars in thousands):

| ** **                                     | ** ** | **Three Months Ended June 30,**                                                                  | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **         2007         ** | ** ** | **        2006        ** | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** |
| Net loss                                       |       |                                                                                                                 | $          | 8,528                                                                                                    |       |   |   | $ | 6,488 |   |   |   | $ | 16,257 |   |   |   | $ | 12,287 |   |   |
| Net unrealized loss on  investment  securities |       |                                                                                                                 | 7          |                                                                                                     |       |   | — |   |   |   | 8 |   |   |   | — |   |   |
| Comprehensive loss                             |       |                                                                                                                 | $          | 8,535                                                                                                    |       |   |   | $ | 6,488 |   |   |   | $ | 16,265 |   |   |   | $ | 12,287 |   |   |

 

**Note 6. Bridge Financing**

On February 1, 2006,the Company received loan proceeds of $3,460,000 from private investors (thebridge financing). Pursuant to the bridge financing, 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 through April 26, 2006,the date of the closing of the Company’s 2006 equity financing (see Note 8).The convertible promissory notes provided for an interest rate of 8% per annumand, at the closing of the 2006 equity financing, the principal amount of thenotes, 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.

**Note 7. Picoplatin License and Amendment**

In April 2004, theCompany acquired from AnorMED, Inc. the worldwide exclusive rights,excluding Japan, to develop, manufacture and commercialize picoplatin, aplatinum-based anti-cancer agent. AnorMED, Inc. was acquired by GenzymeCorporation in November 2006. Under the terms of the agreement, theCompany paid a one-time upfront payment of $1,000,000 in its common stock and$1,000,000 in cash. The agreement also initially provided for $13,000,000 indevelopment and commercialization milestones, payable in cash or a combinationof cash and common stock, and a royalty rate of up to 15% on net product salesafter regulatory approval. The license agreement was amended onSeptember 18, 2006 to modify several key financial terms and expand thelicensed territory to include Japan, thereby providing the Company worldwiderights. In consideration of the amendment, the Company paid Genzyme $5,000,000in cash on October 12, 2006 and $5,000,000 in cash on March 30, 2007.The amendment eliminates all development milestone payments to Genzyme. Genzymeremains entitled to receive up to $5,000,000 in commercialization milestonesupon the attainment of certain levels of annual net sales of picoplatin afterregulatory approval. The amendment also reduces the royalty payable to Genzymeto a maximum of 9% of annual net product sales. In addition, the amendmentreduces the sharing of sublicense revenues for any sublicenses entered intoduring the first year following the amendment and eliminates the sharing of sublicenserevenues with Genzyme on and after September 18, 2007.

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

**Note 8. Liquidity**

On April 30, 2007, the Company completed a publicoffering of 11,848,341 shares of its common stock at a public offering price of$6.33 per share. Net proceeds of the public offering, after payment ofunderwriters’ discounts and commissions and offering expenses, wereapproximately $69,967,000. These proceeds will be used for the continuedclinical and preclinical development of picoplatin, including funding theCompany’s ongoing clinical trails in small cell lung cancer, metastaticcolorectal cancer and hormone-refractory prostate cancer, for discovery andresearch for new products candidates, and for general corporate purposes,including working capital.

As a result of the completion of the public offering,the Company’s outstanding common stock increased from 22,808,233 shares to34,656,574. Entities affiliated with MPM Capital Management (MPM) and Bay CityCapital LLC (BCC) were purchasers in the public offering. Immediately followingclosing of the public offering, MPM beneficially owned approximately 8,648,000shares of our common stock, or approximately 23.7% of the common sharesoutstanding. BCC beneficially owned approximately 5,546,000 shares of ourcommon stock, or approximately 15.5% of the common shares outstanding,immediately following the public offering. See Note 9 below with respect torelated person transactions.

On April 26, 2006, the Company completed the 2006equity financing (the 2006 equity financing) pursuant to a securities purchaseagreement dated as of February 1, 2006. In connection with the 2006 equityfinancing, the Company issued to a group of institutional and other accreditedinvestors an aggregate of 15,491,000 shares of common stock at a cash purchaseprice of $4.20 per share. Investors in the financing also received five-yearwarrants to purchase an aggregate of 4,643,000 shares of common stock at anexercise price of $4.62 per share. Concurrent with the closing of thefinancing, the Company issued an aggregate of 1,591,000 shares of common stockto the holders of its Series B preferred stock upon conversion of theoutstanding Series B preferred shares (the Series B shares). TheCompany received approximately $61,945,000 in net cash proceeds from the saleof common stock and warrants, including the bridge financing, inApril 2006.

As a result of the completion of the 2006 equityfinancing and the conversion of the Series B shares, the Company’soutstanding common stock increased from approximately 5,722,000 shares toapproximately 22,805,000 shares. Entities affiliated with MPM acquiredbeneficial ownership of 7,744,000 common shares, or approximately 31.5% of thecommon stock outstanding immediately following the 2006 equity financing.Entities affiliated with BCC acquired beneficial ownership of 4,646,000 commonshares, or approximately 19.5% of the common shares outstanding immediatelyfollowing the 2006 equity financing. See Note 9 below with respect to relatedperson transactions.

In connection with the 2006 equity financing, onJanuary 30, 2006, the Company entered into a letter of agreement withTexas State Bank, pursuant to which the Company agreed to change the maturitydate of its promissory note with the Bank to June 5, 2006. The Texas StateBank loan, which was secured by the Company’s radiopharmaceutical plant andother skeletal targeted radiotherapy (STR) assets located in Denton, Texas, hadan adjustable interest rate equal to the bank prime rate reported in the WallStreet Journal (8.00% at May 23, 2006). The Company paid the outstandingbalance of the loan, $2,714,000, on May 23, 2006.

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 obtained a$15,000,000 capital loan. The Company used $10,000,000 of the proceeds of theloan to fund its cash payment obligations to Genzyme Corporation (the successorto AnorMED, Inc.) under the picoplatin 

11

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

license amendmentdescribed in Note 7 above, and plans to use the remaining proceeds to supportits late-stage clinical trials of picoplatin and general working capital needs.The loan is for a term of 42 months, maturing on April 1, 2010, with thefirst monthly principal payment on November 1, 2006. Interest on the loanis fixed at 7.67%. An additional payment of $1,350,000 is due on the maturitydate. All interest payable under the loan agreement and the full amount of theadditional payment must be paid upon any prepayment of the loan. The loan issecured by a first lien on substantially all of the non-intellectual propertyassets of the Company. The loan agreement contains restrictions on theCompany’s ability to, among other things, dispose of certain assets, engage in certainmergers and acquisition transactions, incur indebtedness, create liens onassets, 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.

In September 2006, the Company completed therelocation of its corporate headquarters to South San Francisco. TheCompany intends to maintain clinical, development and support activities andfacilities in Seattle. The addition of the South San Francisco facility resultedin a substantial increase in rent and operating costs of the Company. OnJuly 10, 2006, the Company entered into an agreement with ARE-San FranciscoNo. 17 LLC to lease 17,045 square feet of office and laboratory space inSouth San Francisco, California. The initial term of the lease is 60 months.The annual base rent under the lease is approximately $542,000 and is subjectto annual adjustments based on disbursements for tenant improvements andincreases in the Consumer Price Index in the San Francisco metropolitan market.Base rent is payable in monthly installments of approximately $45,200.Additional rent is payable monthly based on the Company’s share of commonoperating 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 averaged $21,000 during the construction of tenantimprovements. Base rent and common operating expenses paid by the Company was$306,000 for the six months ended June 30, 2007. The Company may, uponwritten notice delivered at least nine months prior to expiration of theinitial term of the lease, extend the lease for an additional three years, withrent payable at the then market rate.

On August 4, 2005, the Company entered into aresearch funding and option agreement with The Scripps Research Institute(TSRI). Under the agreement, as amended December 2006 andFebruary 2007, the Company committed to provide TSRI an aggregate of$2,500,000 over a 26-month period to fund research relating to synthesisand evaluation of novel small molecule, multi-targeted protein kinaseinhibitors as therapeutic agents, including the treatment of cancer. TheCompany has the option to negotiate a worldwide exclusive license, includingthe right to sublicense, to develop and to commercialize any compounds arisingfrom the collaboration. The research funding is payable by the Company to TSRIquarterly in accordance with the agreed upon research plan and budget. OnAugust 8, 2005, the Company made an initial funding payment to TSRI of$138,000. The Company paid TSRI $1,012,000 in 2006 and $572,000 during thefirst six months of 2007, which amounts were charged to research anddevelopment 

12

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

expense. The agreementprovides for additional aggregate funding payments of $778,000 during thebalance of 2007.

The Company had cash, cash equivalent balances andinvestment securities balances totaling $103,239,000 at June 30, 2007. TheCompany believes that current cash, cash equivalent balances and investmentsecurities balances will provide adequate resources to fund operations at leastthrough the second quarter of 2009.

The Company’sactual 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 the Company’songoing Phase II and Phase III trials of picoplatin in small cell lungcancer, ongoing Phase I/II trials in colorectal and prostate cancers; as wellas its ongoing Phase I trial of picoplatin (oral formulation) in solid tumors;

·       theCompany’s ability to obtain clinical supplies of picoplatin activepharmaceutical ingredient and finished drug product in a timely andcost-effective manner;

·       actionstaken by the US Food and Drug Administration (FDA) and other regulatoryauthorities;

·       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 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 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.

During 2006, the Company experienced significantchanges to its capital structure which resulted in an ownership change, asdefined under Section 382 of the Internal Revenue Code of 1986, as amended(the IRC). Consequently, the amount of net operating loss carryforwards andresearch and experimentation credit carryforwards available to be used infuture years are limited under IRC Sections 382 and 383. This limitationresulted in the loss of approximately $93,300,000 of the Company’s netoperating loss carryforwards and $9,100,000 of the Company’s research anddevelopment credit carryforwards. The Company had net operating losscarryforwards of approximately $62,300,000 available for future use as ofDecember 31, 2006, which will expire from 2007 through 2026. Although thepublic offering completed on April 30, 2007 resulted in a significantchange in the Company’s capital structure, the Company has 

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

determined that anownership change did not occur as defined in Section 382 of the IRC. Consequently,the amount of net operating loss carryforwards and research and experimentationcarryforwards available for use in future years will not be further limitedunder IRC Sections 382 and 383 as a result of that public offering.

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 the life sciencecapital market specifically may affect the Company’s potential financingsources and opportunities for strategic partnering.

**Note 9. RelatedParty Transactions**

As described in Note 8 above, MPM and BCC aresignificant shareholders of the Company. Nicholas J. Simon III, a directorof the Company, is a general partner of certain of the MPM entities thatacquired the Company’s common stock in the 2006 equity financing and in the2007 public offering. In addition, two Company directors, Fred B. Craves andCarl S. Goldfischer, are managing directors of BCC and possess capital andcarried interests in the BCC entities that acquired stock in the 2006 equityfinancing and in the 2007 public offering. The Company has agreed, for as longas MPM owns at least 10% of the shares of common stock and warrants purchasedin the 2006 equity financing, to use its best efforts to cause one persondesignated by MPM and one person designated by mutual agreement of MPM and BCCto be nominated and elected to the Company’s board of directors. Mr. Simonserves as MPM’s designee on the Company’s board. MPM and BCC have not named theother designee.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

***Important Information Regarding Forward-LookingStatements***

This Form 10-Q contains forward-lookingstatements. These statements relate to future events or future financialperformance. In some cases, you can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,”“anticipate,” “believe,” “estimate,” “predict,” “potential,” “propose” or“continue,” the negative of these terms or other terminology. These statementsare only predictions. Actual events or results may differ materially. Inevaluating these statements, you should specifically consider various factorsdescribed below in the section entitled “Risk Factors.” These factors may causeour actual results to differ materially from any forward-looking statement.

Although we believe the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements. You should not place unduereliance on our forward-looking statements, which speak only as of the date ofthis report. We undertake no obligation to update publicly any forward-lookingstatements to reflect new information, events or circumstances after the dateof this report, or to reflect the occurrence of unanticipated events.

Poniard, PoniardPharmaceuticals, NeoRx and associated logos are registered trademarks ortradenames of Poniard Pharmaceuticals, Inc. This report also containstrademarks, tradenames and service marks of other companies, which are theproperty of their respective owners.

***Critical Accounting Policies and Estimates***

Our critical accountingpolicies and estimates have not changed from those reported in our AnnualReport on Form 10-K for the year ended December 31, 2006, asamended. For a more complete description, please refer to our Annual Report onForm 10-K, as amended.

***Results of Operations***

***Three and six months ended June 30, 2007 comparedto the three and six months ended June 30, 2006***

We had no revenue for either of the second quarters of2007 and 2006.

Total operating expenses for the second quarter of2007 increased 76% to $9.2 million, from $5.2 million for the second quarter of2006, and increased 86% to $17.1 million for the six months ended June 30,2007, from $9.2 million for the same period in 2006. The increase in totaloperating expenses for the quarter and six months ended June 30, 2007 over2006 is due generally to increased costs incurred in connection with ourpicoplatin trials, including the initiation of our Phase III pivotal trial insmall cell lung cancer during the second quarter of 2007, to an increase inrecorded stock option expenseand to an increase in headcount over 2006.

Research and development (R&D) expenses increased79% to $5.8 million for the second quarter of 2007, from $3.2 million for thesame period in 2006. Research and development (R&D) expenses increased 96%to $11.3 million for the six months ended June 30, 2007, from $5.8 millionfor the same period in 2006. The increases in R&D expenses for the quarterand six months ended June 30, 2007 resulted primarily from increasedclinical costs associated with our Phase III small cell lung cancer picoplatintrial and our Phase I oral formulation picoplatin trial and from increased costof picoplatin active ingredient and finished drug product.

General and administrative (G&A) expensesincreased 69% to $3.4 million for the second quarter of 2007, from $2.0 millionfor the same period in 2006. General and administrative (G&A) expensesincreased 64% to $5.8 million for the six months ended June 30, 2007, from$3.5 million for the same period in 2006. The increases in G&A expenses for the quarter and six months endedJune 30, 2007 are 

15

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dueprimarily to increased stock-based compensation expense, increased personnelcosts and increased G&A portion of shared facilities expense.

Interest expense for the second quarter of 2007decreased to $0.4 million from $1.8 million for the second quarter of 2006, anddecreased to $0.9 million for the six months ended June 30, 2007, from$3.6 million for the same period in 2006. The significant decrease in interestexpense was due primarily to the 2006 amortization of debt discount of $1.7 millionand $3.5 million for the three and six months ended June 30, 2006,respectively, compared to debt discount amortization of $0.2 million and $0.4million for the three and six months ended June 30, 2007, respectively.The second quarter 2006 debt discount expensed represented 50% of the totaldebt discount of $3.46 million on the 2006 equity financing bridge notes (seesection “Liquidity and Capital Resources” below), which had a term of fourmonths. The debt discount expense during the three and six months endedJune 30, 2007 resulted from the amortization of the initial discount of$1.9 million on the Silicon Valley Bank loan (see section “Liquidity andCapital Resources” below), which has a term of 42 months. The increase ininterest income to $1.1 million and $1.7 million for the three and six monthsended June 30, 2007, respectively, from $0.5 million and $0.6 million forthe same periods in 2006, respectively, resulted primarily from interest earnedfrom investing the net proceeds of our April 2007 public offering and 2006equity financing.

Cash, cash equivalents and investment securitiesbalances as of June 30, 2007 were $103.2 million, compared with $53.7million at December 31, 2006. On April 26, 2006, we completed anequity financing, in which we raised approximately $62.0 million in net cashproceeds through the private sale to institutional and other sophisticatedinvestors of an aggregate of 15.5 million shares of common stock. Thepurchasers in the 2006 equity financing also received five-year warrants topurchase an aggregate of 4.6 million shares of common stock at an exerciseprice of $4.62 per share. In connection with the 2006 equity financing, weissued $3.5 million face amount of convertible promissory notes to investors onFebruary 1, 2006 (the bridge financing). The notes provided for aninterest rate of 8% per annum. We used the funds received in the bridgefinancing for working capital pending receipt of required shareholder approvalsand other conditions to completion of the 2006 equity financing. Theoutstanding principal amount of the notes, together with $63,000 of accruedinterest, automatically converted, at a conversion price of $4.20 per share,into approximately 839,000 shares of common stock at the closing of the equityfinancing.

On April 30, 2007, we received approximately $70million in net proceeds from an underwritten, firm commitment public offeringof 11,848,341 shares of our common stock. These proceeds will be used for thecontinued clinical and preclinical development of picoplatin, including fundingour ongoing clinical trails in small cell lung cancer, metastatic colorectalcancer and hormone-refractory prostate cancer, for discovery and research fornew products candidates, and for general corporate purposes, including workingcapital. We believe that current cash and cash equivalent balances and fundsfrom the public offering will provide adequate resources to fund operations atleast through the second quarter of 2009.

As discussed below, wecurrently are conducting multiple ongoing studies of picoplatin and, inApril 2007, treated our first patient in our Phase III pivotal study insmall cell lung cancer. In addition, in 2006, we relocated our corporateheadquarters to South San Francisco into office space and laboratory facilitiesthat are under a five-year lease. These, as well as increases in personnel,initiation of internal research programs and plans for continued future growth,are expected to result in significant increases in our operating costs,including research and development and administrative expenses. We will requiresubstantial additional funding to support our picoplatin and other proposedclinical development programs and to fund our operations. In the event that wedo not obtain sufficient additional funds, we may be required to delay, reduceor curtail the scope of our picoplatin and other product developmentactivities.

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***Major Research andDevelopment Projects***

Our major research and development project ispicoplatin, a new-generation platinum-based cancer therapy that is designed totreat cancers that are resistant to existing platinum-based cancer therapies,to prolong time to relapse when used first line, and to have an improved safetyprofile relative to existing platinum-based cancer therapies. We completedpatient enrollment in our Phase II clinical study of picoplatin in small celllung cancer in August 2006 and, based on interim data from that ongoingstudy, initiated a Phase III trial of picoplatin in small cell lung cancer inthe second quarter of 2007. In May 2006, we treated our first patients intwo Phase I/II studies evaluating picoplatin in the first-line treatment ofadvanced colorectal cancer and hormone refractory prostate cancer. We initiatedpatient enrollment in the Phase II component of our prostate cancer study inJuly 2007. We expect to initiate enrollment in the Phase II component ofour colorectal cancer study in the second half of 2007. We initiated patientenrollment in a Phase I trial of an oral formulation of picoplatin in solidtumors in April 2007. As of June 30, 2007, we have incurred externalcosts of approximately $18 million in connection with our entire picoplatinclinical program. Total estimated future costs of our picoplatin Phase II andPhase III trials in small cell lung cancer are in the ranges of $1 million to$2 million and $23 million to $25 million, respectively, through 2008,including the cost of drug supply. Total estimated future costs of ourpicoplatin Phase I/II trial in colorectal cancer and our Phase I/II trial inhormone refractory prostate cancer are in the ranges of $9 million to $11million and $3 million to $4 million, respectively, through 2008, including thecost of drug supply. Total estimated future costs of our Phase I trial in oralpicoplatin are in the range of $1 million to $2 million through 2008, includingthe cost of drug supply. These costs could be substantially higher if we haveto repeat, revise or expand the scope of any of our trials. Material cashinflows relating to our picoplatin development will not commence unless anduntil we complete required clinical trials and obtain FDA marketing approvals,and then only if picoplatin finds acceptance in the marketplace. To date, wehave not received any revenues from 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 risk factorsdescribed 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 approval of the drug or may be unable toobtain such approval on a timely basis.

If we fail toobtain marketing approval 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 otherdevelopment 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.

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*Summary of Research andDevelopment Costs.***  **Ourdevelopment overhead costs, consisting of rent, utilities, consulting fees,patent costs and other various overhead costs, are included in total researchand development expense for each period, but are not allocated among ourvarious projects. Our total development costs include the costs of variousother research efforts directed toward the identification and evaluation offuture product candidates. These other research projects are pre-clinical andnot considered major projects. Our total research and development costs aresummarized below**:**

**Summaryof Research and Development Costs**

| ** **                            | ** ** | **Quarter Ended June 30,**                | ** ** | **Six Months Ended June 30,**        | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** |
| ** **                            | ** ** | **(in thousands)**                                  | ** ** | **(in thousands)**                                  | ** ** |
| Picoplatin                            |       |                                                     | $          | 3,508                                                    |       |   |   | $ | 2,398 |   |   |   | $ | 7,516 |   |   |   | $ | 4,201 |   |   |
| Discontinued  programs                |       |                                                     | 47         |                                                     |       |   |   |   |   |   | 111 |   |   |   |   |   |   |
| Other overhead  and research costs    |       |                                                     | 2,257      |                                                     |       |   | 845 |   |   |   | 3,685 |   |   |   | 1,565 |   |   |
| Total research and  development costs |       |                                                     | $          | 5,812                                                    |       |   |   | $ | 3,243 |   |   |   | $ | 11,312 |   |   |   | $ | 5,766 |   |   |

 

***Completion ofPublic Offering***

On April 30, 2007, we completed a public offeringof 11,848,341 shares of our common stock at a public offering price of $6.33per share. Net proceeds of the public offering, after payment of underwriters’discounts and commissions and offering expenses, were approximately $70.0million. We plan to use these proceeds for the continued clinical andpreclinical development of picoplatin, including funding our ongoing clinicaltrails in small cell lung cancer, metastatic colorectal cancer andhormone-refractory prostate cancer, for discovery and research for new productscandidates, and for general corporate purposes, including working capital. Webelieve that current cash, cash equivalents, securities balances and funds fromthe public offering will provide adequate resources to fund operations at leastthrough the second quarter of 2009.

As a result of thecompletion of the public offering, our outstanding common stock increased from22.8 million shares to 34.7 million shares. Entities affiliated with MPMCapital Management, or MPM, and Bay City Capital LLC, or BCC, which prior tothe public offering beneficially owned 31.5% and 19.5% shares of our commonstock, respectively, participated as purchasers in the public offering.Immediately following closing of the public offering, MPM beneficially ownedapproximately 8.6 million shares of our common stock, or approximately 23.7% ofour common shares outstanding. BCC beneficially owned approximately5.5 million shares of our common stock, or approximately 15.5% of ourcommon shares outstanding, immediately following the public offering. NicholasJ. Simon III, a director of our company, is a general partner of certain of theMPM entities that acquired common shares in the public offering. In addition,two of our directors, Fred B. Craves and Carl S. Goldfischer, are managingdirectors of BCC and possess capital and carried interests in the BCC entitiesthat acquired common shares in the public offering.

***Liquidity and capital resources***

We have historically suffered recurring operatinglosses and negative cash flows from operations. As of June 30, 2007, we hadnet working capital of $96.5 million, an accumulated deficit of $296.1 millionand total shareholders’ equity of $102.7 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 six months endedJune 30, 2007 totaled $12.8 million. There were no revenues and other incomesources for first quarter of 2007. 

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Cash, cash equivalents andinvestment securities, net of restricted cash of $0.3 million, totaled $103.2million at June 30, 2007 compared to $53.7 million at December 31,2006.

On April 30, 2007, we completed the publicoffering of common shares described under the heading “Completion of PublicOffering” above. With the net proceeds of the public offering, of approximately$70.0 million after payment of underwriting discounts and commissions andoffering expenses, we believe that our current cash, cash equivalent balancesand investment securities balances will provide adequate resources to fundoperations at least through the second quarter of 2009.

On April 26, 2006, we completed an equityfinancing, pursuant to which we issued to a group of institutional and otheraccredited investors an aggregate of 15.5 million shares of common stock at acash purchase price of $4.20 per share. Investors in the 2006 equity financingalso received five-year warrants to purchase an aggregate of 4.6 million sharesof common stock at an exercise price of $4.62 per share. We received $62.0million in net proceeds from the 2006 equity financing, which, along with thenet proceed received from our April 2007 public offering, we intend to useto fund our picoplatin clinical program and general working capital needs.Concurrent with the closing of the 2006 equity 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. As a result of the completion of the 2006equity financing and the conversion of the Series B preferred shares, ouroutstanding common stock increased from approximately 5.7 million shares to approximately22.8 million shares.

In connection with our 2006 equity financing, weentered into a letter agreement with Texas State Bank, pursuant to which weagreed to accelerate 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 WallStreet Journal (8.00% at May 23, 2006). We paid off the outstandingbalance of the note, $2.7 million, on May 23, 2006.

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. We have used $10.0 millionof the proceeds of the loan to fund our cash payment obligations to Genzymeunder the license agreement amendment and plan to use the remaining proceeds tosupport our late-stage clinical trials of picoplatin and general workingcapital needs. The loan is for a term of 42 months and matures on April 1,2010. We are required to pay a 7.67% fixed interest rate on the outstandingprincipal balance plus a $1.35 million additional payment upon the maturitydate of the loan. This additional payment will be accreted to the note payablebalance over the term of the loan using the effective interest rate method andreflected 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 forthe picoplatin drug development program and commence enrollment of patients ina Phase 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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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 resulted in a substantial increase inour rent and operating costs. Under the lease agreement dated July 10,2006, the annual base rent for the leased facilities is approximately $542,000and is subject to annual adjustment based on disbursements for tenantimprovements and increases in the Consumer Price Index in the San Franciscometropolitan market. Base rent is payable in monthly 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 averaged $21,000 during the construction of tenantimprovements. We paid total rent (base rent and additional rent based on ourshare of project operating expenses) of $306,000 during the first six months of2007. The initial term of the lease is 60 months. We may, upon written noticedelivered at least nine months prior to expiration of the initial lease term,extend the lease for an additional three years, with rent payable at the thenmarket 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 payment of $1.0 million in common stock and $1.0 million incash. The original agreement provided for development and commercialization milestonepayments of up to $13.0 million, payable in cash or a combination of cash andcommon stock, and a royalty rate of up to 15% of net product sales afterregulatory approval. The parties executed an amendment to the license agreementon September 18, 2006, modifying several key financial terms and expandingthe licensed territory to include Japan, thereby providing us worldwide rights.In consideration of the amendment, we paid Genzyme $5.0 million in cash onOctober 12, 2006 and $5.0 million in cash on March 30, 2007. Theamendment eliminates $8.0 in development milestone payments to Genzyme. Genzymeremains entitled to receive up to $5.0 million in commercialization milestonesupon the attainment of certain levels of annual net sales of picoplatin afterregulatory approval. The amendment also reduces the royalty payable to Genzymeto a maximum of 9% of annual net product sales. In addition, the amendmentreduces the sharing of sublicense revenues for any sublicenses entered intoduring the first year following the amendment and eliminates the sharing ofsublicense revenues on and after September 18, 2007.

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 and February 2007,we committed to provide TSRI an aggregate of $2.5 million 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 the treatment of cancer. We havethe option to negotiate a worldwide exclusive license, including the right tosublicense, to develop and to commercialize any compounds arising from thecollaboration. The research funding is payable by us to TSRI quarterly inaccordance with the agreed upon research plan and budget. On August 8,2005, we made an initial funding payment to TSRI of approximately$0.2 million. We paid TSRI total funding payments of $1.0 million in 2006and $0.6 million during the first six months of 2007, which amounts werecharged to R&D expense. The agreement provides for aggregate additionalfunding payments of $0.8 million during the balance of 2007. We have noassurance that the research funded under this arrangement will be successful orultimately will give rise to any viable product candidates. Further, there canbe no assurance that we will be able to negotiate, on acceptable terms, alicense with respect to any compounds arising from the collaboration.

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Wewill require substantial additional funding to develop and commercializepicoplatin and any other proposed products and to fund our operations.**Management is continuously exploring financingalternatives, including:

·       raising additional capitalthrough the public or private sale of equity or debt securities or through theestablishment of credit or other funding facilities; and

·       entering into strategiccollaborations, which may include joint ventures or partnerships for productdevelopment and commercialization, merger, sale of assets or other similartransactions.

Ouractual capital requirements will depend upon numerous factors, including:

·       the scope and timing of ourpicoplatin clinical program and other research and development efforts,including the progress and costs of our ongoing Phase II and Phase III trialsof picoplatin in small cell lung cancer, our ongoing Phase I/II studies incolorectal and prostate cancers as well as our Phase I trial of picoplatin(oral formulation) in solid tumors;

·       our ability to obtainclinical supplies of picoplatin active pharmaceutical ingredient and finisheddrug product in a timely and cost-effective manner;

·       actions taken by the FDAand other regulatory authorities;

·       the timing and amounts ofproceeds from any sale of the Denton facility and assets;

·       the timing and amount ofany milestone or other payments we might receive from potential strategicpartners;

·       our degree of success incommercializing picoplatin or any other product candidates;

·       the emergence of competingtechnologies and products, and other adverse market developments;

·       the acquisition orin-licensing of other products or intellectual property;

·       the costs, including leaseand operating costs, incurred in connection with the relocation of ourcorporate headquarters to South San Francisco and the planned expansion of ourworkforce;

·       the costs of any researchcollaborations or strategic partnerships established;

·       the costs of preparing,filing, prosecuting, maintaining and enforcing patent claims and otherintellectual property rights; and

·       the costs of performing ourobligations under the loan with Silicon Valley Bank and Merrill Lynch Capital,including the cost of interest and other payment obligations and penalties and thecost of complying with unrestricted cash, product development and othercovenants 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 resulted in the loss of approximately $93.3 million of our netoperating loss carryforwards and $9.1 million of our research and developmentcredit carryforwards. We had net operating loss carryforwards of approximately$62.3 million available for future use as of December 31, 2006, which willexpire from 2007 through 2026. Although the public offering completed onApril 30, 2007 resulted in a significant change in the Company’s capitalstructure, we have determined that an ownership change did not occur as definedin Section 382 of the IRC. Consequently, the amount of net operating losscarryforwards and research and experimentation carryforwards available for usein future years will not be further limited under IRC Sections 382 and 383 as aresult of that public offering.

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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 amaterial adverse effect on our financial position, results of operations andour ability to continue in existence. Our consolidated financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

At June 30, 2007, we had the followingcontractual 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)             |       | $         | 15,173     |                            |       | $                              | 4,879      |                           |       |                               | $          | 10,294 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating lease  obligations:   |       |      |       |                            |       |                           |       |                           |       |                               |       |   |   |   |   |   |   |   |   |
| Seattle office space            |       | 1,143     |       |                            | 546        |                           |       |                           | 597        |                               |       |   | — |   |   |   | — |   |   |
| South San Francisco premises(1) |       | 2,184     |       |                            | 535        |                           |       |                           | 1,070      |                               |       |   | 579 |   |   |   | — |   |   |
|                            |       | 3,327     |       |                            | 1,081      |                           |       |                           | 1,667      |                               |       |   | 579 |   |   |   | — |   |   |
| Purchase obligations:           |       |      |       |                            |       |                           |       |                           |       |                               |       |   |   |   |   |   |   |   |   |
| Scripps research collaboration  |       | 778       |       |                            | 778        |                           |       |                           | —     |                               |       |   | — |   |   |   | — |   |   |
| Total                           |       | $         | 19,278     |                            |       | $                              | 6,738      |                           |       |                               | $          | 11,961 |   |   |   | $ | 579 |   |   |   | $ | — |   |   |

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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 $12,346 as refected onthe Condensed Consolidated Balance Sheet as of June 30, 2007.

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk

The Company is exposed tothe impact of interest rate changes and changes in the market values of itsinvestments.

**Interest Rate Risk**

The Company’s exposure to market rate risk for changesin interest rates relates primarily to the debt securities included in itsinvestment portfolio. The Company does not invest in any derivative financialinstruments. The Company invests in money market funds, debt instruments of theUS Government and its agencies and high-quality corporate issuers. Investmentsin both fixed rate and floating rate interest earning instruments carry adegree of interest rate risk. The fair market value of fixed rate securitiesmay be adversely impacted due to a rise in interest rates, while floating ratesecurities may produce less income than expected if interest rates decrease. Duein part to these factors, the Company’s future investment income may fall shortof expectations due to changes in interest rates or the Company may experiencelosses in principal if forced to sell securities that have declined in marketvalue due to changes in interest rates. At June 30, 2007, the Companyowned no government debt instruments and owned corporate debt securitiestotaling $59.9 million. The Company’s exposure to losses as a result ofinterest rate changes is managed through investing primarily in securities withrelatively short maturities of two years or less and in securities withvariable interest rates. The corporate debt securities owned by the Company at June 30,

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2007 consisted of $56.1million with maturities of less than one year and $3.8 million with maturitiesof greater than one year, but less than two years.

The Company’s onlymaterial outstanding debt is its loan obligation to Silicon Valley Bank andMerrill Lynch Capital. The outstanding balance of this loan was $12.3 millionon June 30, 2007. The loan, which matures on April 1, 2010, bearsinterest at a fixed rate of 7.67%. The occurrence of an event of default underthe loan, as described above, would increase the applicable rate of interest by5% during the continuance of the event of default and could result inacceleration of the Company’s payment obligations under the loan agreement.

**Item 4.**                        Controlsand Procedures

Under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, the Companyhas evaluated the effectiveness and design of its disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e))as of June 30, 2007, to ensure that the information disclosed by theCompany in the reports that the Company files or submits under the SecuritiesExchange Act of 1934, as amended, is properly recorded, processed, summarizedand reported within the time periods specified in the rules and forms. Basedon this evaluation, the Chief Executive Officer and the Chief Financial Officerhave concluded that, as of June 30, 2007, these disclosure controls andprocedures were effective.

There were no changes in the Company’s internal control overfinancial reporting that occurred during the quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s controlover financial reporting.

***Limitations on theEffectiveness of Controls***

The Company’smanagement, including its Chief Executive Officer and its Chief FinancialOfficer**,**does not expect that the Company’sdisclosure controls or internal controls will prevent all errors and all fraud.A control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of that control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of control must be consideredrelative to their costs. Because of the inherent limitation in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the reality that judgments indecision-making can be faulty, and breakdowns can occur because of simple erroror mistake. Additionally, controls can be circumvented by the individual actsof some persons, by collusion of two or more persons, or by management overrideof the control. The design of any system of controls is also based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time controls may become inadequate becauseof changes in conditions or deterioration in the degree of compliance with thepolicies and procedures. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

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**PART II. OTHERINFORMATION**

**Item 1A.**                RiskFactors

In addition to the otherinformation contained in this report, the following factors could affect ouractual results and could cause our actual results to differ materially fromthose achieved in the past or expressed or implied by our forward lookingstatements.

***Risks Related to Our 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 June 30, 2007, we had an accumulated deficit of $296.1million. Our net loss for the six months ended June 30, 2007 was $16.3million. We had net losses of $23.3 million for the year ended December 31,2006 and $21.0 million for the year ended December 31, 2005. These lossesresulted principally from costs incurred in our research and developmentprograms and from our general and administrative activities. To date, we havebeen engaged only in research and development activities and have not generatedany significant revenue from product sales. In May 2005, we announced thediscontinuation of our skeletal targeted radiotherapy, or STR, developmentprogram as part of a strategic plan to refocus our limited resources on thedevelopment of picoplatin, a platinum-based cancer therapy. We do notanticipate that our picoplatin product candidate, or any other proposedproducts, will be commercially available before 2010, if at all. We expect toincur additional operating losses in the future. These losses may increasesignificantly as we expand our clinical trials and increase our research anddevelopment activities and seek to commercialize picoplatin or any futureproduct candidates.

Our ability to achievelong-term profitability is dependent upon achieving successful results inclinical trials and 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 andadditional financing may have dilutive or adverse effects on our stockholders.**

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 30, 2007, we completed a $75.0 millionequity financing; however, we will require substantial additional funding todevelop and commercialize picoplatin and any other proposed products and tofund our future operations.

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 raise additionalfunds by issuing common stock or securities convertible into or exercisable forcommon stock, our shareholders may experience substantial dilution, and newinvestors 

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could have rights superiorto current security holders. If we are unable to obtain sufficient additionalcash when needed, we may be forced to reduce expenses through the delay,reduction or curtailment of our picoplatin and other development andcommercialization 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 Phase III trials of picoplatin in small cell lung cancer, our ongoing PhaseI/II trials in colorectal and prostate cancers as well as our Phase Itrial of picoplatin (oral formulation) in solid tumors;

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

·       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

·       the costs of performing ourobligations under our loan with Silicon Valley Bank and Merrill Lynch Capital,including the cost of interest and other payment obligations and penalties andthe cost of complying with unrestricted cash, product development and othercovenants and restrictions under the loan agreement.

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

The manufacture and marketing of our picoplatinproduct candidate and our research and development activities are subject toregulation for safety, efficacy and quality by the FDA in the United Statesand by comparable 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 will not be able to commercialize ourproduct candidates until we obtain regulatory approvals, and consequently anydelay in obtaining, or our inability to obtain, regulatory approvals could harmour business. We have had only limited experience in filing and pursuingapplications necessary to gain regulatory approvals. This may impede ourability to obtain timely approvals from the FDA or foreign regulatory agencies.

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If we violate regulatory requirements at any stage,whether before or after our marketing approval is obtained, we may be fined,forced to remove a product from the market or experience other adverseconsequences, including delay of the approval of our marketing applications,which would materially harm our business and financial results. Additionally,we may not be able to obtain the labeling claims necessary or desirable forproduct promotion and could be required to conduct post-marketing studies onthe safety or effectiveness of our products. If we or other parties identifyserious side effects after any of our products are on the market, or ifmanufacturing or regulatory problems occur, regulatory approval may bewithdrawn and reformulation of our products, additional clinical trials,changes in labeling of our products, and/or additional marketing applicationsmay be required.

The requirements governingthe conduct of clinical trials and manufacturing and marketing of our proposedproducts outside the United States vary widely from country to country. Foreignapprovals may take longer to obtain than FDA approvals and can involveadditional testing. Foreign regulatory approval processes include all of therisks associated with the FDA approval processes. Also, approval of a productby the FDA does not ensure approval of the same product by the healthauthorities 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 who relapsed within six monthsafter completing prior platinum-containing chemotherapy. The endpoints of thetrial include survival, response rate , disease control and progression freesurvival.

Based upon positive interim overall survival data fromour Phase II study, we have initiated an international, multi-center randomizedPhase III SPEAR (Study of Picoplatin Efficacy After Relapse) pivotal trial ofpicoplatin in small cell lung cancer. The Phase III trial, which is beingconducted pursuant to a Special Protocol Assessment, or SPA, with the FDA, isdesigned to compare the efficacy and safety of picoplatin plus best supportivecare with best supportive care alone as a second-line therapy. The study isexpected to enroll approximately 400 patients with small cell lung cancer whosedisease did not respond to a first-line platinum-containing (cisplatin orcarboplatin) chemotherapy regimen or whose disease responded initially tofirst-line platinum-containing therapy, but then progressed within six monthsafter completion of treatment. Patients are being randomized on a 2:1 ratio toreceive picoplatin plus best supportive care or best supportive care alone. Theprimary endpoint of the study is improved overall survival as measured in timefrom randomization to death. Secondary endpoints include response rates, diseasecontrol, duration of response and progression-free survival. We currentlyestimate that the study will take approximately 20 months to complete; however,the actual 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 of picoplatin in the first-line treatment of patients withmetastatic colorectal cancer. This study is designed to determine the safetyand efficacy of picoplatin substituted for oxaliplatin in the FOLFOX regimen(combination of chemotherapy agents 5-fluorouracil, leucovorin andoxaliplatin) to treat patients newly diagnosed with metastatic colorectalcancer. Also in May 2006, we enrolled our first patient in our Phase I/IItrial of picoplatin in the first-line treatment of patients withhormone-refractory metastatic prostate cancer. This study is designed todetermine the safety and efficacy of picoplatin when combined with thechemotherapy agent docetaxel (Taxotere®) and prednisone. We initiated patientenrollment in the Phase II component of our prostate cancer study in July 2007.We expect to initiate enrollment in the Phase II component of our colorectal 

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cancer study  in the second half of 2007. Endpoints ofthese studies will include safety, response, time to progression,progression-free survival and overall survival.

The actual timesfor initiation and completion of our picoplatin clinical trials depend uponnumerous factors, including:

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

·       ourability to open clinical sites;

·       ourability to recruit and 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;

·       reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and trial sites, the terms of which can be subject to extensivenegotiation and may vary significantly among different CROs and trial sites;

·       obtaininginstitutional review board, or IRB, approval to conduct a clinical trial at aprospective site;

·       failureto conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols;

·       inspectionof the clinical trial operations or trial sites by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold;

·       unforeseensafety issues;

·       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 academicinstitutions and CROs 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.

**If testing of aparticular product does not yield positive 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;

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·       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;

·       we,our potential collaborators or regulators may suspend or terminate clinicaltrials if the participating subjects or patients are being exposed tounacceptable health 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 veryexpensive, can take many years, and the outcome is uncertain. The data that wemay collect from our picoplatin clinical trials may not be sufficient tosupport regulatory approval of our proposed picoplatin product. The clinicaltrials of picoplatin and any other proposed products may not be initiated orcompleted on schedule and the FDA or foreign regulatory agencies may notultimately approve any of our product candidates for commercial sale. Ourfailure to adequately demonstrate the safety and efficacy of a cancer therapyproduct under development would delay or prevent regulatory approval of theproduct, which would prevent us from marketing the proposed product.

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

Results of earlypreclinical and clinical trials are based on a limited number of patients andmay, upon review, be revised or negated by authorities or by later stageclinical results. Historically, the results from preclinical testing and earlyclinical trials often have not been predictive of results obtained in laterclinical trials. A number of new drugs and therapeutics have shown promisingresults in initial clinical trials, but subsequently failed to establish sufficientsafety and effectiveness data to obtain necessary regulatory approvals. Dataobtained from preclinical and clinical activities are subject to varyinginterpretations, which may delay, limit or prevent regulatory approval.

**If we cannotnegotiate and maintain licenses or collaborative arrangements with thirdparties, our research, development, manufacturing, sales and marketingactivities may not be cost-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 payment of$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, 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 an additional $5.0 million in cashon March 30, 2007. The amendment eliminates all development milestonepayments to Genzyme. Genzyme remains entitled to receive up to $5.0 million incommercialization milestones upon the attainment of certain levels of annualnet sales of picoplatin 

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after regulatory approval.The amendment 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 began dosing patients in thesecond quarter of 2007 in our single pivotal Phase III SPEAR trial under ourapproved SPA. If successful, this trial will be the basis of a New DrugApplication, or NDA, targeted for submission 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,or if 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 written noticeto Genzyme. If not earlier terminated, the license agreement will continue ineffect, in each country in the territory in which the licensed product is soldor manufactured, until the earlier of (i) expiration of the last validclaim of a pending or issued patent covering the licensed product in thatcountry or (ii) a specified number of years after first commercial sale ofthe licensed product in that country. If Genzyme were to breach its obligationsunder the license, or if the license expires or is terminated and we cannotrenew, replace, extend or preserve our rights under the license agreement, wewould be unable to move forward with our current and planned picoplatinclinical studies.

On August 4, 2005, weentered into a research funding and option agreement with The Scripps ResearchInstitute, or TSRI. Under the agreement, as amended in December 2006 and February 2007,we will provide TSRI an aggregate of $2.5 million over a 26-month periodto fund research relating to synthesis and evaluation of novel small molecule,multi-targeted protein kinase inhibitors and focal adhesion kinase inhibitorsas therapeutic agents, including the treatment of cancer. We have the option tonegotiate a worldwide exclusive license, including the rights to sublicense, todevelop and to commercialize any compounds arising from the collaboration. Theresearch funding is payable by us to TSRI quarterly in accordance with theagreed upon research plan and budget. We made an initial funding payment toTSRI of approximately $0.2 million, on August 8, 2005. We paid TSRI totalfunding payments of $1.0 million in 2006 and $0.6 million during the first sixmonths of 2007, which amounts were charged to R&D expense. The agreementprovides for aggregate additional funding payments of $0.8 million during thebalance of 2007. We have 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 we will be able tonegotiate, on acceptable terms, a license with respect to any compounds arisingfrom 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 thesesupplies may 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,or 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-partymanufacturers will be obligated to expend time, money and effort in production,record-keeping and quality control to assure that our products meet applicablespecifications and other requirements. If any of our third-party manufacturersor suppliers fails to comply with these requirements, we may be subject toregulatory action.

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We have limited experience in drug formulation ormanufacturing, and we lack the resources and capability to manufacture picoplatinor any other product candidate on a clinical or commercial scale. As a result,we rely on third parties to manufacture picoplatin API and finished drugproduct for our clinical trials. The drug product has been demonstrated to bestable for up to 30 months from the date of manufacture. We currently haveseparate agreements with one supplier each of API and finished drug product.Manufacturing services under these agreements are provided on a purchase order,fixed-fee basis. Unless earlier terminated, each agreement continues for aninitial term ending December 31, 2009 and may be extended beyond theinitial term upon agreement of the parties. The agreements generally providethat they may be terminated by either party if there is a material breach by theother party that remains uncured or in the event of solvency or bankruptcy ofthe other party. We may terminate the finished drug supply agreement at anytime with one year’s advance notice. We may terminate the API manufacturingagreement if there is a change in control of the manufacturer. We have noassurance that our current suppliers will be able to manufacture sufficientpicoplatin API and/or finished drug product on a timely or cost-effective basisat all times in the future. If we are required to seek out alternativemanufacturers, we may incur significant additional costs and suffer delays in,or be prevented from, completing or initiating our ongoing or planned clinicaltrials.

We also rely onthird-party contractors to perform for us, or assist us with, the set-up,conduct, support and management of our clinical studies. Because thesecontractors provide specialized services, their activities and quality ofperformance may be outside our direct control. If these contractors do notperform their contractual duties or obligations, do not meet expecteddeadlines, or need to be replaced, or if the quality or accuracy of theclinical data they obtain is compromised due to the failure to adhere to ourclinical trial protocols or for any other reasons, we may need to enter intonew arrangements with alternative third parties. If any of these circumstanceswere to occur, our clinical trials may be extended, delayed or terminated ormay need to be repeated, we may not be able to obtain regulatory approval foror commercialize the product candidate being tested in such trials, and we maybe subject to regulatory action.

**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.**

We have limited experiencein selling, marketing or distributing therapeutic products. To the extent weare successful in obtaining approval for the commercial sale of picoplatin orany other product candidate, we may need to secure one or more corporatepartners to conduct these activities. We may not be able to enter intopartnering arrangements in a timely manner or on terms acceptable to us. To theextent that we enter into co-promotion or other licensing arrangements, ourproduct revenues are likely to be lower than if we directly marketed and soldour products, and any revenues we receive would depend upon the efforts ofthird parties, which efforts may not be successful. If we are not able tosecure adequate partnering arrangements, we would have to hire additionalemployees or consultants with expertise in sales, marketing and distribution.Employees with relevant skills may not be available to us. Additionally, anyincrease in the number of employees would increase our expense level and couldhave a material adverse effect on our financial position. If we are notsuccessful in commercializing 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.

**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 

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in the United States andabroad. Our initial focus for picoplatin is small cell lung cancer, the mostaggressive and deadly form of lung cancer. Although platinum therapies are thepreferred treatment, no FDA-approved therapies are available for patients withplatinum-refractory or -resistant disease. If approved, picoplatin will becompeting with existing treatment regimens, as well as emerging therapies forsmall cell lung cancer and other platinum-based therapeutics. Largepharmaceutical/biotechnology companies, including Bristol-Myer Squibb Company,Bayer Schering Pharma AG, Dainippon Sumitomo Pharma Co. Ltd., Eli Lilly andCompany, GlaxoSmithKline PLC, Novartis AG, Pfizer Inc., Genentech, Inc.,Shionogi & Co. Ltd., SK Pharma and Sanofi-Aventis Group, are marketingand/or developing therapeutics in late-stage clinical trials for the treatmentof small cell lung cancer or platinum agents for the treatment of cancer.Multiple biotechnology companies are engaged in clinical trials for thetreatment of small cell lung cancer and other platinum-based therapeutics,including Aeterna Zentaris Inc., Access Pharmaceuticals Inc., GPC Biotech AG,Onyx Pharmaceuticals Inc., Pharmion Corporation, Sunesis Pharmaceuticals Inc.,Keryx Biopharmaceuticals Inc., Transave Inc., Vion Pharmaceuticals Inc.,PharmaMar (Zeltia Group), ImmunoGen, Inc., Meabco A/S, Antigenics, Inc.,Ipsen Group and Menarini Group. As we expand the utility of picoplatin intoother oncology indications such as prostate and colon cancers, we will befacing 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.

**Even if any of ourdrug candidates receives regulatory approval, our drug candidates will still besubject to extensive post-marketing regulation.**

If we or our collaborators receive regulatory approvalfor our drug candidates, we will also be subject to ongoing FDA obligations andcontinued regulatory review, such as cGMP regulations and continued adverseevent reporting requirements. We may also be subject to additional FDApost-marketing obligations, all of which may result in significant expense andlimit our ability to commercialize such drugs.

If any of our drugcandidates receive U.S. regulatory approval, the FDA may still impose significantrestrictions on the indicated uses for which such drugs may be marketed orimpose ongoing requirements for potentially costly post-approval studies. Inaddition, regulatory agencies subject a drug, its manufacturer and themanufacturer’s facilities to continual review and inspections. The subsequentdiscovery of previously unknown problems with a drug, including adverse eventsof unanticipated severity or frequency, or problems with the facility where thedrug is manufactured, may result in restrictions on the marketing of that drug,up to and including withdrawal of the drug from the market. Failure to complywith applicable regulatory requirements may result in:

·       issuanceof warning letters by the FDA;

·       impositionof fines and other civil penalties;

·       criminalprosecutions;

·       injunctions,suspensions or revocations of marketing licenses;

·       suspensionof any ongoing clinical trials;

·       suspensionof manufacturing;

·       delaysin commercialization;

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·       refusalby the FDA to approve pending applications or supplements to approvedapplications filed by us or our collaborators;

·       refusalsto permit drugs to be imported to or exported from the United States;

·       restrictionson operations, including costly new manufacturing requirements; and

·       productrecalls or seizures.

The FDA’s policies maychange and additional government regulations may be enacted that could preventor delay regulatory approval of our drug candidates or further restrict orregulate post-approval activities. We cannot predict the likelihood, nature orextent of adverse government regulation that may arise from future legislationor administrative action, either in the United States or abroad. If we are notable to maintain regulatory compliance, we might not be permitted to market ourdrugs and our business could suffer.

**As a result of our 2006 stock offering, the amount ofnet operating loss carryforwards and research and experimentation creditcarryforwards available to be used by us in future years may be limited.**

During 2006, weexperienced significant changes to our capital structure which resulted in anownership change, as defined under Section 382 of the Internal RevenueCode of 1986, as amended, or the IRC. Consequently, the amount of net operatingloss carryforwards and research and experimentation credit carryforwardsavailable to be used in future years are limited under IRC Sections 382 and383. This limitation resulted in the loss of approximately $93.3 million of ournet operating loss carryforwards and $9.1 million of our research anddevelopment credit carryforwards. As of December 31, 2006, we had netoperating loss carryforwards of approximately $62.3 million available forfuture use which will expire from 2007 through 2026. Although the publicoffering completed on April 30, 2007 resulted in a significant change inour capital structure, we have determined that an ownership change did notoccur as defined in Section 382 of the IRC. Consequently, the amount ofnet operating loss carryforwards and research and experimentation carryforwardsavailable for use in future years will not be further limited under IRCSections 382 and 383 as a result of that public offering.

**If we are unable to protect our proprietary rights, wemay not be able to compete effectively, or operate profitably.**

Our success is dependentin part on obtaining, maintaining and enforcing our patents and otherproprietary rights and our ability to avoid infringing the proprietary rightsof others. The United States Patent and Trademark Office, or the USPTO, may notissue patents from the patent applications owned by or licensed to us. Ifissued, the patents may not give us an advantage over competitors with similartechnologies. The issuance of a patent is not conclusive as to its validity orenforceability and it is uncertain how much protection, if any, will be givento our patents if we attempt to enforce them and they are challenged in courtor in other proceedings, such as oppositions, which may be brought in foreignjurisdictions to challenge the validity of a patent. A third party maychallenge the validity or enforceability of a patent after its issuance by theUSPTO. It is possible that a competitor may successfully challenge our patentsor that a challenge will result in limiting their coverage. Moreover, the costof litigation to uphold the validity of patents and to prevent infringement canbe substantial. If the outcome of litigation is adverse to us, third partiesmay be able to use our patented invention without payment to us. Moreover, itis possible that competitors may infringe our patents or successfully avoidthem through design innovation. We may need to file lawsuits to stop theseactivities. These lawsuits can be expensive and would consume time and otherresources, even if we were successful in stopping the violation of our patentrights. In addition, there is a risk that a court would decide that our patentsare not valid and that we do not have the right to stop the other party fromusing the inventions. There is also the risk that, even if the validity of ourpatents was upheld, a court would refuse to stop the other party on the groundthat its activities do not infringe our patents.

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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 Europe. The FDA hasalso designated picoplatin as an orphan drug for the treatment of small celllung cancer under the provisions of the Orphan Drug Act, which entitles us toexclusive marketing rights for picoplatin in the United States for seven yearsfollowing market approval. If approved, we may also be able to extend the termof a U.S. patent covering picoplatin under the Hatch-Waxman Act, which Actpermits the extension of the term of a United States Patent on a new drug forup to a maximum of five years. We intend to submit an application for orphandrug status for small cell lung cancer in Europe during 2007 which, if granted,would also entitle us to exclusive marketing rights in Europe for ten yearsfollowing market approval. Additional potential avenues exist which maysupplement patent protection and exclusivity for picoplatin in Europe**.**

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. U.S. Patent 5,665,771 is co-owned by Genzyme and a third party, whichhas exclusively licensed its rights to the patent to Genzyme (as successor toAnorMED, Inc.).

In addition to theintellectual property rights described above, we rely on unpatented technology,trade secrets and confidential information. Therefore, others may independentlydevelop substantially equivalent information and techniques or otherwise gainaccess to or disclose our technology. We may not be able to effectively protectour rights in unpatented technology, trade secrets and confidentialinformation. We require each of our employees, consultants and advisors toexecute a confidentiality agreement at the commencement of an employment orconsulting relationship with us. However, these agreements may not provideeffective protection 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 othersmay have or may acquire patent rights that they could enforce against us. Insuch case, we may be required to alter our products, pay licensing fees orcease activities. If our products conflict with patent rights of others, thirdparties could bring legal actions against us claiming damages and seeking toenjoin manufacturing and marketing of the affected products. If these legalactions are successful, in addition to any potential liability for damages, wecould be required to obtain a license in order to continue to manufacture ormarket the affected products. We may not prevail in any legal action and arequired license under the patent may 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 ouroperations. If third parties file patent applications, or are issued patentsclaiming technology also claimed by us in pending applications, we may berequired to participate in interference proceedings in the USPTO to determinepriority of invention. We may be required to participate in interferenceproceedings involving our issued patents and pending applications. We may berequired to cease using the technology or license rights from prevailing thirdparties as a result of an unfavorable outcome in an interference proceeding. Aprevailing party in that case may not offer us a license on commerciallyacceptable terms.

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In April 2003, wereceived $10.0 million from the sale to Boston Scientific Corporation, or BSC,of certain non-core patents and patent applications and the grant to BSC ofexclusive license rights to certain non-core patents and patent applications.BSC originally asserted four such patents in two lawsuits againstJohnson & Johnson, Inc., its subsidiary, Cordis Corporation, andGuidant Corporation, alleging infringement of such patents. In both lawsuits,the defendants denied infringement and asserted invalidity and unenforceabilityof the patents. BSC subsequently withdrew three of the patents from thelitigation, including the patents that were assigned to BSC. BSC acquiredGuidant in April 2006. On April 4, 2007, the court issued a summaryjudgment that the defendants did not infringe the patents licensed to BSC.Although we were not a party to the lawsuits, our management and counsel havebeen deposed in connection with the lawsuits. It is possible that BSC, due toits lack of 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 of picoplatin and any other proposed cancer therapyproducts, including past clinical and manufacturing activities in connectionwith our terminated STR radiotherapeutic, may subject us to product liabilityclaims. We are insured against such risks up to a $10.0 million annualaggregate limit in connection with clinical trials of our products underdevelopment and intend to obtain product liability coverage in the future.However, insurance coverage may not be available to us at an acceptable cost.We may not be able to obtain insurance coverage that will be adequate to satisfyany liability that may arise. Regardless of merit or eventual outcome, productliability claims may result in decreased demand for a product, injury to ourreputation, withdrawal of clinical trial volunteers and loss of revenues. As aresult, regardless of whether we are insured, a product liability claim orproduct recall may result in 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 tocomply with 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 have been actively marketing the property. In 2005, werecorded costs associated with the closure of the Denton facility of $0.9million. We incurred costs of $0.3 million in 2006 related to these activities.These costs could increase substantially, depending on actions of regulators orif we discover previously unknown contamination in or around the facility. In addition,the risk of accidental contamination or injury from hazardous or radioactivematerials cannot be completely eliminated. In the event of such an accident, wecould be held liable for any resulting damages, and any such liability could 

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exceed our resources. Ourcurrent insurance does not cover liability for the clean-up of hazardous wastematerials or other environmental risks.

On May 16, 2007,NeoRx Manufacturing Group, Inc., our wholly owned subsidiary, entered intoa Contract of Purchase and Sale with Molecular InsightPharmaceuticals, Inc., for the Denton property. The purchase price of theproperty is $3,000,000, payable in cash at closing. The completion of the saleis subject to a 45-day feasibility review period, which has been extendedto allow for property inspection and due diligence by Molecular Insight, andother customary closing conditions. We have no assurance that conditions of theproposed sale will be satisfied and, if satisfied, what the timing of such salewill be.

**Even if we bring productsto market, changes in health care reimbursement could adversely affect ourability to effectively price our products or obtain adequate reimbursement forsales 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 andprofitability of biotechnology companies may be affected by the continuingefforts of government and third-party payors to contain or reduce the costs ofhealth care through various means. For example, in certain foreign markets,pricing or profitability of prescription pharmaceuticals is subject togovernmental control. In the United States, there have been, and we expect thatthere will continue to be, a number of federal and state proposals to implementsimilar governmental controls. It is uncertain what legislative proposals willbe adopted or what actions federal, state or private payors for health caregoods and 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 serves onour clinical advisory board and provides us consulting services.

Ronald A. Martell, a director of our company, wasappointed as our president and chief operating officer on May 7, 2007.

As of August 2, 2007, we had a total workforce of42 full-time employees and 5 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 30employees 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 

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development activities orany other proposed programs and research and development efforts. We do notmaintain key-person life insurance on any of our officers, employees orconsultants.

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 the future be required to substantially expand ourworkforce, particularly in the areas of manufacturing, clinical trialsmanagement, regulatory affairs, business development and sales and marketing.These activities will require the addition of new personnel, includingmanagement, and the development of additional expertise by existing managementpersonnel.

We have change of controlagreements and severance agreements with all of our executive officers andconsulting agreements with several 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 any time.

**Our operationsmight be interrupted by the occurrence of a natural disaster or othercatastrophic event.**

Our principal executiveoffices are in South San Francisco, California and we maintain clinicaldevelopment and support activities in Seattle, Washington. We depend on ourfacilities and on our collaborators, contractors and vendors for the continuedoperation of our business. Natural disasters or other catastrophic events,including terrorist attacks, power interruptions, wildfires and other fires,actions of animal rights activists, earthquakes and wars could disrupt ouroperations or those of our collaborators, contractors and vendors. Even thoughwe believe we carry commercially reasonable business interruption and liabilityinsurance, and our contractors may carry liability insurance that protect us incertain events, we might suffer losses as a result of business interruptionsthat exceed the coverage available under our and our contractors’ insurancepolicies or for which we or our contractors do not have coverage. Any naturaldisaster or catastrophic event could have a significant negative impact on ouroperations and financial results. Moreover, any such event could delay ourresearch and development programs.

***Risks Relating to Our Securities***

**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 our commonstock on The Nasdaq Global Market unless and until our common stock maintains aminimum bid price of $5.00 per share for 90 consecutive trading days and weotherwise comply with the initial listing requirements for The Nasdaq GlobalMarket. Trading on the Nasdaq Capital Market may have a negative impact on thevalue of our common stock, because securities trading on the Nasdaq CapitalMarket typically are less liquid than those traded on The Nasdaq Global Market.

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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, asamended, or the Exchange Act, which require additional disclosure bybroker-dealers in connection with any trade involving a stock defined as a“penny stock” (generally, any equity security not listed on a nationalsecurities exchange or quoted on Nasdaq that has a market price of less than$5.00 per share, subject to certain exceptions). Many brokerage firms arereluctant to recommend low-priced stocks to their clients. Moreover, variousregulations and policies restrict the ability of shareholders to borrow againstor “margin” low-priced stocks, and declines in the stock price below certainlevels may trigger unexpected margin calls. Additionally, because brokers’ commissionson low-priced stocks generally represent a higher percentage of the stock pricethan commissions on higher priced stocks, the current price of the common stockcan result in an individual shareholder paying transaction costs that representa higher percentage of total share value than would be the case if our shareprice were higher. This factor may also limit the willingness of institutionsto purchase our common stock. Finally, the additional burdens imposed uponbroker-dealers by these requirements could discourage broker-dealers fromfacilitating trades in our common stock, which could severely limit the marketliquidity of the stock and 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. For the six months endedJune 30, 2007, the reported high and low closing sale prices of our commonstock were $8.89 and $4.72. In 2006, the reported high and low closing saleprices were $9.42 and $3.00. The reported high and low closing sale pricesduring the period from January 3, 2006 through September 22, 2006(the last trading day preceding the effectiveness of our one-for-six reversestock split) were $1.57 and $0.50. The reported high and low closing saleprices during the period from September 25, 2006 through December 31,2006 (after the effective date of the reverse stock split) were $7.74 and$3.00. Our stock price has been and may continue to be affected by this type ofmarket volatility, as well as our own performance. Our business and therelative price of our common stock may be influenced by a large variety offactors, including:

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

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·       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 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 litigation could result in substantial costs and divert ourmanagement’s time and resources, which could cause our business to suffer.

**As a result of our2006 and 2007 stock offerings, 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 2006 equity financing, we issuedto a small group of institutional and other accredited investors an aggregateof 15.5 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 2006 equity financing, weissued an aggregate of 1.6 million shares of common stock to the holders of ourSeries B preferred stock upon conversion of their outstanding Series Bpreferred shares. At the time of closing, the placement agent for the financingalso received a five-year warrant to purchase, on the same terms as theinvestors, 139,000 common shares. As a result of the completion of the 2006equity financing, our outstanding common stock increased from 5.7 millionshares to approximately 22.8 million shares. On April 30, 2007, wecompleted a $75.0 million public offering, pursuant to which we sold 11,848,341shares of our common stock at a public offering price of $6.33 per share. As aresult of the completion of the public offering, our outstanding common stockincreased from 22.8 million shares to approximately 34.7 million shares. Boththe 2006 and 2007 stock offerings have resulted in substantial dilution toshareholders who held our common stock prior to those offerings. Entitiesaffiliated with MPM and BCC participated as purchasers in both our 2006 equityfinancing and our 2007 public offering. Immediately following closing of ourpublic offering, MPM beneficially owned approximately 8.6 million shares of ourcommon stock, or approximately 23.7% of our common shares outstanding. BCCbeneficially owned approximately 5.5 million shares of our common stock, orapproximately 15.5% of our common shares outstanding, immediately following thepublic offering. Nicholas J. Simon III, a director of our company, is a generalpartner of certain of the MPM entities that acquired common shares in the stockofferings. In addition, two of our directors, Fred B. Craves and 

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Carl S. Goldfischer,are managing directors of BCC and possess capital and carried interests in theBCC entities that acquired common shares in the stock offerings.

We maintain an effective registration statement withthe SEC covering the resale of the 15.5 million shares of common stock issuedin our 2006 equity financing and the 4.6 million shares of common stockissuable upon exercise of the warrants. Accordingly, these shares are generallyavailable for immediate resale in the public market. In addition, the approximately1.6 million 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 of 1933, as amended. All of theshares acquired by purchasers in our public offering are freely resalable inthe public market. The market price of our common stock could fall as a resultof such resales due to the increased number of shares available for sale in themarket.

**Our largestshareholders may take actions that are contrary to your interests, includingselling their stock.**

A small number of our shareholders hold a significantamount of our outstanding stock. These shareholders may support competing transactionsand have interests that are different from yours. Sales of a large number ofshares of our stock by these large shareholders or other shareholders within ashort period of time could adversely affect our stock price.

**Any future equityor debt issuances by us may have dilutive or adverse effects on our existingshareholders.**

We have financed our operations, and we expect tocontinue to finance our operations, primarily by issuing and selling our commonstock or securities convertible into or exercisable for shares of our commonstock. In light of our need for additional financing, we may issue additionalshares of common stock or convertible securities that could dilute yourownership in our company and may include terms that give new investors rightsthat are superior to yours. Moreover, any issuances by us of equity securitiesmay be at or below the prevailing market price of our common stock and in anyevent may have a dilutive impact on your ownership interest, which could causethe market price of our common stock to decline.

We may also raise additional funds through theincurrence of debt, and the holders of any debt we may issue would have rightssuperior to your rights in the event we are not successful and are forced toseek the protection of bankruptcy laws.

**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 

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corporation’sboard of directors prior to the time the acquiring person first became a 10%beneficial owner of the target corporation’s voting securities. Prohibitedbusiness 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 anti-takeover effect with respect to transactions that our board doesnot approve in advance.

The provisions of ourarticles of incorporation and Washington law discussed above may have theeffect of delaying, deterring or preventing a change of control of the company,even if this change would be beneficial to our shareholders. These provisionsalso may discourage bids for our common stock at a premium over market priceand may adversely affect the market price of, and the voting and other rightsof the holders of, our common stock. In addition, these provisions could makeit more difficult to replace or remove our current directors and management inthe event our shareholders believe this would be in the best interests of thecorporation and our shareholders.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

TheCompany’s annual meeting of shareholders was held on June 14, 2007. Thefollowing nominees were elected as directors, each to hold office until hissuccessor is elected and qualified, by the vote set forth below:

| **Nominee**            | ** ** | ** ** | ** ** | **For**   | ** ** | **Abstain** | ** ** |
|------------------------|------------|------------|------------|-----------|------------|-------------|------------|
| Gerald Mc Mahon        |       | 20,423,800 |       | 147,940   |       |
| Robert S. Basso        |       | 20,398,819 |       | 172,921   |       |
| Frederick B.  Craves   |       | 19,413,217 |       | 1,158,523 |       |
| E. Rolland  Dickson    |       | 20,398,458 |       | 173,282   |       |
| Carl S.  Goldfischer   |       | 20,421,805 |       | 149,935   |       |
| Robert M.  Littauer    |       | 20,401,631 |       | 170,109   |       |
| Ronald A. Martell      |       | 20,423,238 |       | 148,502   |       |
| Nicholas J. Simon  III |       | 20,401,700 |       | 170,040   |       |
| David R. Stevens       |       | 20,423,989 |       | 147,751   |       |

 

Theproposal to ratify the appointment of KPMG LLP as the Company’s independentregistered public accounting firm for 2007 was approved by the vote set forthbelow:

| For     |   | 20,537,948 |   |
|---------|--------|------------|--------|
| Against |   | 23,657     |   |
| Abstain |   | 10,119     |   |

 

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Theproposal to approve an amendment and restatement of the Company’s Amended andRestated 2004 Incentive Compensation Plan (i) to increase the number ofshares of common stock issuable under the plan from 1,666,666 shares to4,166,666 and to add an evergreen provision pursuant to which the number ofshares available under the plan would automatically increase each yearaccording to certain limits set forth in the plan and (ii) to increase thelimits on the number of shares that may be granted as awards to individuals ina calendar year to qualify such awards as performance-based compensation forpurposes of Section 162(m) of the Internal Revenue Code was approvedby the vote set forth below:

| For     |   | 15,263,661 |   |
|---------|--------|------------|--------|
| Against |   | 1,308,413  |   |
| Abstain |   | 22,288     |   |

 

**Item 6.**                        Exhibits

(a)   Exhibits—SeeExhibit Index below.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|        |   |                | PONIARD PHARMACEUTICAL, INC.    |
|--------|--------|---------------------|---------------------------------|
|   |   |                | (Registrant)                    |
| Date:  |   | August 9, 2007 | By:                        | /s/ CAROLINE M. LOEWY |
|   |   |                | Caroline M. Loewy               |
|   |   |                | *Chief Financial Officer*       |
|   |   |                | *(Principal Financial Officer)* |

 

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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    |       | 1991 Stock Option Plan for Non-Employee Directors, as amended(‡)                                                                                                                                                                 |       | (E)             |
| 10.2    |       | Restated 1994 Stock Option Plan(‡)                                                                                                                                                                                               |       | (F)             |
| 10.3    |       | Stock Option  Grant Program for Nonemployee Directors under the NeoRx Corporation 1994  Restated Stock Option Plan(‡)                                                                                                            |       | (M)             |
| 10.4    |       | 2004 Incentive  Compensation Plan, as amended and restated June 14, 2007(‡)                                                                                                                                            |       | (B)             |
| 10.5    |       | Stock Option  Grant Program for Nonemployee Directors under the 2004 Incentive Compensation  Plan, as amended February 7, 2007(‡)                                                                                           |       | (Z)             |
| 10.6    |       | Form of  Non-Qualified Stock Option Agreement under 2004 Incentive  Compensation Plan, as amended June 14, 2007(‡)                                                                                                     |       | (Z)             |
| 10.7    |       | Form of  Incentive Stock Option Agreement under 2004 Incentive Compensation Plan(‡)                                                                                                                                         |       | (O)             |
| 10.8    |       | Stock Option  Agreement, dated December 19, 2000, between NeoRx Corporation  and Carl S. Goldfischer(‡)                                                                                                                     |       | (I)             |
| 10.9    |       | Stock Option  Agreement, dated January 17, 2001, between NeoRx Corporation and  Carl S. Goldfischer(‡)                                                                                                                      |       | (I)             |
| 10.10   |       | 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)             |
| 10.11   |       | 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)             |
| 10.12   |       | Facilities Lease  dated February 15, 2002, between NeoRx Corporation and Selig  Real Estate Holdings Six                                                                                                                         |       | (A)             |
| 10.13   |       | Indemnification  Agreement(‡)                                                                                                                                                                                                    |       | (H)             |
| 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 |   | Key Executive  Severance Agreement dated as of May 7, 2007, between the Company and  Ronald A. Martell(‡)                                                                                                              |   | (Z) |
| 10.23 |   | Change of  Control Agreement dated as of May 7, 2007, between the Company and  Ronald A. Martell(‡)                                                                                                                    |   | (Z) |
| 10.24 |   | Key Employee  Severance Agreement dated as of July 11, 2006, between the  Company and Michael K. Jackson(‡)                                                                                                            |   | (X) |
| 10.25 |   | Key Executive Severance  Agreement dated as of June 23, 2006, between the  Company and Caroline M. Loewy(‡)                                                                                                            |   | (S) |
| 10.26 |   | Change of  Control Agreement dated as of June 23, 2006, between the Company and  Caroline M. Loewy(‡)                                                                                                                  |   | (S) |
| 10.27 |   | Executive  Severance Agreement dated as of June 23, 2006, between the Company  and Cheni Kwok(‡)                                                                                                                       |   | (S) |
| 10.28 |   | Change of  Control Agreement dated as of July 1, 2006, between the Company and  Cheni Kwok(‡)                                                                                                                          |   | (S) |
| 10.29 |   | 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) |
| 10.30 |   | Form of  Directors’ Indemnification Agreements(‡)                                                                                                                                                                 |   | (K) |
| 10.31 |   | Lease Agreement  dated as of July 10, 2006, between the Company and ARE San Francisco  No. 17 LLC                                                                                                                 |   | (W) |
| 10.32 |   | Loan and  Security Agreement dated as of October 25, 2006, among the Company,  Silicon Valley Bank and Merrill Lynch Capital                                                                                                |   | (J) |
| 10.33 |   | Secured  Promissory Notes to Silicon Valley Bank and Merrill Lynch Capital                                                                                                                                                       |   | (J) |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of 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 Chief Executive Officer                                                                                                                                                                      |   | (Z) |
| 32.2  |   | Section 1350  Certification of Chief Financial Officer                                                                                                                                                                      |   | (Z) |

----

| (‡) |   | Management contract or compensatory plan. |   |   |
|----------|--------|-------------------------------------------|--------|--------|

 

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| (A) |   | Filed as an  exhibit to the Company’s Form 10-K for the fiscal year ended  December 31, 2001, and incorporated herein by reference.                                                    |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | Incorporated by  reference to Annex A of the Company’s definitive proxy statement on Schedule  14A filed May 8, 2007.                                                                       |
| (C) |   | Filed as an  exhibit to the Company’s Registration Statement on Form 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’s definitive proxy statement on  Schedule 14A filed April 10, 1996.                                                             |
| (F) |   | Filed as an  exhibit to the Company’s Form 10-K for the fiscal year ended  December 31, 1995, and incorporated herein by reference.                                                    |
| (G) |   | Filed as an  exhibit to the Company’s Current Report on Form 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 the quarterly period ended  March 31, 1996, and incorporated herein by reference.                                             |
| (I) |   | Filed as an  exhibit to the Company’s Form 10-K for the fiscal year ended  December 31, 2000, and incorporated herein by reference.                                                    |
| (J) |   | Filed as an  exhibit to the Company’s Current Report on Form 8-K filed on  October 31, 2006, and incorporated herein by reference.                                                     |
| (K) |   | Filed as an  exhibit to the Company’s Current Reports on Form 8-K filed on  April 28, 2006, June 27, 2006 and May 9, 2007, and  incorporated herein by reference.       |
| (L) |   | Filed as an  exhibit to the Company’s Form 10-Q for the quarterly period ended  March 31, 2005, and incorporated herein by reference.                                             |
| (M) |   | Filed as an  exhibit to the Company’s Form 10-Q for the quarterly period ended  June 30, 2002, and incorporated herein by reference.                                                   |
| (N) |   | Filed as an  exhibit to the Company’s Current Report on Form 8-K filed on  February 8, 2007, and incorporated herein by reference.                                                     |
| (O) |   | Filed as an  exhibit to the Company’s Form 10-Q for the quarterly period ended  September 30, 2004, and incorporated herein by reference.                                         |
| (P) |   | Filed as an  exhibit to the Company’s Current Report on Form 8-K filed on  June 29, 2005, and incorporated herein by reference.                                                        |
| (Q) |   | Filed as an  exhibit to the Company’s Form 10-Q for the quarterly period ended  March 31, 2004, and incorporated herein by reference.                                                  |
| (R) |   | Filed as an  exhibit to the Company’s Form 10-Q for the quarterly period ended  June 30, 2004, and incorporated herein by reference.                                                   |
| (S) |   | Filed as an  exhibit to the Company’s Current Report on Form 8-K filed  June 23, 2006, and incorporated herein by reference.                                                           |
| (T) |   | Reserved.                                                                                                                                                                                             |
| (U) |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended September 30, 2005, and incorporated  herein by reference.                                         |
| (V) |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended March 31, 2006 and incorporated herein  by reference.                                              |

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| (W) |   | Filed as an exhibit to the Company’s Current Report Form 8-K  filed on July 13, 2006 and incorporated herein by reference.                    |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (X) |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended June 30, 2006 and incorporated herein by  reference.           |
| (Y) |   | Filed as an exhibit to the Company’s Form 10-Q for  the quarterly period ended September 30, 2006 and incorporated  herein by reference. |
| (Z) |   | Filed herewith.                                                                                                                                              |

 

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